Hydrofarm Archives - Green Market Report

Debra BorchardtJanuary 7, 2022
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Despite the sales warning, Hydroponic company Hydrofarm Holdings Group, Inc. (Nasdaq: HYFM) reaffirmed its net sales and adjusted its EBITDA outlook for the full fiscal year 2021. Hydrofarm has forecast net sales of approximately $470.0 million to $490.0 million, representing growth of 37% to 43% versus fiscal 2020. However, Hydrofarm also noted that its fourth-quarter 2021 net sales will be attributed to M&A and partially offset by a decline in organic sales. The company estimated that the organic sales decline experienced in the fourth quarter was in the low-to-mid teens, driven by a sales mix that is primarily consumable products as opposed to durable products.

Hydrofarm also said it would provide a detailed financial outlook for 2022 as part of its fourth-quarter earnings report. “However, at this time, management continues to expect 8% to 10% organic top line growth for the full calendar year of 2022, which will likely be weighted toward the back half of 2022 as the industry laps strong comps in the first half of this year and several states that have recently enacted pro-cannabis legislation build momentum through 2022. In addition, management expects to benefit from the full year of ownership in 2022 of the five businesses acquired during 2021.”

The company has estimated that adjusted EBITDA will range between $47.0 million to $53.0 million. This implies full-year organic growth of approximately 18% to 23% and M&A growth of approximately 19% to 20%. The company said it would release its earnings in March 2022.

Hydrofarm said in a statement that its 2021 outlook includes the following assumptions:

  • Partial period contributions from the following acquisitions:
    • Heavy 16 – net sales and EBITDA contribution for May through December 2021
    • House & Garden – net sales and EBITDA contribution for June through December 2021
    • Aurora Innovations – net sales and EBITDA contribution for July through December 2021
    • Greenstar – net sales and EBITDA contributions for August through December 2021
    • IGE – net sales and EBITDA contributions for November through December 2021

The warning comes on the heels of Scotts Miracle-Gro (NYSE: SMG) also stating that its hydroponic business Hawthorne was seeing a decline in sales.  Scotts said the decline in sales was caused by a slowdown in the cannabis market as well as supply chain disruptions that have delayed the sale of certain product lines. However, the company said it was maintaining its full-year company-wide outlook for adjusted earnings per share.

 

 


Debra BorchardtDecember 10, 2021
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It’s a trend that could benefit emerging agricultural technology or ag-tech companies within the cannabis space. Many of these companies either began indoor growing with traditional products like lettuce or started in cannabis only to see a future beyond the confines of a pseudo-legal product.

Pitchbook News issued a new report that found funding for ag-tech companies jumped to a record high in the third quarter of 2021. Their data showed that this group raised $3.2 billion across 201 deals. This was an increase of 57% over the second quarter and annually, deal values hit $7.8 billion year-to-date. It will beat 2020 by 21.3%, with just one quarter remaining in the year. Pitchbook also said that the deal count totaled 545 deals in 2021 year-to-date, on pace to reach a decade high.

While none of the companies mentioned in the Pitchbook report come from the cannabis industry, it does bode well for them and makes their fundraising story a bit easier to tell. The big kahuna was Pivot Bio which raised $430.0 million Series D in the third quarter led by Temasek Holdings. According to Crunchbase, it has raised $616 million to date and has a post-money valuation in the range of $1B to $10B as of Jul 19, 2021, according to PrivCo. The company has developed a method to replace synthetic nitrogen that farmers use with a proprietary microbial technology that supplies the daily nitrogen cereal crops require.

Pitchbook said, “Investors are focusing on tech solutions that reduce atmospheric carbon, either by mitigating factors that lead to carbon emissions, such as enteric fermentation, or improving soil health and other carbon-capture tools and strategies.” The report also said that ag biotech startups attracted the majority (39.6%) of quarterly venture capital funding, while precision ag startups drew the majority of deals by count (34.4%).

