Hydrofarm(HYFM) - 2023 Q4 - Annual Report

Special Note Regarding Forward-Looking Statements 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 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] - Forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from projections[21] - The company disclaims any obligation to publicly update or revise forward-looking statements, except as required by law[21] PART I Item 1. Business Overview 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] 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] - The company operates six U.S. and two Canadian distribution centers, aiming to reach most U.S. customers within 48 hours[33] - The global CEA industry was estimated at $74 billion in 2022 and is projected to grow to $378 billion by 2032 (18% CAGR)[39] - 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][42] - 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][54] - 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] 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] Key Business Metrics | Metric | Value | | :----- | :---- | | 2023 Net Sales | $227 million | | 2005-2023 Net Sales CAGR | ~12% | How We Serve Our Customers 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] Complete Range of Innovative CEA Products 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][30] - The majority of products are proprietary or supplied under exclusive/preferred brand relationships, offering higher gross profit margins and a competitive advantage[30] - 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] Infrastructure and Reach for Fast Delivery, High In-Stock Availability and Exceptional Service 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][34] - Manufacturing facilities are located in Paramount, Arcata, Eugene, Goshen, Sycamore (U.S.) and Edmonton (Canada)[35] - The Distributor Managed Inventory (DMI) Program offers customized, JIT supply chain solutions for large commercial end users[34] The CEA Industry 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] 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][42] Benefits of CEA Adoption 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] - CEA supports ESG trends by preserving resources and enhancing food supply chain transparency and safety[45] Our Strategies and Competitive Strengths 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] - The product portfolio includes ~35 proprietary brands and ~45 preferred brands, with ~75% of sales from these higher-margin offerings[47] - Operates six manufacturing facilities in North America for nutrient blending, soil blending, perlite production, LED light manufacturing, and peat harvesting[49] - Reorganized sales efforts to focus on CEA food and floral markets and consumer gardening, alongside existing specialty hydroponic retailers and commercial resellers[53] - Focused on productivity and cost-saving initiatives, including headcount reduction, operational changes, facility footprint consolidation, and prioritizing proprietary brands[54] Effects of COVID-19 on Our Business 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] - Current operations are not impacted by COVID-19 closures, but future variants could reinstate limitations, affecting supply chains and manufacturing[57] Government Regulation 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][60][61] - Canadian operations are regulated under the Canadian Food Inspection Agency, with organic products attested by EcoCert and peat harvesting by provincial/municipal bodies[59] - Failure to comply with regulations or changes in pesticide registration could adversely affect product sales and business[61][62] Cannabis Industry 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] - U.S. federal law lists cannabis as a Schedule I controlled substance, conflicting with state legalization laws, posing risks of federal enforcement[71][72] - 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] - 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][82][83] - 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] Intellectual Property 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] - Issued patents cover grow lighting and hydroponic systems, expiring between 2024 and 2035[87] - 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][89][90] Human Capital 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] - 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][94] Corporate Structure and Information 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] - The company qualifies as a smaller reporting company and has elected to use scaled-back disclosure accommodations in its SEC filings[98] Item 1A. Risk Factors 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][108][110][114][116] - Indebtedness poses risks through restrictive covenants, the ability to make debt service payments, and limitations on direct sales to the cannabis industry[102][169][172] - Reliance on a limited supplier base and potential disruptions in the global supply chain could adversely affect operations and financial results[102][175][177] - 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][186][187][188][189][190][191] - 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][134][212][214][215][217][219] - Intellectual property risks involve the ability to obtain, maintain, protect, and enforce rights, potential infringement disputes, and the costs associated with such litigation[104][222][223][224][229][230] - 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][233][234][240] Item 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments[255] Item 1C. Cybersecurity 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][257] - A risk-based strategy focuses on safeguarding critical assets with controls around access, data, and infrastructure security[257] - 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] - The Board of Directors oversees the cybersecurity risk management program, receiving periodic updates from the Director of IT[261] - The company maintains cyber insurance, but it may not cover all losses or reputational damage from future breaches[260] Item 2. Properties 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] Item 3. Legal Proceedings 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] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable[267] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] 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] - No sales of unregistered securities or issuer purchases of equity securities were reported[271][272] Item 6. Reserved This item is reserved and contains no information - This item is reserved[273] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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] - 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] - 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] - 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][295] - 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][280][281][282] 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] - 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][312] - 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][317][318] - 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] - Net sales are typically seasonally stronger in the first three fiscal quarters due to warmer spring and summer months in North America[321] Company Overview 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] - Products are used to cultivate various plants in controlled environments, enabling efficiency, year-round cycles, and predictable yields[277] - The company serves over 2,000 wholesale customer accounts through an online platform and diversified retailers[277] Market Conditions 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] - The company initiated a two-phase Restructuring Plan to streamline operations, reduce costs, and improve efficiencies during the industry recession[279][282] 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] - The company's filing status changed to a non-accelerated filer effective December 31, 2023, due to market capitalization falling below $60 million[286] Components of Results of Operations Defines the key components of the company's financial results, including net sales, cost of goods sold, and SG&A expenses - Net sales are generated from manufacturing and distributing hydroponic equipment and supplies, including consumable and durable products, reported net of sales incentives and including shipping/handling