The following discussion and analysis provides information that we believe is
relevant to an assessment and understanding of our results of operations and
financial condition. You should read this analysis in conjunction with our
audited and unaudited consolidated financial statements and the notes contained
elsewhere in this Quarterly Report on Form 10-Q and our 2021 Annual Report. 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. In evaluating
such statements, you should carefully consider the various factors identified in
this Quarterly Report on Form 10-Q, 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 our 2021 Annual
Report. 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 by market share in these markets in an otherwise
highly fragmented industry. 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.
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, CO2, light intensity spectrum, nutrient
concentration and pH. Through CEA, growers are able to be more efficient with
physical space, water and resources, while enjoying year-round and more rapid
grow cycles as well as more predictable and abundant grow yields, when compared
to other traditional growing methods.

We reach commercial farmers and consumers through a broad and diversified
network of over 2,000 wholesale customer accounts, who we connect with primarily
through our proprietary e-commerce marketplace. A substantial majority of our
net sales are to specialty hydroponic retailers, through which growers are able
to enjoy specialized merchandise assortments and knowledgeable staff. We also
distribute our products across the U.S. and Canada to a diversified range of
retailers of commercial and home gardening equipment and supplies that include
garden centers, hardware stores, e-commerce retailers, commercial greenhouse
builders, and commercial resellers.

During fiscal year 2021, we completed five acquisitions of branded manufacturers
of CEA products, resulting in a significant expansion of our portfolio of
proprietary branded products and our specialized manufacturing capabilities,
including:

•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.


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Market Conditions and Goodwill Impairment



Primarily due to a sustained decline in the Company's market value of common
stock and market conditions, we identified a triggering event requiring a test
for goodwill impairment 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. The impairment was primarily
due to a deterioration in customer demand in the U.S. and Canada caused by
macroeconomic and industry conditions.

We determined the fair value of the U.S. and Canada reporting units based on an
income approach, using the present value of future discounted cash flows, and
based on a market approach. The fair values were reconciled to the market value
of common stock of Hydrofarm to corroborate the estimates used in the interim
test for impairment. 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 current
year profitability and loss from operations. The extent to which these market
conditions will continue to impact our business, results of operations, and cash
flows are uncertain and difficult to predict at this time. As a result of market
conditions and our inventory balance, we have reduced manufacturing and
production levels, and in certain cases, implemented temporary employee
furloughs all of which may continue in future periods.

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. Further, we maintain an allowance for excess and
obsolete inventory that is based upon assumptions about future demand and market
conditions. During the three and six months ended June 30, 2022, our condensed
consolidated statements of operations were negatively impacted by $10.2 million
and $13.4 million, respectively, of increases to our allowance for inventory
obsolescence primarily due to certain lighting products. It is possible we may
incur an impairment charge related to intangible assets in the future, or
additional increases to our allowance for inventory obsolescence in future
periods depending on market and industry conditions.

Effects of COVID-19 on Our Business



The World Health Organization recognized COVID-19 as a global pandemic on March
11, 2020, and COVID-19 has had significant and ongoing negative impacts on
global societies, workplaces, economies and health systems. 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. 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 Quarterly Report, our operations are not impacted by any
COVID-19 related facility closures, lockdown measures, travel restrictions or
similar limitations. However, new waves of COVID-19 or its variants could cause
the reinstatement of such limitations, and such limitations may adversely impact
our supply chains, the manufacturing of our own products and our ability to
obtain necessary materials, all of which could adversely affect our business,
results of operations and financial condition. We have historically and may
continue to source select products from China. We are experiencing some extended
lead times in our supply chain, as well as increased shipping costs and believe
the COVID-19 pandemic is a contributing factor to those extended lead times and
increased costs. Furthermore, potential suppliers or sources of materials may
pass the increase in sourcing costs due to the COVID-19 pandemic to us through
price increases, thereby impacting our potential future profit margins.

The extent to which the COVID-19 pandemic will ultimately impact our business,
results of operations, financial condition and cash flows depends on future
developments that are highly uncertain, rapidly evolving and difficult to
predict at this time. It is difficult to assess or quantify with precision the
impact COVID-19 has directly had on our business since we cannot precisely
quantify the impacts, if any, that the various effects have had on the overall
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 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.

