HYDROFARM HOLDINGS GROUP, INC. 10-K

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 56 Consolidated Balance Sheets 58 Consolidated Statements of Operations 59 Consolidated Statements of Comprehensive Loss 60 Consolidated Statements of Changes in Stockholders’ Equity 61 Consolidated Statements of Cash Flows 62 Notes to the Consolidated Financial Statements 63 55 TABLE OF CONTENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Hydrofarm Holdings Group, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Hydrofarm Holdings Group, Inc. and subsidiaries (the "Company") as of December 31, 2024 and 2023, the related consolidated statements of operations, comprehensive loss, changes in stockholders' equity, and cash flows, for each of the two years in the period ended December 31, 2024, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Inventory Valuation - Refer to Notes 2 and 6 to the financial statements Critical Audit Matter Description The Company’s inventories are stated at the lower of cost or net realizable value, principally determined by the first in, first out method of accounting. As described in Notes 2 and 6 to the consolidated financial statements, the Company maintains an allowance for excess and obsolete inventory that is based upon assumptions about current and anticipated demand, customer preferences, business strategies, and market conditions. Management reviews these assumptions periodically to determine if any adjustments are needed to the allowance for excess and obsolete inventory. We identified inventory valuation as a critical audit matter because of the quantitative and qualitative materiality of the inventory excess and obsolescence reserve balance, coupled with the judgments necessary to identify and record the inventory excess and obsolescence reserve timely. Additionally, our audit procedures performed to evaluate management’s estimates of the net realizable value for the inventory on-hand as of the reporting date involved a high degree of auditor judgment. How the Critical Audit Matter Was Addressed in the Audit 56 TABLE OF CONTENTS Our audit procedures related to the inventory valuation included the following, among other things: • We tested the design and implementation of internal controls over the inventory valuation process, including controls over the inputs that are used in management's valuation of the excess and obsolescence reserve analysis. • We evaluated the appropriateness and consistency of management’s methodology and assumptions used in determining the inventory valuation of the excess and obsolescence reserve. • We obtained the Company’s valuation of the inventory excess and obsolescence reserve calculation and tested the mathematical accuracy. • We tested the accuracy and completeness of the underlying data used in the calculation of the Company’s valuation of the inventory excess and obsolescence reserve. • We selected a sample of inventory items and compared the recorded unit cost against the most recent sales price to determine if inventory was recorded at lower of cost or net realizable value. • We selected a sample of inventory items and evaluated historical sales trends, gross margins, and management’s ability to sell-through inventory. /s/ Deloitte & Touche LLP Minneapolis, Minnesota March 4, 2025 We have served as the Company's auditor since 2020. 57 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) December 31, 2024 2023 Assets Current assets: Cash and cash equivalents $ 26,111 $ 30,312 Accounts receivable, net 14,756 16,890 Inventories 50,633 75,354 Prepaid expenses and other current assets 3,712 5,510 Total current assets 95,212 128,066 Property, plant and equipment, net 37,545 47,360 Operating lease right-of-use assets 42,869 54,494 Intangible assets, net 249,002 275,881 Other assets 1,476 1,842 Total assets $ 426,104 $ 507,643 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 12,279 $ 12,613 Accrued expenses and other current liabilities 10,647 9,529 Deferred revenue 2,611 3,231 Current portion of operating lease liabilities 7,731 8,336 Current portion of finance lease liabilities 459 954 Current portion of long-term debt 1,260 2,989 Total current liabilities 34,987 37,652 Long-term operating lease liabilities 37,553 47,506 Long-term finance lease liabilities 7,830 8,734 Long-term debt 114,693 115,412 Deferred tax liabilities 3,047 3,232 Other long-term liabilities 4,272 4,497 Total liabilities 202,382 217,033 Commitments and contingencies (Note 14) Stockholders’ equity Common stock ($ 0.0001 par value; 300,000,000 shares authorized; 4,614,279 and 4,578,841 shares issued and outstanding at December 31, 2024, and December 31, 2023, respectively, giving retroactive effect to the 1-10 reverse split effected on February 12, 2025) — — Additional paid-in capital 790,094 787,851 Accumulated other comprehensive loss ( 8,911 ) ( 6,497 ) Accumulated deficit ( 557,461 ) ( 490,744 ) Total stockholders’ equity 223,722 290,610 Total liabilities and stockholders’ equity $ 426,104 $ 507,643 The accompanying notes are an integral part of the consolidated financial statements. 58 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts) Years ended December 31, 2024 2023 Net sales $ 190,288 $ 226,581 Cost of goods sold 158,155 188,969 Gross profit 32,133 37,612 Operating expenses: Selling, general and administrative 72,794 87,314 Loss on asset disposition 11,520 — Loss from operations ( 52,181 ) ( 49,702 ) Interest expense ( 15,237 ) ( 15,442 ) Other income, net 1,570 118 Loss before tax ( 65,848 ) ( 65,026 ) Income tax (expense) benefit ( 869 ) 213 Net loss $ ( 66,717 ) $ ( 64,813 ) Net loss per share (1) : Basic $ ( 14.51 ) $ ( 14.24 ) Diluted $ ( 14.51 ) $ ( 14.24 ) Weighted-average shares of common stock outstanding (1) : Basic 4,598,640 4,550,836 Diluted 4,598,640 4,550,836 (1) Net loss per share and Weighted-average shares of common stock outstanding amounts have been adjusted to give retroactive effect to the 1-for-10 reverse stock split effected on February 12, 2025. The accompanying notes are an integral part of the consolidated financial statements. 59 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) Years ended December 31, 2024 2023 Net loss $ ( 66,717 ) $ ( 64,813 ) Other comprehensive income (loss): Foreign currency translation (loss) gain ( 2,414 ) 738 Total comprehensive loss $ ( 69,131 ) $ ( 64,075 ) The accompanying notes are an integral part of the consolidated financial statements. 60 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (In thousands, except for share amounts) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares (1) Amount (1) Balance, December 31, 2022 4,519,578 $ — $ 783,047 $ ( 7,235 ) $ ( 425,931 ) $ 349,881 Issuance of common stock for vesting of stock awards 80,530 — — — — — Shares repurchased for withholding tax on stock awards ( 21,267 ) — ( 271 ) — — ( 271 ) Stock-based compensation expense — — 5,075 — — 5,075 Net loss — — — — ( 64,813 ) ( 64,813 ) Foreign currency translation gain — — — 738 — 738 Balance, December 31, 2023 4,578,841 $ — $ 787,851 $ ( 6,497 ) $ ( 490,744 ) $ 290,610 Issuance of common stock for vesting of stock awards 53,464 — — — — — Shares repurchased for withholding tax on stock awards ( 18,026 ) — ( 142 ) — — ( 142 ) Stock-based compensation expense — — 2,385 — — 2,385 Net loss — — — — ( 66,717 ) ( 66,717 ) Foreign currency translation (loss) — — — ( 2,414 ) — ( 2,414 ) Balance, December 31, 2024 4,614,279 $ — $ 790,094 $ ( 8,911 ) $ ( 557,461 ) $ 223,722 (1) Common share and par value amounts have been adjusted to give retroactive effect to the 1-for-10 reverse stock split effected on February 12, 2025. The accompanying notes are an integral part of the consolidated financial statements. 