costs[287][288] - Cost of goods sold includes material, freight, labor, facility costs, depreciation, restructuring costs, inventory allowances, and acquisition/integration expenses[289] - Selling, General and Administrative (SG&A) expenses cover distribution facility costs, depreciation, acquisition/integration expenses, marketing, salaries, benefits, stock-based compensation, and professional fees[290] Results of Operations - Comparison of Years Ended December 31, 2023, and 2022 Compares the company's financial performance for 2023 and 2022, highlighting changes in net sales, gross profit, and net loss Consolidated Statements of Operations Summary (in thousands) | Metric | 2023 | 2022 | Change ($) | 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] - Gross profit improvement was driven by lower inventory charges, reduced acquisition expenses, and benefits from proprietary brands, partially offset by higher restructuring charges[293] - Interest expense increased by 40.9% due to higher variable interest rates on the Term Loan[296] - 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][299] Liquidity and Capital Resources 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] - Investing activities used $4.2 million in 2023, mainly for capital expenditures in property, plant, and equipment, including peat moss harvesting operations[303] - 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] - 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][312] - 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][317][318] - 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] 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] - The industry recession in 2023 led to less consistent seasonal patterns[321] Critical Accounting Policies and Estimates 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][325] - Long-lived tangible and finite-lived intangible assets are reviewed for impairment when circumstances indicate carrying amounts may not be recoverable[326] - 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] Recently Issued Accounting Pronouncements 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] - 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] Item 7A. Quantitative and Qualitative Disclosures About Market Risk 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] - 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] - 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] - 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] Item 8. Financial Statements and Supplementary Data 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] - Deloitte & Touche LLP issued an unqualified opinion on the financial statements[340] - 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][346] Report of Independent Registered Public Accounting Firm 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] - 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][346] Consolidated Balance Sheets 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 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 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 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 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 1. Description of the Business 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] - Products include agricultural lighting, climate control, nutrients, and plant additives for cultivating various plants in controlled environments[363] 2. Basis of Presentation and Significant Accounting Policies 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] - Management makes significant estimates and assumptions for financial reporting, including sales returns, accounts receivable, inventory realization, intangible asset valuation, and deferred income taxes[365] - Business acquisitions are accounted for using the acquisition method, with contingent consideration measured at fair value and adjusted retrospectively during the measurement period[366][367][369] - Goodwill is measured as the excess of consideration transferred over identifiable assets acquired and liabilities assumed[371] - 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][381] 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] - Revenue is recognized when control of goods is transferred to customers, net of variable consideration like rebates and discounts[417] - 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][426] - Deferred income tax assets are recognized based on the likelihood of realization, with a valuation allowance maintained against U.S. deferred tax assets[430][431] 3. Goodwill and Intangible Assets, Net 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] 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 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] - 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][446] 5. Accounts Receivable, Net and Inventories 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] 6. Leases 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] - 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] 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 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] 8. Accrued Expenses and Other Current Liabilities 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 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][468] - The effective interest rate for the Term Loan was 11.55% in 2023 and 8.30% in 2022[464] - 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][467] - 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][477] - The company was in compliance with all debt covenants as of December 31, 2023[468][475] 10. Stockholders' Equity 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] - Each common stock holder is entitled to one vote per share, with no pre-emptive, redemption, subscription, or conversion rights[481] - No Investor Warrants or Placement Agent Warrants were outstanding as of December 31, 2023[483][484] 11. Stock-Based Compensation 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] 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] 12. Income Taxes 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][507] 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] - 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] 13. Commitments and Contingencies 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] - 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] 14. Fair Value Measurements 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] - 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] 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 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] Item 9A. Controls and Procedures 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] - Management assessed and concluded that internal control over financial reporting was effective as of December 31, 2023[524][525] - 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] Item 9B. Other Information 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] Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections This item is not applicable to the company - Disclosure regarding foreign jurisdictions that prevent inspections is not applicable[528] PART III Item 10. Directors, Executive Officers and Corporate Governance 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] - B. John Lindeman brings over 25 years of finance and leadership experience, previously serving as CFO of Calavo Growers, Inc[535] - Kevin O'Brien has 20 years of accounting experience, including as Chief Accounting Officer of CPI Card Group Inc[536][537] - Mark Parker has over 30 years of experience in sales and marketing, and leading complex integration projects[538] Item 11. Executive Compensation 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] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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] Item 13. Certain Relationships and Related Transactions, and Director Independence 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] Item 14. Principal Accounting Fees and Services 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] PART IV Item 15. Exhibits, Financial Statement Schedules 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][551][552] - Exhibits include stock purchase agreements, credit and guaranty agreements, corporate charter documents, equity incentive plans, and certifications[553][554][555] Item 16. Form 10-K Summary This item is not applicable and contains no summary - Form 10-K Summary is not applicable[557]