HYDROFARM HOLDINGS GROUP, INC. 10-Q

ITEM 1. FINANCIAL STATEMENTS Hydrofarm Holdings Group, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands, except share and per share amounts) March 31, December 31, 2024 2023 Assets Current assets: Cash and cash equivalents $ 24,152 $ 30,312 Accounts receivable, net 22,468 16,890 Inventories 72,315 75,354 Prepaid expenses and other current assets 5,039 5,510 Total current assets 123,974 128,066 Property, plant and equipment, net 46,612 47,360 Operating lease right-of-use assets 51,886 54,494 Intangible assets, net 269,794 275,881 Other assets 1,750 1,842 Total assets $ 494,016 $ 507,643 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 15,437 $ 12,613 Accrued expenses and other current liabilities 10,477 9,529 Deferred revenue 2,841 3,231 Current portion of operating lease liabilities 8,362 8,336 Current portion of finance lease liabilities 929 954 Current portion of long-term debt 1,278 2,989 Total current liabilities 39,324 37,652 Long-term operating lease liabilities 45,161 47,506 Long-term finance lease liabilities 8,498 8,734 Long-term debt 115,390 115,412 Deferred tax liabilities 3,232 3,232 Other long-term liabilities 4,382 4,497 Total liabilities 215,987 217,033 Commitments and contingencies (Note 13) Stockholders’ equity Common stock ($ 0.0001 par value; 300,000,000 shares authorized; 45,977,935 and 45,789,890 shares issued and outstanding at March 31, 2024, and December 31, 2023, respectively) 5 5 Additional paid-in capital 788,602 787,846 Accumulated other comprehensive loss ( 7,226 ) ( 6,497 ) Accumulated deficit ( 503,352 ) ( 490,744 ) Total stockholders’ equity 278,029 290,610 Total liabilities and stockholders’ equity $ 494,016 $ 507,643 The accompanying notes are an integral part of the condensed consolidated financial statements. 1 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands, except share and per share amounts) Three months ended March 31, 2024 2023 Net sales $ 54,172 $ 62,178 Cost of goods sold 43,247 50,797 Gross profit 10,925 11,381 Operating expenses: Selling, general and administrative 19,621 24,431 Loss from operations ( 8,696 ) ( 13,050 ) Interest expense ( 3,931 ) ( 3,692 ) Other income, net 215 40 Loss before tax ( 12,412 ) ( 16,702 ) Income tax expense ( 196 ) ( 147 ) Net loss $ ( 12,608 ) $ ( 16,849 ) Net loss per share: Basic $ ( 0.28 ) $ ( 0.37 ) Diluted $ ( 0.28 ) $ ( 0.37 ) Weighted-average shares of common stock outstanding: Basic 45,813,729 45,263,822 Diluted 45,813,729 45,263,822 The accompanying notes are an integral part of the condensed consolidated financial statements. 2 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED) (In thousands) Three months ended March 31, 2024 2023 Net loss $ ( 12,608 ) $ ( 16,849 ) Other comprehensive loss: Foreign currency translation (loss) gain ( 729 ) 112 Total comprehensive loss $ ( 13,337 ) $ ( 16,737 ) The accompanying notes are an integral part of the condensed consolidated financial statements. 3 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED) (In thousands, except for share amounts) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance, January 1, 2023 45,197,249 $ 5 $ 783,042 $ ( 7,235 ) $ ( 425,931 ) $ 349,881 Issuance of common stock for vesting of stock awards 237,333 — — — — — Shares repurchased for withholding tax on stock awards ( 72,306 ) — ( 123 ) — — ( 123 ) Stock-based compensation expense — — 1,182 — — 1,182 Net loss — — — — ( 16,849 ) ( 16,849 ) Foreign currency translation gain — — — 112 — 112 Balance, March 31, 2023 45,362,276 $ 5 $ 784,101 $ ( 7,123 ) $ ( 442,780 ) $ 334,203 Balance, January 1, 2024 45,789,890 $ 5 $ 787,846 $ ( 6,497 ) $ ( 490,744 ) $ 290,610 Issuance of common stock for vesting of stock awards 293,018 — — — — — Shares repurchased for withholding tax on stock awards ( 104,973 ) — ( 97 ) — — ( 97 ) Stock-based compensation expense — — 853 — — 853 Net loss — — — — ( 12,608 ) ( 12,608 ) Foreign currency translation loss — — — ( 729 ) — ( 729 ) Balance, March 31, 2024 45,977,935 $ 5 $ 788,602 $ ( 7,226 ) $ ( 503,352 ) $ 278,029 The accompanying notes are an integral part of the condensed consolidated financial statements. 4 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Three months ended March 31, 2024 2023 Operating activities Net loss $ ( 12,608 ) $ ( 16,849 ) Adjustments to reconcile net loss to net cash from operating activities: Depreciation, depletion and amortization 7,885 8,007 Provision for (benefit from) doubtful accounts 80 ( 247 ) Provision for inventory obsolescence 568 704 Restructuring expenses 7 327 Stock-based compensation expense 853 1,182 Non-cash operating lease expense 2,244 2,948 Other ( 44 ) 456 Changes in assets and liabilities: Accounts receivable ( 5,715 ) ( 5,141 ) Inventories 2,156 7,321 Prepaid expenses and other current assets 442 ( 699 ) Other assets 100 ( 188 ) Accounts payable 2,892 ( 346 ) Accrued expenses and other current liabilities 1,282 ( 3,139 ) Deferred revenue ( 370 ) ( 1,116 ) Lease liabilities ( 1,976 ) ( 2,166 ) Other long-term liabilities ( 93 ) ( 4 ) Net cash used in operating activities ( 2,297 ) ( 8,950 ) Investing activities Capital expenditures of property, plant