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What changed in HYDROFARM HOLDINGS GROUP, INC.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of HYDROFARM HOLDINGS GROUP, INC.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+437 added−544 removedSource: 10-K (2024-02-29) vs 10-K (2023-03-09)

Top changes in HYDROFARM HOLDINGS GROUP, INC.'s 2023 10-K

437 paragraphs added · 544 removed · 361 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

98 edited+11 added−39 removed45 unchanged
Biggest changeStrategic Enhancements to our Product Offering We significantly expanded the breadth of our proprietary product assortment through five acquisitions in 2021: • Heavy 16, a manufacturer of plant nutrients and additives, in May 2021; • House & Garden, a manufacturer of plant nutrients and additives, in June 2021; • Aurora Innovations, a manufacturer of soil, grow media, plant nutrients and additives, in July 2021; • Greenstar Plant Products, a manufacturer of plant nutrients and additives, in August 2021; and • Innovative Growers Equipment, a manufacturer of horticultural benches, racks and grow lights, in November 2021.
Biggest changeIn 2021, we completed five acquisitions of branded manufacturers of soil, grow media, plant nutrients, and horticultural benches, racks and grow lights: (i) Heavy 16, (ii) House & Garden, (iii) Aurora Innovations, (iv) Greenstar Plant Products, and (v) Innovative Growers Equipment.
Solution Based Approach to Serve Our Customers We maintain long-standing relationships with a diversified range of specialty hydroponic retailers, commercial resellers and greenhouse builders, garden centers, hardware stores, and e-commerce retailers. We serve over 2,000 wholesale customer accounts across multiple channels in North America, providing customers with the capability to purchase their entire product range from us.
Solution Based Approach to Serve Our Customers We currently maintain long-standing relationships with a diversified range of specialty hydroponic retailers, commercial resellers and greenhouse builders, garden centers, hardware stores, and e-commerce retailers. We serve over 2,000 wholesale customer accounts across multiple channels in North America, providing customers with the capability to purchase their entire product range from us.
Some of our products are sold to Cannabis Industry Participants and used in connection with cannabis businesses that are subject to federal and state controlled substance laws and regulations. Cannabis businesses are subject to a number of risks related to controlled substances, which risks could reduce demand for our products by Cannabis Industry Participants.
Some of our products are used by Cannabis Industry Participants and used in connection with cannabis businesses that are subject to federal and state controlled substance laws and regulations. Cannabis businesses are subject to a number of risks related to controlled substances, which risks could reduce demand for our products by Cannabis Industry Participants.
Bill Toler, Chairman and Chief Executive Officer, has over 35 years of executive leadership experience in supply chain and consumer packaged goods, most recently serving as President and Chief Executive Officer of Hostess Brands from April 2014 to March 2018.
Bill Toler, Chairman and Chief Executive Officer, has over 35 years of executive leadership experience in supply chain and consumer packaged goods, most recently serving as President and Chief Executive Officer of Hostess Brands from April 2014 to March 2018. B.
There is no way to predict how the federal government may treat cannabis businesses from a taxation standpoint in the future, and no assurance can be given to what extent Code Section 280E, or other tax-related laws and regulations, may be applied to cannabis businesses in the future. • Because the manufacturing (cultivation), sale, possession and use of cannabis is illegal under federal law, cannabis businesses may have restricted intellectual property and proprietary rights, particularly with respect to obtaining and enforcing patents and trademarks.
There is no way to predict how the federal government may treat cannabis businesses from a taxation standpoint in the future, and no assurance can be given to what extent Internal Revenue Code Section 280E, or other tax-related laws and regulations, may be applied to cannabis businesses in the future. • Because the manufacturing (cultivation), sale, possession and use of cannabis is illegal under federal law, cannabis businesses may have restricted intellectual property and proprietary rights, particularly with respect to obtaining and enforcing patents and trademarks.
Our inability to register, or maintain, our trademarks or file for or enforce patents on any of our inventions could materially affect our ability to protect our name, brand and proprietary technologies. In addition, cannabis businesses may face court action by third parties under the Racketeer Influenced and Corrupt Organizations Act (“RICO”).
Our inability to register, or maintain, our trademarks or file for or enforce patents on any of our inventions could materially affect our ability to protect our name, brand and proprietary technologies. In addition, cannabis businesses may face court action by third parties under the Racketeer Influenced and Corrupt Organizations Act ("RICO").
First, we strive to offer the best selection by being a branded provider of all CEA needs. Second, we seek to be the gold standard in distribution and service, leveraging our infrastructure and reach to provide customers with just-in-time (“JIT”) delivery capabilities and exceptional service across the United States and Canada.
First, we strive to offer the best selection by being a branded provider of all CEA needs. Second, we seek to be the gold standard in distribution and service, leveraging our infrastructure and reach to provide customers with just-in-time ("JIT") delivery capabilities and exceptional service across the United States and Canada.
We are subject to a number of risks, directly and indirectly through our Cannabis Industry Participants, because cannabis is illegal under federal law. Federal law and enforcement may adversely affect the implementation of medical cannabis and/or adult use cannabis laws, and may negatively impact our revenues and profits. Under the U.S.
We are subject to a number of risks, directly and indirectly through our Cannabis Industry Participants, because cannabis is illegal under United States federal law. Federal law and enforcement may adversely affect the implementation of medical cannabis and/or adult use cannabis laws, and may negatively impact our revenues and profits. Under the U.S.
Smaller Reporting Company We qualify as a smaller reporting company in accordance with Rule 12b-2 under the Exchange Act, and have elected to follow certain of the scaled back disclosure accommodations within this Annual Report on Form 10-K. 15 TABLE OF CONTENTS
Smaller Reporting Company We qualify as a smaller reporting company in accordance with Rule 12b-2 under the Exchange Act, and have elected to follow certain of the scaled back disclosure accommodations within this Annual Report on Form 10-K. 14 TABLE OF CONTENTS
Under the Bank Secrecy Act (“BSA”), banks must report to the federal government any suspected illegal activity, which includes any transaction associated with a cannabis business. These reports must be filed even though the business is operating legitimately under state law.
Under the Bank Secrecy Act ("BSA"), banks must report to the federal government any suspected illegal activity, which includes any transaction associated with a cannabis business. These reports must be filed even though the business is operating legitimately under state law.
Among other things, such a shift in public opinion could cause state jurisdictions to abandon initiatives or proposals to legalize medical or adult cannabis or adopt new laws or regulations restricting or prohibiting the medical or adult use of cannabis where it is now legal, thereby limiting the potential customers and end-users of our products who are engaged in the cannabis industry (collectively “Cannabis Industry Participants”).
Among other things, such a shift in public opinion could cause state jurisdictions to abandon initiatives or proposals to legalize medical or adult cannabis or adopt new laws or regulations restricting or prohibiting the medical or adult use of cannabis where it is now legal, thereby limiting the potential customers and end-users of our products who are engaged in the cannabis industry (collectively "Cannabis Industry Participants").
Our intellectual property and proprietary rights could be impaired as a result of our retailers’ and resellers’ involvement with cannabis business, and we could be named as a defendant in an action asserting a RICO violation. 11 TABLE OF CONTENTS • Similar to the risks relating to intellectual property and proprietary rights, there is an argument that the federal bankruptcy courts cannot provide relief for parties who engage in cannabis.
Our intellectual property and proprietary rights could be impaired as a result of our retailers’ and resellers’ involvement with cannabis business, and we could be named as a defendant in an action asserting a RICO violation. • Similar to the risks relating to intellectual property and proprietary rights, there is an argument that the federal bankruptcy courts cannot provide relief for parties who engage in cannabis.
In addition, because the manufacturing (cultivation), sale, possession and use of cannabis is illegal under federal law, companies that transact with cannabis businesses may have restricted intellectual property and proprietary rights particularly with respect to obtaining and enforcing patents and trademarks. We do not believe these restrictions apply to our business.
In addition, because the manufacturing (cultivation), harvesting, processing, distribution, sale, possession and use of cannabis is illegal under federal law, companies that transact with cannabis businesses may have restricted intellectual property and proprietary rights particularly with respect to obtaining and enforcing patents and trademarks. We do not believe these restrictions apply to our business.
We believe COVID-19 may have provided a positive demand impact in 2020 and 2021 from shelter-in-place orders in the United States, a possible negative supply chain impact from workforce disruption at international and domestic suppliers, and a possible negative growth rate impact in 2022 due to agricultural oversupply initiated during the height of COVID-related shelter-in-place orders in 2020 and 2021.
We believe COVID-19 may have provided a positive demand impact for the Company in 2020 and 2021 from shelter-in-place orders in the United States, a possible negative supply chain impact from workforce disruption at international and domestic suppliers, and a possible negative growth rate impact in 2022 and 2023 due to agricultural oversupply initiated during the height of COVID-related shelter-in-place orders in 2020 and 2021.
In addition, it is difficult for us to estimate the time or resources that would be needed for the investigation of any such matters or their final resolution 12 TABLE OF CONTENTS because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.
In addition, it is difficult for us to estimate the time or resources that would be needed for the investigation of any such matters or their final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.
In February 2014, the Financial Crimes Enforcement Network (“FinCEN”) of the Treasury Department issued a memorandum (the “FinCEN Memo”) providing guidance to banks seeking to provide services to cannabis businesses. The FinCEN Memo outlines circumstances under which banks may provide services to cannabis businesses without risking federal prosecution for violation of U.S. federal money laundering laws.
In February 2014, the Financial Crimes Enforcement Network ("FinCEN") of the Treasury Department issued a memorandum (the "FinCEN Memo") providing guidance to banks seeking to provide services to cannabis businesses. The FinCEN Memo outlines circumstances under which banks may provide services to cannabis businesses without risking federal prosecution for violation of U.S. federal money laundering laws.
The pesticides we use are either granted a license by the EPA or exempt from such a license and may be evaluated by the EPA as part of its ongoing exposure risk assessment. The EPA may decide that a pesticide we distribute will be limited or will not be re-registered for use in the United States.
The pesticides we use are either granted a license by the EPA and similar state agencies or exempt from such a license and may be evaluated by the EPA as part of its ongoing exposure risk assessment. The EPA may decide that a pesticide we distribute will be limited or will not be re-registered for use in the United States.
One supplier accounted for over 10% of purchases in 2022 and 10% of purchases in 2021. 3 TABLE OF CONTENTS The following graphic illustrates a representative set of our market-leading products across key CEA product categories: Infrastructure and Reach for Fast Delivery, High In-Stock Availability and Exceptional Service Our infrastructure and reach enables us to provide delivery and service capabilities to a highly diverse group of customers across the United States and Canada.
One supplier accounted for over 10% of purchases in 2023 and 2022. 3 TABLE OF CONTENTS The following graphic illustrates a representative set of our market-leading products across key CEA product categories: Infrastructure and Reach for Fast Delivery, High In-Stock Availability and Exceptional Service Our infrastructure and reach enables us to provide delivery and service capabilities to a diverse group of customers primarily in the United States and Canada.
It refers to supplementary guidance that Deputy Attorney General Cole issued to U.S. federal prosecutors relating to the prosecution of U.S. money laundering offenses predicated on cannabis violations of the CSA and outlines extensive due diligence and reporting requirements.
It refers to supplementary guidance that Deputy Attorney General Cole issued to U.S. federal prosecutors relating to the prosecution of U.S. money laundering offenses predicated on cannabis violations of the CSA and outlines extensive due diligence and reporting 11 TABLE OF CONTENTS requirements.
Our peat harvesting operation provides useful products for improving grow media and organic farming. Supplier Relationships and Geographic Footprint We have developed distribution relationships with a network of approximately 400 suppliers, giving us access to a best-in-class diverse product portfolio and allowing us to provide a full range of CEA solutions to our customers.
Our peat harvesting operation provides useful products for improving grow media and organic farming. Supplier Relationships and Geographic Footprint We have developed distribution relationships with a network of several hundred suppliers, giving us access to a best-in-class diverse product portfolio and allowing us to provide a full range of CEA solutions to our customers.
In addition, we selectively add distributed products when the brand or technology provides us with a more comprehensive assortment to satisfy our customers' needs. In the fourth quarter of 2022, we strategically identified products and brands to exit from our portfolio, enabling to better focus on higher value proprietary products and solutions for our customers.
We selectively add distributed products when the brand or technology provides us with a more comprehensive assortment to satisfy our customers' needs. In the fourth quarter of 2022, in connection with our restructuring plans, we strategically identified products and brands to exit from our portfolio, enabling us to better focus on higher value proprietary products and solutions for our customers.
Controlled Substances Act of 1970 (the “CSA”), the U.S. government lists cannabis as a Schedule I controlled substance (i.e., deemed to have no medical value), and accordingly the manufacturing (cultivation), sale, or possession of cannabis is federally illegal.
Controlled Substances Act of 1970 (the "CSA"), the U.S. government currently lists cannabis as a Schedule I controlled substance (i.e., deemed to have no medical value), and accordingly the manufacturing (cultivation), sale, or possession of cannabis is federally illegal.
For over 40 years, we have helped growers make growing easier and more productive. Our mission is to empower growers, farmers and cultivators with products that enable greater quality, efficiency, consistency and speed in their grow projects. For the 2022 fiscal year, our net sales were $345 million.
For over 40 years, we have helped growers make growing easier and more productive. Our mission is to empower growers, farmers and cultivators with products that enable greater quality, efficiency, consistency and speed in their grow projects. For the 2023 fiscal year, our net sales were $227 million.
End users may purchase these products for use in new and emerging industries, including the growing of cannabis, that may not grow or 10 TABLE OF CONTENTS achieve market acceptance in a manner that we can predict.
End users may purchase these products for use in new and emerging industries, including the growing of cannabis, that may not grow or achieve market acceptance in a manner that we can predict.
Such risks include, but are not limited to, the following: • Cannabis is a Schedule I drug under the CSA and regulated by the Drug Enforcement Administration (the “DEA”) as an illegal substance. The Food and Drug Administration (“FDA”), in conjunction with the DEA, licenses cannabis research and drugs containing active ingredients derived from cannabis.
Such risks include, but are not limited to, the following: • Cannabis is currently a Schedule I drug under the CSA and regulated by the Drug Enforcement Administration (the "DEA") as an illegal substance. The Food and Drug Administration ("FDA"), in conjunction with the DEA, licenses cannabis research and drugs containing active ingredients derived from cannabis.
To evaluate our health and safety performance, we use an EHS scorecard composed of leading and lagging indicators, such as progress measurements for behavioral-based safety and hazard observations, near-miss reporting, and total recordable incident rates. Corporate Structure We have been in the business of supplying indoor gardeners since May 4, 1977.
To evaluate our health and safety performance, we use an EHS scorecard composed of leading and lagging indicators, such as progress measurements for behavioral-based safety and hazard observations, near-miss reporting, and total recordable incident rates. 13 TABLE OF CONTENTS Corporate Structure We have been in the business of supplying indoor gardeners since 1977.
Today, we believe that a majority of our products are sold for use in CEA applications. Pictured: PHOTOBIO MX LED, Active Air Commercial Humidifier, Active Aqua Submersible Water Pump, Active Air Heavy Duty 16" Metal Wall Mount Fan, IGE Grow Racks, House & Garden Bud XL, and Roots Organics Soilless Hydroponic Coco Mix.
Today, we believe that a majority of our products are sold for use in CEA applications. Pictured: PHOTOBIO MX LED, Active Air Commercial Humidifier, SunBlaster LED Grow Light Garden, Active Air Heavy Duty 16" Metal Wall Mount Fan, IGE Grow Racks, House & Garden Bud XL, and Roots Organics Soilless Hydroponic Coco Mix.
Today, we believe that a majority of the CEA equipment and supplies we sell to our customers is ultimately purchased by participants in the cannabis industry, though we do not sell to cannabis growers or to retailers that sell only to the cannabis industry in the United States.
Today, we believe that a majority of the CEA equipment and supplies we sell to our customers is ultimately purchased by participants in the cannabis industry, though we do not sell directly to cannabis growers in the United States.
Individual state laws regarding the cultivation, possession, and use of cannabis for adult and medical uses conflict with federal laws prohibiting the cultivation, possession and use of cannabis for any purpose.
In the United States, individual state laws regarding the cultivation, possession, and use of cannabis for adult and medical uses conflict with federal laws prohibiting the cultivation, possession and use of cannabis for any purpose.
Increased Focus on Environmental, Social, and Governance (“ESG”) Issues We believe certain of our CEA end-markets support ESG trends as they may preserve resources, enhance the transparency and safety of our food supply chains, and deliver superior performance characteristics versus traditional agriculture.
We believe certain of our CEA end-markets support environmental, social and governance ("ESG") trends as they may preserve resources, enhance the transparency and safety of our food supply chains, and deliver superior performance characteristics versus traditional agriculture.
From 2005 through 2022, we generated a net sales compound annual growth rate (“CAGR”) of approximately 15%. Hydroponics is the farming of plants using soilless growing media and often artificial lighting in a controlled indoor or greenhouse environment. Hydroponics is the primary category of CEA, and we use the terms CEA and hydroponics interchangeably.