61 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Years ended December 31, Operating activities 2024 2023 Net loss $ ( 66,717 ) $ ( 64,813 ) Adjustments to reconcile net loss to net cash from operating activities: Depreciation, depletion and amortization 30,691 32,075 Provision for (benefit from) doubtful accounts 314 ( 386 ) Provision for inventory obsolescence 2,002 1,587 Non-cash restructuring expenses 806 9,703 Stock-based compensation expense 2,385 5,075 Non-cash operating lease expense 8,248 9,942 Non-cash loss from asset disposition 11,103 — Other 1,118 1,502 Changes in assets and liabilities: Accounts receivable 1,616 766 Inventories 14,415 26,112 Prepaid expenses and other current assets 1,568 ( 49 ) Other assets ( 55 ) ( 172 ) Accounts payable 56 ( 1,105 ) Accrued expenses and other current liabilities 1,648 ( 3,537 ) Deferred revenue ( 601 ) ( 439 ) Lease liabilities ( 8,932 ) ( 9,162 ) Other long-term liabilities 11 ( 55 ) Net cash (used in) from operating activities ( 324 ) 7,044 Investing activities Capital expenditures of property, plant and equipment ( 2,892 ) ( 4,215 ) Proceeds from sale of property, plant and equipment 861 96 Proceeds from Asset Sale for property, plant and equipment 3,700 — Other — ( 51 ) Net cash from (used in) investing activities 1,669 ( 4,170 ) Financing activities Proceeds from Sale-Leaseback Transaction — 8,598 Payment of withholding tax related to stock awards ( 142 ) ( 271 ) Borrowings under foreign revolving credit facilities 378 965 Repayments of foreign revolving credit facilities ( 453 ) ( 970 ) Repayments of Term Loan ( 3,197 ) ( 1,250 ) Finance lease principal payments ( 1,362 ) ( 1,007 ) 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 and cash equivalents at beginning of year 30,312 21,291 Cash and cash equivalents at end of year $ 26,111 $ 30,312 Non-cash investing and financing activities Right-of-use assets relinquished under operating lease obligation $ ( 1,924 ) $ ( 1,067 ) Assets acquired under finance lease obligation — 185 Capital expenditures included in accounts payable and accrued liabilities 76 200 Additions of leasehold improvements and related asset retirement obligations — 349 Supplemental information Cash paid for interest 13,289 13,101 Cash paid (refunds) for income taxes 201 ( 1,000 ) The accompanying notes are an integral part of the consolidated financial statements. 62 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (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, grow media and nutrients, as well as a broad portfolio of innovative, 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 consolidation and presentation The 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 year-end financial reporting. All intercompany balances and transactions have been eliminated in consolidation. Subsequent Event - Reverse Stock Split On February 12, 2025, the Company effected a one-for-ten reverse stock split of its common stock, whereby each lot of ten shares of common stock issued and outstanding immediately prior to the reverse stock split was converted into and became one share of common stock (the "Reverse Stock Split"). In lieu of issuing any fractional shares, any stockholder entitled to receive less than one share of common stock received cash for such stockholder’s fractional share. There is no change to the par value of $ 0.0001 . Accordingly, the presentation of all periods covered by the consolidated financial statements, and notes to the consolidated financial statements, contained herein have been adjusted to give retroactive effect to the Reverse Stock Split. Use of estimates The preparation of 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 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. Segment and entity-wide information Segment information The Company's chief operating decision maker ("CODM") is the Chief Executive Officer (the "CEO") who reviews financial information for the purposes of making operating decisions, assessing financial performance and allocating resources. The Company no longer aggregates its operating segments as it has reorganized and integrated its business activities into one operating segment effective for the period ended December 31, 2024. The business is organized as one operating segment 63 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) managed on a consolidated basis, and one reportable segment, which is the distribution and manufacture of CEA equipment and supplies. In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07), which requires additional disclosures, including an enhanced disclosure of significant segment expenses on an annual and interim basis. The Company adopted this guidance effective in the period ended December 31, 2024, and included the relevant disclosures herein. For the purposes of making operating decisions, assessing financial performance and allocating resources, the CODM reviews financial statement metrics on a consolidated basis, including net sales, gross profit, SG&A, and net income (loss) as presented in the consolidated statements of operations. Net income (loss) is the primary measure of profit or loss reviewed by the CODM. In addition, the CODM reviews consolidated total assets and significant components such as inventories, cash and other assets for the purposes of evaluating financial performance. Significant expense categories regularly reviewed by the CODM are comprised of cost of goods sold and SG&A. The other components of net income (loss) as disclosed in the statements of operations that are not significant segment expenses are loss on asset disposition, interest expense, other income, net, and income tax expense. Therefore, the Company is cross referencing to the U.S. GAAP financial statement measures as presented in the consolidated statement of operations, in connection with adoption of ASU 2023-07. Since the Company operates as one reportable segment, all required segment financial information is found in the consolidated financial statements and footnotes, and within the 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, as determined by the location of the subsidiaries, are shown below. Other foreign locations, which are immaterial, individually and in the aggregate, are included in the United States below. Years ended December 31, 2024 2023 United States $ 151,660 $ 179,844 Canada 41,633 49,668 Eliminations ( 3,005 ) ( 2,931 ) Total consolidated net sales $ 190,288 $ 226,581 Years ended December 31, 2024 2023 United States $ 50,928 $ 68,270 Canada 29,513 33,584 Total property, plant and equipment, net and operating lease right-of-use assets $ 80,441 $ 101,854 All of the products sold by the Company are similar and classified as CEA equipment and supplies. Concentrations of business and credit risk The Company maintains cash balances at certain financial institutions that can, at times, exceed amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk in this area. Accounts receivable expose the Company to credit risks such as collectability and business risks such as customer concentrations. Exposure to losses on receivables is dependent on each customer’s financial condition. Receivables arising from sales are not collateralized; however, credit risk is somewhat mitigated as a result of the large diverse customer base. No customer accounted for more than 10% of revenues in 2024 or 2023. No customer accounted for more than 10% of accounts 64 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) receivable as of December 31, 2024, or December 31, 2023. One supplier accounted for more than 10 % of purchases in 2024 and 2023. 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. Foreign currency matters The Company reports its financial results in United States dollars, which is the currency of the primary economic environment in which it operates. The functional currency for each of the Company’s foreign subsidiaries is generally its local currency. Monetary assets and liabilities, and transactions denominated in currencies other than the functional currency are remeasured to the functional currency at the exchange rate in effect at the end of each period. Foreign currency transaction gains and losses are included in the determination of net loss and classified as other income, net, in the consolidated statements of operations. Assets and liabilities of foreign subsidiaries are translated at the exchange rates in effect at the end of each period. Revenues, expenses, gains and losses are translated at the average rates of exchange prevailing during the period. Accumulated deficit and other equity accounts are translated at historical rates. Translation gains and losses are included in accumulated other comprehensive loss within stockholders’ equity. The effect of currency translation adjustments on cash and cash equivalents is presented separately in the consolidated statements of cash flows. Cash and cash equivalents Cash includes funds deposited in banks. Cash equivalents include highly liquid investments such as term deposits and money market instruments with original maturities of three months or less. Accounts receivable, net Trade accounts receivable represents amounts due from customers. Other receivables represent other current non-trade receivables. Allowance for doubtful accounts reflects the Company’s estimate of amounts in its existing accounts receivable that may not be collected due to customer claims or customer inability or unwillingness to pay. The allowance is estimated based on a combination of factors, including, but not limited to the age of the account, the credit worthiness of the customer, payment terms, the customer’s historical payment history and general economic conditions. Management reviews these factors quarterly to determine if any adjustments are needed to the allowance for doubtful accounts. Accounts receivable are written off when the receivables are deemed uncollectible. Subsequent collections are recorded in SG&A on the consolidated statement of operations when they are received. 