What changed in this filing

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Item 1. Business

2024-02-29 compared with 2023-03-09 · 122 added, 170 removed, 228 unchanged (56% of the section changed)

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Complete Range of Innovative CEA Products

We offer thousands of innovative, branded CEA products spanning lighting solutions, growing media (i.e., premium soils and soil alternatives), nutrients, equipment and supplies.

Some of our most well-known proprietary brands include Phantom, PhotoBio, Active Aqua, Active Air, HEAVY 16, House & Garden, Mad Farmer, Roots Organics, Soul, Procision, Grotek, Gaia Green, and Innovative Growers Equipment.

We estimate that approximately two-thirds of our net sales relate to recurring consumable products, including growing media, nutrients and supplies that are subject to regular replenishment.

We offer thousands of innovative, branded CEA products to provide solutions for our customers.

Our product portfolio spans lighting, growing media (i.e., premium soils and soil alternatives), nutrients, equipment and supplies.

Some of our most well-known proprietary brands include Active Air, Active Aqua, Aurora Peat Products, HEAVY 16, House & Garden, Gaia Green, Grotek, Innovative Growers Equipment, Mad Farmer, Phantom, PHOTOBIO, Procision, Roots Organics, Soul, and SunBlaster.

We estimate that approximately three-quarters of our net sales relate to consumable products, including growing media, nutrients and supplies that are subject to regular replenishment.

The remaining portion of our net sales relate to durable products such as hydroponic lighting and equipment.

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These exclusive and preferred brands generally provide higher gross profit margins compared to distributed brands and provide a competitive advantage as we offer our customers a breadth of products that cannot be purchased elsewhere.

We source individual components from our supplier base to assemble certain products, and use a purchasing team in China.

We source individual components from our supplier base to assemble certain products.

Raw materials used in our nutrient manufacturing operations primarily include nitrogen, potassium, and phosphate.

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We source these raw materials from suppliers located primarily in the United States, Canada, Europe, and China.

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

One supplier accounted for over 10% of purchases in 2023 and 2022.

The following graphic illustrates a representative set of our market-leading products across key CEA product categories:

Infrastructure and Reach for Fast Delivery, High In-Stock Availability and Exceptional Service

Our infrastructure and reach enables us to provide delivery and service capabilities to a highly diverse group of customers across the United States and Canada.

Our infrastructure and reach enables us to provide delivery and service capabilities to a diverse group of customers primarily in the United States and Canada.

We believe that our six U.S.-based distribution centers can reach a significant majority of our U.S.

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and New Hudson, Michigan.

In Canada, we currently operate distribution centers in Langley, British Columbia and Cambridge, Ontario.

Outside of North America, we operate a distribution center in Zaragoza, Spain, and we maintain product quality assurance and supply chain management in Shenzhen, China.

We partner with a network of third-party logistics companies that facilitate expeditious delivery to our customers across the globe.

In Canada, we currently operate distribution centers in Surrey, British Columbia and Cambridge, Ontario.

Outside of North America, we operate a distribution center in Zaragoza, Spain.

We use a third party in China to assist with our international supply chain management and quality assurance in Asia.

We partner with a network of third-party transportation companies that facilitate delivery to our customers.

The majority of customer orders are received through our business-to-business e-commerce platform.

Through our differentiated Distributor Managed Inventory (“DMI”) Program, we partner with our network of retailers and resellers to create customized, JIT supply chain solutions for large commercial end users.

Through our Distributor Managed Inventory ("DMI") Program, we partner with our network of customers to create customized, JIT supply chain solutions for large commercial end users.

In the United States, we currently operate manufacturing facilities in Paramount, California;

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and Sycamore, Illinois.

In Canada, we currently have manufacturing facilities in Edmonton, Alberta and Langley, British Columbia.

In Canada, we currently have manufacturing facilities in Edmonton, Alberta.

The CEA Industry

Our principal industry opportunity is in the wholesale distribution of CEA equipment and supplies, which generally include grow light systems;

advanced heating, ventilation, and air conditioning (“HVAC”) systems;

Our principal industry opportunity is in the wholesale distribution of CEA equipment and supplies, which generally include nutrients and fertilizers;

grow light systems;

horticulture benches and racking systems;

heating, ventilation, and air conditioning ("HVAC") systems;

humidity and carbon dioxide monitors and controllers;

water pumps, heaters, chillers, and filters;

nutrient and fertilizer delivery systems;

and various growing media typically made from soil, rock wool or coconut fiber, among others.

and various growing media typically made from soil, peat, rock wool or coconut fiber, among others.

Today, we believe that a majority of our products are sold for use in CEA applications.

PHOTOBIO MX LED, Active Air Commercial Humidifier, Active Aqua Submersible Water Pump, Active Air Heavy Duty 16" Metal Wall Mount Fan, IGE Grow Racks, House & Garden Bud XL, and Roots Organics Soilless Hydroponic Coco Mix.

PHOTOBIO MX LED, Active Air Commercial Humidifier, SunBlaster LED Grow Light Garden, Active Air Heavy Duty 16" Metal Wall Mount Fan, IGE Grow Racks, House & Garden Bud XL, and Roots Organics Soilless Hydroponic Coco Mix.

CEA is a component of the global commercial agriculture and consumer gardening sectors.

According to industry publications, it estimated that the global CEA industry grew to total approximately $75 billion in 2022 1 , and is expected to grow at a CAGR of 19% from 2022 to 2027 1 .

The growth of CEA crop output may subsequently drive growth in the wholesale CEA equipment and supplies industry.

According to industry publications, the global hydroponic system market, which primarily represents the categories in which we operate, had an estimated total of approximately $12.1 billion in 2022 and had an expectation to grow at a CAGR of 16% from 2022 to 2027 2 .

