What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-05 compared with 2024-02-29 · 123 added, 140 removed, 136 unchanged (66% of the section changed)

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Company Overview

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

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

We primarily serve the U.S.

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Our mission is to empower growers, farmers and cultivators with products that enable greater quality, efficiency, consistency, and speed in their grow projects.

Hydroponics is the farming of plants using soilless growing media and often artificial lighting in a controlled indoor or greenhouse environment.

Hydroponics is the farming of plants using soilless grow media and often artificial lighting in a controlled indoor or greenhouse environment.

Hydroponics is the primary category of CEA and we use the terms CEA and hydroponics interchangeably.

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Market Conditions

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

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

We have experienced adverse financial results which we believe is primarily a result of an agricultural oversupply impacting our market and resulting in a decrease in indoor and outdoor cultivation.

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

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

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

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

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

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

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

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

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

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

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

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

In 2022, we undertook the following major initiatives in connection with the first phase of our previously disclosed restructuring plan (the "Restructuring Plan"):

(i) narrowing our product and brand portfolio, including removing approximately one-third of all products and one-fifth of all brands relating to our primary product portfolio, which excluded our garden center business in Canada, and (ii) relocating and consolidating certain manufacturing and distribution centers, including headcount reductions and reorganization to drive a solution based approach, focusing commercial sales on competencies and product assortment from our 2021 acquisitions.

Total costs incurred relating to this first phase of the Restructuring Plan from its commencement in 2022 to its completion in 2023, were (i) $6.4 million relating primarily to inventory markdowns, and (ii) $3.4 million relating primarily to the relocation and termination of certain facilities in Canada.

As a result of the continued adverse market conditions, in the third quarter of 2023 we began a second phase of the Restructuring Plan which included U.S.

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

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

to improve efficiency and reduce costs.

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

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

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

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

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

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

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

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

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

and Canada was in excess of the fair value.

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

The impairment was primarily due to a deterioration in customer demand in the United States and Canada caused by macroeconomic and industry conditions.

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

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

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

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

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

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

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

In 2023, we recorded $9.2 million of restructuring charges for the second phase.

These charges primarily related to estimated non-cash raw material inventory write-downs as we reduced our capacity and facility

space, given the change in customer demand for these products.

These restructuring charges were primarily recorded within cost of goods sold on the consolidated statements of operations.

In 2024, we evaluated alternatives to maximize the recovery value of our assets and the cost structure associated with manufacturing our Innovative Growers Equipment ("IGE") branded durable equipment products.

In the second quarter of 2024, we entered into an agreement (the "Purchase Agreement") with CM Fabrication, LLC (the "Buyer") to sell the inventories, and property, plant and equipment associated with our IGE branded products for approximately $8.7 million (the "Asset Sale"), while retaining our proprietary brand and customer relationships.

In connection with the Asset Sale, we entered into an exclusive supply agreement with the Buyer, pursuant to which the Buyer provides contract manufacturing and we continue to sell our proprietary branded durable products, which include horticulture benches, racking and LED lighting systems.

As a result of the Asset Sale and new contract manufacturing arrangement, we expect improved profitability on future IGE branded product sales from an anticipated decrease in fixed costs at current sales volumes.

The Asset Sale closed on May 31, 2024 and we sold or disposed of approximately $11.6 million of inventories, $3.7 million of property, plant and equipment, and technology intangible assets of $2.6 million.

In connection with the Asset Sale, we terminated and paid-off the facility operating lease for $1.3 million and certain equipment finance leases for $0.7 million.

We recorded a loss on asset disposition of approximately $11.5 million on the consolidated statements of operations for the year ended December 31, 2024.

During the year ended December 31, 2024, we executed further restructuring actions, including consolidation of other U.S.

manufacturing facilities, and outsourcing certain distribution center locations to reduce costs and further consolidate our facility footprint.

These actions resulted in restructuring charges of $2.2 million during 2024, including termination and disposal costs associated with inventory, facilities and headcount reductions.

After completion of the Asset Sale and the aforementioned restructuring actions, we have now consolidated our manufacturing operations into two U.S.

locations and our peat moss harvesting and processing operation in Canada.

In addition, we reorganized and integrated our business activities into one operating segment in the fourth quarter of 2024.

The second phase of our Restructuring Plan is substantially complete as of December 31, 2024.

Given the current market conditions, we may initiate additional phases to our Restructuring Plan to further consolidate our operations and realize cost savings.

We also continue to evaluate opportunities to sell excess owned land to supplement our cash position.

We may incur additional charges associated with these potential actions.

We anticipate the second phase of our Restructuring Plan and the related actions described above may result in annual cost savings of over $2.0 million.