65 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) 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 years ended December 31, 2024, and 2023, the Company estimated inventory markdowns relating to restructuring charges based upon current and anticipated demand, customer preferences, business strategies, and market conditions including management's actions with respect to inventory raw materials and products and brands being removed from the Company's portfolio. Leases Leases are accounted for under Accounting Standard Codification ("ASC") 842 - Leases . At inception of a contract, the Company determines whether that contract is or contains a lease. A contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. Leases are then classified as either finance or operating, with classification affecting the location of expense recognition in the consolidated statements of operations. Right-of-use assets ("ROU") represent the right to use an underlying asset for the lease term while lease liabilities represent the obligation to make lease payments arising from a lease, measured on a discount basis. All leases greater than 12 months result in the recognition of a ROU and a lease liability at the lease commencement date based on the present value of the lease payments over the lease term. The present value of the lease payments is calculated using the applicable weighted-average discount rate. The weighted-average discount rate is based on the discount rate implicit in the lease, or if the implicit rate is not readily determinable from the lease, the applicable incremental borrowing rate is estimated. The incremental borrowing rate is estimated using the currency denomination of the lease and the contractual lease term. To determine the incremental borrowing rate, reference is made to interest rates that would be available to finance assets similar to the assets under lease in their related geographical location. The Company accounts for lease components separately from non-lease components, other than for office equipment. The Company has certain leases that include one or more options to renew with renewal terms that can extend the lease term. The exercise of the lease renewal options is at the Company’s discretion. A lease renewal option is included in the determination of the ROU asset and lease liability when the option is reasonably certain of being exercised. Property, plant and equipment Property, plant and equipment is recorded at cost less accumulated depreciation, depletion and amortization. Property, plant and equipment assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Property, plant and equipment, excluding peat bogs and related development, are depreciated using the straight-line method. The following table summarizes the estimated useful lives as follows: Buildings and improvements 10 - 40 years Machinery and equipment 5 - 15 years Leasehold improvements Lesser of useful life or term of the lease Computer equipment 3 - 4 years Furniture and fixtures 5 years The useful lives of property, plant and equipment recorded under finance leases are further limited to the term of lease. 66 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Peat bogs and related development costs are depleted using the units of production method over the total expected volume of the peat bogs. The Company operates peat bogs in Alberta Canada. Under current provincial laws, the Company is subject to certain asset retirement obligations ("AROs") and the remediation of the peat bog sites are under provincial oversight. The Company periodically evaluates expected remediation costs associated with the peat bog sites that it operates. Where the Company concludes that it is probable that a liability has been incurred, a provision is made for management's estimate of the liability. As of December 31, 2024, and 2023, the Company had AROs of $ 284 and $ 759 , respectively, recorded in accrued expenses and other current liabilities on the consolidated balance sheets. As of December 31, 2024, and 2023, the Company had AROs of $ 4,232 and $ 4,457 , respectively, recorded in other long-term liabilities on the consolidated balance sheets. Intangible assets Definite-lived intangible assets are amortized using the straight-line method over their estimated useful lives. The Company has one trade name that is considered to have an indefinite useful life. Intangible assets are also tested for impairment at least annually and when events or changes in circumstances indicate that, more-likely-than-not, the carrying amount may not be recoverable. Significant judgment is required in estimating fair values and performing intangible asset impairment tests. 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 $ 7,883 and $ 9,523 in the years ended December 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 on the consolidated balance sheets, totaled $ 2,611 and $ 3,231 as of December 31, 2024, and 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. Warrants issued in connection with financings The Company generally accounts for warrants issued in connection with debt and equity financings as a component of equity unless the warrants include a conditional obligation to issue a variable number of shares among other conditions or it is possible that the Company may need to settle the warrants in cash. Stock-based compensation The Company accounts for stock-based compensation expense in accordance with the fair value recognition and measurement provisions of U.S. GAAP, which requires compensation cost for the grant-date fair value of stock-based awards to be recognized over the requisite service period. The Company accounts for forfeitures when they occur and any compensation expense previously recognized on unvested shares will be reversed when forfeited. 67 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Service-based awards The Company records stock-based compensation expense for restricted stock units ("RSUs") and service-based stock options on a straight-line basis over the requisite service period. The fair value of grants of restricted stock is based on the fair value of the common stock underlying the award. The fair value of the underlying common stock for RSUs prior to the Company’s initial public offering ("IPO") in December 2020, was determined by considering a number of objective, subjective, and highly complex factors including independent third-party valuations of the Company’s common stock, operating and financial performance, the lack of liquidity of capital stock and general and industry specific economic outlook among other factors. For awards granted after the Company's IPO, the fair value of the underlying common stock for RSUs is the closing date price of the Company's common stock at the grant-date. The fair value of option-based awards is estimated using the Black-Scholes valuation model. The Black-Scholes model requires the use of highly subjective and complex assumptions. For inputs into the Black-Scholes model, the expected volatility is based on historical implied volatility from recent stock option transactions at the time of grant. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury implied yield at the date of grant. The Company has elected to use the "simplified method" to determine the expected term which is the midpoint between the vesting date and the end of the contractual term because it has insufficient history upon which to base an assumption about the term. The expected dividend yield is 0.0 % as the Company has not paid and does not anticipate paying dividends on its common stock. Performance-based awards The Company has granted performance stock unit ("PSU") awards that vest upon the satisfaction of both service-based and performance-based conditions. The service-based condition for these awards generally is satisfied over one year . The performance-based conditions generally are satisfied upon achieving specified performance targets. The Company records stock-based compensation expense for performance-based equity awards on a straight-line basis over the requisite service period and only if performance-based conditions are considered probable to be satisfied. Employee benefit plan The Company has a savings retirement plan that covers substantially all full-time employees who meet the plan’s eligibility requirements and provides for an employee elective contribution. The Company made matching contributions to the plan and incurred expense of $ 236 and $ 261 for the years ended December 31, 2024, and 2023, respectively. Income taxes The asset and liability method of accounting for income taxes is followed whereby deferred income tax assets are recognized for deductible temporary differences and operating loss carryforwards, and deferred income tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the amounts of assets and liabilities recorded for income tax and financial reporting purposes. Deferred income tax assets are recognized only to the extent that management determines that it is more-likely-than-not that the deferred income tax assets will be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The income tax expense or benefit is the income tax payable or recoverable for the year plus or minus the change in deferred income tax assets and liabilities during the year. The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. The determination of the amount of valuation allowance to be provided on recorded deferred tax assets involves consideration of estimates regarding the timing and amount of the reversal of taxable temporary differences, expected future taxable income by jurisdiction, and the impact of tax planning strategies. Changes in the relevant facts can impact the judgment or need for valuation allowances. In the event we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. 68 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) The Company will establish a liability for tax return positions when there is uncertainty as to whether the position will ultimately be sustained. Amounts for uncertain tax positions will be adjusted when new information becomes available or when positions are effectively settled. The Company will recognize interest expense and penalties related to these unrecognized tax benefits within income tax expense. U.S. GAAP provides that a tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. The amount recognized is measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the related tax authority. Recently issued accounting pronouncements In November 2023, the FASB issued 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 has adopted the aforementioned guidance, and enhanced segment reporting is presented for the years ended December 31, 2024, and 2023. 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. In November 2024, the FASB issued ASU 2024-03, “Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses,” which requires a public entity to disclose additional information about specific expense categories in the notes to financial statements on an annual and interim basis. The amendments are effective for annual periods beginning after December 15, 2026, and interim periods beginning after December 15, 2027, with early adoption permitted. A public entity should apply the amendments either prospectively to financial statements issued for reporting periods after the effective date of this ASU or retrospectively to any or all prior periods presented in the financial statements. The Company is currently evaluating the impact that adoption of this accounting standard will have on its financial disclosures. 3. RESTRUCTURING AND ASSET SALES 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. The Company's strategic product consolidation entailed removing approximately one-third of all products and one-fifth of all brands relating to the Company's primary product portfolio, which excludes the garden center business in Canada. During the year ended December 31, 2023 , the Company recorded net pre-tax charges of $ 2,084 for the first phase of the Restructuring Plan, which w ere primarily costs related to the relocation and termination of certain facilities in Canada. The restructuring charges were 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 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 year ended December 31, 2023, the Company recorded pre-tax restructuring charges of $ 9,185 for the second phase, relating primarily to non-cash raw material inventory write-downs as the Company liquidated these assets and reduced storage space within certain manufacturing facilities. These restructuring charges 69 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) were recorded primarily within cost of goods sold on the consolidated statements of operations, and were subject to significant estimate. During the year ended December 31, 2024, the Company recorded pre-tax restructuring charges of $ 2,223 for the second phase, relating primarily to cash charges associated with the consolidation and closure of U.S. manufacturing facilities including termination and disposal costs associated with inventory, facilities, and headcount reductions. The non-cash charges consist of fixed asset and inventory write-downs. Total costs incurred relating to this second phase of the Restructuring Plan, from its commencement in 2023 through December 31, 2024, were (i) $ 9,672 of non-cash charges relating primarily to inventory markdowns of durable equipment products, and (ii) $ 1,736 of cash charges relating primarily to the consolidation of U.S. manufacturing facilities including termination and disposal costs associated with inventory, facilities, and headcount reductions. Including both phases of the Restructuring Plan, the Company recorded $ 1,946 and $ 10,664 of total restructuring charges within cost of goods sold on the consolidated statements of operations for the years ended December 31, 2024, and 2023, respectively. The Company recorded total charges for both phases of the Restructuring Plan of $ 277 and $ 605 within SG&A expenses on the consolidated statements of operations for the years ended December 31, 2024, and 2023, respectively. Of the $ 2,223 and $ 11,269 of total restructuring charges recorded for the years ended December 31, 2024, and 2023, respectively, $ 806 and $ 9,703 were non-cash charges primarily related to inventory write-downs and asset dispositions. The second phase of our Restructuring Plan is substantially complete as of December 31, 2024. The following tables presents the activity in accrued expenses and other current liabilities for restructuring costs related to the first and second phases of the Restructuring Plan for the years ended December 31, 2023, and 2024: Phase 1 Phase 2 Restructuring Accruals as of December 31, 2022 $ 696 $ — Expense 1,247 272 Cash Payments ( 1,943 ) ( 85 ) Restructuring Accruals as of December 31, 2023 — 187 Expense — 1,416 Cash Payments — ( 1,500 ) Restructuring Accruals as of December 31, 2024 $ — $ 103 Asset Sales On May 10, 2024, in connection with the Company's restructuring of its durable manufacturing operations, the Company entered into an agreement (the “Purchase Agreement”) with CM Fabrication, LLC (the “Buyer”) to sell assets relating to the production of Innovative Growers Equipment ("IGE") durable equipment products for $ 8,660 (the “Asset Sale”) and retain the proprietary brand and customer relationships. The Asset Sale closed on May 31, 2024, and the Company continues to sell its IGE branded durable products, including horticulture benches, racking and LED lighting systems. In connection with the transaction, the Company entered into an exclusive supply agreement with the Buyer to provide for contract manufacturing, which is expected to yield a more efficient cost model. Assets and liabilities that were sold, disposed or terminated in connection with the Asset Sale included $ 11,616 of inventories, $ 3,721 of property, plant and equipment, $ 2,573 of technology intangible assets, and $ 90 of other net liabilities. The Company paid cash to terminate the facility operating lease for $ 1,275 and certain equipment finance leases for $ 668 . The Company incurred an estimated $ 417 of transaction costs, including legal fees and other transaction-related expenses. The Company recorded a loss on asset disposition of $ 11,520 on the consolidated statements of operations for the year ended December 31, 2024, which included the aforementioned assets and liabilities derecognized, and operating and finance lease termination payments. The Company estimated the amount of cash proceeds associated with the sale of inventories as $ 4,960 and property, plant and equipment as $ 3,700 , and classified the amounts within net cash from operating activities and investing activities, respectively, on the consolidated statements of cash flows for the year ended December 31, 2024. 