What changed in this filing

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Item 1. Financial Statements

2021-08-13 compared with 2021-05-14 · 359 added, 73 removed, 427 unchanged (50% of the section changed)

3 unchanged sentences

(In thousands, except share and per share amounts)

March 31, December 31,

June 30, December 31,

Current assets:

8 unchanged sentences

Operating lease right-of-use assets 28,994 18,289

Goodwill 147,032 —

Intangible assets, net 107,312 52,421

15 unchanged sentences

50,000,000 shares authorized;

0 shares issued and outstanding at March 31, 2021 and December 31, 2020)

0 shares issued and outstanding at June 30, 2021 and December 31, 2020)

Stockholders’ equity

1 unchanged sentence

300,000,000 shares authorized;

33,970,364 and 33,499,953 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively)

41,296,585 and 33,499,953 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively)

Additional paid-in capital 707,690 364,248

7 unchanged sentences

(In thousands, except share and per share amounts)

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2021 2020 2021 2020

Net sales $ 133,800 $ 91,208 $ 245,189 $ 158,105

4 unchanged sentences

Impairment, restructuring and other 1 83 16 92

Income (loss) from operations 6,382 ( 167 )

Income from operations 2,331 4,954 8,713 4,787

Interest expense ( 54 ) ( 2,506 ) ( 144 ) ( 5,309 )

16 unchanged sentences

(In thousands)

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2021 2020 2021 2020

Net income (loss) 2,257 2,567 $ 7,197 $ ( 526 )

14 unchanged sentences

Shares Amount Shares Amount

Balance, March 31, 2020

7,725,045 $ 26,228 20,688,439 $ 2 $ 155,579 $ ( 1,427 ) $ ( 149,752 ) $ 4,402

Stock-based compensation expense — — — — 131 — — 131

Series A Convertible Preferred Stock cumulative dividend — 674 — — ( 674 ) — — ( 674 )

Net income — — — — — — 2,567 2,567

Foreign currency translation gain — — — — — 648 — 648

Balance, June 30, 2020

7,725,045 $ 26,902 20,688,439 $ 2 $ 155,036 $ ( 779 ) $ ( 147,185 ) $ 7,074

Balance, March 31, 2021

— $ — 33,970,364 $ 3 $ 360,015 $ 822 $ ( 148,992 ) $ 211,848

Common stock issued upon exercise of options — — 69,675 — 587 — — 587

Issuance of common stock for vesting of restricted stock units — — 151,423 — — — — —

Shares repurchased for withholding tax on restricted stock units — — ( 58,300 ) — ( 3,315 ) — — ( 3,315 )

Issuance of common stock under cashless warrant exercise — — 29,087 — — — — —

Issuance of common stock under investor warrant exercise — — 1,351,530 — 22,787 — — 22,787

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

— — 5,526,861 1 309,781 — — 309,782

Issuance of common stock in connection with business combination — — 255,945 — 16,736 — — 16,736

Stock-based compensation expense — — — — 1,099 — — 1,099

Net income — — — — — — 2,257 2,257

Foreign currency translation gain — — — — — 380 — 380

Balance, June 30, 2021

— $ — 41,296,585 $ 4 $ 707,690 $ 1,202 $ ( 146,735 ) $ 562,161

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

Hydrofarm Holdings Group, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (UNAUDITED)

(In thousands, except for share amounts)

Preferred Stock Common

Stock Additional

Capital Accumulated

Comprehensive

(Loss) Income Accumulated

Deficit Total

Stockholders’

Shares Amount Shares Amount

Balance, January 1, 2020

7 unchanged sentences

Foreign currency translation loss — — — — — ( 635 ) — ( 635 )

Balance, March 31, 2020

Balance, June 30, 2020

7,725,045 $ 26,902 20,688,439 $ 2 $ 155,036 $ ( 779 ) $ ( 147,185 ) $ 7,074

5 unchanged sentences

Issuance of common stock under cashless warrant exercise — — 341,262 — — — — —

Issuance of common stock under investor warrant exercise — — 1,351,530 — 22,787 — — 22,787

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

— — 5,526,861 1 309,781 — — 309,782

Issuance of common stock in connection with business combination — — 255,945 — 16,736 — — 16,736

Stock-based compensation expense — — — — 2,100 — — 2,100

1 unchanged sentence

Foreign currency translation gain — — — — — 603 — 603

Balance, March 31, 2021

Balance, June 30, 2021

— $ — 41,296,585 $ 4 $ 707,690 $ 1,202 $ ( 146,735 ) $ 562,161

3 unchanged sentences

(In thousands)