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Results of Operations-Comparison of three and six months ended June 30, 2022 and 2021



The following table sets forth our unaudited interim condensed consolidated
statements of operations for the three and six months ended June 30, 2022, and
2021, including amounts and percentages of net sales for each period and the
period-to-period change in dollars and percent (amounts in thousands):

                                                            Three months ended June 30,
                                                    2022                                      2021                                 Period change
Net sales                           $        97,508              100.0    %      $ 133,800             100.0    %      $      (36,292)              -27.1    %
Cost of goods sold                           90,169               92.5    %        104,210              77.9    %             (14,041)              -13.5    %
Gross profit                                  7,339                7.5    %         29,590              22.1    %             (22,251)              -75.2    %
Operating expenses:
Selling, general and administrative          25,974               26.6    %         27,259              20.4    %              (1,285)               -4.7    %
Impairments                                 189,572              194.4    %              -               0.0    %             189,572                    n/a
(Loss) income from operations              (208,207)            -213.5    %          2,331               1.7    %            (210,538)           -9,032.1    %
Interest expense                             (2,424)              -2.5    %            (54)              0.0    %              (2,370)            4,388.9    %
Loss on debt extinguishment                       -                0.0    %              -               0.0    %                   -                    n/a
Other income, net                               458                0.5    %             43               0.0    %                 415               965.1    %
(Loss) income before tax                   (210,173)            -215.5    %          2,320               1.7    %            (212,493)           -9,159.2    %
Income tax benefit (expense)                  6,861                7.0    %            (63)              0.0    %               6,924           -10,990.5    %
Net (loss) income                   $      (203,312)            -208.5    %      $   2,257               1.7    %      $     (205,569)           -9,108.1    %


                                                               Six months ended June 30,
                                                      2022                                        2021                                 Period change
Net sales                           $      208,885                   100.0    %      $ 245,189             100.0    %      $      (36,304)              -14.8    %
Cost of goods sold                         184,940                    88.5    %        192,376              78.5    %              (7,436)               -3.9    %
Gross profit                                23,945                    11.5    %         52,813              21.5    %             (28,868)              -54.7    %
Operating expenses:
Selling, general and administrative         66,221                    31.7    %         44,100              18.0    %              22,121                50.2    %
Impairments                                192,328                    92.1    %              -               0.0    %             192,328                    n/a
(Loss) income from operations             (234,604)                 -112.3    %          8,713               3.6    %            (243,317)           -2,792.6    %
Interest expense                            (4,790)                   -2.3    %           (144)             -0.1    %              (4,646)            3,226.4    %
Loss on debt extinguishment                      -                     0.0    %           (680)             -0.3    %                 680                    n/a
Other income, net                              356                     0.2    %            127               0.1    %                 229               180.3    %
(Loss) income before tax                  (239,038)                 -114.4    %          8,016               3.3    %            (247,054)           -3,082.0    %
Income tax benefit (expense)                12,430                     6.0    %           (819)             -0.3    %              13,249            -1,617.7    %
Net (loss) income                   $     (226,608)                 -108.5    %      $   7,197               2.9    %      $     (233,805)           -3,248.6    %


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Net sales



Net sales for the three months ended June 30, 2022, were $97.5 million, a
decrease of $36.3 million, or 27.1% compared to the same period in 2021. Net
sales for the six months ended June 30, 2022, were $208.9 million, a decrease of
$36.3 million, or 14.8%, compared to the same period in 2021.

The 27.1% decrease in net sales for the three months ended June 30, 2022, as
compared to the same period in 2021, was due to a 29.9% decline in volume of
products sold (a 43.4% decline in organic sales and a 13.5% increase from
recently-acquired proprietary brands), a 3.1% increase in price and mix of
products sold, and 0.3% decline from unfavorable foreign exchange rates. The
decrease in volume of products sold was primarily related to an agricultural
oversupply, which put downward pressure on cannabis growing activity
predominantly in California and Canada but also in many other U.S. states. The
increase in price was primarily related to list price increases, as well as
higher freight recovery. The decrease in foreign exchange related to recent
strength in the U.S. Dollar relative to the Canadian Dollar and to the Euro.

