HYDROFARM HOLDINGS GROUP, INC. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operations and financial condition. You should read this analysis in conjunction with our audited and unaudited consolidated financial statements and the notes contained elsewhere in this Quarterly Report on Form 10-Q and our Annual Report. This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance. These statements are only predictions, and actual events or results may differ materially. In evaluating such statements, you should carefully consider the various factors identified in this Quarterly Report on Form 10-Q, which could cause actual results to differ materially from those expressed in, or implied by, any forward-looking statements, including those set forth in “Risk Factors” in our 2020 Annual Report. See “Special Note Regarding Forward-Looking Statements.” Company Overview We are a leading independent distributor and manufacturer of controlled environment agriculture (“CEA”, principally hydroponics) equipment and supplies, including a broad portfolio of our own innovative portfolio of proprietary branded products. We primarily serve the U.S. and Canadian markets, and believe we are one of the leading competitors by market share in these markets in an otherwise highly fragmented industry. For over 40 years, we have helped growers make growing easier and more productive. Our mission is to empower growers, farmers and cultivators with products that enable greater quality, efficiency, consistency and speed in their grow projects. Hydroponics is the farming of plants using soilless growing media and often artificial lighting in a controlled indoor or greenhouse environment. Hydroponics is the primary category of CEA and we use the terms CEA and hydroponics interchangeably. Our products are 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 spectrum, nutrient concentration and pH. Through CEA, growers are able to be more efficient with physical space, water and resources, while enjoying year-round and more rapid grow cycles as well as more predictable and abundant grow yields, when compared to other traditional growing methods. We reach commercial farmers and consumers through a broad and diversified network of over 2,000 wholesale customer accounts, who we connect with primarily through our proprietary eCommerce marketplace. Over 80% of our net sales are into the specialty hydroponic retailers, through which growers are able to enjoy specialized merchandise assortments and knowledgeable staff. We also distribute our products across the U.S. and Canada to a diversified range of retailers of commercial and home gardening equipment and supplies that include garden centers, hardware stores, eCommerce retailers, commercial greenhouse builders, and commercial resellers. Recent Developments Greenstar/Grotek Acquisition On August 3, 2021, we closed the acquisition of Greenstar (see Note 3, Business Combinations under Greenstar/Grotek Acquisition , in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q). Greenstar produces premium horticultural products and solutions for global, domestic and commercial use. Greenstar’s owned brands include Grotek, Gaia Green, Supergreen, and EarthSafe. Grotek has been producing since 1998 and is sold internationally. Greenstar’s brands are utilized by commercial operators including growers, landscapers, greenhouses, nurseries, organic farms, as well as independent retailers. Greenstar manufactures products for both the retail and commercial market. Investor Warrant Redemption On July 19, 2021, we completed the redemption of certain of our outstanding warrants to purchase shares of our common stock that were issued in connection with a private placement of units (see Note 10, Convertible Preferred Stock and Stockholders' Equity under Warrants , in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q). Prior to the redemption date, 3,367,647 Investor Warrants were exercised, generating approximately $56.8 million of gross proceeds to the Company. Pursuant to the Redemption, we redeemed 1,491 Investor Warrants for a redemption price of $0.00033712 per Investor Warrant. 