and equipment ( 1,442 ) ( 1,653 ) Other 34 51 Net cash used in investing activities ( 1,408 ) ( 1,602 ) Financing activities Proceeds from Sale-Leaseback Transaction — 8,598 Borrowings under foreign revolving credit facilities 158 169 Repayments of foreign revolving credit facilities ( 190 ) ( 116 ) Repayments of Term Loan ( 1,974 ) ( 312 ) Payment of withholding tax related to stock awards ( 97 ) ( 123 ) Finance lease principal payments ( 255 ) ( 257 ) Net cash (used in) from financing activities ( 2,358 ) 7,959 Effect of exchange rate changes on cash and cash equivalents ( 97 ) 5 Net decrease in cash and cash equivalents ( 6,160 ) ( 2,588 ) Cash and cash equivalents cash at beginning of period 30,312 21,291 Cash and cash equivalents at end of period $ 24,152 $ 18,703 Non-cash investing and financing activities Right-of-use assets relinquished under operating lease obligations $ — $ ( 1,103 ) Assets acquired under finance lease obligations — 185 Capital expenditures included in accounts payable and accrued liabilities 155 $ 847 Supplemental information Cash paid for interest 4,708 3,401 Cash paid for income taxes 5 180 The accompanying notes are an integral part of the condensed consolidated financial statements. 5 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (dollars in thousands, except share and per share amounts) 1. DESCRIPTION OF THE BUSINESS Description of the business Hydrofarm Holdings Group, Inc. (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 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. 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the requirements of the U.S. Securities and Exchange Commission ("SEC") for interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These condensed consolidated financial statements have been prepared on the same basis as the Company's annual consolidated financial statements and, in the opinion of management, reflect all normal and recurring adjustments which are necessary for the fair statement of the Company’s financial information. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2024, or for any other interim period or for any other future year. All intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated balance sheet as of December 31, 2023, has been derived from the audited consolidated financial statements of the Company, which is included in the 2023 Annual Report. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the 2023 Annual Report. Use of estimates The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Significant estimates include provisions for sales returns, rebates and claims from customers, realization of accounts receivable and inventories, 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 the Company's 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. Restructuring The Company began a restructuring plan (the "Restructuring Plan") in 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. During the three months ended March 31, 2023, the Company recorded pre-tax expense of $ 1,411 relating primarily to the relocation and termination of certain facilities in Canada, which are primarily cash charges. The Company incurred $ 327 of 6 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (dollars in thousands, except share and per share amounts) non-cash charges during the three months ended March 31, 2023, relating to asset dispositions and write-downs. The Company recorded $ 1,237 of restructuring related charges within Cost of goods sold and $ 174 within Selling, general and administrative expenses on the consolidated statements of operations for the three months ended March 31, 2023. Total costs incurred relating to this first phase of the Restructuring Plan, from its inception in 2022 to its completion in 2023, were (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 three months ended March 31, 2024, the Company recorded pre-tax restructuring charges of $ 138 for the second phase, relating primarily to cash charges associated with the consolidation of U.S. manufacturing facilities. Of the $ 138 recorded charges, $ 91 was recorded within Cost of goods sold on the condensed consolidated statements of operations, while $ 47 was recorded within Selling, general and administrative ("SG&A") expenses on the condensed consolidated statements of operations. Total costs incurred relating to this second phase of the Restructuring Plan, from its commencement in the third quarter of 2023 through March 31, 2024, are (i) $ 8,872 of non-cash charges relating primarily to inventory markdowns, and (ii) $ 451 of cash charges relating primarily to the consolidation of U.S. manufacturing facilities. The following tables present 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 three months ended March 31, 2023, and March 31, 2024, respectively: Three Months Ended March 31, 2023 Restructuring Accruals as of December 31, 2022 $ 696 Expense 1,084 Cash Payments ( 1,156 ) Restructuring Accruals as of March 31, 2023 $ 624 Three Months Ended March 31, 2024 Restructuring Accruals as of December 31, 2023 $ 187 Expense 130 Cash Payments ( 180 ) Restructuring Accruals as of March 31, 2024 $ 137 Refer to Item 2. 