The 14.8% decrease in net sales for the six months ended June 30, 2022, as
compared to the same period in 2021, was due to a 17.4% decline in volume of
products sold (a 40.5% decline in organic sales and a 23.1% increase from
recently-acquired proprietary brands), a 2.8% increase in price and mix of
products sold, and a 0.2% decline from unfavorable foreign exchange rates. The
decrease in volume of products sold was primarily related to the aforementioned
oversupply in the cannabis industry. The increase in price was primarily related
to list price increases, as well as higher freight recovery as we put multiple
measures in place to combat rising freight costs. The decrease in foreign
exchange related to recent strength in the U.S. Dollar relative to the Canadian
Dollar and to the Euro.

Gross profit

Gross profit for the three months ended June 30, 2022, was $7.3 million, a
decrease of $22.3 million, or 75.2%, compared to the same period in 2021. Gross
profit for the six months ended June 30, 2022, was $23.9 million, a decrease of
$28.9 million, or 54.7%, compared to the same period in 2021.

The decrease in gross profit for the three months ended June 30, 2022, as
compared to the same period in 2021, was primarily related to (i) the
aforementioned decrease in net sales and (ii) a significant decrease in our
gross profit margin percentage (gross profit as a percent of net sales). Our
gross profit margin percentage decreased to 7.5% for the three months ended June
30, 2022, from 22.1% in the same period in 2021. The lower gross profit margin
percentage is primarily due to an increase in the inventory obsolescence
allowance of $10.2 million primarily related to certain lighting products. Also
negatively impacting gross profit margin were freight and labor costs which were
higher as percentage of net sales. These were partially offset by the
aforementioned list price increases, as well as a higher proportion of
higher-margin proprietary brand sales.

The decrease in gross profit for the six months ended June 30, 2022, as compared
to the same period in 2021, was primarily related to (i) the aforementioned
decrease in net sales and (ii) a significant decrease in our gross profit margin
percentage (gross profit as a percent of net sales). Our gross profit margin
percentage decreased to 11.5% for the three months ended June 30, 2022, from
21.5% in the same period in 2021. The lower gross profit margin percentage is
primarily due to an increase in the inventory obsolescence allowance of $13.4
million primarily related to certain lighting products. Also negatively
impacting gross profit margin were freight and labor costs which were higher as
percentage of net sales. These were partially offset by the aforementioned list
price increases, as well as a proportion of higher-margin proprietary brand
sales.

Selling, general and administrative expenses



Selling, general and administrative ("SG&A") expenses for the three months ended
June 30, 2022, were $26.0 million, a decrease of $1.3 million compared to the
same period in 2021. SG&A expenses for the six months ended June 30, 2022, was
$66.2 million, an increase of $22.1 million compared to the same period in 2021.

The $1.3 million decrease in SG&A for the three months ended June 30, 2022,
compared to prior year was primarily related to (i) an $8.4 million decrease in
acquisition and integration expenses, and (ii) a $0.4 million decrease in
consulting and professional fees. These decreases were partially offset by (i) a
$4.7 million increase in depreciation, depletion and amortization expense, (ii)
an $1.0 million increase in facility costs, (iii) a $0.8 million increase in
share-based compensation expense, (iv) a $0.6 million increase in compensation
expense (primarily salaries and benefits for employees from companies acquired
in 2021), of which $0.2 million was severance associated with a recent
reduction-in-force, (v) a $0.4 million increase in insurance costs.