We estimate, based upon segmentation data available in industry reports, that the North America hydroponic system market had an estimated value of approximately $3.7 billion in 2022 3 .

Since 2005, we have grown our net sales at an approximate 15% CAGR.

This historical growth is largely due to the CEA market growth, including from cannabis, and our ability to serve these markets with innovative branded products.

While the CEA cannabis market has experienced an agricultural oversupply, we believe that our industry continues to maintain future growth prospects as it matures.

According to industry publications, the global CEA industry was estimated at approximately $74 billion in 2022, and is expected to grow to approximately $378 billion by 2032 representing a CAGR of 18%.

The growth of CEA crop output may subsequently drive growth in the wholesale CEA equipment and supplies industry in which we operate.

Expanding populations, limited natural resources and a focus on the environment and the security of our agricultural systems have illuminated the benefits of CEA compared to traditional outdoor agriculture.

We believe the adoption of CEA will grow particularly in the commercial agriculture industry, where CEA can be

1 KD Market Insights Controlled Environment Agriculture Market, February 2022

2 Markets and Markets TM Hydroponics Market Global Forecast, September 2022

3 Hydroponics Market Global Forecast to 2025, July 2020

deployed to achieve results that are simultaneously more efficient for the planet and profitable for growers.

The global cannabis industry is a developing business opportunity for us, particularly as the legal market in the United States continues to expand.

Today, we believe that a majority of the CEA equipment and supplies we sell to our customers is ultimately purchased by participants in the cannabis industry, though we do not sell to cannabis growers or to retailers that sell only to the cannabis industry in the United States.

As previously described, an agricultural oversupply has impacted our industry, driving cannabis wholesale prices down significantly and resulting in a decrease in indoor and outdoor cultivation.

The oversupply has been impacted by increased licensing activity across the United States, as well as significant capital investment in the cannabis production marketplace over the past several years and the market impacts of the COVID-19 pandemic.

Despite these current factors negatively impacting the industry, according to certain industry publications 4 , the U.S.

cannabis market is projected to reach approximately $52.6 billion by 2026, up from approximately $33.0 billion in 2022, representing a 12.4% CAGR.

We believe the adoption of CEA will grow particularly in the commercial agriculture industry, where CEA can be deployed to achieve results that are simultaneously more efficient for the planet and profitable for growers.

An agricultural

oversupply has impacted our industry, driving cannabis wholesale prices down and resulting in a decrease in indoor and outdoor cultivation.

We believe the oversupply has been impacted by the market impacts of the COVID-19 pandemic.

Despite these factors negatively impacting the industry, according to certain industry publications, the U.S.

cannabis market is projected to reach approximately $57 billion by 2028, up from an estimated $30 billion in 2022, representing a 11.3% CAGR.

We believe this forecasted growth in the U.S.

cannabis market may be attributable to (i) state initiatives for new adult use and/or medical use programs in additional U.S.

states, (ii) expanded access for patients or consumers in existing state medical or adult use cannabis programs, and (iii) increased consumption driven by greater product diversity and choice, reduced stigma, and real and perceived health benefits in states with existing adult use or medical use programs.

According to a November 2022 poll by Pew Research Center, public support for the legalization of cannabis in the United States has significantly increased.

Approximately 59% of U.S.

adults say that cannabis should be legal for recreational and medical use, while an additional 30% say it should be legal for medical use only.

states, (ii) expanded access for patients or consumers in existing state medical or adult use cannabis programs, and (iii) increased consumption driven by greater product diversity and choice, reduced stigma, and real and perceived health benefits including pain management, the treatment of neurological and mental conditions, and sleep management.

In addition, states with legalized adult use cannabis may offer state governments with additional taxation revenue and state job creation.

A number of states are at various stages of considering implementing laws permitting cannabis use or further liberalizing their existing laws permitting such use.

Our sales in U.S.

states with legalized adult use recreational programs are on average several multiples higher than our sales in states without adult use recreational programs.

We believe this supports the market opportunity available to us if additional U.S.

states legalize adult use recreational programs.

Several key developments have contributed to an increase in cannabis product availability and breadth, including the proliferation of cannabidiol (CBD) and other cannabis-infused products, including edibles, oils, tinctures, and topical treatments.

We believe that the historical stigmatization of cannabis use has diminished, driven by generally a more supportive legislative environment, a rise in progressive sociopolitical views and greater consumer awareness of the potential health benefits of cannabis consumption.

According to industry publications, real and perceived health benefits extend into areas including cancer treatment, pain management, the treatment of neurological and mental conditions, and sleep management.

According to a November 2022 poll by Pew Research Center, approximately 59% of U.S.

adults say that cannabis should be legal for recreational and medical use, while an additional 30% say it should be legal for medical use only.

Cannabis product availability and breadth includes cannabidiol (CBD) and other cannabis-infused products, including edibles, oils, tinctures, and topical treatments.

Benefits of CEA Adoption

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• Potentially lower operating expenses from resource-saving technologies such as high-efficiency LED lights, precision nutrient and water systems and automation.

CEA implementation is driven by the factors listed above as well as growth in fruit and vegetable farming, consumer gardening and the adoption of vertical farming.

Vertical farming, a subsector of CEA, has gained popularity mainly due to its unique advantage of maximizing yield by growing crops in layers.

While a small portion of cannabis cultivation may be grown in non-CEA settings, given the benefits of CEA cultivation, we believe CEA will continue to be the primary method of growing cannabis.

In the United States and Canada there has been an increase in regulatory oversight and statutory requirements for growers and their products.