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 Segment information 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 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. 7 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (dollars in thousands, except share and per share amounts) Since the Company operates as one reportable segment, all required segment financial information is found in the condensed consolidated financial statements and footnotes with entity-wide disclosures presented below. Entity-wide information 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. Three months ended March 31, 2024 2023 United States $ 40,455 $ 47,749 Canada 14,425 15,019 Intersegment eliminations ( 708 ) ( 590 ) Total consolidated net sales $ 54,172 $ 62,178 March 31, 2024 December 31, 2023 United States $ 65,118 $ 68,270 Canada 33,380 33,584 Total property, plant and equipment, net and operating lease right-of-use assets $ 98,498 $ 101,854 All of the products sold by the Company are similar and classified as CEA equipment and supplies. Fair value measurements Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has applied the framework for measuring fair value which requires a fair value hierarchy to be applied to all fair value measurements. All financial instruments recognized at fair value are classified into one of three levels in the fair value hierarchy as follows: Level 1 — Valuation based on quoted prices (unadjusted) observed in active markets for identical assets or liabilities. Level 2 — Valuation techniques based on inputs that are quoted prices of similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not in active markets; inputs other than quoted prices used in a valuation model that are observable for that instrument; and inputs that are derived from or, corroborated by, observable market data by correlation or other means. Level 3 — Valuation techniques with significant unobservable market inputs. The Company measures certain non-financial assets and liabilities, including long-lived assets and intangible assets at fair value on a nonrecurring basis. 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. Inventories Inventories consist of finished goods, work-in-process, and raw materials used in manufacturing products. Inventories are stated at the lower of cost or net realizable value, principally determined by the first in, first out method of accounting. The Company maintains an allowance for excess and obsolete inventory. The estimate for excess and obsolete inventory is based upon assumptions about 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. 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 or otherwise disposed. If inventory is sold, any related reserves would be reversed in the period of sale. During the year ended December 31, 2023, and the three months ended March 31, 2024, the Company estimated inventory markdowns relating to restructuring charges based upon current and 8 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (dollars in thousands, except share and per share amounts) 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. Revenue recognition 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. Arrangements generally have a single performance obligation and revenue is reported net of variable consideration which includes applicable volume rebates, cash discounts and sales returns and allowances. Variable consideration is estimated and recorded at the time of sale. The amount billed to customers for shipping and handling costs included in net sales was $ 2,939 and $ 2,568 during the three months ended March 31, 2024, and 2023 respectively. Shipping and handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs included in cost of goods sold. The Company does not receive noncash consideration for the sale of goods. Contract consideration received from a customer prior to revenue recognition is recorded as a contract liability and is recognized as revenue when the Company satisfies the related performance obligation under the terms of the contract. The Company's contract liabilities, which consist primarily of customer deposits reported within deferred revenue in the condensed consolidated balance sheets, totaled $ 2,841 and $ 3,231 as of March 31, 2024, and December 31, 2023, 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. Income taxes The income tax provision is calculated for an interim period by distinguishing between elements recognized in the income tax provision through applying an estimated annual effective tax rate to a measure of year-to-date operating results referred to as “ordinary income (or loss),” and discretely recognizing specific events referred to as “discrete items” as they occur. The income tax provision or benefit for each interim period is the difference between the year-to-date amount for the current period and the year-to-date amount for the prior period. Recent 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. 