The $22.1 million increase in SG&A for the six months ended June 30, 2022, compared to prior year was primarily related to (i) an $18.6 million increase in depreciation, depletion and amortization expense, of which $5.9 million represented


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amortization expense from adjustments to useful lives that were determined this
year, (ii) a $3.7 million increase in compensation costs (primarily salaries and
benefits for employees from companies acquired in 2021), of which $0.8 million
was severance associated with a recent reduction-in-force, (iii) a $2.7 million
increase in share-based compensation, (iv) a $2.0 million increase in facility
costs, (v) an $1.4 million of costs associated with the relocation of certain of
our distribution centers, (vi) a $0.9 million increase in insurance costs, and
(vii) a $0.7 million increase in travel costs. These increases were partially
offset by (i) an $8.0 million decrease in acquisition and integration expenses,
and (ii) a $0.9 million decrease in consulting and professional fees.

Impairments



The Company recorded a goodwill impairment charge of $189.6 million for the
three and six months ended June 30, 2022, as we 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. 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 six months ended June 30, 2022, the Company also recorded, in the fiscal
first quarter, an impairment of a note receivable of $2.6 million.

Interest expense



Interest expense for the three months ended June 30, 2022, was $2.4 million, an
increase of $2.4 million compared to the same period in the prior year. Interest
expense for the six months ended June 30, 2022, was $4.8 million, an increase of
$4.6 million compared to the same period in the prior year. The increase was due
to the interest-bearing Term Loan entered into in the fourth quarter of 2021 and
outstanding for the full period during the first half of 2022.

Loss on debt extinguishment



Loss on debt extinguishment for the six months ended June 30, 2022, was zero,
compared to $0.7 million in the prior year which resulted primarily from the
write-off of unamortized deferred financing costs associated with the payoff of
the Encina Credit Facility.

Income tax (benefit) expense

Income tax benefit for the three months ended June 30, 2022, was $6.9 million,
compared to $0.1 million of income tax expense in the prior year. Income tax
benefit for the six months ended June 30, 2022, was $12.4 million, compared to
$0.8 million of income tax expense in the prior year. Our effective income tax
rate was 5.2% for the six months ended June 30, 2022, and differs from the U.S.
federal statutory rate of 21% primarily due to the impairment of goodwill for
certain 2021 acquisitions which was not deductible for U.S. tax purposes,
increases in our valuation allowance on U.S. deferred tax assets, and the
establishment of a valuation allowance for Canadian deferred tax assets. As
described in Note 4 - Goodwill and Intangible Assets, Net, during the three
months ended June 30, 2022, we fully impaired the goodwill associated with all
2021 acquisitions. For the six months ended June 30, 2022, we recorded discrete
income tax benefits of $12.1 million relating primarily to measurement period
adjustments associated with 2021 acquisitions, and certain tax benefits related
to goodwill impairment.

For the six months ended June 30, 2021, our income tax rate of 10.2% differs
from the federal statutory rate of 21% primarily as a result of reducing
valuation allowances on the our deferred tax assets related to net operating
loss carryforwards.

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Non-GAAP Financial Measures



We report our financial results in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP" or "GAAP").
However, management believes that certain non-GAAP financial measures provide
investors of our financial information 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 unaudited consolidated financial statements which
are prepared in accordance with GAAP, we use "Adjusted EBITDA" and "Adjusted
EBITDA as a percent of sales" which are non-GAAP financial measures
(collectively referred to as "Adjusted EBITDA"). 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:

• Adjusted EBITDA does not reflect the significant interest expense, or the amounts necessary to service interest or principal payments on our indebtedness;

• Adjusted EBITDA excludes depreciation, depletion and amortization, and although these are non-cash expenses, the assets being depreciated and amortized may have to be replaced in the future;

• Adjusted EBITDA does not reflect our tax provision that adjusts cash available to us;

• Adjusted EBITDA excludes the non-cash component of stock-based compensation;

• Adjusted EBITDA excludes the amount of employer payroll taxes on stock-based compensation; and

• Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters we consider not to be reflective, on a recurring basis, of our ongoing operations.