These regulations

4 MJBiz Daily, June 2022

enhance product safety and transparency to consumers but usually necessitate the use of CEA in cannabis cultivation in order to meet mandated tetrahydrocannabinol (THC) content or impurity tolerances.

Increased Focus on Environmental, Social, and Governance (“ESG”) Issues

We believe certain of our CEA end-markets support ESG trends as they may preserve resources, enhance the transparency and safety of our food supply chains, and deliver superior performance characteristics versus traditional agriculture.

On January 11, 2022, we released our first ESG report t o stakeholders, highlighting our environmental, health and safety focus and sustainable governance practices during the 2021 fiscal year.

Our Competitive Strengths

CEA implementation is driven by the factors listed above as well as fruit and vegetable farming, consumer gardening and the adoption of vertical farming.

In the United States and Canada, regulatory oversight and statutory requirements for growers and their products enhance product safety and transparency to consumers, and usually necessitate the use of CEA in cannabis cultivation in order to meet mandated tetrahydrocannabinol (THC) content or impurity tolerances.

We believe certain of our CEA end-markets support environmental, social and governance ("ESG") trends as they may preserve resources, enhance the transparency and safety of our food supply chains, and deliver superior performance characteristics versus traditional agriculture.

Our Strategies and Competitive Strengths

Leading Market Position in our Industry

We are a leading independent manufacturer and distributor of CEA equipment and supplies in the United States and Canada and one of the two major consolidators in the CEA industry.

The broader market is comprised of a fragmented group of smaller competitors.

We are a leading independent manufacturer and distributor of CEA equipment and supplies in the United States and Canada.

Over the course of our long operating history, we have developed product and market expertise that we believe has made us a leader in our industry.

Experienced Management Team with Proven Track Record

Our management team possesses significant public market experience, a history of driving long-term organic growth and a track record of successful business consolidations.

Bill Toler, Chairman and Chief Executive Officer, has over 35 years of executive leadership experience in supply chain and consumer packaged goods, most recently serving as President and Chief Executive Officer of Hostess Brands from April 2014 to March 2018.

Under his leadership, Hostess Brands transitioned from a private to public company, regained a leading market position within the sweet baked goods category and returned to profitability.

Bill also previously served as Chief Executive Officer of AdvancePierre Foods and President of Pinnacle Foods, in addition to holding executive roles at Campbell Soup Company, Nabisco and Procter & Gamble.

John Lindeman, Chief Financial Officer, brings us more than 25 years of finance and leadership experience.

Most recently, he served as Chief Financial Officer and Corporate Secretary at Calavo Growers, Inc., a fresh food company, where he was responsible for the finance, accounting, IT and human resource functions.

Prior to joining Calavo, he held various leadership positions within the finance and investment banking industries at Janney Montgomery Scott, Stifel Nicolaus, Legg Mason and PricewaterhouseCoopers LLP.

Broad Portfolio with Innovative Proprietary Offerings and Recurring Consumables Sales

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We offer everything growers need to ensure their operations are maximizing efficiency, output and quality.

We maintain an extensive portfolio of products which includes over 35 internally developed or acquired proprietary brands across thousands of stock keeping units ("SKUs") as well as over 60 preferred brands.

Approximately 75% of our sales relate to proprietary and preferred brands.

We maintain an extensive portfolio of products which includes approximately 35 internally developed or acquired proprietary brands across thousands of stock keeping units ("SKUs") as well as over 45 preferred brands.

Approximately 75% of our sales relates to proprietary and preferred brands, which generally provide for higher gross profit margins compared to distributed brands and a competitive advantage as we offer products that cannot be purchased elsewhere.

We believe that approximately three-quarters of our net sales are generated from consumable products subject to recurring revenue that includes growing media, nutrients and supplies.

We sell proprietary and preferred brands across all of our product categories.

In 2021, we completed five acquisitions of branded manufacturers of CEA products, resulting in a significant expansion of our portfolio of proprietary branded products, which generally earn a significant gross margin premium relative to distributed brands.

We believe that approximately two-thirds of our net sales are generated from the sale of recurring consumable products including growing media, nutrients and supplies.

In 2021, we completed five acquisitions of branded manufacturers of soil, grow media, plant nutrients, and horticultural benches, racks and grow lights:

(i) Heavy 16, (ii) House & Garden, (iii) Aurora Innovations, (iv) Greenstar Plant Products, and (v) Innovative Growers Equipment.

We selectively add distributed products when the brand or technology provides us with a more comprehensive assortment to satisfy our customers' needs.

In the fourth quarter of 2022, in connection with our restructuring plans, we strategically identified products and brands to exit from our portfolio, enabling us to better focus on higher value proprietary products and solutions for our customers.

Manufacturing Capabilities

Following our 2021 acquisitions, we now maintain internal manufacturing capabilities across seven locations in North America which includes organic certified and synthetic liquid and dry nutrient blending and bottling, organic certified soil blending and bagging, perlite production, injection molding capabilities, custom and off the shelf horticulture benches and racking system fabrication, automated LED light manufacturing (LED surface mounting and light fixture assembly), and peat harvesting and baling.

We currently operate six manufacturing facilities in North America which include organic certified and synthetic liquid and dry nutrient blending and bottling, organic certified soil blending and bagging, perlite production, injection molding capabilities, custom and off the shelf horticulture benches and racking system fabrication, automated LED light manufacturing (LED surface mounting and light fixture assembly), and peat harvesting and baling.

Our peat harvesting operation provides useful products for improving grow media and organic farming.

Supplier Relationships and Geographic Footprint

We have developed distribution relationships with a network of approximately 400 suppliers, giving us access to a best-in-class diverse product portfolio and allowing us to provide a full range of CEA solutions to our customers.