9 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (dollars in thousands, except share and per share amounts) 3. INTANGIBLE ASSETS, NET Intangible assets, net comprised the following: March 31, 2024 December 31, 2023 Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value Finite-lived intangible assets: Computer software $ 9,313 $ ( 8,439 ) $ 874 $ 9,325 $ ( 8,357 ) $ 968 Customer relationships 99,805 ( 33,720 ) 66,085 99,805 ( 31,883 ) 67,922 Technology, formulations and recipes 114,181 ( 27,570 ) 86,611 114,181 ( 25,124 ) 89,057 Trade names and trademarks 131,493 ( 18,413 ) 113,080 131,493 ( 16,740 ) 114,753 Other 4,779 ( 4,436 ) 343 4,802 ( 4,422 ) 380 Total finite-lived intangible assets, net 359,571 ( 92,578 ) 266,993 359,606 ( 86,526 ) 273,080 Indefinite-lived intangible asset: Trade name 2,801 — 2,801 2,801 — 2,801 Total Intangible assets, net $ 362,372 $ ( 92,578 ) $ 269,794 $ 362,407 $ ( 86,526 ) $ 275,881 Amortization expense related to intangible assets was $ 6,084 and $ 6,045 for the three months ended March 31, 2024, and 2023, respectively. The following are the estimated useful lives and the weighted-average amortization period remaining as of March 31, 2024, for the major classes of finite-lived intangible assets: Useful lives Weighted-average amortization period remaining Computer software 3 to 5 years 2 years Customer relationships 7 to 18 years 10 years Technology, formulations and recipes 8 to 12 years 9 years Trade names and trademarks 15 to 20 years 17 years The estimated aggregate future amortization expense for intangible assets subject to amortization as of March 31, 2024, is summarized below: Estimated Future Amortization Expense For the period of April 1, 2024 to December 31, 2024 $ 18,283 Year ending December 31, 2025 24,334 2026 24,066 2027 23,849 2028 23,185 2029 and thereafter 153,276 Total $ 266,993 10 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (dollars in thousands, except share and per share amounts) 4. 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 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 three months ended March 31, 2024 and 2023: Three months ended March 31, 2024 2023 Net loss $ ( 12,608 ) $ ( 16,849 ) Weighted-average shares of common stock outstanding 45,813,729 45,263,822 Dilutive effect of warrants and share based compensation awards using the treasury stock method — — Diluted weighted-average shares of common stock outstanding 45,813,729 45,263,822 Basic loss per common share $ ( 0.28 ) $ ( 0.37 ) Diluted loss per common share $ ( 0.28 ) $ ( 0.37 ) 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: Three months ended March 31, 2024 2023 Shares subject to warrants outstanding — 17,669 Shares subject to unvested performance and restricted stock units 1,129,490 2,048,606 Shares subject to stock options outstanding 443,744 658,296 5. ACCOUNTS RECEIVABLE, NET, AND INVENTORIES Accounts receivable, net comprised the following: March 31, 2024 December 31, 2023 Trade accounts receivable $ 22,176 $ 16,740 Allowance for doubtful accounts ( 784 ) ( 920 ) Other receivables 1,076 1,070 Total accounts receivable, net $ 22,468 $ 16,890 11 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (dollars in thousands, except share and per share amounts) The change in the allowance for doubtful accounts consisted of the following: Three months ended March 31, 2024 2023 Beginning balance $ ( 920 ) $ ( 1,556 ) Changes in estimates ( 124 ) ( 108 ) Write-offs 229 130 Collections/Other 31 370 Ending balance $ ( 784 ) $ ( 1,164 ) Inventories comprised the following: March 31, 2024 December 31, 2023 Finished goods $ 57,525 $ 58,346 Work-in-process 3,324 3,891 Raw materials 20,830 23,256 Allowance for inventory obsolescence ( 9,364 ) ( 10,139 ) Total inventories $ 72,315 $ 75,354 Inventories are stated at the lower of cost or net realizable value, and the Company maintains an allowance for excess and obsolete inventory that is based upon assumptions about future demand and market conditions. The allowance for excess and obsolete inventory is subject to change from period to period based on a number of factors including sales of products, changes in estimates, and disposals. 6. LEASES 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 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. However, these options are generally not reflected in the calculation of the right-of-use assets and lease liabilities due to uncertainty surrounding the likelihood of renewal. The Company recognizes operating lease costs over the respective lease periods, including short-term and month-to-month leases. The Company incurred operating lease costs of $ 2,750 and $ 3,647 during the three months ended March 31, 2024, and March 31, 2023, respectively. These costs are included primarily within SG&A in the condensed consolidated statements of operations. 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. For the three months ended March 31, 2024, and March 31, 2023, the Company recorded sublease income of $ 738 and $ 642 , respectively. 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 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. Refer to Note 9 – Debt for further discussion. 