What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-02-29 compared with 2023-03-09 · 395 added, 528 removed, 695 unchanged (57% of the section changed)

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Consolidated Statements of Operations

Consolidated Statements of Comprehensive ( L oss) Income

Consolidated Statements of Comprehensive Loss

Consolidated Statements of Changes in Stockholders’ Equity

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

Opinion of the Financial Statements

To the stockholders and the Board of Directors of

Hydrofarm Holdings Group, Inc.

Opinion on the Financial Statements

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

and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive (loss) income, changes in stockholders' equity, and cash flows, for each of the two years in the period ended December 31, 2022, and the related notes listed in the Index to Consolidated Financial Statements (collectively referred to as the "financial statements").

and subsidiaries (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, changes in stockholders' equity, and cash flows, for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

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

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

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

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

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

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

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

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

Critical Audit Matters

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

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

Inventory Valuation - Refer to Note 2 to the financial statements

Critical Audit Matter

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

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

Inventory Valuation - Refer to Notes 2 and 5 to the financial statements

Critical Audit Matter Description

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

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

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

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

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

As described in Notes 2 and 5 to the consolidated financial statements, the Company maintains an allowance for excess and obsolete inventory that is based upon assumptions about current and anticipated demand, customer preferences, business strategies, and market conditions.

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

We identified inventory valuation as a critical audit matter because of the quantitative and qualitative materiality of the inventory excess and obsolescence reserve balance, coupled with the judgments necessary to identify and record the inventory excess and obsolescence reserve timely.

Additionally, our audit procedures performed to evaluate management’s estimates of the net realizable value for the inventory on-hand as of the reporting date involved a high degree of auditor judgment.

How the Critical Audit Matter Was Addressed in the Audit

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

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

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

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

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

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

• We selected a sample of inventory items and evaluated historical sales trends, gross margins, and management’s ability to sell-through inventory.

/s/ Deloitte & Touche LLP

Minneapolis, Minnesota

March 9, 2023

February 28, 2024

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

Opinion on Internal Control over Financial Reporting

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

and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2022, of the Company and our report dated March 9, 2023, expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

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

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

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

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

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

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

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

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

Definition and Limitations of Internal Control over Financial Reporting

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

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

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

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

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

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

/s/ Deloitte & Touche LLP

Minneapolis, Minnesota

March 9, 2023

Hydrofarm Holdings Group, Inc.

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Cash and cash equivalents $ 30,312 $ 21,291

Restricted cash — 1,777

Accounts receivable, net 16,890 17,227

Inventories 75,354 111,398

Note receivable — 622

Prepaid expenses and other current assets 5,510 5,032

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Operating lease right-of-use assets 54,494 65,265

Goodwill — 204,868

Intangible assets, net 275,881 300,366

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Deferred revenue 3,231 3,654

Current portion of lease liabilities 9,099 7,198

Current portion of operating lease liabilities 8,336 9,099

Current portion of finance lease liabilities 954 704

Current portion of long-term debt 2,989 1,307

Total current liabilities 37,652 41,605

Long-term lease liabilities 56,299 38,595

Long-term operating lease liabilities 47,506 56,299

Long-term finance lease liabilities 8,734 1,200

Long-term debt 115,412 117,461

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Interest expense ( 15,442 ) ( 10,958 )

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

Other income (expense), net 841 ( 204 )

Other income, net 118 696

Loss before tax ( 65,026 ) ( 291,858 )

Income tax benefit 213 6,443

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

Net (loss) income per share:

Net loss $ ( 64,813 ) $ ( 285,415 )

Net loss per share:

Basic $ ( 1.42 ) $ ( 6.35 )

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Hydrofarm Holdings Group, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

Years ended December 31,

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

Other comprehensive loss:

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

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

Net loss $ ( 64,813 ) $ ( 285,415 )

Other comprehensive income (loss):

Foreign currency translation gain (loss) 738 ( 5,853 )

Total comprehensive loss $ ( 64,075 ) $ ( 291,268 )

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

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Capital Accumulated

Comprehensive Income (Loss) Accumulated

Comprehensive Loss Accumulated

Deficit Total

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

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

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

Issuance of common stock for vesting of stock awards 818,489 1 — — — 1

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

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

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

Issuance of common stock in connection with follow-on public offering, net of offering costs of $ 16,303

5,526,861 1 309,781 — — 309,782

Issuance of common stock in connection with business combinations 1,035,756 — 53,611 — — 53,611

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

Net income — — — — 13,416 13,416

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

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

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

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

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

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

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

Issuance of common stock for vesting of stock awards 805,306 — — — — —

Shares repurchased for withholding tax on stock awards ( 212,665 ) — ( 271 ) — — ( 271 )

Stock-based compensation expense — — 5,075 — — 5,075

Net loss — — — — ( 64,813 ) ( 64,813 )

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

Foreign currency translation gain — — — 738 — 738

Balance, December 31, 2023

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Operating activities 2023 2022

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

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

Net loss $ ( 64,813 ) $ ( 285,415 )

Adjustments to reconcile net loss to net cash from operating activities:

Depreciation, depletion and amortization 32,075 41,527

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

(Benefit from) provision for doubtful accounts ( 386 ) 2,998

Provision for inventory obsolescence 1,587 16,449

Restructuring expenses 6,091 —

Non-cash restructuring expenses 9,703 6,091

Stock-based compensation expense 5,075 8,354

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

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

Deferred income tax expense (benefit) 2 ( 9,310 )

Other 1,500 1,210

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Other long-term liabilities ( 55 ) ( 370 )

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

Net cash from operating activities 7,044 21,989

Investing activities

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

Hydrofarm Holdings Group, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Years ended December 31,

Financing activities

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

Proceeds from exercises of investor warrants — 56,778

Payment of withholding tax related to restricted stock units ( 2,470 ) ( 20,025 )

Borrowings under revolving credit facilities 853 142,628

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

Proceeds from Sale-Leaseback Transaction 8,598 —

Payment of withholding tax related to stock awards ( 271 ) ( 2,470 )

Borrowings under foreign revolving credit facilities 965 853

Repayments of foreign revolving credit facilities ( 970 ) ( 1,102 )

Repayments of Term Loan ( 1,250 ) ( 1,250 )

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

Payments to settle contingent consideration — ( 15,474 )

Other ( 757 ) ( 1,332 )