We have developed distribution relationships with a network of several hundred suppliers, giving us access to a best-in-class diverse product portfolio and allowing us to provide a full range of CEA solutions to our customers.

We have cultivated long-term relationships with several of our main suppliers.

We also maintain a geographic footprint that enables us to efficiently serve our customers across North America.

We believe that our six distribution centers in the United States can reach

a significant majority of our U.S.

customers within 48 hours and our two distribution centers in British Columbia and Ontario can provide timely coverage to the full Canadian market.

We maintain a broad geographic footprint of eight distribution centers to efficiently serve our customers in North America.

We also operate a distribution center in Zaragoza, Spain, and we are focusing on expanding our international sales.

Solution Based Approach to Serve Our Customers

We maintain long-standing relationships with a diversified range of specialty hydroponic retailers, commercial resellers and greenhouse builders, garden centers, hardware stores, and e-commerce retailers.

We currently maintain long-standing relationships with a diversified range of specialty hydroponic retailers, commercial resellers and greenhouse builders, garden centers, hardware stores, and e-commerce retailers.

We serve over 2,000 wholesale customer accounts across multiple channels in North America, providing customers with the capability to purchase their entire product range from us.

To better serve our customers, we are reorganizing our commercial sales team to drive a solution based approach, focusing on added competencies and product assortment gained from our recent acquisitions.

DMI programs further enhance our customer capabilities, offering consultation, technical expertise, facilitated order fulfillment and JIT delivery of consumables.

To better serve our customers, we reorganized our commercial sales team to drive a solution based approach, focusing on added competencies and product assortment gained from our 2021 acquisitions.

Our DMI programs offer consultation, technical expertise, facilitated order fulfillment and JIT delivery of products.

We leverage a seasoned sales team and our internal product category experts to provide industry insights, product capabilities and customer support.

We maintain long-term relationships with the majority of our largest customers.

Our Growth and Productivity Strategies

Capitalizing on the Growing CEA Market

Our customers benefit from macroeconomic factors driving the growth of CEA, including expanded adoption of CEA by commercial growers and consumers, as well as the growth in cannabis, and other end-markets.

Industry publications estimate that the global CEA industry will grow at a 19% CAGR from 2022 to 2027.

Moreover, the North America hydroponic system market had an estimated value of approximately $3.7 billion in 2022, and is projected to grow at a CAGR of 16% from 2022 to 2027.

Strategic Enhancements to our Product Offering

We significantly expanded the breadth of our proprietary product assortment through five acquisitions in 2021:

• Heavy 16, a manufacturer of plant nutrients and additives, in May 2021;

• House & Garden, a manufacturer of plant nutrients and additives, in June 2021;

• Aurora Innovations, a manufacturer of soil, grow media, plant nutrients and additives, in July 2021;

• Greenstar Plant Products, a manufacturer of plant nutrients and additives, in August 2021;

• Innovative Growers Equipment, a manufacturer of horticultural benches, racks and grow lights, in November 2021.

Our proprietary brands generally provide for higher gross profit margins compared to distributed brands and a competitive advantage as we offer products that cannot be purchased elsewhere.

We invest in research and development to improve our products and manufacturing processes and to expand our overall brand value.

We have launched several new product lines over the last two years, most notably PhotoBio LED lighting equipment.

Through recent acquisitions, we have expanded our proprietary brands to include Heavy 16, House & Garden, Mad Farmer, Roots Organics, Soul, Procision, Grotek, Gaia Green, and Innovative Growers Equipment.

In addition, we selectively add distributed products when the brand or technology provides us with a more comprehensive assortment to satisfy our customers' needs.

In the fourth quarter of 2022, we strategically identified products and brands to exit from our portfolio, enabling to better focus on higher value proprietary products and solutions for our customers.

Enabling Wholesaler Network to Effectively Serve Commercial Growers

Working with our wholesale network, we are leveraging our sophisticated product experts and technical sales team to provide our wholesale network the ability to address the needs, demanding requirements and higher volume of their larger-scale commercial customers.

Establishing these relationships with our channel provides us with insight and access to growers’ evolving demands, leading to both increased equipment sales and recurring sales of consumables through our wholesale network.

Our commercial grower outreach program, our analytically driven supply chain function and DMI capabilities enable our wholesaler network to anticipate customer demand for products and ensure their availability.

The goal of these efforts is to maintain long-term relationships with our wholesalers by helping them be successful in providing cultivation square footage savings and access to JIT inventory to their customer base.

We believe this can result in profitability for our wholesalers’ customers on consumables and equipment.

We also believe that increasing the value to our wholesale network will allow us to grow within key accounts and expand sales of our products and services to new accounts.

Expanding our Offerings within CEA Food and Floral Markets and Garden Centers

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households participate in lawn and gardening activities today.

To that end, we have reorganized our sales efforts, including added competencies and product assortment from our recent acquisitions, to focus on the CEA food and floral market, and the consumer gardening markets, where we are well suited to expand our business.

Acquiring Value-Enhancing Businesses

The hydroponics industry is highly fragmented, which we believe presents an opportunity for growth through acquisitions.

We utilize clear investment criteria to make disciplined M&A decisions with the goal of accelerating sales and EBITDA growth, increasing competitive strength and market share and expanding our proprietary brand portfolio.

We pursue opportunities to grow our business through acquisitions of strategically complementary businesses.

We aim primarily to acquire companies that have a competitive market position with the potential to increase market share, a strong brand, high recurring revenue and strong margin potential.

We seek acquisition targets that can accelerate our growth and generate significant cash flows over time.

As previously discussed, we completed five acquisitions in fiscal 2021.