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

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Filing Status

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

We qualify as a smaller reporting company in accordance with Rule 12b-2 under the Exchange Act, and have elected to follow certain of the scaled back disclosure accommodations within this Annual Report on Form 10-K.

As a result, our annual assessment of the effectiveness of our internal control over financial reporting does not require an audit by our external audit firm in compliance with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 for this Annual Report on Form 10-K for the year ended December 31, 2024.

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

Components of Results of Operations

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

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

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

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

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Cost of goods sold

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

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

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

However, we expect that, over time, cost of goods sold may decrease as a percentage of net sales if we achieve higher throughput at our manufacturing facilities and achieve the anticipated savings from our Restructuring Plan.

Selling, general and administrative

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

Selling, general and administrative expenses ("SG&A") consists primarily of facility costs for distribution operations, net of sublease and logistics agreement reimbursements, depreciation and amortization of assets, marketing and advertising, and other selling, general and administrative costs, including but not limited to salaries, benefits, bonuses, stock-based compensation, and professional fees.

Results of Operations - Comparison of Years Ended December 31, 2024, and 2023

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Selling, general and administrative 72,794 38.3 % 87,314 38.5 % (14,520) -16.6 %

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

Loss on asset disposition 11,520 6.1 % — 0.0 % 11,520 N/M %

Loss from operations (52,181) -27.4 % (49,702) -21.9 % (2,479) -5.0 %

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Loss before tax (65,848) -34.6 % (65,026) -28.7 % (822) -1.3 %

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

Income tax (expense) benefit (869) -0.5 % 213 0.1 % (1,082) -508.0 %

Net loss $ (66,717) -35.1 % $ (64,813) -28.6 % $ (1,904) -2.9 %

"N/M" is not meaningful.

Net sales for the year ended December 31, 2024, were $190.3 million, a decrease of $36.3 million, or 16.0%, compared to the same period in 2023.

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

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

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

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

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

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

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

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

The 16.0% decline was primarily due to a 12% reduction in volume and mix of products sold and a 4% decrease in price.

This decline was largely driven by the previously mentioned oversupply in the cannabis industry.

Gross profit for the year ended December 31, 2024, was $32.1 million, a decrease of $5.5 million, or 14.6%, compared to the same period in 2023.

Our gross profit margin percentage increased to 16.9% for the year ended December 31, 2024, from 16.6% in the same period in 2023 .

The decrease in gross profit was primarily due to the lower net sales in the current year.

The increase in gross profit margin was largely driven by an $8.7 million decrease in restructuring charges.

Selling, general and administrative expenses

SG&A expenses for the year ended December 31, 2024, were $72.8 million, a decrease of $14.5 million, or 16.6%, compared to the same period in 2023.

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

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

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

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

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

and Canada was in excess of the fair value.

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

The impairment was primarily due to a deterioration in customer demand in the United States and Canada caused by macroeconomic and industry conditions.

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

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

SG&A expenses decreased in several areas, including as a result of our cost saving and restructuring initiatives:

(i) $6.5 million decrease in employee compensation costs, including stock-based compensation and

salaries and benefits, (ii) $4.5 million decrease in facility costs, (iii) $1.9 million decrease in insurance expenses, (iv) $1.8 million decrease in professional and outside services, and (v) $1.0 million decrease in amortization and depreciation, partially offset by $1.4 million change in accounts receivable reserves and related charges.

Loss on asset disposition

As previously described, we entered into a Purchase Agreement with Buyer to sell assets relating to the production of durable equipment products for $8.7 million.

The Asset Sale closed during the second quarter of 2024, and we sold or disposed of inventories and other assets.

We recorded a loss on asset disposition of $11.5 million for the year ended December 31, 2024 .

Refer to Note 3 – Restructuring and Asset Sales for a further description of the Asset Sale.

Interest expense

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

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

Interest expense for the year ended December 31, 2024, was $15.2 million, a decrease of $0.2 million, or 1.3%, compared to the same period in the prior year.

The decrease was primarily due to lower debt outstanding due to principal repayments, partially offset by higher variable interest rates on our Term Loan.

Other income, net

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

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

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

Income tax benefit

Other income, net for the year ended December 31, 2024, was $1.6 million, an increase of $1.5 million compared to the same period in the prior year.

Other income, net for the year ended December 31, 2024, was primarily driven by a cash settlement arising from an outstanding litigation matter of a previously acquired entity, foreign currency exchange rate gains and interest income.

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

Income tax (expense) benefit

We recorded an income tax expense of $0.9 million for the year ended December 31, 2024, representing an effective tax rate of (1.3)%.

Our effective tax rate for the year ended December 31, 2024, differs from the federal statutory rate of 21% primarily due to maintaining a full valuation allowance against our net deferred tax assets in the United States and most foreign jurisdictions.

