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Item 7. Management’s Discussion and Analysis

2024-02-29 compared with 2023-03-09 · 152 added, 222 removed, 124 unchanged (75% of the section changed)

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This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance.

These statements are only predictions, and actual events or results may differ materially.

Actual events or results may differ materially from forward-looking statements.

In evaluating such statements, you should carefully consider the various factors identified in this Annual Report on Form 10-K, which could cause actual results to differ materially from those expressed in, or implied by, any forward-looking statements, including those set forth in "Risk Factors" in this Annual Report on Form 10-K.

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Company Overview

We are a leading independent manufacturer and distributor of CEA equipment and supplies, including a broad portfolio of our own innovative proprietary branded products.

We are a leading independent manufacturer and distributor of branded hydroponics equipment and supplies for controlled environment agriculture ("CEA"), including grow lights, climate control solutions, growing media and nutrients, as well as a broad portfolio of innovative and proprietary branded products.

We primarily serve the U.S.

and Canadian markets, and believe we are one of the leading competitors in these markets in an otherwise highly fragmented industry.

and Canadian markets, and believe we are one of the leading companies in these markets in an otherwise fragmented industry.

For over 40 years, we have helped growers make growing easier and more productive.

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Market Conditions

We experienced adverse financial results during 2022 which we believe is primarily a result of an agricultural oversupply impacting our market.

This has led to a reduction in our 2022 profitability, as compared to the prior year, and a loss from operations.

These market conditions continued to negatively impact our business and results of operations, and the extent to which this will continue is uncertain and difficult to predict at this time.

In connection with our previously disclosed evaluation of our facility footprint and product and brand portfolio, we began a restructuring plan during the quarter ended December 31, 2022.

We are undertaking significant actions to streamline our operations, reduce costs and improve efficiencies during the industry recession.

Our major initiatives include (i) narrowing our product and brand portfolio and (ii) relocating and consolidating certain manufacturing and distribution centers including headcount reductions and reorganization to drive a solution based approach.

We are focusing commercial sales on competencies and product assortment gained from our recent acquisitions.

During the year ended December 31, 2022, we recorded pre-tax charges of $6.8 million relating to inventory markdowns of products and brands being removed from our portfolio, which is primarily non-cash, and $0.9 million relating primarily to the relocation and termination of certain facilities in Canada, which are primarily cash charges.

Restructuring charges are primarily recorded within Cost of goods sold on the consolidated statement of operations for the year ended December 31, 2022.

We plan to incur approximately $1.7 million of additional charges in 2023, which are primarily cash, associated with the execution of our restructuring plan, which we expect to complete in the first half of 2023.

We may also execute a second phase of our restructuring plan in 2023 and incur additional costs.

Our 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.

We expect the restructuring and related actions to result in cost savings of approximately $7.0 million on an annualized basis.

We have experienced adverse financial results which we believe is primarily a result of an agricultural oversupply impacting our market.

An agricultural oversupply has impacted our industry, driving cannabis wholesale prices down and resulting in a decrease in indoor and outdoor cultivation in the markets where we operate.

The extent these market conditions will continue to negatively impact our business and results of operations is uncertain and difficult to predict at this time.

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.

In connection with our previously disclosed evaluation of our facility footprint and product and brand portfolio, we initiated a restructuring plan (the "Restructuring Plan") during the quarter ended December 31, 2022.

In connection with the first phase of our Restructuring Plan, we have undertaken significant actions to streamline our operations, reduce costs and improve efficiencies during the industry recession.

Our major initiatives included (i) narrowing our product and brand portfolio, including removing approximately one-third of all products and one-fifth of all brands relating to our primary product portfolio, which excluded our garden center business in Canada, and (ii) relocating and consolidating certain manufacturing and distribution centers including headcount reductions and reorganization to drive a solution based approach, focusing commercial sales on competencies and product assortment gained from our recent acquisitions.

During the year ended December 31, 2022 , we recorded pre-tax charges of $6.8 million relating to the inventory markdowns of products and brands being removed from our portfolio, which is primarily non-cash, and $0.9 million relating primarily to the relocation and termination of certain facilities in Canada, which are primarily cash charges.

During the year ended December 31, 2023, we recorded a pre-tax restructuring charges of $2.1 million for the first phase of the Restructuring

Plan, which were primarily costs related to the relocation and termination of certain facilities in Canada.

The restructuring charges are primarily recorded within Cost of goods sold on the consolidated statements of operations.

Total costs incurred relating to this first phase of the Restructuring Plan since it commenced in the fourth quarter of 2022, are (i) $6.4 million relating primarily to inventory markdowns, and (ii) $3.4 million relating primarily to the relocation and termination of certain facilities in Canada.

As a result of the continued adverse market conditions, in the third quarter of 2023 we announced and began implementing a second phase of the Restructuring Plan, including U.S.

manufacturing facility consolidations, in particular with respect to our production of certain durable equipment products.

We are reducing facility space and consolidating our manufacturing operations in the U.S.

to improve efficiency and reduce costs.

During the year ended December 31, 2023, we recorded estimated pre-tax charges of $9.2 million for the second phase of restructuring relating primarily to non-cash raw material inventory write-downs as we sell certain assets and reduce capacity and facility space, given low customer demand for these products.

We also may evaluate other alternatives or opportunities to maximize our recovery of the inventory value.

These restructuring charges are primarily recorded within Cost of goods sold on the consolidated statements of operations.

Further, we estimate additional charges associated with this second phase of the Restructuring Plan may exceed $2.0 million and be incurred through the next several quarters as we consolidate and exit facilities.

These estimated additional charges include an estimated cash impact that may exceed $1.0 million for facility consolidations and lease and other contract terminations.

We anticipate the second phase of our restructuring plan and related actions may result in cost savings of approximately $1.5 million on an annualized basis.

The amounts we will ultimately realize or disburse in connection with both phases of the Restructuring Plan could differ materially from our estimates, and we may not be able to realize the full extent of our anticipated cost savings.

As of June 30, 2022, primarily due to a sustained decline in the market value of our common stock and the market conditions described above, we identified a triggering event requiring a test for goodwill impairment.