12 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (dollars in thousands, except share and per share amounts) Total right-of-use ("ROU") assets, finance lease assets, and lease liabilities were as follows: Balance Sheet Classification March 31, 2024 December 31, 2023 Lease assets Operating lease assets Operating lease right-of-use assets $ 51,886 $ 54,494 Finance lease assets Property, plant and equipment, net 9,020 9,315 Total lease assets $ 60,906 $ 63,809 Lease liabilities Current: Operating leases Current portion of operating lease liabilities $ 8,362 $ 8,336 Finance leases Current portion of finance lease liabilities 929 954 Noncurrent: Operating leases Long-term operating lease liabilities 45,161 47,506 Finance leases Long-term finance lease liabilities 8,498 8,734 Total lease liabilities $ 62,950 $ 65,530 The aggregate future minimum lease payments under long-term non-cancelable operating and finance leases with remaining terms greater than one year as of March 31, 2024, are as follows: Operating Finance For the period of April 1, 2024 to December 31, 2024 $ 7,872 $ 1,063 Year ending December 31, 2025 10,315 1,303 2026 9,159 851 2027 8,938 853 2028 8,383 806 2029 and thereafter 16,800 8,039 Total lease payments 61,467 12,915 Less portion representing interest ( 7,944 ) ( 3,488 ) Total principal 53,523 9,427 Less current portion ( 8,362 ) ( 929 ) Long-term portion $ 45,161 $ 8,498 13 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (dollars in thousands, except share and per share amounts) 7. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment, net comprised the following: March 31, 2024 December 31, 2023 Machinery and equipment $ 27,768 $ 27,417 Peat bogs and related development 12,670 12,256 Building and improvements 10,278 10,132 Land 6,109 6,114 Furniture and fixtures 4,370 4,360 Computer equipment 3,284 3,301 Leasehold improvements 5,166 5,169 Gross property, plant and equipment 69,645 68,749 Less: accumulated depreciation ( 23,033 ) ( 21,389 ) Total property, plant and equipment, net $ 46,612 $ 47,360 Depreciation, depletion and amortization expense related to property, plant and equipment, net was $ 1,801 and $ 1,962 for the three months ended March 31, 2024, and 2023, respectively. As of March 31, 2024, Land, Building and improvements, Computer equipment, and Machinery and equipment contain finance leases assets, recorded at cost of $ 12,173 , less accumulated depreciation of $ 3,153 . 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 . 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. When 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 March 31, 2024, and December 31, 2023, the Company had AROs of $ 491 and $ 759 , respectively, recorded in Accrued expenses and other current liabilities on the condensed consolidated balance sheets. As of March 31, 2024, and December 31, 2023, the Company had AROs of $ 4,382 and $ 4,457 , respectively, recorded in Other long-term liabilities on the condensed consolidated balance sheets. The ARO changes related to the various components of accretion, and additional obligations incurred were not significant. 8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities comprised the following: March 31, 2024 December 31, 2023 Accrued compensation and benefits $ 2,600 $ 2,096 Interest accrual 169 1,214 Freight, custom and duty accrual 1,140 1,040 Goods in transit accrual 1,653 360 Income tax accrual 146 — Other accrued liabilities 4,769 4,819 Total accrued expenses and other current liabilities $ 10,477 $ 9,529 14 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (dollars in thousands, except share and per share amounts) 9. DEBT Debt is comprised of the following: March 31, 2024 December 31, 2023 Term loan - net of unamortized discount and deferred financing costs of $ 3,983 and $ 4,259 as of March 31, 2024, and December 31, 2023, respectively $ 116,543 $ 118,241 Other 125 160 Total debt $ 116,668 $ 118,401 Current portion of long-term debt $ 1,278 $ 2,989 Long-term debt - net of unamortized discount and deferred financing costs of $ 3,983 and $ 4,259 as of March 31, 2024, and December 31, 2023, respectively 115,390 115,412 Total debt $ 116,668 $ 118,401 Term Loan On October 25, 2021, the Company and certain of its direct and indirect subsidiaries (the "Obligors") entered into a Credit and Guaranty Agreement with JPMorgan Chase Bank, N.A., as administrative agent for the lenders, pursuant to which the Company borrowed a $ 125,000 senior secured term loan (“Term Loan”). The Term Loan 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 Condensed Consolidated Statements of Operations during 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 the 2023 Annual Report. 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 three months ended March 31, 2024, the effective interest rate was 12.03 % and interest expense was $ 3,652 , which includes amortization of deferred financing costs and discount of $ 220 . 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) certain asset sales that are collateral, or (iii) upon the issuance, offering, or placement of new debt obligations. 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 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 prepaid the Term Loan in this amount in the first quarter of 2024. In addition, the Company had $ 2,187 of contractual commitments 15 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (dollars in thousands, except share and per share amounts) pursuant to this provision as of December 31, 2023 . 