Hydrofarm(HYFM) - 2024 Q2 - Quarterly Report

Part I Financial Statements Hydrofarm's financial statements detail its financial position and performance, showing decreased assets, continued net losses, and positive operating cash flow Condensed Consolidated Balance Sheets Total assets decreased to $463.4 million as of June 30, 2024, driven by reduced inventories and fixed assets, with liabilities and equity also declining Balance Sheet Summary | Balance Sheet Items | June 30, 2024 (In thousands) | December 31, 2023 (In thousands) | | :--- | :--- | :--- | | Total Current Assets | $111,655 | $128,066 | | Inventories | $58,719 | $75,354 | | Total Assets | $463,358 | $507,643 | | Total Current Liabilities | $35,482 | $37,652 | | Long-term debt | $114,948 | $115,412 | | Total Liabilities | $208,349 | $217,033 | | Total Stockholders' Equity | $255,009 | $290,610 | Condensed Consolidated Statements of Operations Net losses widened to $23.5 million and $36.1 million for the three and six months ended June 30, 2024, driven by declining sales and a significant asset disposition loss Operating Results Summary | Operating Results | Three Months Ended June 30, 2024 (In thousands) | Three Months Ended June 30, 2023 (In thousands) | Six Months Ended June 30, 2024 (In thousands) | Six Months Ended June 30, 2023 (In thousands) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $54,793 | $63,051 | $108,965 | $125,229 | | Gross profit | $10,851 | $14,473 | $21,776 | $25,854 | | Loss from operations | $(19,328) | $(8,995) | $(28,024) | $(22,045) | | Net loss | $(23,450) | $(12,865) | $(36,058) | $(29,714) | | Net loss per share (Basic & Diluted) | $(0.51) | $(0.28) | $(0.79) | $(0.66) | Condensed Consolidated Statements of Cash Flows Operating cash flow improved to $1.5 million for the six months ended June 30, 2024, driven by inventory reduction, with investing activities generating $2.3 million from asset sales Cash Flow Summary | Cash Flow Summary | Six Months Ended June 30, 2024 (In thousands) | Six Months Ended June 30, 2023 (In thousands) | | :--- | :--- | :--- | | Net cash from operating activities | $1,487 | $961 | | Net cash from (used in) investing activities | $2,280 | $(3,263) | | Net cash (used in) from financing activities | $(3,576) | $7,447 | | Net increase in cash and cash equivalents | $2 | $5,391 | | Cash and cash equivalents at end of period | $30,314 | $26,682 | Notes to the Condensed Consolidated Financial Statements The notes detail accounting policies, restructuring, asset dispositions, and debt facilities, highlighting the two-phase restructuring plan, significant asset sale loss, and debt covenant compliance - The company operates as a single reportable segment, aggregating its United States and Canada operations, involving the distribution and manufacture of Controlled Environment Agriculture (CEA) equipment and supplies[24][25] - The company is executing a two-phase Restructuring Plan, with the second phase focusing on U.S. manufacturing consolidation, incurring $9.2 million in non-cash and $1.1 million in cash charges through June 30, 2024[38] - On May 31, 2024, the company sold its Innovative Growers Equipment (IGE) assets for $8.7 million, resulting in an $11.5 million loss on asset disposition for the quarter[43][44] Debt Summary | Debt Summary | June 30, 2024 (In thousands) | December 31, 2023 (In thousands) | | :--- | :--- | :--- | | Term Loan - Principal | $120,218 | $122,500 | | Total debt | $116,518 | $118,401 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the 13% net sales decline due to agricultural oversupply, detailing restructuring efforts including an $11.5 million asset disposition loss, reduced SG&A, and maintained liquidity Market Conditions Financial results are adversely affected by agricultural oversupply, prompting a two-phase restructuring plan, including a significant asset sale and anticipated annual cost savings exceeding $2.0 million, though further charges may occur - Financial results are negatively impacted by an agricultural oversupply leading to decreased cultivation[110] - The company is implementing the second phase of its Restructuring Plan, focusing on U.S. manufacturing consolidation and including the sale of IGE durable equipment assets[112][114] - Additional restructuring charges in H2 2024 may exceed $2.0 million, with anticipated annual cost savings of over $2.0 million from these actions[115] Results of Operations Net sales fell 13.0% to $109.0 million, gross profit decreased, and SG&A expenses reduced, leading to a wider net loss of $36.1 million due to an $11.5 million asset disposition loss Operating Results Metrics | Metric (Six Months Ended June 30) | 2024 (In millions) | 2023 (In millions) | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $109.0M | $125.2M | -13.0% | | Gross Profit | $21.8M | $25.9M | -15.8% | | SG&A Expenses | $38.3M | $47.9M | -20.1% | | Net Loss | $(36.1M) | $(29.7M) | -21.4% | - The 13.0% decrease in net sales for H1 2024 was primarily due to an 11.1% decline in volume/mix, attributed to cannabis industry oversupply[120] - A $11.5 million Loss on asset disposition was recorded in Q2 2024 from the sale of durable equipment production assets[125] Liquidity and Capital Resources As of June 30, 2024, the company maintained $30.3 million in cash, generated $1.5 million from operations and $2.3 million from investing, and believes its liquidity is sufficient for the next twelve months, with a $120.2 million Term Loan outstanding - The company believes cash flow from operations, current cash levels, and Revolving Credit Facility availability will be adequate to support operations for the next twelve months[135] - As of June 30, 2024, the Term Loan outstanding principal was $120.2 million, and the company was in compliance with all debt covenants[140] - As of June 30, 2024, there were zero borrowings under the Revolving Credit Facility, with approximately $20 million available before triggering the minimum fixed charge coverage ratio covenant[144] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate, foreign currency, and inflation, with a 100 basis point interest rate increase on its $120.2 million variable-rate Term Loan raising annual interest expense by $1.1 million - The company is exposed to interest rate risk on its $120.2 million variable-rate Term Loan; a 100 basis point increase would raise annual interest expense by approximately $1.1 million[151] - The company is exposed to foreign currency risk, primarily from Canadian dollar (CAD) fluctuations, due to operations in CAD and Euro[152] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2024, with no material changes in internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2024[155] - No material changes occurred during the quarter affecting the company's internal control over financial reporting[157] Part II Legal Proceedings The company is not currently involved in any legal proceedings 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 that would have a material adverse effect on its business[159] Risk Factors A material change to risk factors is the potential delisting from Nasdaq due to failing the minimum $1.00 bid price requirement, with a compliance deadline of September 10, 2024 - A new material risk factor is the potential delisting from Nasdaq due to failure to meet the minimum $1.00 bid price requirement[160] - The company received a non-compliance notice from Nasdaq on March 14, 2024, with a grace period until September 10, 2024, to regain compliance[161] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported for the period - None[163] Other Information No other information to report for the period - None[165] Exhibits This section lists exhibits filed with the Form 10-Q, including equity incentive plan notices, the asset sale Purchase Agreement, and CEO/CFO certifications - Key exhibits filed include the Purchase Agreement dated May 10, 2024, with CM Fabrication, LLC, and CEO/CFO certifications pursuant to the Sarbanes-Oxley Act[168]