From 2005 through 2023, we generated a net sales compound annual growth rate ("CAGR") of approximately 12%. Hydroponics is the farming of plants using soilless growing media and often artificial lighting in a controlled indoor or greenhouse environment. Hydroponics is the primary category of CEA, and we use the terms CEA and hydroponics interchangeably.
Unless and until Congress amends the CSA with respect to medical and/or adult use cannabis, there is a risk that federal prosecutors may enforce the existing CSA.
Unless and until cannabis is de-scheduled entirely or rescheduled or Congress amends the CSA with respect to medical and/or adult use cannabis, there is a risk that federal prosecutors may enforce the existing CSA.
We believe this forecasted growth in the U.S. cannabis market may be attributable to (i) state initiatives for new adult use and/or medical use programs in additional U.S. states, (ii) expanded access for patients or consumers in existing state medical or adult use cannabis programs, and (iii) increased consumption driven by greater product diversity and choice, reduced stigma, and real and perceived health benefits in states with existing adult use or medical use programs.
We believe this forecasted growth in the U.S. cannabis market may be attributable to (i) state initiatives for new adult use and/or medical use programs in additional U.S. states, (ii) expanded access for patients or consumers in existing state medical or adult use cannabis programs, and (iii) increased consumption driven by greater product diversity and choice, reduced stigma, and real and perceived health benefits including pain management, the treatment of neurological and mental conditions, and sleep management.
It is also federally illegal to advertise the sale of cannabis or to sell paraphernalia designed or intended primarily for use with cannabis, unless the paraphernalia is authorized by federal, state, or local law. The U.S. Supreme Court ruled in United States v. Oakland Cannabis Buyers’ Cooperative, 532 U.S. 483 (2001) , and Gonzales v.
It is also federally illegal to advertise the sale of cannabis or to sell paraphernalia designed or intended primarily for use with cannabis, unless the paraphernalia is authorized by federal, state, or local law. The U.S. Supreme Court ruled in United States v.
Department of Justice (the “DOJ”) under the Obama administration issued a memorandum (the “Cole Memorandum”), characterizing strict enforcement as an inefficient use of federal investigative and prosecutorial resources.
Department of Justice (the "DOJ") under the Obama administration issued a memorandum (the "Cole Memorandum"), characterizing strict enforcement as an inefficient use of federal investigative and prosecutorial resources.
Raw materials used in our nutrient manufacturing operations primarily include nitrogen, potassium, and phosphate. In addition, our durables manufacturing operations primarily use steel, plastic, and aluminum as raw materials. We source these raw materials from suppliers located primarily in the United States, Canada, Europe, and China.
We source individual components from our supplier base to assemble certain products. Raw materials used in our nutrient manufacturing operations primarily include nitrogen, potassium, and phosphate. In addition, our durables manufacturing operations primarily use steel, plastic, and aluminum as raw materials. We source these raw materials from suppliers located primarily in the United States, Canada, Europe, and China.
Any presidential administration, current or future, could change federal enforcement policy or execution and decide to enforce the federal cannabis laws more strongly. Recent administrations have disagreed on how strongly to enforce federal cannabis laws. For example, on August 29, 2013, the U.S.
Any presidential administration, current or future, could change federal enforcement policy or execution and decide to enforce the federal cannabis laws more strongly. Recent administrations have disagreed on how strongly to enforce federal cannabis laws. Certain laws and regulations affecting the U.S. cannabis industry include the following: • On August 29, 2013, the U.S.
In Canada, we currently have manufacturing facilities in Edmonton, Alberta and Langley, British Columbia. 4 TABLE OF CONTENTS The CEA Industry Our principal industry opportunity is in the wholesale distribution of CEA equipment and supplies, which generally include grow light systems; advanced heating, ventilation, and air conditioning (“HVAC”) systems; humidity and carbon dioxide monitors and controllers; water pumps, heaters, chillers, and filters; nutrient and fertilizer delivery systems; and various growing media typically made from soil, rock wool or coconut fiber, among others.
In Canada, we currently have manufacturing facilities in Edmonton, Alberta. 4 TABLE OF CONTENTS The CEA Industry Our principal industry opportunity is in the wholesale distribution of CEA equipment and supplies, which generally include nutrients and fertilizers; grow light systems; horticulture benches and racking systems; heating, ventilation, and air conditioning ("HVAC") systems; humidity and carbon dioxide monitors and controllers; water pumps, heaters, chillers, and filters; and various growing media typically made from soil, peat, rock wool or coconut fiber, among others.
The failure by one of our partners to obtain, or the cancellation of any such registration, or the withdrawal from the marketplace of such pesticides, could have an adverse effect on our businesses, the severity of which would depend on the products involved, whether other products could be substituted and whether our competitors were similarly affected.
The failure by one of our partners to obtain, or the cancellation of any such registration, or the withdrawal from the marketplace of such pesticides, could have an adverse effect on our Company, the severity of which would depend on the products involved, whether other products could be substituted and whether our competitors were similarly affected, and whether pesticide claims or sales may be made by distributors of any Hydrofarm products which are not actively registered as such.
To better serve our customers, we are reorganizing our commercial sales team to drive a solution based approach, focusing on added competencies and product assortment gained from our recent acquisitions. DMI programs further enhance our customer capabilities, offering consultation, technical expertise, facilitated order fulfillment and JIT delivery of consumables.
To better serve our customers, we reorganized our commercial sales team to drive a solution based approach, focusing on added competencies and product assortment gained from our 2021 acquisitions. Our DMI programs offer consultation, technical expertise, facilitated order fulfillment and JIT delivery of products.
Complete Range of Innovative CEA Products We offer thousands of innovative, branded CEA products spanning lighting solutions, growing media (i.e., premium soils and soil alternatives), nutrients, equipment and supplies.
Complete Range of Innovative CEA Products We offer thousands of innovative, branded CEA products to provide solutions for our customers. Our product portfolio spans lighting, growing media (i.e., premium soils and soil alternatives), nutrients, equipment and supplies.
Manufacturing Capabilities Following our 2021 acquisitions, we now maintain internal manufacturing capabilities across seven locations in North America which includes organic certified and synthetic liquid and dry nutrient blending and bottling, organic certified soil blending and bagging, perlite production, injection molding capabilities, custom and off the shelf horticulture benches and racking system fabrication, automated LED light manufacturing (LED surface mounting and light fixture assembly), and peat harvesting and baling.
Manufacturing Capabilities We currently operate six manufacturing facilities in North America which include organic certified and synthetic liquid and dry nutrient blending and bottling, organic certified soil blending and bagging, perlite production, injection molding capabilities, custom and off the shelf horticulture benches and racking system fabrication, automated LED light manufacturing (LED surface mounting and light fixture assembly), and peat harvesting and baling.
Any change in the federal government’s enforcement of current federal laws could cause significant financial damage to us. The legal uncertainty and possible future changes in law could negatively affect our growth, revenues, results of operations and success generally.
We cannot predict how the current administration or future administrations will enforce the CSA or other laws against cannabis activities. Any change in the federal government’s enforcement of current federal laws could cause significant financial damage to us. The legal uncertainty and possible future changes in law could negatively affect our growth, revenues, results of operations and success generally.
The majority of customer orders are received through our business-to-business e-commerce platform. Through our differentiated Distributor Managed Inventory (“DMI”) Program, we partner with our network of retailers and resellers to create customized, JIT supply chain solutions for large commercial end users.
We partner with a network of third-party transportation companies that facilitate delivery to our customers. The majority of customer orders are received through our business-to-business e-commerce platform. Through our Distributor Managed Inventory ("DMI") Program, we partner with our network of customers to create customized, JIT supply chain solutions for large commercial end users.
We may need to obtain licenses to patents and other intellectual property and proprietary rights held by third parties to develop, manufacture and market our products, if, for example, we sought to develop our products, in conjunction with any patented technology.
We may need to obtain licenses to patents and other intellectual property and proprietary rights held by third parties to develop, manufacture and market our products, if, for example, we should wish to develop products that incorporate or otherwise include, third-party patented technology.
However, if we are unable to register, or maintain, our trademarks or file for or enforce patents on any of our inventions, such an inability could materially affect our ability to protect our name, brand and proprietary technologies. See “— Risks Relating to Our Intellectual Property” for more information on the risks associated with intellectual and proprietary rights.
However, if we are restricted in our ability to register, or maintain, our trademarks or to file for or enforce patents on any of our inventions, such an inability could materially affect our ability to protect our name, brand and proprietary technologies.
Other laws that directly impact the cannabis growers that are end users of certain of our products include: • Businesses trafficking in cannabis may not take tax deductions for costs beyond costs of goods sold under Code Section 280E.
Therefore, strict enforcement of federal law regarding cannabis would likely adversely affect our revenues and results of operations. Other laws that directly impact the cannabis growers that are end users of certain of our products include: • Businesses trafficking in cannabis may not take tax deductions for costs beyond costs of goods sold under Internal Revenue Code Section 280E.
Even if we are able to comply with all such laws and regulations and obtain all necessary registrations and licenses, the pesticides or other products we apply or use, or the manner in which we apply or use them, could be effected by changing regulations or changing interpretations of the regulations, could be alleged to cause injury to the environment, to people or to animals, or such products could be banned in certain circumstances.
Even if we are able to comply with all such laws and regulations and obtain all necessary registrations and licenses, the pesticides or other products we apply or use, or the manner in which we apply or use them, could be effected by changing regulations or changing interpretations of the regulations, could be alleged to cause injury to the environment, to people or to animals, or such products could be banned in certain circumstances. 8 TABLE OF CONTENTS Cannabis Industry We sell our products through third-party retailers and resellers and not directly to cannabis growers in countries that prohibit the sale and use of cannabis, including the United States.
We leverage a seasoned sales team and our internal product category experts to provide industry insights, product capabilities and customer support. We maintain long-term relationships with the majority of our largest customers.
We leverage a seasoned sales team and our internal product category experts to provide industry insights, product capabilities and customer support.
Despite these current factors negatively impacting the industry, according to certain industry publications 4 , the U.S. cannabis market is projected to reach approximately $52.6 billion by 2026, up from approximately $33.0 billion in 2022, representing a 12.4% CAGR.
Despite these factors negatively impacting the industry, according to certain industry publications, the U.S. cannabis market is projected to reach approximately $57 billion by 2028, up from an estimated $30 billion in 2022, representing a 11.3% CAGR.
Businesses involved in the cannabis industry, and investments in such businesses, are subject to a variety of laws and regulations related to money laundering, financial recordkeeping and proceeds of crimes. We sell our products through third-party retailers and resellers which do not exclusively sell to the cannabis industry.
Businesses involved in the cannabis industry, and investments in such businesses, are subject to a variety of laws and regulations related to money laundering, financial recordkeeping and proceeds of crimes.
Expanding populations, limited natural resources and a focus on the environment and the security of our agricultural systems have illuminated the benefits of CEA compared to traditional outdoor agriculture.
The growth of CEA crop output may subsequently drive growth in the wholesale CEA equipment and supplies industry in which we operate. Expanding populations, limited natural resources and a focus on the environment and the security of our agricultural systems have illuminated the benefits of CEA compared to traditional outdoor agriculture.
Accordingly, laws and regulations governing the cultivation and sale of cannabis and related products have an indirect effect on our business. Legislation and regulations pertaining to the use and growth of cannabis are enacted on both the state and federal government level within the United States.
Legislation and regulations pertaining to the use and growth of cannabis are enacted on both the state and federal government level within the United States. The federal and state laws and regulations governing the growth and use of cannabis are subject to change.
According to a November 2022 poll by Pew Research Center, public support for the legalization of cannabis in the United States has significantly increased. Approximately 59% of U.S. adults say that cannabis should be legal for recreational and medical use, while an additional 30% say it should be legal for medical use only.
In addition, states with legalized adult use cannabis may offer state governments with additional taxation revenue and state job creation. According to a November 2022 poll by Pew Research Center, approximately 59% of U.S. adults say that cannabis should be legal for recreational and medical use, while an additional 30% say it should be legal for medical use only.
Our ability to compete effectively depends in part on our rights to trademarks, patents and other intellectual property rights we own or license. We have not sought to register every one of our trademarks either in the United States or in every country in which such mark is used.
We have not sought to register every one of our trademarks either in the United States or in every country in which such mark is used.
Authorities throughout the world have implemented measures to contain or mitigate the spread of the virus, including at various times physical distancing, travel bans and restrictions, closure of non-essential businesses, quarantines, work-from-home directives, mask requirements, shelter-in-place orders and vaccination programs, but despite these efforts, COVID-19 has persisted, has mutated into new variants, and is expected to become endemic.
At various times, authorities throughout the world have implemented measures to contain or mitigate the spread of the virus, including physical distancing, travel bans and restrictions, closure of non-essential businesses, quarantines, work-from-home directives, mask requirements, shelter-in-place orders and vaccination programs, each of which have significantly impacted the ability of many companies to conduct business.
CEA is a component of the global commercial agriculture and consumer gardening sectors. According to industry publications, it estimated that the global CEA industry grew to total approximately $75 billion in 2022 1 , and is expected to grow at a CAGR of 19% from 2022 to 2027 1 .
CEA is a component of the global commercial agriculture and consumer gardening sectors. According to industry publications, the global CEA industry was estimated at approximately $74 billion in 2022, and is expected to grow to approximately $378 billion by 2032 representing a CAGR of 18%.
The Cole Memorandum provided guidance to all federal prosecutors and indicated that federal enforcement of the CSA against cannabis-related conduct should be focused on specific priorities, including cannabis distribution to minors, violence in connection with cannabis distribution, cannabis cultivation on federal property, and collection of cannabis-derived revenue by criminal enterprises, gangs and cartels.
The Cole Memorandum provided guidance to all federal prosecutors and indicated that federal enforcement of the CSA against cannabis-related conduct should be focused on specific priorities, including cannabis distribution to minors, violence in connection with cannabis 10 TABLE OF CONTENTS distribution, cannabis cultivation on federal property, and collection of cannabis-derived revenue by criminal enterprises, gangs and cartels. • On January 4, 2018, the DOJ under the Trump administration issued a memorandum (the "Sessions Memorandum"), which effectively rescinded the Cole Memorandum and directed federal prosecutors to enforce the CSA and to follow well-established principles when pursuing prosecutions related to cannabis activities.
We also believe that increasing the value to our wholesale network will allow us to grow within key accounts and expand sales of our products and services to new accounts. 8 TABLE OF CONTENTS Expanding our Offerings within CEA Food and Floral Markets and Garden Centers CEA offers a more sustainable and secure alternative to traditional outdoor agriculture, allowing food to be grown closer to where it is ultimately consumed, thereby reducing supply chain-related risks and food waste.
Expanding our Offerings within CEA Food and Floral Markets and Garden Centers CEA offers a more sustainable and secure alternative to traditional outdoor agriculture, allowing food to be grown closer to where it is ultimately consumed, thereby reducing supply chain-related risks and food waste.
Intellectual Property We own 15 issued U.S. design patents, 2 issued U.S. utility patents, 4 issued foreign patents and designs, 104 registered U.S. trademarks, and 114 registered foreign trademarks that enable us to position ourselves and our products to a wide range of customers. Our 21 issued patents cover grow lighting and hydroponic systems and components.
Intellectual Property We own 15 issued U.S. design patents, 2 issued U.S. utility patents, 4 issued foreign patents and designs, 106 registered U.S. trademarks, and 121 registered foreign trademarks. Our 21 issued patents cover grow lighting and hydroponic systems and components. These issued patents and our registered trademarks allow us to build out our proprietary brand products.
We have implemented business continuity plans and followed safety protocols as recommended by government guidelines, and we will continue to do so as the state of COVID-19 evolves. As of the filing of this Annual Report on Form 10-K, our operations are not impacted by any COVID-19 related facility closures, lockdown measures, travel restrictions or similar limitations.
As of the filing of this Annual Report on Form 10-K, our operations are not impacted by any COVID-19 related facility closures, lockdown measures, travel restrictions or similar limitations.
In Canada, we currently operate distribution centers in Langley, British Columbia and Cambridge, Ontario. Outside of North America, we operate a distribution center in Zaragoza, Spain, and we maintain product quality assurance and supply chain management in Shenzhen, China. We partner with a network of third-party logistics companies that facilitate expeditious delivery to our customers across the globe.
In Canada, we currently operate distribution centers in Surrey, British Columbia and Cambridge, Ontario. Outside of North America, we operate a distribution center in Zaragoza, Spain. We use a third party in China to assist with our international supply chain management and quality assurance in Asia.
Our proprietary brands generally provide for higher gross profit margins compared to distributed brands and a competitive advantage as we offer products that cannot be purchased elsewhere. We invest in research and development to improve our products and manufacturing processes and to expand our overall brand value.
Approximately 75% of our sales relates to proprietary and preferred brands, which generally provide for higher gross profit margins compared to distributed brands and a competitive advantage as we offer products that cannot be purchased elsewhere.
Raich , 545 U.S. 1 (2005), that the federal government has the right to regulate and criminalize cannabis, even for medical purposes. The illegality of cannabis under federal law preempts state laws that legalize or decriminalize its use. Therefore, strict enforcement of federal law regarding cannabis would likely adversely affect our revenues and results of operations.