We define Adjusted EBITDA as net income (loss) excluding interest expense,
income taxes, depreciation, depletion and amortization, stock-based
compensation, employer payroll taxes on stock-based compensation and other
unusual and/or infrequent costs, which we do not consider in our evaluation of
ongoing operating performance. The following table presents a reconciliation of
net (loss) income, the most comparable GAAP financial measure, to Adjusted
EBITDA for the three and six months ended June 30, 2022, and 2021 (in
thousands):

                                                 Three months ended June 30,                   Six months ended June 30,
                                                   2022                   2021                  2022                  2021
Net (loss) income                           $      (203,312)          $   2,257          $     (226,608)          $   7,197
 Interest expense                                     2,424                  54                   4,790                 144
 Income tax (benefit) expense                        (6,861)                 63                 (12,430)                819
 Distribution center exit costs and other1              289                   -                   1,375                   -
 Depreciation, depletion and amortization             7,835               2,187                  24,776               3,778
 Impairments2                                       189,572                   -                 192,328                   -
 Severance and other3                                   334                   1                     971                  16
 Acquisition expenses4                                1,249               9,566                   6,235              10,225
 Stock-based compensation5                            2,080               1,258                   5,156               2,516
 Investor warrant solicitation fees6                      -                 844                       -                 844
 Other income, net                                     (458)                (43)                   (356)               (127)
 Loss on debt extinguishment                              -                   -                       -                 680
Adjusted EBITDA                             $        (6,848)          $ 

16,187 $ (3,763) $ 26,092 Adjusted EBITDA as a percent of net sales

              (7.0)  %            12.1  %                 (1.8)  %            10.6  %


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1. Relates to costs incurred to exit and relocate distribution centers in California and Pennsylvania including lease exit costs, transportation, and labor related costs.



2. The Company completed its goodwill impairment testing and recorded an
impairment charge of $189.6 million in the three months ended June 30, 2022, due
to market softness in demand in the U.S. and Canada. During the quarter ended
March 31, 2022, impairment primarily related to a $2.6 million charge associated
with a note receivable that originated in 2019 associated with a third party
independent processor serving the CBD market.

3. Severance costs incurred during the three and six months ended June 30, 2022, related to workforce reductions to optimize our cost structure.



4. For the three months ended June 30, 2022, this includes non-cash purchase
accounting inventory adjustments for House & Garden and Greenstar $0.4 million,
and the elimination of acquisition and integration consulting, transaction
services and legal fees incurred for the completed Heavy 16, House & Garden,
Aurora, Greenstar, and the Innovative Growers Equipment acquisitions and certain
potential acquisitions of $0.8 million. For the six months ended June 30, 2022,
this includes non-cash purchase accounting inventory adjustments for House &
Garden, Aurora, Greenstar and the Innovative Growers Equipment of $4.4 million,
the elimination of acquisition and integration consulting, transaction services
and legal fees incurred for the completed Heavy 16, House & Garden, Aurora,
Greenstar, and Innovative Growers Equipment acquisitions and certain potential
acquisitions of $3.4 million, partially offset by the change in fair value of
contingent consideration for Aurora of ($1.6 million).

5. Includes stock-based compensation and related employer payroll taxes on stock-based compensation for the periods presented.

6. Reflects the elimination of one-time investor warrant solicitation fees.

Liquidity and Capital Resources

The following table summarizes our cash flows for the six months ended June 30, 2022, and 2021 (amounts in thousands):



                                                                        Six 

months ended June 30,


                                                                         2022                 2021
Net cash from (used in) operating activities                       $       7,268          $    (501)
Net cash used in investing activities                                     (4,743)          (196,607)
Net cash (used in) from financing activities                              (3,349)           315,447

Effect of exchange rate changes on cash, cash equivalents and restricted cash

                                                             (115)                73

Net (decrease) increase in cash, cash equivalents and restricted cash

                                                                        (939)           118,412

Cash, cash equivalents and restricted cash at beginning of period 28,384

             76,955

Cash, cash equivalents and restricted cash at end of period $ 27,445 $ 195,367




Operating Activities

Net cash from operating activities was $7.3 million for the six months ended
June 30, 2022, primarily due to $7.2 million net cash inflow from a reduction of
working capital. This included a decrease of $21.3 million in inventories and a
decrease of $6.2 million in accounts receivable, partially offset by decreases
of $6.7 million in deferred revenue and $6.4 million in accrued expenses and
other current liabilities.

