Hydrofarm Holdings Group Announces First Quarter 2022 Results

SHOEMAKERSVILLE, Pa., May 10, 2022 (GLOBE NEWSWIRE) — Hydrofarm Holdings Group, Inc. (“Hydrofarm” or the “Company”) (Nasdaq: HYFM), a leading independent manufacturer and distributor of branded hydroponics equipment and supplies for controlled environment agriculture (“CEA”), today announced financial results for its first quarter ended March 31, 2022.

First Quarter 2022 Highlights vs. Prior Year Period:

• Net sales remained flat at $111.4 million.
• Gross Profit decreased to $16.6 million compared to $23.2 million. Adjusted Gross Profit⁽¹⁾⁽²⁾ was $22.3 million compared to $23.4 million.
• Net loss was ($23.3) million, or a loss of ($0.52) per diluted share, compared to net income of $4.9 million, or $0.13 per diluted share. Adjusted Net Loss⁽¹⁾⁽²⁾ was ($7.8) million, or ($0.17) per diluted share, compared to Adjusted Net Income⁽¹⁾ of $7.2 million, or $0.18 per diluted share.
• Adjusted EBITDA⁽¹⁾⁽²⁾ decreased to $3.1 million compared to $9.9 million.
• The Company recorded a $3.2 million inventory reserve during the quarter, which was not treated as an adjustment.

Full Year 2022 Outlook:

• Net sales of approximately $480 million to $520 million.
• Adjusted EBITDA⁽¹⁾ of $46 million to $54 million, or approximately 10% of net sales.
• Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net (Loss) Income, Adjusted SG&A, Adjusted SG&A as a percent of net sales, and Adjusted EBITDA are non-GAAP measures. For reconciliations of GAAP to non-GAAP measures see the “Reconciliation of Non-GAAP Measures” accompanying the release.
• As a result of the $3.2 million inventory reserve, Adjusted Gross Profit, Adjusted Net Income and Adjusted EBITDA were negatively impacted.

Over the past year, our team has strengthened our business through a number of initiatives, including our five acquisitions, the expansion of our distribution and manufacturing footprint, and the creation of new leadership roles.

Bill Toler, Chairman and Chief Executive Officer of Hydrofarm

While we remain optimistic about the health of our business and our long-term potential, our ability to reap the benefits of our actions has been impacted by the agricultural oversupply that has hampered cannabis growing activity across the US and Canada. This dynamic was apparent in our first quarter results.

Mr. Toler added, “We believe these industry challenges are transient, and we continue to take aggressive actions to optimize our business through pricing and cost controls that we believe will benefit our business over time.   Moreover, we are seeing bright spots in our IGE business, in our commercial business, in newer legalized states, and in our peat business. With a strong product portfolio and healthy balance sheet, we remain well positioned to capture the tremendous long-term growth opportunities in the CEA industry.”

First Quarter 2022 Financial Results

Net sales in the first quarter of 2022 remained flat at $111.4 million compared to the first quarter of 2021, driven by an approximate 2.1% decrease in volume of products sold, offset by an approximate 2.2% increase in price and mix of products sold, and an approximate 0.1% decline from unfavorable foreign exchange rates.

Gross profit decreased to $16.6 million, or 14.9% of sales, during the first quarter of 2022 and included $3.9 million of expenses related to acquisitions completed in 2021 and a $3.2 million inventory reserve. Adjusted Gross Profit⁽¹⁾⁽²⁾ was $22.3 million or 20.0% of net sales, compared to $23.4 million or 21.0% in the first quarter of 2021. Adjusted gross profit margin⁽¹⁾⁽²⁾ was negatively impacted by a $3.2 million increase in inventory reserves primarily related to a surplus of lighting inventory. During the first quarter of 2022, we experienced higher freight and labor costs, offset by pricing actions and favorable sales mix of the Company’s proprietary brand products.

Selling, general and administrative (“SG&A”) expense was $43.0 million in the first quarter of 2022, or 38.6% of net sales, compared to $16.8 million in the first quarter of 2021. The increase in SG&A expense was primarily related to several non-cash charges including amortization expense and other acquisition-related costs, and distribution center relocation expenses.   Adjusted SG&A⁽¹⁾ increased to $19.2 million or 17.2% of net sales in the first quarter of 2022, compared to $13.5 million or 12.1% of net sales in the prior year period. The increase in Adjusted SG&A⁽¹⁾ primarily relates to an increase in compensation costs, facility costs, and insurance expenses. The added costs were largely the result of the five acquisitions completed in 2021 as well as the Company’s preparation for future growth.

Net loss was ($23.3) million, or ($0.52) per diluted share, in the first quarter of 2022, compared to a net income of $4.9 million, or $0.13 per diluted share in the first quarter of 2021. Adjusted Net Loss⁽¹⁾⁽²⁾ was ($7.8 million), or ($0.17) per diluted share, in the first quarter of 2022, compared to Adjusted Net Income⁽¹⁾ of $7.2 million, or $0.18 per diluted share, in the first quarter of 2021.

Adjusted EBITDA⁽¹⁾⁽²⁾ was $3.1 million, or 2.8% of net sales, for the first quarter of 2022, compared to $9.9 million, or 8.9% of net sales, in the first quarter of 2021. The decrease in Adjusted EBITDA⁽¹⁾⁽²⁾ was primarily related to higher Adjusted SG&A⁽¹⁾ expenses on relatively flat net sales as our business has been impacted by agricultural oversupply, as well as the $3.2 million inventory reserve mentioned above.

Balance Sheet and Liquidity

As of March 31, 2022, the Company had unrestricted cash and cash equivalents of approximately $12.2 million and approximately $99.7 million of available borrowing capacity under its revolving credit facility. The Company also carried a principal amount of debt outstanding of $124.7 million under our Term Loan at the end of the quarter.

Full Year 2022 Outlook

Based on first quarter performance and recent sales trends, the Company is providing an update to its outlook for the full fiscal year 2022:

• Net sales of approximately $480 million to $520 million.
• Adjusted EBITDA⁽¹⁾ of $46 million to $54 million, representing a range of approximately 9.6% to 10.4% of net sales for the full fiscal year.

The Company’s 2022 outlook includes the following updated assumptions:

• Sequential improvement from negative organic growth in Q1 to positive organic growth in Q4.
• Capital expenditures of approximately $8.0 million to $10.0 million; and
• An estimated tax provision between $0 and $3 million for the full year, excluding the large discrete tax benefit of $8.5 million recognized in Q1 2022.

With respect to projected fiscal year 2022 Adjusted EBITDA, a quantitative reconciliation is not available without unreasonable effort due to the variability, complexity and low visibility with respect to certain items, including, but not limited to, stock-based compensation and employer payroll taxes, uncertainties caused by the global COVID-19 pandemic, changes to the regulatory landscape, and certain potential future transaction expenses, which are excluded from Adjusted EBITDA. The Company expects the variability of these items to have a potentially unpredictable, and potentially significant, impact on its future GAAP financial results.

(1) Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net (Loss) Income, Adjusted SG&A, Adjusted SG&A as a percent of net sales, and Adjusted EBITDA are non-GAAP measures. For reconciliations of GAAP to non-GAAP measures see the “Reconciliation of Non-GAAP Measures” accompanying the release.

(2) As a result of the $3.2 million inventory reserve, Adjusted Gross Profit, Adjusted Net Income and Adjusted EBITDA were negatively impacted.

Conference Call

The Company will host a conference call to discuss financial results for the first quarter 2022 today at 4:30 p.m. Eastern Time. Bill Toler, Chairman and Chief Executive Officer, and John Lindeman, Chief Financial Officer, will host the call.

The conference call can be accessed live over the phone by dialing 201-389-0879. A replay will be available after the call until Tuesday, May 17, 2022 and can be accessed by dialing 412-317-6671. The passcode is 13728344. The conference call will also be webcast live and archived on the corporate website at www.hydrofarm.com, under the “Investors” section.

About Hydrofarm

Hydrofarm is a leading independent manufacturer and distributor of branded hydroponics equipment and supplies for controlled environment agriculture, including grow lights, climate control solutions, growing media and nutrients, as well as a broad portfolio of innovative and proprietary branded products. For over 40 years, Hydrofarm has helped growers make growing easier and more productive. The Company’s mission is to empower growers, farmers and cultivators with products that enable greater quality, efficiency, consistency and speed in their grow projects.

Contacts:
Investor Contact
Fitzhugh Taylor / ICR
ir@hydrofarm.com

Media Contact
Hydrofarm Marketing
Lisa Gallagher, 513-505-2334, lgallagher@hydrofarm.com

1. _{Reflects the adjustment to eliminate the historical interest expense for the periods presented.}
2. _{Reflects the elimination of the impairment, restructuring and other for the periods presented. During the quarter ended March 31, 2022, impairment primary related to a note receivable that originated in 2019 associated with a third party independent processor serving the CBD market.}
3. _{For the quarter ended March 31, 2022, this includes non-cash purchase accounting inventory adjustments for House and Garden, Aurora, Greenstar and Innovative Growers Equipment $3.9 million, the elimination of acquisition and integration consulting, transaction services and legal fees incurred for the completed Heavy 16, House and Garden, Aurora, Greenstar, and Innovative Growers Equipment acquisitions and certain potential acquisitions of $2.6 million, partially offset by the change in fair value of contingent consideration for Aurora of ($1.6 million).}
4. _{Reflects the elimination of the stock-based compensation and related employer payroll taxes on stock-based compensation for the periods presented.}
5. _{Reflects the elimination of one-time charges for loss on debt extinguishment.}
6. _{Reflects the elimination of charges for distribution center exit and relocation costs.}
7. _{Reflects the tax effect related with adjustments to net (loss) income at the normalized tax rate of 13%, which reflects an appropriate tax rate based on the nature of these adjustments.}
8. _{Discrete tax (benefit) resulting from a reduction in the Company’s valuation allowance against deferred tax assets due to the allocation of assets acquired and adjusting provisional amounts from business combinations.}
9. _{Depreciation, depletion and amortization increased significantly over the prior year due primarily to several acquisition related purchase-accounting adjustments impacting the quarter ended March 31, 2022. For purposes of computing adjusted net (loss) income for the quarter ended March 31, 2022, the Company is including the impacts from 2021 acquisitions for comparability to the prior year, including (i) amortization relating to 2021 acquisitions of $7.6 million, (ii) amortization expense of $5.9 million related to adjustments to the preliminary allocation of useful lives for intangibles assets for 2021 acquisitions, and (iii) depreciation relating to 2021 acquisitions of $1.6 million.}

Non-GAAP Financial Measures

We report our financial results in accordance with generally accepted accounting principles in the U.S. (“GAAP”). Management believes that certain non-GAAP financial measures provide investors with additional useful information in evaluating our performance and that excluding certain items that may vary substantially in frequency and magnitude period-to-period from net (loss) income provides useful supplemental measures that assist in evaluating our ability to generate earnings and to more readily compare these metrics between past and future periods. These non-GAAP financial measures may be different than similarly titled measures used by other companies.

To supplement our condensed consolidated financial statements which are prepared in accordance with GAAP, we use “Adjusted EBITDA”, “Adjusted Gross Profit”, “Adjusted SG&A”, “Adjusted Net (loss) income”, and “Adjusted Net (loss) income per diluted share” which are non-GAAP financial measures. Our non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with GAAP. There are several limitations related to the use of our non-GAAP financial measures as compared to the closest comparable GAAP measures. Some of these limitations include:

We define Adjusted EBITDA as net (loss) income excluding interest expense, income taxes, depreciation, depletion, and amortization, share-based compensation, employer payroll taxes on share-based compensation and other non-cash, unusual and/or infrequent costs (i.e., impairment, restructuring and other expenses, acquisition-related expenses, distribution center exit costs, loss on debt extinguishment and other income, net), which we do not consider in our evaluation of ongoing operating performance.

We define Adjusted EBITDA as a percent of net sales as adjusted EBITDA as defined above divided by net sales realized in the respective period.

We define Adjusted Gross Profit as gross profit excluding depreciation, depletion, and amortization, and other non-cash, unusual and/or infrequent costs (i.e., impairment, restructuring and other expenses, and acquisition-related expenses), which we do not consider in our evaluation of ongoing operating performance.

We define Adjusted SG&A as SG&A excluding depreciation, depletion, and amortization, and other non-cash, unusual and/or infrequent costs (i.e., impairment, restructuring and other expenses, acquisition-related expenses, share-based compensation, employer payroll taxes on share-based compensation, and distribution center exit costs), which we do not consider in our evaluation of ongoing operating performance.

We define Adjusted Net (loss) income as net (loss) income excluding adjustments to stock-based compensation and employer payroll taxes on stock-based compensation, and certain other non-cash, unusual and/or infrequent costs including those relating to our five acquisitions in 2021 (i.e., Depreciation, depletion and amortization related to acquisitions, impairment, restructuring and other expenses, acquisition-related expenses, loss on debt extinguishment, and distribution center exit costs), which we do not consider in our evaluation of ongoing operating performance, and the income tax impact resulting from the above adjustments to net (loss) income.

We define Adjusted Net (loss) income per share – Diluted as adjusted net (loss) income as defined above divided by the weighted average diluted shares outstanding.

Original Press Release

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