Hydrofarm(HYFM) - 2025 Q2 - Quarterly Report

EXPLANATORY NOTE REGARDING REVERSE STOCK SPLIT Hydrofarm Holdings Group, Inc. completed a 1-for-10 reverse stock split effective February 12, 2025, with all financial statements retroactively adjusted - Hydrofarm Holdings Group, Inc. completed a 1-for-10 reverse stock split effective February 12, 2025, with trading on Nasdaq Capital Market beginning February 13, 2025, under symbol "HYFM"[7] - The reverse stock split was approved by stockholders on June 6, 2024, and the board of directors approved the 1-for-10 ratio on February 6, 2025[8] - No fractional shares were issued; stockholders received cash payments in lieu of fractional shares. The number of authorized shares and par value remained unchanged[9] - All periods in the condensed consolidated financial statements, including net loss per share, have been retroactively adjusted to reflect the reverse stock split[10] SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements subject to various risks, including industry oversupply, price decreases, and regulatory changes, with no obligation to update - The report contains forward-looking statements regarding business strategy, future operating results, and financial position, identifiable by terms like "believe," "may," "will," "estimate," "expect," etc[14][15] - Key risks include industry oversupply, decreasing product prices, potential tariffs, asset impairment charges, liquidity concerns, ability to meet Nasdaq listing standards, and impacts of restructuring activities[15] - Other risks involve customer conditions, supply chain interruptions, regulatory changes (cannabis), public perception, lease obligations, reliance on key suppliers, technological advances, e-commerce execution, public company costs, acquisition success, marketing effectiveness, IT system breaches, indebtedness, third-party dependence, reputation, product price fluctuations, and competitive pressures[15][20] - Forward-looking statements are based on current expectations and projections and are subject to risks and uncertainties detailed in the "Risk Factors" section of the 2024 Annual Report; the company disclaims any obligation to update them[16] SPECIAL NOTE REGARDING USE OF TRADE NAMES AND TRADEMARKS The report uses "Hydrofarm" and other company trademarks, with third-party names not implying endorsement or relationship - "Hydrofarm" and other trade names/trademarks in the report are the company's property[18] - Use of other companies' trade names/trademarks does not imply endorsement, sponsorship, or any relationship with those companies[18] SPECIAL NOTE REGARDING CERTAIN TERMINOLOGY IN THIS ANNUAL REPORT ON FORM 10-Q The terms "Hydrofarm," "the Company," "we," "our," and "us" refer to Hydrofarm Holdings Group, Inc. and its subsidiaries - The terms "Hydrofarm," "the Company," "we," "our," and "us" refer to Hydrofarm Holdings Group, Inc. and its subsidiaries[19] PART I - FINANCIAL INFORMATION Item 1. Financial Statements This item includes the unaudited condensed consolidated financial statements, comprising the balance sheets, statements of operations, comprehensive loss, changes in stockholders' equity, and cash flows, along with their accompanying notes, providing a detailed financial overview for the reported periods Condensed Consolidated Balance Sheets This section details the company's financial position, presenting assets, liabilities, and stockholders' equity as of June 30, 2025, and December 31, 2024 | Metric | June 30, 2025 ($ in thousands) | December 31, 2024 ($ in thousands) | Change (2025 vs 2024) ($ in thousands) | | :-------------------------------- | :-------------- | :---------------- | :-------------------- | | Assets | | | | | Cash and cash equivalents | $10,991 | $26,111 | $(15,120) | | Accounts receivable, net | $14,304 | $14,756 | $(452) | | Inventories | $44,164 | $50,633 | $(6,469) | | Total current assets | $73,040 | $95,212 | $(22,172) | | Total assets | $389,875 | $426,104 | $(36,229) | | Liabilities | | | | | Total current liabilities | $31,479 | $34,987 | $(3,508) | | Total liabilities | $194,866 | $202,382 | $(7,516) | | Stockholders' Equity | | | | | Total stockholders' equity | $195,009 | $223,722 | $(28,713) | Condensed Consolidated Statements of Operations This section details the company's financial performance, including net sales, gross profit, operating expenses, and net loss for the three and six months ended June 30, 2025 and 2024 | Metric | 3 Months Ended June 30, 2025 ($ in thousands) | 3 Months Ended June 30, 2024 ($ in thousands) | Change (YoY) ($ in thousands) | 6 Months Ended June 30, 2025 ($ in thousands) | 6 Months Ended June 30, 2024 ($ in thousands) | Change (YoY) ($ in thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | :----------- | :----------------------------- | :----------------------------- | :----------- | | Net sales | $39,245 | $54,793 | $(15,548) (-28.4%) | $79,779 | $108,965 | $(29,186) (-26.8%) | | Cost of goods sold | $36,451 | $43,942 | $(7,491) (-17.0%) | $70,108 | $87,189 | $(17,081) (-19.6%) | | Gross profit | $2,794 | $10,851 | $(8,057) (-74.3%) | $9,671 | $21,776 | $(12,105) (-55.6%) | | Selling, general and administrative | $16,140 | $18,659 | $(2,519) (-13.5%) | $34,003 | $38,280 | $(4,277) (-11.2%) | | Loss on asset disposition | $0 | $11,520 | $(11,520) (-100.0%) | $0 | $11,520 | $(11,520) (-100.0%) | | Loss from operations | $(13,346) | $(19,328) | $5,982 (30.9%) | $(24,332) | $(28,024) | $3,692 (13.2%) | | Net loss | $(16,861) | $(23,450) | $6,589 (28.1%) | $(31,246) | $(36,058) | $4,812 (13.3%) | | Basic net loss per share | $(3.63) | $(5.10) | $1.47 | $(6.75) | $(7.86) | $1.11 | | Diluted net loss per share | $(3.63) | $(5.10) | $1.47 | $(6.75) | $(7.86) | $1.11 | Condensed Consolidated Statements of Comprehensive Loss This section details the company's comprehensive loss, including net loss and other comprehensive income/loss components such as foreign currency translation adjustments | Metric | 3 Months Ended June 30, 2025 ($ in thousands) | 3 Months Ended June 30, 2024 ($ in thousands) | Change (YoY) ($ in thousands) | 6 Months Ended June 30, 2025 ($ in thousands) | 6 Months Ended June 30, 2024 ($ in thousands) | Change (YoY) ($ in thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | :----------- | :----------------------------- | :----------------------------- | :----------- | | Net loss | $(16,861) | $(23,450) | $6,589 | $(31,246) | $(36,058) | $4,812 | | Foreign currency translation gain (loss) | $1,665 | $(341) | $2,006 | $1,802 | $(1,070) | $2,872 | | Total comprehensive loss | $(15,196) | $(23,791) | $8,595 | $(29,444) | $(37,128) | $7,684 | Condensed Consolidated Statements of Changes in Stockholders' Equity This section presents changes in stockholders' equity, reflecting movements in common stock, additional paid-in capital, accumulated other comprehensive loss, and accumulated deficit | Metric | Balance, Dec 31, 2024 ($ in thousands) | Issuance of stock awards ($ in thousands) | Shares repurchased ($ in thousands) | Stock-based comp. expense ($ in thousands) | Net loss ($ in thousands) | FX translation gain ($ in thousands) | Balance, June 30, 2025 ($ in thousands) | | :-------------------------- | :-------------------- | :----------------------- | :----------------------- | :------------------------ | :--------- | :-------------------- | :--------------------- | | Common Stock Shares | 4,614,279 (Shares) | 59,210 (Shares) | (14,469) (Shares) | — | — | — | 4,659,020 (Shares) | | Additional Paid-In Capital | $790,094 | — | $(27) | $758 | — | — | $790,825 | | Accumulated Other Comp. Loss | $(8,911) | — | — | — | — | $1,802 | $(7,109) | | Accumulated Deficit | $(557,461) | — | — | — | $(31,246) | — | $(588,707) | | Total Stockholders' Equity | $223,722 | — | $(27) | $758 | $(31,246) | $1,802 | $195,009 | Condensed Consolidated Statements of Cash Flows This section details the company's cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2025 and 2024 | Metric | 6 Months Ended June 30, 2025 ($ in thousands) | 6 Months Ended June 30, 2024 ($ in thousands) | Change (YoY) ($ in thousands) | | :------------------------------------------ | :----------------------------- | :----------------------------- | :----------- | | Net cash (used in) from operating activities | $(10,047) | $1,487 | $(11,534) | | Net cash (used in) from investing activities | $(501) | $2,280 | $(2,781) | | Net cash used in financing activities | $(5,121) | $(3,576) | $(1,545) | | Effect of exchange rate changes on cash | $549 | $(189) | $738 | | Net (decrease) increase in cash | $(15,120) | $2 | $(15,122) | | Cash and cash equivalents at beginning of period | $26,111 | $30,312 | $(4,201) | | Cash and cash equivalents at end of period | $10,991 | $30,314 | $(19,323) | Notes to the Condensed Consolidated Financial Statements This section provides supplementary information and detailed explanations for the figures presented in the condensed consolidated financial statements 1. DESCRIPTION OF THE BUSINESS The company is a leading manufacturer and distributor of hydroponics equipment and supplies for controlled environment agriculture in the U.S. and Canada - The Company, founded in 1977, is a leading independent manufacturer and distributor of branded hydroponics equipment and supplies for controlled environment agriculture (CEA)[35] - Products include grow lights, climate control solutions, grow media, nutrients, and proprietary branded products used for cultivating cannabis, flowers, fruits, plants, vegetables, grains, and herbs in controlled environments[35] 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES This section outlines the accounting principles and policies used in preparing financial statements, covering presentation, estimates, and segment information Basis of presentation Financial statements are prepared under U.S. GAAP and SEC requirements, with all periods retroactively adjusted for the 1-for-10 reverse stock split - Financial statements are prepared in accordance with U.S. GAAP and SEC requirements for interim reporting, including all normal and recurring adjustments[36] - A 1-for-10 reverse stock split was effective February 12, 2025, with all periods retroactively adjusted, including net loss per share[38] Use of estimates Management relies on significant estimates and assumptions for financial statement preparation, covering various valuations and liabilities, subject to ongoing review - Management relies on estimates and assumptions for financial statement preparation, including sales returns, accounts receivable, inventory realization, asset/liability valuation, useful lives, stock-based compensation, and deferred taxes[39] - Significant estimates also cover debt classification, commitments, contingencies, asset retirement obligations, and valuation allowances, with ongoing review to reflect business changes[39][40] Segment and entity-wide information The company operates as a single segment for CEA equipment and supplies, with the CEO reviewing consolidated metrics for performance and resource allocation - The Company operates as one operating and reportable segment: the manufacture and distribution of CEA equipment and supplies[41] - The CEO, as CODM, reviews consolidated metrics like net sales, gross profit, SG&A, net loss, total assets, and significant components for performance assessment and resource allocation[42] | Geography | 3 Months Ended June 30, 2025 ($ in thousands) | 3 Months Ended June 30, 2024 ($ in thousands) | 6 Months Ended June 30, 2025 ($ in thousands) | 6 Months Ended June 30, 2024 ($ in thousands) | | :---------- | :----------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | United States | $31,316 | $44,096 | $63,593 | $84,551 | | Canada | $8,286 | $11,603 | $17,308 | $26,028 | | Eliminations | $(357) | $(906) | $(1,122) | $(1,614) | | Total consolidated net sales | $39,245 | $54,793 | $79,779 | $108,965 | | Geography | June 30, 2025 ($ in thousands) | December 31, 2024 ($ in thousands) | | :---------- | :-------------- | :---------------- | | United States | $46,270 | $50,928 | | Canada | $31,828 | $29,513 | | Total | $78,098 | $80,441 | Fair value measurements Fair value is defined as an orderly transaction price, with financial instruments classified into a three-level hierarchy based on input observability - Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants[45] - Financial instruments are classified into a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (significant unobservable market inputs)[45][46] - Non-financial assets and liabilities, including long-lived and intangible assets, are measured at fair value on a nonrecurring basis[47] Inventories Inventories are valued at the lower of cost or net realizable value using FIFO, with an allowance for excess and obsolete items based on demand assumptions - Inventories (finished goods, work-in-process, raw materials) are stated at the lower of cost or net realizable value, primarily using the FIFO method[48] - An allowance for excess and obsolete inventory is maintained, based on assumptions about current and anticipated demand, customer preferences, business strategies, and market conditions[48] Revenue recognition Revenue is recognized when control of goods transfers to customers, net of variable