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

Finance lease principal payments ( 1,007 ) ( 757 )

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 ( 7,093 ) ( 48,571 )

Net increase (decrease) in cash, cash equivalents and restricted cash 9,021 ( 7,093 )

Cash, cash equivalents and restricted cash at beginning of year 21,291 28,384

Cash, cash equivalents and restricted cash at end of year $ 21,291 $ 28,384

Cash and cash equivalents at end of year $ 30,312 $ 21,291

Non-cash investing and financing activities

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

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

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

Right-of-use assets (relinquished) acquired under operating lease obligation $ ( 1,067 ) $ 28,972

Assets acquired under finance lease obligation 185 409

Capital expenditures included in accounts payable and accrued liabilities 200 611

Additions of leasehold improvements and related asset retirement obligations 349 987

Supplemental information

Cash paid for interest 13,101 9,643

Cash paid for income taxes 3,906 1,963

Cash (refunds) paid for income taxes ( 1,000 ) 3,906

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

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

The Company is a leading independent manufacturer and distributor of controlled environment agriculture ("CEA", principally hydroponics) equipment and supplies, including a broad portfolio of proprietary branded products.

The Company is 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.

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

Initial public offering and follow-on public offering

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

The public offering price was $ 20.00 per share.

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

On May 3, 2021, the Company closed its follow-on public offering ("follow-on offering") under a registration statement effective April 28, 2021, in which it issued and sold 5,526,861 shares of its common stock, including the full exercise by the underwriters of their option to purchase 720,894 additional shares of common stock.

The public offering price was $ 59.00 per share.

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

BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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

The Company reclassified balances of $ 704 and $ 1,200 as of December 31, 2022, previously reported in "Current portion of long-term debt" and "Long-term debt", respectively, into "Current portion of finance lease liabilities" and "Long-term finance lease liabilities", respectively, on the consolidated balance sheet as of December 31, 2022, to conform to the current period presentation.

The Company reclassified the balance of $ 145 as of December 31, 2022, previously reported in "Loss on debt extinguishment or modification" into "Other income, net", on the consolidated statement of operations for the year ended December 31, 2022, to conform to the current period presentation.

All intercompany balances and transactions have been eliminated in consolidation.

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

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

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

Use of estimates

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

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

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

Actual results may differ from these estimates.

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Business combinations

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

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

Acquisition related costs are recognized in net loss as incurred.

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

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

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

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

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

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

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

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

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

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

Goodwill arose on the acquisitions because the consideration paid effectively included amounts in relation to the benefit of expected synergies, revenue growth, future market development and the assembled workforce.

These benefits are not recognized separately from goodwill and they do not meet the recognition criteria for identifiable intangible assets.

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

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

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

The intangible assets were assigned estimated useful lives as follows:

(i) customer relationships:

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

8 to 12 years, (iii) computer software:

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

15 to 20 years.

Pursuant to the Heavy 16 purchase agreement, the Company was required to pay up to an additional $ 2,500 of contingent consideration based on $ 200 for each $ 1,000 above a $ 21,000 threshold for net sales in calendar year 2021.

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

The contingent consideration was estimated using a Black-Scholes valuation model, which utilized Level 3 inputs as defined in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 820 - Fair Value Measurements.

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

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

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

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

As of December 31, 2021, contingent consideration of $ 200 was calculated utilizing actual net sales for the full year ended December 31, 2021.

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

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

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

To the extent 2021 earnings before interest, taxes, depreciation, and amortization ("EBITDA") of Aurora

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

exceeded $ 15,556 , the excess was multiplied by eleven to determine contingent consideration.

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

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

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

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

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

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

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

Restructuring

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

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

The Company began a restructuring plan (the "Restructuring Plan") during the three months ended December 31, 2022, and undertook significant actions to streamline operations, reduce costs and improve efficiencies.

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

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

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

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

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

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

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

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

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

During the year ended December 31, 2023, we recorded a pre-tax restructuring charges of $ 2,084 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) $ 6,398 relating primarily to inventory markdowns, and (ii) $ 3,373 relating primarily to the relocation and termination of certain facilities in Canada.

As a result of the continued adverse market conditions, the Company implemented a second phase of the Restructuring Plan beginning in the third quarter of 2023, including U.S.

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

The Company is reducing facility space and consolidating manufacturing operations to improve efficiency and reduce costs.

During the year ended December 31, 2023, the Company recorded pre-tax restructuring charges of $ 9,185 for the second phase, relating primarily to non-cash raw material inventory write-downs as Company liquidates these assets and reduces storage space within certain manufacturing facilities.

These restructuring charges are recorded primarily within Cost of goods sold on the consolidated statements of operations, and are subject to significant estimate.

Including both phases of the Restructuring Plan, the Company recorded $ 10,664 of total restructuring charges within Cost of goods sold on the consolidated statements of operations for the year ended December 31, 2023.

The Company recorded total charges for both phases of the Restructuring Plan of $ 605 within SG&A expenses on the consolidated statements of operations for the year ended December 31, 2023.

Of the $ 11,269 of total restructuring charges recorded for the year ended December 31, 2023, $ 9,703 were non-cash charges primarily related to inventory write-downs and asset dispositions.

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

(In thousands, except share and per share amounts)

The following table presents the activity in accrued expenses and other current liabilities for restructuring costs related to the first and second phases of the Restructuring Plan for the year ended December 31, 2023:

Year Ended December 31, 2023

Phase 1 Phase 2

Restructuring Accruals as of January 1, 2023 $ 696 $ —

Expense 1,247 272

Cash Payments ( 1,943 ) ( 85 )

Restructuring Accruals as of December 31, 2023

Refer to Item 7.

Management’s Discussion And Analysis Of Financial Condition And Results of Operations – Market Conditions for further explanation of the Restructuring Plan and estimates of additional costs that may be incurred.

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

Segment and entity-wide information

1 unchanged sentence

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

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

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

The business is organized as two operating segments, the United States and Canada, which meet the criteria for aggregation, and the Company has elected to present them as one reportable segment, which is the distribution and manufacture of CEA equipment and supplies.

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

1 unchanged sentence

Entity-wide information

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

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

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

Other foreign locations, which are immaterial, individually and in the aggregate, are included in the United States below.