70 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Pursuant to requirements in the Company's Revolving Credit Facility, consent was obtained from JPMorgan Chase Bank, N.A., as administrative agent to permit the Asset Sale. The Company intends to reinvest the net proceeds from the Asset Sale into certain permitted investments, such as capital expenditures or other permitted acquisitions/ investments, in accordance with provisions of the Term Loan. The foregoing description of the Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the Purchase Agreement, included as Exhibit 10.23 to this Annual Report on Form 10-K. During the year ended December 31, 2024, the Company sold approximately 20 acres of the 140 acres of excess owned land at the Goshen, New York location. The sale price less costs to sell were consistent with the carrying value of the land, and therefore no gain or loss was recorded in the year ended December 31, 2024. 4. INTANGIBLE ASSETS, NET Intangible assets, net comprised the following: December 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 $ 8,982 $ ( 8,625 ) $ 357 $ 9,325 $ ( 8,357 ) $ 968 Customer relationships 99,806 ( 39,230 ) 60,576 99,805 ( 31,883 ) 67,922 Technology, formulations and recipes 110,381 ( 33,401 ) 76,980 114,181 ( 25,124 ) 89,057 Trade names and trademarks 131,492 ( 23,432 ) 108,060 131,493 ( 16,740 ) 114,753 Other 4,716 ( 4,488 ) 228 4,802 ( 4,422 ) 380 Total finite-lived intangible assets, net 355,377 ( 109,176 ) 246,201 359,606 ( 86,526 ) 273,080 Indefinite-lived intangible asset: Trade name 2,801 — 2,801 2,801 — 2,801 Total Intangible assets, net $ 358,178 $ ( 109,176 ) $ 249,002 $ 362,407 $ ( 86,526 ) $ 275,881 The Company did not record any impairment during the years ended December 31, 2024, or 2023. Amortization expense related to intangible assets was $ 23,998 and $ 24,355 for the years ended December 31, 2024, and 2023, respectively. In conjunction with the Asset Sale, the Company disposed of technology intangible assets with a net book value of $ 2,573 . Refer to Note 3 – Restructuring and Asset Sales for further details. The following are the estimated useful lives and the weighted-average amortization period remaining as of December 31, 2024, for the major classes of finite-lived intangible assets: Useful lives Weighted-average amortization period Computer software 3 to 5 years 2 years Customer relationships 7 to 18 years 9 years Technology, formulations and recipes 8 to 12 years 8 years Trade names and trademarks 15 to 20 years 16 years 71 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) The estimated aggregate future amortization expense for intangible assets subject to amortization as of December 31, 2024, is summarized below: Estimated Future Amortization Expense Year ending December 31, 2025 $ 23,734 2026 23,527 2027 23,355 2028 22,710 2029 21,582 Thereafter 131,293 Total $ 246,201 5. 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 RSUs and 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 years ended December 31, 2024, and 2023: Years ended December 31, 2024 2023 Net loss $ ( 66,717 ) $ ( 64,813 ) Weighted-average shares of common stock outstanding 4,598,640 4,550,836 Dilutive effect of warrants and share based compensation awards using the treasury stock method — — Diluted weighted-average shares of common stock outstanding 4,598,640 4,550,836 Basic loss per common share $ ( 14.51 ) $ ( 14.24 ) Diluted loss per common share $ ( 14.51 ) $ ( 14.24 ) 72 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) The computation of the weighted-average shares of common stock outstanding for diluted loss per common share excludes the following potential shares of common stock as their inclusion would have an anti-dilutive effect on diluted loss per common share: Years ended December 31, 2024 2023 Shares subject to unvested or deferred performance and restricted stock units 290,334 217,037 Shares subject to stock options outstanding 40,654 57,207 6. ACCOUNTS RECEIVABLE, NET AND INVENTORIES Accounts receivable, net comprised the following: December 31, 2024 2023 Trade accounts receivable $ 14,112 $ 16,740 Allowance for doubtful accounts ( 706 ) ( 920 ) Other receivables 1,350 1,070 Total accounts receivable, net $ 14,756 $ 16,890 The change in the allowance for doubtful accounts consisted of the following: Years ended December 31, 2024 2023 Beginning balance $ ( 920 ) $ ( 1,556 ) Changes in estimates ( 1,006 ) ( 1,280 ) Write-offs 718 310 Collections/Other 502 1,606 Ending balance $ ( 706 ) $ ( 920 ) Inventories comprised the following: December 31, 2024 2023 Finished goods $ 44,372 $ 58,346 Work-in-process 1,137 3,891 Raw materials 12,398 23,256 Allowance for inventory obsolescence ( 7,274 ) ( 10,139 ) Total inventories $ 50,633 $ 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. In conjunction with the Asset Sale, the Company sold $ 11,616 of inventories. Refer to Note 3 – Restructuring and Asset Sales for further details. 73 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) 7. 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 $ 10,195 and $ 12,371 during the years ended December 31, 2024, and 2023, respectively. These costs are included primarily within SG&A in the consolidated statements of operations and do not include lease termination costs associated with the Asset Sale. Refer to Note 3 – Restructuring and Asset Sales for further details. The Company has operating subleases which have been accounted for by reference to the underlying asset subject to the lease, primarily as an offset to rent expense within SG&A. In January 2023, Gotham Properties LLC, an Oregon limited liability company and a subsidiary of the Company (“Seller”), consummated a Purchase and Sale Agreement with J & D Property, LLC, a Nevada limited liability company (“Purchaser”) pursuant to which certain real property located in the City of Eugene, County of Lane, State of Oregon (the “Eugene Property”) was sold to Purchaser for $ 8,598 and then leased back by Seller (the “Sale-Leaseback Transaction”). The new lease has a term of 15 years with annual rent starting at $ 731 and fixed increases to the final year when annual rent is $ 964 . The Company accounted 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 10 – Debt for further discussion. Total ROU assets, finance lease assets, and lease liabilities were as follows: December 31, Balance Sheet Classification 2024 2023 Lease assets Operating lease assets Operating lease right-of-use assets $ 42,869 $ 54,494 Finance lease assets Property, plant and equipment, net 7,279 9,315 Total lease assets $ 50,148 $ 63,809 Lease liabilities Current: Operating leases Current portion of operating lease liabilities $ 7,731 $ 8,336 Finance leases Current portion of finance lease liabilities 459 954 Noncurrent: Operating leases Long-term operating lease liabilities 37,553 47,506 Finance leases Long-term finance lease liabilities 7,830 8,734 Total lease liabilities $ 53,573 $ 65,530 74 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Total lease costs and sublease and logistics income were as follows: Years ended December 31, Classification 2024 2023 Operating lease costs Selling, general and administrative (1) $ 10,195 $ 12,371 Finance lease costs: Amortization of lease assets Selling, general and administrative 734 1,047 Amortization of lease assets Cost of goods sold 137 328 Interest on lease liabilities Interest expense 459 519 Sublease and logistics income Selling, general and administrative ( 3,851 ) ( 1,722 ) (1) Operating lease costs are primarily recorded in SG&A. In addition to the operating lease costs above, short-term and month-to-month lease expense was $ 61 and $ 182 for the years ended December 31, 2024, and 2023, respectively, and other costs associated with operating leases were $ 3,207 and $ 3,132 , respectively, for non-lease components such as common area maintenance and other miscellaneous items. These costs were included primarily within SG&A in the consolidated statements of operations. The aggregate future minimum lease payments under long-term non-cancelable operating and finance leases with remaining terms greater than one year as of December 31, 2024, are as follows: Year ending December 31, Operating Finance 2025 $ 9,397 $ 880 2026 8,702 847 2027 8,789 849 2028 8,252 805 2029 5,384 822 Thereafter 10,915 7,217 Total lease payments 51,439 11,420 Less portion representing interest 6,155 3,131 Total principal 45,284 8,289 Less current portion 7,731 459 Long-term portion $ 37,553 $ 7,830 The following table summarizes the weighted-average remaining lease term as well as the weighted average discount rate as of December 31, 2024, and 2023: December 31, 2024 2023 Weighted-average remaining lease term in years: Operating leases 6.0 6.7 Finance leases 12.9 12.5 Weighted-average discount rate: Operating leases 4.12 % 4.20 % Finance leases 5.39 % 5.25 % 75 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Cash paid for amounts included in lease liabilities for the years ended December 31, 2024, and 2023, were: Years ended December 31, Cash paid for amounts included in lease liabilities: 2024 2023 Operating cash flows from operating leases $ ( 9,653 ) $ ( 12,121 ) Operating cash flows from finance leases ( 459 ) ( 516 ) Financing cash flows from finance leases ( 680 ) ( 1,007 ) 8. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment, net comprised the following: December 31, 2024 2023 Machinery and equipment $ 23,531 $ 27,417 Peat bogs and related development 11,895 12,256 Building and improvements 10,313 10,132 Land 5,630 6,114 Furniture and fixtures 4,239 4,360 Computer equipment 3,152 3,301 Leasehold improvements 3,185 5,169 Gross property, plant, and equipment 61,945 68,749 Less: accumulated depreciation ( 24,400 ) ( 21,389 ) Total property, plant, and equipment, net $ 37,545 $ 47,360 Depreciation, depletion and amortization expense related to property, plant, and equipment, net was $ 6,693 and $ 7,720 for the years ended December 31, 2024, and 2023, respectively. As of December 31, 2024, Land, Building and improvements, Computer equipment and Machinery and equipment contain finance leases assets, recorded at cost of $ 9,823 , less accumulated depreciation of $ 2,544 . 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 . In conjunction with the Asset Sale, the Company sold $ 3,721 of property, plant and equipment, net. Refer to Note 3 – Restructuring and Asset Sales for further details. The Company operates peat bogs in Alberta, Canada. Under current provincial laws the Company is subject to certain 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 December 31, 2024, and 2023, the Company had AROs of $ 284 and $ 759 , respectively, recorded in Accrued expenses and other current liabilities on the consolidated balance sheets. As of December 31, 2024, and 2023, the Company had AROs of $ 4,232 and $ 4,457 , respectively, recorded in Other long-term liabilities on the consolidated balance sheets. 76 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) The following table presents changes in asset retirement obligations for the following periods: Years ended December 31, 2024 2023 Balance, beginning of the period $ 5,216 $ 4,632 Liabilities incurred in the period — 349 Liabilities settled in the period ( 474 ) ( 17 ) Accretion expense 165 147 Other ( 391 ) 105 Balance, end of the period $ 4,516 $ 5,216 9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities comprised the following: December 31, 2024 2023 Accrued compensation and benefits $ 1,987 $ 2,096 Interest accrual 2,141 1,214 Freight, custom and duty accrual 1,130 1,040 Goods in transit accrual 574 360 Income tax accrual 127 — Asset retirement obligations 284 759 Other accrued liabilities 4,404 4,060 Total accrued expenses and other current liabilities $ 10,647 $ 9,529 10. DEBT Debt is comprised of the following: December 31, 2024 2023 Term loan - Principal $ 119,303 $ 122,500 Term loan - unamortized discount and deferred financing costs ( 3,443 ) ( 4,259 ) Term Loan - net of unamortized discount and deferred financing costs 115,860 118,241 Other 93 160 Total debt $ 115,953 $ 118,401 Current portion of long-term debt $ 1,260 $ 2,989 Long-term debt - net of unamortized discount and deferred financing costs of $ 3,443 and $ 4,259 as of December 31, 2024, and December 31, 2023, respectively 114,693 115,412 Total debt $ 115,953 $ 118,401 77 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) 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 the Credit and Guaranty Agreement (“Amendment No. 1”) effective on June 27, 2023, to replace the LIBOR referenced rates with SOFR referenced rates. Pursuant to Amendment No. 1, any Term Loan that constitutes a Eurodollar Rate Loan that is outstanding as of the Amendment No. 1 closing date shall continue until the end of the applicable interest period for such Eurodollar Rate Loan and the provisions of the Term Loan applicable thereto shall continue and remain in effect (notwithstanding the occurrence of the Amendment No. 1 closing date) until the end of the applicable interest period for such Eurodollar Rate Loan, after which such provisions shall have no further force or effect. Such Eurodollar Rate Loan shall subsequently either be an ABR Loan or a Term Benchmark Loan. The ABR Loans shall bear interest at the Alternate Base Rate (with a 2.0 % floor) plus 4.50 %, and Term Benchmark Loans shall bear interest at the Adjusted Term SOFR Rate (with a 1.0 % floor), plus 5.50 %. The ABR Loan and Term Benchmark Loan credit spreads of 4.50 % and 5.50 %, respectively, within the Amendment No. 1 have not changed from the credit spreads in the original Term Loan. Legal fees associated with Amendment No. 1 were not material, and were included in other income, net, on the Consolidated Statements of Operations for the year ended December 31, 2023. The foregoing description of Amendment No. 1 does not purport to be complete and is qualified in its entirety by reference to the provisions of Amendment No. 1, included as Exhibit 10.9 to this Annual Report on Form 10-K. Capitalized terms referenced above are defined in the Term Loan. The Term Loan was subject to a call premium of 1 % if called prior to October 25, 2023, and 0 % thereafter, and matures on October 25, 2028 ("Maturity Date"). Deferred financing costs are being amortized to interest expense over the term of the loan. For the year ended December 31, 2024, the effective interest rate was 11.70 % and interest expense was $ 14,112 , which includes amortization of deferred financing costs and discount of $ 751 . For the year ended December 31, 2023, the effective interest rate was 11.55 % and interest expense was $ 14,245 , which included amortization of deferred financing costs and discount of $ 883 . The principal amounts of the Term Loan are required to be repaid in consecutive quarterly installments in amounts equal to 0.25 % of the original principal amount of the Term Loan, reduced pro rata by any additional payments made, 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 3 – Restructuring and Asset Sales and Note 7 – Leases , the Company received net cash proceeds in May 2024 from the Asset Sale and January 2023 from the Sale-Leaseback Transaction and is subject to a provision of the Term Loan 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 transaction date, and (ii) investments which are contractually committed within one-year of the transaction date 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 accordance with this provision in relation to the Sale-Leaseback, described further in Note 7 – Leases , the Company classified $ 1,665 as current debt as of December 31, 2023, and prepaid the Term Loan in this amount. In addition, the Company had $ 2,187 of contractual commitments pursuant to this provision as of December 31, 2023. As of December 31, 2024, the Company has satisfied this provision through a combination of payments made pursuant to the contractual commitments and an additional $ 300 repayment of the Term Loan. As described in Note 3 – Restructuring and Asset Sales , the Company sold assets for $ 8,660 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, however the Company intends to reinvest the net cash proceeds from the Asset Sale into certain permitted investments, such as capital expenditures, and no amounts were 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. 