Refer to Part II, Item 8, Financial Statements, Note 10 - Debt, for details regarding certain covenants in our JPMorgan Revolving Loan Facility that currently limit the Company's ability to consummate acquisitions.

Acquisitions involve a number of risks and may not achieve our expectations;

and, therefore, we could be adversely affected by any such acquisition.

There are a number of risks inherent in assessing the value, strengths, weaknesses, contingent or other liabilities, and potential profitability of acquisition candidates, as well as the challenges of integrating acquired companies and achieving potential synergies once an acquisition is consummated, that may cause an acquisition to fail.

To that end, we have reorganized our sales efforts to focus on the CEA food and floral market, and the consumer gardening markets, where we are well suited to expand our business.

Productivity and Cost Saving Initiatives

While maintaining our dedication to customer service and on-time delivery, we are focused on reducing costs and improving productivity within the organization.

Our initiatives have included reducing headcount, implementing operational changes, consolidating our facility footprint, and focusing our sales efforts on our proprietary brand offerings.

We are executing on our previously announced restructuring plans to improve efficiency and reduce costs.

Experienced Management Team with Proven Track Record

We have an experienced leadership team that possesses significant public market experience, a history of driving long-term organic growth and a track record of successful business consolidations.

John Lindeman, Executive Vice President and Chief Financial Officer, brings us more than 25 years of finance and leadership experience.

E ffects of COVID-19 on Our Business

The World Health Organization recognized COVID-19 as a global pandemic on March 11, 2020, and COVID-19 has had significant and ongoing negative impacts on global societies, workplaces, economies and health systems.

Authorities throughout the world have implemented measures to contain or mitigate the spread of the virus, including at various times physical distancing, travel bans and restrictions, closure of non-essential businesses, quarantines, work-from-home directives, mask requirements, shelter-in-place orders and vaccination programs, but despite these efforts, COVID-19 has persisted, has mutated into new variants, and is expected to become endemic.

We have implemented business continuity plans and followed safety protocols as recommended by government guidelines, and we will continue to do so as the state of COVID-19 evolves.

The World Health Organization recognized COVID-19 as a global pandemic on March 11, 2020, and it is now widely expected to become endemic.

COVID-19 has had significant and ongoing negative impacts on global societies, workplaces, economies and health systems.

At various times, authorities throughout the world have implemented measures to contain or mitigate the spread of the virus, including physical distancing, travel bans and restrictions, closure of non-essential businesses, quarantines, work-from-home directives, mask requirements, shelter-in-place orders and vaccination programs, each of which have significantly impacted the ability of many companies to conduct business.

As of the filing of this Annual Report on Form 10-K, our operations are not impacted by any COVID-19 related facility closures, lockdown measures, travel restrictions or similar limitations.

However, new waves of COVID-19 or its variants could cause the reinstatement of such limitations, and such limitations may adversely impact our supply chains, the manufacturing of our own products and our ability to obtain necessary materials, all of which could adversely affect our business, results of operations and financial condition.

We have historically and may continue to source select products from China.

We have experienced in the past, and may again in the future experience some extended lead times in our supply chain, as well as increased shipping costs, and we believe the COVID-19 pandemic is a contributing factor to those extended lead times and increased costs.

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

The extent to which the COVID-19 pandemic will ultimately impact our business, results of operations, financial condition and cash flows depends on future developments that are highly uncertain, rapidly evolving and difficult to predict at this time.

It is difficult to assess or quantify with precision the impact COVID-19 has directly had on our business since we cannot precisely quantify the impacts, if any, that the various effects have had on the overall business.

We believe COVID-19 may have provided a positive demand impact in 2020 and 2021 from shelter-in-place orders in the United States, a possible negative supply chain impact from workforce disruption at international and domestic suppliers, and a possible negative growth rate impact in 2022 due to agricultural oversupply initiated during the height of COVID-related shelter-in-place orders in 2020 and 2021.

We believe that COVID-19 may at times have contributed to some extended lead times in our supply chain, as well as increased shipping costs, and there is no guarantee that it will not impact our operations in the future.

We believe COVID-19 may have provided a positive demand impact for the Company in 2020 and 2021 from shelter-in-place orders in the United States, a possible negative supply chain impact from workforce disruption at international and domestic suppliers, and a possible negative growth rate impact in 2022 and 2023 due to agricultural oversupply initiated during the height of COVID-related shelter-in-place orders in 2020 and 2021.

Management believes that COVID-19 drove a greater volume of sales by our customers in select time periods, thus creating demand for our CEA supplies and equipment.

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state specific registration requirements.

Organic listed products are audited by the California Department of Food and Agriculture and the Organic Materials Review Institute.

Finished goods and ingredients labeled as pesticides are regulated by the Environmental Protection Agency (the “EPA”).

Organic listed products are audited by the California Department of Food and Agriculture and/or the Organic Materials Review Institute.

Finished goods and ingredients labeled as pesticides are regulated by federal and state offices of the Environmental Protection Agency (the "EPA").

Canadian based operations and product lines are regulated under the Canadian Food Inspection Agency.

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Grow Media and Nutrients

Our leading product lines are growing media and nutrients products.

These product lines include organic listed soils, soils without organic listings, and both organic listed and synthetic nutrients that contain ingredients requiring supplier registration with certain regulators.

Grow media and nutrients products include organic listed soils, soils without organic listings, and both organic listed and synthetic nutrients that contain ingredients requiring supplier registration with certain regulators.

The use and disposal of these products in some jurisdictions are subject to regulation by various agencies.

A decision by a regulatory agency to significantly restrict the use of these products impacts those companies providing us with such regulated products, and as a result, limits our ability to sell these products.