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. 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 March 31, 2024, and December 31, 2023, the outstanding principal balance on the Term Loan was $ 120,526 and $ 122,500 , respectively. The Term Loan requires the Company to maintain certain reporting requirements, affirmative covenants, and negative covenants, and the Company was in compliance with all requirements as of March 31, 2024. 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 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 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 $ 484 and $ 538 as of March 31, 2024, and December 31, 2023, respectively, and are included in other assets in the condensed consolidated balance sheets. 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 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 16 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (dollars in thousands, except share and per share amounts) fixed charge coverage ratio of 1.15 x, but no such acquisitions or payments are currently contemplated. As of March 31, 2024, 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 %. Each rate has a 0.0 % floor. A fee of 0.40 % per annum is charged for available but unused borrowings. As of March 31, 2024, and December 31, 2023, the Company had zero borrowed under the facility. As of March 31, 2024, the Company would be able to borrow approximately $ 25 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 Other debt of $ 125 and $ 160 as of March 31, 2024, and December 31, 2023, respectively, was primarily comprised of a foreign subsidiary's other debt which constitutes an immaterial revolving line of credit and mortgage. Aggregate future principal payments As of March 31, 2024, the aggregate future principal payments under long-term debt are as follows: Debt For the period of April 1, 2024 to December 31, 2024 $ 965 Year ending December 31, 2025 1,252 2026 1,252 2027 1,253 2028 115,929 2029 and thereafter — Total $ 120,651 10. STOCKHOLDERS’ EQUITY Common stock Each holder of common stock is entitled to one vote for each share of common stock. Common stockholders have no pre-emptive rights to acquire additional shares of common stock or other securities. The common stock is not subject to redemption rights and carries no subscription or conversion rights. In the event of liquidation, the stockholders are entitled to share in corporate assets on a pro rata basis after the Company satisfies all liabilities and after provision is made for any class of capital stock having preference over the common stock. Subject to corporate regulations and preferences to preferred stock, if any, dividends are at the discretion of the Board of Directors. As of March 31, 2024, there were 45,977,935 shares outstanding and 300,000,000 shares authorized. Warrants On July 19, 2021, the Company completed the redemption ("Redemption") of certain of its outstanding warrants (the "Investor Warrants") that were issued in connection with a private placement of units (the "private placement"), each consisting of a share of common stock and a warrant to purchase an additional one-half (1/2) shares of common stock. 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 17 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (dollars in thousands, except share and per share amounts) Agent upon the exercise of certain Investor Warrants following such call for Redemption. As of March 31, 2024, and December 31, 2023, 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 March 31, 2024, and December 31, 2023, there were no outstanding placement agent warrants . 11. STOCK-BASED COMPENSATION Stock-based compensation plan overview The Company maintains three equity incentive plans: the 2018 Equity Incentive Plan (“2018 Plan”), the 2019 Employee, Director and Consultant Equity Incentive Plan (“2019 Plan”) and the 2020 Employee, Director, and Consultant Equity Incentive Plan (“2020 Plan” and collectively, “Incentive Plans”). The 2020 Plan serves as the successor to the 2019 Plan and 2018 Plan and provides for the issuance of incentive stock options ("ISOs"), stock grants and stock-based awards to employees, directors, and consultants of the Company. No further awards will be issued under the 2018 Plan and 2019 Plan. As of March 31, 2024, a total of 4,065,385 shares were available for grant under the 2020 Plan. The Incentive Plans are administered by the Company's Board of Directors. Notwithstanding the foregoing, the Board of Directors may delegate concurrent responsibility for administering each plan, including with respect to designated classes of persons eligible to receive an award under each plan, to a committee or committees (which term shall include subcommittees) consisting of one or more members of the Board of Directors (collectively, the “Plan Administrator”), subject to such limitations as the Board of Directors deems appropriate. In November 2020, the Board of Directors and