Net cash used in operating activities was $0.5 million for the six months ended
June 30, 2021, primarily consisting of $9.2 million in non-cash expense
addbacks, which were largely composed of depreciation, depletion and
amortization, stock-based compensation expense, non-cash operating lease and
other non-cash expense, to reconcile net income of $7.2 million to net cash used
in operating activities, less a $16.9 million increase in working capital. This
change in working capital primarily reflects an aggregate increase of
$33.7 million in accounts receivable, inventories, prepaid expenses and other
current assets, and other assets for the period offset by an aggregate net
increase of $16.8 million in accounts payable, accrued expenses and other
current liabilities, and a decrease in lease liabilities due to payments on
lease obligations during the period.

Investing Activities

Net cash used in investing activities was $4.7 million for the six months ended June 30, 2022, and was due primarily to purchases of property, plant and equipment, which increased over prior year due to our acquired companies' greater capital requirements.


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Net cash used in investing activities for the six months ended June 30, 2021,
was $196.6 million, due mostly to the Heavy 16 and the House & Garden
acquisitions we completed during the period. The outflows associated with the
Heavy 16 acquisition and the House & Garden acquisitions totaled $195.8 million.

Financing Activities



Net cash used in financing activities was $3.3 million for the six months ended
June 30, 2022. We paid $2.1 million related to employees' withholding tax in
connection with the vesting of restricted stock units. In addition, we paid $0.6
million on the Term Loan.

Net cash from financing activities for the six months ended June 30, 2021, was
$315.4 million. We received proceeds of $309.8 million from our follow-on
offering, and received an additional $20.3 million from the redemption
("Redemption") of investor warrants. We received the remaining balance of the
$56.8 million of gross proceeds from the Redemption in July 2021. We also paid
$14.9 million related to employees' withholding tax in connection with the
vesting of restricted stock units.

Liquidity



Our ability to make investments in our business, service our debt and
maintaining strong liquidity will depend upon our ability to generate excess
operating cash flows through our operating subsidiaries. Based on current levels
of operations, we believe that our cash flows from operations, combined with our
current cash levels and borrowing availability, will be adequate to fund debt
service requirements and provide cash, as required, to support our ongoing
operations, capital expenditures, lease obligations and working capital needs
through the next twelve months of operations.

If necessary, we believe that we could supplement our cash position through
sales/leasebacks, asset sales and an equity financing. We are hopeful that none
of these actions will be necessary in the down market we are currently
experiencing. However, we also believe it is prudent to be prepared if required
and, accordingly, are engaged in the preliminary process of evaluating and
preparing to implement such steps should it prove necessary.

Senior Secured 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 certain lenders, pursuant to which we borrowed a $125.0 million senior
secured term loan. 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. We received net proceeds of $119.9 million in
2021 from the Term Loan after deducting discounts and deferred financing costs.

The principal amounts of the Term Loan are to be repaid in consecutive quarterly
installments in amounts equal to 0.25% of the 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.

The Term Loan requires us to maintain certain reporting requirements,
affirmative covenants, and negative covenants, and we were in compliance with
all requirements as of June 30, 2022. The Term Loan is secured by a first lien
on the non-working capital assets of the Company and a second lien on the
working capital assets. We may request additional term loan commitments subject
to certain loan conditions.

JPMorgan Revolving Credit Facility



On March 29, 2021, we and certain of our direct and indirect subsidiaries
entered into a Senior Secured Revolving Credit Facility with JPMorgan Chase
Bank, N.A., as administrative agent, issuing bank and swingline lender, and the
lenders from time-to-time party thereto. The Revolving Credit Facility replaced
the Encina Credit Facility. The Revolving Credit Facility is due on the earlier
of March 29, 2024, or any earlier date on which the revolving commitments are
reduced to zero.

The Revolving Credit Facility has been amended since its origination in connection with modifications to increase the borrowing limit and to consent to the Term Loan.