Three months ended March 31,

Six months ended June 30,

Operating activities

16 unchanged sentences

Investing activities

Business Combinations, net of cash, cash equivalents and restricted cash acquired ( 195,816 ) —

Purchases of property and equipment ( 691 ) ( 308 )

3 unchanged sentences

Financing activities

Proceeds from issuance of common stock upon follow-on public offering, net of offering costs 309,798 —

Proceeds from exercises of investor warrants 20,295 —

Payment of withholding tax related to restricted stock units ( 14,910 ) —

Proceeds from issuance of Series A Convertible Preferred Stock, net of issuance costs — 3,792

Borrowings from PPP Loan — 3,274

Borrowings under revolving credit facilities 69,923 119,911

Repayments of revolving credit facilities ( 69,716 ) ( 126,314 )

Proceeds from issuance of Series A Convertible Preferred Stock, net of issuance costs — 3,792

Other 57 ( 320 )

Net cash used in financing activities ( 11,827 ) ( 1,234 )

Net cash provided by financing activities 315,447 343

Effect of exchange rate changes on cash, cash equivalents and restricted cash 73 ( 64 )

Net decrease in cash, cash equivalents and restricted cash ( 14,914 ) ( 1,195 )

Net increase in cash, cash equivalents and restricted cash 118,412 595

Cash, cash equivalents and restricted cash at beginning of period 76,955 32,857

10 unchanged sentences

Products offered include agricultural lighting devices, indoor climate control equipment, hydroponics and 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.

Follow-on public offering

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

The public offering price was $ 59.00 per share.

The Company received net proceeds of approximately $ 309.8 million from the follow-on offering after deducting underwriting discounts and commissions and offering expenses.

Initial public offering

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

The price was $ 20.00 per share.

The public offering price was $ 20.00 per share.

The Company received net proceeds of approximately $ 182.3 million from the IPO after deducting underwriting discounts and commissions and offering expenses.

11 unchanged sentences

These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the 2020 Annual Report.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except share and per share amounts)

Use of estimates

2 unchanged sentences

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, valuation of intangible assets, valuation of stock and warrants issued in private placements, valuation of stock-based compensation, recognition of deferred income taxes, recognition of liabilities related to commitments and contingencies and valuation allowances.

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

Business Combinations

Acquisitions of businesses are accounted for using the acquisition method.

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

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

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

Contingent consideration is established for business acquisitions where the Company has the obligation to transfer additional assets or equity interests to the former owners if specified future events occur or conditions are met.

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

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

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

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

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

For a given acquisition, the Company may identify certain pre-acquisition contingencies as of the acquisition date and may extend its review and evaluation of these pre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess these contingencies as part of acquisition accounting, as applicable.

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

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Company reports provisional amounts for the items for which the accounting is incomplete.

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

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

Hydrofarm Holdings Group, Inc.

10 unchanged sentences

Sales to external customers and property and equipment, net in the United States and Canada, determined by the location of the subsidiaries, were as follows:

For the three months ended

Three months ended June 30, Six months ended June 30,

2021 2020 2021 2020

United States $ 111,356 $ 75,787 $ 202,028 $ 129,291

14 unchanged sentences

Cash and cash equivalents, and restricted cash $ 195,367 $ 76,955

Cash and cash equivalents and restricted cash as of March 31, 2020 were $ 30,037 and $ 1,625 , respectively, for total cash, cash equivalents and restricted cash as of March 31, 2020 of $ 31,662 .

Cash and cash equivalents and restricted cash as of June 30, 2020 were $ 31,827 and $ 1,625 , respectively, for total cash, cash equivalents and restricted cash as of June 30, 2020 of $ 33,452 .

Hydrofarm Holdings Group, Inc.

6 unchanged sentences

Payment terms are primarily at the point of sale or due within thirty days.

The amount billed to customers for shipping and handling costs included in net sales was $ 1,245 and $ 756 for the three months ended March 31, 2021 and 2020, respectively.

The amount billed to customers for shipping and handling costs included in net sales was $ 1,683 and $ 2,928 during the three and six months ended June 30, 2021, respectively, and $ 1,588 and $ 2,344 during the three and six months ended June 30, 2020, 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 under the practical expedient provisions of ASC 606.