Years ended December 31,

3 unchanged sentences

Total consolidated net sales $ 226,581 $ 344,501

Years ended December 31,

United States $ 68,270 $ 80,380

Canada 33,584 36,020

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

Total property, plant and equipment, net and operating lease right-of-use assets $ 101,854 $ 116,400

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Concentrations of business and credit risk

10 unchanged sentences

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

The Company has applied the framework for measuring fair value which

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

requires a fair value hierarchy to be applied to all fair value measurements.

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

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

6 unchanged sentences

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

The fair value of contingent consideration is classified within level 3 of the fair value hierarchy (See discussion of contingent consideration in Note 3 - Business Combinations and Note 15 - Fair Value Measurements ).

The fair value of contingent consideration was classified within level 3 of the fair value hierarchy.

Refer to Note 14 – Fair Value Measurements , for further discussion of the contingent consideration.

Foreign currency matters

2 unchanged sentences

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

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

Foreign currency transaction gains and losses are included in the determination of Net loss and classified as Other income, net, in the consolidated statements of operations.

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

6 unchanged sentences

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

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

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

As of December 31, 2023, and 2022, there were no amounts classified as restricted cash, as all previous restrictions lapsed during the year ended December 31, 2022.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Accounts receivable, net

2 unchanged sentences

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

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

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

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

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

Subsequent collections are recorded in SG&A on the consolidated statement of operations when they are received.

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

2 unchanged sentences

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

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

Such allowance is not reduced until the product is sold.

Such allowance is not reduced until the product is sold or otherwise disposed.

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

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

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

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

During the years ended December 31, 2023, and 2022 the Company estimated 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 raw materials and products and brands being removed from the Company's portfolio.

Leases are accounted for under ASC 842 - Leases .

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

14 unchanged sentences

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

5 unchanged sentences

Furniture and fixtures 5 years

The useful lives of property, plant and equipment recorded under finance leases are further limited to the term of lease.

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

The Company operates peat bogs in Alberta Canada.

Under current provincial laws the Company is subject to certain asset retirement obligations ("AROs") and the remediation of the peat bog sites are under provincial oversight.

The Company periodically evaluates expected remediation costs associated with the peat bog sites that it operates.

Where the Company concludes that it is probable that a liability has been incurred, a provision is made for management's estimate of the liability.

As of December 31, 2023, and 2022, the Company has AROs of $ 759 and $ 262 , respectively, recorded in Accrued expenses and other current liabilities on the consolidated balance sheet.

As of December 31, 2023, and 2022, the Company has AROs of $ 4,457 and $ 4,370 , respectively, recorded in Other long-term liabilities on the consolidated balance sheet.

The ARO changes related to the various components of accretion, and additional obligations incurred during 2023 and 2022 were not significant.

Intangible assets and goodwill

1 unchanged sentence

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

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

amount may not be recoverable.

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

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

6 unchanged sentences

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

Note Receivable

Note Receivable and Investment

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

1 unchanged sentence

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

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

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

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

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

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

During the first quarter of 2023, the Company agreed to forgive the note

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

receivable in exchange for interest in a third-party equity investment.

The investment is recorded at an estimated cost basis of $ 531 , inclusive of capitalized transaction costs, which is reported within Other assets on the consolidated balance sheet.

Revenue recognition

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

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

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

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

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

1 unchanged sentence

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

The amount billed to customers for shipping and handling costs included in net sales was $ 13,180 , and $ 8,050 in 2022, and 2021, respectively.

The amount billed to customers for shipping and handling costs included in net sales was $ 9,523 and $ 13,180 in the years ended December 31, 2023, and 2022, respectively.

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

1 unchanged sentence

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

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

There are no significant financing components.

The Company's contract liabilities, which consist primarily of customer deposits reported within deferred revenue on the consolidated balance sheets, totaled $ 3,231 and $ 3,654 as of December 31, 2023, and 2022, respectively.

There are no significant financing components and the majority of revenue is recognized within one year.

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

1 unchanged sentence

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Stock-based compensation

12 unchanged sentences

Treasury implied yield at the date of grant.

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

The Company has elected to use the "simplified method" to determine the expected term which is the midpoint between the vesting date and the end of the

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

contractual term because it has insufficient history upon which to base an assumption about the term.

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

12 unchanged sentences

For the years ended December 31, 2023, and 2022, there were no performance awards with market-based conditions granted.

Employee benefit plan

The Company has a savings retirement plan that covers substantially all full-time employees who meet the plan’s eligibility requirements and provides for an employee elective contribution.

The Company made matching contributions to the plan and incurred expense of $ 261 and $ 280 for the years ended December 31, 2023, and 2022, respectively.

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

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

9 unchanged sentences

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

GAAP provides that a tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position.

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

Recently issued accounting pronouncements

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

BUSINESS COMBINATIONS

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

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

These benefits are not recognized separately from goodwill and they do not meet the recognition criteria for identifiable intangible assets.

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

The intangible assets were assigned estimated useful lives as follows:

(i) customer relationships:

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

8 to 12 years, (iii) computer software:

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

15 to 20 years.

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

operating segment since the acquisition date.

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Heavy 16 Acquisition

On May 3, 2021, the Company acquired 100 % of the issued and outstanding membership interests of Field 16, LLC ("Heavy 16"), a manufacturer and supplier of branded plant nutritional products.

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

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

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

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

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

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

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

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

As of December 31, 2021, contingent consideration of $ 200 was calculated utilizing actual net sales for the full year ended December 31, 2021.

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

The amount of goodwill is fully deductible for tax purposes.

House & Garden Acquisition

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

(“HG”), Humboldt Wholesale, Inc.

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

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

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

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

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

The amount of goodwill is not deductible for tax purposes.

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

tax purposes.

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

Aurora Acquisition

On July 1, 2021, the Company acquired 100 % of the issued and outstanding membership interests of Gotham Properties LLC (“Gotham Properties”), Aurora Innovations LLC (“Aurora Innovations”), Aurora International LLC (“Aurora International” and, together with Gotham Properties and Aurora Innovations, “Aurora”), a manufacturer of plant fertility product lines.

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

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

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

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

The amount of goodwill is fully deductible for tax purposes.

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

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

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

The contingent consideration was estimated using the discounted cash flow method, which estimated the incremental EBITDA based on the Company's forecasted 2021 EBITDA of

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

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

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

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

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

Greenstar/Grotek Acquisition

On August 3, 2021, the Company acquired 100 % of the issued and outstanding shares of Greenstar Plant Products Inc., (“Greenstar”), a manufacturer of horticultural products and solutions for global, domestic and commercial use.