consideration, from the single category of CEA equipment and supplies - Revenue is recognized when control of promised goods transfers to customers, generally upon receipt at their locations, and is reported net of variable consideration (rebates, discounts, returns)[50] - The company's revenue is generated from a single category: the manufacture and distribution of CEA equipment and supplies[49] | Period | 2025 ($ in thousands) | 2024 ($ in thousands) | | :-------------------------------- | :----- | :----- | | Three months ended June 30, | $1,179 | $2,270 | | Six months ended June 30, | $2,582 | $5,209 | - Contract liabilities (customer deposits/deferred revenue) totaled $2,097 thousand as of June 30, 2025, and $2,611 thousand as of December 31, 2024[51] Income taxes Interim income tax provision is calculated using an estimated annual effective tax rate, with discrete items recognized as they occur - Interim income tax provision is calculated by applying an estimated annual effective tax rate to year-to-date ordinary income/loss, with discrete items recognized as they occur[52][53] Recent accounting pronouncements New FASB ASUs require greater disaggregation of effective tax rate reconciliation, income taxes paid by jurisdiction, and specific expense categories - FASB ASU No. 2023-09 (Income Taxes) requires greater disaggregation of effective tax rate reconciliation and income taxes paid by jurisdiction, effective for fiscal years beginning after December 15, 2024[54] - FASB ASU 2024-03 (Expense Disaggregation Disclosures) requires public entities to disclose additional information about specific expense categories annually and interim, effective for annual periods beginning after December 15, 2026[55] 3. RESTRUCTURING AND ASSET SALES This section details the 2023 and 2025 Restructuring Plans, including facility consolidations, product portfolio reductions, and the IGE asset sale Restructuring The company completed its 2023 Restructuring Plan in Q1 2025 and initiated a new 2025 plan to optimize its product portfolio, distribution, manufacturing, and headcount - The 2023 Restructuring Plan, completed in Q1 2025, involved U.S. manufacturing facility consolidations, resulting in $9.7 million in non-cash inventory markdowns and $2.0 million in cash charges[56][57] - A new 2025 Restructuring Plan was initiated in Q2 2025 to reduce product portfolio (underperforming brands), distribution network, manufacturing footprint, and headcount[61] - The 2025 Restructuring Plan incurred estimated costs of $3.3 million in Q2 2025, primarily non-cash inventory write-downs, and is expected to result in additional charges of approximately $2 million and annual cost savings exceeding $3 million[61][130] Asset Sales The company completed the sale of Innovative Growers Equipment (IGE) durable equipment assets for $8.66 million, resulting in an $11.52 million loss on disposition in Q2 2024 - On May 10, 2024, the Company entered into an agreement to sell assets related to Innovative Growers Equipment (IGE) durable equipment products for $8.66 million, closing on May 31, 2024[63] - The IGE Asset Sale resulted in a loss on asset disposition of $11.52 million for the three and six months ended June 30, 2024, and included the derecognition of inventories, property, plant and equipment, and technology intangible assets[64] - The company retained the IGE brand and customer relationships and entered an exclusive supply agreement with the buyer for contract manufacturing, aiming for a more efficient cost model[63] - Net cash proceeds of approximately $6.3 million from the IGE Asset Sale were subject to reinvestment into certain investments or prepayment against the Term Loan principal[66] 4. INTANGIBLE ASSETS, NET This section breaks down the company's intangible assets, including software, customer relationships, technology, and trade names, along with their amortization | Category | June 30, 2025 Net Book Value ($ in thousands) | December 31, 2024 Net Book Value ($ in thousands) | Change ($ in thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | :------- | | Computer software | $233 | $357 | $(124) | | Customer relationships | $56,902 | $60,576 | $(3,674) | | Technology, formulations and recipes | $72,327 | $76,980 | $(4,653) | | Trade names and trademarks | $104,714 | $108,060 | $(3,346) | | Other finite-lived | $152 | $228 | $(76) | | Total finite-lived intangible assets, net | $234,328 | $246,201 | $(11,873) | | Indefinite-lived intangible asset: Trade name | $2,801 | $2,801 | $0 | | Total Intangible assets, net | $237,129 | $249,002 | $(11,873) | | Period | 2025 ($ in thousands) | 2024 ($ in thousands) | | :-------------------------------- | :----- | :----- | | Three months ended June 30, | $5,931 | $6,036 | | Six months ended June 30, | $11,864 | $12,120 | | Period | Estimated Future Amortization Expense ($ in thousands) | | :------------------------------------ | :------------------------------------ | | For the period of July 1, 2025 to Dec 31, 2025 | $11,864 | | Year ending December 31, 2026 | $23,526 | | Year ending December 31, 2027 | $23,353 | | Year ending December 31, 2028 | $22,715 | | Year ending December 31, 2029 | $21,583 | | Year ending December 31, 2030 | $21,395 | | Thereafter | $109,892 | | Total | $234,328 | 5. LOSS PER COMMON SHARE This section details the calculation of basic and diluted loss per common share, considering net loss and weighted-average shares outstanding | Metric | 3 Months Ended June 30, 2025 ($ in thousands) | 3 Months Ended June 30, 2024 ($ in thousands) | 6 Months Ended June 30, 2025 ($ in thousands) | 6 Months Ended June 30, 2024 ($ in thousands) | | :------------------------------------------ | :----------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(16,861) | $(23,450) | $(31,246) | $(36,058) | | Weighted-average shares outstanding (Basic) | 4,646,096 (Shares) | 4,597,720 (Shares) | 4,630,390 (Shares) | 4,589,471 (Shares) | | Dilutive effect of share based compensation awards using the treasury stock method | — | — | — | — | | Diluted weighted-average shares outstanding | 4,646,096 (Shares) | 4,597,720 (Shares) | 4,630,390 (Shares) | 4,589,471 (Shares) | | Basic loss per common share | $(3.63) (per share) | $(5.10) (per share) | $(6.75) (per share) | $(7.86) (per share) | | Diluted loss per common share | $(3.63) (per share) | $(5.10) (per share) | $(6.75) (per share) | $(7.86) (per share) | - The computation of diluted loss per common share excludes 357,796 unvested/deferred RSUs/PSUs and 34,045 stock options as of June 30, 2025, due to their anti-dilutive effect[74] 6. ACCOUNTS RECEIVABLE, NET, AND INVENTORIES This section details