7 unchanged sentences

Under FASB ASC 740-270-30-36, entities subject to income taxes in multiple jurisdictions should apply one overall ETR instead of separate ETRs for each jurisdiction when calculating the interim-period income tax or benefit related to consolidated ordinary income (or loss) for the year-to-date interim period, except in certain circumstances.

The Company’s effective tax rates for the three months ended March 31, 2021 and 2020 differ from the federal statutory rate of 21% principally as a result of reducing valuation allowances on the Company's deferred tax assets related to net operating loss carryforward.

No financial assets or liabilities are measured at fair value on a recurring basis for the periods presented.

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued and other current liabilities and revolving asset-backed credit facility approximate their fair value due to their short-term maturities using level 2 inputs.

The Company’s effective tax rates for the six months ended June 30, 2021 and 2020 differ from the federal statutory rate of 21% principally as a result of reducing valuation allowances on the Company's deferred tax assets related to net operating loss carryforward.

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 carrying values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued and other current liabilities approximate their fair value due to their short-term maturities using level 2 inputs.

The fair value of contingent consideration is classified within level 3 of the fair value hierarchy (See discussion of contingent consideration in Note 3, Business Combinations ).

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except share and per share amounts)

Recently issued accounting pronouncements

7 unchanged sentences

The Company early adopted the standard effective January 1, 2021 with no impact on the condensed consolidated financial statements.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except share and per share amounts)

In August 2020, the FASB issued ASU No.

2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity .

This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity.

This ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S.

The amendments are effective for fiscal years beginning after December 15, 2021, and early adoption is permitted.

The Company early adopted the standard effective January 1, 2021 with no impact on the condensed consolidated financial statements.

Accounting standards not yet effective

7 unchanged sentences

The Company is currently evaluating the impact the adoption of Topic 326 will have on its condensed consolidated financial statements.

BUSINESS COMBINATIONS

Heavy 16 Acquisition

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

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

The acquisition fair value of the consideration transferred for Heavy 16 was $ 77,855 , consisting of $ 60,775 in cash, $ 16,736 of the Company's common stock and $ 344 contingent consideration.

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

The financial results of Heavy 16 are included in the U.S.

operating segment since the acquisition date.

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

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

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

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

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

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

The contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved with changes in fair value being recognized within selling, general and administrative expense in the condensed consolidated statements of operations.

As of June 30, 2021, the related contingent consideration was $ 604 .

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except share and per share amounts)

The following table sets forth the components and the preliminary allocation of the purchase price for the Company's acquisition of Heavy 16:

Components of Purchase Price:

Cash $ 60,775

Common stock 16,736

Contingent consideration 344

Total purchase price $ 77,855

Acquisition-related costs $ 2,865

Allocation of Purchase Price:

Identifiable assets (liabilities)

Accounts receivable, net $ 510

Inventories 1,451

Prepaid expenses and other current assets 34

Property and equipment, net 1,078

Operating lease right-of-use assets 1,088

Other assets 25

Accounts payable ( 1,055 )

Accrued expenses and other current liabilities ( 226 )

Current portion of lease liabilities ( 274 )

Long-term lease liabilities ( 868 )

Net identifiable assets 1,763

Identifiable intangible assets

Customer relationships 5,100

Trademarks and trade names 18,500

Technology and formulations & recipes 33,600

Total identifiable intangible assets 57,400

Goodwill 18,692

Total purchase price allocation $ 77,855

Goodwill arose on the acquisition of Heavy 16 because the consideration paid for the combination effectively included amounts in relation to the benefit of expected synergies, revenue growth, future market development and the assembled workforce.

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

The amount of goodwill is fully deductible for tax purposes.

The customer relationships and technology and formulation & recipes were assigned estimated useful lives of 18 years.

The trademarks and trade names are considered to have indefinite useful lives and will be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that assets are impaired.

Amounts recognized as of the acquisition date are provisional and subject to change within the measurement period as the Company's fair value assessments are finalized.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except share and per share amounts)

House & Garden Acquisition

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

(“HG”), Humboldt Wholesale, Inc.

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

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

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

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

The acquisition date fair value of the consideration transferred for the H&G Entities was $ 135,041 in cash.

T he financial results of the H&G Entities are included in the U.S.

operating segment since the acquisition date.