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

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

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

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

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

Innovative Growers Equipment, Inc.

On November 1, 2021, the Company acquired 100 % of the issued and outstanding shares of Innovative Growers Equipment, Inc., an Illinois corporation (“IGE”), Innovative AG Installation, Inc., an Illinois corporation (“IAG”), Innovative Racking Systems, Inc., an Illinois corporation (“IRS”), and Innovative Shipping Solutions, Inc., an Illinois corporation (“ISS” and, together with IGE, IAG, IRS, and their respective subsidiaries, the “IGE Entities”), a manufacturer of horticulture benches, racking and LED lighting systems which complement the Company’s existing lineup of high performance, proprietary branded products.

The preliminary acquisition fair value of the consideration transferred for the IGE Entities was $ 60,902 , consisting of $ 49,129 in cash, $ 11,051 of the Company's common stock, and $ 722 forgiveness of a contract asset.

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

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

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

tax purposes.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

Heavy 16 H&G Entities Aurora Greenstar IGE Entities

Component of Purchase Price:

Amount Amount Amount Amount Amount

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

Common stock 16,736 — 25,824 — 11,051

Contingent consideration 344 — 19,300 — —

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

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

Acquisition-related costs $ 3,109 $ 5,063 $ 7,358 $ 3,688 $ 2,150

Allocation of Purchase Price:

Identifiable assets (liabilities)

Accounts receivable $ 510 $ 3,308 $ 6,967 $ 982 $ 2,367

Inventories 1,451 6,559 11,031 8,728 30,592

Prepaid expenses and other current assets 34 493 1,086 447 470

Property and equipment 1,078 358 37,991 1,717 4,274

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

Other assets 25 213 — 176 —

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

Accrued expenses and other current liabilities ( 226 ) ( 445 ) ( 768 ) ( 1,421 ) ( 859 )

Current portion of lease liabilities ( 274 ) ( 447 ) — ( 624 ) ( 815 )

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

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

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

Long-term debt — — — — ( 1,434 )

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

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

Identifiable intangible assets

Other intangible assets 200 200 824 383 2,430

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

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

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

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

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

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

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

(In thousands, except share and per share amounts)

Supplemental Disclosure of Financial Results

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

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

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

December 31, 2021

Estimated ($ in millions)

Net sales $ 596

Net income $ 66

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

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

Recently issued accounting pronouncements

In November 2023, the FASB issued Accounting Standards Update (“ASU”) No.

2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures (ASU 2023-07), which requires an enhanced disclosure of significant segment expenses on an annual and interim basis.

This ASU will be effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

In December 2023, the FASB issued ASU No.

2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures (ASU 2023-09), which requires greater disaggregation of information in the effective tax rate reconciliation, income taxes paid disaggregated by jurisdiction, and certain other amendments related to income tax disclosures.

This guidance will be effective for fiscal years beginning after December 15, 2024.

Early adoption is permitted.

The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

GOODWILL AND INTANGIBLE ASSETS, NET

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

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

and Canada was in excess of the fair value.

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

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

1 unchanged sentence

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

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

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

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

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

The changes in goodwill are as follows:

Balance at December 31, 2021 $ 204,868

Acquisition - Heavy 16 18,204

Acquisition - H&G Entities 49,707

Acquisition - Aurora 46,433

Acquisition - Greenstar 43,009

Acquisition - IGE Entities 48,687

Foreign currency translation adjustments, net ( 1,172 )

Balance at December 31, 2021 $ 204,868

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

Acquisition - Greenstar - measurement period adjustments 7,000

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

Acquisition - Innovative Growers Equipment - measurement period adjustments ( 21,304 )

Acquisition - Greenstar Plant Products - measurement period adjustments 7,000

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

Impairments ( 189,572 )

9 unchanged sentences

Computer software $ 9,325 $ ( 8,357 ) $ 968 $ 9,408 $ ( 7,976 ) $ 1,432

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

Customer relationships 99,805 ( 31,883 ) 67,922 99,933 ( 24,533 ) 75,400

Technology, formulations and recipes 114,181 ( 25,124 ) 89,057 114,187 ( 15,344 ) 98,843

2 unchanged sentences

Total finite-lived intangible assets, net 359,606 ( 86,526 ) 273,080 359,716 ( 62,151 ) 297,565

Indefinite-lived intangible assets:

Indefinite-lived intangible asset:

Trade name 2,801 — 2,801 2,801 — 2,801

Other — — — 120 — 120

Total Intangible assets, net $ 362,407 $ ( 86,526 ) $ 275,881 $ 362,517 $ ( 62,151 ) $ 300,366

The Company also reviewed intangible assets with finite lives and indefinite lives for impairment as of June 30, 2022, however no impairment was noted.

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

Amortization expense related to intangible assets was $ 24,355 and $ 33,308 for the years ended December 31, 2023, and 2022, respectively.

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

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

The following are the estimated useful lives and the weighted-average amortization period remaining as of December 31, 2023, for the major classes of finite-lived intangible assets:

Weighted-average amortization period

Computer software 5 years

Computer software 3 to 5 years

Customer relationships 7 to 18 years

10 unchanged sentences

(In thousands, except share and per share amounts)

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

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

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

LOSS PER COMMON SHARE

Basic loss per common share is computed using net loss divided by the weighted-average number of common shares outstanding during each period, excluding unvested restricted stock units ("RSUs") and performance stock units ("PSUs").

Diluted loss per common share represents net loss divided by the weighted-average number of common shares outstanding during the period, including common stock equivalents.