The income tax expense for the year ended December 31, 2024, was primarily due to current foreign tax expense in certain jurisdictions.

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

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

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

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

federal statutory rate of 21% primarily due to the impairment of goodwill for certain 2021 acquisitions which was not deductible for U.S.

tax purposes, increases in our valuation allowance on U.S.

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

As described in Note 3 - Goodwill and Intangible Assets, Net , during the year ended December 31, 2022, we fully impaired the goodwill associated with all 2021 acquisitions.

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.

Liquidity and Capital Resources

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Years ended December 31,

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

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

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

Net cash (used in) from operating activities $ (324) $ 7,044

Net cash from (used in) investing activities 1,669 (4,170)

Net cash (used in) from financing activities (4,776) 6,065

Effect of exchange rate changes on cash and cash equivalents (770) 82

Net (decrease) increase in cash and cash equivalents

(4,201) 9,021

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

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

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

Cash and cash equivalents at end of year $ 26,111 $ 30,312

Operating Activities

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

Net cash used in operating activities was $0.3 million for the year ended December 31, 2024.

The net cash usage was primarily due to a net loss, partially offset by $9.7 million net cash inflow from a reduction in working capital.

The total 2024 cash impact was a net loss of $66.7 million, less net non-cash items of $56.7 million.

The $9.7 million net reduction in working capital was primarily comprised of a $14.4 million decrease of inventories, a $1.6 million decrease in accounts receivable, and a $1.6 million decrease of prepaid expenses and other current assets, partially offset by a $8.9 million decrease of lease liabilities.

During the year ended December 31, 2024, we paid $13.3 million in cash interest and we paid cash income taxes, net of refunds, of $0.2 million.

As described in Note 3 – Restructuring and Asset Sales, in connection with the Asset Sale, we estimated the amount of cash proceeds associated with the sale of inventories as $5.0 million and classified the amount within net cash from operating activities.

In addition, the Company paid cash of $1.3 million to terminate the facility operating lease in connection with the Asset Sale.

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

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

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

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

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

This included a decrease of $57.0 million in inventories and a decrease of $16.7 million in accounts receivable, net, partially offset by decreases of $13.3 million in deferred revenue and $16.5 million in accounts payable, accrued expenses and other current liabilities.

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

During the year ended December 31, 2023, we paid $13.1 million in cash interest and we received cash income tax refunds of $1.0 million.

In both 2024 and 2023, the Company consolidated its operations in connection with restructuring and related cost saving initiatives and decreased its inventory, contributing significantly to operating cash flows.

Investing Activities

Net cash from investing activities was $1.7 million for the year ended December 31, 2024.

We received cash proceeds from the Asset Sale associated with the sale of property, plant and equipment of $3.7 million, and additional cash proceeds from the sale of property, plant and equipment of $0.9 million.

These cash proceeds were partially offset by $2.9 million of capital expenditures of property, plant and equipment.

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

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

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

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

In both 2024 and 2023, the capital expenditures of property, plant and equipment primarily relates to investments in our peat moss harvesting operation in Canada.

Financing Activities

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

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

We paid $2.5 million related to employees' withholding tax in connection with the vesting of restricted stock units.

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

Net cash used in financing activities was $4.8 million for the year ended December 31, 2024, primarily driven by (i) $3.2 million of Term Loan repayments relating to required quarterly payments of principal and payments made in conjunction with the Sale-Leaseback Transaction and (ii) finance lease principal payments of $1.4 million which included approximately $0.7 million relating to equipment finance lease payments made in connection with the Asset Sale.

Refer to further description of the Sale-Leaseback Transaction and Term Loan reinvestment provision in Part II Item 7.

Availability and Use of Cash

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

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

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

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In January 2023, Gotham Properties LLC, an Oregon limited liability company and our subsidiary ("Seller"), consummated a Purchase and Sale Agreement with J & D Property, LLC, a Nevada limited liability company ("Purchaser") pursuant to which certain real property located in the City of Eu gene, County of Lane, State of Oregon (the “Eugene Property”) was sold to Purchaser for $8.6 million and then leased back by Seller (the "Sale Leaseback Transaction").

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

The new lease has a

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

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

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

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

As further described in Note 3 – Restructuring and Asset Sales to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K , we closed on an Asset Sale and received gross proceeds of $8.7 million during the year ended December 31, 2024.

In accordance with our Term Loan, the net proceeds, approximately $6.3 million, from the Asset Sale transaction are required to be reinvested into certain permitted investments, such as capital expenditures or permitted acquisitions/ investments, or offered to prepay Term Loan principal.

We intend to reinvest the net proceeds from the Asset Sale into certain permitted investments, which may include capital expenditures or permitted acquisitions/ investments, if approved by the administrative agent, in accordance with provisions of the Term Loan.