The following table sets forth the components and the preliminary allocation of the purchase price for the Company's acquisition of the H&G Entities:

Component of Purchase Price:

Cash $ 135,041

Total purchase price $ 135,041

Acquisition-related costs $ 4,509

Allocation of Purchase Price:

Identifiable assets (liabilities)

Accounts receivable, net $ 3,308

Inventories 4,153

Prepaid expenses and other current assets 493

Property and equipment, net 358

Operating lease right-of-use assets 1,921

Other assets 217

Accounts payable ( 1,320 )

Accrued expenses and other current liabilities ( 481 )

Current portion of lease liabilities ( 447 )

Long-term lease liabilities ( 1,501 )

Net identifiable assets 6,701

Goodwill 128,340

Total purchase price allocation $ 135,041

The Company is in the process of obtaining third-party valuations of certain intangible assets;

thus, the provisional measurement of goodwill is subject to change.

The amount of goodwill is not deductible for tax purposes.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except share and per share amounts)

Supplemental Disclosure Of Financial Results

The following represents the condensed consolidated statements of operations as if the acquisitions had been included in the consolidated results of the Company for the entire periods presented below.

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

Three months ended June 30, Six months ended June 30,

2021 2020 2021 2020

Net sales $ 144,982 $ 105,667 $ 274,071 $ 184,411

Net income $ 14,793 $ 8,033 $ 28,775 $ ( 1,181 )

These amounts have been calculated after applying the Company's accounting policies and adjusting the results of the acquisitions to reflect the additional amortization of intangibles and the purchase price adjustments as if they had been applied on January 1, 2020.

The supplemental net income for the three and six months ended June 30, 2021 were adjusted to exclude the acquisition-related costs incurred in connection with the acquisitions.

Accordingly, the 2020 supplemental net income was adjusted to include these charges.

For the tax effects of the net income adjustments, the Company factored in its net operating loss carryforwards.

Since the acquisition date, the estimated net sales and net income of these acquisitions for the three and six months ended June 30, 2021 are $ 9 million and $ 4 million, respectively.

The Company is in the process of vertically integrating the operations of these acquisitions into Hydrofarm, LLC and its existing functions (e.g., sales, supply chain, marketing, etc.).

Accordingly, the net sales and net income of these acquisitions represent an approximation.

Aurora Acquisition

On July 1, 2021, the Company completed the acquisition of 100 % of the issued and outstanding membership interests of Gotham Properties LLC (“Gotham Properties”), Aurora Innovations Inc.

(“Aurora Innovations”), Aurora International, Inc.(“Aurora International” and, together with Gotham Properties and Aurora Innovations, “Aurora”), a manufacturer of plant fertility product lines free from harmful chemical residues and pesticides.

The total purchase price was up to $ 161 million, consisting of $ 135 million in cash and $ 26 million of the Company's common stock, subject to customary adjustments at closing for cash, working capital, transaction expenses and indebtedness of Aurora.

The purchase price excludes a potential earn out payment estimated at approximately $ 21 million based on achievement of certain performance metrics.

Greenstar/Grotek Acquisition

On August 3, 2021, the Company closed the acquisition of 100 % of the issued and outstanding shares of Greenstar Plant Products Inc., (“Greenstar”), a manufacturer of premium horticultural products and solutions for global, domestic and commercial use since 1998.

The Company paid a purchase price of approximately $ 83 million in cash subject to customary adjustments at closing for cash, working capital, transaction expenses and indebtedness of Greenstar.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except share and per share amounts)

GOODWILL AND INTANGIBLE ASSETS, NET

As of June 30, 2021, the Company completed the acquisitions of all of the assets of Heavy 16 and the H&G Entities.

The acquisitions were accounted for as a business combination, resulting in recognition of $ 147,032 in goodwill and $ 57,400 in intangible assets (See Note 3 - Business Combinations).

The changes in goodwill are as follows:

2021 December 31,

Balance, beginning of period $ — $ —

Acquisitions (Note 3) 147,032 —

Balance, end of period $ 147,032 $ —

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except share and per share amounts)

Intangible Assets, net

Intangible assets, net comprised the following:

June 30, 2021 December 31, 2020

Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value

Finite-lived intangible assets:

Computer software $ 8,204 $ ( 6,370 ) $ 1,834 $ 7,775 $ ( 5,640 ) $ 2,135

Customer relationship (1)

64,476 ( 13,708 ) 50,768 59,375 ( 12,010 ) 47,365

Technology and formulations & recipes (1)

33,600 ( 311 ) 33,289 — — —

1,387 ( 1,387 ) — 1,156 ( 1,156 ) —

Total finite-lived intangible assets, net 107,667 ( 21,776 ) 85,891 68,306 ( 18,806 ) 49,500

Indefinite-lived intangible asset:

Trade names (1)

21,301 — 21,301 2,801 — 2,801

Other 120 — 120 120 — 120

Total Intangible assets, net $ 129,088 $ ( 21,776 ) $ 107,312 $ 71,227 $ ( 18,806 ) $ 52,421

( 1 ) Includes intangible assets acquired from Heavy 16 (See Note 3 - Business Combinations)

Amortization expense was $ 1,766 and $ 1,349 for the three months ended June 30, 2021 and 2020, respectively.

Amortization expense was $ 2,972 and $ 2,724 for the six months ended June 30, 2021 and 2020, respectively.

For intangible assets subject to amortization, the weighted-average amortization period as of June 30, 2021 for computer software, customer relationships, and technology and formulations & recipes, was 5.0 years, 18.0 years, and 18.0 years, respectively.

The estimated aggregate future amortization expense for intangible assets subject to amortization as June 30, 2021 is summarized below:

Estimated Future Amortization Expense

For the period of July 1, 2021 to December 31, 2021 $ 3,580

Year ending December 31,

Thereafter 59,567

Total $ 85,891

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except share and per share amounts)

NET INCOME (LOSS) PER COMMON SHARE (“EPS”)

5 unchanged sentences

Net income (loss) per share attributable to common stockholders

The following table presents information necessary to calculate basic and diluted EPS for the three months ended March 31, 2021 and 2020:

Three months ended March 31,

The following table presents information necessary to calculate basic and diluted EPS for the three and six months ended June 30, 2021 and 2020:

Three months ended June 30, Six months ended June 30,

2021 2020 2021 2020

Net income (loss) $ 2,257 $ 2,567 $ 7,197 $ ( 526 )

12 unchanged sentences

Diluted net income (loss) per share attributable to common stockholders $ 0.05 $ 0.08 $ 0.18 $ ( 0.09 )

Basic and diluted net income (loss) per share attributable to common stockholders is computed using the two-class method as the convertible preferred stock is determined to be a participating security and the application of the if-converted method is not more dilutive.

The computation of the weighted-average shares of common stock outstanding for diluted EPS includes the

Hydrofarm Holdings Group, Inc.

1 unchanged sentence

(dollars in thousands, except share and per share amounts)

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

Three months ended March 31,

following potential common shares attributable to common stockholders using the treasury stock method for the weighted-average period during which the units were outstanding:

Three months ended June 30, Six months ended June 30,

2021 2020 2021 2020

Shares subject to warrants outstanding 2,822,764 344,678 3,261,951 —

Shares subject to unvested restricted stock units 1,766,324 —

Shares subject to unvested restricted stock units subject to time-based and/or market-based conditions vesting 1,554,156 309,348 1,659,654 —

Shares subject to stock options outstanding 857,528 — 884,774 —

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

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2021 2020 2021 2020

Shares subject to warrants outstanding — 3,541,475 — 3,886,191

Shares subject to unvested restricted stock units with performance conditions — 1,820,598 — 1,820,598

Shares subject to unvested restricted stock units subject only to time-based vesting 22,979 — 11,553 91,650

Shares subject to stock options outstanding — 797,413 4,651 791,871

Shares of common stock subject to conversion of 7,725,045 shares Series A Convertible Preferred Stock

— 2,291,469 — 2,291,469

Shares of common stock subject to share settlement of cumulative dividend on Series A Convertible Preferred Stock — 57,119 — 55,426

9 unchanged sentences

Finished goods $ 113,786 $ 83,213

Work-in-process 152 —

Raw materials 9,999 7,837

Allowance for inventory obsolescence ( 2,440 ) ( 2,432 )

3 unchanged sentences

(dollars in thousands, except share and per share amounts)

The December 31, 2020 amounts for raw materials were reclassified from finished goods to separate line items to conform to the current year presentation.

Hydrofarm Holdings Group, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except share and per share amounts)

OPERATING LEASES

2 unchanged sentences

The Company recognizes operating lease costs over the respective lease periods, including short-term and month-to-month leases.

During the three months ended March 31, 2021 and 2020, the Company incurred operating lease costs of $ 1,494 and $ 1,418 , respectively, included within selling, general and administrative expense in the condensed consolidated statements of operations.

During the three and six months ended June 30, 2021, the Company incurred operating lease costs of $ 1,678 and $ 3,172 , respectively, and during the three and six months ended June 30, 2020, the Company incurred operating lease costs of $ 1,410 and $ 2,828 , respectively.

These costs are included primarily within selling, general and administrative expense in the condensed consolidated statements of operations.

Supplemental balance sheet information related to the Company’s operating leases are as follows:

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Total lease liabilities $ 29,647 $ 19,021

As of March 31, 2021, future minimum lease payments under non-cancelable operating leases are as follows:

For the period of April 1, 2021 to December 31, 2021 $ 3,413

As of June 30, 2021, future minimum lease payments under non-cancelable operating leases are as follows:

For the period of July 1, 2021 to December 31, 2021 $ 3,099

Year ending December 31,

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Long-term portion $ 24,342

In April 2021, the Company executed a lease for approximately 175,000 square feet of warehouse space in Fairfield, CA for a distribution center that the Company will relocate to from its Petaluma, California distribution facility.

The new lease commencing August 15, 2021 has a term of 126 months with an option to renew at the then fair market value for another ten years .

Rent is abated for the first six months .

Thereafter, monthly rent is approximately $ 77 , and increases periodically to the final year where the monthly rent is $ 134 .

In April 2021, the Company executed a lease for approximately 147,000 square feet of warehouse space in Fontana, CA to be available upon expiration of the lease for existing space.

The new lease commencing July 1, 2021 has a term of 86.5 months with an option to renew for another five years at the greater of 103 % of the rent payable during the last month of the initial term or the then fair market value.

Rent is abated for the first two and a half months.

Thereafter, monthly rent is approximately $ 115 , and increases periodically to the final year where the monthly rent is $ 141 .

In July 2021, the Company executed a lease for approximately 246,000 square feet of warehouse space in Surrey, British Columbia, Canada to be available upon expiration of the lease for existing space.

The new lease commencing January 1, 2023 has a term of 120 months with two options to renew for an additional five years each at the greater of an amount equal to the annual rent payable for the last twelve months of the initial term or the then fair market value.

There is no rent abatement.

Monthly rent fee starts at approximate $ 235 , and increases periodically to the final year when the monthly rent is $ 300 .

In July 2021, the Company executed a lease of approximately 6,000 square feet for an office in Petaluma, CA.

The new lease commencing August 1, 2021 has a term of 25 months with an option to renew for another two years at the then fair market value.

Rent is abated for the first month.

Thereafter, monthly rent is approximately $ 8 until the final year.

Hydrofarm Holdings Group, Inc.

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(dollars in thousands, except share and per share amounts)

The new lease commencing August 15, 2021 has a term of 126 months with an option to renew at the then fair market value for another ten years .

Rent is abated for the first six months .

Thereafter, monthly rent is approximately $ 77 , and increases periodically to the final year when the monthly rent is $ 134 .

The future minimum lease payments for executed non-cancelable operating leases not yet commenced are as follows:

For the period of April 1, 2021 to December 31, 2021 $ 501

For the period of July 1, 2021 to December 31, 2021 $ 1,100

Year ending December 31,

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Total rental payments $ 46,020

In July 2021, the Company executed a sublease agreement for its Santa Fe Springs, CA location.

The sublease commences August 1, 2021 and terminates June 30, 2023 in alignment with the master lease.

Sublease income for 2021, 2022 and 2023 are $ 378 , $ 917 and $ 467 , respectively.

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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2021 December 31,

Acquisition post-close related payable $ 4,805 $ —

Accrued compensation and benefits 4,547 9,902

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The Term Loan was to mature on May 12, 2022 and was secured by substantially all non-working capital assets and a second lien on working capital assets of the Term Loan Obligors.

For the three months ended March 31, 2020, the effective interest rate was 12.10 % and interest expense was $ 2,208 .

For the three months ended June 30, 2020, the effective interest rate was 10.00 % and interest expense was $ 1,552 .

For the six months ended June 30, 2020, the effective interest rate was 10.52 % and interest expense was $ 3,760 .

The Term Loan was repaid in December 2020.

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

For the three months ended March 31, 2020, the effective interest rate was 9.10 % and interest expense was $ 523 .

For the three months ended June 30, 2020, the effective interest rate was 9.60 % and interest expense was $ 509 .

For the six months ended June 30, 2020, the effective interest rate was 9.39 % and interest expense was $ 1,032 .

The Encina Credit Facility was repaid in December 2020 and replaced in March 2021.

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

On March 29, 2021, Hydrofarm Holdings Group, Inc.