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

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

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

The following table presents information necessary to calculate basic and diluted EPS for the years ended December 31, 2022, and 2021:

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

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

The following table presents basic and diluted loss per common share for the years ended December 31, 2023, and 2022:

Years ended December 31,

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

Net loss $ ( 64,813 ) $ ( 285,415 )

Weighted-average shares of common stock outstanding 45,508,363 44,974,856

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

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

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

Dilutive effect of warrants and share based compensation awards using the treasury stock method — —

Diluted weighted-average shares of common stock outstanding 45,508,363 44,974,856

Basic EPS $ ( 6.35 ) $ 0.34

Diluted EPS $ ( 6.35 ) $ 0.31

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

Years ended December 31,

Shares subject to warrants outstanding — 1,899,435

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

Shares subject to stock options outstanding — 831,517

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

Basic loss per common share $ ( 1.42 ) $ ( 6.35 )

Diluted loss per common share $ ( 1.42 ) $ ( 6.35 )

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

Years ended December 31,

Shares subject to warrants outstanding — 17,669

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

Shares subject to unvested performance and restricted stock units 2,163,392 1,088,879

Shares subject to stock options outstanding 571,359 670,026

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

ACCOUNTS RECEIVABLE, NET AND INVENTORIES

4 unchanged sentences

Total accounts receivable, net $ 16,890 $ 17,227

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The change in the allowance for doubtful accounts consisted of the following:

Years ended December 31,

Beginning balance $ ( 1,556 ) $ ( 1,156 )

Changes in estimates ( 1,280 ) ( 3,274 )

Write-offs 310 2,375

Collections/Other 1,606 499

Ending balance $ ( 920 ) $ ( 1,556 )

Inventories comprised the following:

4 unchanged sentences

Total inventories $ 75,354 $ 111,398

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

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

1 unchanged sentence

The Company leases its distribution centers and manufacturing facilities from third parties under various non-cancelable lease agreements expiring at various dates through 2038.

Also, the Company leases some equipment under finance leases.

Also, the Company leases some property, plant and equipment under finance leases.

Certain leases contain escalation provisions and/or renewal options, giving the Company the right to extend the leases by up to 20 years .

2 unchanged sentences

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

In January 2023, Gotham Properties LLC, an Oregon limited liability company and a subsidiary of the Company (“Seller”), consummated a Purchase and Sale Agreement with J & D Property, LLC, a Nevada limited liability company (“Purchaser”) pursuant to which certain real property located in the City of Eugene, County of Lane, State of Oregon (the “Eugene Property”) was sold to Purchaser for $ 8,598 and then leased back by Seller (the “Sale-Leaseback Transaction”).

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

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

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

Refer to Note 9 - Debt for further discussion.

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

(In thousands, except share and per share amounts)

Total ROU assets and lease liabilities were as follows:

Total right-of-use ("ROU") assets, finance lease assets, and lease liabilities were as follows:

Balance Sheet Classification 2023 2022

Leased assets

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

Operating lease assets Operating lease right-of-use assets $ 54,494 $ 65,265

Finance lease assets Property, plant and equipment, net 9,315 2,005

Total leased assets $ 67,270 $ 47,610

Total lease assets $ 63,809 $ 67,270

Lease liabilities

Operating leases Current portion of lease liabilities $ 9,099 $ 7,198

Finance leases Current portion of long-term debt 704 739

Operating leases Long-term lease liabilities 56,299 38,595

Finance leases Long-term debt 1,200 1,628

Operating leases Current portion of operating lease liabilities $ 8,336 $ 9,099

Finance leases Current portion of finance lease liabilities 954 704

Operating leases Long-term operating lease liabilities 47,506 56,299

Finance leases Long-term finance lease liabilities 8,734 1,200

Total lease liabilities $ 65,530 $ 67,302

Total lease income and costs were as follows:

For the years ended December 31,

Total lease costs and sublease income were as follows:

Years ended December 31,

Classification 2023 2022

Operating lease costs Selling, general and administrative (1)

$ 12,371 $ 11,484

Finance lease costs:

3 unchanged sentences

Sublease income Selling, general and administrative ( 1,722 ) ( 1,533 )

(1) Operating lease costs are primarily recorded in SG&A.

In addition to the operating lease costs above, short-term and month-to-month lease expense was $ 182 and $ 341 for the years ended December 31, 2023, and 2022, respectively, and other costs associated with operating leases were $ 3,132 and $ 2,573 , respectively, for non-lease components such as common area maintenance and other miscellaneous items.

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

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

Hydrofarm Holdings Group, Inc.

9 unchanged sentences

Thereafter 16,989 8,039

Total rental payments 76,109 2,007

Total lease payments 64,436 13,299

Less portion representing interest 8,594 3,611

2 unchanged sentences

Long-term portion $ 47,506 $ 8,734

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

The following table summarizes the weighted-average remaining lease term as well as the weighted average discount rate as of December 31, 2023, and 2022:

Weighted-average remaining lease term in years:

4 unchanged sentences

Finance leases 5.25 % 3.63 %

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

For the years ended December 31,

Cash paid for amounts included in lease liabilities for the years ended December 31, 2023, and 2022, were:

Years ended December 31,

Cash paid for amounts included in lease liabilities:

19 unchanged sentences

Depreciation, depletion and amortization expense related to property, plant, and equipment, net was $ 7,720 and $ 8,219 for the years ended December 31, 2023, and 2022, respectively.

As of December 31, 2023, Land, Building and improvements, Computer equipment and Machinery and equipment contain finance leases assets, recorded at cost of $ 12,783 , less accumulated depreciation of $ 3,468 .

As of December 31, 2022, Computer equipment and Machinery and equipment contains finance leases assets, recorded at cost of $ 3,128 , less accumulated depreciation of $ 1,123 .

The increase in finance lease assets in 2023 primarily relates to the Sale-Leaseback Transaction.

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

1 unchanged sentence

Accrued compensation and benefits $ 2,096 $ 2,522

Interest accrual 1,214 108

Freight, custom and duty accrual 1,040 1,022

1 unchanged sentence

Income tax accrual — 451

Contingent consideration — 17,034

Other accrued liabilities 4,819 7,933

9 unchanged sentences

Current portion of long-term debt $ 2,989 $ 1,307

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

Long-term debt - net of unamortized discount and deferred financing costs of $ 4,259 and $ 5,142 as of December 31, 2023, and December 31, 2022, respectively

115,412 117,461

1 unchanged sentence

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

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

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

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

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

The Term Loan was amended by Amendment No.

1 to Credit and Guaranty Agreement (“Amendment No.

1”) effective on 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 is outstanding as of the Amendment No.

1 closing date shall continue until the end of the applicable interest period for such Eurodollar Rate Loan and the provisions of the Term Loan applicable thereto shall continue and remain 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 shall have 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 %.

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.

Legal fees associated with Amendment No.

1 were not material, and were included in Other income, net, on the Consolidated Statements of Operations for the year ended December 31, 2023.

The foregoing description of Amendment No.

1 does not purport to be complete and is qualified in its entirety by reference to the provisions of Amendment No.