We completed our goodwill impairment testing and recorded an impairment charge of $189.6 million as the test determined that the carrying value of the reporting units of U.S.

We completed our goodwill impairment testing and recorded an impairment charge of $189.6 million as the test determined that the carrying value of the goodwill 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 impairment was primarily due to a deterioration in customer demand in the United States and Canada caused by macroeconomic and industry conditions.

We also review intangible assets with finite lives and indefinite lives for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.

We did not identify a triggering event requiring a test for impairment of intangible assets during the remainder of 2022.

We did not identify a triggering event requiring a test for impairment during the remainder of 2022, or the year ended December 31, 2023.

In connection with the goodwill impairment analysis performed as of June 30, 2022, we determined the fair value of the U.S.

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

The fair value determinations were a reflection of recent sales declines we have experienced, which we believe are primarily a result of an agricultural oversupply impacting our market, and a reduction to our 2022 profitability and loss from operations.

The fair value determinations were a reflection of sales declines we experienced, which we believe were primarily a result of an agricultural oversupply impacting our market, and a reduction to our profitability and loss from operations.

These market conditions continued to negatively impact our business and results of operations during the remainder of 2022, and the year ended December 31, 2023.

We maintain an allowance for excess and obsolete inventory that is based upon assumptions about future demand and market conditions.

During the year ended December 31, 2022, our consolidated statements of operations included charges of $18.5 million, primarily relating to increases to our allowance for inventory obsolescence relating to certain lighting products, which are incremental to the restructuring costs described above.

In addition, during the year ended December 31, 2022, our consolidated statements of operations included $2.9 million of accounts receivable allowances and write downs.

While we believe our estimates of charges relating to our Restructuring Plan, long-lived assets, inventory obsolescence, and accounts receivable allowances are reasonable, it is possible that we may incur additional charges in the future and actual results may differ significantly from these estimates and assumptions.

Depending on the length and severity of the industry and market conditions impacting our business, it is possible we may execute additional restructuring plans and incur future associated charges, and we may not be able to realize the full extent of our anticipated cost savings.

Five Acquisitions Completed in 2021

During the year ended December 31, 2021, we completed the following five acquisitions of branded manufacturers of CEA products, resulting in a significant expansion of our portfolio of proprietary branded products and manufacturing capabilities.

Our proprietary brands generally provide for higher gross profit margins compared to distributed brands.

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

Heavy 16 was a leading manufacturer and supplier of branded plant nutritional products, with nine core products featuring a full line of premium nutrients used in all stages of plant growth, helping to increase the yield and quality of crops.

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

House & Garden is located in Arcata, California, and produces and distributes premium grade plant nutrients and fertilizers, offering a strong product line to strengthen our position in the nutrient sector.

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

Aurora provides comprehensive plant fertility products and grow media and includes organic nutrient and premium soil brands.

With the Aurora acquisition, we gained new domestic manufacturing and distribution capabilities on the east and west coasts along with a peat moss harvesting operation in Canada.

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

Greenstar produces premium horticultural products and solutions with brands including Grotek, Gaia Green, Supergreen, and EarthSafe.

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

The acquisition of Innovative Growers Equipment added to our existing lineup of high performance, proprietary branded products.

S ee Note 3 - Business Combinations in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Recent Financing Arrangements and Other Transactions

During the years ended December 31, 2022, and 2021, we entered into new financing arrangements and other significant transactions including:

On October 25, 2021, we entered into a senior secured term loan facility, in the aggregate principal amount of $125.0 million, with JPMorgan Chase Bank, N.A.

as administrative agent for the lenders (the "Term Loan").

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

◦ Investor Warrant Redemption:

On July 19, 2021, we completed the redemption (the “Warrant Redemption”) of certain of our outstanding warrants (the "Investor Warrants") to purchase shares of our common stock that were issued in connection with a private placement of units.

Prior to the redemption date, 3,367,647 Investor Warrants were exercised, generating total gross proceeds of approximately $56.8 million.

As of December 31, 2022, and 2021, respectively, there were no Investor Warrants outstanding.

◦ Follow-on Public Offering:

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

◦ JPMorgan Revolving Loan Facility:

On March 29, 2021, we and certain of our subsidiaries 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 for a three-year revolving line of credit up to $50 million.

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

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

The JPMorgan Revolving Loan Facility was amended by the First Amendment dated August 31, 2021, which increased the revolving line of credit by an additional $50 million for an aggregate borrowing limit of $100 million.

The JPMorgan Revolving Loan Facility was further amended by the Second Amendment dated October 25, 2021, which, among other things, permitted the incurrence of the Term Loan and made certain other changes.

The JPMorgan Revolving Loan Facility was further amended by the Third Amendment and Joinder dated August 23, 2022, 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, we entered into a Fourth Amendment pursuant to which the maximum commitment amount under the JPMorgan Revolving Loan Facility was reduced from $100 million to $75 million, and certain other changes were made, including transitioning the LIBOR based rates to SOFR based rates.

The aforementioned financing arrangements and other transactions are more fully described in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Effects 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.

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

Depending on the length and severity of the industry and market conditions impacting our business, it is possible we may execute additional restructuring plan actions and incur future associated charges, and we may not be able to realize the full extent of our anticipated cost savings.

Filing Status

As of June 30, 2023, the market capitalization of outstanding shares of our common stock owned by non-affiliates decreased to below $60 million, which triggered the Company being classified as a non-accelerated filer with respect to SEC regulations and filing requirements effective December 31, 2023.

As a result, our annual assessment of the effectiveness of our internal control over financial reporting does not require an audit by our external audit firm in compliance with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 for this Annual Report on Form 10-K for the year ended December 31, 2023.

The Company continues to qualify as a smaller reporting company in accordance with Rule 12b-2 under the Exchange Act and continues to follow certain of the scaled back disclosure accommodations.

Components of Results of Operations

We generate net sales from the distribution and manufacturing of hydroponic equipment and supplies to our customers.

We generate net sales from the manufacturing and distribution of hydroponic equipment and supplies to our customers.