accounts receivable, net of doubtful accounts, and inventories, net of obsolescence allowances | Metric | June 30, 2025 ($ in thousands) | December 31, 2024 ($ in thousands) | Change ($ in thousands) | | :-------------------------- | :-------------- | :---------------- | :----- | | Trade accounts receivable | $13,720 | $14,112 | $(392) | | Allowance for doubtful accounts | $(629) | $(706) | $77 | | Other receivables | $1,213 | $1,350 | $(137) | | Total accounts receivable, net | $14,304 | $14,756 | $(452) | | Metric | June 30, 2025 ($ in thousands) | December 31, 2024 ($ in thousands) | Change ($ in thousands) | | :-------------------------- | :-------------- | :---------------- | :------- | | Finished goods | $36,677 | $44,372 | $(7,695) | | Work-in-process | $913 | $1,137 | $(224) | | Raw materials | $11,727 | $12,398 | $(671) | | Allowance for inventory obsolescence | $(5,153) | $(7,274) | $2,121 | | Total inventories | $44,164 | $50,633 | $(6,469) | 7. LEASES The company leases distribution centers, manufacturing facilities, and equipment under operating and finance leases, with associated costs and liabilities - The Company leases distribution centers and manufacturing facilities under non-cancelable operating leases expiring through 2038, and some property, plant, and equipment under finance leases[76] | Metric | 3 Months Ended June 30, 2025 ($ in thousands) | 3 Months Ended June 30, 2024 ($ in thousands) | 6 Months Ended June 30, 2025 ($ in thousands) | 6 Months Ended June 30, 2024 ($ in thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | :----------------------------- | | Operating lease costs | $2,415 | $2,611 | $4,799 | $5,361 | | Sublease and logistics income | $1,110 | $785 | $2,298 | $1,523 | | Metric | June 30, 2025 ($ in thousands) | December 31, 2024 ($ in thousands) | | :-------------------------- | :-------------- | :---------------- | | Total lease assets | $48,777 | $50,148 | | Total lease liabilities | $52,450 | $53,573 | | Period | Operating Lease Payments ($ in thousands) | Finance Lease Payments ($ in thousands) | | :------------------------------------ | :----------------------- | :--------------------- | | For the period of July 1, 2025 to Dec 31, 2025 | $4,787 | $448 | | Year ending December 31, 2026 | $9,055 | $845 | | Year ending December 31, 2027 | $9,278 | $853 | | Year ending December 31, 2028 | $8,739 | $805 | | Year ending December 31, 2029 | $5,872 | $822 | | Year ending December 31, 2030 | $4,752 | $838 | | Thereafter | $7,869 | $6,379 | | Total lease payments | $50,352 | $10,990 | 8. PROPERTY, PLANT AND EQUIPMENT, NET This section details the company's property, plant, and equipment, including machinery, peat bogs, buildings, and land, net of accumulated depreciation | Metric | June 30, 2025 ($ in thousands) | December 31, 2024 ($ in thousands) | Change ($ in thousands) | | :-------------------------------- | :-------------- | :---------------- | :------- | | Machinery and equipment | $24,178 | $23,531 | $647 | | Peat bogs and related development | $12,634 | $11,895 | $739 | | Building and improvements | $10,370 | $10,313 | $57 | | Land | $5,659 | $5,630 | $29 | | Furniture and fixtures | $4,286 | $4,239 | $47 | | Computer equipment | $3,212 | $3,152 | $60 | | Leasehold improvements | $3,333 | $3,185 | $148 | | Gross property, plant and equipment | $63,672 | $61,945 | $1,727 | | Less: accumulated depreciation | $(27,426) | $(24,400) | $(3,026) | | Total property, plant and equipment, net | $36,246 | $37,545 | $(1,299) | | Period | 2025 ($ in thousands) | 2024 ($ in thousands) | | :-------------------------------- | :----- | :----- | | Three months ended June 30, | $1,481 | $1,740 | | Six months ended June 30, | $2,857 | $3,541 | - The Company operates peat bogs in Alberta, Canada, and is subject to Asset Retirement Obligations (AROs) for site remediation[81] - AROs totaled $4,847 thousand as of June 30, 2025, and $4,516 thousand as of December 31, 2024[82] 9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES This section breaks down accrued expenses and other current liabilities, including compensation, interest, freight, and asset retirement obligations | Metric | June 30, 2025 ($ in thousands) | December 31, 2024 ($ in thousands) | Change ($ in thousands) | | :-------------------------------- | :-------------- | :---------------- | :------- | | Accrued compensation and benefits | $1,703 | $1,987 | $(284) | | Interest accrual | $1,990 | $2,141 | $(151) | | Freight, custom and duty accrual | $753 | $1,130 | $(377) | | Goods in transit accrual | $485 | $574 | $(89) | | Income tax accrual | $215 | $127 | $88 | | Asset retirement obligations | $272 | $284 | $(12) | | Other accrued liabilities | $3,055 | $4,404 | $(1,349) | | Total accrued expenses and other current liabilities | $8,473 | $10,647 | $(2,174) | 10. DEBT This section details the company's debt obligations, including the Term Loan and Revolving Credit Facility, along with their terms and outstanding balances Term Loan The Term Loan, originally $125 million, matures in October 2028 with variable interest rates, and a $4.5 million prepayment was made in Q2 2025 - The Term Loan, originally $125 million, was entered into on October 25, 2021, and matures on October 25, 2028[85][86] - Interest rates are variable, based on SOFR, with an effective interest rate of 10.89% for Q2 2025 and 10.91% for the six months ended June 30, 2025[85][86] - A $4.5 million prepayment was made in Q2 2025 from IGE Asset Sale proceeds, which eliminated all remaining 0.25% quarterly principal installments for the Term Loan's remaining term[88] - The outstanding principal balance on the Term Loan was $114.5 million as of June 30, 2025, and the company was in compliance with all debt covenants[160] Revolving Credit Facility The Revolving Credit Facility's maximum commitment was reduced to $22 million and maturity extended to June 2027, with no amounts borrowed as of June 30, 2025 - The Seventh Amendment to the Revolving Credit Facility, effective May 9, 2025, extended the maturity to June 30, 2027, and reduced the maximum commitment from $35 million to $22 million[91][92] - As of June 30, 2025, the company had zero borrowed under the facility and approximately $9 million was available before triggering the minimum fixed charge coverage ratio covenant of 1.1x[97][165] - The facility is asset-based, secured by a first priority lien on working capital assets and a second priority lien on non-working capital assets, and the company was in compliance with all covenants[94][95] Other Debt Other debt of $89 thousand primarily consists of an immaterial revolving line of credit and a mortgage from a foreign subsidiary - Other debt of $89 thousand as of June 30, 2025, primarily comprises an immaterial revolving line of credit and mortgage from a foreign subsidiary[98] Aggregate future principal payments This section outlines the aggregate future principal payments for the company's debt obligations, primarily the Term Loan | Period | Debt ($ in thousands) | | :------------------------------------ | :------- | | For the period of July 1, 2025 to Dec 31, 2025 | $19 | | Year ending December 31, 2026 | $21 | | Year ending December 31, 2027 | $21 | | Year ending December 31, 2028 and thereafter | $114,480 | | Total | $114,541 | 11. STOCKHOLDERS' EQUITY This section details the company's common stock, including shares outstanding, authorized shares, voting rights, and liquidation provisions - As of June 30, 2025, there were 4,659,020 shares of common stock outstanding and 300,000,000 shares authorized[101] - Each common stock share entitles the holder to one vote, with no pre-emptive, redemption, subscription, or conversion rights[101] - In liquidation, stockholders share pro rata in corporate assets after all liabilities and preferred stock provisions are met. Dividends are at the board's discretion[101] 12. STOCK-BASED COMPENSATION This section describes the company's stock-based compensation plans, including Restricted Stock Units (RSUs), Performance Stock Units (PSUs), and stock options Stock-based compensation plan overview The 2020 Equity Incentive Plan provides various stock-based awards, with 286,112 shares available for grant to employees, directors, and consultants as of June 30, 2025 - The 2020 Equity Incentive Plan is the successor to the 2018 and 2019 plans, providing for ISOs, nonqualified stock options, stock grants, and stock-based awards to employees, directors, and consultants[102] - As of June 30, 2025, 286,112 shares were available for grant under the 2020 Plan[102] - The number of shares available for issuance under the 2020 Plan may increase annually by the lesser of 4% of outstanding common stock or a number determined by the Plan Administrator[104] Restricted Stock Unit Activity This section details the activity of Restricted Stock Units (RSUs), including grants, vesting, forfeitures, and unamortized compensation cost | Metric | Number of RSUs (Units) | Weighted average grant date fair value ($) | | :-------------------------- | :--------------- | :----------------------------- | | Balance, December 31, 2024 | 102,030 | $13.82 | | Granted | 211,618 | $4.68 | | Vested | (82,527) | $12.18 | | Forfeited | (34) | $157.40 | | Balance, June 30, 2025 | 231,087 | $6.01 | - As of June 30, 2025, total unamortized stock-based compensation cost for unvested RSUs was $977 thousand, with an expected recognition period of approximately one year[108] - The company recognized $278 thousand and $636 thousand in stock-based compensation expense for RSUs for the three and six months ended June 30, 2025, respectively[108] Performance Stock Unit Activity This section outlines the activity of Performance Stock Units (PSUs), including vesting and forfeitures due to performance conditions or terminations | Metric | Number of PSUs (Units) | Weighted average grant date fair value ($) | | :-------------------------- | :--------------- | :----------------------------- | | Balance, December 31, 2024 | 125,783 | $9.89 | | Vested | (40,871) | $9.89 | | Forfeited | (84,912) | $9.89 | | Balance, June 30, 2025 | — | — | - PSU forfeitures were due to employee terminations and performance conditions not being satisfied[110] - As of June 30, 2025, there was no unamortized stock-based compensation cost related to unvested PSUs[110] Stock Options This section provides details on stock option activity, including outstanding and exercisable options, with no grants or exercises during the six months ended June 30, 2025 - No stock options were granted or exercised during the six months ended June 30, 2025[111] | Metric | Number (Units) | Weighted average exercise price ($) | Weighted average grant date fair value ($) | Weighted average remaining contractual term (years) | | :------------------------------------------ | :------- | :------------------------------ | :------------------------------------- | :-------------------------------------------------- | | Outstanding and exercisable as of Dec 31, 2024 | 40,654 | $96.36 | $22.76 | 3.67 | | Cancelled | (6,609) | $95.86 | $13.78 | | | Outstanding and exercisable as of June 30, 2025 | 34,045 | $96.46 | $24.50 | 3.71 | - As of June 30, 2025, there were no unvested stock awards and no unrecognized compensation cost related to options[111] 13. INCOME TAXES This section presents the company's income tax benefit/expense and effective tax rates, which differ from the statutory rate due to full valuation allowances | Period | Income Tax Benefit (Expense) ($ in thousands) | Effective Tax Rate | | :-------------------------------- | :--------------------------- | :----------------- | | 3 Months Ended June 30, 2025 | $98 | 0.6% | | 6 Months Ended June 30, 2025 | $16 | 0.1% | | 3 Months Ended June 30, 2024 | $(390) | (1.7)% | | 6 Months Ended June 30, 2024 | $(586) | (1.7)% | - The effective tax rates for 2025 and 2024 differ from the 21% federal statutory rate primarily due to full valuation allowances in U.S. and foreign jurisdictions[112][113] - The 2025 income tax benefit was mainly from Canadian jurisdictions, partially offset by foreign taxes in Spain and U.S. state taxes[112] - The company is evaluating the impact of the recently enacted One Big Beautiful Bill Act (OBBBA) but does not expect a material impact on its results of operations[114] 14. COMMITMENTS AND CONTINGENCIES This section addresses the company's purchase commitments and ongoing legal proceedings, which are not expected to have a material adverse effect Purchase commitments The company enters into agreements with suppliers, committing to minimum inventory purchases in exchange for favorable pricing - The company enters into agreements with suppliers for favorable pricing in return for commitments to purchase minimum inventory amounts over defined periods[115] Contingencies The company is involved in routine legal proceedings, but management does not anticipate a material adverse effect on its financial position or results - The company is involved in various lawsuits and legal proceedings in the ordinary course of business[116] - Management does not expect the outcome of any current matters, individually or in aggregate, to have a material adverse effect on the company's financial position, results of operations, cash flows, or future earnings[117] 15. FAIR