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

If necessary, we believe that we could supplement our cash position through additional asset sales or divestiture of one or more of our brands or lines of business.

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

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

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

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

The Term Loan was amended by Amendment No.

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

1 effective as of June 27, 2023, to replace the London Interbank Offered Rate ("LIBOR") referenced rates with Secured Overnight Financing Rate ("SOFR") referenced rates.

Pursuant to Amendment No.

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

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

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

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 had no further force or effect.

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

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The principal amounts of the Term Loan are scheduled to be repaid in consecutive quarterly installments in amounts equal to 0.25% of the original principal amount of the Term Loan on the last day of each fiscal quarter commencing March 31, 2022, with the balance of the Term Loan payable on the Maturity Date of October 25, 2028.

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

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

As described in Note 7 – Leases , we received net cash proceeds in January 2023 from the Sale Leaseback Transaction and are subject to a provision whereby such net cash proceeds can be reinvested into certain investments, such as capital expenditures.

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

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

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

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

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

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

As of December 31, 2024, we have satisfied this provision as related to the Sale Leaseback Transaction, through a combination of payments made pursuant to the contractual commitments and additional $2.0 million repayments of the Term Loan.

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 described in Note 3 – Restructuring and Asset Sales , we sold assets for $8.7 million in May 2024.

The net cash proceeds from the Asset Sale are subject to the same Term Loan reinvestment provision described above, including (i) cash investments made within a one-year period, and (ii) investments which are contractually committed within one-year of the Asset Sale and paid within 180 days after entering into such contractual commitment.

We intend to reinvest the net proceeds from the Asset Sale into certain permitted investments, such as capital expenditures or permitted acquisitions/ investments, and no Term Loan debt principal was classified as current debt as of December 31, 2024 related to this provision.

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, 2024, and 2023, the outstanding principal balance on the Term Loan was $119.3 million and $122.5 million, respectively.

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Revolving Credit Facility

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

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

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

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

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

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

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

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

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

On November 1, 2024, we and certain of our subsidiaries entered into the Sixth Amendment to the Revolving Credit Facility pursuant to which the maximum commitment amount was reduced to $35 million.

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

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A certain financial covenant becomes applicable in the event that our excess availability under the Revolving Credit Facility is less than an amount equal to 10% of the Aggregate Revolving Commitment (currently $35 million) and would require us to maintain a minimum fixed charge coverage ratio of 1.1x on a rolling twelve-month basis.

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

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

We received a consent from JPMorgan Chase Bank, N.A., as administrative agent, to permit the cash settlement of fractional shares in connection with the reverse stock split, which is described further in Part II, Item 5.

Market Information .

We were in compliance with all debt covenants as of December 31, 2024.

As of December 31, 2024, approximately $13 million was available to borrow under the Revolving Credit Facility, before we would be required to comply with the minimum fixed charge coverage ratio of 1.1x.

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

As of December 31, 2024, and December 31, 2023, we had zero borrowed under the Revolving Credit Facility.

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

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Material Cash Requirements

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

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

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

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

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

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

Our estimated 2025 material cash requirements include (i) principal repayments and anticipated interest payments on our long-term debt, (ii) finance lease payments, (iii) operating lease payments, and (iv) balances subject to the Term Loan reinvestment provision, as well as other purchase obligations to support our operations.

Variable rates on our Term Loan are subject to change as further described in Item 7A, Quantitative and Qualitative Disclosures About Market Risk .

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

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

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

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

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

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

Likely due to the industry recession, our net sales have declined which have led to seasonal patterns that may have less consistency.

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

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Certain accounting policies require us to make estimates and judgments in determining the amounts reflected in the consolidated financial statements.

Such estimates and judgments necessarily involve varying, and possibly significant, degrees of uncertainty.

Such estimates and judgments involve varying, and possibly significant, degrees of uncertainty.

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

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

Goodwill and indefinite-lived intangible assets

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

Goodwill is evaluated for impairment annually in the fourth quarter, or on an interim basis when an event or change in circumstances occurs, indicating that the carrying value may not be recoverable.

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

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

demand in the U.S.

We determined the fair value of the U.S.

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

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

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

A discussion of our critical accounting policies that required the application of significant judgments as of December 31, 2024 and 2023 are as follows.

Long-lived tangible and finite-lived intangible assets

Long-lived tangible assets and finite-lived intangible assets are stated at cost.

Depreciation, depletion and amortization expense is primarily provided on the straight-line method and based on the estimated useful economic lives of the long-lived tangible assets.

Depreciation, depletion and amortization expense is primarily provided on the straight-line method and based on the estimated useful economic lives of the long-lived assets.

Intangible assets with finite lives are subject to amortization.

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

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

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

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

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

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

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

No such impairment was identified during the years ended December 31, 2024 or 2023.

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis