[Part I - Financial Information](index=5&type=section&id=Part%20I%20-%20Financial%20Information) This section details the company's financial performance, condition, and cash flows, along with management's analysis, market risk exposures, and internal control effectiveness [Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) Q1 2024 saw an improved net loss, decreased total assets, and significantly improved, though still negative, operating cash flow [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $24,152 | $30,312 | | Inventories | $72,315 | $75,354 | | Total current assets | $123,974 | $128,066 | | Total assets | $494,016 | $507,643 | | **Liabilities & Equity** | | | | Total current liabilities | $39,324 | $37,652 | | Long-term debt | $115,390 | $115,412 | | Total liabilities | $215,987 | $217,033 | | Total stockholders' equity | $278,029 | $290,610 | [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Statement of Operations Summary (in thousands, except per share data) | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net sales | $54,172 | $62,178 | | Gross profit | $10,925 | $11,381 | | Loss from operations | $(8,696) | $(13,050) | | Net loss | $(12,608) | $(16,849) | | Net loss per share (Basic & Diluted) | $(0.28) | $(0.37) | [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Cash Flow Summary (in thousands) | Activity | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $(2,297) | $(8,950) | | Net cash used in investing activities | $(1,408) | $(1,602) | | Net cash (used in) from financing activities | $(2,358) | $7,959 | | **Net decrease in cash** | **$(6,160)** | **$(2,588)** | [Notes to the Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) - The company operates as a single reportable segment, focusing on the distribution and manufacture of Controlled Environment Agriculture (CEA) equipment and supplies across the United States and Canada[39](index=39&type=chunk) - A second phase of the Restructuring Plan, focusing on U.S. manufacturing facility consolidations, resulted in **$138 thousand** in pre-tax restructuring charges in Q1 2024[37](index=37&type=chunk) - As of March 31, 2024, the Term Loan's outstanding principal balance was **$120.5 million**, with **zero** borrowed under the **$55 million** Revolving Credit Facility[74](index=74&type=chunk)[82](index=82&type=chunk) - Post-quarter, on May 10, 2024, the company agreed to sell assets for durable equipment production for approximately **$8.7 million**, expecting a **$12.0 million** loss on disposition in Q2 2024[106](index=106&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=31&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes adverse results to agricultural oversupply, initiating a restructuring plan that improved gross margin and narrowed operating loss Results of Operations Comparison (in thousands) | | Q1 2024 | Q1 2023 | Period Change ($) | Period Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $54,172 | $62,178 | $(8,006) | -12.9% | | Gross profit | $10,925 | $11,381 | $(456) | -4.0% | | Loss from operations | $(8,696) | $(13,050) | $4,354 | 33.4% | | Net loss | $(12,608) | $(16,849) | $4,241 | 25.2% | - The **12.9% decrease** in net sales was primarily driven by a **12.6% decline** in product volume/mix, attributed to oversupply in the cannabis industry[120](index=120&type=chunk) - Gross profit margin improved to **20.2%** from **18.3%** year-over-year, mainly due to enhanced manufacturing productivity from restructuring and cost-saving initiatives[121](index=121&type=chunk)[122](index=122&type=chunk) - Selling, general and administrative (SG&A) expenses decreased by **$4.8 million**, or **19.7%**, due to cost-saving measures reducing facility, professional services, insurance, and salary costs[123](index=123&type=chunk) - The second phase of the Restructuring Plan, focusing on U.S. manufacturing consolidation, may incur additional charges exceeding **$2.0 million** and is expected to yield annualized cost savings of approximately **$1.5 million**[116](index=116&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=38&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Primary market risks include interest rate exposure from the variable-rate Term Loan and foreign currency fluctuations from Canadian and European operations - The company is exposed to interest rate risk on its **$120.5 million** variable-rate Term Loan debt, where a hypothetical **100 basis point (1%) increase** would raise annual interest expense by an average of **$1.1 million**[154](index=154&type=chunk) - Foreign currency risk arises from operations with functional currencies in Canadian dollars (CAD) and Euros, impacting sales, purchases, and cash flows due to exchange rate fluctuations[155](index=155&type=chunk) [Controls and Procedures](index=39&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls and procedures were effective as of March 31, 2024, with no material changes to internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were **effective** as of March 31, 2024[158](index=158&type=chunk) - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[160](index=160&type=chunk) [Part II - Other Information](index=40&type=section&id=Part%20II%20-%20Other%20Information) This section covers legal proceedings, updated risk factors including potential Nasdaq delisting, and other significant corporate developments [Legal Proceedings](index=40&type=section&id=Item%201.%20Legal%20Proceedings) The company is not aware of any legal proceedings or claims expected to materially affect its business or financial condition - The company reports **no material legal proceedings**[162](index=162&type=chunk) [Risk Factors](index=40&type=section&id=Item%201A.%20Risk%20Factors) A material risk factor change is the Nasdaq notice of non-compliance for minimum bid price, with a compliance period until September 10, 2024 - On March 14, 2024, the company received a notice from Nasdaq for failing to meet the minimum bid price requirement of **$1.00 per share** for **30 consecutive business days**[165](index=165&type=chunk) - The company has a **180-day compliance period**, until September 10, 2024, to regain compliance by having its stock close at or above **$1.00** for at least **10 consecutive business days**[165](index=165&type=chunk) [Other Information](index=41&type=section&id=Item%205.%20Other%20Information) The company agreed to sell certain durable equipment production assets for **$8.7 million** in Q2 2024, including an exclusive five-year supply agreement - The company agreed to sell certain assets related to durable equipment production for approximately **$8.7 million** in a transaction expected to close in Q2 2024[171](index=171&type=chunk) - As part of the deal, the company will enter into an **exclusive supply agreement** with the buyer for an initial term of **five years** to ensure continued availability of the products[173](index=173&type=chunk) [Exhibits](index=42&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including equity incentive plan grant notices and required CEO/CFO certifications

Exhibit 99.1 First Quarter 2024 Highlights vs. Prior Year Period: (1) Adjusted Gross Profit (Loss), Adjusted Gross Profit Margin, Adjusted SG&A, Adjusted SG&A as a percent of net sales, Adjusted EBITDA, and Free Cash Flow are non-GAAP measures. For reconciliations of non-GAAP to GAAP measures see the "Reconciliation of Non-GAAP Measures" accompanying the release. Bill Toler, Chairman and Chief Executive Officer of Hydrofarm, said, "We are pleased with our first quarter results, as we delivered Adjusted Gros ...

[Special Note Regarding Forward-Looking Statements](index=3&type=section&id=SPECIAL%20NOTE%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) This section outlines the forward-looking nature of statements in the report, subject to risks and uncertainties, with no obligation for updates except as legally required [Forward-Looking Statements Disclaimer](index=3&type=section&id=Forward-Looking%20Statements%20Disclaimer) This section highlights that the Annual Report on Form 10-K contains forward-looking statements regarding the company's business strategy, future operating results, and financial position, cautioning readers that these statements are subject to various risks and uncertainties, and actual results may differ materially from projections - The report contains forward-looking statements about business strategy, future operating results, and financial position[18](index=18&type=chunk) - Forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from projections[21](index=21&type=chunk) - The company disclaims any obligation to publicly update or revise forward-looking statements, except as required by law[21](index=21&type=chunk) [PART I](index=5&type=section&id=PART%20I) [Item 1. Business Overview](index=5&type=section&id=Item%201.%20BUSINESS) Hydrofarm Holdings Group, Inc. is a leading independent manufacturer and distributor of Controlled Environment Agriculture (CEA) equipment and supplies in the U.S. and Canadian markets, offering a broad portfolio of proprietary and preferred branded products, primarily serving the hydroponics sector with a significant portion of sales from recurring consumable products - Hydrofarm is a leading independent manufacturer and distributor of CEA equipment and supplies in the U.S. and Canadian markets[26](index=26&type=chunk) Net Sales Performance | Metric | 2023 (Millions USD) | CAGR (2005-2023) | | :----- | :------------------ | :----------------- | | Net Sales | $227 | ~12% | - Approximately three-quarters of net sales are from consumable products (growing media, nutrients, supplies) subject to regular replenishment[30](index=30&type=chunk) - The company operates six U.S. and two Canadian distribution centers, aiming to reach most U.S. customers within 48 hours[33](index=33&type=chunk) - The global CEA industry was estimated at **$74 billion in 2022** and is projected to grow to **$378 billion by 2032** (**18% CAGR**)[39](index=39&type=chunk) - A majority of CEA equipment and supplies are sold for use in the cannabis industry, which is projected to reach **$57 billion by 2028** in the U.S. (**11.3% CAGR** from 2022)[41](index=41&type=chunk)[42](index=42&type=chunk) - The company is executing restructuring plans, including narrowing its product portfolio (removing ~1/3 of products and ~1/5 of brands) and consolidating manufacturing/distribution centers, to improve efficiency and reduce costs[48](index=48&type=chunk)[54](index=54&type=chunk) - As of December 31, 2023, the company had **369 full-time employees** globally, a reduction from **498 in 2022**, due to operational efficiency initiatives[92](index=92&type=chunk) [Introduction](index=5&type=section&id=Introduction) Introduces Hydrofarm as a leading manufacturer and distributor of Controlled Environment Agriculture (CEA) equipment and supplies - Hydrofarm is a leading independent manufacturer and distributor of controlled environment agriculture (CEA) equipment and supplies in the U.S. and Canadian markets[26](index=26&type=chunk) Key Business Metrics | Metric | Value | | :----- | :---- | | 2023 Net Sales | $227 million | | 2005-2023 Net Sales CAGR | ~12% | [How We Serve Our Customers](index=5&type=section&id=How%20We%20Serve%20Our%20Customers) Details the company's customer value proposition, emphasizing product selection, distribution, and just-in-time delivery - The company's customer value proposition focuses on offering the best selection of CEA products and being the gold standard in distribution and service, including just-in-time (JIT) delivery[28](index=28&type=chunk) [Complete Range of Innovative CEA Products](index=5&type=section&id=Complete%20Range%20of%20Innovative%20CEA%20Products) Describes the company's diverse product portfolio, including proprietary and preferred brands, and raw material sourcing - Product portfolio includes lighting, growing media, nutrients, equipment, and supplies, with approximately three-quarters of net sales from consumable products[29](index=29&type=chunk)[30](index=30&type=chunk) - The majority of products are proprietary or supplied under exclusive/preferred brand relationships, offering higher gross profit margins and a competitive advantage[30](index=30&type=chunk) - Raw materials for nutrient manufacturing include nitrogen, potassium, and phosphate; durable products use steel, plastic, and aluminum, sourced primarily from the U.S., Canada, Europe, and China[31](index=31&type=chunk) [Infrastructure and Reach for Fast Delivery, High In-Stock Availability and Exceptional Service](index=6&type=section&id=Infrastructure%20and%20Reach%20for%20Fast%20Delivery,%20High%20In-Stock%20Availability%20and%20Exceptional%20Service) Highlights the company's extensive distribution and manufacturing infrastructure for efficient product delivery and service - The company operates six U.S. distribution centers and two Canadian distribution centers, aiming for 48-hour delivery to most U.S. customers[33](index=33&type=chunk)[34](index=34&type=chunk) - Manufacturing facilities are located in Paramount, Arcata, Eugene, Goshen, Sycamore (U.S.) and Edmonton (Canada)[35](index=35&type=chunk) - The Distributor Managed Inventory (DMI) Program offers customized, JIT supply chain solutions for large commercial end users[34](index=34&type=chunk) [The CEA Industry](index=7&type=section&id=The%20CEA%20Industry) Provides an overview of the Controlled Environment Agriculture (CEA) industry, its market size, growth, and key end-markets - The principal industry opportunity is in wholesale distribution of CEA equipment and supplies, including nutrients, grow lights, HVAC, and growing media[37](index=37&type=chunk) Global CEA Industry Market Size and Growth | Year | Estimated Market Size | | :--- | :-------------------- | | 2022 | ~$74 billion | | 2032 (Projected) | ~$378 billion | | CAGR (2022-2032) | 18% | - A majority of products are sold for use in the cannabis industry, which is projected to reach **$57 billion by 2028** in the U.S. (**11.3% CAGR** from 2022)[41](index=41&type=chunk)[42](index=42&type=chunk) [Benefits of CEA Adoption](index=8&type=section&id=Benefits%20of%20CEA%20Adoption) Explains the environmental and operational advantages of Controlled Environment Agriculture (CEA) adoption - Benefits of CEA include greater product safety/consistency, reliable year-round crop supply, lower pest risk, reduced water/pesticide use, and potentially lower operating expenses from resource-saving technologies[44](index=44&type=chunk) - CEA supports ESG trends by preserving resources and enhancing food supply chain transparency and safety[45](index=45&type=chunk) [Our Strategies and Competitive Strengths](index=8&type=section&id=Our%20Strategies%20and%20Competitive%20Strengths) Outlines Hydrofarm's market leadership, proprietary product focus, manufacturing capabilities, and cost-saving initiatives - The company holds a leading market position in CEA equipment and supplies in the U.S. and Canada, built on over 40 years of experience[46](index=46&type=chunk) - The product portfolio includes ~35 proprietary brands and ~45 preferred brands, with ~75% of sales from these higher-margin offerings[47](index=47&type=chunk) - Operates six manufacturing facilities in North America for nutrient blending, soil blending, perlite production, LED light manufacturing, and peat harvesting[49](index=49&type=chunk) - Reorganized sales efforts to focus on CEA food and floral markets and consumer gardening, alongside existing specialty hydroponic retailers and commercial resellers[53](index=53&type=chunk) - Focused on productivity and cost-saving initiatives, including headcount reduction, operational changes, facility footprint consolidation, and prioritizing proprietary brands[54](index=54&type=chunk) [Effects of COVID-19 on Our Business](index=10&type=section&id=Effects%20of%20COVID-19%20on%20Our%20Business) Assesses the past and potential future impacts of COVID-19 on the company's demand and supply chain operations - COVID-19 may have positively impacted demand in 2020-2021 due to shelter-in-place orders but negatively impacted supply chains and contributed to agricultural oversupply in 2022-2023[58](index=58&type=chunk) - Current operations are not impacted by COVID-19 closures, but future variants could reinstate limitations, affecting supply chains and manufacturing[57](index=57&type=chunk) [Government Regulation](index=10&type=section&id=Government%20Regulation) Details the regulatory landscape for the company's products in the U.S. and Canada, including cannabis-related compliance - Grow media and nutrient products are subject to U.S. state-specific registration requirements, with organic products audited by CDFA/OMRI and pesticides regulated by the EPA[59](index=59&type=chunk)[60](index=60&type=chunk)[61](index=61&type=chunk) - Canadian operations are regulated under the Canadian Food Inspection Agency, with organic products attested by EcoCert and peat harvesting by provincial/municipal bodies[59](index=59&type=chunk) - Failure to comply with regulations or changes in pesticide registration could adversely affect product sales and business[61](index=61&type=chunk)[62](index=62&type=chunk) [Cannabis Industry](index=11&type=section&id=Cannabis%20Industry) Discusses the complex legal and operational challenges and opportunities related to the cannabis industry as a key end-market - The company sells products through third-party retailers, not directly to cannabis growers in countries prohibiting cannabis sale/use, but acknowledges the positive impact of cannabis legalization on its industry[63](index=63&type=chunk) - U.S. federal law lists cannabis as a Schedule I controlled substance, conflicting with state legalization laws, posing risks of federal enforcement[71](index=71&type=chunk)[72](index=72&type=chunk) - Cannabis businesses face challenges including limited tax deductions (Section 280E), restricted intellectual property rights, inability to access federal bankruptcy courts, and difficulties in banking due to federal illegality[74](index=74&type=chunk) - The FinCEN Memo provides guidance for banks serving cannabis businesses, but its future adherence is uncertain, and the SAFE Banking Act has not yet passed the U.S. Senate[81](index=81&type=chunk)[82](index=82&type=chunk)[83](index=83&type=chunk) - The company's Credit Facilities prohibit direct sales to cannabis growers in countries where it's illegal, impacting market selectivity and potentially competitive advantage[84](index=84&type=chunk) [Intellectual Property](index=15&type=section&id=Intellectual%20Property) Covers the company's intellectual property portfolio, including patents and trademarks, and associated protection risks - The company owns 15 issued U.S. design patents, 2 issued U.S. utility patents, 4 issued foreign patents/designs, 106 registered U.S. trademarks, and 121 registered foreign trademarks[87](index=87&type=chunk) - Issued patents cover grow lighting and hydroponic systems, expiring between 2024 and 2035[87](index=87&type=chunk) - Effective competition depends on protecting intellectual property rights, with risks including litigation, difficulty obtaining licenses, and potential restrictions due to the federal illegality of cannabis[88](index=88&type=chunk)[89](index=89&type=chunk)[90](index=90&type=chunk) [Human Capital](index=15&type=section&id=Human%20Capital) Provides an overview of the company's workforce, headcount changes, and compensation philosophy Full-Time Employees | Date | Number of Employees | | :--- | :------------------ | | Dec 31, 2023 | 369 | | Dec 31, 2022 | 498 | - The company reduced headcount in 2023 and may implement further reductions for operational efficiencies[92](index=92&type=chunk) - Compensation philosophy aims to attract, motivate, reward, and retain high-performing employees, supported by a comprehensive benefits platform and an Environmental Health and Safety (EHS) management system[93](index=93&type=chunk)[94](index=94&type=chunk) [Corporate Structure and Information](index=16&type=section&id=Corporate%20Structure%20and%20Information) Details Hydrofarm's corporate history, incorporation, and SEC filing status as a smaller reporting company - Hydrofarm Holdings Group, Inc. was incorporated in Delaware in January 2017, with its predecessor founded in 1977[96](index=96&type=chunk) - The company qualifies as a smaller reporting company and has elected to use scaled-back disclosure accommodations in its SEC filings[98](index=98&type=chunk) [Item 1A. Risk Factors](index=17&type=section&id=Item%201A.