1, included as Exhibit 10.8 to this Annual Report on Form 10-K.

Capitalized terms referenced above are defined in the Term Loan.

The Term Loan was subject to a call premium of 1 % if called prior to October 25, 2023, and 0 % thereafter, and matures on October 25, 2028 ("Maturity Date").

Deferred financing costs are being amortized to interest expense over the term of the loan.

For the year ended December 31, 2023, the effective interest rate was 11.55 % and interest expense was $ 14,245 , which includes amortization of deferred financing costs and discount of $ 883 .

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

The principal amounts of the Term Loan are required to be repaid in consecutive quarterly installments in amounts equal to 0.25 % of the 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.

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

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

As described in Note 6 – Leases , the Company received net cash proceeds in January 2023 from the Sale-Leaseback Transaction and is 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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

which are not reinvested would require the Company to make an offer to prepay the corresponding amount on the Term Loan in 2024.

In accordance with this provision, the Company classified $ 1,665 as current debt as of December 31, 2023, and offer to prepay the Term Loan in this amount.

In addition, the Company has $ 2,187 of contractual commitments pursuant to this provision.

Should any of the $ 2,187 balance not be paid within 180 days of the contractual commitment dates, the Company 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 $ 122,500 and $ 123,750 , respectively.

1 unchanged sentence

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

Revolving asset-backed credit facilities

JPMorgan Revolving Loan Facility

On March 29, 2021, the Obligors entered into a Senior Secured Revolving Credit Facility (the “JPMorgan Revolving Loan Facility”) with JPMorgan Chase Bank, N.A., as administrative agent, issuing bank and swingline lender, and the lenders from time to time party thereto.

The JPMorgan Revolving Loan Facility is due on March 29, 2024, or any earlier date on which the revolving commitments are reduced to zero.

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

Revolving Credit Facility

On March 29, 2021, the Obligors 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, and the lenders from time to time party thereto.

The Revolving Credit Facility is due on June 30, 2026, or any earlier date on which the revolving commitments are reduced to zero.

The Revolving Credit Facility originally had a borrowing limit of $ 50,000 .

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

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

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

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

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

On December 22, 2022, the Company entered into a fourth amendment (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 $ 100,000 to $ 75,000 and transitioning the LIBOR based rates to SOFR based rates.

On March 31, 2023, the Company and certain of its subsidiaries entered into an amendment (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 $ 55,000 , and the interest rate on borrowings was revised to various spreads, based on the Company's fixed charge coverage ratio.

The unamortized debt discount and deferred financing costs were $ 538 and $ 580 as of December 31, 2023, and 2022, respectively, and are included in other assets in the consolidated balance sheet.

Debt discount and deferred financing costs are being amortized to interest expense over the term of the Revolving Credit Facility.

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

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

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

Additionally, if the Company’s Excess Availability (as defined in the Revolving Credit Facility documents) is less than an amount equal to 10 % of the Aggregate Revolving Commitment (currently $ 55,000 ), the Company will be required to maintain a minimum fixed charge coverage ratio of 1.1 x on a rolling twelve-month basis until

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

(In thousands, except share and per share amounts)

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

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

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

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

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

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

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

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

the Excess Availability is more than 10 % of the Aggregate Revolving Commitment for thirty consecutive days.

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

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

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

As of December 31, 2023, the Company is in compliance with the covenants contained in the Revolving Credit Facility.

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 %.

1 unchanged sentence

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

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

Encina Credit Facility

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

The Encina Credit Facility was due on the earlier of July 11, 2022, or 90 days prior to the scheduled maturity date of the Brightwood Term Loan.

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

Interest was calculated at LIBOR or a base rate, plus an applicable margin ranging between 3.75 % to 5.50 % per annum determined based on the fixed charge coverage ratio calculated over an applicable time period.

A fee of 0.50 % per annum was charged for available, but unused borrowings as defined.

An additional 200 basis points was added to the interest

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

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

The Encina Credit Facility was subject to numerous amendments since its origination generally in connection with modifications to available borrowings, financial covenants, permitted indebtedness and permitted capital expenditures.

Certain amendments required payments of fees.

All amendments were accounted for as debt modifications.

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

For the year ended December 31, 2021, the Company recognized interest expense of $ 82 .

The unamortized deferred financing costs and early termination fees totaling $ 680 were recognized as a loss on debt extinguishment in the consolidated statements of operations for the year ended December 31, 2021.

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

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

As of December 31, 2023, and 2022, the Company had zero borrowed under the facility.

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

Other debt of $ 160 and $ 160 as of December 31, 2023, and December 31, 2022, respectively, was primarily comprised of foreign subsidiary's other debt which constitutes an immaterial revolving line of credit and mortgage.

Loss on debt modification

The losses on debt modification of $ 59 and $ 145 for the years ended December 31, 2023 and 2022, respectively, resulting primarily from the financing transactions described above, are presented in Other income, net on the consolidated statement of operations.

Aggregate future principal payments

As of December 31, 2022, the aggregate future principal payments under long-term debt, excluding payments due under finance lease obligations presented in Note 7 - Leases , are as follows:

As of December 31, 2023, the aggregate estimated future principal payments under long-term debt are as follows:

Year ending December 31,

Thereafter 117,526

Total principal payments under long-term debt $ 123,910

The following is a reconciliation of payment due:

Finance lease obligations Debt Total

Current portion of long-term debt $ 704 $ 1,307 $ 2,011

Long-term debt 1,200 122,603 123,803

Total payments due $ 1,904 $ 123,910 $ 125,814

Total $ 122,660

STOCKHOLDERS’ EQUITY

2 unchanged sentences

The common stock is not subject to redemption rights and carries no subscription or conversion rights.

In the event of liquidation, the stockholders are entitled to share in corporate assets on a pro rata basis after the Company satisfies all liabilities and after provision is made for any class of

In the event of liquidation, the stockholders are entitled to share in corporate assets on a pro rata basis after the Company satisfies all liabilities and after provision is made for any class of capital stock having preference over the common stock.

Subject to corporate regulations and preferences to preferred stock, if any, dividends are at the discretion of the Board of Directors.

As of December 31, 2023, there were 45,789,890 shares outstanding and 300,000,000 shares authorized.

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

(In thousands, except share and per share amounts)

capital stock having preference over the common stock.

Subject to corporate regulations and preferences to preferred stock, if any, dividends are at the discretion of the Board.