The three-year Revolving Credit Facility has a borrowing limit of $100 million
subject to customary conditions. The Revolver maintains an interest rate of
LIBOR plus 1.95% and has a 0.0% LIBOR floor. A fee of 0.25% per annum is charged
for available but unused borrowings as defined. The Revolving Credit Facility is
an asset-based facility that is secured by a first lien on the working capital
assets of the Company and a second lien on the non-working capital assets of the
Company (including most of the Company's subsidiaries). The borrowing base is
based on a detailed monthly calculation of the sum of

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(a) a percentage of the Eligible Accounts at such time, plus (b) the lesser of
(i) a percentage of the Eligible Inventory, at such time, valued at the lower of
cost or market value, determined on a first-in-first-out basis, and (ii) the
product of a percentage multiplied by the Net Orderly Liquidation Value
percentage identified in the most recent inventory appraisal ordered by the
Administrative Agent multiplied by the Eligible Inventory, valued at the lower
of cost or market value, determined on a first-in-first-out basis, minus (c)
Reserves (each of the defined terms above, as defined in the Revolving Credit
Facility documents). As of June 30, 2022, the Company would be able to borrow
approximately $70 million under the Revolving Credit Facility.

The Company is required to maintain certain reporting requirements, affirmative
covenants and negative covenants, pursuant to terms outlined in the agreement.
Additionally, if the Company's Excess Availability (as defined in the Revolving
Credit Facility documents) is less than $10,000, the Company will be required to
maintain a minimum fixed charge coverage ratio of 1.1x on a rolling twelve-month
basis until the Excess Availability is more than $10,000 for P30D consecutive
days. The Company must also comply with a higher fixed charge coverage ratio of
1.15x in order to consummate permitted acquisitions and to make restricted
payments, but no such acquisitions or payments are currently contemplated. As of
June 30, 2022, the Company is in compliance with the covenants contained in the
Revolving Credit Facility.

As of June 30, 2022, and December 31, 2021, the Company had zero borrowed under the facility.



Material Cash Requirements

Our material cash requirements include interest payments on our long-term debt,
operating lease payments, the payment of contingent consideration, which was
subsequently paid out in cash in July 2022, and purchase obligations to support
our operations. Refer to Part I, Item 1, Financial Statements, Note 10 - Debt,
Note 7 - Operating Leases, Note 3 - Business Combinations and Note 13 -
Commitments, 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, contingent consideration,
and purchase obligations, respectively.

Critical Accounting Policies and Estimates



The preceding discussion and analysis of our consolidated results of operations
and financial condition should be read in conjunction with our condensed
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q. Our critical accounting policies and estimates are identified in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Part II, Item 7 of our most recently filed Form 10-K and include
the discussion of estimates used in business combinations, goodwill, and
long-lived assets. Such accounting policies and estimates require significant
judgments and assumptions to be used in the preparation of the Condensed
Consolidated Financial Statements included in this Form 10-Q, and actual results
could differ materially from the amounts reported.

Goodwill is evaluated for impairment annually in the fourth quarter, or on an
interim basis when an event or change in circumstances occurs, indicating that
the carrying value may not be recoverable. Primarily due to a decline in the
Company's market value of common stock and market conditions, the Company
identified a triggering event requiring a test for impairment as of June 30,
2022. The Company completed its goodwill impairment testing and recorded an
impairment charge due to market softness in demand in the U.S. and Canada. The
Company determined the fair value of the U.S. and Canada reporting units based
on an income approach, using the present value of future discounted cash flows,
and based on a market approach. 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
common stock of Hydrofarm to corroborate the estimates used in the interim test
for 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, the Company
performed an evaluation of intangible assets for impairment in connection with
the triggering event identified requiring a quantitative test for goodwill
impairment. 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. Based
on the Company's evaluation, there was no impairment of intangible assets or
other long lived assets for the quarter ended June 30, 2022.

The Company believes that the intangible asset impairment evaluations were based
on reasonable assumptions that marketplace participants would use. However, such
assumptions are inherently uncertain and actual results could differ from those
estimates. Changes to or a failure to achieve our projected business
assumptions, including growth and profitability, could result in a valuation
that would trigger an impairment in future periods.

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