International, federal, state, provincial and local laws and regulations relating to environmental, health and safety matters affect us in several ways in light of the ingredients that are used in products included in our growing media and nutrients product line.

A decision by a regulatory agency to significantly restrict the use of these products can limit our ability to sell these products.

In the United States, products containing pesticides generally must be registered with the EPA and similar state agencies before they can be sold or applied.

The failure by one of our partners to obtain, or the cancellation of any such registration, or the withdrawal from the marketplace of such pesticides, could have an adverse effect on our businesses, the severity of which would depend on the products involved, whether other products could be substituted and whether our competitors were similarly affected.

The pesticides we use are either granted a license by the EPA or exempt from such a license and may be evaluated by the EPA as part of its ongoing exposure risk assessment.

The failure by one of our partners to obtain, or the cancellation of any such registration, or the withdrawal from the marketplace of such pesticides, could have an adverse effect on our Company, the severity of which would depend on the products involved, whether other products could be substituted and whether our competitors were similarly affected, and whether pesticide claims or sales may be made by distributors of any Hydrofarm products which are not actively registered as such.

The pesticides we use are either granted a license by the EPA and similar state agencies or exempt from such a license and may be evaluated by the EPA as part of its ongoing exposure risk assessment.

The EPA may decide that a pesticide we distribute will be limited or will not be re-registered for use in the United States.

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New laws and regulations pertaining to the use or cultivation of cannabis and enforcement actions by state and federal authorities concerning the cultivation or use of cannabis could indirectly reduce demand for our products, and may impact our current and planned future operations.

Individual state laws regarding the cultivation, possession, and use of cannabis for adult and medical uses conflict with federal laws prohibiting the cultivation, possession and use of cannabis for any purpose.

In the United States, individual state laws regarding the cultivation, possession, and use of cannabis for adult and medical uses conflict with federal laws prohibiting the cultivation, possession and use of cannabis for any purpose.

A number of states have passed legislation legalizing or decriminalizing cannabis for adult use, other states have enacted legislation specifically permitting the cultivation and use of cannabis for medicinal purposes, and several states have enacted legislation permitting cannabis cultivation and use for both adult and medicinal purposes.

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We sell products, including hydroponic gardening products, through third-party retailers and resellers.

End users may purchase these products for use in new and emerging industries, including the growing of cannabis, that may not grow or

achieve market acceptance in a manner that we can predict.

End users may purchase these products for use in new and emerging industries, including the growing of cannabis, that may not grow or achieve market acceptance in a manner that we can predict.

The demand for these products is dependent on the growth of these industries, which is uncertain, as well as the laws governing the growth, possession, and use of cannabis by adults for both adult and medical use.

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We cannot predict the nature of such developments or the effect, if any, that such developments could have on our business.

We are subject to a number of risks, directly and indirectly through our Cannabis Industry Participants, because cannabis is illegal under federal law.

We are subject to a number of risks, directly and indirectly through our Cannabis Industry Participants, because cannabis is illegal under United States federal law.

Federal law and enforcement may adversely affect the implementation of medical cannabis and/or adult use cannabis laws, and may negatively impact our revenues and profits.

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Controlled Substances Act of 1970 (the "CSA"), the U.S.

government lists cannabis as a Schedule I controlled substance (i.e., deemed to have no medical value), and accordingly the manufacturing (cultivation), sale, or possession of cannabis is federally illegal.

government currently lists cannabis as a Schedule I controlled substance (i.e., deemed to have no medical value), and accordingly the manufacturing (cultivation), sale, or possession of cannabis is federally illegal.

It is also federally illegal to advertise the sale of cannabis or to sell paraphernalia designed or intended primarily for use with cannabis, unless the paraphernalia is authorized by federal, state, or local law.

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Other laws that directly impact the cannabis growers that are end users of certain of our products include:

• Businesses trafficking in cannabis may not take tax deductions for costs beyond costs of goods sold under Code Section 280E.

There is no way to predict how the federal government may treat cannabis businesses from a taxation standpoint in the future, and no assurance can be given to what extent Code Section 280E, or other tax-related laws and regulations, may be applied to cannabis businesses in the future.

• Businesses trafficking in cannabis may not take tax deductions for costs beyond costs of goods sold under Internal Revenue Code Section 280E.

There is no way to predict how the federal government may treat cannabis businesses from a taxation standpoint in the future, and no assurance can be given to what extent Internal Revenue Code Section 280E, or other tax-related laws and regulations, may be applied to cannabis businesses in the future.

• Because the manufacturing (cultivation), sale, possession and use of cannabis is illegal under federal law, cannabis businesses may have restricted intellectual property and proprietary rights, particularly with respect to obtaining and enforcing patents and trademarks.

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Recent administrations have disagreed on how strongly to enforce federal cannabis laws.

For example, on August 29, 2013, the U.S.

Certain laws and regulations affecting the U.S.

cannabis industry include the following:

• On August 29, 2013, the U.S.

Department of Justice (the "DOJ") under the Obama administration issued a memorandum (the "Cole Memorandum"), characterizing strict enforcement as an inefficient use of federal investigative and prosecutorial resources.

The Cole Memorandum provided guidance to all federal prosecutors and indicated that federal enforcement of the CSA against cannabis-related conduct should be focused on specific priorities, including cannabis distribution to minors, violence in connection with cannabis distribution, cannabis cultivation on federal property, and collection of cannabis-derived revenue by criminal enterprises, gangs and cartels.

distribution, cannabis cultivation on federal property, and collection of cannabis-derived revenue by criminal enterprises, gangs and cartels.

