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 theU.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 theU.S. andCanada 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
•House & Garden, a manufacturer of plant nutrients and additives, in
•Aurora Innovations, a manufacturer of soil, grow media, plant nutrients and
additives, in
•Greenstar Plant Products, a manufacturer of plant nutrients and additives, in
•Innovative Growers Equipment, a manufacturer of horticultural benches, racks
and grow lights, in
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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 ofJune 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 ofU.S. andCanada was in excess of the fair value. The recognized impairment reduced the goodwill balance to zero as ofJune 30, 2022 . The impairment was primarily due to a deterioration in customer demand in theU.S. andCanada caused by macroeconomic and industry conditions. We determined the fair value of theU.S. andCanada 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 ofHydrofarm 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 endedJune 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
TheWorld Health Organization recognized COVID-19 as a global pandemic onMarch 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 fromChina . 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 inthe 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. 26
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Results of Operations-Comparison of three and six months ended
The following table sets forth our unaudited interim condensed consolidated statements of operations for the three and six months endedJune 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 % 27
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Net sales
Net sales for the three months endedJune 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 endedJune 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 endedJune 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 inCalifornia andCanada but also in many otherU.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 theU.S. Dollar relative to the Canadian Dollar and to the Euro. The 14.8% decrease in net sales for the six months endedJune 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 theU.S. Dollar relative to the Canadian Dollar and to the Euro. Gross profit Gross profit for the three months endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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
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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 endedJune 30, 2022 , as we determined that the carrying value of the goodwill reporting units ofU.S. andCanada was in excess of the fair value. The recognized impairment reduced the goodwill balance to zero as ofJune 30, 2022 . The impairment was primarily due to a deterioration in customer demand in theU.S. andCanada caused by macroeconomic and industry conditions. For the six months endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 30, 2022 , and differs from theU.S. federal statutory rate of 21% primarily due to the impairment of goodwill for certain 2021 acquisitions which was not deductible forU.S. tax purposes, increases in our valuation allowance onU.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 endedJune 30, 2022 , we fully impaired the goodwill associated with all 2021 acquisitions. For the six months endedJune 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 endedJune 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. 29
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Non-GAAP Financial Measures
We report our financial results in accordance with accounting principles generally accepted inthe 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 endedJune 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
(7.0) % 12.1 % (1.8) % 10.6 % 30
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1. Relates to costs incurred to exit and relocate distribution centers in
2. The Company completed its goodwill impairment testing and recorded an impairment charge of$189.6 million in the three months endedJune 30, 2022 , due to market softness in demand in theU.S. andCanada . During the quarter endedMarch 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
4. For the three months endedJune 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 endedJune 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 ($1.6 million ).
5. Includes stock-based compensation and related employer payroll taxes on stock-based compensation for the periods presented.
6. Reflects the elimination of one-time investor warrant solicitation fees.
Liquidity and Capital Resources
The following table summarizes our cash flows for the six months ended
Six
months ended
2022 2021 Net cash from (used in) operating activities$ 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
Operating Activities Net cash from operating activities was$7.3 million for the six months endedJune 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 endedJune 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
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Net cash used in investing activities for the six months endedJune 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 endedJune 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 endedJune 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 inJuly 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
OnOctober 25, 2021 , we and certain of our direct and indirect subsidiaries entered into the Term Loan withJPMorgan 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 onOctober 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 commencingMarch 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 ofJune 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
OnMarch 29, 2021 , we and certain of our direct and indirect subsidiaries entered into a Senior Secured Revolving Credit Facility withJPMorgan 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 ofMarch 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 32
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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 ofJune 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 ofJune 30, 2022 , the Company is in compliance with the covenants contained in the Revolving Credit Facility.
As of
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 inJuly 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 ofJune 30, 2022 . The Company completed its goodwill impairment testing and recorded an impairment charge due to market softness in demand in theU.S. andCanada . The Company determined the fair value of theU.S. andCanada 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 ofHydrofarm 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 endedJune 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 endedJune 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. 33
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