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

On July 19, 2021, the Company completed the redemption ("Redemption") of certain of its outstanding warrants (the "Investor Warrants") that were issued in connection with a private placement of units (the "private placement"), each consisting of a share of common stock and a warrant to purchase an additional one-half (1/2) shares of common stock.

The Company was entitled to redeem all of the outstanding Investor Warrants for a redemption price of $ 0.00033712 per Investor Warrant ("redemption price") if (i) there was an effective registration statement covering the resale of the shares of common stock underlying the Investor Warrants, and (ii) the volume-weighted average price of the Company's common stock for the twenty consecutive trading days prior to the date of the notice of redemption was at least $ 25.28 , of which both requirements were met.

Investor Warrants were exercisable at a price of $ 16.86 per share until July 19, 2021 (the "redemption date").

Any Investor Warrants that remained unexercised immediately after the redemption date were void and no longer exercisable, and the holders of those Investor Warrants were entitled to receive the redemption price.

Prior to the redemption date, 3,367,647 Investor Warrants were exercised, generating total gross proceeds of $ 56,778 .

The Company redeemed 1,491 Investor Warrants at the redemption price.

In connection with the private placement, the Company agreed to engage the placement agent (the "Placement Agent") as the Company's warrant solicitation agent in the event the Investor Warrants were called for Redemption.

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

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

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

Number of Warrants Exercise Price

Placement agent warrants 11,662 $ 8.43

Placement agent warrants 6,007 $ 16.86

Total 17,669 $ 11.30

For the years ended December 31, 2023 and 2022, respectively, there were no Investor Warrants outstanding.

In connection with the private placement, the Placement Agent was issued warrants (the “placement agent warrants”) which expired on December 14, 2023.

As of December 31, 2023, there were no outstanding placement agent warrants.

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

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As of December 31, 2023, a total of 1,400,453 shares were available for grant under the 2020 Plan.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

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

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

The Plan Administrator shall establish and set forth

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

in each instrument that evidences an option the time at which, or the installments in which, the option shall vest and become exercisable.

• The Plan Administrator may grant stock grants and stock-based awards, including securities convertible into shares, stock appreciation rights, phantom stock awards or stock units on such terms and conditions which may be based on continuous service with the Company or related company or the achievement of any performance goals, as the Plan Administrator shall determine in its sole discretion, which terms, conditions and restrictions shall be set forth in the instrument evidencing the award.

The tax benefits recognized in the consolidated statements of operations for stock-based compensation arrangements for the years ended December 31, 2023, and 2022, were not material to the financial statements.

Restricted Stock Unit ("RSU") Activity

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

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

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

During the first quarter of 2023, the Company granted RSU awards that are expected to vest with two equal vesting tranches;

one tranche vested on October 31, 2023, and the second one is scheduled to vest on October 31, 2024.

During the second quarter of 2023, the Company granted RSU awards to members of the Board of Directors that are expected to vest on the one year anniversary of the grant date.

During the third quarter of 2023, the Company granted RSU awards that are expected to vest with three equal vesting tranches, annually on the anniversary of the grant date.

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

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In July 2021, the market-based vesting condition for this award was satisfied and 148,315 RSUs of the former Board member vested.

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

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

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

For the year ended December 31, 2022, the Company withheld 247,979 of the 818,489 of common stock issued upon vesting of RSUs to meet employees' payroll tax withholding requirements.

The tax withholding payments of $ 2,461 were made in 2022 in addition to a tax withholding obligation of $ 9 from 2021.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The remaining 111,236 unvested RSUs met the time-based vesting conditions during the year ended December 31, 2022, and vested at that time.

No additional awards with market-based conditions have been granted.

The following table summarizes the activity related to the Company's RSUs for the year ended December 31, 2023.

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Balance, December 31, 2022

992,633 $ 8.57

Granted 1,091,726 $ 1.19

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1,242,210 $ 3.06

The total fair value of RSUs vested for the years ended December 31, 2022, and 2021, was $ 7,628 , and $ 6,090 , respectively.

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

The total vest date fair value of RSUs vested for the years ended December 31, 2023, and 2022, was $ 948 , and $ 8,397 , respectively.

As of December 31, 2023, total unamortized stock-based compensation cost related to unvested RSUs was $ 2,021 and the weighted-average period over which the compensation is expected to be recognized is 1.09 years.

As of December 31, 2023, there were 6,357 RSUs which had vested, but were not yet issued due to the recipients' elections to defer the awards.

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

The Company recognized $ 4,502 , and $ 7,638 , of total stock-based compensation expense for RSUs for the years ended December 31, 2023, and 2022, respectively.

For the year ended December 31, 2023, the Company withheld 203,756 , of the 779,412 , of common stock issued upon vesting of RSUs to meet employees' payroll tax withholding requirements.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

withholding payments of $ 256 were made in 2023.

Performance Stock Unit ("PSU") Activity

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Balance, December 31, 2022

96,246 $ 15.74

Granted 1,141,543 $ 1.77

Vested ( 25,894 ) $ 15.74

Forfeited ( 290,713 ) $ 5.15

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921,182 $ 1.77

During the year ended December 31, 2023, the PSU forfeitures were due to employee terminations and performance conditions that were not satisfied, while PSU vests were from awards granted in prior periods.

The Company anticipates that a majority of the PSUs outstanding as of December 31, 2023 will forfeit in 2024 as a result of not meeting certain performance conditions.

As of December 31, 2023, total unamortized stock-based compensation cost related to unvested PSUs was $ 72 and the weighted-average period over which the compensation is expected to be recognized is less than one-year .

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

The total vest date fair value of PSUs vested for the year ended December 31, 2023, was $ 44 .

For the years ended December 31, 2023, and 2022, respectively, the Company recognized $ 300 , and $ 355 , of total stock-based compensation expense for PSUs.

For the year ended December 31, 2023, the Company withheld 8,909 , of the 25,894 , of common stock issued upon vesting of PSUs to meet employees' payroll tax withholding requirements.

The tax withholding payments of $ 15 were made in 2023.

Stock Options

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

There were no stock options granted or exercised during the year ended December 31, 2023.