The hydroponic equipment and supplies that we sell include consumable products, such as growing media, nutrients and supplies that are subject to regular replenishment and durable products, such as lighting and hydroponic equipment.

Our scale allows us to provide delivery and service capabilities to customers across the U.S.

Our scale allows us to provide delivery and service capabilities to our customers primarily in the U.S.

We periodically offer sales incentives to our customers, including early pay discounts, volume-based rebates, temporary price reductions, advertising credits and other trade activities.

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Cost of goods sold

Cost of goods sold consists primarily of material costs, inbound and outbound freight costs, direct labor costs primarily for manufacturing and warehouse personnel, facility costs for manufacturing operations, depreciation, depletion and amortization of manufacturing and warehouse improvements and equipment, inventory allowances, restructuring costs, and certain acquisition and integration expenses.

We expect that our cost of goods sold would increase in absolute dollars in conjunction with net sales growth if that occurs in the future.

However, we expect that, over time, cost of goods sold may decrease as a percentage of net sales if we are able to scale our business as we obtain a higher proportion of net sales associated with proprietary and exclusive branded products.

Cost of goods sold consists primarily of material costs, inbound and outbound freight costs, labor costs primarily for manufacturing and warehouse personnel, facility costs for manufacturing operations, depreciation, depletion and amortization of manufacturing and warehouse improvements and equipment, restructuring costs, inventory allowances, and certain acquisition and integration expenses.

We expect that our cost of goods sold would increase in absolute dollars in conjunction with net sales growth when/if that occurs in the future.

However, we expect that, over time, cost of goods sold may decrease as a percentage of net sales if we are successful in instituting our restructuring and related productivity and cost saving initiatives and/or if we are able to scale our business as we obtain a higher proportion of net sales associated with proprietary branded products.

Selling, general and administrative

Selling, general and administrative expenses ("SG&A") consists primarily of marketing and advertising, facility costs for distribution operations, depreciation and amortization of all other assets, certain acquisition and integration expenses and other selling, general and administrative costs, including but not limited to salaries, benefits, bonuses, stock-based compensation, professional fees, and various costs related to being a publicly-traded company.

Results of Operations Data

The results of operations data in the following table for the years ended December 31, 2022, and 2021 have been derived from the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Selling, general and administrative expenses ("SG&A") consists primarily of facility costs for distribution operations, depreciation and amortization of assets, certain acquisition and integration expenses, marketing and advertising, and other selling, general and administrative costs, including but not limited to salaries, benefits, bonuses, stock-based compensation, professional fees, and various costs related to being a publicly-traded company.

Results of Operations - Comparison of Years Ended December 31, 2023, and 2022

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Selling, general and administrative 87,314 38.5 % 118,604 34.4 % (31,290) -26.4 %

Impairments 192,328 55.8 % — 0.0 % 192,328 N/A

Impairments — 0.0 % 192,328 55.8 % (192,328) -100.0 %

Loss from operations (49,702) -21.9 % (281,596) -81.7 % 231,894 82.3 %

Interest expense (15,442) -6.8 % (10,958) -3.2 % 4,484 40.9 %

Loss on debt extinguishment or modification (145) 0.0 % (680) -0.1 % (535) -78.7 %

Other income (expense), net 841 0.2 % (204) 0.0 % 1,045 512.3 %

Other income, net 118 0.1 % 696 0.2 % (578) -83.0 %

Loss before tax (65,026) -28.7 % (291,858) -84.7 % 226,832 77.7 %

Income tax benefit 213 0.1 % 6,443 1.9 % (6,230) -96.7 %

Net (loss) income (285,415) -82.8 % 13,416 2.8 % (298,831) -2,227.4 %

Net loss (64,813) -28.6 % (285,415) -82.8 % 220,602 77.3 %

Net sales for the year ended December 31, 2023, were $226.6 million, a decrease of $117.9 million, or 34.2%, compared to the same period in 2022.

The 28.1% decrease was due to a 29.5% decline in volume of products sold (a 46.5% decline in organic sales and a 17.0% increase from 2021 acquired proprietary brands), a 1.7% increase in price and mix of products sold, and a 0.3% decline from unfavorable foreign exchange rates.

The 34.2% decrease was primarily due to a 32% decline in volume of products sold and a 2% decrease in price and mix of products sold.

The decrease in volume of products sold was primarily related to the aforementioned oversupply in the cannabis industry.

The increase in price was primarily related to list price increases, as well as higher freight recovery as we put multiple measures in place to combat rising freight costs.

The decrease in foreign exchange related to recent strength in the U.S.

Dollar relative to the Canadian Dollar and to the Euro.

Gross profit for the year ended December 31, 2022, was $29.3 million, a decrease of $72.2 million, or 71.1%, compared to the same period in 2021.

The decrease in gross profit was primarily related to the aforementioned decrease in net sales and a significant decrease in our gross profit margin percentage.

Our gross profit margin percentage decreased to 8.5% for the year ended December 31, 2022, from 21.2% in the same period in 2021.

The lower gross profit margin percentage is primarily due to an increase in the inventory obsolescence allowances and related charges of $18.5 million primarily related to certain lighting products, and restructuring costs of $7.5 million associated with inventory markdowns of products and brands being removed from our portfolio and the relocation and termination of certain facilities in Canada.

Also negatively impacting gross profit margin were freight and labor costs which were higher as a percentage of net sales.

These were partially offset by the aforementioned list price increases, as well as a higher proportion of higher-margin proprietary brand sales.

During the year ended December 31, 2023, we sold a higher mix of generally lower-priced consumables relative to higher-priced durable products, and reduced selling prices for certain brands and product segments, including previously reserved lighting products .

Gross profit for the year ended December 31, 2023, was $37.6 million, an increase of $8.3 million, or 28.2%, compared to the same period in 2022.

The increase in gross profit was primarily due to (i) incurring lower inventory charges in the current year, as the prior year 2022 was impacted by $18.5 million of inventory reserves and related charges, (ii) a $4.8 million reduction in acquisition and integration expenses compared to the prior year, and (iii) benefits from selling a higher proportion of proprietary brand products, lower freight costs, and improved productivity.