Oakland Cannabis Buyers’ Cooperative, 532 U.S. 483 (2001) , and Gonzales v. 9 TABLE OF CONTENTS Raich , 545 U.S. 1 (2005) that the federal government has the right to regulate and criminalize cannabis, even for medical purposes. The illegality of cannabis under federal law preempts state laws that legalize or decriminalize its use.
House of Representatives has passed the Secure and Fair Enforcement (SAFE) Act (the “SAFE Banking Act”) numerous times, and, if enacted, this bill would protect banks and credit unions from federal prosecution for providing services to cannabis companies.
House of Representatives passed the Secure and Fair Enforcement (SAFE) Act (the "SAFE Banking Act") numerous times. This bill was intended to protect banks and credit unions from federal prosecution for providing services to cannabis companies, thus allowing cannabis companies greater access to deposit accounts, insurance, and other financial institutions. However, the U.S.
We believe the adoption of CEA will grow particularly in the commercial agriculture industry, where CEA can be 1 KD Market Insights Controlled Environment Agriculture Market, February 2022 2 Markets and Markets TM Hydroponics Market Global Forecast, September 2022 3 Hydroponics Market Global Forecast to 2025, July 2020 5 TABLE OF CONTENTS deployed to achieve results that are simultaneously more efficient for the planet and profitable for growers.
We believe the adoption of CEA will grow particularly in the commercial agriculture industry, where CEA can be deployed to achieve results that are simultaneously more efficient for the planet and profitable for growers.
We offer everything growers need to ensure their operations are maximizing efficiency, output and quality. We maintain an extensive portfolio of products which includes over 35 internally developed or acquired proprietary brands across thousands of stock keeping units ("SKUs") as well as over 60 preferred brands. Approximately 75% of our sales relate to proprietary and preferred brands.
We maintain an extensive portfolio of products which includes approximately 35 internally developed or acquired proprietary brands across thousands of stock keeping units ("SKUs") as well as over 45 preferred brands.
Some of our most well-known proprietary brands include Phantom, PhotoBio, Active Aqua, Active Air, HEAVY 16, House & Garden, Mad Farmer, Roots Organics, Soul, Procision, Grotek, Gaia Green, and Innovative Growers Equipment. We estimate that approximately two-thirds of our net sales relate to recurring consumable products, including growing media, nutrients and supplies that are subject to regular replenishment.
Some of our most well-known proprietary brands include Active Air, Active Aqua, Aurora Peat Products, HEAVY 16, House & Garden, Gaia Green, Grotek, Innovative Growers Equipment, Mad Farmer, Phantom, PHOTOBIO, Procision, Roots Organics, Soul, and SunBlaster.
Our compensation philosophy is to implement a program that enables us to attract, motivate, reward, and retain high-performing employees who can create and sustain value for our stockholders over the long term. In addition, our compensation program is designed to provide a fair and balanced opportunity that appropriately rewards employees for their direct contributions to our success.
Additionally, we use temporary workers as needed to provide flexibility for our business including for seasonal projects. Our compensation philosophy is to implement a program that enables us to attract, motivate, reward, and retain high-performing employees who can create and sustain value for our stockholders over the long term.
These exclusive and preferred brands generally provide higher gross profit margins compared to distributed brands and provide a competitive advantage as we offer our customers a breadth of products that cannot be purchased elsewhere. We source individual components from our supplier base to assemble certain products, and use a purchasing team in China.
The majority of products we offer are produced by us or are supplied to us under exclusive or preferred brand relationships. These exclusive and preferred brands generally provide higher gross profit margins compared to distributed brands and provide a competitive advantage as we offer our customers a breadth of products that cannot be purchased elsewhere.
Management believes that COVID-19 drove a greater volume of sales by our customers in select time periods, thus creating demand for our CEA supplies and equipment.
Management believes that COVID-19 drove a greater volume of sales by our customers in select time periods, thus creating demand for our CEA supplies and equipment. We continue to monitor the COVID-19 pandemic and will adjust our mitigation strategies as necessary to address changing health, operational or financial risks that may arise.
The DOJ under the Biden administration has not readopted the Cole Memorandum, but President Biden has indicated support for decriminalization of cannabis.
The DOJ under the Biden administration has not readopted the Cole Memorandum, but President Biden has indicated support for decriminalization of cannabis. • On October 6, 2022, President Biden issued an executive order pardoning all persons convicted of simple possession of cannabis under the CSA.
Additionally, we believe consumer gardening can be an important driver of future CEA growth, as many U.S. households participate in lawn and gardening activities today.
Additionally, we believe consumer gardening can be an important driver of future CEA growth, as many U.S. households participate in lawn and gardening activities today. To that end, we have reorganized our sales efforts to focus on the CEA food and floral market, and the consumer gardening markets, where we are well suited to expand our business.
A substantial number of our products in our growing media and nutrients product lines are subject to U.S. state specific registration requirements. Organic listed products are audited by the California Department of Food and Agriculture and the Organic Materials Review Institute. Finished goods and ingredients labeled as pesticides are regulated by the Environmental Protection Agency (the “EPA”).
Organic listed products are audited by the California Department of Food and Agriculture and/or the Organic Materials Review Institute. Finished goods and ingredients labeled as pesticides are regulated by federal and state offices of the Environmental Protection Agency (the "EPA"). Canadian based operations and product lines are regulated under the Canadian Food Inspection Agency.
We could be implicated in such enforcement or sanctions because of the sale of our products to such Cannabis Industry Participants. • The failure of our Cannabis Industry Participants to comply with applicable controlled substance laws and regulations, or the cost of compliance with these laws and regulations, may adversely affect the demand for our products and, as a result, the financial results of our business operations and our financial condition. 13 TABLE OF CONTENTS Furthermore, the Loan and Security Agreement by and among certain of our subsidiaries (the “Subsidiary Obligors”) and JPMorgan Chase Bank, N.A., dated March 29, 2021, (the “JPMorgan Credit Facility”) restricts our ability to sell our products directly to cannabis growers or to retailers that sell only to the cannabis industry in countries where it is federally illegal.
We could be implicated in such enforcement or sanctions because of the sale of our products to such Cannabis Industry Participants. • The failure of our Cannabis Industry Participants to comply with applicable controlled substance laws and regulations, or the cost of compliance with these laws and regulations, may adversely affect the demand for our products and, as a result, the financial results of our business operations and our financial condition.
Cannabis Industry We sell our products through third-party retailers and resellers and not directly to cannabis growers in countries that prohibit the sale and use of cannabis, including the United States. Nonetheless, it is evident to us that the legalization of cannabis in many U.S. states and Canada has ultimately had a significant, positive impact on our industry.
Nonetheless, it is evident to us that the legalization of cannabis in many U.S. states and Canada has ultimately had a significant, positive impact on our industry. Accordingly, laws and regulations governing the cultivation and sale of cannabis and related products have an indirect effect on our business.
We have cultivated long-term relationships with several of our main suppliers. We also maintain a geographic footprint that enables us to efficiently serve our customers across North America.
We have cultivated long-term relationships with several of our main suppliers. We maintain a broad geographic footprint of eight distribution centers to efficiently serve our customers in North America. We also operate a distribution center in Zaragoza, Spain, and we are focusing on expanding our international sales.
These regulations 4 MJBiz Daily, June 2022 6 TABLE OF CONTENTS enhance product safety and transparency to consumers but usually necessitate the use of CEA in cannabis cultivation in order to meet mandated tetrahydrocannabinol (THC) content or impurity tolerances.
In the United States and Canada, regulatory oversight and statutory requirements for growers and their products enhance product safety and transparency to consumers, and usually necessitate the use of CEA in cannabis cultivation in order to meet mandated tetrahydrocannabinol (THC) content or impurity tolerances.
As previously described, an agricultural oversupply has impacted our industry, driving cannabis wholesale prices down significantly and resulting in a decrease in indoor and outdoor cultivation.
An agricultural 5 TABLE OF CONTENTS oversupply has impacted our industry, driving cannabis wholesale prices down and resulting in a decrease in indoor and outdoor cultivation. We believe the oversupply has been impacted by the market impacts of the COVID-19 pandemic.
CEA implementation is driven by the factors listed above as well as growth in fruit and vegetable farming, consumer gardening and the adoption of vertical farming. Vertical farming, a subsector of CEA, has gained popularity mainly due to its unique advantage of maximizing yield by growing crops in layers.
CEA implementation is driven by the factors listed above as well as fruit and vegetable farming, consumer gardening and the adoption of vertical farming.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeRisks Relating to Our Business • our proprietary brand offerings expose us to various risks; • our ability to keep pace with technological advances; • competitive industry pressures; • long-lived assets and inventories represent a significant portion of our total assets and we may be required to record impairments or write-downs in future periods; • if we fail to manage our inventory effectively, our results of operations, financial condition and liquidity may be materially and adversely affected; • the risk of damage to, loss of, or theft of our inventory; • the risk that adverse weather may impact our peat harvest; • the risk of product defects; • general economic and/or industry and financial conditions, specifically in the United States and Canada; • increased prices and inflation could negatively impact our margin performance and our financial results. • acquisitions, other strategic alliances and investments could result in operating difficulties, dilution and other harmful consequences that may adversely impact our business and results of operations; • our commitments to long-term leases and our ability to renew or exit our leases; • the costs and risks of operating internationally; • manufacturing risks as a result of recent acquisitions; • our ability to comply with environmental regulations; • interruptions in our supply chain; • increasing scrutiny regarding environmental, social and governance practices; • the impact of climate change on our facilities and operations; • risks related to corporate and social responsibility and reputation; • the costs of being a public company; • limitations and possible failures of our internal control systems; • our ability to maintain effective internal control over financial reporting; • the adverse effects of public health epidemics, including the COVID-19 pandemic, on our business, results of operations and financial operations; • damage to our reputation could have an adverse effect on our business; • our marketing activities may not be successful; • a disruption or breach of our information technology systems; • potential inaccuracies in our estimates and assumptions relied upon in preparing consolidated financial statements; • the costs of potential tariffs or a global trade war; • possible difficulties in raising sufficient capital to fund our operations; and • the potential for product liability lawsuits.
Biggest changeRisks Relating to Our Business • our proprietary brand offerings expose us to various risks; • competitive industry pressures; • long-lived assets and inventories represent a significant portion of our total assets and we may be required to record impairments or write-downs in future periods; • if we fail to manage our inventory effectively, our results of operations, financial condition and liquidity may be materially and adversely affected; • the risk of damage to, loss of, or theft of our inventory; • manufacturing risks as a result of recent acquisitions; • expenses and risks associated with our restructuring activities; • the risk that adverse weather may impact our peat harvest; • the risk of product defects; • our ability to keep pace with technological advances; • increased prices and inflation could negatively impact our margin performance and our financial results; • acquisitions, other strategic alliances and investments could result in operating difficulties, dilution and other harmful consequences that may adversely impact our business and results of operations; • our commitments to long-term leases and our ability to renew or exit our leases; • the costs and risks of operating internationally; • our ability to comply with environmental regulations; • interruptions in our supply chain; • general economic and/or industry and financial conditions, specifically in the United States and Canada; • increasing scrutiny, costs and compliance with environmental, social and governance practices; • the impact of climate change on our facilities and operations; • the costs of being a public company; • limitations and possible failures of our internal control systems; • our ability to maintain effective internal control over financial reporting; • the adverse effects of public health epidemics, including the COVID-19 pandemic, on our business, results of operations and financial operations; • damage to our reputation could have an adverse effect on our business; • our marketing activities may not be successful; • a disruption or breach of our information technology systems; • potential inaccuracies in our estimates and assumptions relied upon in preparing consolidated financial statements; • the costs of potential tariffs or a global trade war; • possible difficulties in raising sufficient capital to fund our operations; and • the potential for product liability lawsuits.
Any operational failure or breach of security from these increasingly sophisticated cyber threats could lead to the loss or disclosure of both our and our retail customers’ financial, product, and other confidential information, as well as personally identifiable information about our employees or customers, result in negative publicity and expensive and time-consuming regulatory or other legal proceedings, damage our relationships with our customers and have a material adverse effect on our business and reputation.
Any operational failure or breach of security from these increasingly sophisticated cyber threats could lead to the loss or disclosure of both our and our customers’ financial, product, and other confidential information, as well as personally identifiable information about our employees or customers, result in negative publicity and expensive and time-consuming regulatory or other legal proceedings, damage our relationships with our customers and have a material adverse effect on our business and reputation.
The areas where we face risks may include, but are not limited to: • diversion of management’s time and focus from operating our business to acquisition integration challenges; • failure to successfully further develop the acquired business or products; • implementation or remediation of controls, procedures and policies at the acquired company; • integration of the acquired company’s accounting, information technology (IT) systems, human resources and other administrative systems, and coordination of product, engineering and sales and marketing functions; • transition of operations, users and customers onto our existing platforms; • reliance on the expertise of our strategic partners with respect to market development, sales, local regulatory compliance and other operational matters; 20 TABLE OF CONTENTS • failure to obtain required approvals on a timely basis, if at all, from governmental authorities, or conditions placed upon approval, under competition and antitrust laws which could, among other things, delay or prevent us from completing a transaction, or otherwise restrict our ability to realize the expected financial or strategic goals of an acquisition; • in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries; • cultural challenges associated with integrating employees from the acquired company into our organization, and retention of employees from the businesses we acquire; • liability for or reputational harm from activities of the acquired company before the acquisition or from our strategic partners, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; and • litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders or other third parties.
The areas where we face risks may include, but are not limited to: • diversion of management’s time and focus from operating our business to acquisition integration challenges; • failure to successfully further develop the acquired business or products; • implementation or remediation of controls, procedures and policies at the acquired company; • integration of the acquired company’s accounting, information technology (IT) systems, human resources and other administrative systems, and coordination of product, engineering and sales and marketing functions; • transition of operations, users and customers onto our existing platforms; • reliance on the expertise of our strategic partners with respect to market development, sales, local regulatory compliance and other operational matters; • failure to obtain required approvals on a timely basis, if at all, from governmental authorities, or conditions placed upon approval, under competition and antitrust laws which could, among other things, delay or prevent us from completing a transaction, or otherwise restrict our ability to realize the expected financial or strategic goals of an acquisition; • in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries; • cultural challenges associated with integrating employees from the acquired company into our organization, and retention of employees from the businesses we acquire; • liability for or reputational harm from activities of the acquired company before the acquisition or from our strategic partners, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; and • litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders or other third parties.
See “— Risks Relating to Our Indebtedness.” Certain of our products may be purchased for use in new and emerging industries and/or be subject to varying, inconsistent, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, future scientific research and public perception. We sell products, including hydroponic gardening products, through third-party retailers and resellers.
See "Risks Relating to Our Indebtedness." Certain of our products may be purchased for use in new and emerging industries and/or be subject to varying, inconsistent, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, future scientific research and public perception. We sell products, including hydroponic gardening products, through third-party retailers and resellers.
Risks Relating to Our Indebtedness The JPMorgan credit facilities contain, and future debt facilities may contain, restrictions that limit our flexibility in operating our business; we fund interest and amortization payments from cash flows generated in our operations, and to the extent that cash flows deteriorate, it could be difficult or impossible to timely make our debt service payments or obtain additional debt financing.
Risks Relating to Our Indebtedness The Credit Facilities contain, and future debt facilities may contain, restrictions that limit our flexibility in operating our business; we fund interest and amortization payments from cash flows generated in our operations, and to the extent that cash flows deteriorate, it could be difficult or impossible to timely make our debt service payments or obtain additional debt financing.
Our inventory is vulnerable to damage or loss caused by accidents or natural disasters, and we face the risk of theft of our products from inventory or during shipment. Our inventory is stored at warehouses in the United States and Canada. Our inventory is vulnerable to accidents, fire, flood, earthquakes, and similar events that may impact our facilities.
Our inventory is vulnerable to damage or loss caused by accidents or natural disasters, and we face the risk of theft of our products from inventory or during shipment. Our inventory is stored at warehouses in the United States, Canada and Spain. Our inventory is vulnerable to accidents, fire, flood, earthquakes, and similar events that may impact our facilities.
Additionally, damage or disruption to our production or distribution capabilities resulting from weather, any potential effects of climate change, natural disaster, disease, crop spoilage, fire or explosion, terrorism, pandemics, strikes, repairs or enhancements at our facilities, or other reasons, could impair our ability to produce or sell our products.
Additionally, damage or disruption to our production or distribution capabilities resulting from weather, any potential effects of climate change, natural disaster, disease, crop spoilage, fire or explosion, flooding, terrorism, pandemics, strikes, repairs or enhancements at our facilities, or other reasons, could impair our ability to produce or sell our products.
Moreover, the breach of any of these compliance requirements may result in the occurrence of an event of default under each of the JPMorgan Revolving Loan Facility and the Term Loan, which would entitle JPMorgan to terminate the commitments thereunder and declare all loans then outstanding to be due and payable.
Moreover, the breach of any of these compliance requirements may result in the occurrence of an event of default under each of the Revolving Credit Facility and the Term Loan, which would entitle JPMorgan to terminate the commitments thereunder and declare all loans then outstanding to be due and payable.
Such risks include, but are not limited to, the following: • Cannabis is a Schedule I drug under the CSA and regulated by the DEA as an illegal substance. The FDA, in conjunction with the DEA, licenses cannabis research and drugs containing active ingredients derived from cannabis.
Such risks include, but are not limited to, the following: • Cannabis is currently a Schedule I drug under the CSA and regulated by the DEA as an illegal substance. The FDA, in conjunction with the DEA, licenses cannabis research and drugs containing active ingredients derived from cannabis.
A delay or other inability of the Company to complete product research and development and successfully reformulate our products in response to any such regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.
A delay or other inability of the Company to complete product research and development and successfully reformulate and/or relabel our products in response to any such regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.
The existing JPMorgan credit facilities also require, and any documents governing our or our subsidiaries’ future indebtedness may require, us to meet certain financial ratios and tests in order to enter into certain transactions, incur additional indebtedness, pay dividends and other actions.
The existing Credit Facilities also require, and any documents governing our or our subsidiaries’ future indebtedness may require, us to meet certain financial ratios and tests in order to enter into certain transactions, incur additional indebtedness, pay dividends and other actions.
Under the Controlled Substances Act, the U.S. federal government lists cannabis as a Schedule I controlled substance (i.e., deemed to have no medical value), and accordingly the manufacturing (cultivation), sale, or possession of cannabis is federally illegal.
Under the Controlled Substances Act, the U.S. federal government currently lists cannabis as a Schedule I controlled substance (i.e., deemed to have no medical value), and accordingly the manufacturing (cultivation), sale, or possession of cannabis is federally illegal.
We and our Subsidiary Obligors’ ability to comply with these and other provisions of the existing JPMorgan credit facilities is dependent on our future performance, which will be subject to many factors, some of which are beyond our control.
We and our Subsidiary Obligors’ ability to comply with these and other provisions of the existing Credit Facilities is dependent on our future performance, which will be subject to many factors, some of which are beyond our control.
The foregoing events would have a material adverse effect on our business, results of operations and financial condition. Substantially all of our and our Subsidiary Obligors’ assets are pledged to secure obligations under the JPMorgan credit facilities.
The foregoing events would have a material adverse effect on our business, results of operations and financial condition. Substantially all of our and our Subsidiary Obligors’ assets are pledged to secure obligations under the Credit Facilities.
We do not ultimately have direct control over how the cannabis industry is perceived by others. Reputation loss may result in decreased investor confidence, increased challenges in developing and maintaining community relations and an impediment to our overall ability to advance our business strategy and realize our growth prospects, thereby having a material adverse impact on our business.
We do not have control over how the cannabis industry is perceived by others. Reputation loss may result in decreased investor confidence, increased challenges in developing and maintaining community relations and an impediment to our overall ability to advance our business strategy and realize our growth prospects, thereby having a material adverse impact on our business.
Accordingly, we are subject to risks associated with operating in foreign countries, including: • fluctuations in currency exchange rates; • limitations on the remittance of dividends and other payments by foreign subsidiaries; • additional costs of compliance with local regulations; • additional costs associated with fuel prices and freight/import expenses; • in certain countries, historically higher rates of inflation than in the United States; • changes in the economic conditions or consumer preferences or demand for our products in these markets; • restrictive actions by multi-national governing bodies, foreign governments or subdivisions thereof; • changes in foreign labor laws and regulations affecting our ability to hire and retain employees; • changes in U.S. and foreign laws regarding trade and investment; • less robust protection of our intellectual property and proprietary rights under foreign laws; • difficulty in obtaining distribution and support for our products; and • our ability to collect trade receivables in foreign jurisdictions.
We are subject to risks associated with operating in foreign countries, including: • fluctuations in currency exchange rates; • limitations on the remittance of dividends and other payments by foreign subsidiaries; • additional costs of compliance with local regulations; • additional costs associated with fuel prices and freight/import expenses; • in certain countries, historically higher rates of inflation than in the United States; • changes in the economic conditions or consumer preferences or demand for our products in these markets; • restrictive actions by multi-national governing bodies, foreign governments or subdivisions thereof; • changes in foreign labor laws and regulations affecting our ability to hire and retain employees; • changes in U.S. and foreign laws regarding trade and investment; • less robust protection of our intellectual property and proprietary rights under foreign laws; 21 TABLE OF CONTENTS • difficulty in obtaining distribution and support for our products; and • our ability to collect trade receivables in foreign jurisdictions.
Factors that could cause fluctuations in the trading price of our common stock include the following: • price and volume fluctuations in the overall stock market from time to time; • volatility in the trading prices and trading volumes of stocks in our industry; • changes in operating performance and stock market valuations of other companies generally, or those in our industry in particular; • sales of shares of our common stock by us or our stockholders; 44 TABLE OF CONTENTS • failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow our company or our failure to meet these estimates or the expectations of investors; • the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections; • announcements by us or our competitors of new offerings or platform features; • the public’s reaction to our press releases, other public announcements and filings with the SEC; • rumors and market speculation involving us or other companies in our industry; • actual or anticipated changes in our results of operations or fluctuations in our results of operations; • actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally; • litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors; • developments or disputes concerning our intellectual property or other proprietary rights; • announced or completed acquisitions of businesses, services or technologies by us or our competitors; • new laws or regulations or new interpretations of existing laws or regulations applicable to our business; • changes in accounting standards, policies, guidelines, interpretations or principles; • any significant change in our management; • the continued threat of terrorism and the impact of military and other action, including military actions involving Russia and Ukraine; and • general economic conditions and slow or negative growth of our markets.
Factors that could cause fluctuations in the trading price of our common stock include the following: 39 TABLE OF CONTENTS • price and volume fluctuations in the overall stock market from time to time; • volatility in the trading prices and trading volumes of stocks in our industry; • changes in operating performance and stock market valuations of other companies generally, or those in our industry in particular; • sales of shares of our common stock by us or our stockholders; • failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow our company or our failure to meet these estimates or the expectations of investors; • the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections; • announcements by us or our competitors of new offerings or platform features; • the public’s reaction to our press releases, other public announcements and filings with the SEC; • rumors and market speculation involving us or other companies in our industry; • actual or anticipated changes in our results of operations or fluctuations in our results of operations; • actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally; • litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors; • developments or disputes concerning our intellectual property or other proprietary rights; • announced or completed acquisitions of businesses, services or technologies by us or our competitors; • new laws or regulations or new interpretations of existing laws or regulations applicable to our business; • changes in accounting standards, policies, guidelines, interpretations or principles; • any significant change in our management; • the continued threat of terrorism and the impact of military and other action, including military actions involving Russia and Ukraine and the ongoing conflict in Israel and Gaza; and • general economic conditions and slow or negative growth of our markets.
Although we continue to devote significant resources to support our brands, unfavorable economic and/or industry conditions may negatively affect consumer demand for our products.
Although we continue to devote significant resources to support our brands, unfavorable economic and/or industry conditions may negatively affect demand for our products.
Any failure or perceived failure by us to comply with any applicable federal, state or similar foreign laws and regulations relating to data privacy and security could result in 38 TABLE OF CONTENTS damage to our reputation, as well as proceedings or litigation by government agencies or other third parties, including class action privacy litigation in certain jurisdictions, which would subject us to significant fines, sanctions, awards, penalties or judgements, all of which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Any failure or perceived failure by us to comply with any applicable federal, state or similar foreign laws and regulations relating to data privacy and security could result in damage to our reputation, as well as proceedings or litigation by government agencies or other third parties, including class action privacy litigation in certain jurisdictions, which would subject us to significant fines, sanctions, awards, penalties or judgements, all of which could have a material adverse effect on our business, financial condition, results of operations and prospects.
There is no way to predict how the federal government may treat cannabis businesses from a 33 TABLE OF CONTENTS taxation standpoint in the future and no assurance can be given to what extent Code Section 280E, or other tax-related laws and regulations, may be applied to cannabis businesses in the future. • Because the manufacturing (cultivation), sale, possession and use of cannabis is illegal under federal law, cannabis businesses may have restricted intellectual property and proprietary rights, particularly with respect to obtaining and enforcing patents and trademarks.
There is no way to predict how the federal government may treat cannabis businesses from a taxation standpoint in the future and no assurance can be given to what extent Code Section 280E, or other tax-related laws and regulations, may be applied to cannabis businesses in the future. • Because the manufacturing (cultivation), sale, possession and use of cannabis is illegal under federal law, cannabis businesses may have restricted intellectual property and proprietary rights, particularly with respect to obtaining and enforcing patents and trademarks.
A decision by a regulatory agency to significantly restrict the use of such products that have traditionally been used in the cultivation of our leading products could have an adverse impact on those companies providing us with such regulated products, and as a result, limit our ability to sell these products.
A decision by a regulatory agency to significantly restrict the use of such products that have traditionally been used in the cultivation of our products could have an adverse impact on us or those companies providing us with such regulated products, and as a result, limit our ability to sell these products.
The doctrine of corporate opportunity is intended to preclude officers or directors or other fiduciaries from personally benefiting from opportunities that belong to the corporation. Our Certificate of Incorporation provides that the doctrine of “corporate opportunity” does not apply with respect to any director or stockholder who is not employed by us or our affiliates.
The doctrine of corporate opportunity is intended to preclude officers or directors or other fiduciaries from personally benefiting from opportunities that belong to the corporation. Our Certificate of Incorporation provides that the doctrine of "corporate opportunity" does not apply with respect to any director or stockholder who is not employed by us or our affiliates.
Our failure to comply with any of these regulations or our inability to adequately predict the manner in which these local regulations are interpreted and applied to our business by the applicable enforcement agencies could have a materially adverse effect on our business, financial condition and results of operations.
Our failure to comply with any of these regulations or our inability to adequately predict the manner in which these local regulations are interpreted and applied to our business by the applicable enforcement agencies could have a material adverse effect on our business, financial condition and results of operations.
We have experienced recent sales declines, which we believe are primarily a result of agricultural oversupply impacting our market.
We have experienced sales declines, which we believe are primarily a result of agricultural oversupply impacting our market.
We may not be able to adequately obtain, maintain, protect or enforce our intellectual property and other proprietary rights that are material to our business. Our ability to compete effectively depends in part on our rights to trademarks, patents and other intellectual property rights we own or license.
Risks Relating to Our Intellectual Property We may not be able to adequately obtain, maintain, protect or enforce our intellectual property and other proprietary rights that are material to our business. Our ability to compete effectively depends in part on our rights to trademarks, patents and other intellectual property rights we own or license.
Additionally, our amended and restated certificate of incorporation (the “Certificate of Incorporation”) does not prohibit us from issuing any series of preferred stock that would rank senior or equally to our common stock as to dividend payments and liquidation preference.
Additionally, our amended and restated certificate of incorporation (the "Certificate of Incorporation") does not prohibit us from issuing any series of preferred stock that would rank senior or equally to our common stock as to dividend payments and liquidation preference.
Although we believe that our proprietary brand products offer value to our customers at each price point and provide us with higher gross margins than comparable third-party branded products we sell, the expansion of our proprietary brand offerings also subjects us to certain specific risks in addition to those discussed elsewhere in this section, such as: • potential mandatory or voluntary product recalls; • supply chain disruptions; • our ability to successfully obtain, maintain, protect and enforce our intellectual property and proprietary rights (including defending against counterfeit, knock offs, grey-market, infringing or otherwise unauthorized goods); and • our ability to successfully navigate and avoid claims related to the proprietary rights of third parties.
Although we believe that our proprietary brand products offer value to our customers and generally provide us with higher gross margins than comparable third-party branded products we sell, the expansion of our proprietary brand offerings also subjects us to certain specific risks in addition to those discussed elsewhere in this section, such as: • potential mandatory or voluntary product recalls; • supply chain disruptions; • our ability to successfully obtain, maintain, protect and enforce our intellectual property and proprietary rights (including defending against counterfeit, knock offs, grey-market, infringing or otherwise unauthorized goods); and • our ability to successfully navigate and avoid claims related to the proprietary rights of third parties.
Many of the products we distribute and market, such as our fertilizers and nutrients, contain ingredients that are subject to regulatory approval or registration with certain U.S. state and Canadian regulators.
Many of the products we distribute and market, such as our fertilizers and nutrients, contain ingredients that are subject to regulatory approval or registration with certain U.S., Canadian and/or international regulators.
The need to obtain such approval or registration could delay the launch of new products or product innovations that contain such ingredients or otherwise prevent us 18 TABLE OF CONTENTS from developing and manufacturing certain products and product innovations.
The need to obtain such approval or registration could delay the launch of new products or product innovations that contain such ingredients or 17 TABLE OF CONTENTS otherwise prevent us from developing and manufacturing certain products and product innovations.
General Data Protection Regulation (“GDPR”), which became effective in May 2018, greatly increased the European Commission’s jurisdictional reach of its laws and adds a broad array of requirements for handling personal data.
General Data Protection Regulation ("GDPR"), which became effective in May 2018, greatly increased the European Commission’s jurisdictional reach of its laws and adds a broad array of requirements for handling personal data.
In addition, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq Global Select Market and other applicable securities rules and regulations impose various requirements on public 24 TABLE OF CONTENTS companies. Our management and other personnel devote a substantial amount of time to compliance with these requirements.
In addition, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq Global Select Market and other applicable securities rules and regulations impose various requirements on public companies. Our management and other personnel devote a substantial amount of time to compliance with these requirements.
In addition, it is difficult for us to estimate the time or resources that would be needed for the investigation of any such matters or their final resolution 34 TABLE OF CONTENTS because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.
In addition, it is difficult for us to estimate the time or resources that would be needed for the investigation of any such matters or their final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.
Among other things, such a shift in public opinion could cause state jurisdictions to abandon initiatives or proposals to legalize medical or adult use cannabis or 36 TABLE OF CONTENTS adopt new laws or regulations restricting or prohibiting the medical or adult use of cannabis where it is now legal, thereby limiting the Cannabis Industry Participants.
Among other things, such a shift in public opinion could cause state jurisdictions to abandon initiatives or proposals to legalize medical or adult use cannabis or adopt new laws or regulations restricting or prohibiting the medical or adult use of cannabis where it is now legal, thereby limiting the Cannabis Industry Participants.
The costs of compliance, noncompliance, investigation, remediation, combating reputational harm or defending civil or criminal proceedings, products liability, personal injury or other lawsuits could have a material adverse impact on our reputation, businesses, financial position, results of operations and cash flows.
The costs of compliance, noncompliance, investigation, remediation, combating 35 TABLE OF CONTENTS reputational harm or defending civil or criminal proceedings, products liability, personal injury or other lawsuits could have a material adverse impact on our reputation, businesses, financial position, results of operations and cash flows.
We are in compliance with the terms set forth in the JPMorgan Revolving Loan Facility and the Term Loan and maintain policies and procedures that are designed to promote and achieve continued compliance with such requirements.
We are in compliance with the terms set forth in the Revolving Credit Facility and the Term Loan and maintain policies and procedures that are designed to promote and achieve continued compliance with such requirements.
Nevertheless, if our security measures fail, losses exceed our insurance coverage, or we are not able to maintain insurance at a reasonable cost, we could incur significant losses from damage, loss or theft, any of which could substantially harm our business and results of operations.
Nevertheless, if our security measures fail, losses exceed our insurance coverage or are not otherwise covered by insurance, or we are not able to maintain insurance at a reasonable cost, we could incur significant losses from damage, loss or theft, any of which could substantially harm our business and results of operations.
Additional issuances and sales of preferred stock, or the perception that such issuances and sales could occur, may cause prevailing market prices for our common stock to decline and may adversely affect our ability to raise additional capital in the financial markets at times and 42 TABLE OF CONTENTS prices favorable to us.
Additional issuances and sales of preferred stock, or the perception that such issuances and sales could occur, may cause prevailing market prices for our common stock to decline and may adversely affect our ability to raise additional capital in the financial markets at times and prices favorable to us.
If we or our Cannabis Industry Participants are unable to comply with any applicable regulations and/or registration prescribed by the FDA, we may be unable to continue to transact with retailers and resellers who sell products to cannabis businesses and/or our financial condition may be adversely impacted. • Controlled substance legislation differs between states, and legislation in certain states may restrict or limit Cannabis Industry Participants from buying our products.
If we or our Cannabis Industry Participants are unable to comply with any applicable regulations and/or registration prescribed by the FDA, we may be unable to continue to transact with retailers and resellers who sell products to cannabis businesses and/or our financial condition may be adversely impacted. 31 TABLE OF CONTENTS • Controlled substance legislation differs between states, and legislation in certain states may restrict or limit Cannabis Industry Participants from buying our products.
Furthermore, we have the authority to issue up to 50,000,000 shares of our preferred stock without further stockholder approval, the rights of which will be determined at the discretion of the board of directors and that, if issued, could operate as a “poison pill” to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that our board of directors does not approve.
Furthermore, we have the authority to issue up to 50,000,000 shares of our preferred stock without further stockholder approval, the rights of which will be determined at the discretion of the board of directors and that, if issued, could operate as a "poison pill" to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that our board of directors does not approve.
In the United States, products containing pesticides generally must be registered with the Environmental Protection Agency (the “EPA”), and similar state agencies before they can be sold.
In the United States, products containing pesticides generally must be registered with the Environmental Protection Agency (the "EPA"), and similar state agencies before they can be sold.
Penalties for violating federal drug, conspiracy, aiding, abetting, bank fraud and/or money laundering laws 35 TABLE OF CONTENTS may include prison, fines, and seizure/forfeiture of property used in connection with cannabis activities, including proceeds derived from such activities.
Penalties for violating federal drug, conspiracy, aiding, abetting, bank fraud and/or money laundering laws may include prison, fines, and seizure/forfeiture of property used in connection with cannabis activities, including proceeds derived from such activities.
Risks Relating to Other Regulations Certain state and other regulations pertaining to the use of certain ingredients in growing media and plant nutrients could adversely impact us by restricting our ability to sell such products. 37 TABLE OF CONTENTS One of our leading product lines is growing media and nutrients products.
Risks Relating to Other Regulations Certain state and other regulations pertaining to the use of certain ingredients in growing media and plant nutrients could adversely impact us by restricting our ability to sell such products. One of our leading product lines is growing media and nutrients products.
If our or our third-party vendors’ information technology systems are damaged or cease to be available or function properly for an extended period of time, 27 TABLE OF CONTENTS whether as a result of a significant cyber incident or otherwise, our ability to communicate internally as well as with our retail customers could be significantly impaired, which may adversely impact our business.
If our or our third-party vendors’ information technology systems are damaged or cease to be available or function properly for an extended period of time, whether as a result of a significant cyber incident or otherwise, our ability to communicate internally as well as with our customers could be significantly impaired, which may adversely impact our business.
Though these license agreements may provide guidelines for how our trademarks, trade names and service marks may be used, a breach of these agreements or misuse of our trademarks, trade names and service marks by our licensees may jeopardize our rights in or diminish the goodwill associated with our trademarks and 41 TABLE OF CONTENTS trade names.
Though these license agreements may provide guidelines for how our trademarks, trade names and service marks may be used, a breach of these agreements or misuse of our trademarks, trade names and service marks by our licensees may jeopardize our rights in or diminish the goodwill associated with our trademarks and trade names.
The costs of preparing and filing periodic and other reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders, will cause significant increases in our expenses than if we had remained privately-held.
The costs of preparing and filing periodic and other reports, proxy statements and other information with the SEC and furnishing audited 23 TABLE OF CONTENTS reports to stockholders, will cause significant increases in our expenses than if we had remained privately-held.
In addition, our ability to pay dividends is restricted by the terms of the JPMorgan Credit Facility and, in addition, future debt financing, if any, may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our securities.
In addition, our ability to pay dividends is restricted by the terms of the Credit Facilities and, in addition, future debt financing, if any, may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our securities.
Sales of substantial numbers of such shares of common stock in the public market could adversely affect the market price of our shares of common stock. Substantial dilution and/or a substantial increase in the number of shares of common stock available for future resale may negatively impact the trading price of our shares of common stock.
Sales of substantial numbers of such shares of common stock in the public market could adversely affect the market price of our shares 41 TABLE OF CONTENTS of common stock. Substantial dilution and/or a substantial increase in the number of shares of common stock available for future resale may negatively impact the trading price of our shares of common stock.
We believe that our expenditures related to environmental matters have not had, and are not currently expected to have, a material adverse effect on our financial condition, results of operations or cash flows. However, the environmental laws under which we operate are complicated, often become increasingly more stringent and may be applied retroactively.
We believe that our expenditures related to environmental matters have not had, and are not currently expected to have, a material adverse effect on our financial condition, results of operations or cash flows. However, the environmental laws under which we operate are complicated, often become increasingly more stringent.
Our common stock is currently traded on the Nasdaq Global Select Market (“Nasdaq”). Nasdaq requires us to meet certain financial, public float, bid price and liquidity standards on an ongoing basis in order to continue the listing of our common stock, including that we maintain a minimum closing bid price of $1.00 per share.
Our common stock is currently traded on the Nasdaq. Nasdaq requires us to meet certain financial, public float, bid price and liquidity standards on an ongoing basis in order to continue the listing of our common stock, including that we maintain a minimum closing bid price of $1.00 per share.
Our substantial indebtedness and interest expense could have important consequences to us, including: • limiting our ability to use a substantial portion of our cash flow from operations in other areas of our business, including for working capital, expanding our infrastructure, capital expenditures and other general business activities and investment opportunities in our company, because we must dedicate a substantial portion of these funds to pay interest and/or service our debt and because the documents contain restrictions on certain of those actions; • impacting our cash flows, results of operations and financial condition as interest rates rise, as our JPMorgan credit facilities incur interest at a floating rate; • requiring us to seek to incur further indebtedness in order to make the capital expenditures and other expenses or investments necessary to operate the business to the extent our future cash flows are insufficient; • requiring us to refinance the JPMorgan Revolving Loan Facility (as defined below) if the lenders do not agree to extend the maturity date beyond March 29, 2024; • limiting our ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions and the execution of our strategy, and other expenses or investments planned by us; • limiting our flexibility and our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation, our business and our industry; • our inability to satisfy our obligations under our indebtedness (which could result in an event of default and acceleration if we fail to comply with the requirements of our indebtedness); and • increasing our vulnerability to a downturn in our business and to adverse economic and industry conditions generally.
Our substantial indebtedness and interest expense could have important consequences to us, including: • limiting our ability to use a substantial portion of our cash flow from operations in other areas of our business, including for working capital, expanding our infrastructure, capital expenditures and other general business activities and investment opportunities in our company, because we must dedicate a substantial portion of these funds to pay interest and/or service our debt and because the documents contain restrictions on certain of those actions; • impacting our cash flows, results of operations and financial condition as interest rates rise, as our Credit Facilities incur interest at a floating rate; • requiring us to seek to incur further indebtedness in order to make the capital expenditures and other expenses or investments necessary to operate the business to the extent our future cash flows are insufficient; • requiring us to refinance the Revolving Credit Facility if the lenders do not agree to extend the maturity date beyond June 30, 2026; • limiting our ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions and the execution of our strategy, and other expenses or investments planned by us; • limiting our flexibility and our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation, our business and our industry; 27 TABLE OF CONTENTS • our inability to satisfy our obligations under our indebtedness (which could result in an event of default and acceleration if we fail to comply with the requirements of our indebtedness); and • increasing our vulnerability to a downturn in our business and to adverse economic and industry conditions generally.
Risks Relating to Third Parties • we rely on a limited base of suppliers for certain products, which may result in disruptions to our business; 16 TABLE OF CONTENTS • if our suppliers are unable to source raw materials or the prices of raw materials increase, this may adversely affect our results of operations; and • if our suppliers decide to sell directly into the retail market that we conduct our current or future business in, we may face increased competition.
Risks Relating to Third Parties • we rely on a limited base of suppliers for certain products, which may result in disruptions to our business; • if our suppliers are unable to source raw materials or the prices of raw materials increase, this may adversely affect our results of operations; and • as our suppliers sell directly into the retail market that we conduct our current or future business in, we may face increased competition.
Legal and contractual restrictions in the JPMorgan Credit Facility and other agreements which may govern future indebtedness of our subsidiaries, as well as the financial condition and operating requirements of our subsidiaries, may limit our ability to obtain cash from our subsidiaries.
Legal and contractual restrictions in the Credit Facilities and other agreements which may govern future indebtedness of our subsidiaries, as well as the financial condition and operating requirements of our subsidiaries, may limit our ability to obtain cash from our subsidiaries.
Acquisitions, other strategic alliances and investments could result in operating difficulties, dilution, and other harmful consequences that may adversely impact our business and results of operations. Acquisitions are an important element of our overall corporate strategy, and these transactions entail material investments by us and are material to our financial condition and results of operations.
Acquisitions, other strategic alliances and investments could result in operating difficulties, dilution, and other harmful consequences that may adversely impact our business and results of operations. Acquisitions have been an important element of our overall corporate strategy, and these transactions entailed material investments by us that are material to our financial condition and results of operations.
Although we continue to implement risk-mitigation strategies for single-source suppliers, we rely on a limited number of suppliers for certain of our light ballasts, used in manufacturing our lighting systems. A portion of our key suppliers previously experienced significant volume demands, which impacted supplier performance.
Although we continue to implement risk-mitigation strategies for single-source suppliers, we rely on a limited number of suppliers for certain of the light ballasts used in manufacturing our lighting systems. A portion of our key suppliers 28 TABLE OF CONTENTS previously experienced significant volume demands, which impacted supplier performance.
Our inability to terminate a lease when we stop fully utilizing a facility or exit a market can have a significant adverse impact on our financial condition, operating results and cash flows.
Our inability to sublease excess space, terminate a lease when we stop fully utilizing a facility or exit a market can have a significant adverse impact on our financial condition, operating results and cash flows.
Failure to adequately handle increasing production costs and complexity, turnover of personnel, or production capability and efficiency issues could materially impact our ability to cost effectively produce our products and meet customer demand.
Failure to adequately handle increasing production costs and 22 TABLE OF CONTENTS complexity, turnover of personnel, or production capability and efficiency issues could materially impact our ability to cost effectively produce our products and meet customer demand.
Our success depends upon our ability to develop, manufacture, market and sell our products, and to use our proprietary technologies without infringing, misappropriating or otherwise violating the intellectual property or proprietary rights of third 40 TABLE OF CONTENTS parties.
Our success depends upon our ability to develop, manufacture, market and sell our products, and to use our proprietary technologies without infringing, misappropriating or otherwise violating the intellectual property or proprietary rights of third parties.
We sell our products through third-party retailers and resellers which do not exclusively sell to the cannabis industry, however, it is evident to us that the movement towards the legalization of cannabis in the United States and its legalization in Canada has ultimately had a significant, positive impact on our industry.
We sell our products through third-party retailers and resellers, however, it is evident to us that the movement towards the legalization of cannabis in the United States and its legalization in Canada has ultimately had a significant, positive impact on our industry.
See “Description of Capital Stock — Anti-Takeover Provisions” which is attached to this Annual Report on Form 10-K as Exhibit 4.2. We have no direct operations and no significant assets other than the ownership of capital stock and equity interests of our subsidiaries.
See "Description of Capital Stock — Anti-Takeover Provisions" which is attached to this Annual Report on Form 10-K as Exhibit 4.2. We have no direct operations and no significant assets other than the ownership of capital stock and equity interests of our subsidiaries.
As a result, we are subject to the risk that cyber-attacks on, or other security incidents affecting, our third-party vendors may adversely affect our business even if an attack or breach does not directly impact our systems.
As a result, we are subject to 25 TABLE OF CONTENTS the risk that cyber-attacks on, or other security incidents affecting, our third-party vendors may adversely affect our business even if an attack or breach does not directly impact our systems.
We are a “smaller reporting company” under the SEC’s disclosure rules, and as such, we are permitted to comply with scaled-back disclosure obligations in our SEC filings compared to other issuers, including with respect to disclosure obligations regarding executive compensation in our periodic reports and proxy statements.
We are a "smaller reporting company" under the SEC’s disclosure rules, and as such, we are permitted to comply with scaled-back disclosure obligations in our SEC filings compared to other issuers, including with respect to disclosure obligations regarding executive compensation in our periodic reports and proxy statements.
Our inability to retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or 29 TABLE OF CONTENTS inhibit the commercialization of products we develop.
Our inability to retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop.
In addition, if we become subject to the financial ratios and tests that are specified in the JPMorgan Revolving Loan Facility, noncompliance with such ratios and tests would be an event of default.
In addition, if we become subject to the financial ratios and tests that are specified in the Revolving Credit Facility, noncompliance with such ratios and tests would be an event of default.
Unless and until Congress amends the CSA with respect to medical and/or adult use cannabis, there is a risk that federal prosecutors may enforce the existing CSA.
Unless and until cannabis is de-scheduled entirely or Congress amends the CSA with respect to medical and/or adult use cannabis, there is a risk that federal prosecutors may enforce the existing CSA.
Further, we may not be able to secure a replacement facility in a location that is as commercially viable, including access to rail service. Having to close a facility, even briefly to relocate, could reduce the sales that such facility would have contributed to our revenues.
Further, we may not be able to secure a replacement facility in a location that is as commercially viable. Having to close a facility, even briefly to relocate, could reduce the sales that such facility would have contributed to our revenues.
Both the medical and adult use of cannabis are controversial topics, and there is no guarantee that future scientific research, publicity, regulations, medical opinion, and public opinion relating to cannabis will be favorable. The cannabis industry is an early-stage business that is constantly evolving with no guarantee of viability.
Both the medical and adult use of cannabis are controversial topics, and there is no guarantee that future scientific research, publicity, regulations, medical opinion, and public opinion relating to cannabis will be favorable. The cannabis industry is constantly evolving with no guarantee of viability.
Additionally, we reduced headcount and implemented temporary employee furloughs in 2022, and may implement further reductions in the future to create operational efficiencies. This workforce reduction may yield unintended consequences, such as attrition beyond our intended reductions and reduced employee morale, which may cause our employees who were not affected by the headcount reductions to seek alternate employment.
We reduced headcount in 2023 and 2022, and may implement further reductions in the future to create operational efficiencies. This workforce reduction may yield unintended consequences, such as attrition beyond our intended reductions and reduced employee morale, which may cause our employees who were not affected by the headcount reductions to seek alternate employment.
In addition, our Certificate of Incorporation and amended and restated bylaws (the “Bylaws”) contain provisions that may make the acquisition of our company more difficult, including the following: • our authorized but unissued and unreserved common stock and preferred stock could make more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise; • our board of directors is classified into three classes of directors with staggered three-year terms and directors are only able to be removed from office for cause; • stockholders will only be able to take action at a meeting of stockholders and will not be able to take action by written consent for any matter, except in certain circumstances; • a special meeting of our stockholders may only be called by the chairperson of our board of directors or a majority of our board of directors; • advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders; and • certain amendments to our Certificate of Incorporation and any amendments to our Bylaws by our stockholders will require the approval of at least two-thirds of our then-outstanding voting power entitled to vote generally in an election of directors, voting together as a single class.
In addition, our Certificate of Incorporation and amended and restated bylaws (the "Bylaws") contain provisions that may make the acquisition of our company more difficult, including the following: • our authorized but unissued and unreserved common stock and preferred stock could make more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise; • our board of directors is classified into three classes of directors with staggered three-year terms and directors are only able to be removed from office for cause; • stockholders will only be able to take action at a meeting of stockholders and will not be able to take action by written consent for any matter, except in certain circumstances; • a special meeting of our stockholders may only be called by the chairperson of our board of directors or a majority of our board of directors; • advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders; and • certain amendments to our Certificate of Incorporation and any amendments to our Bylaws by our stockholders will require the approval of at least two-thirds of our then-outstanding voting power entitled to vote generally in an election of directors, voting together as a single class. 38 TABLE OF CONTENTS Various provisions of our lending agreements with JPMorgan, in addition to our Certificate of Incorporation, Bylaws and other corporate documents, could delay or prevent a change of control.
Any of these risks may be further exacerbated by climate change. If our peat bogs are damaged or our peat harvest is less than anticipated for one or more seasons, this could have an adverse impact on our business and results of operations.
Any of these risks may be further exacerbated by climate change and the heightened risk of forest fires. If our peat bogs are damaged or our peat harvest is less than anticipated for one or more seasons, this could have an adverse impact on our business and results of operations.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our personnel from their normal responsibilities.
Intellectual property disputes could cause us to spend substantial resources and distract our personnel from their normal responsibilities. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our personnel from their normal responsibilities.
In addition, on November 3, 2020, California voters approved a new privacy law, the California Privacy Rights Act (“CPRA”). The CPRA comes into effect on January 1, 2023, and will significantly modify the CCPA, including by expanding consumers’ rights with respect to certain personal information and creating a new state agency to oversee implementation and enforcement efforts.
In addition, on November 3, 2020, California voters approved a new privacy law, the California Privacy Rights Act ("CPRA"). The CPRA came into effect on January 1, 2023, and significantly modifies the CCPA, including by expanding consumers’ rights with respect to certain personal information and creating a new state agency to oversee implementation and enforcement efforts.
In addition, we cannot guarantee that we have entered into confidentiality agreements with each party that has 39 TABLE OF CONTENTS or may have had access to our proprietary information, know-how and trade secrets.
In addition, we cannot guarantee that we have entered into confidentiality agreements with each party that has or may have had access to our proprietary information, know-how and trade secrets.
This product line includes certain products, such as organic soils and nutrients that contain ingredients that require the companies that provide us with these products to register the product with certain regulators. The use and disposal of these products in some jurisdictions are subject to regulation by various agencies.
This product line includes certain products, such as organic soils and nutrients that contain ingredients that require product registrations with certain regulators. The use and disposal of these products in some jurisdictions are subject to regulation by various agencies.
The Term Loan prohibits us and the Subsidiary Obligors from selling our products, inventory or services directly to cannabis growers operating in any country that prohibits the sale and use of cannabis products other than in accordance with the applicable laws of such country.
The Credit Facilities prohibit us and the Subsidiary Obligors from selling our products, inventory or services directly to cannabis growers operating in any country that prohibits the sale and use of cannabis products other than in accordance with the applicable laws of such country.
State laws are changing rapidly and there is discussion in the U.S. Congress of a new comprehensive federal data privacy law to which we would become subject if it is enacted. Internationally, laws, regulations and standards in many jurisdictions apply broadly to the collection, use, retention, security, disclosure, transfer and other processing of personal information. For example, the E.U.
Congress of a new comprehensive federal data privacy law to which we would become subject if it is enacted. Internationally, laws, regulations and standards in many jurisdictions apply broadly to the collection, use, retention, security, disclosure, transfer and other processing of personal information. For example, the E.U.
We are a “smaller reporting company” and, because we have opted to use the reduced reporting requirements available to us, certain investors may find investing in our securities less attractive.
We are a "smaller reporting company" and, because we have opted to use the reduced reporting requirements available to us, certain investors may find investing in our securities less attractive.
In addition, the development and introduction of new products and product innovations require substantial research, development and marketing expenditures, which we may be unable to recoup if such new products or innovations do not achieve market acceptance.
In addition, the development and introduction of new products and product innovations require substantial research, development and marketing expenditures. We may be unable to invest in new products and innovations, and may be unable to recoup any such investments if our new products or innovations do not achieve market acceptance.
We expect to evaluate and enter into discussions regarding a wide array of potential strategic transactions. The process of integrating an acquired company, business, or product has created, and will continue to create, unforeseen operating difficulties and expenditures.
We may evaluate and enter into discussions regarding potential strategic transactions. The process of integrating an acquired company, business, or product has created, and will continue to create, unforeseen operating difficulties and expenditures.
Our Certificate of Incorporation provides that the doctrine of “corporate opportunity” will not apply with respect to any director or stockholder who is not employed by us or our affiliates.
Our Certificate of Incorporation provides that the doctrine of "corporate opportunity" will not apply with respect to any director or stockholder who is not employed by us or our affiliates.
Exercise of options may have a dilutive effect on your percentage ownership and may result in a dilution of your voting power and an increase in the number of shares of common stock eligible for future resale in the public market, which may negatively impact the trading price of our shares of common stock.
The Company's equity incentive plans may have a dilutive effect on your percentage ownership and may result in a dilution of your voting power and an increase in the number of shares of common stock eligible for future resale in the public market, which may negatively impact the trading price of our shares of common stock.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeRefer to Part II, Item 8, Financial Statements, Note 16 - Subsequent Events for additional information about the sale and leaseback transaction at the Eugene, OR location. 3 In addition, we operate a distribution center in Zaragoza, Spain.
Biggest changeRefer to Part II, Item 8, Financial Statements, Note 6 - Leases for additional information about the sale and leaseback transaction at the Eugene, OR location. 3 In addition to the 21,000 square foot building that we own and occupy, we own approximately 100 acres of excess land suitable for future industrial/commercial development located adjacent to our building.
Location 3 Square Footage Owned or Leased Distribution Centers: Fairfield, CA, U.S. 175,000 Leased 1 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 1 New Hudson, MI, U.S. 126,000 Leased 1 Langley, BC, Canada 157,000 Leased Cambridge, ON, Canada 53,000 Leased Manufacturing Facilities: Paramount, CA, U.S. 25,000 Leased Arcata, CA, U.S. 115,000 Leased Eugene, OR, U.S. 242,000 Owned 2 Goshen, NY, U.S. 21,000 Owned Sycamore, IL, U.S. 316,000 Leased 1 Edmonton, AB, Canada 26,000 Leased Langley, BC, Canada 79,000 Leased 1 We have one or more operating subleases or third-party logistics agreements at this location. 2 In January 2023, we entered into a sale-leaseback transaction.
Location Square Footage Owned or Leased Distribution Centers: Fairfield, CA, U.S. 175,000 Leased 1 Fontana, CA, U.S. 147,000 Leased Gresham, OR, U.S. 98,000 Leased 1 Denver, CO, U.S. 87,000 Leased Shoemakersville, PA, U.S. 303,000 Leased 1 New Hudson, MI, U.S. 126,000 Leased 1 Surrey, BC, Canada 136,000 Leased Cambridge, ON, Canada 53,000 Leased Zaragoza, Spain 20,000 Owned Manufacturing Facilities: Paramount, CA, U.S. 25,000 Leased Arcata, CA, U.S. 112,000 Leased Eugene, OR, U.S. 242,000 Leased 2 Goshen, NY, U.S. 21,000 Owned 3 Sycamore, IL, U.S. 209,800 Leased 1 Edmonton, AB, Canada 26,000 Leased 1 We have one or more operating subleases or third-party logistics agreements at this location. 2 In January 2023, we entered into a sale-leaseback transaction.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeMINE SAFETY DISCLOSURES Not applicable. 48 TABLE OF CONTENTS PART II
Biggest changeMINE SAFETY DISCLOSURES Not applicable. 44 TABLE OF CONTENTS PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeHolders of our Common Stock As of March 1, 2023, there were approximately 79 stockholders of record of our common stock. The number of stockholders of record does not include beneficial owners of our securities whose shares are held in the name of various security brokers, dealers and registered clearing agencies.
Biggest changeHolders of our Common Stock As of February 15, 2024, there were approximately 84 stockholders of record of our common stock. The number of stockholders of record does not include beneficial owners of our securities whose shares are held in the name of various security brokers, dealers and registered clearing agencies.
The payment of any future dividends will be at the discretion of our Board of Directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payment of dividends present in any debt agreements, and other factors that our Board of Directors may deem relevant. Recent Sales of Unregistered Securities None.
The payment of any future dividends will be at the discretion of our Board of Directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payment of dividends present in any debt agreements, and other factors that our Board of Directors may deem relevant. Sales of Unregistered Securities None.
Dividend Policy We have never declared or paid any dividends on our common stock. We currently intend to retain all available funds and any future earnings for the operation and expansion of our business. Accordingly, we do not anticipate declaring or paying dividends in the foreseeable future.
Dividend Policy We have never declared or paid any dividends on our common stock. We currently intend to retain all available funds and any future earnings for the operation of our business. Accordingly, we do not anticipate declaring or paying dividends in the foreseeable future.
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock began trading on The Nasdaq Global Select Market under the symbol “HYFM” on December 10, 2020. Prior to that date, there was no public trading market for our common stock.
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock began trading on The Nasdaq Global Select Market under the symbol "HYFM" on December 10, 2020. Prior to that date, there was no public trading market for our common stock.
Issuer Purchases of Equity Securities None. Item 6. RESERVED Reserved. 49 TABLE OF CONTENTS
Issuer Purchases of Equity Securities None. Item 6. RESERVED Reserved. 45 TABLE OF CONTENTS

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeResults of Operations Data The results of operations data in the following table for the years ended December 31, 2022, and 2021 have been derived from the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. 53 TABLE OF CONTENTS Results of Operations - Comparison of Years Ended December 31, 2022, and 2021 The results of operations data in the following table, including amounts and percentages of net sales for each year and the year-to-year change in dollars and percent, for the years ended December 31, 2022, and 2021, have been derived from the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K (amounts in thousands): Years ended December 31, 2022 2021 Year to year change Net sales $ 344,501 100.0 % $ 479,420 100.0 % $ (134,919) -28.1 % Cost of goods sold 315,165 91.5 % 377,934 78.8 % (62,769) -16.6 % Gross profit 29,336 8.5 % 101,486 21.2 % (72,150) -71.1 % Operating expenses: Selling, general and administrative 118,604 34.4 % 104,185 21.7 % 14,419 13.8 % Impairments 192,328 55.8 % — 0.0 % 192,328 N/A Loss from operations (281,596) -81.7 % (2,699) -0.6 % 278,897 10,333.3 % Interest expense (10,958) -3.2 % (2,138) -0.4 % 8,820 412.5 % Loss on debt extinguishment or modification (145) 0.0 % (680) -0.1 % (535) -78.7 % Other income (expense), net 841 0.2 % (204) 0.0 % 1,045 512.3 % Loss before tax (291,858) -84.7 % (5,721) -1.2 % 286,137 5,001.5 % Income tax benefit 6,443 1.9 % 19,137 4.0 % (12,694) -66.3 % Net (loss) income (285,415) -82.8 % 13,416 2.8 % (298,831) -2,227.4 % Net sales Net sales for the year ended December 31, 2022, were $344.5 million, a decrease of $134.9 million, or 28.1%, compared to the same period in 2021.
Biggest changeResults of Operations - Comparison of Years Ended December 31, 2023, and 2022 The results of operations data in the following table, including amounts and percentages of net sales for each year and the year-to-year change in dollars and percent, for the years ended December 31, 2023, and 2022, have been derived from the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K (amounts in thousands): Years ended December 31, 2023 2022 Year to year change Net sales $ 226,581 100.0 % $ 344,501 100.0 % $ (117,920) -34.2 % Cost of goods sold 188,969 83.4 % 315,165 91.5 % (126,196) -40.0 % Gross profit 37,612 16.6 % 29,336 8.5 % 8,276 28.2 % Operating expenses: Selling, general and administrative 87,314 38.5 % 118,604 34.4 % (31,290) -26.4 % Impairments — 0.0 % 192,328 55.8 % (192,328) -100.0 % Loss from operations (49,702) -21.9 % (281,596) -81.7 % 231,894 82.3 % Interest expense (15,442) -6.8 % (10,958) -3.2 % 4,484 40.9 % Other income, net 118 0.1 % 696 0.2 % (578) -83.0 % Loss before tax (65,026) -28.7 % (291,858) -84.7 % 226,832 77.7 % Income tax benefit 213 0.1 % 6,443 1.9 % (6,230) -96.7 % Net loss (64,813) -28.6 % (285,415) -82.8 % 220,602 77.3 % 48 TABLE OF CONTENTS Net sales Net sales for the year ended December 31, 2023, were $226.6 million, a decrease of $117.9 million, or 34.2%, compared to the same period in 2022.
During the year ended December 31, 2022, we recorded pre-tax charges of $6.8 million relating to inventory markdowns of products and brands being removed from our portfolio, which is primarily non-cash, and $0.9 million relating primarily to the relocation and termination of certain facilities in Canada, which are primarily cash charges.
During the year ended December 31, 2022 , we recorded pre-tax charges of $6.8 million relating to the inventory markdowns of products and brands being removed from our portfolio, which is primarily non-cash, and $0.9 million relating primarily to the relocation and termination of certain facilities in Canada, which are primarily cash charges.
We completed our goodwill impairment testing and recorded an impairment charge of $189.6 million as the test determined that the carrying value of the reporting units of U.S. and Canada was in excess of the fair value. The recognized impairment reduced the goodwill balance to zero as of June 30, 2022.
We completed our goodwill impairment testing and recorded an impairment charge of $189.6 million as the test determined that the carrying value of the goodwill reporting units of U.S. and Canada was in excess of the fair value. The recognized impairment reduced the goodwill balance to zero as of June 30, 2022.
Financing Activities Net cash used in financing activities was $20.2 million for the year ended December 31, 2022, primarily consisting of $15.5 million in payments to settle contingent consideration, primarily on our Aurora acquisition. We paid $2.5 million related to employees' withholding tax in connection with the vesting of restricted stock units.
Net cash used in financing activities was $20.2 million for the year ended December 31, 2022, primarily consisting of $15.5 million in payments to settle contingent consideration, primarily on our Aurora acquisition. We paid $2.5 million related to employees' withholding tax in connection with the vesting of restricted stock units.
Term Loan On October 25, 2021, we and certain of our direct and indirect subsidiaries entered into the Term Loan with JPMorgan Chase Bank, N.A., as administrative agent for the lenders, pursuant to which we borrowed a $125.0 million senior secured term loan.
Term Loan On October 25, 2021, we and certain of our direct and indirect subsidiaries entered into the Term Loan with JPMorgan Chase Bank, N.A., as administrative agent for the lenders, pursuant to which we borrowed a $125.0 million senior secured term loan (the "Term Loan").
Significant estimates used to determine fair value include the weighted average cost of capital, financial forecasts, and pricing multiples derived from publicly-traded companies that are comparable to the reporting units. The fair values were reconciled to the market value of our common stock of to corroborate the estimates used in the interim test for impairment.
Significant estimates used to determine fair value include the weighted average cost of capital, financial forecasts, and pricing multiples derived from publicly-traded companies that are comparable to the reporting units. The fair values were reconciled to the market value of our common stock to corroborate the estimates used in the interim test for impairment.
Selling, general and administrative Selling, general and administrative expenses ("SG&A") consists primarily of marketing and advertising, facility costs for distribution operations, depreciation and amortization of all other assets, certain acquisition and integration expenses and other selling, general and administrative costs, including but not limited to salaries, benefits, bonuses, stock-based compensation, professional fees, and various costs related to being a publicly-traded company.
Selling, general and administrative Selling, general and administrative expenses ("SG&A") consists primarily of facility costs for distribution operations, depreciation and amortization of assets, certain acquisition and integration expenses, marketing and advertising, and other selling, general and administrative costs, including but not limited to salaries, benefits, bonuses, stock-based compensation, professional fees, and various costs related to being a publicly-traded company.
Cost of goods sold Cost of goods sold consists primarily of material costs, inbound and outbound freight costs, direct labor costs primarily for manufacturing and warehouse personnel, facility costs for manufacturing operations, depreciation, depletion and amortization of manufacturing and warehouse improvements and equipment, inventory allowances, restructuring costs, and certain acquisition and integration expenses.
Cost of goods sold Cost of goods sold consists primarily of material costs, inbound and outbound freight costs, labor costs primarily for manufacturing and warehouse personnel, facility costs for manufacturing operations, depreciation, depletion and amortization of manufacturing and warehouse improvements and equipment, restructuring costs, inventory allowances, and certain acquisition and integration expenses.
Our obligations under the JPMorgan Credit Facility are secured by a first priority lien (subject to certain permitted liens) in substantially all of our and our subsidiaries' respective personal property assets pursuant to the terms of a U.S. and Canadian Pledge and Security Agreement dated March 29, 2021 and other security documents, as amended to include additional subsidiaries.
Our obligations under the Revolving Credit Facility are secured by a first priority lien (subject to certain permitted liens) in substantially all of our and our subsidiaries' respective personal property assets pursuant to the terms of a U.S. and Canadian Pledge and Security Agreement dated March 29, 2021 and other security documents, as amended to include additional subsidiaries.
We expect that our cost of goods sold would increase in absolute dollars in conjunction with net sales growth if that occurs in the future.
We expect that our cost of goods sold would increase in absolute dollars in conjunction with net sales growth when/if that occurs in the future.
We believe that our cash flows from operating activities, combined with current cash levels and borrowing availability under the JPMorgan Credit Facility, will be adequate to support our ongoing operations, to fund debt service requirements, capital expenditures, lease obligations and working capital needs through the next twelve months of operations.
We believe that our cash flows from operating activities, combined with current cash levels and borrowing availability under the Revolving Credit Facility, will be adequate to support our ongoing operations, to fund debt service requirements, capital expenditures, lease obligations and working capital needs through the next twelve months of operations.
The JPMorgan Revolving Loan Facility was further amended by the Second Amendment dated October 25, 2021 which, among other things, permitted the incurrence of the Term Loan and made certain other changes including subordinating its liens on non-working capital assets to the obligations under the Term Loan.
The Revolving Credit Facility was further amended by the Second Amendment dated October 25, 2021 which, among other things, permitted the incurrence of the Term Loan and made certain other changes including subordinating its liens on non-working capital assets to the obligations under the Term Loan.
This impairment evaluation includes a comparison of the undiscounted cash flows expected to be generated by that long-lived asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying amount exceeds its fair value.
This impairment evaluation included a comparison of the undiscounted cash flows expected to be generated by that long-lived asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying amount exceeds its fair value.
The rates that use SOFR as the reference rate (Adjusted Term SOFR Rate, the Adjusted REVSOFR30 Rate, the Adjusted Daily Simple SOFR and the CBFR rate) use the Term SOFR Rate plus 1.95%. Each rate has a 0.0% floor. A fee of 0.25% per annum is charged for available but unused borrowings.
The rates that use SOFR as the reference rate (Adjusted Term SOFR Rate, the Adjusted REVSOFR30 Rate, the Adjusted Daily Simple SOFR and the CBFR rate) use the Term SOFR Rate plus 1.95%. Each rate has a 0.0% floor. A fee of 0.40% per annum is charged for available but unused borrowings.
Recent accounting pronouncements For information regarding recent accounting pronouncements, refer to Note 2 - Basis of presentation and significant accounting policies — Recently issued accounting pronouncements , to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. 62 TABLE OF CONTENTS
Recent accounting pronouncements For information regarding recent accounting pronouncements, refer to Note 2 - Basis of presentation and significant accounting policies — Recently issued accounting pronouncements , to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. 54 TABLE OF CONTENTS
Intangible assets with finite lives and indefinite lives are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. For the quarter ended June 30, 2022, we performed an evaluation of intangible assets for impairment in connection with the triggering event identified requiring a quantitative test for goodwill impairment.
Intangible assets with finite lives and indefinite lives are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. For the quarter ended June 30, 2022, we performed an evaluation of long-lived tangibles and intangible assets for impairment in connection with the triggering event identified requiring a quantitative test for goodwill impairment.
Our customers include specialty hydroponic retailers, commercial resellers and greenhouse builders, garden centers, hardware stores, and e-commerce retailers. Specialty hydroponic retailers can provide growers with specialized merchandise assortments and knowledgeable staff. Market Conditions We experienced adverse financial results during 2022 which we believe is primarily a result of an agricultural oversupply impacting our market.
Our customers include specialty hydroponic retailers, commercial resellers and greenhouse builders, garden centers, hardware stores, and e-commerce retailers. Specialty hydroponic retailers can provide growers with specialized merchandise assortments and knowledgeable staff. Market Conditions We have experienced adverse financial results which we believe is primarily a result of an agricultural oversupply impacting our market.
We believe COVID-19 may have provided a positive demand impact in 2020 and 2021 from shelter-in-place orders in the United States, a possible negative supply chain impact from workforce disruption at international and domestic suppliers, and a possible negative growth rate impact in 2022 due to agricultural oversupply initiated during the height of COVID-related shelter-in-place orders in 2020 and 2021.
We believe COVID-19 may have provided a positive demand impact for the Company in 2020 and 2021 from shelter-in-place orders in the United States, a possible negative supply chain impact from workforce disruption at international and domestic suppliers, and a possible negative growth rate impact in 2022 and 2023 due to agricultural oversupply initiated during the height of COVID-related shelter-in-place orders in 2020 and 2021.
In evaluating such statements, you should carefully consider the various factors identified in this Annual Report on Form 10-K, which could cause actual results to differ materially from those expressed in, or implied by, any forward-looking statements, including those set forth in “Risk Factors” in this Annual Report on Form 10-K.
In evaluating such statements, you should carefully consider the various factors identified in this Annual Report on Form 10-K, which could cause actual results to differ materially from those expressed in, or implied by, any forward-looking statements, including those set forth in "Risk Factors" in this Annual Report on Form 10-K.
The JPMorgan Revolving Loan Facility was amended by the First Amendment dated August 31, 2021, which increased the revolving line of credit by an additional $50 million for an aggregate borrowing limit of $100 million.
The Revolving Credit Facility was amended by the First Amendment dated August 31, 2021, which increased the revolving line of credit by an additional $50 million for an aggregate borrowing limit of $100 million.
As described in Note 4 - Goodwill and Intangible Assets, Net , during the year ended December 31, 2022, we fully impaired the goodwill associated with all 2021 acquisitions.
As described in Note 3 - Goodwill and Intangible Assets, Net , during the year ended December 31, 2022, we fully impaired the goodwill associated with all 2021 acquisitions.
Depending on the length and severity of the industry and market conditions impacting our business, it is possible we may execute additional restructuring plans and incur future associated charges, and we may not be able to realize the full extent of our anticipated cost savings.
Depending on the length and severity of the industry and market conditions impacting our business, it is possible we may execute additional restructuring plan actions and incur future associated charges, and we may not be able to realize the full extent of our anticipated cost savings.
The hydroponic equipment and supplies that we sell include consumable products, such as growing media, nutrients and supplies that are subject to regular replenishment and durable products, such as lighting and hydroponic equipment. Our scale allows us to provide delivery and service capabilities to customers across the U.S. and Canada.
The hydroponic equipment and supplies that we sell include consumable products, such as growing media, nutrients and supplies that are subject to regular replenishment and durable products, such as lighting and hydroponic equipment. Our scale allows us to provide delivery and service capabilities to our customers primarily in the U.S. and Canada.
The impairment was primarily due to a deterioration in customer demand in the U.S. and Canada caused by macroeconomic and industry conditions. We also review intangible assets with finite lives and indefinite lives for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.
The impairment was primarily due to a deterioration in customer demand in the United States and Canada caused by macroeconomic and industry conditions. We also review intangible assets with finite lives and indefinite lives for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.
Based on our evaluation, there was no impairment of intangible assets or other long-lived assets for the quarter ended June 30, 2022. No such triggering event was identified during the remainder of 2022. We believe that the intangible asset impairment evaluations were based on reasonable assumptions that marketplace participants would use.
Based on our evaluation, there was no impairment of intangible assets or other long-lived assets for the quarter ended June 30, 2022. No such triggering event was identified during the remainder of 2022 or the year ended December 31, 2023. We believe that the intangible asset impairment evaluations were based on reasonable assumptions that marketplace participants would use.
The JPMorgan Revolving Loan Facility was further amended by the Third Amendment and Joinder dated August 23, 2022, pursuant to which several previously acquired subsidiaries became parties to the JPMorgan Revolving Loan Facility and granted liens on their assets.
The Revolving Credit Facility was further amended by the Third Amendment and Joinder dated August 23, 2022, pursuant to which several previously acquired subsidiaries became parties to the Revolving Credit Facility and granted liens on their assets.
A certain financial covenant becomes applicable in the event that our excess availability under the JPMorgan Revolving Loan Facility is less than an amount equal to 10% of the Aggregate Revolving Commitment (currently $75 million) and would require us to maintain a minimum fixed charge coverage ratio of 1.1x on a rolling twelve-month basis.
A certain financial covenant becomes applicable in the event that our excess availability under the Revolving Credit Facility is less than an amount equal to 10% of the Aggregate Revolving Commitment (currently $55 million) and would require us to maintain a minimum fixed charge coverage ratio of 1.1x on a rolling twelve-month basis.
You should read this analysis in conjunction with our audited consolidated financial statements and the notes contained elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance. These statements are only predictions, and actual events or results may differ materially.
You should read this analysis in conjunction with our audited consolidated financial statements and the notes contained elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance. Actual events or results may differ materially from forward-looking statements.
In order to consummate permitted acquisitions or to make restricted payments, the Company would be required to comply with a higher fixed charge coverage ratio of 1.15x, but no such acquisitions or payments are currently contemplated. We were in compliance with all debt covenants as of December 31, 2022.
In order to consummate permitted acquisitions or to make restricted payments, the Company would be required to comply with a higher fixed charge coverage ratio of 1.15x, but no such acquisitions or payments are currently contemplated. 52 TABLE OF CONTENTS We were in compliance with all debt covenants as of December 31, 2023.
The JPMorgan Revolving Loan Facility provides for various interest rate options including the Adjusted Term SOFR Rate, the Adjusted REVSOFR30 Rate, the CB Floating Rate, the Adjusted Daily Simple SOFR, the CBFR, the Canadian Prime Rate, or the CDOR Rate.
The Revolving Credit Facility provides for various interest rate options including the Adjusted Term SOFR Rate, the Adjusted REVSOFR30 Rate, the CB Floating Rate, the Adjusted Daily Simple SOFR, the CBFR, the Canadian Prime Rate, or the CDOR Rate.
On December 22, 2022, the Company entered into the Fourth Amendment pursuant to which the maximum commitment amount under the JPMorgan Revolving Loan Facility was reduced from $100 million to $75 million, a sale and leaseback transaction was permitted and certain other changes were made, including transitioning the LIBOR based rates to SOFR based rates.
On December 22, 2022, the Company entered into the Fourth Amendment pursuant to which a sale-leaseback transaction was permitted, and certain other changes were made, including a reduction of the maximum commitment amount under the Revolving Credit Facility from $100 million to $75 million and transitioning the LIBOR based rates to SOFR based rates.
In January 2023, Gotham Properties LLC, an Oregon limited liability company and our subsidiary (“Seller”), consummated a Purchase and Sale Agreement with J & D Property, LLC, a Nevada limited liability company (“Purchaser”) pursuant to which certain real property located in the City of Eugene, County of Lane, State of Oregon (the “Eugene Property”) was sold to Purchaser for $8.6 million and then leased back by Seller (the “Sale-Leaseback Transaction”).
In January 2023, Gotham Properties LLC, an Oregon limited liability company and our subsidiary ("Seller"), consummated a Purchase and Sale Agreement with J & D Property, LLC, a Nevada limited liability company ("Purchaser") pursuant to which certain real property located in the City of Eu gene, County of Lane, State of Oregon (the “Eugene Property”) was sold to Purchaser for $8.6 million and then leased back by Seller (the "Sale Leaseback Transaction").
The 2022 cash usage primarily includes our growth-oriented investments in the peat moss harvesting operation in Canada and IGE manufacturing operations in the U.S.
The 2022 cash usage primarily includes investments in the peat moss harvesting operation in Canada and IGE manufacturing operations in the U.S.
The principal amounts of the Term Loan are scheduled to be repaid in consecutive quarterly installments in amounts equal to 0.25% of the $125 million principal amount of the Term Loan on the last day of each fiscal quarter commencing March 31, 2022, with the balance of the Term Loan payable on the Maturity Date of October 25, 2028.
The Term Loan matures on October 25, 2028. 51 TABLE OF CONTENTS The principal amounts of the Term Loan are scheduled to be repaid in consecutive quarterly installments in amounts equal to 0.25% of the original principal amount of the Term Loan on the last day of each fiscal quarter commencing March 31, 2022, with the balance of the Term Loan payable on the Maturity Date of October 25, 2028.
Primarily due to a decline in the market value of our common stock and market conditions, we identified a triggering event requiring a test for impairment as of June 30, 2022. We completed our goodwill impairment testing and recorded an impairment charge due to market softness in demand in the U.S. and Canada.
Primarily due to a decline in the market value of our common stock and market conditions, we identified a triggering event requiring a test for impairment as of June 30, 2022. We completed our goodwill impairment testing and recorded a full impairment of all goodwill due to market softness in 53 TABLE OF CONTENTS demand in the U.S. and Canada.
The recognized impairment reduced the goodwill balance to zero as of December 31, 2022. The impairment was primarily due to a deterioration in customer demand in the U.S. and Canada caused by macroeconomic and industry conditions. For the year ended December 31, 2022, we also recorded an impairment of a note receivable of $2.6 million.
The recognized impairment reduced the goodwill balance to zero as of June 30, 2022. The impairment was primarily due to a deterioration in customer demand in the United States and Canada caused by macroeconomic and industry conditions. For the year ended December 31, 2022, the Company also recorded an impairment of a note receivable of $2.6 million.
If inventory is sold, any related reserves would be reversed in the period of sale. The Company estimates inventory markdowns relating to restructuring charges based upon current and anticipated demand, customer preferences, business strategies, and market conditions including management's actions with respect to inventory products and brands being removed from our portfolio.
If inventory is sold, any related reserves would be reversed in the period of sale. The Company estimates inventory markdowns relating to restructuring charges based upon current and anticipated demand, customer preferences, business strategies, and market conditions including management's planned actions with respect to inventory.
In connection with our previously disclosed evaluation of our facility footprint and product and brand portfolio, we began a restructuring plan during the quarter ended December 31, 2022. We are undertaking significant actions to streamline our operations, reduce costs and improve efficiencies during the industry recession.
In connection with our previously disclosed evaluation of our facility footprint and product and brand portfolio, we initiated a restructuring plan (the "Restructuring Plan") during the quarter ended December 31, 2022. In connection with the first phase of our Restructuring Plan, we have undertaken significant actions to streamline our operations, reduce costs and improve efficiencies during the industry recession.
The JPMorgan Revolving Loan Facility maintains certain reporting requirements, affirmative covenants, negative covenants and financial covenants.
The Revolving Credit Facility maintains certain reporting requirements, affirmative covenants, negative covenants and financial covenants.
Seasonality Our net sales are typically seasonally stronger in our fiscal second and third quarters due to robust sales in the warmer spring and summer months in North America (the United States and Canada are our primarily markets).
Seasonality Our net sales are typically seasonally stronger in our first three fiscal quarters due to robust sales in preparation of and during the warmer spring and summer months in North America (the United States and Canada are our primarily markets).
Hydroponics is the primary category of CEA and we use the terms CEA and hydroponics interchangeably. Our products are used to grow, farm and cultivate cannabis, flowers, fruits, plants, vegetables, grains and herbs in controlled environment settings that allow end users to control key farming variables including temperature, humidity, CO 2 , light intensity spectrum, nutrient concentration and pH.
Our products are used to grow, farm and cultivate cannabis, flowers, fruits, plants, vegetables, grains and herbs in controlled environment settings that allow end users to control key farming variables including temperature, humidity, CO 2 , light intensity spectrum, nutrient concentration and pH.
Investing Activities Net cash used in investing activities for the year ended December 31, 2022, was $8.5 million, due primarily to capital expenditures for property, plant and equipment, which increased over the prior year primarily due to growth investments in our manufacturing operations and the expansion and relocation of certain of our distribution centers.
The 2023 cash usage primarily includes investments in our peat moss harvesting operation in Canada. 50 TABLE OF CONTENTS Net cash used in investing activities for the year ended December 31, 2022, was $8.5 million, due primarily to capital expenditures for property, plant and equipment, which increased over the prior year primarily due to investments in our manufacturing operations and the expansion and relocation of certain of our distribution centers.
However, we expect that, over time, cost of goods sold may decrease as a percentage of net sales if we are able to scale our business as we obtain a higher proportion of net sales associated with proprietary and exclusive branded products.
However, we expect that, over time, cost of goods sold may decrease as a percentage of net sales if we are successful in instituting our restructuring and related productivity and cost saving initiatives and/or if we are able to scale our business as we obtain a higher proportion of net sales associated with proprietary branded products.
Refer to Part II, Item 8, Financial Statements, Note 10 - Debt , Note 7 - Leases , and Note 14 - Commitments and Contingencies, and Related Party Transactions for details relating to our material cash requirements for debt, our leasing arrangements, including future maturities of our operating lease liabilities, and purchase obligations, respectively.
Also refer to Item 8, Financial Statements , Note 9 - Debt , Note 6 - Leases , and Note 13 - Commitments and Contingencies for details relating to our material cash requirements for debt, our leasing arrangements, including future maturities of our operating lease liabilities, and purchase obligations, respectively.
For over 40 years, we have helped growers make growing easier and more productive. Our mission is to empower growers, farmers and cultivators with products that enable greater quality, efficiency, consistency, and speed in their grow projects. Hydroponics is the farming of plants using soilless growing media and often artificial lighting in a controlled indoor or greenhouse environment.
Our mission is to empower growers, farmers and cultivators with products that enable greater quality, efficiency, consistency, and speed in their grow projects. Hydroponics is the farming of plants using soilless growing media and often artificial lighting in a controlled indoor or greenhouse environment. Hydroponics is the primary category of CEA and we use the terms CEA and hydroponics interchangeably.
A discussion of our principal accounting policies that required the application of significant judgments as of December 31, 2022 follows. 61 TABLE OF CONTENTS Goodwill and indefinite-lived intangible assets Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in the acquiree (if any) over the net acquisition-date fair value amounts of the identified assets acquired and liabilities assumed in a business combination.
Goodwill and indefinite-lived intangible assets Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in the acquiree (if any) over the net acquisition-date fair value amounts of the identified assets acquired and liabilities assumed in a business combination.
As of December 31, 2022, approximately $40 million was available to borrow under the undrawn JPMorgan Revolving Loan Facility, before we would be required to comply with the minimum fixed charge coverage ratio of 1.1x.
As of December 31, 2023, approximately $22 million was available to borrow under the Revolving Credit Facility, before we would be required to comply with the minimum fixed charge coverage ratio of 1.1x. As of December 31, 2023, and December 31, 2022, the Company had zero borrowed under the Revolving Credit Facility.
We did not identify a triggering event requiring a test for impairment of intangible assets during the remainder of 2022.
We did not identify a triggering event requiring a test for impairment during the remainder of 2022, or the year ended December 31, 2023.
We expect the restructuring and related actions to result in cost savings of approximately $7.0 million on an annualized basis. 50 TABLE OF CONTENTS As of June 30, 2022, primarily due to a sustained decline in the market value of our common stock and the market conditions described above, we identified a triggering event requiring a test for goodwill impairment.
As of June 30, 2022, primarily due to a sustained decline in the market value of our common stock and the market conditions described above, we identified a triggering event requiring a test for goodwill impairment.
The Term Loan requires us to maintain certain reporting requirements, affirmative covenants, and negative covenants. We were in compliance with all debt covenants as of December 31, 2022.
The Term Loan requires us to maintain certain reporting requirements, affirmative covenants, and negative covenants. We were in compliance with all debt covenants as of December 31, 2023. The Term Loan is secured by a first lien on our non-working capital assets and a second lien on our working capital assets.
Our major initiatives include (i) narrowing our product and brand portfolio and (ii) relocating and consolidating certain manufacturing and distribution centers including headcount reductions and reorganization to drive a solution based approach. We are focusing commercial sales on competencies and product assortment gained from our recent acquisitions.
Our major initiatives included (i) narrowing our product and brand portfolio, including removing approximately one-third of all products and one-fifth of all brands relating to our primary product portfolio, which excluded our garden center business in Canada, and (ii) relocating and consolidating certain manufacturing and distribution centers including headcount reductions and reorganization to drive a solution based approach, focusing commercial sales on competencies and product assortment gained from our recent acquisitions.
However, we cannot ensure that our business will generate sufficient cash flow from operating activities or that future borrowings will be available under our borrowing agreements in amounts sufficient to pay indebtedness or fund other working capital needs. Actual results of operations will depend on numerous factors, many of which are beyond our control as further discussed in Item 1A.
However, we cannot guarantee that our business will generate sufficient cash flow from operating activities or that future borrowings will be available under our borrowing agreements in amounts sufficient to pay indebtedness or fund other working capital needs.
While this seasonal pattern did not hold true during fiscal 2022, likely due to the industry recession, we expect this typical seasonal pattern to return in fiscal 2023. Also, we typically expect to utilize cash from operating activities in the first quarter to fund our working capital requirements related to the seasonal sales pattern described above.
Likely due to the industry recession, our net sales have declined in 2023 compared to 2022 and have led to seasonal patterns that may have less consistency. Also, we typically expect to utilize cash from operating activities in the first quarter to fund our working capital requirements related to the seasonal sales pattern described above.
Reflects the elimination of investor warrant solicitation fees. 58 TABLE OF CONTENTS Liquidity and Capital Resources Cash Flow from Operating, Investing, and Financing Activities Comparison of Years Ended December 31, 2022, and 2021 The following table summarizes our cash flows for the years ended December 31, 2022, and 2021 (amounts in thousands): Years ended December 31, 2022 2021 Net cash from (used in) operating activities $ 21,989 $ (45,067) Net cash used in investing activities (8,487) (468,184) Net cash (used in) from financing activities (20,200) 464,707 Effect of exchange rate changes on cash, cash equivalents and restricted cash (395) (27) Net decrease in cash, cash equivalents and restricted cash (7,093) (48,571) Cash, cash equivalents and restricted cash at beginning of year 28,384 76,955 Cash, cash equivalents and restricted cash at end of year $ 21,291 $ 28,384 Operating Activities Net cash from operating activities was $22.0 million for the year ended December 31, 2022, primarily due to a $39.6 million net cash inflow from a reduction of working capital related assets and liabilities.
Liquidity and Capital Resources Cash Flow from Operating, Investing, and Financing Activities Comparison of Years Ended December 31, 2023, and 2022 The following table summarizes our cash flows for the years ended December 31, 2023, and 2022 (amounts in thousands): Years ended December 31, 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) Effect of exchange rate changes on cash, cash equivalents and restricted cash 82 (395) Net increase (decrease) in cash, cash equivalents and restricted cash 9,021 (7,093) Cash, cash equivalents and restricted cash at beginning of year 21,291 28,384 Cash, cash equivalents and restricted cash at end of year $ 30,312 $ 21,291 Operating Activities Net cash from operating activities was $7.0 million for the year ended December 31, 2023, was primarily due to a $12.4 million net cash inflow from a reduction of working capital, partially offset by a reported net loss of $64.8 million less non-cash items of $59.5 million.
Income tax benefit Income tax benefit for the year ended December 31, 2022, was $6.4 million, compared to $19.1 million in the prior year.
The income tax benefit for the year ended December 31, 2023, was primarily due to minor foreign tax benefits in certain jurisdictions. Income tax benefit for the year ended December 31, 2022, was $6.4 million.
Selling, general and administrative expenses SG&A expenses for the year ended December 31, 2022, were $118.6 million, an increase of $14.4 million, or 13.8% compared to the same period in 2021.
Our gross profit margin percentage increased to 16.6% for the year ended December 31, 2023, from 8.5% in the same period in 2022 . Selling, general and administrative expenses SG&A expenses for the year ended December 31, 2023, were $87.3 million, a decrease of $31.3 million, or 26.4%, compared to the same period in 2022.
Availability and Use of Cash Our ability to make investments in our business, service our debt and maintain strong liquidity will depend upon our ability to generate excess operating cash flows through our operating subsidiaries. We believe that the Company will generate positive cash flows from operating activities over the next twelve months.
In addition, we paid $1.3 million in principal payments on the Term Loan. Availability and Use of Cash Our ability to make investments in our business, service our debt and maintain liquidity will depend upon our ability to generate excess operating cash flows through our operating subsidiaries.
Interest expense Interest expense for the year ended December 31, 2022, was $11.0 million, an increase of $8.8 million, or 412.5%, compared to the same period in the prior year.
Gross profit Gross profit for the year ended December 31, 2023, was $37.6 million, an increase of $8.3 million, or 28.2%, compared to the same period in 2022.
Such estimates and judgments necessarily involve varying, and possibly significant, degrees of uncertainty. Accordingly, certain amounts currently recorded in the financial statements will likely be adjusted in the future based on new available information and changes in other facts and circumstances.
Accordingly, certain amounts currently recorded in the financial statements will likely be adjusted in the future based on new available information and changes in other facts and circumstances. A discussion of our principal accounting policies that required the application of significant judgments as of December 31, 2023 and 2022 follows.
The net cash inflow from a reduction of working capital is partially offset by consolidated net loss on the statement of operations. During the year ended December 31, 2022, we paid $9.6 million in cash interest, compared to $1.6 million in the prior year.
The net cash inflow from a reduction of working capital is partially offset by consolidated net loss on the statement of operations. Investing Activities Net cash used in investing activities for the year ended December 31, 2023, was $4.2 million, due primarily to capital expenditures for property, plant and equipment.
The fair value determinations were a reflection of recent sales declines we have experienced, which we believe are primarily a result of an agricultural oversupply impacting our market, and a reduction to our 2022 profitability and loss from operations. We maintain an allowance for excess and obsolete inventory that is based upon assumptions about future demand and market conditions.
The fair values were reconciled to the market value of our common stock to corroborate the estimates used in the interim test for impairment. The fair value determinations were a reflection of sales declines we experienced, which we believe were primarily a result of an agricultural oversupply impacting our market, and a reduction to our profitability and loss from operations.
We intend to reinvest the net cash proceeds into certain permitted investments in 2023, such as capital expenditures. If necessary, we believe that we could supplement our cash position through additional sale/leasebacks, asset sales and equity financing.
Refer to further discussion below relatin g to Term Loan reinvestment provisions regarding the net cash proceeds of the Sale Leaseback Transaction. If necessary, we believe that we could supplement our cash position through additional sale-leasebacks, asset sales and equity financing.
Restructuring charges are primarily recorded within Cost of goods sold on the consolidated statement of operations for the year ended December 31, 2022. We plan to incur approximately $1.7 million of additional charges in 2023, which are primarily cash, associated with the execution of our restructuring plan, which we expect to complete in the first half of 2023.
During the year ended December 31, 2023, we recorded a pre-tax restructuring charges of $2.1 million for the first phase of the Restructuring 46 TABLE OF CONTENTS Plan, which were primarily costs related to the relocation and termination of certain facilities in Canada. The restructuring charges are primarily recorded within Cost of goods sold on the consolidated statements of operations.
This has led to a reduction in our 2022 profitability, as compared to the prior year, and a loss from operations. These market conditions continued to negatively impact our business and results of operations, and the extent to which this will continue is uncertain and difficult to predict at this time.
An agricultural oversupply has impacted our industry, driving cannabis wholesale prices down and resulting in a decrease in indoor and outdoor cultivation in the markets where we operate. The extent these market conditions will continue to negatively impact our business and results of operations is uncertain and difficult to predict at this time.
The SG&A increases compared to the prior year were partially offset by (i) a $16.8 million decrease in acquisition and integration expenses, and (ii) a $1.9 million decrease from investor warrant solicitation fees incurred last year. 54 TABLE OF CONTENTS Impairments We recorded goodwill impairment charges of $189.6 million for the year ended December 31, 2022, as we determined that the carrying value of the reporting units of U.S. and Canada were in excess of the fair value.
Impairments The Company did not record any impairment charges for the year ended December 31, 2023. The Company recorded goodwill impairment charges of $189.6 million for the year ended December 31, 2022, as we determined that the carrying value of the reporting units of U.S. and Canada was in excess of the fair value.
In addition, we paid $1.3 million in principal payments on the Term Loan. Net cash provided by financing activities was $464.7 million for the year ended December 31, 2021.
Financing Activities Net cash from financing activities was $6.1 million for the year ended December 31, 2023, primarily driven by $8.6 million of proceeds from the Sale-Leaseback Transaction, partially offset by $1.3 million of quarterly principal payments of the Term Loan.
The Term Loan is secured by a first lien on our non-working capital assets and a second lien on our working capital assets. 60 TABLE OF CONTENTS Cash and cash equivalents The cash and cash equivalents balances of $21.3 million and $26.6 million at December 31, 2022, and December 31, 2021, respectively, included $7.3 million and $4.1 million, respectively, held by foreign subsidiaries.
Cash and cash equivalents The cash and cash equivalents balances of $30.3 million and $21.3 million at December 31, 2023, and December 31, 2022, respectively, included $8.5 million and $7.3 million, respectively, held by foreign subsidiaries.
We believe it is prudent to be prepared if required and, accordingly, continue to be engaged in the process of evaluating and preparing to implement one or more of the aforementioned activities. Critical Accounting Policies and Estimates Certain accounting policies require us to make estimates and judgments in determining the amounts reflected in the Consolidated Financial Statements.
We believe it is prudent to be prepared if required and, accordingly, continue to be engaged in the process of evaluating and preparing to implement one or more of the aforementioned activities. Any potential such event may be subject to provisions referenced in our Term Loan and Revolving Credit Facility, such as subjecting the Company to making mandatory prepayments.
Loss on debt extinguishment or modification Loss on debt extinguishment or modification for the year ended December 31, 2022, was $0.1 million, a decrease of $0.5 million, or 78.7%, compared to the same period in 2021.
The increase was primarily due to higher variable interest rates on our Term Loan. Other income, net Other income, net for the year ended December 31, 2023, was $0.1 million, a decrease of $0.6 million compared to the same period in the prior year.
See “Special Note Regarding Forward-Looking Statements.” Company Overview We are a leading independent manufacturer and distributor of CEA equipment and supplies, including a broad portfolio of our own innovative proprietary branded products. We primarily serve the U.S. and Canadian markets, and believe we are one of the leading competitors in these markets in an otherwise highly fragmented industry.
See "Special Note Regarding Forward-Looking Statements." Company Overview We are a leading independent manufacturer and distributor of branded hydroponics equipment and supplies for controlled environment agriculture ("CEA"), including grow lights, climate control solutions, growing media and nutrients, as well as a broad portfolio of innovative and proprietary branded products.
For the year ended December 31, 2021, income tax benefit was primarily the result of a reduction in the valuation allowance recorded against our net deferred tax assets.
Our effective tax rate for the year ended December 31, 2023, differs from the federal statutory rate of 21% primarily due to maintaining a full valuation allowance against our net deferred tax assets in the United States and most foreign jurisdictions.
The Term Loan bears interest at LIBOR (with a 1.0% floor) plus 5.50%, or an alternative base rate (with a 2.0% floor), plus 4.50%, and is subject to a call premium of 2% in year one, 1% in year two, and 0% thereafter, and matures on October 25, 2028.
Such Eurodollar Rate Loan shall subsequently either be an ABR Loan or a Term Benchmark Loan. The ABR Loans shall bear interest at the Alternate Base Rate (with a 2.0% floor) plus 4.50%, and Term Benchmark Loans shall bear interest at the Adjusted Term SOFR Rate (with a 1.0% floor) plus 5.50%.
Other income (expense), net Other income for the year ended December 31, 2022, was $0.8 million compared to Other expense of $0.2 million for the year ended December 31, 2021. The increase in other income compared to the prior year periods relates primarily to foreign currency exchange rate gains in 2022.
Other income, net for the year ended December 31, 2023, was primarily driven by foreign currency exchange rate gains and interest income, partially offset by legal fees associated with the amendment of the Term Loan.
As of December 31, 2022, and 2021, respectively, there were no Investor Warrants outstanding. ◦ Follow-on Public Offering: On May 3, 2021, we closed our follow-on offering, in which we issued and sold 5,526,861 shares of our common stock, including the full exercise by the underwriters of their option to purchase 720,894 additional shares of our common stock, at a public offering price of $59.00 per share, which resulted in net proceeds of approximately $309.8 million after deducting underwriting discounts and commissions and offering expenses. ◦ JPMorgan Revolving Loan Facility: On March 29, 2021, we and certain of our subsidiaries entered into a Senior Secured Revolving Credit Facility (the “JPMorgan Revolving Loan Facility”) with JPMorgan Chase Bank, N.A., as administrative agent, issuing bank and swingline lender for a three-year revolving line of credit up to $50 million.
Revolving Credit Facility On March 29, 2021, we and certain of our subsidiaries entered into a Senior Secured Revolving Credit Facility (the "Revolving Credit Facility") with JPMorgan Chase Bank, N.A., as administrative agent, issuing bank and swingline lender for a revolving line of credit up to $50 million.
Material Cash Requirements Our material cash requirements include interest payments on our long-term debt, operating lease payments, and purchase obligations to support our operations.
Material Cash Requirements Our estimated 2024 material cash requirements include (i) principal repayments and anticipated interest payments based on current variable rates on our long-term debt of $3.0 million and $14.8 million, respectively, (ii) finance lease payments of $1.4 million, (iii) operating lease payments of $10.4 million, and (iv) $2.2 million subject to the Term Loan's reinvestment provision, as well as other purchase obligations to support our operations.
Removed
We may also execute a second phase of our restructuring plan in 2023 and incur additional costs. Our strategic product consolidation entails removing approximately one-third of all products and one-fifth of all brands relating to our primary product portfolio, which excludes our garden center business in Canada.
Added
We primarily serve the U.S. and Canadian markets, and believe we are one of the leading companies in these markets in an otherwise fragmented industry. For over 40 years, we have helped growers make growing easier and more productive.
Removed
The fair values were reconciled to the market value of our common stock to corroborate the estimates used in the interim test for impairment.
Added
Total costs incurred relating to this first phase of the Restructuring Plan since it commenced in the fourth quarter of 2022, are (i) $6.4 million relating primarily to inventory markdowns, and (ii) $3.4 million relating primarily to the relocation and termination of certain facilities in Canada.
Removed
During the year ended December 31, 2022, our consolidated statements of operations included charges of $18.5 million, primarily relating to increases to our allowance for inventory obsolescence relating to certain lighting products, which are incremental to the restructuring costs described above.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

6 edited+2 added−2 removed1 unchanged
Biggest changeFor the purposes of presenting these consolidated financial statements, the assets and liabilities of subsidiaries with CAD or Euro functional currencies are translated into USD using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average rate prevailing during the period with exchange differences impacting other comprehensive income (loss) in equity.
Biggest changeForeign Currency Risk The functional currencies of our foreign subsidiary operations are predominantly in the Canadian dollar ("CAD") and the Euro. For the purposes of presenting these consolidated financial statements, the assets and liabilities of subsidiaries with CAD or Euro functional currencies are translated into USD using exchange rates prevailing at the end of each reporting period.
There are inherent limitations in the sensitivity analysis presented, primarily due to the assumptions that interest rate changes would be instantaneous, while LIBOR changes regularly. We do not currently hedge our interest rate risks, but may determine to do so in the future.
There are inherent limitations in the sensitivity analysis presented, primarily due to the assumptions that interest rate changes would be instantaneous, while SOFR changes regularly. We do not currently hedge our interest rate risks, but may determine to do so in the future.
Refer to Part I, Item 1, Financial Statements, Note 10 - Debt for details relating to the debt. If these rates were to increase by 100 basis points from the rates in effect as of December 31, 2022, our interest expense on the variable rate debt would increase by an average of $1.2 million annually.
Refer to Note 10 - Debt for details relating to the debt. If the rates were to increase by 100 basis points from the rates in effect as of December 31, 2023, our interest expense on the variable rate debt would increase by an average of $1.1 million annually.
Interest Rate Risk We are exposed to interest rate risk through our variable rate debt. As of December 31, 2022, we had $124 million of debt under the Term Loan subject to variable interest rates that are based on LIBOR or an alternate base rate.
Interest Rate Risk We are exposed to interest rate risk through our variable rate debt. As of December 31, 2023, we had $122.5 million of Term Loan debt that is subject to variable interest rates that are based on Secured Overnight Financing Rate (“SOFR”) or an alternate base rate.
Therefore, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, principally the CAD. We are impacted by changes in foreign currency exchange rates when we sell product in currencies different from the currency in which costs were incurred.
We are impacted by changes in foreign currency exchange rates when we sell product in currencies different from the currency in which costs were incurred. The functional currencies and our purchasing and sales activities primarily include USD, CAD and Euro.
To date, we have not entered into any foreign currency exchange contracts and currently do not expect to enter into foreign currency exchange contracts for trading or speculative purposes. 63 TABLE OF CONTENTS
As these currencies fluctuate against each other, and other currencies, we are exposed to foreign currency exchange rate risk on sales, purchasing transactions, and labor. To date, we have not entered into any foreign currency exchange contracts and currently do not expect to enter into foreign currency exchange contracts for trading or speculative purposes.
Removed
See Risk Factors — We may be adversely impacted by the transition from the London interbank offered rate (“LIBOR”) to the Secured Overnight Funding Rate ("SOFR") as a reference rate. Foreign Currency Risk The functional currencies of our foreign subsidiary operations are predominantly in the Canadian dollar (“CAD”) and the Euro.
Added
Income and expense items are translated at the average rate prevailing during the period with exchange differences impacting other comprehensive income (loss) in equity. Therefore, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, principally the CAD.
Removed
The functional currencies and our purchasing and sales activities primarily include USD, CAD and Euro. As these currencies fluctuate against each other, and other currencies, we are exposed to foreign currency exchange rate risk on sales, purchasing transactions, and labor.
Added
Impact of Inflation Our results of operations and financial condition are presented based on historical costs. We cannot provide assurances that our results of operations and financial condition will not be materially impacted by inflation in the future. 55 TABLE OF CONTENTS

Other HYFM 10-K year-over-year comparisons