• On January 4, 2018, the DOJ under the Trump administration issued a memorandum (the "Sessions Memorandum"), which effectively rescinded the Cole Memorandum and directed federal prosecutors to enforce the CSA and to follow well-established principles when pursuing prosecutions related to cannabis activities.

The DOJ under the Biden administration has not readopted the Cole Memorandum, but President Biden has indicated support for decriminalization of cannabis.

On October 6, 2022, President Biden issued an executive order pardoning all persons convicted of simple possession of cannabis under the CSA and directed the Secretary of Health and Human Services and the Attorney General to initiate an administrative process to review the scheduling of cannabis under the CSA.

Further, on December 2, 2022, President Biden signed into law the Medical Marijuana and Cannabidiol Research Expansion Act, which streamlines and expands the process for researching the medical use of cannabis.

• On October 6, 2022, President Biden issued an executive order pardoning all persons convicted of simple possession of cannabis under the CSA.

In the same executive order, President Biden also directed the Secretary of Health and Human Services and the Attorney General to initiate an administrative process to review the scheduling of cannabis under the CSA, and on August 29, 2023, the Department of Health and Human Services officially recommended that the DEA reschedule cannabis from Schedule I to Schedule III, although the DEA is not obligated to follow this recommendation.

• On December 2, 2022, President Biden signed into law the Medical Marijuana and Cannabidiol Research Expansion Act, which streamlines and expands the process for researching the medical use of cannabis.

Currently in the United States, 38 states have adopted frameworks that authorize and regulate cannabis cultivation and sale for medical use, while 24 states legalized cannabis for medical and recreational use.

It is estimated that over half of the United States population resides in a state where cannabis is currently legal for medical and recreational use.

We cannot predict how the current administration or future administrations will enforce the CSA or other laws against cannabis activities.

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The legal uncertainty and possible future changes in law could negatively affect our growth, revenues, results of operations and success generally.

Unless and until Congress amends the CSA with respect to medical and/or adult use cannabis, there is a risk that federal prosecutors may enforce the existing CSA.

Unless and until cannabis is de-scheduled entirely or rescheduled or Congress amends the CSA with respect to medical and/or adult use cannabis, there is a risk that federal prosecutors may enforce the existing CSA.

Federal authorities may decide to change their current posture and begin to enforce current federal cannabis law and, if they begin to aggressively enforce such laws, it is possible that they could allege that we violated federal laws by selling products used in the cannabis industry.

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This could have a material adverse effect on our business, including our reputation and ability to conduct business, the listing of our securities on any stock exchanges, the settlement of trades of our securities, our ability to obtain banking services, our financial position, operating results, profitability or liquidity or the market price of our publicly-traded shares.

In addition, it is difficult for us to estimate the time or resources that would be needed for the investigation of any such matters or their final resolution

because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.

In addition, it is difficult for us to estimate the time or resources that would be needed for the investigation of any such matters or their final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.

Businesses involved in the cannabis industry, and investments in such businesses, are subject to a variety of laws and regulations related to money laundering, financial recordkeeping and proceeds of crimes.

We sell our products through third-party retailers and resellers which do not exclusively sell to the cannabis industry.

Investments in the U.S.

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federal prosecutors relating to the prosecution of U.S.

money laundering offenses predicated on cannabis violations of the CSA and outlines extensive due diligence and reporting requirements.

money laundering offenses predicated on cannabis violations of the CSA and outlines extensive due diligence and reporting

requirements.

The FinCEN Memo currently remains in place, but it is unclear at this time whether current or future administrations will continue to follow the guidelines of the FinCEN Memo.

Any abrogation or modification of the FinCEN Memo could negatively affect the ability of certain of the end users of our products to establish and maintain banking relationships.

House of Representatives has passed the Secure and Fair Enforcement (SAFE) Act (the “SAFE Banking Act”) numerous times, and, if enacted, this bill would protect banks and credit unions from federal prosecution for providing services to cannabis companies.

However, the Senate has thus far failed to pass the SAFE Banking Act or other similar legislation, despite industry expectations that the Senate would pass the SAFE Banking Act in late 2022.

We sell our products through third-party retailers and resellers which do not exclusively sell to the cannabis industry.

Some of our products are sold to Cannabis Industry Participants and used in connection with cannabis businesses that are subject to federal and state controlled substance laws and regulations.

House of Representatives passed the Secure and Fair Enforcement (SAFE) Act (the "SAFE Banking Act") numerous times.

This bill was intended to protect banks and credit unions from federal prosecution for providing services to cannabis companies, thus allowing cannabis companies greater access to deposit accounts, insurance, and other financial institutions.

However, the U.S.

Senate has thus far failed to pass the SAFE Banking Act or other similar legislation.

In September 2023, the Secure and Fair Enforcement Regulation Banking Act ("SAFER Banking Act") passed the U.S.

Senate Banking Committee.

However, passage of the SAFER Banking Act in the U.S.

Senate or U.S.

House of Representatives remains uncertain.

Some of our products are used by Cannabis Industry Participants and used in connection with cannabis businesses that are subject to federal and state controlled substance laws and regulations.

Cannabis businesses are subject to a number of risks related to controlled substances, which risks could reduce demand for our products by Cannabis Industry Participants.

Such risks include, but are not limited to, the following:

• Cannabis is a Schedule I drug under the CSA and regulated by the Drug Enforcement Administration (the “DEA”) as an illegal substance.

• Cannabis is currently a Schedule I drug under the CSA and regulated by the Drug Enforcement Administration (the "DEA") as an illegal substance.

The Food and Drug Administration ("FDA"), in conjunction with the DEA, licenses cannabis research and drugs containing active ingredients derived from cannabis.