Our restructuring plan and related cost-saving initiatives contributed to realizing these net benefits.

These improvements were partially offset by lower net sales in the current year and $3.2 million of higher restructuring charges in 2023 compared to the prior year period.

The restructuring charges were primarily due to non-cash inventory markdowns.

Our gross profit margin percentage increased to 16.6% for the year ended December 31, 2023, from 8.5% in the same period in 2022 .

Selling, general and administrative expenses

SG&A expenses for the year ended December 31, 2022, were $118.6 million, an increase of $14.4 million, or 13.8% compared to the same period in 2021.

The increase is primarily related to (i) a $23.4 million increase in depreciation, depletion and amortization expense primarily due to the acquisitions completed in 2021 which includes $5.9 million of additional amortization expense from adjustments to useful lives that were determined this year, (ii) a $2.9 million increase in accounts receivable allowances and write-offs, (iii) a $2.8 million increase in share-based compensation, (iv) a $2.1 million increase in compensation costs (primarily salaries and benefits for employees from companies acquired in 2021), of which $0.7 million was an increase in severance associated with a recent reduction-in-force, and (v) a $2.0 million increase in insurance costs.

The SG&A increases compared to the prior year were partially offset by (i) a $16.8 million decrease in acquisition and integration expenses, and (ii) a $1.9 million decrease from investor warrant solicitation fees incurred last year.

We recorded goodwill impairment charges of $189.6 million for the year ended December 31, 2022, as we determined that the carrying value of the reporting units of U.S.

and Canada were in excess of the fair value.

The recognized impairment reduced the goodwill balance to zero as of December 31, 2022.

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

and Canada caused by macroeconomic and industry conditions.

For the year ended December 31, 2022, we also recorded an impairment of a note receivable of $2.6 million.

SG&A expenses for the year ended December 31, 2023, were $87.3 million, a decrease of $31.3 million, or 26.4%, compared to the same period in 2022.

The decrease was partially due to a $9.7 million decline in amortization and depreciation expenses, as the prior year period included additional amortization expense due to adjustments to the useful lives of intangible assets, as described in Note 2 – Basis of Presentation and Significant Accounting Policies .

Additionally, SG&A expenses decreased $21.6 million in the year ended December 31, 2023, due to lower expenses in several areas, including as a result of our cost saving and restructuring initiatives:

(i) $5.5 million decrease in salaries and benefits, (ii) $4.1 million decrease in accounts receivable reserves and related charges, (iii) $3.4 million decrease in stock-based compensation, (iv) $2.9 million decrease in acquisition and integration expenses, and (v) $2.1 million decrease in professional and outside services, along with other expense reductions in multiple areas.

The Company did not record any impairment charges for the year ended December 31, 2023.

The Company recorded goodwill impairment charges of $189.6 million for the year ended December 31, 2022, as we 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 United States and Canada caused by macroeconomic and industry conditions.

For the year ended December 31, 2022, the Company also recorded an impairment of a note receivable of $2.6 million.

Refer to Note 2 – Basis of Presentation and Significant Accounting Policies and Note 14 – Fair Value Measurements for further description regarding the note receivable impairment.

Interest expense

Interest expense for the year ended December 31, 2023, was $15.4 million, an increase of $4.5 million, or 40.9%, compared to the same period in the prior year.

The increase was primarily due to the interest-bearing Term Loan entered into in the fourth quarter of 2021 and outstanding for the entirety of 2022, as well as interest rate increases through the year.

Loss on debt extinguishment or modification

Loss on debt extinguishment or modification for the year ended December 31, 2022, was $0.1 million, a decrease of $0.5 million, or 78.7%, compared to the same period in 2021.

The Loss on debt extinguishment or modification 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, which reduced our borrowing capacity from $100 million to $75 million, permitted a sale and leaseback transaction, and made certain other changes, including transitioning the LIBOR based rates to SOFR based rates.

Loss on debt extinguishment or modification for the year ended December 31, 2021, resulted primarily from the write-off of unamortized deferred financing costs associated with the termination of the Encina Credit Facility.

Other income (expense), net

Other income for the year ended December 31, 2022, was $0.8 million compared to Other expense of $0.2 million for the year ended December 31, 2021.

The increase in other income compared to the prior year periods relates primarily to foreign currency exchange rate gains in 2022.

The increase was primarily due to higher variable interest rates on our Term Loan.

Other income, net

Other income, net for the year ended December 31, 2023, was $0.1 million, a decrease of $0.6 million compared to the same period in the prior year.

Other income, net for the year ended December 31, 2023, was primarily driven by foreign currency exchange rate gains and interest income, partially offset by legal fees associated with the amendment of the Term Loan.

Other income, net for the year ended December 31, 2022 was primarily driven by foreign exchange rate gains, partially offset by the write-off of unamortized deferred financing costs associated with the modification of the Revolving Credit Facility entered into during the fourth quarter of 2022.

Income tax benefit

Income tax benefit for the year ended December 31, 2022, was $6.4 million, compared to $19.1 million in the prior year.

We recorded an income tax benefit of $0.2 million for the year ended December 31, 2023, representing an effective tax rate of 0.3%.

Our effective tax rate for the year ended December 31, 2023, differs from the federal statutory rate of 21% primarily due to maintaining a full valuation allowance against our net deferred tax assets in the United States and most foreign jurisdictions.

The income tax benefit for the year ended December 31, 2023, was primarily due to minor foreign tax benefits in certain jurisdictions.

Income tax benefit for the year ended December 31, 2022, was $6.4 million.

Our effective income tax rate was 2.2% for the year ended December 31, 2022, and differs from the U.S.

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

For the year ended December 31, 2021, income tax benefit was primarily the result of a reduction in the valuation allowance recorded against our net deferred tax assets.

In connection with the acquisition of the H&G Entities, we recorded a net deferred tax liability in 2021 which provided an additional source of taxable income to support the realization of the pre-existing deferred tax assets.

Non-GAAP Financial Measures

We report our financial results in accordance with accounting principles generally accepted in the United States of America (“U.S.

GAAP” or “GAAP”).