28 TABLE OF CONTENTS Aurora Acquisition On July 1, 2021, we completed the acquisition of 100% of the issued and outstanding membership interests of Aurora (see Note 3, Business Combinations under Aurora Acquisition , in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q). Founded in 2000, Aurora is a family-owned business with a strong vertically integrated manufacturing base with three locations across North America. The company is dedicated to ethical and sustainable practices and offers comprehensive plant fertility product lines free from harmful chemical residues and pesticides. Aurora will add to our growing proprietary brand nutrient and grow media line-ups, including its first organic nutrient and premium soil brands. We will also gain new domestic manufacturing and distribution capabilities on the east and west coasts along with a peat moss harvesting operation in Canada. House and Garden Acquisition On June 1, 2021, we acquired 100% of the issued and outstanding shares of capital stock of the H&G Entities (see Note 3, Business Combinations under House & Garden Acquisition , in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q). The H&G entities are located in Arcata, California, and produce and distribute premium grade plant nutrients and fertilizers across the globe. The H&G entities offer a strong product line of plant nutrients that will strengthen our position in the nutrient sector and complement our rapidly expanding portfolio of premium products for controlled environment agriculture. Follow-on Public Offering On May 3, 2021, we closed our follow-on offering, in which we issued and sold 5,526,861 shares of our common stock, including the full exercise by the underwriters of their option to purchase 720,894 additional shares of our common stock, at a public offering price of $59.00 per share, which resulted in net proceeds of approximately $309.8 million after deducting underwriting discounts and commissions and offering expenses. We expect to use the proceeds from the follow-on offering for acquisitions, working capital and other general corporate purposes. Heavy 16 Acquisition On May 3, 2021, we acquired 100% of the issued and outstanding membership interests of Heavy 16 (see Note 3, Business Combinations under Heavy 16 Acquisition , in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q). Heavy 16 is a leading manufacturer and supplier of branded plant nutritional products, with nine core products that are currently sold to approximately 300 retail stores across the U.S. The Heavy 16 products feature a full line of premium nutrients with nine core products used in all stages of plant growth, helping to increase the yield and quality of crops. New Distribution Centers In April 2021, we entered into leases for two new distribution centers aggregating approximately 322,000 square feet. One is located in Fairfield, California and is the distribution center that we will relocate to from our Petaluma, California distribution facility in connection with the sale of that building by our lessor. The other distribution center is located in Fontana, California which we will relocate to from our Santa Fe Springs, California distribution facility. Additionally, in July 2021, we 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, commencing January 1, 2023 (see Note 7: Operating Leases , in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q). Effects of Coronavirus on Our Business The World Health Organization recognized COVID-19 as a public health emergency of international concern on January 30, 2020 and as a global pandemic on March 11, 2020. Public health responses have included national pandemic preparedness and response plans, travel restrictions, quarantines, curfews, event postponements and cancellations and closures of facilities including local schools and businesses. While the rollout of vaccines has begun, the efficacy and acceptance of vaccinations, herd immunity, and the lifting of preventative measures is unknown. The global pandemic and actions taken to contain COVID-19 have adversely affected the global economy and financial markets. In response to the COVID-19 pandemic, we implemented business continuity plans designed to address the impact of the COVID-19 pandemic on our business, such as restrictions on non-essential business travel, the institution of work-from-home practices and the implementation of strategies for workplace safety at our facilities. While we are not currently experiencing material adverse impacts to our supply chain, we intend to continue to source many products from China. It is difficult to predict the extent to which COVID-19 may continue to spread. As of the date of this Quarterly Report on Form 10-Q 29 TABLE OF CONTENTS manufacturers in China and in North America are generally back in operation; however, new waves of the COVID-19 pandemic could result in the re-closure of factories in China and/or in North America. Quarantine orders and travel restrictions within the U.S. and other countries may also adversely impact our supply chains, the manufacturing of our own products and our ability to obtain necessary materials. Consequently, we may be unable to obtain adequate inventory to fill purchase orders or manufacture our own products, which could adversely affect our business, results of operations and financial