The following table summarizes the stock option activity for the year ended December 31, 2023:

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

Granted 4,250 $ 13.12 $ 12.95

Exercised ( 8,283 ) $ 9.01 $ 2.12

Cancelled ( 91,443 ) $ 9.44 $ 2.19

3 unchanged sentences

Vested and expected to vest as of December 31, 2023 571,359 $ 9.47 $ 2.01 3.69

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The following table summarizes the unvested stock option activity for the year ended December 31, 2023:

3 unchanged sentences

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

Granted 4,250 $ 12.95

Vested ( 46,689 ) $ 5.68

1 unchanged sentence

Unvested as of December 31, 2023 16,674 $ 12.15

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

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

There were no stock options granted for the year ended December 31, 2023.

The weighted average grant date fair value of stock options granted was $ 12.95 for the year ended December 31, 2022.

Since stock options represent equity awards of the Company, such awards are fair valued as of the grant date for the purposes of measurement and recognition under U.S.

To measure the fair value of an option, the Black-Scholes valuation model was utilized.

The valuation model requires the input of highly subjective assumptions.

The valuation model requires the input of subjective assumptions.

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

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

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

Years ended December 31,

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

Year ended December 31, 2022

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

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Risk-free rate 2.8 %

Dividend yield Nil Nil

Dividend yield Nil

Expected term in years 6.0

As of December 31, 2023, the total compensation cost related to unvested options not yet recognized was $ 113 and the weighted-average period over which the compensation is expected to be recognized is less than one-year .

For the years ended December 31, 2023, and 2022, respectively, the Company recognized $ 273 and $ 361 , of total stock-based compensation expense for stock options.

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

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

(Loss) income before tax was as follows:

The total intrinsic value of options exercised was $ 82 for the year ended December 31, 2022.

Loss before tax was as follows:

Years ended December 31,

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Loss before tax $ ( 65,026 ) $ ( 291,858 )

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Significant components of income tax benefit consist of the following:

Years ended December 31,

Total current expense

( 382 ) 2,767

Total current expense

( 215 ) 2,867

111 ( 8,689 )

Total deferred benefit

( 109 ) 2,359

Total deferred expense (benefit)

Total income tax benefit

$ ( 213 ) $ ( 6,443 )

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The reconciliation of income tax computed at the U.S.

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Goodwill impairment — 23,170

Global intangible low-taxed income

Foreign rate differential

3 unchanged sentences

Deferred adjustments

Transaction costs

( 1,320 ) 2,410

2 unchanged sentences

Total income tax benefit $ ( 213 ) $ ( 6,443 )

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

Hydrofarm Holdings Group, Inc.

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Deferred tax liabilities

Intangible assets — ( 17,526 )

Property, plant and equipment

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As of December 31, 2022, the Company had federal and state NOL carryforwards of approximately $ 107,100 and $ 80,800 , respectively.

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

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

Foreign NOL carryforwards were approximately $ 8,900 at December 31, 2023.

The foreign NOLs, if not utilized, will begin to expire in 2040.

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

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

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

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

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

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

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

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Carryforwards of NOLs are subject to possible limitation should a change in ownership occur, as defined by Internal Revenue Code Section 382.

3 unchanged sentences

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

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

In 2023 and 2022, the Company did not record any liabilities related to uncertain tax positions.

The Company does not have any tax positions for which it is reasonably possible that the total amount of gross unrecognized tax benefits will significantly change within 12 months of December 31, 2022, and 2021.

The Company recognizes interest and penalties relating to unrecognized tax benefits as part of its income tax expense.

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Due to the Company’s net operating loss carryforwards, the Company’s income tax returns remain subject to examination by federal, foreign and most state taxing authorities for all tax years.

COMMITMENTS AND CONTINGENCIES, AND RELATED PARTY TRANSACTIONS

COMMITMENTS AND CONTINGENCIES

Purchase commitments

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While there is inherent difficulty in predicting the outcome of such matters, management has vigorously contested the validity of these claims.

Based on available information, management believes the claims are without merit and does not expect that the outcome, individually or in the aggregate, would have a material adverse effect on the consolidated financial positions, results of operations, cash flows or future earnings.

Related party transactions—Hydrofarm Distribution Center

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

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

Based on available information, management does not expect that the outcome of any matters, individually or in the aggregate, would have a material adverse effect on the consolidated financial position, results of operations, cash flows or future earnings of the Company.

FAIR VALUE MEASUREMENTS

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

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

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

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

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

Contingent consideration, as described under the heading Business combinations in Note 2 – Basis of Presentation and Significant Accounting Policies , was measured at estimated fair value on a recurring basis and based on Level 3 fair value measurements.

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

There was no change in the fair value of the contingent consideration for the Heavy 16 acquisition during fiscal year 2022, and it was paid in April 2022.

The change in the fair value of contingent consideration for the Aurora Innovations acquisition was a benefit of $ 1,560 , during the six months ended June 30, 2022, and was recognized in SG&A on the consolidated statements of operations during that period.

The value of the contingent consideration was $ 15,274 as of June 30, 2022, and was subsequently paid in July 2022.

As of December 31, 2023, and 2022, the Company had no remaining unsettled contingent consideration relating to the Company's five acquisitions from 2021.

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

Refer to Note 3 – Goodwill and Intangible Assets, Net , for further discussion.

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

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

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

The carrying value of the note receivable was $ 3,111 as of December 31, 2021.

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

The carrying value of the note receivable was

The carrying value of the note receivable was $ 475 as of December 31, 2022, and was included in other assets on the consolidated balance sheet.

Hydrofarm Holdings Group, Inc.

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(In thousands, except share and per share amounts)

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

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

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

December 31, 2022 December 31, 2021

Fair Value Hierarchy Level

Carrying Amount

Estimated Fair Value

Carrying Amount

Estimated Fair Value

Contingent consideration:

Heavy 16 Acquisition

Aurora Acquisition

— — 16,834 16,834

Other Fair Value Measurements

8 unchanged sentences

30,312 30,312 21,291 21,291

Restricted cash

— — 1,777 1,777

Debt facilities

Finance leases

9,688 9,688 1,904 1,904

122,500 98,000 123,750 105,188

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

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

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

Finance leases primarily relate to the Sale-Leaseback transaction that was entered into in the first quarter of 2023.

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

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

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

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

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

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

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

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

SUBSEQUENT EVENTS

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

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

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

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

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

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

Refer to Note 6 – Leases and Note 9 – Debt , for further discussion of the Company's finance leases and Term Loan, respectively.

The Company did not have any transfers between Levels within the fair value hierarchy during the periods presented.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data