%20RISK%20FACTORS) The company faces a wide array of risks, including those related to its proprietary brand offerings, intense competition, potential asset impairments, and inventory management challenges, with significant risks stemming from its indebtedness, reliance on a limited supplier base, and the complex, evolving legal and public perception landscape of the cannabis industry - Key business risks include challenges with proprietary brands, competitive pressures, potential impairments of long-lived assets and inventory, and effective inventory management[102](index=102&type=chunk)[108](index=108&type=chunk)[110](index=110&type=chunk)[114](index=114&type=chunk)[116](index=116&type=chunk) - Indebtedness poses risks through restrictive covenants, the ability to make debt service payments, and limitations on direct sales to the cannabis industry[102](index=102&type=chunk)[169](index=169&type=chunk)[172](index=172&type=chunk) - Reliance on a limited supplier base and potential disruptions in the global supply chain could adversely affect operations and financial results[102](index=102&type=chunk)[175](index=175&type=chunk)[177](index=177&type=chunk) - The cannabis industry's federal illegality in the U.S. creates significant indirect risks, including potential federal enforcement, tax limitations (Section 280E), restricted intellectual property rights, and banking difficulties for end-users[102](index=102&type=chunk)[186](index=186&type=chunk)[187](index=187&type=chunk)[188](index=188&type=chunk)[189](index=189&type=chunk)[190](index=190&type=chunk)[191](index=191&type=chunk) - Other regulatory risks include compliance with environmental, health, and safety laws, data privacy regulations (e.g., CCPA, GDPR), and specific rules for growing media and plant nutrients[104](index=104&type=chunk)[134](index=134&type=chunk)[212](index=212&type=chunk)[214](index=214&type=chunk)[215](index=215&type=chunk)[217](index=217&type=chunk)[219](index=219&type=chunk) - Intellectual property risks involve the ability to obtain, maintain, protect, and enforce rights, potential infringement disputes, and the costs associated with such litigation[104](index=104&type=chunk)[222](index=222&type=chunk)[223](index=223&type=chunk)[224](index=224&type=chunk)[229](index=229&type=chunk)[230](index=230&type=chunk) - Capital stock risks include potential dilution from future issuances, anti-takeover provisions in corporate documents, and volatility in the common stock's market price[106](index=106&type=chunk)[233](index=233&type=chunk)[234](index=234&type=chunk)[240](index=240&type=chunk) [Item 1B. Unresolved Staff Comments](index=44&type=section&id=Item%201B.%20UNRESOLVED%20STAFF%20COMMENTS) The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments[255](index=255&type=chunk) [Item 1C. Cybersecurity](index=44&type=section&id=Item%201C.%20CYBERSECURITY) Cybersecurity is a critical risk managed through ongoing monitoring, vigilance, and enhancements to policies and procedures, employing a risk-based strategy, conducting employee training, and engaging third-party assessors - Cybersecurity is a critical risk, managed through ongoing monitoring, vigilance, and enhancements to policies, procedures, and practices[256](index=256&type=chunk)[257](index=257&type=chunk) - A risk-based strategy focuses on safeguarding critical assets with controls around access, data, and infrastructure security[257](index=257&type=chunk) - In January 2022, certain computer systems related to the Aurora acquisition were victimized by a cyber-attack, but it was contained, and no critical data was accessed[259](index=259&type=chunk) - The Board of Directors oversees the cybersecurity risk management program, receiving periodic updates from the Director of IT[261](index=261&type=chunk) - The company maintains cyber insurance, but it may not cover all losses or reputational damage from future breaches[260](index=260&type=chunk) [Item 2. Properties](index=46&type=section&id=Item%202.%20PROPERTIES) The company's significant facilities include distribution centers in the U.S., Canada, and Spain, along with manufacturing facilities in the U.S. and Canada, with most facilities being leased, and one distribution center in Spain and one manufacturing facility in Goshen, NY, being owned Distribution Centers | Location | Square Footage | Ownership | | :------- | :------------- | :-------- | | Fairfield, CA, U.S. | 175,000 | Leased | | Fontana, CA, U.S. | 147,000 | Leased | | Gresham, OR, U.S. | 98,000 | Leased | | Denver, CO, U.S. | 87,000 | Leased | | Shoemakersville, PA, U.S. | 303,000 | Leased | | New Hudson, MI, U.S. | 126,000 | Leased | | Surrey, BC, Canada | 136,000 | Leased | | Cambridge, ON, Canada | 53,000 | Leased | | Zaragoza, Spain | 20,000 | Owned | Manufacturing Facilities | Location | Square Footage | Ownership | | :------- | :------------- | :-------- | | Paramount, CA, U.S. | 25,000 | Leased | | Arcata, CA, U.S. | 112,000 | Leased | | Eugene, OR, U.S. | 242,000 | Leased | | Goshen, NY, U.S. | 21,000 | Owned | | Sycamore, IL, U.S. | 209,800 | Leased | | Edmonton, AB, Canada | 26,000 | Leased | - The company believes its existing facilities are adequate for current needs[264](index=264&type=chunk) [Item 3. Legal Proceedings](index=46&type=section&id=Item%203.%20LEGAL%20PROCEEDINGS) The company is not currently aware of any legal proceedings or claims that are expected to have a material adverse effect on its business, financial condition, or operating results - The company is not aware of any legal proceedings or claims expected to have a material adverse effect on its business[266](index=266&type=chunk) [Item 4. Mine Safety Disclosures](index=46&type=section&id=Item%204.%20MINE%20SAFETY%20DISCLOSURES) This item is not applicable to the company - Mine Safety Disclosures are not applicable[267](index=267&type=chunk) [PART II](index=47&type=section&id=PART%20II) [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=47&type=section&id=Item%205.%20MARKET%20FOR%20REGISTRANT'S%20COMMON%20EQUITY,%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) The company's common stock has been traded on The Nasdaq Global Select Market under the symbol 'HYFM' since December 10, 2020, with approximately 84 stockholders of record as of February 15, 2024, and the company has never declared or paid dividends, intending to retain future earnings for business operations and expansion - Common stock began trading on The Nasdaq Global Select Market under 'HYFM' on December 10, 2020[268](index=268&type=chunk) Common Stock Holders | Date | Stockholders of Record | | :--- | :--------------------- | | Feb 15, 2024 | ~84 | - The company has never declared or paid dividends and intends to retain all available funds and future earnings for business operations and expansion[270](index=270&type=chunk) - No sales of unregistered securities or issuer purchases of equity securities were reported[271](index=271&type=chunk)[272](index=272&type=chunk) [Item 6. Reserved](index=47&type=section&id=Item%206.%20RESERVED) This item is reserved and contains no information - This item is reserved[273](index=273&type=chunk) [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=48&type=section&id=Item%207.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Hydrofarm experienced a significant decline in net sales by **34.2% in 2023**, primarily due to agricultural oversupply in the cannabis industry, yet gross profit increased by **28.2%** due to lower inventory charges and cost-saving initiatives, while the company undergoes a two-phase restructuring plan to streamline operations and reduce costs - Net sales for 2023 decreased by **$117.9 million** (**34.2%**) to **$226.6 million**, primarily due to a **32% decline in product volume** and a **2% decrease in price/mix**, driven by oversupply in the cannabis industry[292](index=292&type=chunk) - Gross profit increased by **$8.3 million** (**28.2%**) to **$37.6 million in 2023**, with gross profit margin rising to **16.6%** from **8.5% in 2022**, attributed to lower inventory charges, reduced acquisition expenses, and benefits from proprietary brands and cost savings[293](index=293&type=chunk) - Selling, General and Administrative (SG&A) expenses decreased by **$31.3 million** (**26.4%**) to **$87.3 million in 2023**, mainly due to lower amortization/depreciation, salaries/benefits, and accounts receivable reserves[294](index=294&type=chunk) - The company recorded a **$189.6 million goodwill impairment charge in 2022**, reducing the goodwill balance to zero, due to a sustained decline in market value and deterioration in customer demand[283](index=283&type=chunk)[295](index=295&type=chunk) - A two-phase Restructuring Plan was initiated, involving narrowing the product portfolio and consolidating manufacturing/distribution centers, incurring **$11.3 million in charges in 2023** (primarily non-cash inventory write-downs) and anticipating **$1.5 million in annualized cost savings** from the second phase[279](index=279&type=chunk)[280](index=280&type=chunk)[281](index=281&type=chunk)[282](index=282&type=chunk) Cash Flow Summary (in thousands) | Activity | 2023 | 2022 | | :------- | :--- | :--- | | Operating Activities | $7,044 | $21,989 | | Investing Activities | $(4,170) | $(8,487) | | Financing Activities | $6,065 | $(20,200) | | End of Year Cash | $30,312 | $21,291 | - Net cash from operating activities was **$7.0 million in 2023**, driven by a **$12.4 million reduction in working capital** (mainly inventory decrease), despite a net loss[301](index=301&type=chunk) - The Term Loan had an outstanding principal balance of **$122.5 million** as of December 31, 2023, with an effective interest rate of **11.55%** for the year[310](index=310&type=chunk)[312](index=312&type=chunk) - The Revolving Credit Facility's maximum commitment was reduced to **$55 million**, with approximately **$22 million available to borrow** as of December 31, 2023, and zero borrowed[313](index=313&type=chunk)[317](index=317&type=chunk)[318](index=318&type=chunk) - The company expects 2024 material cash requirements to include **$3.0 million in principal repayments** and **$14.8 million in interest payments** on long-term debt, **$1.4 million in finance lease payments**, and **$10.4 million in operating lease payments**[320](index=320&type=chunk) - Net sales are typically seasonally stronger in the first three fiscal quarters due to warmer spring and summer months in North America[321](index=321&type=chunk) [Company Overview](index=48&type=section&id=Company%20Overview) Introduces Hydrofarm as a leading manufacturer and distributor of hydroponics equipment and supplies for controlled environment agriculture - Hydrofarm is a leading independent manufacturer and distributor of branded hydroponics equipment and supplies for controlled environment agriculture (CEA) in the U.S. and Canadian markets[276](index=276&type=chunk) - Products are used to cultivate various plants in controlled environments, enabling efficiency, year-round cycles, and predictable yields[277](index=277&type=chunk) - The company serves over 2,000 wholesale customer accounts through an online platform and diversified retailers[277](index=277&type=chunk) [Market Conditions](index=48&type=section&id=Market%20Conditions) Analyzes market conditions, including agricultural oversupply, and details the company's restructuring plans and goodwill impairment - Adverse financial results are primarily due to agricultural oversupply impacting the market, driving down cannabis wholesale prices and decreasing cultivation[278](index=278&type=chunk) - The company initiated a two-phase Restructuring Plan to streamline operations, reduce costs, and improve efficiencies during the industry recession[279](index=279&type=chunk)[282](index=282&type=chunk) Restructuring Charges (in thousands) | Phase | Year | Pre-tax Charges (Cost of Goods Sold) | | :---- | :--- | :----------------------------------- | | Phase 1 | 2022 | $6,790 (inventory markdowns), $897 (relocation/termination) | | Phase 1 | 2023 | $2,084 (relocation/termination) | | Phase 2 | 2023 | $9,185 (raw material inventory write-downs) | - A goodwill impairment charge of **$189.6 million** was recorded as of June 30, 2022, reducing goodwill to zero, due to a decline in market value and customer demand[283](index=283&type=chunk) - The company's filing status changed to a non-accelerated filer effective December 31, 2023, due to market capitalization falling below **$60 million**[286](index=286&type=chunk) [Components of Results of Operations](index=50&type=section&id=Components%20of%20Results%20of%20Operations) Defines the key components of the company's financial results, including net sales, cost of goods sold, and SG&A expenses - Net sales are generated from manufacturing and distributing hydroponic equipment and supplies, including consumable and durable products, reported net of sales incentives and including shipping/handling costs[287](index=287&type=chunk)[288](index=288&type=chunk) - Cost of goods sold includes material, freight, labor, facility costs, depreciation, restructuring costs, inventory allowances, and acquisition/integration expenses[289](index=289&type=chunk) - Selling, General and Administrative (SG&A) expenses cover distribution facility costs, depreciation, acquisition/integration expenses, marketing, salaries, benefits, stock-based compensation, and professional fees[290](index=290&type=chunk) [Results of Operations - Comparison of Years Ended December 31, 2023, and 2022](index=50&type=section&id=Results%20of%20Operations%20-%20Comparison%20of%20Years%20Ended%20December%2031,%202023,%20and%202022) Compares the company's financial performance for 2023 and 2022, highlighting changes in net sales, gross profit, and net loss Consolidated Statements of Operations Summary (in thousands) | Metric | 2023 | 2022 | Change ($) | Change (%) | | :----- | :--- | :--- | :--------- | :--------- | | Net sales | $226,581 | $344,501 | $(117,920) | -34.2% | | Cost of goods sold | $188,969 | $315,165 | $(126,196) | -40.0% | | Gross profit | $37,612 | $29,336 | $8,276 | 28.2% | | SG&A | $87,314 | $118,604 | $(31,290) | -26.4% | | Impairments | $0 | $192,328 | $(192,328) | -100.0% | | Loss from operations | $(49,702) | $(281,596) | $231,894 | 82.3% | | Interest expense | $(15,442) | $(10,958) | $4,484 | 40.9% | | Net loss | $(64,813) | $(285,415) | $220,602 | 77.3% | | Basic EPS | $(1.42) | $(6.35) | $4.93 | 77.6% | | Diluted EPS | $(1.42) | $(6.35) | $4.93 | 77.6% | - The 2023 net sales decrease was due to a **32% volume decline** and a **2% price/mix decrease**, with a higher mix of lower-priced consumables[292](index=292&type=chunk) - Gross profit improvement was driven by lower inventory charges, reduced acquisition expenses, and benefits from proprietary brands, partially offset by higher restructuring charges[293](index=293&type=chunk) - Interest expense increased by **40.9%** due to higher variable interest rates on the Term Loan[296](index=296&type=chunk) - Income tax benefit was **$0.2 million in 2023** (**0.3% effective rate**) compared to **$6.4 million in 2022** (**2.2% effective rate**), primarily due to a full valuation allowance against U.S. deferred tax assets[298](index=298&type=chunk)[299](index=299&type=chunk) [Liquidity and Capital Resources](index=52&type=section&id=Liquidity%20and%20Capital%20Resources) Assesses the company's cash flow, debt structure, credit facilities, and future cash requirements for operations and debt service Cash Flow Summary (in thousands) | Activity | 2023 | 2022 | | :------- | :--- | :--- | | Net cash from operating activities | $7,044 | $21,989 | | Net cash used in investing activities | $(4,170) | $(8,487) | | Net cash from (used in) financing activities | $6,065 | $(20,200) | | Net increase (decrease) in cash | $9,021 | $(7,093) | | Cash, cash equivalents and restricted cash at end of year | $30,312 | $21,291 | - Operating cash flow in 2023 was **$7.0 million**, primarily from a **$12.4 million reduction in working capital** (mainly inventory decrease), partially offset by a net loss[301](index=301&type=chunk) - Investing activities used **$4.2 million in 2023**, mainly for capital expenditures in property, plant, and equipment, including peat moss harvesting operations[303](index=303&type=chunk) - Financing activities generated **$6.1 million in 2023**, driven by **$8.6 million from a Sale-Leaseback Transaction**, partially offset by Term Loan principal payments[305](index=305&type=chunk) - The Term Loan, amended in June 2023 to replace LIBOR with SOFR, has an outstanding principal balance of **$122.5 million** as of December 31, 2023, maturing in October 2028[310](index=310&type=chunk)[312](index=312&type=chunk) - The Revolving Credit Facility was amended in March 2023, extending maturity to June 30, 2026, and reducing the maximum commitment to **$55 million**; **$22 million** was available as of December 31, 2023, with no outstanding borrowings[313](index=313&type=chunk)[317](index=317&type=chunk)[318](index=318&type=chunk) - Estimated 2024 material cash requirements include **$3.0 million for debt principal**, **$14.8 million for interest**, **$1.4 million for finance lease payments**, and **$10.4 million for operating lease payments**[320](index=320&type=chunk) [Seasonality](index=55&type=section&id=Seasonality) Describes the typical seasonal patterns of the company's net sales and recent deviations due to market conditions - Net sales are typically stronger in the first three fiscal quarters due to robust sales during warmer spring and summer months in North America, influenced by the garden center customer base and outdoor product use[321](index=321&type=chunk) - The industry recession in 2023 led to less consistent seasonal patterns[321](index=321&type=chunk) [Critical Accounting Policies and Estimates](index=55&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Outlines the key accounting policies and estimates, including goodwill impairment, long-lived assets, and inventory valuation - Goodwill is evaluated for impairment annually or when triggering events occur; a full impairment of **$189.6 million** was recorded as of June 30, 2022, reducing the balance to zero[324](index=324&type=chunk)[325](index=325&type=chunk) - Long-lived tangible and finite-lived intangible assets are reviewed for impairment when circumstances indicate carrying amounts may not be recoverable[326](index=326&type=chunk) - Inventories are valued at the lower of cost or net realizable value, with an allowance for excess and obsolete inventory based on demand and market conditions[328](index=328&type=chunk) [Recently Issued Accounting Pronouncements](index=75&type=section&id=Recently%20issued%20accounting%20pronouncements) Summarizes recently issued accounting standards that will impact future financial disclosures - ASU No. 2023-07 (Segment Reporting) requires enhanced disclosure of significant segment expenses, effective for fiscal years beginning after December 15, 2023[435](index=435&type=chunk) - ASU No. 2023-09 (Income Taxes) requires greater disaggregation of information in effective tax rate reconciliation and income taxes paid, effective for fiscal years beginning after December 15, 2024[436](index=436&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=57&type=section&id=Item%207A.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company is exposed to market risks primarily from interest rate fluctuations on its variable-rate debt and foreign currency exchange rate changes, mainly involving the Canadian dollar and Euro, but does not currently hedge these risks and has no material exposure to commodity risk - Primary market risks include interest rate, foreign currency, and inflation risk; no material exposure to commodity risk[331](index=331&type=chunk) - Interest rate risk: **$122.5 million Term Loan debt** is subject to variable SOFR-based rates; a **100 basis point increase** would raise annual interest expense by approximately **$1.1 million**[332](index=332&type=chunk) - Foreign currency risk: Operations in Canada (CAD) and Europe (Euro) expose the company to exchange rate fluctuations on sales, purchasing, and labor; no foreign currency exchange contracts are currently used[333](index=333&type=chunk) - Inflation risk: Rising costs for raw materials, freight, labor, and energy could negatively impact margin performance if not offset by price increases or operating efficiencies[334](index=334&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=58&type=section&id=Item%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) This section presents the audited consolidated financial statements for Hydrofarm Holdings Group, Inc. for the years ended December 31, 2023, and 2022, along with the report of the independent registered public accounting firm, including Balance Sheets, Statements of Operations, Comprehensive Loss, Changes in Stockholders' Equity, and Cash Flows, with accompanying detailed notes - The financial statements present the company's financial position as of December 31, 2023 and 2022, and results of operations and cash flows for the two years ended December 31, 2023, in conformity with U.S. GAAP[340](index=340&type=chunk) - Deloitte & Touche LLP issued an unqualified opinion on the financial statements[340](index=340&type=chunk) - Inventory valuation was identified as a critical audit matter due to the materiality of the excess and obsolescence reserve and the judgment involved in its estimation[345](index=345&type=chunk)[346](index=346&type=chunk) [Report of Independent Registered Public Accounting Firm](index=59&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) Presents the independent auditor's opinion on the consolidated financial statements and highlights critical audit matters - Deloitte & Touche LLP provided an unqualified opinion on the consolidated financial statements for the periods ended December 31, 2023 and 2022[340](index=340&type=chunk) - Inventory valuation was identified as a critical audit matter due to the materiality of the excess and obsolescence reserve and the subjective judgments required for its estimation[345](index=345&type=chunk)[346](index=346&type=chunk) [Consolidated Balance Sheets](index=61&type=section&id=Consolidated%20Balance%20Sheets) Provides a snapshot of the company's financial position, detailing assets, liabilities, and equity as of year-end Consolidated Balance Sheet Highlights (in thousands) | Asset/Liability/Equity | Dec 31, 2023 | Dec 31, 2022 | | :--------------------- | :----------- | :----------- | | Total Current Assets | $128,066 | $154,948 | | Inventories | $75,354 | $111,398 | | Intangible Assets, net | $275,881 | $300,366 | | Total Assets | $507,643 | $573,559 | | Total Current Liabilities | $37,652 | $41,605 | | Long-term Debt | $115,412 | $117,461 | | Total Liabilities | $217,033 | $223,678 | | Total Stockholders' Equity | $290,610 | $349,881 | [Consolidated Statements of Operations](index=62&type=section&id=Consolidated%20Statements%20of%20Operations) Reports the company's revenues, expenses, and net loss for the fiscal years ended December 31, 2023 and 2022 Consolidated Statements of Operations Highlights (in thousands) | Metric | 2023 | 2022 | | :----- | :--- | :--- | | Net sales | $226,581 | $344,501 | | Gross profit | $37,612 | $29,336 | | SG&A | $87,314 | $118,604 | | Impairments | $0 | $192,328 | | Loss from operations | $(49,702) | $(281,596) | | Net loss | $(64,813) | $(285,415) | | Basic EPS | $(1.42) | $(6.35) | | Diluted EPS | $(1.42) | $(6.35) | [Consolidated Statements of Comprehensive Loss](index=63&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Loss) Details the company's net loss and other comprehensive income/loss components, including foreign currency translation adjustments Consolidated Statements of Comprehensive Loss Highlights (in thousands) | Metric | 2023 | 2022 | | :----- | :--- | :--- | | Net loss | $(64,813) | $(285,415) | | Foreign currency translation gain (loss) | $738 | $(5,853) | | Total comprehensive loss | $(64,075) | $(291,268) | [Consolidated Statements of Changes in Stockholders' Equity](index=64&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) Illustrates changes in the company's stockholders' equity, including common stock, additional paid-in capital, and accumulated deficit Consolidated Statements of Changes in Stockholders' Equity Highlights (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :----- | :----------- | :----------- | | Common Stock Shares | 45,789,890 | 45,197,249 | | Additional Paid-In Capital | $787,846 | $783,042 | | Accumulated Other Comprehensive Loss | $(6,497) | $(7,235) | | Accumulated Deficit | $(490,744) | $(425,931) | | Total Stockholders' Equity | $290,610 | $349,881 | [Consolidated Statements of Cash Flows](index=65&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Summarizes the cash inflows and outflows from operating, investing, and financing activities for the fiscal years Consolidated Statements of Cash Flows Highlights (in thousands) | Activity | 2023 | 2022 | | :------- | :--- | :--- | | Net cash from operating activities | $7,044 | $21,989 | | Net cash used in investing activities | $(4,170) | $(8,487) | | Net cash from (used in) financing activities | $6,065 | $(20,200) | | Net increase (decrease) in cash | $9,021 | $(7,093) | | Cash, cash equivalents and restricted cash at end of year | $30,312 | $21,291 | [Notes to the Consolidated Financial Statements](index=66&type=section&id=Notes%20to%20the%20Consolidated%20Financial%20Statements) [1. Description of the Business](index=66&type=section&id=1.%20DESCRIPTION%20OF%20THE%20BUSINESS) Provides a detailed description of Hydrofarm's business as a manufacturer and distributor of hydroponics equipment and supplies - Hydrofarm Holdings Group, Inc. is a leading independent manufacturer and distributor of branded hydroponics equipment and supplies for controlled environment agriculture (CEA)[363](index=363&type=chunk) - Products include agricultural lighting, climate control, nutrients, and plant additives for cultivating various plants in controlled environments[363](index=363&type=chunk) [2. Basis of Presentation and Significant Accounting Policies](index=66&type=section&id=2.%20BASIS%20OF%20PRESENTATION%20AND%20SIGNIFICANT%20ACCOUNTING%20POLICIES) Outlines the basis for financial statement preparation, key accounting policies, and significant estimates and assumptions - Consolidated financial statements are prepared in accordance with U.S. GAAP and SEC requirements, including reclassifications for consistent presentation[364](index=364&type=chunk) - Management makes significant estimates and assumptions for financial reporting, including sales returns, accounts receivable, inventory realization, intangible asset valuation, and deferred income taxes[365](index=365&type=chunk) - Business acquisitions are accounted for using the acquisition method, with contingent consideration measured at fair value and adjusted retrospectively during the measurement period[366](index=366&type=chunk)[367](index=367&type=chunk)[369](index=369&type=chunk) - Goodwill is measured as the excess of consideration transferred over identifiable assets acquired and liabilities assumed[371](index=371&type=chunk) - The company initiated a two-phase Restructuring Plan in Q4 2022 to streamline operations, reduce costs, and improve efficiencies, involving product portfolio narrowing and facility consolidations[379](index=379&type=chunk)[381](index=381&type=chunk) Restructuring Charges (in thousands) | Year | Total Restructuring Charges | | :--- | :-------------------------- | | 2023 | $11,269 | | 2022 | $7,687 | - The company operates as one reportable segment (U.S. and Canada) for CEA equipment and supplies[386](index=386&type=chunk) - Revenue is recognized when control of goods is transferred to customers, net of variable consideration like rebates and discounts[417](index=417&type=chunk) - Stock-based compensation expense for RSUs and stock options is recognized over the requisite service period, with performance-based awards recognized if conditions are probable[420](index=420&type=chunk)[426](index=426&type=chunk) - Deferred income tax assets are recognized based on the likelihood of realization, with a valuation allowance maintained against U.S. deferred tax assets[430](index=430&type=chunk)[431](index=431&type=chunk) [3. Goodwill and Intangible Assets, Net](index=75&type=section&id=3.%20GOODWILL%20AND%20INTANGIBLE%20ASSETS,%20NET) Details the company's goodwill and intangible assets, including impairment charges and amortization expenses - A goodwill impairment charge of **$189.6 million** was recorded as of June 30, 2022, reducing the goodwill balance to zero, due to a sustained decline in market value and customer demand[437](index=437&type=chunk) Intangible Assets, Net (in thousands) | Category | Dec 31, 2023 Net Book Value | Dec 31, 2022 Net Book Value | | :------- | :-------------------------- | :-------------------------- | | Computer software | $968 | $1,432 | | Customer relationships | $67,922 | $75,400 | | Technology, formulations and recipes | $89,057 | $98,843 | | Trade names and trademarks | $114,753 | $121,358 | | Other finite-lived | $380 | $532 | | Indefinite-lived trade name | $2,801 | $2,801 | | Total Intangible Assets, Net | $275,881 | $300,366 | Amortization Expense for Intangible Assets (in thousands) | Year | Amortization Expense | | :--- | :------------------- | | 2023 | $24,355 | | 2022 | $33,308 | [4. Loss Per Common Share](index=77&type=section&id=4.%20LOSS%20PER%20COMMON%20SHARE) Presents the calculation of basic and diluted loss per common share for the fiscal years Loss Per Common Share | Metric | 2023 | 2022 | | :----- | :--- | :--- | | Net loss | $(64,813) | $(285,415) | | Basic loss per common share | $(1.42) | $(6.35) | | Diluted loss per common share | $(1.42) | $(6.35) | - Basic loss per common share is calculated using net loss and weighted-average common shares outstanding, excluding unvested RSUs and PSUs[444](index=444&type=chunk) - Diluted loss per common share excludes potential common stock shares (warrants, share-based awards) as their inclusion would be anti-dilutive due to net loss[445](index=445&type=chunk)[446](index=446&type=chunk) [5. Accounts Receivable, Net and Inventories](index=77&type=section&id=5.%20ACCOUNTS%20RECEIVABLE,%20NET%20AND%20INVENTORIES) Provides a breakdown of accounts receivable and inventories, including allowances for doubtful accounts and obsolescence Accounts Receivable, Net (in thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :------- | :----------- | :----------- | | Trade accounts receivable | $16,740 | $18,204 | | Allowance for doubtful accounts | $(920) | $(1,556) | | Other receivables | $1,070 | $579 | | Total accounts receivable, net | $16,890 | $17,227 | Inventories (in thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :------- | :----------- | :----------- | | Finished goods | $58,346 | $83,134 | | Work-in-process | $3,891 | $5,403 | | Raw materials | $23,256 | $38,558 | | Allowance for inventory obsolescence | $(10,139) | $(15,697) | | Total inventories | $75,354 | $111,398 | - Inventories are stated at the lower of cost or net realizable value, with an allowance for excess and obsolete inventory based on demand and market conditions[448](index=448&type=chunk) [6. Leases](index=78&type=section&id=6.%20LEASES) Details the company's lease arrangements for facilities, including right-of-use assets, liabilities, and related costs - The company leases distribution centers and manufacturing facilities under non-cancelable agreements expiring through 2038, accounted for under ASC 842[449](index=449&type=chunk) - In January 2023, the company completed a Sale-Leaseback Transaction for the Eugene, OR property, which is accounted for as a failed sale-leaseback, retaining assets and recognizing a financial liability[451](index=451&type=chunk) Lease Assets and Liabilities (in thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :------- | :----------- | :----------- | | Operating lease right-of-use assets | $54,494 | $65,265 | | Finance lease assets | $9,315 | $2,005 | | Total lease assets | $63,809 | $67,270 | | Total lease liabilities | $65,530 | $67,302 | Total Lease Costs and Sublease Income (in thousands) | Category | 2023 | 2022 | | :------- | :--- | :--- | | Operating lease costs | $12,371 | $11,484 | | Finance lease costs (amortization) | $1,375 | $612 | | Finance lease costs (interest) | $519 | $61 | | Sublease income | $(1,722) | $(1,533) | Weighted-Average Lease Terms and Discount Rates | Metric | Dec 31, 2023 | Dec 31, 2022 | | :----- | :----------- | :----------- | | Operating leases (remaining term) | 6.7 years | 7.1 years | | Finance leases (remaining term) | 12.5 years | 3.1 years | | Operating leases (discount rate) | 4.20% | 4.00% | | Finance leases (discount rate) | 5.25% | 3.63% | [7. Property, Plant and Equipment, Net](index=81&type=section&id=7.%20PROPERTY,%20PLANT%20AND%20EQUIPMENT,%20NET) Presents the company's property, plant, and equipment, net of accumulated depreciation, and related expenses Property, Plant and Equipment, Net (in thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :------- | :----------- | :----------- | | Gross PP&E | $68,749 | $66,055 | | Accumulated depreciation | $(21,389) | $(14,920) | | Total PP&E, net | $47,360 | $51,135 | Depreciation, Depletion and Amortization Expense (in thousands) | Year | Expense | | :--- | :------ | | 2023 | $7,720 | | 2022 | $8,219 | - Finance lease assets within PP&E increased in 2023, primarily due to the Sale-Leaseback Transaction[459](index=459&type=chunk) [8. Accrued Expenses and Other Current Liabilities](index=81&type=section&id=8.%20ACCRUED%20EXPENSES%20AND%20OTHER%20CURRENT%20LIABILITIES) Lists the components of accrued expenses and other current liabilities as of year-end Accrued Expenses and Other Current Liabilities (in thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :------- | :----------- | :----------- | | Accrued compensation and benefits | $2,096 | $2,522 | | Interest accrual | $1,214 | $108 | | Freight, custom and duty accrual | $1,040 | $1,022 | | Goods in transit accrual | $360 | $1,172 | | Income tax accrual | $0 | $451 | | Other accrued liabilities | $4,819 | $7,933 | | Total | $9,529 | $13,208 | [9. Debt](index=82&type=section&id=9.%20DEBT) Details the company's debt obligations, including the Term Loan and Revolving Credit Facility, and associated terms Total Debt (in thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :------- | :----------- | :----------- | | Term Loan (net) | $118,241 | $118,608 | | Other | $160 | $160 | | Total Debt | $118,401 | $118,768 | | Current portion of long-term debt | $2,989 | $1,307 | | Long-term debt (net) | $115,412 | $117,461 | - The Term Loan, with an outstanding principal of **$122.5 million** as of December 31, 2023, was amended in June 2023 to replace LIBOR with SOFR-based rates, maturing in October 2028[463](index=463&type=chunk)[468](index=468&type=chunk) - The effective interest rate for the Term Loan was **11.55% in 2023** and **8.30% in 2022**[464](index=464&type=chunk) - A Sale-Leaseback Transaction in January 2023 triggered a Term Loan reinvestment provision, classifying **$1.7 million** as current debt for a potential prepayment offer in 2024[465](index=465&type=chunk)[467](index=467&type=chunk) - The Revolving Credit Facility's maximum commitment was reduced to **$55 million**, maturing in June 2026, with no outstanding borrowings as of December 31, 2023[470](index=470&type=chunk)[477](index=477&type=chunk) - The company was in compliance with all debt covenants as of December 31, 2023[468](index=468&type=chunk)[475](index=475&type=chunk) [10. Stockholders' Equity](index=84&type=section&id=10.%20STOCKHOLDERS'%20EQUITY) Provides information on the company's common stock, authorized shares, and changes in stockholders' equity - As of December 31, 2023, there were **45,789,890 shares of common stock outstanding**, with **300,000,000 shares authorized**[481](index=481&type=chunk) - Each common stock holder is entitled to one vote per share, with no pre-emptive, redemption, subscription, or conversion rights[481](index=481&type=chunk) - No Investor Warrants or Placement Agent Warrants were outstanding as of December 31, 2023[483](index=483&type=chunk)[484](index=484&type=chunk) [11. Stock-Based Compensation](index=85&type=section&id=11.%20STOCK-BASED%20COMPENSATION) Describes the company's equity incentive plans and the activity and expense related to restricted stock units, performance stock units, and stock options - The company maintains three equity incentive plans (2018, 2019, 2020 Plans), with the 2020 Plan serving as successor and having **1,400,453 shares available for grant** as of December 31, 2023[485](index=485&type=chunk) Restricted Stock Unit (RSU) Activity | Metric | Dec 31, 2023 | Dec 31, 2022 | | :----- | :----------- | :----------- | | Balance (RSUs) | 1,242,210 | 992,633 | | Granted (RSUs) | 1,091,726 | N/A | | Vested (RSUs) | (779,412) | N/A | | Forfeited (RSUs) | (62,737) | N/A | | Stock-based compensation expense (in thousands) | $4,502 | $7,638 | Performance Stock Unit (PSU) Activity | Metric | Dec 31, 2023 | Dec 31, 2022 | | :----- | :----------- | :----------- | | Balance (PSUs) | 921,182 | 96,246 | | Granted (PSUs) | 1,141,543 | N/A | | Vested (PSUs) | (25,894) | N/A | | Forfeited (PSUs) | (290,713) | N/A | | Stock-based compensation expense (in thousands) | $300 | $355 | Stock Option Activity | Metric | Dec 31, 2023 | Dec 31, 2022 | | :----- | :----------- | :----------- | | Outstanding Options | 571,359 | 670,026 | | Exercisable Options | 554,685 | N/A | | Stock-based compensation expense (in thousands) | $273 | $361 | - The company anticipates a majority of PSUs outstanding as of December 31, 2023, will forfeit in 2024 due to not meeting performance conditions[497](index=497&type=chunk) [12. Income Taxes](index=88&type=section&id=12.%20INCOME%20TAXES) Details the company's income tax benefit, effective tax rate, deferred tax assets/liabilities, and net operating loss carryforwards Loss Before Tax (in thousands) | Region | 2023 | 2022 | | :----- | :--- | :--- | | United States | $(58,068) | $(235,215) | | Foreign | $(6,958) | $(56,643) | | Total | $(65,026) | $(291,858) | Total Income Tax Benefit (in thousands) | Year | Income Tax Benefit | | :--- | :----------------- | | 2023 | $(213) | | 2022 | $(6,443) | - The effective tax rate for 2023 was **0.3%**, differing from the **21% federal statutory rate** primarily due to a full valuation allowance against U.S. deferred tax assets[298](index=298&type=chunk)[507](index=507&type=chunk) Net Deferred Tax Liability (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :----- | :----------- | :----------- | | Deferred tax assets | $75,442 | $64,591 | | Valuation allowance | $(55,742) | $(39,293) | | Total deferred tax assets | $19,700 | $25,298 | | Total deferred tax liabilities | $(22,718) | $(27,983) | | Net deferred tax liability | $(3,018) | $(2,685) | - As of December 31, 2023, the company had U.S. federal NOL carryforwards of **$153.3 million** (expiring from 2037, with **$140 million indefinite**) and state NOLs of **$113.1 million** (expiring from 2027)[506](index=506&type=chunk) - NOL carryforwards are subject to Section 382 limitations due to an ownership change at IPO, but the annual limitation is not expected to cause expiration before utilization[508](index=508&type=chunk) [13. Commitments and Contingencies](index=91&type=section&id=13.%20COMMITMENTS%20AND%20CONTINGENCIES) Outlines the company's purchase commitments and legal contingencies, assessing their potential financial impact - The company enters into purchase commitments with suppliers for favorable pricing in exchange for minimum inventory purchases[511](index=511&type=chunk) - Management does not expect current legal claims to have a material adverse effect on the consolidated financial position, results of operations, cash flows, or future earnings[512](index=512&type=chunk) [14. Fair Value Measurements](index=91&type=section&id=14.%20FAIR%20VALUE%20MEASUREMENTS) Presents fair value measurements for financial instruments, including cash, leases, and the Term Loan - Contingent consideration for Heavy 16 and Aurora Innovations acquisitions was measured at Level 3 fair value, with all amounts settled by July 2022[513](index=513&type=chunk) - A nonrecurring impairment loss of **$2.6 million** was recorded on a note receivable in 2022, based on Level 3 fair value measurement of collateral[515](index=515&type=chunk) Fair Value of Financial Instruments (in thousands) | Instrument | Fair Value Hierarchy Level | Dec 31, 2023 Carrying Amount | Dec 31, 2023 Estimated Fair Value | Dec 31, 2022 Carrying Amount | Dec 31, 2022 Estimated Fair Value | | :--------- | :----------------------- | :----------------------------- | :-------------------------------- | :----------------------------- | :-------------------------------- | | Cash and cash equivalents | Level 1 | $30,312 | $30,312 | $21,291 | $21,291 | | Finance leases | Level 3 | $9,688 | $9,688 | $1,904 | $1,904 | | Term Loan | Level 2 | $122,500 | $98,000 | $123,750 | $105,188 | [Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure](index=93&type=section&id=Item%209.%20CHANGES%20IN%20AND%20DISAGREEMENTS%20WITH%20ACCOUNTANTS%20ON%20ACCOUNTING%20AND%20FINANCIAL%20DISCLOSURE) The company reported no changes in or disagreements with accountants on accounting and financial disclosure - There are no changes in or disagreements with accountants on accounting and financial disclosure[521](index=521&type=chunk) [Item 9A. Controls and Procedures](index=93&type=section&id=Item%209A.%20CONTROLS%20AND%20PROCEDURES) Management, with CEO and CFO participation, concluded that the company's disclosure controls and procedures were effective as of December 31, 2023, and internal control over financial reporting was also effective, providing reasonable assurance regarding financial reporting reliability - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[522](index=522&type=chunk) - Management assessed and concluded that internal control over financial reporting was effective as of December 31, 2023[524](index=524&type=chunk)[525](index=525&type=chunk) - No changes in internal control over financial reporting materially affected or are reasonably likely to materially affect internal control over financial reporting during the period[526](index=526&type=chunk) [Item 9B. Other Information](index=93&type=section&id=Item%209B.%20OTHER%20INFORMATION) No director or officer adopted, modified, or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement during the three months ended December 31, 2023 - No director or officer adopted, modified, or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement during Q4 2023[527](index=527&type=chunk) [Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections](index=93&type=section&id=Item%209C.%20DISCLOSURE%20REGARDING%20FOREIGN%20JURISDICTIONS%20THAT%20PREVENT%20INSPECTIONS) This item is not applicable to the company - Disclosure regarding foreign jurisdictions that prevent inspections is not applicable[528](index=528&type=chunk) [PART III](index=94&type=section&id=PART%20III) [Item 10. Directors, Executive Officers and Corporate Governance](index=94&type=section&id=Item%2010.%20DIRECTORS,%20EXECUTIVE%20OFFICERS%20AND%20CORPORATE%20GOVERNANCE) This section provides information on the company's executive officers and directors as of February 29, 2024, including key executive officers William Toler (Chairman & CEO), B. John Lindeman (EVP & CFO), Kevin O'Brien (Chief Accounting Officer), and Mark Parker (EVP), and a Board of Directors with diverse expertise Executive Officers and Directors as of February 29, 2024 | Name | Position | | :--- | :------- | | William Toler | Chairman of the Board and Chief Executive Officer | | B. John Lindeman | Executive Vice President and Chief Financial Officer | | Kevin O'Brien | Chief Accounting Officer | | Mark Parker | Executive Vice President | | Patrick Chung | Director | | Susan P. Peters | Director, Chairperson of Compensation Committee | | Renah Persofsky | Director, Chairperson of Nominating and Corporate Governance Committee | | Richard D. Moss | Director, Chairperson of Audit Committee and Mergers and Acquisitions Committee | | Melisa Denis | Director | - William Toler has over 35 years of executive leadership experience, including as CEO of Hostess Brands[534](index=534&type=chunk) - B. John Lindeman brings over 25 years of finance and leadership experience, previously serving as CFO of Calavo Growers, Inc[535](index=535&type=chunk) - Kevin O'Brien has 20 years of accounting experience, including as Chief Accounting Officer of CPI Card Group Inc[536](index=536&type=chunk)[537](index=537&type=chunk) - Mark Parker has over 30 years of experience in sales and marketing, and leading complex integration projects[538](index=538&type=chunk) [Item 11. Executive Compensation](index=96&type=section&id=Item%2011.%20EXECUTIVE%20COMPENSATION) The information regarding executive compensation is incorporated by reference from the company's 2024 Proxy Statement - Executive compensation information is incorporated by reference from the 2024 Proxy Statement[545](index=545&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=96&type=section&id=Item%2012.%20SECURITY%20OWNERSHIP%20OF%20CERTAIN%20BENEFICIAL%20OWNERS%20AND%20MANAGEMENT%20AND%20RELATED%20STOCKHOLDER%20MATTERS) The information regarding security ownership of certain beneficial owners and management, and related stockholder matters, is incorporated by reference from the company's 2024 Proxy Statement - Security ownership information is incorporated by reference from the 2024 Proxy Statement[546](index=546&type=chunk) [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=96&type=section&id=Item%2013.%20CERTAIN%20RELATIONSHIPS%20AND%20RELATED%20TRANSACTIONS,%20AND%20DIRECTOR%20INDEPENDENCE) The information regarding certain relationships and related transactions, and director independence, is incorporated by reference from the company's 2024 Proxy Statement - Information on certain relationships and related transactions, and director independence, is incorporated by reference from the 2024 Proxy Statement[547](index=547&type=chunk) [Item 14. Principal Accounting Fees and Services](index=96&type=section&id=Item%2014.%20PRINCIPAL%20ACCOUNTING%20FEES%20AND%20SERVICES) The information regarding principal accounting fees and services is incorporated by reference from the company's 2024 Proxy Statement - Information on principal accounting fees and services is incorporated by reference from the 2024 Proxy Statement[548](index=548&type=chunk) [PART IV](index=97&type=section&id=PART%20IV) [Item 15. Exhibits, Financial Statement Schedules](index=97&type=section&id=Item%2015.%20EXHIBITS,%20FINANCIAL%20STATEMENT%20SCHEDULES) This section lists all exhibits and financial statement schedules filed as part of the Annual Report on Form 10-K, including various agreements, corporate documents, equity incentive plans, and certifications - This section includes an index to consolidated financial statements and a comprehensive list of exhibits filed with the Annual Report on Form 10-K[550](index=550&type=chunk)[551](index=551&type=chunk)[552](index=552&type=chunk) - Exhibits include stock purchase agreements, credit and guaranty agreements, corporate charter documents, equity incentive plans, and certifications[553](index=553&type=chunk)[554](index=554&type=chunk)[555](index=555&type=chunk) [Item 16. Form 10-K Summary](index=100&type=section&id=Item%2016.%20FORM%2010-K%20SUMMARY) This item is not applicable and contains no summary - Form 10-K Summary is not applicable[557](index=557&type=chunk)

[Financial Performance Summary](index=1&type=section&id=Hydrofarm%20Holdings%20Group%20Announces%20Fourth%20Quarter%20and%20Full%20Year%202023%20Results) [Fourth Quarter 2023 Highlights](index=1&type=section&id=Fourth%20Quarter%202023%20Highlights%20vs.%20Prior%20Year%20Period%3A) Q4 2023 net sales decreased to $47.2 million, but profitability significantly improved with positive gross profit and narrowed net loss Q4 2023 vs. Q4 2022 Financial Highlights | Metric | Q4 2023 | Q4 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $47.2M | $61.5M | -23.2% | | Gross Profit (Loss) | $8.4M | $(0.5)M | Improvement | | Gross Profit Margin | 17.9% | (0.8)% | +18.7 p.p. | | Adjusted Gross Profit | $11.5M | $9.0M | +27.8% | | Adjusted Gross Profit Margin | 24.3% | 14.7% | +9.6 p.p. | | Net Loss | $(15.2)M | $(35.3)M | Improvement | | Adjusted EBITDA | $(0.6)M | $(8.4)M | Improvement | [Full Year 2023 Highlights](index=1&type=section&id=Fiscal%20Year%202023%20Highlights%20vs.%20Prior%20Year%3A) FY2023 net sales declined to $226.6 million, yet operational improvements yielded positive Adjusted EBITDA and Free Cash Flow, significantly reducing net loss Full Year 2023 vs. 2022 Financial Highlights | Metric | FY 2023 | FY 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $226.6M | $344.5M | -34.2% | | Gross Profit | $37.6M | $29.3M | +28.3% | | Gross Profit Margin | 16.6% | 8.5% | +8.1 p.p. | | Adjusted Gross Profit | $55.0M | $48.2M | +14.1% | | Adjusted Gross Profit Margin | 24.3% | 14.0% | +10.3 p.p. | | Net Loss | $(64.8)M | $(285.4)M | Improvement | | Adjusted EBITDA | $0.3M | $(21.2)M | Improvement | | Free Cash Flow | $2.8M | $13.8M (from reconciliation) | -79.7% | [Management Commentary](index=1&type=section&id=Management%20Commentary) Management noted restructuring and cost-saving initiatives achieved positive Adjusted EBITDA and Free Cash Flow in 2023, with more savings expected in 2024 - Restructuring and cost savings efforts led to **positive Adjusted EBITDA** and **Free Cash Flow** in 2023[6](index=6&type=chunk) - The company improved margins, increased its cash balance, and decreased inventory levels through aggressive working capital management[6](index=6&type=chunk) - Revenue base became more diverse through penetration into non-US/Canada geographies and non-cannabis CEA applications[6](index=6&type=chunk) - A second phase of the restructuring strategy is underway, focused on the durables business, with expectations of additional cost savings in 2024[6](index=6&type=chunk) [Detailed Financial Analysis](index=3&type=section&id=Detailed%20Financial%20Analysis) [Fourth Quarter 2023 Financial Results](index=3&type=section&id=Fourth%20Quarter%202023%20Financial%20Results) Q4 2023 net sales fell to $47.2 million due to volume decline and price/mix impact, but gross profit significantly improved, and net loss was reduced - Net sales decreased to **$47.2 million**, primarily due to an **18.7% decline** in sales volume related to oversupply in the cannabis industry and a **4.5% decrease** in price/mix[8](index=8&type=chunk) - Gross profit increased to **$8.4 million** (**17.9% margin**) due to lower restructuring charges, a higher proportion of proprietary brand sales, lower freight costs, and improved productivity[10](index=10&type=chunk) - SG&A expense decreased to **$19.9 million**, and Adjusted SG&A fell to **$12.0 million**, primarily due to reduced compensation costs, lower accounts receivable reserves, and decreased professional fees[10](index=10&type=chunk) - The company initiated a second phase of its restructuring plan, incurring **$1.3 million** in charges in Q4 2023, mainly for non-cash inventory write-downs related to facility consolidations[9](index=9&type=chunk) [Balance Sheet, Liquidity and Cash Flow](index=3&type=section&id=Balance%20Sheet%2C%20Liquidity%20and%20Cash%20Flow) As of December 31, 2023, Hydrofarm maintained a strong cash position and compliance with debt covenants, generating positive Free Cash Flow for the full year - As of December 31, 2023, the Company had **$30.3 million** in cash and approximately **$22 million** of available borrowing capacity on its Revolving Credit Facility[11](index=11&type=chunk) - The company was in compliance with debt covenants as of December 31, 2023, and maintained a zero balance on its Revolving Credit Facility throughout 2023[11](index=11&type=chunk) Cash Flow Summary | Metric | Q4 2023 | Full Year 2023 | | :--- | :--- | :--- | | Cash from Operating Activities | $(1.6)M | $7.0M | | Capital Expenditures | $(0.2)M | $(4.2)M | | Free Cash Flow | $(1.7)M | $2.8M | [Full Year 2024 Outlook](index=4&type=section&id=Full%20Year%202024%20Outlook) The company anticipates positive Adjusted EBITDA and Free Cash Flow in 2024, driven by continued cost savings and working capital management, despite projected net sales decline Full Year 2024 Guidance | Metric | Outlook | | :--- | :--- | | Net Sales | Decrease low to high teens % | | Adjusted EBITDA | Positive | | Free Cash Flow | Positive | | Capital Expenditures | Approx. $4.0M to $5.0M | - The 2024 outlook is based on several assumptions[13](index=13&type=chunk)[17](index=17&type=chunk) - **Improved Adjusted Gross Profit Margin:** Driven by cost savings from restructuring and an expectation of minimal non-restructuring inventory reserves[17](index=17&type=chunk) - **Reduced Adjusted SG&A:** Resulting from the full-year benefit of 2023 headcount reductions and lower professional, facilities, and insurance expenses[17](index=17&type=chunk) - **Positive Free Cash Flow Generation:** Aided by reductions in inventory and net working capital[17](index=17&type=chunk) [Financial Statements](index=7&type=section&id=Financial%20Statements) [Condensed Consolidated Statements of Operations](index=7&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS) For FY2023, the company significantly reduced its net loss to $(64.8) million, driven by increased gross profit and reduced operating expenses, despite lower net sales Consolidated Statements of Operations (in thousands) | Metric | Twelve months ended Dec 31, 2023 | Twelve months ended Dec 31, 2022 | | :--- | :--- | :--- | | Net sales | $226,581 | $344,501 | | Gross profit | $37,612 | $29,336 | | Selling, general and administrative | $87,314 | $118,604 | | Impairments | $— | $192,328 | | Loss from operations | $(49,702) | $(281,596) | | Net loss | $(64,813) | $(285,415) | | Net loss per share, diluted | $(1.42) | $(6.35) | [Condensed Consolidated Balance Sheets](index=8&type=section&id=CONDENSED%20CONSOLIDATED%20BALANCE%20SHEETS) As of December 31, 2023, total assets decreased to $507.6 million, primarily due to reduced inventories, while cash and cash equivalents increased Consolidated Balance Sheets (in thousands) | Metric | December 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $30,312 | $21,291 | | Inventories | $75,354 | $111,398 | | Total current assets | $128,066 | $154,948 | | Total assets | $507,643 | $573,559 | | **Liabilities and Stockholders' Equity** | | | | Total current liabilities | $37,652 | $41,605 | | Long-term debt | $115,412 | $117,461 | | Total liabilities | $217,033 | $223,678 | | Total stockholders' equity | $290,610 | $349,881 | [Reconciliation of Non-GAAP Measures](index=9&type=section&id=RECONCILIATION%20OF%20NON-GAAP%20MEASURES) [Reconciliation of Adjusted Gross Profit](index=9&type=section&id=Reconciliation%20of%20Adjusted%20Gross%20Profit) Adjusted Gross Profit for FY2023 increased to $55.0 million (24.3% margin), driven by adjustments for depreciation and restructuring expenses Reconciliation of Adjusted Gross Profit (in thousands) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | :--- | | Gross Profit (GAAP) | $8,449 | $(473) | $37,612 | $29,336 | | Restructuring expenses | $1,263 | $7,466 | $10,664 | $7,466 | | **Adjusted Gross Profit (Non-GAAP)** | **$11,468** | **$9,034** | **$55,015** | **$48,182** | | Adjusted Gross Profit Margin | 24.3% | 14.7% | 24.3% | 14.0% | [Reconciliation of Adjusted SG&A](index=9&type=section&id=Reconciliation%20of%20Adjusted%20SG%26A) Adjusted SG&A for FY2023 was reduced to $54.7 million, primarily due to adjustments for depreciation, stock-based compensation, and restructuring expenses Reconciliation of Adjusted SG&A (in thousands) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | :--- | | SG&A (GAAP) | $19,872 | $26,197 | $87,314 | $118,604 | | Depreciation, depletion and amortization | $(6,233) | $(6,551) | $(25,491) | $(35,157) | | Stock-based compensation | $(1,057) | $(1,709) | $(5,114) | $(8,543) | | **Adjusted SG&A (Non-GAAP)** | **$12,018** | **$17,416** | **$54,749** | **$69,375** | | Adjusted SG&A as % of net sales | 25.5% | 28.3% | 24.2% | 20.1% | [Reconciliation of Adjusted EBITDA](index=10&type=section&id=Reconciliation%20of%20Adjusted%20EBITDA) The company achieved positive Adjusted EBITDA of $0.3 million for FY2023, a significant turnaround from a loss in the prior year Reconciliation of Adjusted EBITDA (in thousands) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | :--- | | Net loss (GAAP) | $(15,215) | $(35,268) | $(64,813) | $(285,415) | | Depreciation, depletion and amortization | $7,910 | $8,312 | $32,075 | $41,527 | | Restructuring expenses | $1,467 | $7,687 | $11,269 | $7,687 | | Stock-based compensation | $1,057 | $1,709 | $5,114 | $8,543 | | Impairments | $— | $— | $— | $192,328 | | **Adjusted EBITDA (Non-GAAP)** | **$(550)** | **$(8,382)** | **$266** | **$(21,193)** | [Reconciliation of Free Cash Flow](index=10&type=section&id=Reconciliation%20of%20Free%20Cash%20Flow) For FY2023, the company generated positive Free Cash Flow of $2.8 million from operating activities less capital expenditures Reconciliation of Free Cash Flow (in thousands) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | :--- | | Net cash from operating activities (GAAP) | $(1,585) | $6,499 | $7,044 | $21,989 | | Capital expenditures (GAAP) | $(159) | $(1,116) | $(4,215) | $(8,229) | | **Free Cash Flow (Non-GAAP)** | **$(1,744)** | **$5,383** | **$2,829** | **$13,760** | [Definitions of Non-GAAP Measures](index=11&type=section&id=Definitions%20of%20Non-GAAP%20Measures) The company defines non-GAAP measures to provide a clearer view of ongoing operational performance by excluding certain variable or non-recurring items - **Adjusted EBITDA:** Defined as net loss excluding interest expense, taxes, D&A, stock-based compensation, restructuring charges, and other non-cash or infrequent costs[35](index=35&type=chunk) - **Adjusted Gross Profit:** Defined as gross profit excluding D&A, restructuring charges, and other non-cash or infrequent costs[36](index=36&type=chunk) - **Adjusted SG&A:** Defined as SG&A excluding D&A, stock-based compensation, restructuring charges, and other non-cash or infrequent costs[38](index=38&type=chunk) - **Free Cash Flow:** Defined as Net cash from (used in) operating activities less capital expenditures for property, plant and equipment[41](index=41&type=chunk)

Financial Performance - Total consolidated net sales for the three months ended September 30, 2023, were $54.168 million, a decrease of 27% compared to $74.155 million for the same period in 2022[59]. - For the nine months ended September 30, 2023, total consolidated net sales were $179.397 million, down from $283.040 million in the same period of 2022, representing a decline of 37%[59]. - Net sales for Q3 2023 were $54.2 million, a decrease of $20.0 million, or 27.0% compared to Q3 2022[142]. - Net sales for the nine months ended September 30, 2023, were $179.4 million, a decrease of $103.6 million, or 36.6% compared to the same period in 2022[142]. - The 27.0% decrease in net sales for Q3 2023 was attributed to a 22% decline in volume of products sold and a 5% decrease in price and mix of products sold[143]. - Net loss for the nine months ended September 30, 2023, was $(49.6) million, a significant improvement of $200.5 million compared to $(250.1) million in the same period in 2022[141]. - Loss from operations for Q3 2023 was $(16.2) million, compared to $(20.3) million in Q3 2022, reflecting a 20.1% improvement[141]. Restructuring and Impairment - The company recorded a goodwill impairment charge of $189.572 million as of June 30, 2022, reducing the goodwill balance to zero due to a decline in market value and customer demand[70]. - The company recorded a net restructuring benefit of $0.2 million for Q3 2023, while net pre-tax charges for the nine months ended September 30, 2023, were $2.0 million[134]. - Total costs incurred relating to the first phase of the Restructuring Plan since its commencement were $6.4 million for inventory markdowns and $3.2 million for facility relocations[134]. - Estimated pre-tax charges for the second phase of the Restructuring Plan were $7.8 million, primarily related to non-cash raw material inventory write-downs[135]. - The company anticipates annualized cost savings of approximately $1.5 million from the restructuring efforts[135]. Cash Flow and Liquidity - Net cash from operating activities was $8.6 million for the nine months ended September 30, 2023, driven by a $11.7 million net cash inflow from a reduction in working capital[157]. - Net cash used in investing activities was $4.1 million for the nine months ended September 30, 2023, compared to $7.4 million for the same period in 2022[159]. - Net cash from financing activities was $6.6 million for the nine months ended September 30, 2023, primarily driven by $8.6 million of proceeds from a Sale-Leaseback Transaction[160]. - The company had cash and cash equivalents of $32.5 million as of September 30, 2023, compared to $21.3 million at December 31, 2022[175]. - Approximately $28 million was available to borrow under the Revolving Credit Facility as of September 30, 2023[173]. Assets and Liabilities - The company’s property, plant, and equipment, net, was $104.774 million as of September 30, 2023, compared to $116.400 million as of December 31, 2022[59]. - Total inventories decreased to $80,101 as of September 30, 2023, from $111,398 as of December 31, 2022, reflecting a 28% reduction[78]. - The total lease liabilities as of September 30, 2023, amounted to $68,278, slightly up from $67,302 as of December 31, 2022[82]. - As of September 30, 2023, total debt amounted to $118,464, a decrease from $118,768 as of December 31, 2022, reflecting a reduction of approximately 0.26%[86]. - The outstanding principal balance on the Term Loan was $122,813, a slight decrease from $123,750 as of December 31, 2022[91]. Stock-Based Compensation - The Company granted 1,091,726 Restricted Stock Units (RSUs) during the nine months ended September 30, 2023, with a weighted average grant date fair value of $1.19[113]. - The total unamortized stock-based compensation cost related to unvested RSUs was $3,022, with a weighted-average recognition period of 1.29 years as of September 30, 2023[113]. - The Company recognized $1,073 and $3,501 of total stock-based compensation expense for RSUs for the three and nine months ended September 30, 2023, respectively[113]. - The balance of Performance Stock Units (PSUs) as of September 30, 2023, was 928,070, with a weighted average grant date fair value of $1.77[115]. Taxation - The Company recorded an income tax expense of $89 for the three months ended September 30, 2023, representing an effective tax rate of (0.4)%[118]. - The Company recorded an income tax benefit of $82 for the nine months ended September 30, 2023, representing an effective income tax rate of 0.2%[118]. Compliance and Governance - The Company is in compliance with all covenants related to the Term Loan and Revolving Credit Facility as of September 30, 2023[92][97]. - There were no changes in internal control over financial reporting that materially affected the company's controls during the reporting period[186].

Hydrofarm Holdings Group, Inc (NASDAQ:HYFM) Q2 2023 Earnings Conference Call August 9, 2023 4:30 PM ET Company Participants Anna Kate Heller - Investor Relations Bill Toler - Chairman and Chief Executive Officer John Lindeman - Chief Financial Officer Conference Call Participants Andrew Carter - Stifel Peter Grom - UBS Bill Chappell - Truist Securities Jesse Redmond - Water Tower Research Operator Good day, ladies and gentlemen and thank you for standing by. Welcome to the Hydrofarm Holdings Group Second Qu ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) Commission File Number: 001-39773 Hydrofarm Holdings Group, Inc. (Exact name of registrant as specified in its charter) (State or other jurisdiction of incorporation or organization) Delaware 81-4895761 (I.R.S. Employer Identification Number) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTIO ...

Hydrofarm Holdings Group, Inc. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For transition period from to Commission File Number: 001-39773 (Exact name of registrant as specified in its charter) (State or other jurisdiction of incorpo ...

Financial Data and Key Metrics Changes - Net sales for Q4 2022 were $61.5 million, down from $110.4 million in the prior year period, with a 46% decline in organic sales volume [24][27] - Adjusted gross profit decreased to $9 million (14.7% of net sales) from $23.3 million (21.1% of net sales) in the previous year [25] - Adjusted EBITDA decreased to a loss of $8.4 million in Q4 from a profit of $4.9 million in the prior year [26] Business Line Data and Key Metrics Changes - Proprietary brands increased to over 55% of total sales in Q4, but margin contribution was diluted due to discounted lighting products [24] - Commercial sales represented approximately 40% of total sales for the full year 2022, up from 25% in the prior year [24] Market Data and Key Metrics Changes - Year-over-year sales declines improved in Q4 from Q3 in several mature states, including Oklahoma, Colorado, Oregon, Washington, Michigan, and Maine [24] - US cannabis dispensary inventory in 2023 is below the average inventory in 2022, with prices stabilizing in many markets [12] Company Strategy and Development Direction - The company is focused on becoming a leaner, more nimble, diverse, and profitable business through restructuring initiatives, including consolidating product portfolios and reducing headcount by over 30% [11][23] - The long-term outlook remains bullish, with expectations for a return to growth in the second half of 2023 driven by improved access to cannabis and higher quality branded products [12][24] Management's Comments on Operating Environment and Future Outlook - Management noted stabilization in average daily sales from November 2022 through February 2023, with positive signals from industry metrics [12] - The company expects to generate positive free cash flow for the full year 2023, despite not expecting it in Q1 due to seasonal cash flow nature [15] Other Important Information - The company recorded pre-tax charges of approximately $7.7 million in Q4 due to restructuring initiatives, with expected annualized cost savings of approximately $7 million [25] - Cash balance improved to $21.3 million as of December 31, 2022, with total liquidity estimated at approximately $61.3 million [26] Q&A Session Questions and Answers Question: Impact of product margin and inventory drawdown - Management indicated that the majority of the $26 million inventory drawdown in Q4 was related to lighting products, with expectations to work through remaining inventory in Q1 [17][18] Question: Clarification on debt capacity and liquidity - Management confirmed a liquidity position of approximately $60 million, with the majority of debt not maturing until 2028, indicating confidence in liquidity [32] Question: Stabilization in average daily sales and growth expectations - Management noted that the industry was trending down until October 2022, but began to show improvement from November 2022 onwards, with cautious optimism for growth in the second half of 2023 [37] Question: Commentary on newer states and market dynamics - Management acknowledged that while some newer states have not performed as expected, others like Missouri and Louisiana are showing positive trends [40] Question: Health of core consumers and growers - Management expressed concerns about the health of growers but noted that there is potential for stabilization as the market adjusts [41] Question: Ongoing pricing adjustments and inventory management - Management indicated that while there are still pricing concessions in Q1, they expect to see low single-digit positive pricing for the remainder of the year [51]

[FORM 10-K Cover Page](index=1&type=section&id=FORM%2010-K%20Cover%20Page) This section serves as the official cover page for the company's annual report on Form 10-K [DOCUMENTS INCORPORATED BY REFERENCE](index=2&type=section&id=DOCUMENTS%20INCORPORATED%20BY%20REFERENCE) Certain content from the 2023 annual shareholder meeting proxy statement is incorporated by reference into Part III of this 10-K report - Certain content from the company's 2023 annual shareholder meeting proxy statement has been incorporated by reference into Part III of this 10-K annual report, with the proxy statement to be filed within 120 days after the fiscal year ended December 31, 2022[8](index=8&type=chunk) [TABLE OF CONTENTS](index=3&type=section&id=TABLE%20OF%20CONTENTS) This section provides an organized overview of the report's structure and content [SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS](index=4&type=section&id=SPECIAL%20NOTE%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) This report contains forward-looking statements regarding business strategies, financial performance, and objectives, subject to various risks and uncertainties - This annual report contains forward-looking statements, as defined by the Private Securities Litigation Reform Act of 1995, concerning business strategies, future operating results, financial condition, objectives, and expectations, excluding historical facts[18](index=18&type=chunk) - Forward-looking statements are identified by words such as "believe," "may," "will," "potentially," "estimate," "continue," "anticipate," "intend," "could," "would," "project," "plan," "expect," but not all forward-looking statements contain these words[19](index=19&type=chunk) - Forward-looking statements are subject to risks, uncertainties, and assumptions described in the "Risk Factors" section and elsewhere in this annual report, where actual results may differ materially from projections, and the company undertakes no obligation to publicly update or revise any forward-looking statements unless required by law[21](index=21&type=chunk) PART I [Item 1. BUSINESS](index=6&type=section&id=Item%201.%20BUSINESS) Hydrofarm Holdings Group, Inc. is a leading North American manufacturer and distributor of controlled environment agriculture equipment and supplies [Introduction](index=6&type=section&id=Introduction) Hydrofarm is a leading independent manufacturer and distributor of controlled environment agriculture equipment and supplies with over 40 years of history - Hydrofarm is a leading independent manufacturer and distributor of controlled environment agriculture (CEA) equipment and supplies, primarily serving the United States and Canadian markets[26](index=26&type=chunk) - The company's mission is to empower growers by providing products that enhance the quality, efficiency, consistency, and speed of cultivation projects[26](index=26&type=chunk) Key Financial Data | Metric | Fiscal Year 2022 | CAGR (2005-2022) | | :--- | :--- | :--- | | Net Sales | $345 million | Approx. 15% | [How We Serve Our Customers](index=6&type=section&id=How%20We%20Serve%20Our%20Customers) The company serves customers by offering a comprehensive range of innovative CEA products and superior distribution and service capabilities - The company's customer value proposition is based on two pillars: offering the best selection of CEA products and being the gold standard in distribution and service[28](index=28&type=chunk) - The company offers thousands of innovative, branded CEA products, including lighting solutions, growing media, nutrients, equipment, and supplies[29](index=29&type=chunk) - Approximately **two-thirds of net sales** come from consumable products (growing media, nutrients, and supplies), with the remainder from durable products (lighting and equipment)[30](index=30&type=chunk) - Most of the company's products are either self-manufactured or supplied through exclusive/preferred brand relationships, which typically offer higher gross margins and competitive advantages[30](index=30&type=chunk) - The company operates six U.S. distribution centers and two Canadian distribution centers in North America, aiming to reach most customers within 48 hours, and also has a distribution center in Spain and a sourcing team in China[32](index=32&type=chunk)[33](index=33&type=chunk) - The company has multiple manufacturing facilities in the U.S. and Canada, producing nutrients, soils, LED lights, and other products[34](index=34&type=chunk) [The CEA Industry](index=8&type=section&id=The%20CEA%20Industry) The Controlled Environment Agriculture industry is a significant global market segment with substantial growth projections, despite current cannabis market oversupply CEA Industry Market Size and Growth Forecast | Metric | 2022 Market Size | 2022-2027 CAGR | | :--- | :--- | :--- | | Global CEA Industry | Approx. $75 billion | 19% | | Global Hydroponics System Market | Approx. $12.1 billion | 16% | | North American Hydroponics System Market | Approx. $3.7 billion | 16% | - The company's historical growth (approx. **15% CAGR**) has primarily been driven by the growth of the CEA market (including cannabis) and its innovative branded product and service capabilities[37](index=37&type=chunk) - Despite agricultural oversupply in the CEA cannabis market, the company believes the industry still has future growth prospects, especially as cannabis legalization progresses, with the U.S. cannabis market projected to reach approximately **$52.6 billion by 2026**, representing a **12.4% CAGR from 2022-2026**[38](index=38&type=chunk)[40](index=40&type=chunk) - Advantages of CEA include: higher product safety, quality, and consistency; more reliable, climate-independent year-round crop supply; lower pest and disease risk and reduced pesticide needs; less water and pesticide use; and reduced operating costs through efficient LED lighting, precise nutrient and water systems, and automation technologies[43](index=43&type=chunk) [Increased Focus on Environmental, Social, and Governance ("ESG") Issues](index=10&type=section&id=Increased%20Focus%20on%20Environmental%2C%20Social%2C%20and%20Governance%20%28%22ESG%22%29%20Issues) The company's CEA markets support ESG trends by promoting resource conservation, supply chain transparency, and superior agricultural performance - The company's CEA end markets support ESG trends by conserving resources, enhancing food supply chain transparency and safety, and offering superior performance compared to traditional agriculture[45](index=45&type=chunk) - The company published its inaugural ESG report on January 11, 2022, highlighting its environmental, health, and safety priorities and sustainable governance practices for fiscal year 2021[45](index=45&type=chunk) [Our Competitive Strengths](index=10&type=section&id=Our%20Competitive%20Strengths) The company maintains a leading market position in the CEA industry through its extensive proprietary product portfolio, manufacturing capabilities, and customer-centric service - The company is a leading independent manufacturer and distributor of CEA equipment and supplies in the U.S. and Canada, and one of the two major consolidators in the industry[46](index=46&type=chunk) - The management team is highly experienced, including Chairman and CEO Bill Toler (former Hostess Brands CEO) and CFO B. John Lindeman (former Calavo Growers CFO)[47](index=47&type=chunk) - The company boasts over **35 internally developed or acquired proprietary brands** and more than **60 preferred brands**, with approximately **75% of sales** derived from these brands, and proprietary brands typically yield higher gross margins[48](index=48&type=chunk) - The company operates **seven internal manufacturing facilities** in North America, covering nutrient blending, soil mixing, LED light manufacturing, and peat harvesting[49](index=49&type=chunk) - The company has established distribution relationships with approximately **400 suppliers** and maintains a broad geographic footprint in North America, with six U.S. distribution centers covering most customers within 48 hours and two Canadian distribution centers serving the entire Canadian market[50](index=50&type=chunk)[51](index=51&type=chunk) - The company serves large commercial end-users by restructuring its commercial sales team, adopting a solutions-oriented approach, and utilizing the DMI program to provide consulting, technical expertise, and timely delivery to wholesalers[52](index=52&type=chunk) [Our Growth and Productivity Strategies](index=11&type=section&id=Our%20Growth%20and%20Productivity%20Strategies) The company pursues growth by leveraging the expanding CEA market, enhancing product offerings, empowering its wholesale network, and executing strategic acquisitions - The company benefits from the growth of the CEA market, including widespread adoption by commercial growers and consumers, as well as growth in cannabis and other end markets[53](index=53&type=chunk) - In 2021, the company significantly expanded its proprietary product portfolio and manufacturing capabilities through the acquisition of five companies: Heavy 16, House & Garden, Aurora Innovations, Greenstar Plant Products, and Innovative Growers Equipment[54](index=54&type=chunk)[55](index=55&type=chunk) - The company invests in research and development to improve products and manufacturing processes, having launched new product lines such as PhotoBio LED lighting equipment[54](index=54&type=chunk) - The company is reorganizing its sales efforts to focus on the CEA food and floral markets, as well as the consumer gardening market[56](index=56&type=chunk) - The company empowers its wholesale network to serve large commercial growers by utilizing product experts and technical sales teams, offering cultivation space savings and timely inventory access[55](index=55&type=chunk) - The company views acquisitions as a critical component of its overall corporate strategy, aiming to accelerate sales and EBITDA growth by acquiring companies with competitive market positions, strong brands, high recurring revenue, and high-profit potential[57](index=57&type=chunk) [Effects of COVID-19 on Our Business](index=12&type=section&id=Effects%20of%20COVID-19%20on%20Our%20Business) The COVID-19 pandemic continues to impact global supply chains and costs, potentially affecting demand and operational efficiency - The COVID-19 pandemic has had a significant and ongoing negative impact on global society, workplaces, economies, and healthcare systems[59](index=59&type=chunk) - The company has implemented business continuity plans and adheres to government safety protocols, with current operations unaffected by COVID-19-related facility closures, lockdowns, or travel restrictions[60](index=60&type=chunk) - The pandemic may lead to supply chain disruptions, hindered manufacturing of proprietary products, and difficulties in obtaining raw materials, which could adversely affect the business, operating results, and financial condition[60](index=60&type=chunk) - The company has experienced and may continue to experience extended supply chain lead times and increased shipping costs, with the COVID-19 pandemic being a primary cause[60](index=60&type=chunk) - Management believes COVID-19 may have positively impacted demand in 2020 and 2021 due to stay-at-home orders, but could negatively impact growth rates in 2022 due to agricultural oversupply[61](index=61&type=chunk) [Government Regulation](index=13&type=section&id=Government%20Regulation) The company's products are subject to various state and federal regulations, with indirect impacts from the evolving legal landscape of the cannabis industry - The company's growing media and nutrient product lines in the U.S. are subject to state registration requirements, with organic products audited by the California Department of Food and Agriculture and the Organic Materials Review Institute, and pesticide products regulated by the Environmental Protection Agency (EPA)[62](index=62&type=chunk) - Canadian operations and product lines are regulated by the Canadian Food Inspection Agency, organic certified products by EcoCert, and peat harvesting operations by provincial and municipal agencies[62](index=62&type=chunk) - The company sells products through third-party retailers and distributors and does not directly sell to cannabis growers in countries where cannabis sales and use are prohibited, including the United States[66](index=66&type=chunk) - U.S. federal law still classifies cannabis as a Schedule I controlled substance, conflicting with state legalization laws, and changes in federal enforcement policy could have a material adverse effect on the cannabis industry and the company's business[75](index=75&type=chunk)[78](index=78&type=chunk) - The company's credit agreement with JPMorgan restricts it from directly selling products to the cannabis industry[86](index=86&type=chunk) [Intellectual Property](index=17&type=section&id=Intellectual%20Property) The company protects its proprietary brands and technologies through a portfolio of patents and trademarks, which are crucial for competitive advantage - The company holds **15 U.S. design patents**, **2 U.S. utility patents**, **4 foreign patents and designs**, **104 registered U.S. trademarks**, and **114 registered foreign trademarks**[87](index=87&type=chunk) - The company's **21 issued patents** cover grow lighting and hydroponic systems and components, with expiration dates ranging from 2023 to 2035[87](index=87&type=chunk) - Intellectual property helps the company establish proprietary branded products, which typically generate higher sales margins than distributed products[87](index=87&type=chunk) - The company may need to enforce intellectual property and proprietary rights through litigation or defend against third-party infringement claims, which could result in significant costs and diversion of resources[88](index=88&type=chunk) - Due to the federal illegality of cannabis, companies involved in cannabis-related businesses may face restrictions in obtaining and enforcing patents and trademarks, which could impact the company's ability to protect its brands and proprietary technology[90](index=90&type=chunk) [Human Capital](index=17&type=section&id=Human%20Capital) The company's success relies on effective human resource management, including talent acquisition, development, and retention, amidst recent workforce reductions - As of December 31, 2022, the company had approximately **498 full-time employees globally**, a reduction from **709 as of December 31, 2021**[92](index=92&type=chunk) - In 2022, the company implemented layoffs and temporary employee furloughs to improve operational efficiency, with potential for further reductions in the future[92](index=92&type=chunk) - The company is committed to open and healthy communication, fostering an inclusive work environment to cultivate an innovative and team-oriented culture[91](index=91&type=chunk) - The company provides a comprehensive benefits platform, including an employee assistance program, and maintains a robust Environmental Health and Safety (EHS) management system, evaluating performance through an EHS scorecard[93](index=93&type=chunk)[94](index=94&type=chunk)[95](index=95&type=chunk) [Corporate Structure](index=18&type=section&id=Corporate%20Structure) Hydrofarm Holdings Group, Inc., incorporated in Delaware, operates through subsidiaries and functions as a "smaller reporting company" with simplified disclosure requirements - The company was incorporated in Delaware in January 2017 and conducts business through its wholly-owned direct and indirect subsidiaries, having supplied indoor gardening products since 1977[96](index=96&type=chunk)[97](index=97&type=chunk) - The company qualifies as a "smaller reporting company" and has elected to comply with simplified disclosure requirements in this 10-K annual report[99](index=99&type=chunk) [Item 1A. RISK FACTORS](index=19&type=section&id=Item%201A.%20RISK%20FACTORS) The company faces diverse risks related to business operations, debt, third-party dependencies, the cannabis industry, intellectual property, and capital stock [Summary of Risk Factors](index=19&type=section&id=Summary%20of%20Risk%20Factors) The company's business is exposed to various risks and uncertainties across operational, financial, regulatory, and market domains - Risks facing the company's business include: proprietary brand risks, technological advancements, competitive pressures, asset impairment, inventory management, supply chain disruptions, international operations, environmental regulations, ESG practices, reputational damage, IT system disruptions, tariffs, taxes, capital needs, and product liability litigation[103](index=103&type=chunk) - Risks related to indebtedness include: substantial debt, ability to service debt, credit agreement restrictions (including prohibition on direct sales to the cannabis industry), and the impact of LIBOR to SOFR transition[103](index=103&type=chunk) - Risks related to third parties include: reliance on limited suppliers, difficulties or price increases in raw material procurement, and potential competition from suppliers directly entering the retail market[103](index=103&type=chunk)[107](index=107&type=chunk) - Risks related to the cannabis industry include: conflicts between federal and state regulations, new California regulations, products affected by changing laws, federal illegality of cannabis, indirect involvement in the cannabis industry potentially harming reputation, and money laundering and financial record regulations[104](index=104&type=chunk)[107](index=107&type=chunk) - Risks related to intellectual property include: unpredictability of patent issuance and enforcement, inadequate intellectual property protection, reliance on licenses, infringement claims, and costly intellectual property disputes[105](index=105&type=chunk)[107](index=107&type=chunk) - Risks related to capital stock include: issuance of securities senior to common stock potentially causing dilution, anti-takeover provisions in corporate charter and Delaware law, risks as a holding company, Nasdaq listing standards, influence of large shareholders, and common stock price volatility[105](index=105&type=chunk)[107](index=107&type=chunk) [Risks Relating to Our Business](index=21&type=section&id=Risks%20Relating%20to%20Our%20Business) The company's business operations are exposed to risks including product recalls, intense competition, asset impairment, supply chain disruptions, and regulatory compliance - Proprietary branded products may face product recalls, supply chain disruptions, and intellectual property protection challenges, potentially affecting relationships with suppliers[109](index=109&type=chunk) - Competitors may develop more effective or commercially attractive products, or sell at lower prices, making it difficult for the company to increase revenue and market share[110](index=110&type=chunk) - Failure to successfully develop new products or improve existing ones, or to meet consumer demand in a timely manner, could adversely affect market share[111](index=111&type=chunk) - As of December 31, 2022, the company's balance sheet included **$300.4 million in net intangible assets**, **$111.4 million in inventory**, **$51.1 million in net property, plant, and equipment**, and **$65.3 million in operating lease right-of-use assets**[114](index=114&type=chunk) - In 2022, the company recorded a **$189.6 million goodwill impairment**, reducing goodwill carrying value to zero, and recorded an **$18.5 million inventory obsolescence reserve**[114](index=114&type=chunk) - Poor inventory management could lead to obsolete inventory, decreased value, and significant write-downs, impacting operating results and financial condition[116](index=116&type=chunk) - Peat harvesting operations are susceptible to weather changes and climate change, potentially leading to lower-than-expected harvests[118](index=118&type=chunk)[119](index=119&type=chunk) - Product defects or recalls could damage brand image, lead to decreased sales and profitability, and deplete financial resources[120](index=120&type=chunk) - Adverse economic and industry conditions (especially in the U.S. and Canada) could lead to reduced consumer and business spending, affecting the company's revenue, profitability, and cash flow[121](index=121&type=chunk) - Inflation and rising prices for raw materials, freight, labor, and energy could increase product manufacturing costs, negatively impacting profit margins and financial performance if not passed on to customers[122](index=122&type=chunk) - Acquisitions, strategic alliances, and investments may lead to operational difficulties, equity dilution, increased debt, contingent liabilities, and goodwill impairment, affecting financial condition and operating results[123](index=123&type=chunk)[124](index=124&type=chunk)[125](index=125&type=chunk)[126](index=126&type=chunk) - Many of the company's facilities operate under long-term non-cancelable leases, and failure to renew or exit leases could result in additional costs or adversely affect the business[128](index=128&type=chunk)[129](index=129&type=chunk) - Disruptions in freight carrier operations, increased shipping costs, or transportation delays could disrupt the supply chain, negatively impacting profit margins and financial performance[130](index=130&type=chunk) - International operations face risks including currency exchange rate fluctuations, restrictions on dividend remittances, compliance costs, increased fuel and import fees, inflation, changes in economic conditions, changes in trade and investment laws, and inadequate intellectual property protection[131](index=131&type=chunk) - Manufacturing risks from acquisitions include equipment failures, contamination, labor issues, raw material shortages, natural disasters, safety, and certification issues, potentially leading to product defects, recalls, and liability claims[132](index=132&type=chunk) - Failure to comply with environmental, health, and safety laws and regulations could result in significant costs, fines, or product recalls, damaging the company's reputation and financial condition[133](index=133&type=chunk)[134](index=134&type=chunk)[135](index=135&type=chunk)[136](index=136&type=chunk) - Supply chain disruptions or failure to optimize the supply chain could adversely affect the business, financial condition, and operating results[137](index=137&type=chunk)[138](index=138&type=chunk) - Increased scrutiny of ESG practices by customers, regulators, and investors may increase compliance costs or introduce new risks[139](index=139&type=chunk) - Climate change may affect facility availability, lead to increased costs for complying with climate change legislation and related regulations, and potentially impact financial performance[140](index=140&type=chunk)[141](index=141&type=chunk) - Corporate and social responsibility and reputational risks could affect employee engagement, willingness of customers, suppliers, and partners to collaborate, and have a material adverse effect on the business[142](index=142&type=chunk) - As a public company, the company will continue to incur higher legal, accounting, Sarbanes-Oxley Act compliance, insurance, and other expenses, potentially diverting management's attention[143](index=143&type=chunk)[144](index=144&type=chunk)[145](index=145&type=chunk)[146](index=146&type=chunk)[147](index=147&type=chunk)[148](index=148&type=chunk) - The company's election to use simplified disclosure as a "smaller reporting company" may lead investors to perceive its securities as less attractive, affecting the stock trading market and price volatility[149](index=149&type=chunk) - The company previously identified material weaknesses in internal control, which may recur in the future, and failure to maintain effective internal controls could affect the accuracy and timeliness of financial reporting, harming investor confidence[150](index=150&type=chunk)[151](index=151&type=chunk)[152](index=152&type=chunk)[153](index=153&type=chunk)[154](index=154&type=chunk) - The impact of the COVID-19 pandemic is unpredictable and could lead to reduced consumer spending, operational disruptions, supply chain constraints, and increased transportation costs, negatively affecting operating results and financial condition[155](index=155&type=chunk)[156](index=156&type=chunk)[157](index=157&type=chunk)[158](index=158&type=chunk) - Reputational damage (e.g., product recalls, government investigations, allegations of unsafe products) could have a material adverse effect on business operations, sales, and costs[159](index=159&type=chunk)[160](index=160&type=chunk) - Marketing activities may be unsuccessful, leading to significant resource investment without achieving sales growth[161](index=161&type=chunk) - IT system failures or cyberattacks could lead to operational disruptions, data breaches, negative publicity, and legal actions, materially adversely affecting the business and reputation[162](index=162&type=chunk)[163](index=163&type=chunk)[164](index=164&type=chunk)[165](index=165&type=chunk)[166](index=166&type=chunk) - Estimates and judgments in financial statement preparation may be inaccurate, leading to potential litigation and impaired financial performance[167](index=167&type=chunk) - Potential tariffs or global trade wars could increase product costs, affecting product competitiveness[168](index=168&type=chunk) - Changes in tax regulations, new tax laws, or additional tax burdens could affect profitability and cash flow[169](index=169&type=chunk)[170](index=170&type=chunk) - The company's ability to utilize net operating loss (NOL) carryforwards may be limited, for example, due to ownership changes (Section 382) restricting annual utilization amounts[171](index=171&type=chunk)[172](index=172&type=chunk) - If unable to obtain sufficient additional capital to fund operations, the company may be forced to limit the scope of its expansion[173](index=173&type=chunk) - Product liability lawsuits could result in significant liabilities, damage brand image, and deplete financial resources[174](index=174&type=chunk)[175](index=175&type=chunk) [Risks Relating to Our Indebtedness](index=33&type=section&id=Risks%20Relating%20to%20Our%20Indebtedness) The company's substantial debt and restrictive credit agreements may limit operational flexibility, increase financial vulnerability, and impact market competitiveness - The company carries a substantial amount of debt and may incur additional debt in the future, which could limit cash flow for other business areas, affect debt servicing ability, and increase vulnerability to economic downturns and adverse industry conditions[177](index=177&type=chunk) - The JPMorgan credit agreement contains various financial and operational covenants that restrict the company's flexibility regarding debt, liens, dividend payments, investments, asset dispositions, mergers, and related-party transactions[177](index=177&type=chunk) - Violation of any covenant or failure to meet financial ratio tests could lead to debt default and accelerated repayment, materially adversely affecting the business, operating results, and financial condition[178](index=178&type=chunk) - The JPMorgan credit agreement prohibits the company from directly selling products to cannabis growers or retailers exclusively serving the cannabis industry, which may limit market options and affect competitiveness[179](index=179&type=chunk)[180](index=180&type=chunk) - Most of the company's and its subsidiaries' assets are pledged under the JPMorgan credit agreement, and in case of default, JPMorgan has the right to exercise remedies, which could severely harm the company's business[181](index=181&type=chunk) - The transition from LIBOR to SOFR as an interest rate benchmark may result in higher borrowing costs and financial market disruptions, affecting the company's interest expense and earnings[182](index=182&type=chunk)[183](index=183&type=chunk)[184](index=184&type=chunk)[185](index=185&type=chunk) [Risks Relating to Third Parties](index=35&type=section&id=Risks%20Relating%20to%20Third%20Parties) The company faces risks from reliance on limited suppliers, global supply chain disruptions, and potential competition from its own suppliers - The company relies on a limited number of suppliers (e.g., for lighting ballasts), and disruptions in these relationships or their financial distress could lead to production interruptions, materially adversely affecting financial condition, operating results, and cash flow[187](index=187&type=chunk) - Global supply chain disruptions (e.g., COVID-19, labor disputes, natural disasters, trade sanctions, geopolitical tensions) could affect product supply, materially adversely impacting business operations, financial condition, and operating results[188](index=188&type=chunk)[189](index=189&type=chunk) - Operational disruptions at company or supplier facilities (e.g., fire, flood, disease outbreaks, acts of war) could severely impact product production and customer service capabilities, harming customer relationships, revenue, and financial condition[190](index=190&type=chunk) - Suppliers' inability to procure raw materials in a timely manner, in sufficient quantities, or at acceptable costs, or increases in raw material prices, could harm the company's product sales ability and cost structure[191](index=191&type=chunk)[192](index=192&type=chunk)[193](index=193&type=chunk)[194](index=194&type=chunk) - If suppliers directly enter the retail markets where the company operates and reduce sales through the company, it could materially adversely affect the company's product supply, reputation, and business[195](index=195&type=chunk) [Risks Relating to the Cannabis Industry](index=36&type=section&id=Risks%20Relating%20to%20the%20Cannabis%20Industry) The company is indirectly affected by the cannabis industry's evolving legal status, facing risks from federal illegality, regulatory changes, and public perception - The company sells products through third-party retailers and distributors, indirectly benefiting from the trend of cannabis legalization in the U.S. and Canada[196](index=196&type=chunk) - Cannabis remains classified as a Schedule I controlled substance under U.S. federal law, and changes in federal enforcement policy could negatively impact the company's revenue and operating results[197](index=197&type=chunk)[198](index=198&type=chunk)[205](index=205&type=chunk)[206](index=206&type=chunk) - Federal legal risks for cannabis industry participants include: inability to deduct expenses other than cost of goods sold under Section 280E of the Tax Code; limited intellectual property and proprietary rights; inability to access federal bankruptcy courts; restricted banking services; and difficulty obtaining insurance[199](index=199&type=chunk)[201](index=201&type=chunk)[202](index=202&type=chunk)[203](index=203&type=chunk)[204](index=204&type=chunk) - Cannabis industry regulations are constantly changing, which could lead to high compliance costs or changes in business plans for the company or its end-users[220](index=220&type=chunk) - Public perception of cannabis could affect industry success, and negative publicity, scientific research, or restrictive regulations could materially adversely impact the company's operating results, customer base, and financial results[222](index=222&type=chunk)[224](index=224&type=chunk)[225](index=225&type=chunk) - The JPMorgan credit agreement restricts the company from directly selling products to U.S. cannabis growers or retailers exclusively serving the U.S. cannabis industry[213](index=213&type=chunk)[219](index=219&type=chunk) [Risks Relating to Other Regulations](index=40&type=section&id=Risks%20Relating%20to%20Other%20Regulations) The company's products and operations are subject to various state, federal, and international regulations, including those for data privacy and environmental protection - Certain ingredients in the growing media and nutrient product lines are subject to state and other regulatory restrictions, which may affect the company's ability to sell these products[228](index=228&type=chunk) - The company's peat harvesting operations in Canada face increasing federal, provincial, and regional regulatory and environmental scrutiny[229](index=229&type=chunk) - The company is subject to U.S. state and foreign data privacy and security laws and regulations, such as CCPA, CPRA, and GDPR, and failure to comply could lead to reputational damage, legal actions, and significant fines[230](index=230&type=chunk)[231](index=231&type=chunk)[232](index=232&type=chunk)[233](index=233&type=chunk) - Compliance with or violations of environmental, health, and safety laws and regulations (including pesticide use) could result in significant costs and materially adversely affect the company's reputation, business, financial condition, and cash flow[235](index=235&type=chunk)[236](index=236&type=chunk) [Risks Relating to Our Intellectual Property](index=42&type=section&id=Risks%20Relating%20to%20Our%20Intellectual%20Property) The company faces challenges in protecting and enforcing its intellectual property, with risks of infringement, costly litigation, and reliance on third-party licenses - Changes in patent law or its interpretation could significantly impact the company's ability to protect technology and enforce intellectual property rights[237](index=237&type=chunk) - The company may be unable to adequately obtain, maintain, protect, or enforce its trademarks, patents, and other proprietary rights, leading to competitors copying technology or facing infringement claims[238](index=238&type=chunk)[239](index=239&type=chunk)[240](index=240&type=chunk)[241](index=241&type=chunk) - Failure to comply with government patent agency requirements for procedures, filings, and fee payments could result in the abandonment or invalidation of patents or patent applications[242](index=242&type=chunk) - The company may need to rely on third-party licenses, and inability to obtain or maintain these licenses in a timely manner could hinder product commercialization and harm the business[243](index=243&type=chunk)[244](index=244&type=chunk) - Third parties may initiate legal actions for intellectual property infringement, leading to the company incurring damages, being unable to offer certain products or services, or use certain brand names[245](index=245&type=chunk)[246](index=246&type=chunk) - Intellectual property disputes could lead to the company investing significant resources, diverting management's attention, and potentially affecting stock value[248](index=248&type=chunk) - If the company's owned or licensed trademarks and trade names are not adequately protected, it may be unable to establish brand recognition in target markets, adversely affecting the business[249](index=249&type=chunk)[250](index=250&type=chunk) - The protection of intellectual property and proprietary rights has limitations and may not fully safeguard the company's business or maintain its competitive advantage[251](index=251&type=chunk)[252](index=252&type=chunk)[254](index=254&type=chunk) [Risks Relating to Our Capital Stock](index=45&type=section&id=Risks%20Relating%20to%20Our%20Capital%20Stock) Risks related to capital stock include potential equity dilution, anti-takeover provisions, dividend policies, and stock price volatility - The company may issue debt or equity securities senior to common stock, leading to dilution of existing shareholders' ownership and potentially affecting the common stock market price[253](index=253&type=chunk)[255](index=255&type=chunk) - Anti-takeover provisions in the company's charter and Delaware law may make it more difficult for the company to be acquired and could prevent shareholders from replacing management[256](index=256&type=chunk)[257](index=257&type=chunk) - As a holding company, the company relies on subsidiary dividends to meet financial obligations, but may be subject to legal and contractual restrictions under the JPMorgan credit agreement and other agreements[258](index=258&type=chunk) - The company currently does not intend to pay dividends in the foreseeable future, and capital appreciation may be the sole source of future investment returns[259](index=259&type=chunk) - Failure to meet Nasdaq Global Select Market (Nasdaq) continued listing standards (e.g., minimum bid price) could result in common stock delisting, affecting market price and liquidity[260](index=260&type=chunk) - The company's largest shareholders will exert significant influence over company affairs for the foreseeable future, including matters requiring shareholder approval, potentially limiting the influence of other shareholders[261](index=261&type=chunk)[262](index=262&type=chunk) - Future sales of a large number of common shares could negatively impact the market price[263](index=263&type=chunk) - The market price of the company's common stock is highly volatile and influenced by various factors, potentially leading to investors losing part or all of their investment[264](index=264&type=chunk)[265](index=265&type=chunk) - The "corporate opportunity" doctrine in the company's charter does not apply to non-employee directors or shareholders, potentially leading to competition between the company and certain shareholders or directors, and loss of potentially advantageous transaction opportunities[266](index=266&type=chunk)[267](index=267&type=chunk) [General Risk Factors](index=49&type=section&id=General%20Risk%20Factors) General risks include challenges in talent retention, potential litigation, dilution from equity awards, and compliance with anti-corruption laws - The company's future success depends on its ability to attract, recruit, train, and retain qualified management, operational, and other personnel, facing risks of talent competition and loss of key individuals[269](index=269&type=chunk) - In 2022, the company conducted layoffs and temporary employee furloughs, with potential for further reductions, which could lead to unexpected personnel attrition and decreased employee morale, affecting business plan execution[270](index=270&type=chunk) - Litigation could result in significant liabilities, diversion of resources, and negative publicity, materially adversely affecting the business, financial condition, and operating results[271](index=271&type=chunk) - The exercise of options could lead to significant dilution of existing shareholders' ownership and voting power, and increase the number of common shares available for resale in the public market, thereby negatively impacting the stock price[272](index=272&type=chunk)[273](index=273&type=chunk) - Future issuances of additional securities (including common stock, warrants, or other convertible securities) could dilute existing shareholders' equity and negatively impact the common stock market price[274](index=274&type=chunk)[275](index=275&type=chunk) - Failure to comply with the U.S. Foreign Corrupt Practices Act could result in severe penalties and other adverse consequences[276](index=276&type=chunk) - Anti-takeover provisions in Delaware law may make it more difficult for a third party to acquire the company, even if beneficial to shareholders[277](index=277&type=chunk) [Item 1B. UNRESOLVED STAFF COMMENTS](index=50&type=section&id=Item%201B.%20UNRESOLVED%20STAFF%20COMMENTS) There are no unresolved staff comments in this report - No unresolved staff comments[278](index=278&type=chunk) [Item 2. PROPERTIES](index=51&type=section&id=Item%202.%20PROPERTIES) The company operates numerous leased and owned distribution and manufacturing facilities across the United States and Canada - The company operates multiple distribution centers and manufacturing facilities in the United States and Canada[280](index=280&type=chunk)[281](index=281&type=chunk) Key Facilities List | Location | Area (Square Feet) | Ownership Type | | :--- | :--- | :--- | | **Distribution Centers:** | | | | Fairfield, CA, U.S. | 175,000 | Leased | | Fontana, CA, U.S. | 147,000 | Leased | | Gresham, OR, U.S. | 98,000 | Leased | | Denver, CO, U.S. | 87,000 | Leased | | Shoemakersville, PA, U.S. | 303,000 | Leased | | New Hudson, MI, U.S. | 126,000 | Leased | | Langley, BC, Canada | 157,000 | Leased | | Cambridge, ON, Canada | 53,000 | Leased | | **Manufacturing Facilities:** | | | | Paramount, CA, U.S. | 25,000 | Leased | | Arcata, CA, U.S. | 115,000 | Leased | | Eugene, OR, U.S. | 242,000 | Owned (later sold and leased back) | | Goshen, NY, U.S. | 21,000 | Owned | | Sycamore, IL, U.S. | 316,000 | Leased | | Edmonton, AB, Canada | 26,000 | Leased | | Langley, BC, Canada | 79,000 | Leased | | Zaragoza, Spain | N/A | Distribution Center | - In January 2023, the company's property in Eugene, Oregon, was sold and leased back through a sale-leaseback transaction for a 15-year term, with annual rent starting at approximately **$0.7 million**[281](index=281&type=chunk) [Item 3. LEGAL PROCEEDINGS](index=51&type=section&id=Item%203.%20LEGAL%20PROCEEDINGS) The company is involved in various legal proceedings in the ordinary course of business, none of which are expected to have a material adverse effect - The company may be involved in various legal actions and proceedings in the ordinary course of business[282](index=282&type=chunk) - Currently, there are no legal actions or claims identified that are expected to have a material adverse effect on the business, financial condition, or operating results[282](index=282&type=chunk) [Item 4. MINE SAFETY DISCLOSURES](index=51&type=section&id=Item%204.%20MINE%20SAFETY%20DISCLOSURES) This item is not applicable to the company's operations - Not applicable[283](index=283&type=chunk) PART II [Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES](index=52&type=section&id=Item%205.%20MARKET%20FOR%20REGISTRANT%27S%20COMMON%20EQUITY%2C%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) The company's common stock trades on Nasdaq, with approximately 79 registered shareholders, and no dividends have been declared or paid - The company's common stock has traded on The Nasdaq Global Select Market under the symbol "HYFM" since December 10, 2020[284](index=284&type=chunk) - As of March 1, 2023, the company had approximately **79 registered holders** of its common stock[285](index=285&type=chunk) - The company has never declared or paid any dividends on its common stock and plans to retain all available funds and future earnings for business operations and expansion, with no dividends expected in the foreseeable future[286](index=286&type=chunk) - The company has not sold any unregistered securities recently nor made any issuer purchases of equity securities[287](index=287&type=chunk)[288](index=288&type=chunk) [Item 6. RESERVED](index=52&type=section&id=Item%206.%20RESERVED) This item is reserved - This item is reserved[289](index=289&type=chunk) [Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=53&type=section&id=Item%207.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) The company experienced adverse financial performance in 2022 due to market oversupply, leading to restructuring efforts and significant impairment charges [Company Overview](index=53&type=section&id=Company%20Overview) Hydrofarm Holdings Group, Inc. is a leading independent manufacturer and distributor of controlled environment agriculture equipment and supplies in North America - The company is a leading independent manufacturer and distributor of controlled environment agriculture (CEA) equipment and supplies, primarily serving the United States and Canadian markets[292](index=292&type=chunk) - The company's products are used for cultivating cannabis, flowers, fruits, plants, vegetables, grains, and herbs in controlled environments, allowing end-users to manage key growing variables[293](index=293&type=chunk) - The company serves commercial farmers and consumers through over **2,000 wholesale customer accounts**, including specialty hydroponic retailers, commercial distributors, greenhouse builders, garden centers, hardware stores, and e-commerce retailers[293](index=293&type=chunk) [Market Conditions](index=53&type=section&id=Market%20Conditions) Adverse market conditions in 2022, driven by agricultural oversupply, led to declining profitability, operating losses, and significant impairment charges - The company's financial performance in 2022 was poor, primarily due to agricultural oversupply leading to decreased market demand, resulting in reduced profitability and operating losses[294](index=294&type=chunk) - The company has initiated a restructuring plan to streamline operations, reduce costs, and improve efficiency, with key measures including optimizing the product and brand portfolio (removing approximately **one-third of products** and **one-fifth of brands**) and consolidating manufacturing and distribution centers[295](index=295&type=chunk)[296](index=296&type=chunk) - In 2022, the company recorded a **$189.6 million goodwill impairment**, reducing the goodwill balance to zero, primarily due to deteriorating customer demand in the U.S. and Canada[297](index=297&type=chunk)[298](index=298&type=chunk) - In 2022, the company recorded an **$18.5 million inventory obsolescence reserve** (primarily for lighting products) and a **$2.9 million allowance for doubtful accounts and write-offs**[299](index=299&type=chunk) - The company expects to incur approximately **$1.7 million in additional restructuring charges in 2023** and anticipates that restructuring and related measures will result in approximately **$7 million in annual cost savings**[296](index=296&type=chunk) [Five Acquisitions Completed in 2021](index=54&type=section&id=Five%20Acquisitions%20Completed%20in%202021) In 2021, the company completed five strategic acquisitions, significantly expanding its proprietary brand portfolio and manufacturing capabilities - In 2021, the company completed five acquisitions of CEA product brand manufacturers, significantly expanding its proprietary brand product portfolio and manufacturing capabilities[301](index=301&type=chunk) - Acquisitions included: Heavy 16 (plant nutrients, May 2021), House & Garden (plant nutrients and fertilizers, June 2021), Aurora (soils, growing media, plant nutrients, July 2021), Greenstar Plant Products (horticultural products and solutions, August 2021), and Innovative Growers Equipment (horticultural benches, racks, and grow lights, November 2021)[302](index=302&type=chunk) - These proprietary brands typically yield higher gross margins than distributed brands[301](index=301&type=chunk) [Recent Financing Arrangements and Other Transactions](index=55&type=section&id=Recent%20Financing%20Arrangements%20and%20Other%20Transactions) The company executed several financing arrangements and transactions in 2021 and 2022, including a senior secured term loan and equity offerings - On October 25, 2021, the company entered into a **$125 million senior secured term loan**, with an interest rate of LIBOR (1.0% floor) plus 5.50% or an alternative base rate (2.0% floor) plus 4.50%, maturing on October 25, 2028[303](index=303&type=chunk) - On July 19, 2021, the company completed an investor warrant redemption, with **3,367,647 warrants exercised**, generating approximately **$56.8 million in gross proceeds**[303](index=303&type=chunk) - On May 3, 2021, the company completed a follow-on public offering, issuing and selling **5,526,861 shares of common stock**, generating approximately **$309.8 million in net proceeds**[303](index=303&type=chunk) - On March 29, 2021, the company entered into a JPMorgan revolving credit facility, initially with a **$50 million borrowing limit**, which was subsequently amended multiple times, reducing the maximum commitment to **$75 million** on December 22, 2022, and converting to a SOFR-based interest rate[303](index=303&type=chunk) [Effects of COVID-19 on Our Business](index=55&type=section&id=Effects%20of%20COVID-19%20on%20Our%20Business) The COVID-19 pandemic continues to impact global supply chains and costs, potentially affecting demand and operational efficiency - The COVID-19 pandemic has had a significant and ongoing negative impact on global society, workplaces, economies, and healthcare systems[304](index=304&type=chunk) - The company has implemented business continuity plans and adheres to government safety protocols, with current operations unaffected by COVID-19-related facility closures, lockdowns, or travel restrictions[304](index=304&type=chunk) - The pandemic may lead to supply chain disruptions, hindered manufacturing of proprietary products, and difficulties in obtaining raw materials, which could adversely affect the business, operating results, and financial condition[304](index=304&type=chunk) - The company has experienced and may continue to experience extended supply chain lead times and increased shipping costs, with the COVID-19 pandemic being a primary cause[304](index=304&type=chunk) - Management believes COVID-19 may have positively impacted demand in 2020 and 2021 due to stay-at-home orders, but could negatively impact growth rates in 2022 due to agricultural oversupply[306](index=306&type=chunk) [Components of Results of Operations](index=56&type=section&id=Components%20of%20Results%20of%20Operations) The company's operating results are primarily driven by net sales, cost of goods sold, and selling, general, and administrative expenses - Net sales are derived from the distribution and manufacturing of hydroponic equipment and supplies, including consumables and durables, and are affected by sales incentives and freight recoveries[307](index=307&type=chunk)[308](index=308&type=chunk) - Cost of goods sold primarily includes material costs, inbound and outbound freight, direct labor costs, manufacturing facility costs, depreciation, amortization, inventory reserves, restructuring charges, and certain acquisition and integration expenses[309](index=309&type=chunk) - Selling, general, and administrative (SG&A) expenses primarily include marketing and advertising, distribution facility costs, depreciation and amortization of other assets, certain acquisition and integration expenses, as well as salaries, benefits, stock-based compensation, and professional fees[310](index=310&type=chunk) [Results of Operations - Comparison of Years Ended December 31, 2022, and 2021](index=57&type=section&id=Results%20of%20Operations%20-%20Comparison%20of%20Years%20Ended%20December%2031%2C%202022%2C%20and%202021) In 2022, the company experienced a significant decline in net sales and gross profit, coupled with increased operating expenses and substantial impairment charges Operating Results Overview (2022 vs 2021) | Metric (in thousands) | 2022 | 2021 | Year-over-Year Change ($) | Year-over-Year Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | 344,501 | 479,420 | (134,919) | -28.1% | | Cost of Goods Sold | 315,165 | 377,934 | (62,769) | -16.6% | | Gross Profit | 29,336 | 101,486 | (72,150) | -71.1% | | Selling, General & Administrative Expenses | 118,604 | 104,185 | 14,419 | 13.8% | | Impairment | 192,328 | — | 192,328 | N/A | | Operating Loss | (281,596) | (2,699) | 278,897 | 10,333.3% | | Interest Expense | (10,958) | (2,138) | 8,820 | 412.5% | | Loss Before Income Taxes | (291,858) | (5,721) | 286,137 | 5,001.5% | | Income Tax Benefit | 6,443 | 19,137 | (12,694) | -66.3% | | Net (Loss) Income | (285,415) | 13,416 | (298,831) | -2,227.4% | - Net sales decreased by **28.1%**, primarily due to a **29.5% decline in product volume** (organic sales down **46.5%**, with 2021 acquired brands contributing **17.0% growth**), partially offset by a **1.7% increase in price and product mix**[314](index=314&type=chunk) - Gross profit decreased by **71.1%**, with gross margin falling from **21.2% to 8.5%**, mainly due to an **$18.5 million increase in inventory obsolescence reserves**, **$7.5 million in restructuring costs**, and higher freight and labor costs as a percentage of net sales[315](index=315&type=chunk) - Selling, general, and administrative (SG&A) expenses increased by **13.8%**, primarily due to a **$23.4 million increase in depreciation and amortization**, a **$2.9 million increase in allowance for doubtful accounts and write-offs**, a **$2.8 million increase in stock-based compensation**, and a **$2.1 million increase in compensation costs**[316](index=316&type=chunk) - In 2022, a **$189.6 million goodwill impairment** was recorded, along with a **$2.6 million impairment of notes receivable**[317](index=317&type=chunk) - Interest expense increased by **412.5% to $11 million**, primarily due to the term loan entered into in the fourth quarter of 2021 and rising interest rates throughout the year[318](index=318&type=chunk) - Income tax benefit decreased from **$19.1 million in 2021 to $6.4 million in 2022**, with the effective tax rate falling from **4.0% in 2021 to 2.2% in 2022**, mainly due to non-deductible goodwill impairment, increased valuation allowance on U.S. deferred tax assets, and the establishment of a valuation allowance on Canadian deferred tax assets[321](index=321&type=chunk) [Non-GAAP Financial Measures](index=59&type=section&id=Non-GAAP%20Financial%20Measures) The company uses Adjusted EBITDA as a non-GAAP financial measure to supplement GAAP results and provide additional insights into its operating performance - The company uses "Adjusted EBITDA" as a non-GAAP financial measure to supplement GAAP financial statements, helping investors assess the company's performance[323](index=323&type=chunk) - Adjusted EBITDA is defined as net (loss) income, excluding interest expense, income taxes, depreciation, amortization, stock-based compensation expense (including employer payroll taxes), and other non-cash, non-recurring, or unusual costs (such as restructuring, impairment, severance, acquisition and integration expenses)[325](index=325&type=chunk) Reconciliation of Adjusted EBITDA to Net (Loss) Income (in thousands) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net (Loss) Income (GAAP) | (285,415) | 13,416 | | Interest Expense | 10,958 | 2,138 | | Income Tax Benefit | (6,443) | (19,137) | | Distribution Center Exit Costs & Other | 1,412 | 2,641 | | Depreciation, Amortization | 41,527 | 14,934 | | Impairment | 192,328 | — | | Restructuring Charges | 7,687 | — | | Severance & Other | 1,224 | 297 | | Acquisition & Integration Expenses | 7,682 | 24,210 | | Other (Income) Expense, Net | (841) | 204 | | Stock-Based Compensation Expense | 8,543 | 5,750 | | Loss on Debt Extinguishment or Modification | 145 | 680 | | Investor Warrant Solicitation Fees | — | 1,949 | | **Adjusted EBITDA (Non-GAAP)** | **(21,193)** | **47,082** | | Percentage of Net Sales: | | | | Net (Loss) Income (GAAP) | (82.8)% | 2.8% | | Adjusted EBITDA (Non-GAAP) | (6.2)% | 9.8% | - Net (loss) income and Adjusted EBITDA in 2022 were negatively impacted by **$21.4 million in inventory and accounts receivable reserves** and related expenses[327](index=327&type=chunk) [Liquidity and Capital Resources](index=62&type=section&id=Liquidity%20and%20Capital%20Resources) In 2022, the company generated positive cash flow from operations, supported by working capital reductions, and expects sufficient liquidity for future needs Cash Flow Overview (in thousands) | Cash Flow Type | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash from Operating Activities | 21,989 | (45,067) | | Net Cash from Investing Activities | (8,487) | (468,184) | | Net Cash from Financing Activities | (20,200) | 464,707 | | Effect of Exchange Rate Changes | (395) | (27) | | Net Decrease in Cash, Cash Equivalents, and Restricted Cash | (7,093) | (48,571) | | Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | 28,384 | 76,955 | | Cash, Cash Equivalents, and Restricted Cash at End of Period | 21,291 | 28,384 | - Operating activities generated **$22 million in cash flow in 2022**, primarily due to a **$39.6 million decrease in working capital-related assets and liabilities**, including a **$57 million reduction in inventory** and a **$16.7 million reduction in accounts receivable**[339](index=339&type=chunk) - Investing activities used **$8.5 million in cash in 2022**, primarily for capital expenditures in property, plant, and equipment, including growth investments in Canadian peat harvesting operations and U.S. IGE manufacturing operations[341](index=341&type=chunk) - Financing activities used **$20.2 million in cash in 2022**, primarily for **$15.5 million in contingent consideration payments** (mainly from the Aurora acquisition) and **$1.3 million in term loan principal payments**[343](index=343&type=chunk) - The maximum commitment amount for the JPMorgan revolving credit facility was reduced from **$100 million to $75 million** on December 22, 2022, and converted to a SOFR-based interest rate[347](index=347&type=chunk) - As of December 31, 2022, the company was in compliance with all debt covenants, with approximately **$40 million available for borrowing** under the JPMorgan revolving credit facility[351](index=351&type=chunk)[352](index=352&type=chunk) - The company's net sales typically strengthen seasonally in the second and third fiscal quarters, and this pattern is expected to resume in 2023[358](index=358&type=chunk) - In January 2023, the company sold its Eugene, Oregon property through a sale-leaseback transaction, receiving **$8.6 million in cash**, which is planned for reinvestment in capital expenditures in 2023[360](index=360&type=chunk) [Critical Accounting Policies and Estimates](index=64&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) The company's financial statements rely on critical accounting policies and estimates, particularly for goodwill, long-lived assets, and inventory valuation - Goodwill is assessed for impairment annually in the fourth quarter, or on an interim basis if impairment indicators arise; on June 30, 2022, the company recorded a **$189.6 million goodwill impairment** due to a sustained decline in common stock market value and market conditions[364](index=364&type=chunk) - Long-lived tangible assets and finite-lived intangible assets are stated at cost and depreciated/amortized on a straight-line basis, with impairment reviews conducted when events or changes in circumstances indicate that the carrying amount may not be recoverable[365](index=365&type=chunk) - Inventory, including finished goods, work-in-process, and raw materials, is measured at the lower of cost or net realizable value, with reserves for excess and obsolete inventory based on assumptions about future demand, customer preferences, business strategies, and market conditions[367](index=367&type=chunk) - The company's strategic product consolidation involves removing approximately **one-third of products** and **one-fifth of brands**[367](index=367&type=chunk) [Recent accounting pronouncements](index=65&type=section&id=Recent%20accounting%20pronouncements) The company has reviewed recent accounting pronouncements and found no new standards relevant to its operations - The company has reviewed recently issued accounting pronouncements and found no new standards relevant to its operations[368](index=368&type=chunk) [Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=66&type=section&id=Item%207A.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company is primarily exposed to interest rate and foreign currency risks, with no significant hedging activities currently in place - The company is primarily exposed to interest rate risk, foreign currency risk, and inflation risk, with no significant exposure to commodity risk[369](index=369&type=chunk) - As of December 31, 2022, the company had **$124 million in variable-rate debt**, and a **100 basis point increase in interest rates** would increase annual interest expense by approximately **$1.2 million**[370](index=370&type=chunk) - The company currently does not hedge against interest rate risk but may consider it in the future[370](index=370&type=chunk) - The company faces foreign currency risk, primarily from fluctuations in the Canadian Dollar (CAD) and Euro (EUR) exchange rates, affecting sales, purchase transactions, and labor costs[371](index=371&type=chunk) - The company currently does not have any foreign currency forward contracts and does not anticipate entering into such contracts for trading or speculative purposes[371](index=371&type=chunk) [Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA](index=67&type=section&id=Item%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) This section presents the company's consolidated financial statements for 2022 and 2021, along with the independent auditor's reports and detailed notes [Report of Independent Registered Public Accounting Firm](index=68&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) Deloitte & Touche LLP issued an unqualified opinion on the company's consolidated financial statements, identifying inventory valuation as a key audit matter - Deloitte & Touche LLP has issued an unqualified opinion on the company's consolidated financial statements as of December 31, 2022, and 2021[377](index=377&type=chunk) - The auditors believe the financial statements are fairly presented in all material respects in accordance with U.S. Generally Accepted Accounting Principles[377](index=377&type=chunk) - Inventory valuation was identified as a key audit matter because, as of December 31, 2022, the excess and obsolete inventory reserve was **$15.7 million**, and management's estimates for future demand, customer preferences, and market conditions involve a high degree of judgment[382](index=382&type=chunk)[383](index=383&type=chunk) [Report of Independent Registered Public Accounting Firm (Internal Control)](index=70&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm%20%28Internal%20Control%29) Deloitte & Touche LLP issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2022 - Deloitte & Touche LLP has issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[387](index=387&type=chunk) - The auditors believe the company maintained effective internal control over financial reporting in all material respects, based on the criteria established in Internal Control—Integrated Framework (2013) issued by COSO[387](index=387&type=chunk) [Consolidated Balance Sheets](index=71&type=section&id=Consolidated%20Balance%20Sheets) As of December 31, 2022, the company's total assets and shareholder equity significantly decreased, primarily due to increased accumulated deficit and goodwill impairment Consolidated Balance Sheets Summary (in thousands) | Item | December 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | **Assets:** | | | | Cash and Cash Equivalents | 21,291 | 26,607 | | Restricted Cash | - | 1,777 | | Accounts Receivable, Net | 17,227 | 41,484 | | Inventories | 111,398 | 189,134 | | Prepaid Expenses and Other Current Assets | 5,032 | 9,760 | | **Total Current Assets** | **154,948** | **269,384** | | Property, Plant and Equipment, Net | 51,135 | 50,473 | | Operating Lease Right-of-Use Assets | 65,265 | 45,245 | | Goodwill | - | 204,868 | | Intangible Assets, Net | 300,366 | 314,819 | | Other Assets | 1,845 | 6,453 | | **Total Assets** | **573,559** | **891,242** | | **Liabilities:** | | | | Accounts Payable | 13,633 | 26,685 | | Accrued Expenses and Other Current Liabilities | 13,208 | 33,996 | | Deferred Revenue | 3,654 | 18,273 | | Current Lease Liabilities | 9,099 | 7,198 | | Current Portion of Long-Term Debt | 2,011 | 2,263 | | **Total Current Liabilities** | **41,605** | **88,415** | | Long-Term Lease Liabilities | 56,299 | 38,595 | | Long-Term Debt | 118,661 | 119,517 | | Deferred Tax Liabilities | 2,685 | 5,631 | | Other Long-Term Liabilities | 4,428 | 3,904 | | **Total Liabilities** | **223,678** | **256,062** | | **Stockholders' Equity:** | | | | Common Stock | 5 | 4 | | Additional Paid-in Capital | 783,042 | 777,074 | | Accumulated Other Comprehensive Loss | (7,235) | (1,382) | | Accumulated