condition. Furthermore, potential suppliers or sources of materials may pass the increase in sourcing costs due to the COVID-19 pandemic to us through price increases, thereby impacting our potential future profit margins. Our customers reside in countries, primarily the U.S. and Canada, that are currently affected by the COVID-19 pandemic. Many of these customers have experienced shelter-in-place measures in attempts to contain the spread of COVID-19, including general lockdowns, closure of schools and non-essential businesses, bans on gatherings and travel restrictions. Our sales growth for the six months ended June 30, 2021 was approximately $42.6 million or 46.7% higher than the same period in 2020. A portion of our net sales during this period could be due to pull-through demand for our products due to higher consumption of CEA products from individuals spending more time at home due to shelter-in-place measures. Our business has remained resilient during the COVID-19 pandemic. As of June 30, 2021, our manufacturing and distribution operations are viewed as essential services and continue to operate. Our key suppliers, retailers and resellers have been designated as essential services and remain open at this time; however, in certain places they are operating under reduced hours and capacity limitations. The majority of U.S. and Canadian cannabis businesses have been designated as essential by U.S. State and Canadian government authorities. The extent to which the COVID-19 pandemic will ultimately impact our business, results of operations, financial condition and cash flows depends on future developments that are highly uncertain, rapidly evolving and difficult to predict at this time. Recent Transactions JPMorgan Credit Facility On March 29, 2021, we and certain of our subsidiaries entered into a Senior Secured Revolving Credit Facility (the “JPMorgan Credit Facility”) with JPMorgan Chase Bank, N.A., as administrative agent, issuing bank and swingline lender (“JPMorgan”), and the lenders from time to time party thereto. The JPMorgan Credit Facility replaces the Loan and Security Agreement with Encina Business Credit, LLC (as amended to date, the “Encina Credit Facility”). There was no outstanding indebtedness under the Encina Credit Facility when it was replaced. The JPMorgan Credit Facility, among other things, provides for an asset based senior revolving credit line (the “Senior Revolver”) with JPMorgan as the initial lender. The three-year Senior Revolver has a borrowing limit of $50 million. We have the right to increase the amount of the Senior Revolver in an amount up to $25 million by obtaining commitments from JPMorgan or from other lenders. Our and our subsidiaries’ obligations under the JPMorgan Credit Facility are secured by a first priority lien (subject to certain permitted liens) in substantially all of our and our subsidiaries’ respective personal property assets pursuant to the terms of a U.S. and a Canadian Pledge and Security Agreement, dated March 29, 2021 and the other security documents. The JPMorgan Credit Facility is more fully described in Note 9, Debt under Revolving asset-backed credit facilities in the notes to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on form 10-Q. Initial Public Offering On December 14, 2020, we completed our initial public offering (“IPO”), in which we issued and sold 9,966,667 shares of our common stock, including the full exercise by the underwriters of their option to purchase 1,300,000 additional shares of our common stock, at a public offering price of $20.00 per share, which resulted in net proceeds of $182.3 million after deducting underwriting discounts and commissions and offering expenses. The proceeds from the IPO were used to (i) repay amounts outstanding under the Term Loan by and among Term Loan Obligors, Brightwood Loan Services, LLC and the other lenders party thereto of $76.6 million (includes accrued interest and fees of $0.3 million), (ii) to pay down certain amounts outstanding under the Encina Credit Facility of $33.4 million, (iii) to repay $3.3 million under the promissory note to JPMorgan Chase, N.A. through the U.S. Small Business Administration Paycheck Protection Program, and (iv) to pay $2.6 million to settle the Series A preferred stock dividend. Our common stock began trading on the Nasdaq Global Select Market on December 10, 2020. Reverse Stock Split Our board of directors and stockholders approved an amendment to our amended and restated certificate of incorporation effecting a 1-for-3.3712 reverse stock split of our issued and outstanding shares of common stock. The reverse split was effected on November 24, 2020 without any change in the par value per share. 30 TABLE OF CONTENTS Results of Operations—Comparison of three and six months ended June 30, 2021 and 2020 The following table sets forth our unaudited interim condensed consolidated statements of operations for the three months ended June 30, 2021 and 2020, including amounts and percentages of net sales for each period and the period-to-period change in dollars and percent (amounts in thousands): Three months ended June 30, 2021 2020 Period change Net sales $ 133,800 100.0 % $ 91,208 100.0 % $ 42,592 46.7 % Cost of goods sold 104,210 77.9 % 73,333 80.4 % 30,877 42.1 % Gross profit 29,590 22.1 % 17,875 19.6 % 11,715 65.5 % Operating expenses: Selling, general and administrative 27,258 20.4 % 12,838 14.1 % 14,420 112.3 % Impairment, restructuring and other 1 0.0 % 83 0.1 % (82) -98.8 % Income from operations 2,331 1.7 % 4,954 5.4 % (2,623) -52.9 % Interest expense (54) 0.0 % (2,506) -2.7 % 2,452 -97.8 % Loss on debt extinguishment — 0.0 % — 0.0 % — n/a % Other income, net 43 0.0 % 305 0.3 % (262) -85.9 % Income before tax 2,320 1.7 % 2,753 3.0 % (433) -15.7 % Income tax expense (63) 0.0 % (186) -0.2 % 123 -66.1 % Net income 2,257 1.7 % 2,567 2.8 % (310) -12.1 % Cumulative dividends allocated to Series A Convertible Preferred Stock — 0.0 % (674) -0.7 % 674 -100.0 % Net income attributable to common stockholders $ 2,257 1.7 % $ 1,893 2.1 % $ 364 19.2 % The following table sets forth our unaudited interim condensed consolidated statements of operations for the six months ended June 30, 2021 and 2020, including amounts and percentages of net sales for each period and the period-to-period change in dollars and percent (amounts in thousands): Six months ended June 30, 2021 2020 Period change Net sales $ 245,189 100.0 % $ 158,105 100.0 % $ 87,084 55.1 % Cost of goods sold 192,376 78.5 % 128,666 81.4 % 63,710 49.5 % Gross profit 52,813 21.5 % 29,439 18.6 % 23,374 79.4 % Operating expenses: Selling, general and administrative 44,084 18.0 % 24,560 15.5 % 19,524 79.5 % Impairment, restructuring and other 16 0.0 % 92 0.1 % (76) -82.6 % Income from operations 8,713 3.6 % 4,787 3.0 % 3,926 82.0 % Interest expense (144) -0.1 % (5,309) -3.4 % 5,165 -97.3 % Loss on debt extinguishment (680) -0.3 % — 0.0 % (680) n/a % Other income, net 127 0.1 % 326 0.2 % (199) -61.0 % Income (loss) before tax 8,016 3.3 % (196) -0.1 % 8,212 -4,189.8 % Income tax expense (819) -0.3 % (330) -0.2 % (489) 148.2 % Net income (loss) 7,197 2.9 % (526) -0.3 % 7,723 -1,468.3 % Cumulative dividends allocated to Series A Convertible Preferred Stock — 0.0 % (1,308) -0.8 % 1,308 -100.0 % Net income (loss) attributable to common stockholders $ 7,197 2.9 % $ (1,834) -1.2 % $ 9,031 -492.4 % 31 TABLE OF CONTENTS Net sales Net sales for the three months ended June 30, 2021 were $133.8 million, an increase of $42.6 million, or 46.7%, compared to the same period in 2020. Net sales for the six months ended June 30, 2021 were $245.2 million, an increase of $87.1 million, or 55.1%, compared to the same period in 2020. The 46.7% increase in net sales for the three months ended June 30, 2021 as compared to the same period in 2020 was due to a 40.5% increase in volume of products sold (inclusive of incremental sales from acquisitions closed within the second quarter of 2021 and preferred brands added in the year-to-date period), a 2.7% increase in price/mix of products sold, and 3.5% growth from favorable foreign exchange rates. The increase in volume of products sold was primarily related to (i) higher demand from end-markets across numerous U.S. states, including, but not limited, to California, Oklahoma, Michigan and Canada and (ii) higher demand for our proprietary and preferred branded products which was primarily due to recently acquired proprietary brands and added preferred brands. The increase in price was primarily related to list price increases. The 55.1% increase in net sales for the six months ended June 30, 2021 as compared to the same period in 2020 was due to a 48.5% increase in volume of products sold, a 3.9% increase in price/mix of products sold, and 2.7% growth from favorable foreign exchange rates. The increase in volume of products sold was primarily related to (i) expansion of our proprietary and preferred brands, (ii) large expansion of our nutraceutical products, (iii) continued growth in our base business in California, coupled with rapid expansion in high-growth areas such as Oklahoma and Missouri, and (iv) inorganic growth from our acquisitions, which accounted for approximately one-tenth of our total growth. The increase in price was primarily related to list price increases. The increase in foreign exchange related to recent weakness in the U.S. Dollar relative to the Canadian Dollar and to the Euro. Gross profit Gross profit for the three months ended June 30, 2021 was $29.6 million, an increase of $11.7 million, or 65.5%, compared to the same period in 2020. Gross profit for the six months ended June 30, 2021 was $52.8 million, an increase of $23.4 million, or 79.4%, compared to the same period in 2020. The increase in gross profit for the three months ended June 30, 2021 as compared to the same period in 2020 was primarily related to (i) the aforementioned increase in net sales and (ii) a significant increase in our gross profit margin percentage (gross profit as a percent of net sales). Our gross profit margin percentage increased to 22.1% for the three months ended June 30, 2021 from 19.6% in the same period in 2020. The higher gross profit margin percentage is primarily due to a more favorable sales mix of proprietary brand products (due in part to the aforementioned proprietary brands that were recently acquired and the preferred brand added in the year-to-date period), which typically carries a higher gross margin than our distributed branded products, as well as improved labor efficiency. The increase in gross profit for the six months ended June 30, 2021 as compared to the same period in 2020 was primarily related to (i) the aforementioned increase in net sales and (ii) a significant increase in our gross profit margin percentage (gross profit as a percent of net sales). Our gross profit margin percentage increased to 21.5% for the six months ended June 30, 2021 from 18.6% in the same period in 2020. The higher gross profit margin percentage is primarily due to a more favorable sales mix of proprietary brand products (due in part to the aforementioned proprietary brands that were recently acquired and the preferred brand added in the year-to-date period), which typically carries a higher gross margin than our distributed branded products, as well as improved labor efficiency. Selling, general and administrative expenses Selling, general and administrative expenses ("SG&A") for the three months ended June 30, 2021 was $27.3 million, an increase of $14.4 million compared to the same period in 2020. SG&A expenses for the six months ended June 30, 2021 was $44.1 million, an increase of $19.5 million compared to the same period in 2020. For the three months ended June 30, 2021, the $14.4 million increase in selling, general and administrative expenses is primarily related to acquisition-related costs of $9.6 million, compensation costs (an increase of $1.3 million), insurance costs (an increase of $0.7 million), depreciation and amortization associated with the new acquisitions (an increase of $0.6 million), share-based compensation (an increase of $1.1 million) and $0.8 million of solicitation fees incurred in connection with the Redemption. These increases were largely the result of (i) our accelerated M&A strategy and (ii) the increased costs associated with running a public company and support of our long-term growth strategy. 32 TABLE OF CONTENTS The $19.5 million increase in selling, general and administrative expenses for the six months ended June 30, 2021 is primarily related to acquisition-related costs of $10.2 million, compensation costs (an increase of $2.8 million), consulting fees (an increase of $1.8 million), insurance costs (an increase of $1.2 million), depreciation and amortization associated with the new acquisitions (an increase of $0.6 million), share-based compensation (an increase of $2.4 million) and $0.8 million of solicitation fees incurred in connection with the Redemption. These increases were largely the result of increased costs associated with (i) our accelerated M&A strategy and (ii) running a public company and support of our long-term growth strategy. Interest expense Interest expense for the three months ended June 30, 2021 was $0.1 million, a decrease of $2.5 million, or 97.8%, compared to the same period in the prior year. Interest expense for the six months ended June 30, 2021 was $0.1 million, a decrease of $5.2 million, or 97.3%, compared to the same period in the prior year. The decreases were due to the payoff of the Term Loan and pay down of the Encina Credit Facility in connection with the December 2020 IPO and the May 2021 follow-on offering which has helped fund recent acquisitions. Loss on debt extinguishment Loss on debt extinguishment for the six months ended June 30, 2021 was $0.7 million, which resulted primarily from the write-off of unamortized deferred financing costs associated with the payoff of the Encina Credit Facility. Income tax expense Income tax expense for the six months ended June 30, 2021 increased by $0.5 million compared to the same period in the prior year, due to an increase in income before taxes. 33 TABLE OF CONTENTS Non-GAAP Financial Measures We report our financial results in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”). However, management believes that certain non-GAAP financial measures provide investors of our financial information with additional useful information in evaluating our performance and that excluding certain items that may vary substantially in frequency and magnitude period-to-period from net income (loss) provides useful supplemental measures that assist in evaluating our ability to generate earnings and to more readily compare these metrics between past and future periods. These non-GAAP financial measures may be different than similarly titled measures used by other companies. To supplement our condensed unaudited consolidated financial statements which are prepared in accordance with GAAP, we use “Adjusted EBITDA” and “Adjusted EBITDA as a percent of sales” which are non-GAAP financial measures (collectively referred to as “Adjusted EBITDA”). Our non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with GAAP. There are several limitations related to the use of our non-GAAP financial measures as compared to the closest comparable GAAP measures. Some of these limitations include: • Adjusted EBITDA does not reflect the significant interest expense, or the amounts necessary to service interest or principal payments on our indebtedness; • Adjusted EBITDA excludes depreciation and amortization, and although these are non-cash expenses, the assets being depreciated and amortized may have to be replaced in the future; • Adjusted EBITDA does not reflect our tax provision that adjusts cash available to us; • Adjusted EBITDA excludes the non-cash component of stock-based compensation; • Adjusted EBITDA excludes the amount of employer payroll taxes on stock-based compensation; and • Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters we consider not to be reflective, on a recurring basis, of our ongoing operations. We define Adjusted EBITDA as net income (loss) excluding interest expense, income taxes, depreciation and amortization, stock-based compensation, employer payroll taxes on stock-based compensation and other unusual and/or infrequent costs, which we do not consider in our evaluation of ongoing operating performance. The following table presents a reconciliation of net income (loss), the most comparable GAAP financial measure, to Adjusted EBITDA for the three months ended June 30, 2021 and 2020 (In thousands): Three months ended June 30, 2021 2020 Net Income $ 2,257 $ 2,567 Interest expense 54 2,506 Income taxes 63 186 Depreciation and amortization 2,187 1,947 Impairment, restructuring and other 1 83 Acquisition and integration expenses* 9,566 — Investor warrant solicitation fees 844 — Other income, net (43) (305) Stock-based compensation** 1,258 131 Adjusted EBITDA $ 16,187 $ 7,115 Adjusted EBITDA as a percent of net sales 12.1 % 7.8 % 34 TABLE OF CONTENTS The following table presents a reconciliation of net income (loss), the most comparable GAAP financial measure, to Adjusted EBITDA for the six months ended June 30, 2021 and 2020 (In thousands): Six months ended June 30, 2021 2020 Net Income (Loss) $ 7,197 $ (526) Interest expense 144 5,309 Income taxes 819 330 Depreciation and amortization 3,778 3,662 Impairment, restructuring and other 16 92 Acquisition and integration expenses* 10,225 — Investor warrant solicitation fees 844 — Other income, net (127) (326) Stock-based compensation** 2,516 165 Loss on debt extinguishment 680 — Adjusted EBITDA $ 26,092 $ 8,706 Adjusted EBITDA as a percent of net sales 10.6 % 5.5 % (*) Includes consulting, transaction services and legal fees incurred for the completed Heavy 16, House and Garden, Aurora, and Greenstar/Grotek acquisitions and certain potential acquisitions. (**) Includes employer payroll taxes on stock-based compensation Liquidity and Capital Resources The following table summarizes our cash flows for the six months ended June 30, 2021 and 2020 (amounts in thousands): Six months ended June 30, 2021 2020 Net cash used in operating activities $ (501) $ (1,396) Net cash (used in) provided by investing activities (196,607) 1,712 Net cash provided by financing activities 315,447 343 Effect of exchange rate changes on cash, cash equivalents and restricted cash 73 (64) 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 Cash, cash equivalents and restricted cash at end of period $ 195,367 $ 33,452 Operating Activities Net cash used in operating activities was $0.5 million for the six months ended June 30, 2021, primarily consisting of $9.2 million in non-cash expense addbacks, which were largely composed of depreciation and amortization, stock-based compensation expense, non-cash operating lease and other non-cash expense, to reconcile net income of $7.2 million to net cash used in operating activities, less a $16.9 million increase in working capital. This change in working capital primarily reflects an aggregate increase of $33.7 million in accounts receivable, inventories, prepaid expenses and other current assets, and other assets for the period offset by an aggregate net increase of $16.8 million in accounts payable, accrued expenses and other current liabilities, and a decrease in lease liabilities due to payments on lease obligations during the period. Investing Activities Investing activities for the six months ended June 30, 2021 were $196.6 million, due mostly to the Heavy 16 and the H&G entities acquisitions we completed during the period. The outflows associated with the Heavy 16 acquisition and the H&G entities acquisitions totaled $195.8 million. In addition, for the six months ended June 30, 2020, we received proceeds from a $2.0 million note receivable from a third party. 35 TABLE OF CONTENTS Financing Activities For the six months ended June 30, 2021, we received proceeds of $309.8 million from our follow-on offering, and received an additional $20.3 million from the Redemption. We received the remaining balance of the $56.8 million of gross proceeds from the Redemption in July 2021. We also paid $14.9 million related to employee's withholding tax in connection with the vesting of certain restricted stock units. For the six months ended June 30, 2020, draws under the Encina Credit Facility were less than repayments by $6.4 million. We also received net proceeds of $3.8 million from the issuance of Series A preferred stock, and received proceeds of $3.3 million under the promissory note to JPMorgan Chase, N.A. through the U.S. Small Business Administration Paycheck Protection Program, which was repaid in December 2020. Credit Facilities On March 29, 2021, we and certain of our direct and indirect subsidiaries (the "JPMorgan Obligors") entered into a Senior Secured Revolving Credit Facility (the "JPMorgan 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 JPMorgan Credit Facility replaced the Encina Credit Facility. The JPMorgan Credit Facility is due on the earlier of March 29, 2024 or any earlier date on which the revolving commitments are reduced to zero. The three-year JPMorgan Credit Facility has a borrowing limit of $50.0 million with an option to request an increase in the revolving commitment by up to $25.0 million, drawn in $5.0 million increments, for a total not to exceed $75.0 million, subject to customary condition ("Revolver"). The Revolver maintains an interest rate of LIBOR plus 1.95% and has a 0.0% LIBOR floor. A fee of 0.25% per annum is charged for available but unused borrowings as defined. The JPMorgan Obligors had approximately $50.0 million 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 we must maintain a minimum fixed charge coverage ratio of 1.1x on a rolling twelve-month basis. The JPMorgan Obligors were in compliance with all debt covenants as of June 30, 2021. As of June 30, 2021, we had no borrowings outstanding under the JPMorgan Credit Facility. As of August 9, 2021, we had borrowings outstanding under the JPMorgan Credit Facility of $16.0 million. The JPMorgan Credit Facility is secured by our assets and the assets of certain of our subsidiaries obligated under the JPMorgan Credit Facility. Emerging Growth Company Status We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, companies have extended transition periods available for complying with new or revised accounting standards. We have elected this exemption to delay adopting new or revised accounting standards until such time as those standards apply to private companies. In addition, we intend to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, we are entitled to rely on certain exemptions as an emerging growth company, we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b), (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation-related items. These exemptions will apply for a period of five years following the completion of our IPO or until we no longer meet the requirements of being an emerging growth company, whichever is earlier. We expect that we will no longer be an emerging growth company on December 31, 2021. 36 TABLE OF CONTENTS Critical Accounting Policies and Estimates The preceding discussion and analysis of our consolidated results of operations and financial condition should be read in conjunction with our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. The 2020 Annual Report includes additional information about us, our operations, our financial condition, our critical accounting policies and accounting estimates, and should be read in conjunction with this Quarterly Report on Form 10-Q.