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A fee of 0.25 % per annum is charged for available but unused borrowings as defined.

The JPMorgan Obligors had approximately $ 50,000 available to borrow under the JPMorgan Credit Facility as of March 31, 2021.

The JPMorgan Obligors had approximately $ 50,000 available to borrow under the JPMorgan Credit Facility as of June 30, 2021.

The JPMorgan Credit Facility maintains certain reporting requirements, affirmative covenants, negative covenants and financial covenants ("debt covenants").

The financial covenants include that the Company must maintain a minimum fixed charge coverage ratio of 1.1 x on a rolling twelve-month basis.

The JPMorgan Obligors were in compliance with all debt covenants as of March 31, 2021.

The JPMorgan Obligors were in compliance with all debt covenants as of June 30, 2021.

The JPMorgan Credit Facility is secured by the Company’s assets and the assets of certain of the Company’s subsidiaries obligated under the JPMorgan Credit Facility.

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Capital stock

As of March 31, 2021, the following summarizes shares authorized, issued and outstanding:

As of June 30, 2021, the following summarizes shares authorized, issued and outstanding:

Capital stock authorized and outstanding:

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Common stock 300,000,000 41,296,585

As of March 31, 2021, the following summarizes shares of common stock reserved for issuance:

As of June 30, 2021, the following summarizes shares of common stock reserved for issuance:

Common stock reserved for issuance:

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Subject to corporate regulations and preferences to preferred stock, if any, dividends are at the discretion of the Company’s board of directors (the ‘‘Board’’).

Redemption of investor 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, which concluded in the fall of 2018.

Hydrofarm Holdings Group, Inc.

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(dollars in thousands, except share and per share amounts)

As of March 31, 2021, the following table summarizes the outstanding warrants:

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

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

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

Prior to the redemption date, 3,367,647 Investor Warrants were exercised, generating total gross proceeds of $ 56,779 , of which $ 36,484 was received subsequent to June 30, 2021.

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

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

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

For the three and six months ended June 30, 2021, total warrant solicitation fee expense was $ 844 and is included in selling, general and administrative expenses in the condensed consolidated statements of operations.

In July 2021, the Company estimates the warrant solicitation fee expense to be approximately $ 1,105 subject to finalization during the quarter ending September 30, 2021.

As of June 30, 2021, the following table summarizes the outstanding warrants:

Number of Warrants Exercise Price

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Total 2,129,441 $ 16.45

For the three months ended March 31, 2021, 155,370 placement agent warrants were exercised on a cashless basis at a price of $ 16.86 per share for 121,401 shares of common stock and 214,735 placement agent warrants were exercised on as cashless basis at a price of $ 8.43 per share for 190,774 shares of common stock.

For the six months ended June 30, 2021, 163,006 placement agent warrants were exercised on a cashless basis at a price of $ 16.86 per share for 126,937 shares of common stock and 242,214 placement agent warrants were exercised on as cashless basis at a price of $ 8.43 per share for 214,325 shares of common stock.

Hydrofarm Holdings Group, Inc.

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No further awards will be issued under the 2018 Plan and 2019 Plan.

Of the total shares available for grant under the 2020 Plan, 2,197,988 remain available as of March 31, 2021.

Of the total shares available for grant under the 2020 Plan, 2,140,960 remain available as of June 30, 2021.

RSUs granted to certain executives, employees and members of the Board expire 10 years after the grant date.

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

The following table summarizes the activity related to the Company's RSUs for the three months ended March 31, 2021.

For purposes of this table, vested RSUs represent the shares for which the service condition had been fulfilled as of March 31, 2021:

The following table summarizes the activity related to the Company's RSUs for the six months ended June 30, 2021.

For purposes of this table, vested RSUs represent the shares for which the service condition had been fulfilled as of June 30, 2021:

RSUs Weighted

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Vested ( 365,747 ) $ 5.94

Balance, March 31, 2021

Balance, June 30, 2021

1,540,871 $ 8.46

As of March 31, 2021, total unamortized stock-based compensation cost related to unvested RSUs was $ 7,179 and the weighted-average period over which the compensation is expected to be recognized is 2.30 years.The award granted to the member of the Board in July 2020 and modified in November 2020 contains a market-based vesting condition based on the traded value of shares of the Company’s common stock following the IPO over a specific time frame.

As of June 30, 2021, total unamortized stock-based compensation cost related to unvested RSUs was $ 9,236 and the weighted-average period over which the compensation is expected to be recognized is 2.11 years.