However, management believes that certain non-GAAP financial measures provide investors with additional useful information in evaluating our performance and that excluding certain items that may vary substantially in frequency and magnitude period-to-period from net (loss) income provides useful supplemental measures that assist in evaluating our ability to generate earnings and to more readily compare these metrics between past and future periods.

These non-GAAP financial measures may be different than similarly titled measures used by other companies.

To supplement our audited consolidated financial statements which are prepared in accordance with GAAP, and to supplement "net (loss) income" and "net (loss) income as a percent of sales", we use “Adjusted EBITDA” and “Adjusted EBITDA as a percent of sales” which are non-GAAP financial measures.

Our non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with GAAP.

There are several limitations related to the use of our non-GAAP financial measures as compared to the closest comparable GAAP measures.

Some of these limitations include:

• Adjusted EBITDA does not reflect the significant interest expense, or the amounts necessary to service interest or principal payments on our indebtedness;

• Adjusted EBITDA excludes depreciation, depletion and amortization, and although these are non-cash expenses, the assets being depreciated and amortized may have to be replaced in the future;

• Adjusted EBITDA does not reflect our tax provision that adjusts cash available to us;

• Adjusted EBITDA excludes the non-cash component of stock-based compensation;

• Adjusted EBITDA excludes the amount of employer payroll taxes on stock-based compensation;

• Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters we consider not to be reflective, on a recurring basis, of our ongoing operations.

These items include restructuring, impairments, severance and other expenses, acquisition and integration expenses, distribution center exit costs, loss on debt extinguishment or modification, investor warrant solicitation fees, and other (expense) income, net.

We define Adjusted EBITDA as net (loss) income excluding interest expense, income taxes, depreciation, depletion and amortization, stock-based compensation including employer payroll taxes on stock-based compensation and other non-cash, unusual and/or infrequent costs (i.e., restructuring, impairments, severance and other expenses, acquisition and integration expenses, distribution center exit costs, loss on debt extinguishment or modification, investor warrant solicitation fees, and other income/expense, net), which we do not consider in our evaluation of ongoing operating performance.

The following table presents a reconciliation of net (loss) income, the most comparable GAAP financial measure, to Adjusted EBITDA for the years ended December 31, 2022, and 2021 (in thousands):

Years ended December 31,

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

Interest expense 10,958 2,138

Income tax benefit (6,443) (19,137)

Distribution center exit costs and other 1

Depreciation, depletion and amortization 41,527 14,934

Impairments 2

Restructuring expenses 3

Severance and other 4

Acquisition and integration expenses 5

Other (income) expense, net 6

Stock-based compensation 7

Loss on debt extinguishment or modification 8

Investor warrant solicitation fees 9

Adjusted EBITDA (Non-GAAP) $ (21,193) $ 47,082

As a percent of net sales:

Net (loss) income (GAAP) (82.8) % 2.8 %

Adjusted EBITDA (Non-GAAP) (6.2) % 9.8 %

Net (loss) income (GAAP) and Adjusted EBITDA (Non-GAAP) for the year ended December 31, 2022, were negatively impacted by $21.4 million of inventory and accounts receivable reserves and related charges.

For the 2022 and 2021 periods presented, this relates to costs incurred to exit and relocate distribution centers in California and Pennsylvania including lease exit costs, transportation, and labor related costs.

The Company completed its goodwill impairment testing and recorded an impairment charge of $189.6 million during year ended December 31, 2022, due to market softness in demand in the U.S.

Additionally, during the year ended December 31, 2022, the Company recorded an impairment primarily related to a $2.6 million charge associated with a note receivable that originated in 2019 in connection with a third party independent processor serving the CBD market.

During the year ended December 31, 2022, the Company recorded pre-tax charges of $6.8 million relating to the inventory markdowns of products and brands being removed from our portfolio and $0.9 million relating primarily to the relocation and termination of certain facilities in Canada.

Severance and other primarily consists of severance costs incurred during the year ended December 31, 2022, related to workforce reductions to optimize our cost structure.

Severance and other primarily consists of costs related to an aborted financing during the year ended December 31, 2021.

For the year ended December 31, 2022, acquisition and integration expenses include non-cash purchase accounting inventory adjustments for House and Garden, Aurora, Greenstar and Innovative Growers Equipment of $4.8 million, and acquisition and integration consulting, transaction services and legal fees incurred for the completed Heavy 16, House and Garden, Aurora, Greenstar, and Innovative Growers Equipment acquisitions and certain potential acquisitions of $4.5 million, partially offset by the change in fair value of contingent consideration for Aurora of ($1.6 million).

For the prior year period, acquisition and integration expenses primarily include investment banking, consulting, transaction services and legal fees incurred for the completed Heavy 16, House & Garden, Aurora, Greenstar, and Innovative Growers Equipment acquisitions and certain potential acquisitions, including non-cash purchase accounting inventory adjustment s of $4.5 million, partially offset by the change in fair value of contingent consideration for Aurora of ($2.5 million) for the year ended December 31, 2021 .

Other (income) expense, net relates primarily to foreign currency exchange rate gains and losses and other non-operating income and expenses.

Includes stock-based compensation and related employer payroll taxes on stock-based compensation for the periods presented.

For the year ended December 31, 2022, loss on debt extinguishment or modification resulted primarily from the write-off of unamortized deferred financing costs associated with the modification of the JPMorgan Revolving Loan Facility.

For the year ended December 31, 2021, loss on debt extinguishment resulted primarily from the write-off of unam ortized deferred financing costs associated with the termination of the Encina Credit Facility.

Reflects the elimination of investor warrant solicitation fees.

Liquidity and Capital Resources

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Years ended December 31,

Net cash from (used in) operating activities $ 21,989 $ (45,067)

Net cash from operating activities $ 7,044 $ 21,989

Net cash used in investing activities (4,170) (8,487)

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

Net cash from (used in) financing activities 6,065 (20,200)

Effect of exchange rate changes on cash, cash equivalents and restricted cash 82 (395)

Net decrease in cash, cash equivalents and restricted cash

Net increase (decrease) in cash, cash equivalents and restricted cash

9,021 (7,093)

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Operating Activities

Net cash from operating activities was $7.0 million for the year ended December 31, 2023, was primarily due to a $12.4 million net cash inflow from a reduction of working capital, partially offset by a reported net loss of $64.8 million less non-cash items of $59.5 million.