78 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) 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 December 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 to the Revolving Credit Facility (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 to the Revolving Credit Facility (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 to the Revolving Credit Facility 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 to the Revolving Credit Facility (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 a fifth amendment to the Revolving Credit Facility (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. On November 1, 2024, the Company and certain of its subsidiaries entered into a sixth amendment to the Revolving Credit Facility (the “Sixth Amendment”) which reduced the maximum commitment amount under the Revolving Credit Facility to $ 35,000 . The unamortized debt discount and deferred financing costs were $ 237 and $ 538 as of December 31, 2024, and 2023, respectively, and are included in other assets in the consolidated balance sheet. Debt discount and deferred financing costs are being amortized to interest expense over the term of the Revolving Credit Facility. The Revolving Credit Facility is an asset-based facility that is secured by a first lien on the working capital assets of the Company and a second lien on the non-working capital assets of the Company (including most of the Company’s subsidiaries). The borrowing base is based on a detailed monthly calculation of the sum of (a) a percentage of the Eligible Accounts at such time, plus (b) the lesser of (i) a percentage of the Eligible Inventory, at such time, valued at the lower of cost or market value, determined on a first-in-first-out basis, and (ii) the product of a percentage multiplied by the Net Orderly Liquidation Value percentage identified in the most recent inventory appraisal ordered by the Administrative Agent multiplied by the Eligible Inventory, valued at the lower of cost or market value, determined on a first-in-first-out basis, minus (c) Reserves (each of the defined terms above, as defined in the Revolving Credit Facility documents). The Company is required to maintain certain reporting requirements, affirmative covenants and negative covenants, pursuant to terms outlined in the agreement. Additionally, if the Company’s Excess Availability (as defined in the Revolving Credit Facility documents) is less than an amount equal to 10 % of the Aggregate Revolving Commitment (currently $ 35,000 ), 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 fixed charge coverage ratio of 1.15 x, but no such acquisitions or payments are currently contemplated. As of December 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, or the CBFR. The rates that use SOFR as the reference rate (Adjusted Term SOFR Rate, the Adjusted REVSOFR30 Rate, the Adjusted Daily Simple SOFR and the 79 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) 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 December 31, 2024, and 2023, the Company had zero borrowed under the facility. As of December 31, 2024, the Company would be able to borrow approximately $ 13 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 $ 93 and $ 160 as of December 31, 2024, and 2023, respectively, was primarily comprised of a foreign subsidiary's other debt which constitutes an immaterial revolving line of credit and mortgage. Loss on debt modification The losses on debt modification of $ 195 and $ 59 for the years ended December 31, 2024 and 2023, respectively, resulting primarily from the financing transactions described above, are presented in other income, net on the consolidated statement of operations. Aggregate future principal payments As of December 31, 2024, the aggregate estimated future principal payments under long-term debt are as follows: Debt Year ending December 31, 2025 $ 1,260 2026 1,248 2027 1,249 2028 and thereafter 115,639 Total $ 119,396 11. 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 December 31, 2024, there were 4,614,279 shares outstanding and 300,000,000 shares authorized, after giving retroactive effect to the February 12, 2025, reverse stock split. 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 Agent upon the exercise of certain Investor Warrants following such call for Redemption. As of December 31, 2024, and 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 December 31, 2024, and 2023, 80 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) there were no outstanding placement agent warrants. 12. 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 December 31, 2024, a total of 213,551 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 228,405 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 ISOs 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. The tax benefits recognized in the consolidated statements of operations for stock-based compensation arrangements for the years ended December 31, 2024, and 2023, were not material to the financial statements. Restricted Stock Unit 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 vested in two equal vesting tranches; one tranche vested on October 31, 2023, and the second one on October 31, 2024. During the second quarter of 2023, the Company granted RSU awards to members of the board of directors that are expected to vest on the one year anniversary of the grant date. During the third quarter of 2023, the Company granted RSU awards that are expected to vest with three equal vesting tranches, annually on the anniversary of the grant date. During the second quarter of 2024, 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. 81 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) The following table summarizes the activity related to the Company's RSUs for the year ended December 31, 2024. For purposes of this table, vested RSUs represent the shares for which the service condition had been fulfilled during the year ended December 31, 2024: Number of RSUs Weighted average grant date fair value Balance, December 31, 2023 124,253 $ 30.62 Granted 80,235 $ 7.79 Vested ( 97,319 ) $ 30.08 Forfeited ( 5,139 ) $ 18.10 Balance, December 31, 2024 102,030 $ 13.82 The total vest date fair value of RSUs vested for the years ended December 31, 2024, and 2023, was $ 729 , and $ 948 , respectively. The Company recognized $ 1,927 , and $ 4,502 , of total stock-based compensation expense for RSUs for the years ended December 31, 2024, and 2023, respectively. As of December 31, 2024, total unamortized stock-based compensation cost related to unvested RSUs was $ 629 and the weighted-average period over which the compensation is expected to be recognized is less than one year . During the year ended December 31, 2024, 61,885 RSUs that vested were not issued due to the recipients' elections to defer the conversion into common stock. As of December 31, 2024, there were 62,521 RSUs which had vested, but were not yet issued due to the recipients' elections. For the year ended December 31, 2024, the Company withheld 11,705 , of the 35,434 , of common stock issued upon vesting of RSUs to meet employees' payroll tax withholding requirements. The tax withholding payments of $ 83 were made in 2024. Subsequent Event - January 1, 2025 Grant On January 1, 2025, the Company granted 85,000 RSU awards to certain executives that are expected to vest with either two or three equal vesting tranches, annually on the anniversary of the grant date. Refer to the Current Report on Form 8-K filed with the SEC on October 17, 2024, for additional details. Performance Stock Unit Activity During the years ended December 31, 2024, and 2023, the Company granted PSU awards that are subject to a one-year vesting requirement (based on continuous employment) and contain performance conditions based on certain performance metrics. The following table summarizes the activity related to the Company's PSUs for the year ended December 31, 2024: Number of PSUs Weighted average grant date fair value Balance, December 31, 2023 92,148 $ 17.70 Granted 137,254 $ 9.89 Vested ( 18,030 ) $ 17.70 Forfeited ( 85,589 ) $ 16.65 Balance, December 31, 2024 125,783 $ 9.89 During the year ended December 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 Company anticipates that a majority of the PSUs outstanding as of December 31, 2024 will forfeit in 2025 as a result of not meeting certain performance conditions. The total vest date fair value of PSUs vested for the years ended December 31, 2024, and 2023, was $ 167 and $ 44 , 82 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) respectively. The Company recognized $ 357 , and $ 300 , of total stock-based compensation expense for PSUs the years ended December 31, 2024, and 2023, respectively. As of December 31, 2024, total unamortized stock-based compensation cost related to unvested PSUs was $ 128 and the weighted-average period over which the compensation is expected to be recognized is less than one year . For the year ended December 31, 2024, the Company withheld 6,321 , of the 18,030 , of common stock issued upon vesting of PSUs to meet employees' payroll tax withholding requirements. The tax withholding payments of $ 28 were made in 2024. Stock Options The vesting of stock options is subject to certain change in control provisions as provided in the incentive plan agreements and stock options may be exercised up to 10 years from the date of issuance. There were no stock options granted or exercised during the years ended December 31, 2024, or 2023. The following table summarizes the stock option activity for the year ended December 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 57,207 $ 94.67 $ 20.20 3.69 Cancelled ( 16,416 ) $ 90.37 $ 13.20 Forfeited ( 137 ) $ 110.60 $ 98.87 Outstanding as of December 31, 2024 40,654 $ 96.36 $ 22.76 3.67 Options exercisable as of December 31, 2024 40,654 $ 96.36 $ 22.76 3.67 Vested and expected to vest as of December 31, 2024 40,654 $ 96.36 $ 22.76 3.67 The following table summarizes the unvested stock option activity for the year ended December 31, 2024: Number Weighted average grant date fair value Unvested as of December 31, 2023 1,662 $ 121.20 Vested ( 1,525 ) $ 116.59 Forfeited ( 137 ) $ 98.87 Unvested as of December 31, 2024 — $ — Since stock options represent equity awards of the Company, such awards are fair valued as of the grant date for the purposes of measurement and recognition under U.S. GAAP. To measure the fair value of an option, the Black-Scholes valuation model was utilized. The valuation model requires the input of subjective assumptions. For inputs into the Black-Scholes model, the expected volatility is based on historical implied volatility from recent stock option transactions at the time of grant. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury implied yield at the date of grant. The Company has elected to use the "simplified method" to determine the expected term which is the midpoint between the vesting date and the end of the contractual term because it has insufficient history upon which to base an assumption about the term. The expected dividend yield is 0.0 % as the Company has not paid and does not anticipate paying dividends on its common stock. For the years ended December 31, 2024, and 2023, respectively, the Company recognized $ 101 and $ 273 , of total stock-based compensation expense for stock options. As of December 31, 2024, there was no unvested options or unrecognized compensation expense. 83 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) 13. INCOME TAXES Loss before tax was as follows: Years ended December 31, 2024 2023 United States $ ( 64,011 ) $ ( 58,068 ) Foreign ( 1,837 ) ( 6,958 ) Loss before tax $ ( 65,848 ) $ ( 65,026 ) Significant components of income tax benefit consist of the following: Years ended December 31, 2024 2023 Current: Federal $ — $ — State 90 167 Foreign 706 ( 382 ) Total current expense (benefit) 796 ( 215 ) Deferred: Federal — 111 State — — Foreign 73 ( 109 ) Total deferred expense 73 2 Total income tax expense (benefit) $ 869 $ ( 213 ) The reconciliation of income tax computed at the U.S. federal statutory tax rates of 21% to income tax benefit consists of the following: Years ended December 31, 2024 2023 Effective rate reconciliation U.S. federal tax benefit at statutory rate $ ( 13,828 ) $ ( 13,656 ) State income taxes, net 71 132 Permanent items 688 120 Foreign rate differential 112 ( 3,988 ) 162(m) officers compensation — 17 Share-based compensation 417 680 Deferred adjustments ( 827 ) 1,035 Other, net 14 ( 1,320 ) Valuation allowance 14,222 16,767 Total income tax expense (benefit) $ 869 $ ( 213 ) 84 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) Deferred income tax assets and liabilities consist of the following: December 31, 2024 2023 Deferred tax assets Lease liabilities $ 12,959 $ 16,646 Accrued expenses 1,671 2,022 Share-based compensation 674 177 Intangible assets 1,449 1,422 Net operating loss 49,690 38,729 Inventories 7,832 5,437 Interest expense 12,658 9,466 Other 1,540 1,543 Deferred tax assets 88,473 75,442 Valuation allowance ( 75,336 ) ( 55,742 ) Total deferred tax assets 13,137 19,700 Deferred tax liabilities Property, plant and equipment ( 5,479 ) ( 8,618 ) Operating lease right-of-use assets ( 10,624 ) ( 14,063 ) Other ( 81 ) ( 37 ) Total deferred tax liabilities ( 16,184 ) ( 22,718 ) Net deferred tax liability $ ( 3,047 ) $ ( 3,018 ) Other long-term assets - deferred tax assets $ — $ 214 Long-term deferred tax liabilities ( 3,047 ) ( 3,232 ) Net deferred tax liability $ ( 3,047 ) $ ( 3,018 ) As of December 31, 2024, the Company had federal and state NOL carryforwards of approximately $ 183,800 and $ 136,400 , respectively. The federal and state NOL carryforwards, if not utilized, will begin to expire in 2037 and 2027, respectively, and $ 170,100 of the federal losses are indefinite. As of December 31, 2023, the Company had federal and state NOL carryforwards of approximately $ 153,300 and $ 113,100 , respectively. Foreign NOL carryforwards were approximately $ 9,700 at December 31, 2024. The foreign NOLs, if not utilized, will begin to expire in 2041. The Company determined the amount of its valuation allowance based on estimates regarding the timing and amount of the reversal of taxable temporary differences, expected future taxable income by jurisdiction, and the impact of tax planning strategies. As of December 31, 2024, and 2023, the Company believes it is more-likely-than-not that it will not be able to realize its U.S. deferred tax assets and therefore has maintained a full valuation allowance against its U.S. deferred tax assets. The Company has also provided valuation allowances against certain foreign deferred tax assets. Carryforwards of NOLs are subject to possible limitation should a change in ownership occur, as defined by Internal Revenue Code Section 382. An ownership change is generally defined as a greater than 50% increase in equity ownership by 5% stockholders in any three-year period. The Company experienced an aggregate ownership change which exceeded the 50% threshold in connection with the Company's IPO, and future changes in stock ownership may occur. To the extent that the Company earns net taxable income, the Company's ability to use NOLs to offset such taxable income may be subject to limitations. The annual limitation resulting from the IPO ownership change is not expected to result in the expiration of the NOL carry forwards before utilization. 85 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) In 2024 and 2023, the Company did not record any liabilities related to uncertain tax positions. The Company does not have any tax positions for which it is reasonably possible that the total amount of gross unrecognized tax benefits will significantly change within 12 months of December 31, 2024. The Company recognizes interest and penalties relating to unrecognized tax benefits as part of its income tax expense. The Company’s major filing jurisdictions are the United States and Canada. Due to the Company’s NOL carryforwards, the Company’s income tax returns remain subject to examination by federal, foreign and most state taxing authorities for all tax years. 14. 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. 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. 15. FAIR VALUE MEASUREMENTS Recurring and Nonrecurring As described in Note 3 – Restructuring and Asset Sales, during the second quarter of 2024, the Company entered into an agreement to sell approximately 20 acres of the 140 acres of owned land at its Goshen, New York location. The Company measured the held-for-sale land asset at estimated fair value based on the agreement, which was considered a Level 2 fair value measurement. The land had a carrying value of $ 470 , which was consistent with the estimated sale price less costs to sell, and therefore no estimated gain or loss was recorded in the year ended December 31, 2024. The $ 470 carrying value of the land has been reclassified from property, plant and equipment, net, to assets held for sale on the Company's condensed consolidated balance sheets at June 30, 2024 and September 30, 2024. The transaction closed in the fourth quarter of 2024, and the Company has no assets held for sale as of December 31, 2024. Other Fair Value Measurements The following table summarizes the fair value of the Company’s assets and liabilities which are provided for disclosure purposes: December 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 26,111 26,111 30,312 30,312 Liabilities Finance leases Level 3 8,289 8,437 9,688 9,688 Term Loan Level 2 119,303 95,442 122,500 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. 86 TABLE OF CONTENTS Hydrofarm Holdings Group, Inc. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) The estimated fair value of finance leases, which were considered Level 3 fair value measurements were calculated as the present value of the required future cash outflows discounted at an estimated borrowing rate. 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 7 – Leases and Note 10 – 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. 87 TABLE OF CONTENTS Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.