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

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

All of the stock-based compensation expense related to this award was recognized upon the IPO in December 2020.

The total shares under the unvested RSUs subject to a market-based vesting condition are 296,630 as of March 31, 2021.

The total shares under the unvested RSUs subject to a market-based vesting condition are 296,630 as of June 30, 2021.

Hydrofarm Holdings Group, Inc.

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Stock options

The following table summarizes the stock option activity for the three months ended March 31, 2021:

The following table summarizes the stock option activity for the six months ended June 30, 2021:

Number Weighted

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Granted 10,641 $ 59.03 $ 25.58

Forfeited ( 592 ) $ 11.06 $ 9.89

Exercised ( 101,947 ) $ 8.43 $ 0.73

Outstanding as of March 31, 2021

Forfeited ( 7,950 ) $ 9.64 $ 4.77

Outstanding as of June 30, 2021

823,540 $ 9.50 $ 2.19 7.67

Exercisable as of March 31, 2021

Exercisable as of June 30, 2021

473,695 $ 8.43 $ 0.75 7.08

Unvested as of March 31, 2021

Unvested as of June 30, 2021

349,845 $ 10.94 $ 4.18 2.18

Vested and expected to vest as of March 31, 2021

Vested and expected to vest as of June 30, 2021

823,540 $ 9.50 $ 2.19 7.67

As of March 31, 2021, total compensation cost related to unvested awards not yet recognized was $ 1,125 and the weighted-average period over which the compensation is expected to be recognized is 2.29 years.

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

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

The valuation model requires the input of highly subjective assumptions.

The weighted average assumptions for awards granted as of June 30, 2021 are as follows:

Estimated weighted-average fair value per stock option $ 59.03

Volatility 45 %

Risk-free rate 0.85 %

Dividend yield Nil

Expected term in years 6.0

As of June 30, 2021, total compensation cost related to unvested awards not yet recognized was $ 1,250 and the weighted-average period over which the compensation is expected to be recognized is 2.18 years.

Hydrofarm Holdings Group, Inc.

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Related party transactions—Hydrofarm Distribution Center

The Company leases a distribution center in Petaluma, California from entities in which a related party is an investor.

For the three months ended March 31, 2021 and 2020, rent expense for the month to month lease totaled $ 320 and $ 319 , respectively.

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

For the three months ended June 30, 2021 and 2020, rent expense for the month to month lease totaled $ 319 and $ 320 , respectively.

For the six months ended June 30, 2021 and 2020, rent expense for the month to month lease totaled $ 639 for both periods.

Hydrofarm Holdings Group, Inc.

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SUBSEQUENT EVENTS

On May 3, 2021, the Company acquired 100 % of the issued and outstanding membership interests of Field 16, LLC, a Delaware limited liability company ("HEAVY 16"), pursuant to the terms of a unit purchase and contribution agreement, dated April 26, 2021, by and between the Company, HEAVY 16, F16 Holding LLC, a California limited liability company (the “Seller”), and the members of the Seller, for a purchase price of up to $ 78.1 million, consisting of $ 63.1 million in cash and $ 15 million of the Company's common stock, subject to customary adjustments at closing for cash, working capital, transaction expenses and indebtedness of HEAVY 16 (the "Acquisition").

The purchase price includes a potential earn out payment of up to $ 2.5 million based on achievement of certain performance metrics.

In connection with the Acquisition, the Company intends to enter into employment agreements with certain key employees of HEAVY 16.

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

The public offering price was $ 59.00 per share.

The Company received net proceeds of approximately $ 309.8 million from the FPO after deducting underwriting discounts and commissions and estimated offering expenses.

On July 29, 2021, the Company executed an intercreditor and subordination agreement ("Agreement") related to the amended and restated note receivable, which is included in notes receivable and other assets, allowing the third-party payee to receive debt financing ("Subordinated Note") that will be used to fund operations.

Pursuant to the Agreement, the Subordinated Note is hereby junior to and subordinated in right of payment to all indebtedness, obligations and liabilities of the third-party payee to the Company.

The Company completed two acquisitions after June 30, 2021, which are described in Note 3 - Business Combinations.

The Company completed the redemption of certain of its outstanding warrants after June 30, 2021, which is described in Note 10 - Convertible Preferred Stock and Stockholders' Equity .

The Company executed operating leases after June 30, 2021, which are described in Note 7 - Operating Leases.

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

What changed 10-Q

Item 1. Financial Statements