The net reduction in working capital was primarily driven by a $26.1 million decrease of inventories, partially offset by decreases of $9.2 million of lease liabilities and $3.5 million of accrued expenses and other current liabilities.

During the year ended December 31, 2023, we paid $13.1 million in cash interest, compared to $9.6 million in the prior year.

In addition, we obtained cash income tax refunds of $1.0 million in 2023 compared to $3.9 million of cash income tax payments in the prior year.

Net cash from operating activities was $22.0 million for the year ended December 31, 2022, primarily due to a $39.6 million net cash inflow from a reduction of working capital related assets and liabilities.

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The net cash inflow from a reduction of working capital is partially offset by consolidated net loss on the statement of operations.

During the year ended December 31, 2022, we paid $9.6 million in cash interest, compared to $1.6 million in the prior year.

Net cash used in operating activities was $45.1 million for the year ended December 31, 2021, primarily consisting of $13.4 million in net income, $4.4 million in net non-cash expense reductions, which were largely comprised of depreciation, depletion and amortization, stock-based compensation expense, non-cash operating lease expense, deferred income tax benefit and other non-cash expenses, less a $62.9 million increase in working capital.

This change in working capital primarily reflects an aggregate increase of $47.8 million in accounts receivable, inventories, prepaid expenses and other current assets, and other assets for the period as well as an aggregate net decrease of $15.1 million in accounts payable, accrued expenses and other current liabilities, deferred revenue, and a decrease in lease liabilities due to payments on lease obligations during the period.

Investing Activities

Net cash used in investing activities for the year ended December 31, 2022, was $8.5 million, due primarily to capital expenditures for property, plant and equipment, which increased over the prior year primarily due to growth investments in our manufacturing operations and the expansion and relocation of certain of our distribution centers.

The 2022 cash usage primarily includes our growth-oriented investments in the peat moss harvesting operation in Canada and IGE manufacturing operations in the U.S.

Net cash used in investing activities for the year ended December 31, 2021, was $468.2 million, due primarily to five business acquisitions we completed during the period, which totaled $462.2 million in cash outflows and $6.0 million in capital expenditures for property, plant and equipment and other.

Net cash used in investing activities for the year ended December 31, 2023, was $4.2 million, due primarily to capital expenditures for property, plant and equipment.

The 2023 cash usage primarily includes investments in our peat moss harvesting operation in Canada.

Net cash used in investing activities for the year ended December 31, 2022, was $8.5 million, due primarily to capital expenditures for property, plant and equipment, which increased over the prior year primarily due to investments in our manufacturing operations and the expansion and relocation of certain of our distribution centers.

The 2022 cash usage primarily includes investments in the peat moss harvesting operation in Canada and IGE manufacturing operations in the U.S.

Financing Activities

Net cash from financing activities was $6.1 million for the year ended December 31, 2023, primarily driven by $8.6 million of proceeds from the Sale-Leaseback Transaction, partially offset by $1.3 million of quarterly principal payments of the Term Loan.

Net cash used in financing activities was $20.2 million for the year ended December 31, 2022, primarily consisting of $15.5 million in payments to settle contingent consideration, primarily on our Aurora acquisition.

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In addition, we paid $1.3 million in principal payments on the Term Loan.

Net cash provided by financing activities was $464.7 million for the year ended December 31, 2021.

We received $309.8 million proceeds from our follow-on offering, $119.9 million proceeds from the Term Loan, net of discount and

issuance costs, and received an additional $56.8 million from the exercise of warrants, including the Warrant Redemption.

We also paid $20.0 million related to employees' withholding tax in connection with the vesting of certain restricted stock units.

JPMorgan Revolving Loan Facility

On March 29, 2021, we entered into the JPMorgan Revolving Loan Facility, which provided for a borrowing limit of $50 million.

The JPMorgan Revolving Loan Facility replaced the Encina Credit Facility.

The JPMorgan Revolving Loan Facility matures on March 29, 2024.

The JPMorgan Revolving Loan Facility was further amended by the Second Amendment dated October 25, 2021 which, among other things, permitted the incurrence of the Term Loan and made certain other changes including subordinating its liens on non-working capital assets to the obligations under the Term Loan.

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

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.

Availability and Use of Cash

Our ability to make investments in our business, service our debt and maintain liquidity will depend upon our ability to generate excess operating cash flows through our operating subsidiaries.

We believe that our cash flows from operating activities, combined with current cash levels and borrowing availability under the Revolving Credit Facility, will be adequate to support our ongoing operations, to fund debt service requirements, capital expenditures, lease obligations and working capital needs through the next twelve months of operations.

However, we cannot guarantee that our business will generate sufficient cash flow from operating activities or that future borrowings will be available under our borrowing agreements in amounts sufficient to pay indebtedness or fund other working capital needs.

Actual results of operations will depend on numerous factors, many of which are beyond our control as further discussed in Part I, Item 1A, Risk Factors included in this Annual Report on Form 10-K.

In January 2023, Gotham Properties LLC, an Oregon limited liability company and our subsidiary ("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 Eu gene, County of Lane, State of Oregon (the “Eugene Property”) was sold to Purchaser for $8.6 million and then leased back by Seller (the "Sale Leaseback Transaction").

The new lease has a term of 15 years with annual rent starting at approximately $0.7 million and increases to the final year when annual rent is approximately $1.0 million.

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

Refer to further discussion below relatin g to Term Loan reinvestment provisions regarding the net cash proceeds of the Sale Leaseback Transaction.

If necessary, we believe that we could supplement our cash position through additional sale-leasebacks, asset sales and equity financing.

We believe it is prudent to be prepared if required and, accordingly, continue to be engaged in the process of evaluating and preparing to implement one or more of the aforementioned activities.

Any potential such event may be subject to provisions referenced in our Term Loan and Revolving Credit Facility, such as subjecting the Company to making mandatory prepayments.

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

The Term Loan was amended by Amendment No.

1 effective as of June 27, 2023, to replace the LIBOR referenced rates with SOFR referenced rates.

Pursuant to Amendment No.

1, any Term Loan that constitutes a Eurodollar Rate Loan that was outstanding as of the Amendment No.

1 closing date continued until the end of the applicable interest period for such Eurodollar Rate Loan and the provisions of the Term Loan applicable thereto continued and remained in effect (notwithstanding the occurrence of the Amendment No.

1 closing date) until the end of the applicable interest period for such Eurodollar Rate Loan, after which such provisions had no further force or effect.

Such Eurodollar Rate Loan shall subsequently either be an ABR Loan or a Term Benchmark Loan.

The ABR Loans shall bear interest at the Alternate Base Rate (with a 2.0% floor) plus 4.50%, and Term Benchmark Loans shall bear interest at the Adjusted Term SOFR Rate (with a 1.0% floor) plus 5.50%.

As of the date of filing this Annual Report on Form 10-K, the ABR Loan and Term Benchmark Loan credit spreads of 4.50% and 5.50%, respectively, within the Amendment No.

1 have not changed from the credit spreads in the original Term Loan.

The Term Loan matures on October 25, 2028.

The principal amounts of the Term Loan are scheduled to be repaid in consecutive quarterly installments in amounts equal to 0.25% of the original 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 of October 25, 2028.

We are 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.

As described in Note 6 – Leases , we received net cash proceeds in January 2023 from the Sale-Leaseback Transaction and are subject to a provision whereby such net cash proceeds can be reinvested into certain investments, such as capital expenditures.

This provision of the Term Loan includes (i) cash investments made within a one-year period from the Sale Leaseback Transaction, and (ii) investments which are contractually committed within one-year of the Sale Leaseback Transaction, and paid within 180 days after entering into such contractual commitment.

The amount of any net cash proceeds which are not reinvested would require us to make an offer to prepay the corresponding amount on the Term Loan in 2024.

In accordance w ith this provision, we classified $1.7 million as current debt on our consolidated balance sheet as of December 31, 2023, and offer to prepay the Term Loan in this amount.

In addition, we have $2.2 million of contractual commitments pursuant to this provision.

Should any of the $2.2 million of contractual commitments not be paid within 180 days of their contractual commitment dates, we will be required to make an additional offer to prepay the corresponding amount in 2024.

The foregoing description of the reinvestment provision does not purport to be complete and is qualified in its entirety by reference to the provisions of the Term Loan.

As of December 31, 2023, and 2022, the outstanding principal balance on the Term Loan was $122.5 million and $123.8 million, respectively.

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

We were in compliance with all debt covenants as of December 31, 2023.

The Term Loan is secured by a first lien on our non-working capital assets and a second lien on our working capital assets.

Revolving Credit Facility

On March 29, 2021, we and certain of our subsidiaries entered into a Senior Secured Revolving Credit Facility (the "Revolving Credit Facility") with JPMorgan Chase Bank, N.A., as administrative agent, issuing bank and swingline lender for a revolving line of credit up to $50 million.

The Revolving Credit Facility was amended by the First Amendment dated August 31, 2021, which increased the revolving line of credit by an additional $50 million for an aggregate borrowing limit of $100 million.

The Revolving Credit Facility was further amended by the Second Amendment dated October 25, 2021 which, among other things, permitted the incurrence of the Term Loan and made certain other changes including subordinating its liens on non-working capital assets to the obligations under the Term Loan.

The Revolving Credit Facility was further amended by the Third Amendment and Joinder dated August 23, 2022, pursuant to which several previously acquired subsidiaries became parties to the Revolving Credit Facility and granted liens on their assets.

On December 22, 2022, the Company entered into the Fourth Amendment pursuant to which a sale-leaseback transaction was permitted, and certain other changes were made, including a reduction of the maximum commitment amount under the Revolving Credit Facility from $100 million to $75 million and transitioning the LIBOR based rates to SOFR based rates.

On March 31, 2023, the Company and certain of its subsidiaries entered into the Fifth Amendment, pursuant to which the maturity date was extended to June 30, 2026, the maximum commitment amount under the Revolving Credit Facility was reduced to $55 million, and the interest rate on borrowings was revised to various spreads, based on the Company's fixed charge coverage ratio.

The Revolving Credit 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%.

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A fee of 0.40% per annum is charged for available but unused borrowings.

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

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

and Canadian Pledge and Security Agreement dated March 29, 2021 and other security documents, as amended to include additional subsidiaries.

The JPMorgan Revolving Loan Facility maintains certain reporting requirements, affirmative covenants, negative covenants and financial covenants.

A certain financial covenant becomes applicable in the event that our excess availability under the JPMorgan Revolving Loan Facility is less than an amount equal to 10% of the Aggregate Revolving Commitment (currently $75 million) and would require us to maintain a minimum fixed charge coverage ratio of 1.1x on a rolling twelve-month basis.

The Revolving Credit Facility maintains certain reporting requirements, affirmative covenants, negative covenants and financial covenants.

A certain financial covenant becomes applicable in the event that our excess availability under the Revolving Credit Facility is less than an amount equal to 10% of the Aggregate Revolving Commitment (currently $55 million) and would require us to maintain a minimum fixed charge coverage ratio of 1.1x on a rolling twelve-month basis.

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 1.15x, but no such acquisitions or payments are currently contemplated.

We were in compliance with all debt covenants as of December 31, 2023.

As of December 31, 2022, approximately $40 million was available to borrow under the undrawn JPMorgan Revolving Loan Facility, before we would be required to comply with the minimum fixed charge coverage ratio of 1.1x.

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

We received net proceeds of $119.9 million from the Term Loan after deducting discounts and deferred financing costs.

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 million 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 of October 25, 2028.

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

We were in compliance with all debt covenants as of December 31, 2022.

The Term Loan is secured by a first lien on our non-working capital assets and a second lien on our working capital assets.

As of December 31, 2023, approximately $22 million was available to borrow under the Revolving Credit Facility, before we would be required to comply with the minimum fixed charge coverage ratio of 1.1x.

As of December 31, 2023, and December 31, 2022, the Company had zero borrowed under the Revolving Credit Facility.

The aforementioned financing arrangements and other transactions are more fully described in the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Cash and cash equivalents

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Material Cash Requirements

Our material cash requirements include interest payments on our long-term debt, operating lease payments, and purchase obligations to support our operations.

Refer to Part II, Item 8, Financial Statements, Note 10 - Debt , Note 7 - Leases , and Note 14 - Commitments and Contingencies, and Related Party Transactions for details relating to our material cash requirements for debt, our leasing arrangements, including future maturities of our operating lease liabilities, and purchase obligations, respectively.

Our estimated 2024 material cash requirements include (i) principal repayments and anticipated interest payments based on current variable rates on our long-term debt of $3.0 million and $14.8 million, respectively, (ii) finance lease payments of $1.4 million, (iii) operating lease payments of $10.4 million, and (iv) $2.2 million subject to the Term Loan's reinvestment provision, as well as other purchase obligations to support our operations.

We have estimated our material cash requirements assuming no borrowings under the Revolving Credit Facility and considering the current variable interest rates on our Term Loan that are based on Secured Overnight Financing Rate.

However, these assumptions may change and variable rates on our Term Loan are subject to change as further described in Item 7A.

The aforementioned estimated 2024 material cash requirements are substantially similar to our 2023 cash requirements.

Refer to the above discussion relating to our cash flows from operating, investing and financing activities for the year ended December 31, 2023.

Also refer to Item 8, Financial Statements , Note 9 - Debt , Note 6 - Leases , and Note 13 - Commitments and Contingencies for details relating to our material cash requirements for debt, our leasing arrangements, including future maturities of our operating lease liabilities, and purchase obligations, respectively.

From time to time in the normal course of business, we will enter into agreements with suppliers which provide favorable pricing in return for a commitment to purchase minimum amounts of inventory over a defined time period.

Our net sales are typically seasonally stronger in our fiscal second and third quarters due to robust sales in the warmer spring and summer months in North America (the United States and Canada are our primarily markets).

Our net sales are typically seasonally stronger in our first three fiscal quarters due to robust sales in preparation of and during the warmer spring and summer months in North America (the United States and Canada are our primarily markets).

This seasonal trend is primarily due to the garden center portion of our customer base, and because certain of our customers may use some of our products (such as grow media and nutrients) in outdoor applications.

While this seasonal pattern did not hold true during fiscal 2022, likely due to the industry recession, we expect this typical seasonal pattern to return in fiscal 2023.

Likely due to the industry recession, our net sales have declined in 2023 compared to 2022 and have led to seasonal patterns that may have less consistency.

Also, we typically expect to utilize cash from operating activities in the first quarter to fund our working capital requirements related to the seasonal sales pattern described above.

Availability and Use of Cash

Our ability to make investments in our business, service our debt and maintain strong liquidity will depend upon our ability to generate excess operating cash flows through our operating subsidiaries.

We believe that the Company will generate positive cash flows from operating activities over the next twelve months.

We believe that our cash flows from operating activities, combined with current cash levels and borrowing availability under the JPMorgan Credit Facility, will be adequate to support our ongoing operations, to fund debt service requirements, capital expenditures, lease obligations and working capital needs through the next twelve months of operations.

However, we cannot ensure that our business will generate sufficient cash flow from operating activities or that future borrowings will be available under our borrowing agreements in amounts sufficient to pay indebtedness or fund other working capital needs.

Actual results of operations will depend on numerous factors, many of which are beyond our control as further discussed in Item 1A.

Risk Factors included elsewhere in this Annual Report on Form 10-K.

In January 2023, Gotham Properties LLC, an Oregon limited liability company and our subsidiary (“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 “Eugene Property”) was sold to Purchaser for $8.6 million and then leased back by Seller (the “Sale-Leaseback Transaction”).

The new lease has a term of 15 years with annual rent starting at approximately $0.7 million and increases to the final year when annual rent is approximately $1.0 million.

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

We intend to reinvest the net cash proceeds into certain permitted investments in 2023, such as capital expenditures.

If necessary, we believe that we could supplement our cash position through additional sale/leasebacks, asset sales and equity financing.

We believe it is prudent to be prepared if required and, accordingly, continue to be engaged in the process of evaluating and preparing to implement one or more of the aforementioned activities.

Critical Accounting Policies and Estimates

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Accordingly, certain amounts currently recorded in the financial statements will likely be adjusted in the future based on new available information and changes in other facts and circumstances.

A discussion of our principal accounting policies that required the application of significant judgments as of December 31, 2022 follows.

A discussion of our principal accounting policies that required the application of significant judgments as of December 31, 2023 and 2022 follows.

Goodwill and indefinite-lived intangible assets

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

We completed our goodwill impairment testing and recorded an impairment charge due to market softness in demand in the U.S.

We completed our goodwill impairment testing and recorded a full impairment of all goodwill due to market softness in

demand in the U.S.

We determined the fair value of the U.S.

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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.

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

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

Long-lived tangible and finite-lived intangible assets

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

For the quarter ended June 30, 2022, we performed an evaluation of intangible assets for impairment in connection with the triggering event identified requiring a quantitative test for goodwill impairment.

This impairment evaluation includes a comparison of the undiscounted cash flows expected to be generated by that long-lived asset or asset group to its carrying amount.

For the quarter ended June 30, 2022, we performed an evaluation of long-lived tangibles and intangible assets for impairment in connection with the triggering event identified requiring a quantitative test for goodwill impairment.

This impairment evaluation included a comparison of the undiscounted cash flows expected to be generated by that long-lived asset or asset group to its carrying amount.

If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying amount exceeds its fair value.

Based on our evaluation, there was no impairment of intangible assets or other long-lived assets for the quarter ended June 30, 2022.

No such triggering event was identified during the remainder of 2022.

No such triggering event was identified during the remainder of 2022 or the year ended December 31, 2023.

We believe that the intangible asset impairment evaluations were based on reasonable assumptions that marketplace participants would use.

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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.

Recent accounting pronouncements

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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 7. Management’s Discussion and Analysis