VALUE MEASUREMENTS This section discusses the company's fair value measurements for assets and liabilities, including recurring and nonrecurring measurements and other disclosures Recurring and Nonrecurring In 2024, the company sold excess land measured at Level 2 fair value, with no other assets or liabilities remeasured during the periods presented - In 2024, the company sold 20 acres of excess land, measured at Level 2 fair value, with no gain or loss recorded as the sale price was consistent with carrying value[118] - No other assets or liabilities were remeasured to fair value on a recurring or nonrecurring basis during the periods presented[119] Other Fair Value Measurements This section provides estimated fair values for cash, finance leases, and the Term Loan, with methodologies based on market quotes and discounted cash flows | Metric | Fair Value Hierarchy Level | Carrying Amount (June 30, 2025) ($ in thousands) | Estimated Fair Value (June 30, 2025) ($ in thousands) | Carrying Amount (Dec 31, 2024) ($ in thousands) | Estimated Fair Value (Dec 31, 2024) ($ in thousands) | | :-------------------------- | :------------------------- | :------------------------------ | :----------------------------------- | :------------------------------ | :----------------------------------- | | Cash and cash equivalents | Level 1 | $10,991 | $10,991 | $26,111 | $26,111 | | Finance leases | Level 3 | $8,072 | $8,303 | $8,289 | $8,437 | | Term Loan | Level 2 | $114,452 | $93,851 | $119,303 | $95,442 | - Fair values of cash and cash equivalents, other current assets, and liabilities approximated carrying values due to short-term maturities[120] - Finance leases' fair values (Level 3) were calculated using the present value of future cash outflows discounted at an estimated borrowing rate. The Term Loan's fair value (Level 2) was based on bank quotes[121] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition, discussing the adverse impact of market oversupply, restructuring initiatives, and detailed comparisons of operating results for the three and six months ended June 30, 2025 and 2024, along with liquidity and capital resources Company Overview 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 - 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[124] - The company's mission is to empower growers with products that enable greater quality, efficiency, consistency, and speed in their grow projects[124] - Products are used for cultivating various plants, including cannabis, flowers, fruits, and vegetables, in controlled settings, allowing for efficient use of space, water, and resources, and year-round growing[125] - The company reaches commercial farmers and consumers through over 2,000 wholesale customer accounts, including specialty hydroponic retailers, commercial resellers, garden centers, hardware stores, and e-commerce retailers[125] Market Conditions Adverse financial results stem from agricultural oversupply, decreasing cultivation, and slow U.S. federal cannabis regulation, impacting product demand and leading to restructuring - Adverse financial results are primarily due to agricultural oversupply impacting the market and decreasing indoor and outdoor cultivation[126] - Demand for products has been negatively impacted by the slow enactment of U.S. federal cannabis regulations, leading operators to reduce investments, particularly in durable goods[126] - The 2023 Restructuring Plan, completed in Q1 2025, involved U.S. manufacturing facility consolidations, resulting in $9.7 million in non-cash inventory markdowns and $2.0 million in cash charges[128] - The 2025 Restructuring Plan, initiated in Q2 2025, aims to reduce the product portfolio (underperforming brands), distribution network, manufacturing footprint, and headcount, incurring $3.3 million in Q2 2025 for inventory write-downs[130] - The company continues to evaluate its product portfolio, supply chain, and opportunities to sell excess land or pursue outsourcing to improve efficiency and cash position[131] Results of Operations—Comparison of three and six months ended June 30, 2025 and 2024 This section compares the company's operating results for the three and six months ended June 30, 2025 and 2024, analyzing key financial metrics and their drivers Net sales Net sales decreased significantly for both periods, primarily due to reduced volume, mix, and price, driven by industry oversupply | Period | 2025 ($ in thousands) | 2024 ($ in thousands) | Change (YoY) ($ in thousands) | | :-------------------------------- | :----- | :----- | :----------- | | Three months ended June 30, | $39,245 | $54,793 | $(15,548) (-28.4%) | | Six months ended June 30, | $79,779 | $108,965 | $(29,186) (-26.8%) | - The decrease in net sales was primarily due to a 27.9% reduction in volume and mix of products sold and a 0.4% decrease in price for the three months, and a 25.4% reduction in volume/mix and 1.0% decrease in price for the six months, largely driven by industry oversupply[135] Gross profit Gross profit and margin decreased substantially for both periods, attributed to lower net sales, a reduced proportion of proprietary brand products, and restructuring charges | Period | 2025 ($ in thousands) | 2024 ($ in thousands) | Change (YoY) ($ in thousands) | | :-------------------------------- | :----- | :----- | :----------- | | Three months ended June 30, | $2,794 | $10,851 | $(8,057) (-74.3%) | | Six months ended June 30, | $9,671 | $21,776 | $(12,105) (-55.6%) | | Period | 2025 (Gross Margin %) | 2024 (Gross Margin %) | Change (YoY) (pp) | | :-------------------------------- | :----- | :----- | :----------- | | Three months ended June 30, | 7.1% | 19.8% | (12.7 pp) | | Six months ended June 30, | 12.1% | 20.0% | (7.9 pp) | - Gross profit and margin decreased due to lower net sales, a lower proportion of proprietary brand products sold, and restructuring charges (primarily inventory markdowns) of $3.3 million for three months and $3.7 million for six months ended June 30, 2025[138] Selling, general and administrative expenses Selling, general, and administrative expenses decreased for both periods, primarily due to reductions in employee compensation, facility costs, and insurance expenses | Period | 2025 ($ in thousands) | 2024 ($ in thousands) | Change (YoY) ($ in thousands) | | :-------------------------------- | :----- | :----- | :----------- | | Three months ended June 30, | $16,140 | $18,659 | $(2,519) (-13.5%) | | Six months ended June 30, | $34,003 | $38,280 | $(4,277) (-11.2%) | - The decrease in SG&A for the three months was driven by a $1.8 million reduction in employee compensation, $0.3 million in facility costs, and $0.3 million in insurance expenses[140] - For the six months, the decrease was primarily due to a $3.1 million reduction in employee compensation and a $0.7 million decrease in facility costs[140] Loss on asset disposition A $11.5 million loss on asset disposition was recorded for the three and six months ended June 30, 2024, due to the IGE Asset Sale, with no such loss in 2025 - A loss on asset disposition of $11.5 million was recorded for the three and six months ended June 30, 2024, due to the IGE Asset Sale[141] - No loss on asset disposition was recorded for the three and six months ended June 30, 2025[133] Interest expense Interest expense decreased for both periods, primarily due to lower outstanding debt from principal repayments and reduced variable interest rates on the Term Loan | Period | 2025 ($ in thousands) | 2024 ($ in thousands) | Change (YoY) ($ in thousands) | | :-------------------------------- | :----- | :----- | :----------- | | Three months ended June 30, | $3,391 | $3,811 | $(420) (-11.0%) | | Six months ended June 30, | $6,768 | $7,742 | $(974) (-12.6%) | - The decrease in interest expense was primarily due to lower debt outstanding from principal repayments and lower variable interest rates on the Term Loan[142] Other (expense) income, net The shift to other expense in 2025 was primarily due to a loss on debt extinguishment recorded in conjunction with the Term Loan prepayment | Period | 2025 ($ in thousands) | 2024 ($ in thousands) | Change (YoY) ($ in thousands) | | :-------------------------------- | :----- | :----- | :----------- | | Three months ended June 30, | $(222) | $79 | $(301) (-381.0%) | | Six months ended June 30, | $(162) | $294 | $(456) (-155.1%) | - The shift to other expense in 2025 was primarily due to a loss on debt extinguishment recorded in conjunction with the Term Loan prepayment[143] Income taxes The company reported an income tax benefit in 2025, differing from the federal statutory rate primarily due to full valuation allowances in U.S. and foreign jurisdictions | Period | Income Tax Benefit (Expense) ($ in thousands) | Effective Tax Rate | | :-------------------------------- | :--------------------------- | :----------------- | | 3 Months Ended June 30, 2025 | $0.1 | 0.6% | | 6 Months Ended June 30, 2025 | < $0.1 | 0.1% | | 3 Months Ended June 30, 2024 | $(0.4) | (1.7)% | | 6 Months Ended June 30, 2024 | $(0.6) | (1.7)% | - Effective tax rates differ from the 21% federal statutory rate primarily due to full valuation allowances in U.S. and foreign jurisdictions[144][145] - The 2025 income tax benefit was primarily due to benefits in Canadian jurisdictions, partially offset by foreign and U.S. state taxes[144] Liquidity and Capital Resources This section discusses the company's ability to generate and manage cash, including cash flows from operating, investing, and financing activities, and its available capital resources Cash Flow from Operating, Investing, and Financing Activities Net cash used in operating activities increased significantly in H1 2025, while investing activities shifted to a net use, and financing activities continued to use cash for debt repayments | Metric | 6 Months Ended June 30, 2025 ($ in thousands) | 6 Months Ended June 30, 2024 ($ in thousands) | Change (YoY) ($ in thousands) | | :------------------------------------------ | :----------------------------- | :----------------------------- | :----------- | | Net cash (used in) from operating activities | $(10,047) | $1,487 | $(11,534) | | Net cash (used in) from investing activities | $(501) | $2,280 | $(2,781) | | Net cash used in financing activities | $(5,121) | $(3,576) | $(1,545) | | Effect of exchange rate changes on cash | $549 | $(189) | $738 | | Net (decrease) increase in cash | $(15,120) | $2 | $(15,122) | | Cash and cash equivalents at beginning of period | $26,111 | $30,312 | $(4,201) | | Cash and cash equivalents at end of period | $10,991 | $30,314 | $(19,323) | - Net cash used in operating activities for H1 2025 was $10.0 million, primarily due to a $31.2 million net loss and a $3.8 million working capital outflow, partially offset by $25.0 million in non-cash items[147] - Net cash used in investing activities for H1 2025 was $0.5 million, mainly for capital expenditures, contrasting with a $2.3 million inflow in H1 2024 due to IGE Asset Sale proceeds[150] - Net cash used in financing activities for H1 2025 was $5.1 million, driven by $4.9 million in Term Loan repayments and $0.2 million in finance lease principal payments[151] Availability and Use of Cash Management believes current cash, operating cash flows, and the Revolving Credit Facility will adequately support operations, debt service, and capital expenditures for the next twelve months - Management believes cash flows from operating activities, current cash levels, and Revolving Credit Facility availability will be adequate to support operations and fund debt service, capital expenditures, lease obligations, and working capital for the next twelve months[153] - A $4.5 million prepayment was made on the Term Loan in Q2 2025 using IGE Asset Sale proceeds, with $0.8 million in remaining contractual commitments[154] - The company is evaluating additional asset sales (e.g., excess land) or divestitures of brands/lines of business to supplement its cash position, which may be subject to debt provisions[155] Term Loan The Term Loan, with an outstanding principal balance of $114.5 million as of June 30, 2025, had a $4.5 million prepayment in Q2 2025, eliminating future quarterly installments - The Term Loan, originally $125 million, was entered into on October 25, 2021, and matures on October 25, 2028, with variable interest rates based on SOFR[156] - A $4.5 million prepayment was made in Q2 2025 from IGE Asset Sale proceeds, which reduced required quarterly installment amounts to zero for the remaining term[158][159] - The outstanding principal balance was $114.5 million as of June 30, 2025, and the company was in compliance with all debt covenants[160] Revolving Credit Facility The Revolving Credit Facility's maximum commitment was reduced to $22 million and maturity extended to June 2027, with $9 million available before triggering the fixed charge coverage ratio covenant - The Seventh Amendment, dated May 9, 2025, reduced the maximum commitment under the Revolving Credit Facility from $35 million to $22 million and extended the maturity date to June 30, 2027[161] - As of June 30, 2025, no amounts were borrowed, and approximately $9 million was available before triggering the minimum fixed charge coverage ratio covenant of 1.1x[165] - The facility is secured by a first priority lien on working capital assets and a second priority lien on non-working capital assets, and the company was in compliance with all debt covenants[162][164] Cash and Cash Equivalents Total cash and cash equivalents decreased by $15.1 million to $11.0 million as of June 30, 2025, with $6.6 million held by foreign subsidiaries | Metric | June 30, 2025 ($ in millions) | December 31, 2024 ($ in millions) | Change ($ in millions) | | :-------------------------- | :-------------- | :---------------- | :------- | | Total cash and cash equivalents | $11.0 | $26.1 | $(15.1) | | Held by foreign subsidiaries | $6.6 | $11.9 | $(5.3) | Material Cash Requirements Material cash requirements include interest payments on long-term debt, lease payments, Term Loan reinvestment balances, and purchase obligations, exposing the company to interest rate risk - Material cash requirements include interest payments on long-term debt, finance lease payments, operating lease payments, Term Loan reinvestment provision balances, and purchase obligations[168] - Variable rates on the Term Loan are subject to change, exposing the company to interest rate risk[168] Critical Accounting Policies and Estimates Critical accounting policies and estimates involve significant judgments, particularly for indefinite-lived intangible assets, long-lived assets, and inventory valuation, where actual results may differ - Critical accounting policies and estimates involve significant judgments and assumptions, particularly for indefinite-lived intangible assets, long-lived tangible and finite-lived intangible assets, and inventory valuation[169] - Actual results could differ materially from the amounts reported based on these estimates[169] Recent Accounting Pronouncements Information regarding recent accounting pronouncements is provided in Note 2 – Basis of Presentation and Significant Accounting Policies - Information on recent accounting pronouncements is detailed in Note 2 – Basis of Presentation and Significant Accounting Policies[170] Item 3. Quantitative and Qualitative Disclosures About Market Risk This item discusses the company's exposure to market risks, primarily interest rate risk from variable-rate debt, foreign currency risk from operations in CAD and Euro, and inflation risk, noting that the company does not currently hedge these risks Interest Rate Risk The company is exposed to interest rate risk due to its $114.5 million variable-rate Term Loan, with a 100 basis point increase potentially raising annual interest expense by $1.2 million - The company is exposed to interest rate risk due to its $114.5 million variable-rate Term Loan as of June 30, 2025[173] - A 100 basis point increase in interest rates would increase annual interest expense by an average of $1.2 million[173] - The company does not currently hedge its interest rate risks[173] Foreign Currency Risk Operations in CAD and Euro expose the company to foreign currency risk, impacting sales, purchasing, and labor, though no hedging contracts are currently used - The functional currencies of foreign subsidiary operations are predominantly CAD and Euro, exposing the company to foreign currency risk[174] - Fluctuations in exchange rates impact sales, purchasing transactions, and labor, affecting results of operations and cash flows[174] - The company does not currently use foreign currency exchange contracts for trading or speculative purposes[174] Inflation Risk The company's financial results are based on historical costs, and future inflation could materially impact its operations and financial condition - The company's financial results are based on historical costs, and there is no assurance that future inflation will not materially impact its operations and financial condition[175] Item 4. Controls and Procedures Management, with CEO and CFO participation, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2025, concluding they were effective. There were no material changes in internal controls over financial reporting during the period Evaluation of Disclosure Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2025, ensuring timely and accurate information reporting - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of June 30, 2025[177] - Disclosure controls are designed to ensure timely recording, processing, summarizing, and reporting of information required under the Exchange Act[178] Changes in Internal Controls over Financial Reporting No material changes in internal controls over financial reporting occurred during the period covered by this report - No material changes in internal controls over financial reporting occurred during the period covered by this report[179] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is not currently aware of any material pending legal proceedings or claims beyond routine litigation incidental to its business - The company is not aware of any material pending legal proceedings or claims, other than routine litigation incidental to business[181] Item 1A. Risk Factors The risk factors discussed in the 2024 Annual Report remain relevant, with no material changes as of the date of this Quarterly Report - Risk factors from the 2024 Annual Report remain relevant, and no material changes have occurred as of the date of this Quarterly Report[182] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds to report[183] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report for the period - No defaults upon senior securities to report[184] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[185] Item 5. Other Information This item states that sections (a) and (b) are not applicable, and no director or officer adopted, modified, or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" during the quarter ended June 30, 2025 - Sections (a) and (b) are not applicable[186] - No director or officer adopted, modified, or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" during the quarter ended June 30, 2025[186] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including corporate governance documents, credit agreement amendments, compensation policies, and CEO/CFO certifications - The section lists all exhibits filed with the Form 10-Q, including corporate governance documents, credit agreement amendments, compensation policies, and CEO/CFO certifications[192] SIGNATURES The Quarterly Report on Form 10-Q was signed by B. John Lindeman, CEO, and Kevin O'Brien, CFO, on August 12, 2025 - The Quarterly Report on Form 10-Q was signed by B. John Lindeman, Chief Executive Officer, and Kevin O'Brien, Chief Financial Officer, on August 12, 2025[196]