stockholders approved the 2020 Plan and reserved an aggregate of 2,284,053 shares of common stock for issuance under the 2020 Plan. Pursuant to the 2020 Plan, the number of shares available for issuance under the 2020 Plan may be increased on January 1 of each year, beginning on January 1, 2021, and ending on January 2, 2030, in an amount equal to the lesser of (i) 4 % of the outstanding shares of the Company’s common stock on such date or (ii) such number of shares determined by the Plan Administrator. The 2020 Plan provides for the grant of ISOs, nonqualified stock options, stock grants, and stock-based awards that are based in whole or in part by reference to the Company’s common stock. • The Plan Administrator may grant options designated as incentive stock options or nonqualified stock options. Options shall be granted with an exercise price per share not less than 100 % of the fair market value of the common stock on the grant date, subject to certain limitations and exceptions as described in the plan agreements. Generally, the maximum term of an option shall be 10 years from the grant date. The Plan Administrator shall establish and set forth in each instrument that evidences an option the time at which, or the installments in which, the option shall vest and become exercisable. • The Plan Administrator may grant stock grants and stock-based awards, including securities convertible into shares, stock appreciation rights, phantom stock awards or stock units on such terms and conditions which may be based on continuous service with the Company or related company or the achievement of any performance goals, as the Plan Administrator shall determine in its sole discretion, which terms, conditions and restrictions shall be set forth in the instrument evidencing the award. Restricted Stock Unit ("RSU") Activity RSUs granted to certain executives, employees and members of the Board of Directors expire 10 years after the grant date. The awards generally have a time-based vesting requirement (based on continuous employment). Upon vesting, the RSUs convert into shares of the Company's common stock. The stock-based compensation expense related to service-based awards is recorded over the requisite service period. During the first quarter of 2023, the Company granted RSU awards that are expected to vest with two equal vesting tranches, one of which vested on October 31, 2023, and the second of which 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. 18 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (dollars in thousands, except share and per share amounts) The following table summarizes the activity related to the Company's RSUs for the three months ended March 31, 2024. For purposes of this table, vested RSUs represent the shares for which the service condition had been fulfilled during the three months ended March 31, 2024: Number of RSUs Weighted average grant date fair value Balance, December 31, 2023 1,242,210 $ 3.06 Vested ( 112,720 ) $ 13.75 Balance, March 31, 2024 1,129,490 $ 1.99 As of March 31, 2024, total unamortized stock-based compensation cost related to unvested RSUs was $ 1,269 and the weighted-average period over which the compensation is expected to be recognized is less than one year . For the three months ended March 31, 2024, the Company recognized $ 752 of total stock-based compensation expense for RSUs. As of March 31, 2024, there were 6,357 RSUs which had previously vested, but were not yet issued due to the recipients' elections to defer the awards. Performance Stock Unit ("PSU") Activity The following table summarizes the activity related to the Company's PSUs for the three months ended March 31, 2024: Number of PSUs Weighted average grant date fair value Balance, December 31, 2023 921,182 $ 1.77 Vested ( 180,298 ) $ 1.77 Forfeited ( 740,884 ) $ 1.77 Balance, March 31, 2024 — $ — During the three months ended March 31, 2024, 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 majority of the PSUs outstanding as of December 31, 2023 were forfeited in the three months ended March 31, 2024, as a result of not meeting certain performance conditions. As of March 31, 2024, there was no unamortized stock-based compensation cost or unvested PSUs outstanding. For the three months ended March 31, 2024, the Company recognized $ 72 of total stock-based compensation expense for PSUs. The Company issued 1,372,188 additional PSUs in April 2024, which are scheduled to vest in April 2025, assuming certain performance metrics are achieved. 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. 