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• The failure of our Cannabis Industry Participants to comply with applicable controlled substance laws and regulations, or the cost of compliance with these laws and regulations, may adversely affect the demand for our products and, as a result, the financial results of our business operations and our financial condition.

Furthermore, the Loan and Security Agreement by and among certain of our subsidiaries (the “Subsidiary Obligors”) and JPMorgan Chase Bank, N.A., dated March 29, 2021, (the “JPMorgan Credit Facility”) restricts our ability to sell our products directly to cannabis growers or to retailers that sell only to the cannabis industry in countries where it is federally illegal.

As a result, the Subsidiary Obligors do not sell our products directly to the cannabis industry, cannabis growers or cultivators, or to sellers or retailers that sell only to the cannabis industry.

See “— Risks Relating to our Indebtedness” for further detail.

On March 29, 2021, we and our subsidiaries (the "Subsidiary Obligors") entered into a senior secured revolving loan facility with JPMorgan Chase Bank, N.A.

("JPMorgan"), as administrative agent for the lenders, which was subsequently amended and currently provides for a maximum commitment amount of $55 million and terminates on June 30, 2026 (as amended, the "Revolving Credit Facility").

On October 25, 2021, we and the Subsidiary Obligors entered into a $125 million senior secured term loan facility with JPMorgan as administrative agent for the lenders, which was subsequently amended (the "Term Loan").

The Revolving Credit Facility and the Term Loan (collectively, the "Credit Facilities") each contain customary covenants, restrictions and defaults.

The Credit Facilities prohibit us and the Subsidiary Obligors from selling our products, inventory or services directly to cannabis growers operating in any country that prohibits the sale and use of cannabis products other than in accordance with the applicable laws of such country.

As a result, the Company does not sell our products, inventory or services directly to cannabis growers operating in any country that prohibits the sale and use of cannabis products

other than in accordance with the applicable laws of such country.

See "Risk Factors— Risks Relating to our Indebtedness" for further detail.

Intellectual Property

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utility patents, 4 issued foreign patents and designs, 106 registered U.S.

trademarks, and 114 registered foreign trademarks that enable us to position ourselves and our products to a wide range of customers.

trademarks, and 121 registered foreign trademarks.

Our 21 issued patents cover grow lighting and hydroponic systems and components.

These issued patents and our registered trademarks allow us to build out our proprietary brand products, which we believe are high quality products and generate higher sales margins than the distributed products that we sell.

These issued patents and our registered trademarks allow us to build out our proprietary brand products.

Our owned U.S.

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Any litigation or claims brought by or against us could result in substantial costs and diversion of our resources.

We may need to obtain licenses to patents and other intellectual property and proprietary rights held by third parties to develop, manufacture and market our products, if, for example, we sought to develop our products, in conjunction with any patented technology.

We may need to obtain licenses to patents and other intellectual property and proprietary rights held by third parties to develop, manufacture and market our products, if, for example, we should wish to develop products that incorporate or otherwise include, third-party patented technology.

If we are unable to timely obtain these licenses on commercially reasonable terms (or at all) and maintain these licenses, our ability to commercially market our products, may be inhibited or prevented.

In addition, because the manufacturing (cultivation), sale, possession and use of cannabis is illegal under federal law, companies that transact with cannabis businesses may have restricted intellectual property and proprietary rights particularly with respect to obtaining and enforcing patents and trademarks.

In addition, because the manufacturing (cultivation), harvesting, processing, distribution, sale, possession and use of cannabis is illegal under federal law, companies that transact with cannabis businesses may have restricted intellectual property and proprietary rights particularly with respect to obtaining and enforcing patents and trademarks.

We do not believe these restrictions apply to our business.

However, if we are unable to register, or maintain, our trademarks or file for or enforce patents on any of our inventions, such an inability could materially affect our ability to protect our name, brand and proprietary technologies.

However, if we are restricted in our ability to register, or maintain, our trademarks or to file for or enforce patents on any of our inventions, such an inability could materially affect our ability to protect our name, brand and proprietary technologies.

See "— Risks Relating to Our Intellectual Property" for more information on the risks associated with intellectual and proprietary rights.

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We seek to create an inclusive work environment in order to foster an innovative and team-oriented culture.

As of December 31, 2022, we had approximately 498 full time employees globally, as compared to 709 full time employees as of December 31, 2021.

As of December 31, 2023, we had 369 full time employees globally, as compared to 498 full time employees as of December 31, 2022.

Of this amount, approximately 69% are located in the United States, and the remainder primarily in Canada.

During 2022, we reduced headcount and implemented temporary employee furloughs and we may implement further reductions in the future to create operational efficiencies.

During 2023, we reduced headcount and we may implement further reductions in the future to create operational efficiencies.

Additionally, we use temporary workers as needed to provide flexibility for our business including for seasonal projects.

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Workplace safety is important to our business culture and we believe that a safe and empowered workforce is critical to the success of our business.

We maintain several health and safety programs, including our comprehensive Environmental Health and Safety (“EHS”) management system.

We maintain health and safety programs, including our Environmental Health and Safety ("EHS") management system.

Our associates participate in safety committees, hazard identification, work order resolutions and mandatory compliance training.

Additionally, we participate in third party health and safety inspections to

meet regulatory requirements.

Additionally, we participate in third party health and safety inspections to meet regulatory requirements.

To evaluate our health and safety performance, we use an EHS scorecard composed of leading and lagging indicators, such as progress measurements for behavioral-based safety and hazard observations, near-miss reporting, and total recordable incident rates.

Corporate Structure

We have been in the business of supplying indoor gardeners since May 4, 1977.

We have been in the business of supplying indoor gardeners since 1977.

We conduct our business through our wholly-owned, direct and indirect subsidiaries.

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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 1. Business