19 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (dollars in thousands, except share and per share amounts) There were no stock options granted or exercised during the three months ended March 31, 2024. The following table summarizes the stock option activity for the three months ended March 31, 2024: Number Weighted average exercise price Weighted average grant date fair value Weighted average remaining contractual term (years) Outstanding as of December 31, 2023 571,359 $ 9.47 $ 2.01 3.69 Cancelled ( 127,576 ) $ 8.44 $ 0.92 Forfeited ( 39 ) $ 11.06 $ 9.89 Outstanding as of March 31, 2024 443,744 $ 9.76 $ 2.33 4.44 Options exercisable as of March 31, 2024 427,922 $ 9.38 $ 1.95 4.35 Vested and expected to vest as of March 31, 2024 443,744 $ 9.76 $ 2.33 4.44 The following table summarizes the unvested stock option activity for the three months ended March 31, 2024: Number Weighted average grant date fair value Unvested as of December 31, 2023 16,674 $ 12.15 Vested ( 813 ) $ 3.85 Forfeited ( 39 ) $ 9.89 Unvested as of March 31, 2024 15,822 $ 12.59 As of March 31, 2024, total compensation cost related to unvested options not yet recognized was $ 84 and the weighted-average period over which the compensation is expected to be recognized is less than one-year . For the three months ended March 31, 2024, the Company recognized $ 29 of total stock-based compensation expense for stock options. 12. INCOME TAXES The Company recorded income tax expense of $ 196 for the three months ended March 31, 2024, representing an effective tax rate of ( 1.6 )%. The Company’s effective tax rate for the three months ended March 31, 2024, differs from the federal statutory rate of 21% primarily due to the Company maintaining a full valuation allowance against its net deferred tax assets in the U.S. and most foreign jurisdictions. The income tax expense for the three months ended March 31, 2024, was primarily due to U.S. state taxes and foreign taxes in certain jurisdictions. The Company recorded income tax expense of $ 147 for the three months ended March 31, 2023, representing an effective tax rate of ( 0.9 )%. The Company’s effective tax rate for the three months ended March 31, 2023, differs from the federal statutory rate of 21% primarily due to the Company maintaining a full valuation allowance against its net deferred tax assets in the U.S. and most foreign jurisdictions. The tax expense for the three months ended March 31, 2023, was primarily due to foreign tax expense. 13. COMMITMENTS AND CONTINGENCIES Purchase commitments From time to time in the normal course of business, the Company will enter into agreements with suppliers which provide favorable pricing in return for a commitment to purchase minimum amounts of inventory over a defined time period. 20 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (dollars in thousands, except share and per share amounts) Contingencies In the normal course of business, certain claims have been brought against the Company and, where applicable, its suppliers. While there is inherent difficulty in predicting the outcome of such matters, management has vigorously contested the validity of these claims. Based on available information, management 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. 14. FAIR VALUE MEASUREMENTS Recurring and Nonrecurring The Company did not have any assets or liabilities that were remeasured to fair value on a recurring or nonrecurring basis during the periods presented. Other Fair Value Measurements The following table summarizes the fair value of the Company’s assets and liabilities which are provided for disclosure purposes: March 31, 2024 December 31, 2023 Fair Value Hierarchy Level Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Assets Cash and cash equivalents Level 1 24,152 24,152 30,312 30,312 Liabilities Finance leases Level 3 9,427 9,427 9,688 9,688 Term Loan Level 2 120,526 97,024 122,500 98,000 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 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. 15. SUBSEQUENT EVENTS On May 10, 2024, in connection with the Company's restructuring of its durable manufacturing operations, the Company entered into an agreement with CM Fabrication, LLC, (the “Buyer”) to sell assets relating to the production of certain durable equipment products, including an estimate of approximately $ 16,000 of inventories, property, plant and equipment, and other assets to the Buyer for approximately $ 8,700 (the “Asset Sale”). In connection with the Asset Sale, the Company intends to terminate and payoff the facility operating lease estimated at approximately $ 1,300 and certain equipment finance leases estimated at approximately $ 700 . The Asset Sale is expected to close in the second quarter of 2024, subject to customary closing conditions. The Company estimates it will record a loss on the disposition of the tangible and intangible assets of approximately $ 12,000 in the second quarter of 2024, upon closing of the Asset Sale. 21 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (dollars in thousands, except share and per share amounts) The Company will continue to sell its proprietary branded durable products. In connection with the transaction, the Company is entering into an exclusive supply agreement with the Buyer to provide for contract manufacturing, yielding a more efficient cost model going forward. JPMorgan Chase Bank, N.A., as administrative agent to the Company’s Revolving Credit Facility, granted a consent to permit the Asset Sale. In accordance with the Company’s Term Loan, the net proceeds from the Asset Sale transaction are required to be reinvested into certain permitted investments, such as capital expenditures, or offered to prepay Term Loan principal. 22 TABLE OF CONTENTS