Ag-Tech Exit

Of course, most venture capital investors aren’t in it for the long haul. Most of them want to know the way out the door before signing the check. Pitchbook said that the largest exit of the quarter was Ginkgo Bioworks’ $1.7 billion SPAC merger. The report said, “The company’s cell editing platform is used to pursue livestock feed innovation and microbiomics alternatives to synthetic agricultural chemicals, among other objectives.” Pitchbook reported that other key companies that exited in the third quarter included Benson Hill (NYSE: BHIL), Bear Flag Robotics, and American Robotics.

Cannabis Ag-Tech

Some of the leading names in cannabis Ag-tech are:


Debra BorchardtOctober 26, 2021
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Hydrofarm Holdings Group, Inc. (Nasdaq: HYFM) is buying Illinois-based Innovative Growers Equipment Inc. for approximately $58 million. The deal is expected to close in early November 2021. At the same time, Hydrofarm also released preliminary third-quarter results and gave guidance for the full year of 2021.

Third Quarter Earnings

Hydrofarm reported that its net sales will range between $121.0 million to $124.0 million for the three months ending September 30, 2020 versus last year’s $96.7 million. This is increase of approximately 27% was driven entirely by M&A growth. The net income is expected to range between $13.3 million and $18.3 million, versus last year’s net income of $2.7 million for the same time period. The adjusted EBITDA is estimated to be between $14.4 million to $16.4 million versus last year’s $7.4 million, an increase of approximately 108%. 

Bill Toler, Chairman and Chief Executive Officer of Hydrofarm said, “We believe a short-term oversupply has put downward pressure on cannabis growing activity predominantly in California and Canada. In addition, sales activity in highly-populated states such as New York, New Jersey, Virginia and Connecticut, which have passed new adult-use legislation within the past year, has not yet gained full momentum. We expect sales in these states to improve as they begin to more aggressively implement revenue-generating cannabis legislation as part of their respective state budgets. Despite the disruption, we continue to believe our long-term growth algorithm remains intact and that we are uniquely positioned to capitalize on the unprecedented expansion of Controlled Environment Agriculture. We remain convinced that we have only scratched the surface of the long-term opportunity in front of us.”

Outlook

Hydrofarm lowered its outlook from a range of $565 million to $590 million of net sales to approximately $470 million to $490 million. The original forecast of adjusted EBITDA of approximately $80 million to $90 million was reduced to adjusted EBITDA of $47 million to $53 million, or approximately 10% to 11% of net sales for the full fiscal year, up from approximately 6% in the prior year.

The company said that the expected increase in year-over-year adjusted EBITDA was due primarily to “(i) anticipated higher sales of proprietary brands which represented a higher proportion of total sales in the Q3 2021 period due to the company’s four completed acquisitions of proprietary branded product companies and (ii) anticipated higher gross profit and gross profit margin in the third quarter of 2021 primarily resulting from the aforementioned mix change to higher-margin proprietary brands. Those increases were partially offset by higher selling, general and administrative expenses as company further built-out its growth platform versus the same period in the prior year.”

Hyrdofarm said in a statement that since it recently completed four acquisitions with the closing of one additional acquisition pending in the fourth quarter, the company estimates that on a pro forma full-year basis as if all five acquisitions had occurred on January 1, 2021the company would have expected to generate between approximately $580 million and $600 million of net sales and $85 and $95 million of Adjusted EBITDA.

ICE Acquisition

Hydrofarm said that the addition of the IGE commercial equipment product range complements its existing lineup of high-performance, proprietary branded products. 

“We are excited for IGE to officially join the Hydrofarm family,” said Toler. “With their manufacturing capabilities and strong line of customized CEA solutions for commercial growers, including benching and racking systems, made-in-America LED lighting solutions, and other equipment and services, IGE is a solid addition to our growing portfolio and will further solidify our position as the acquirer of choice in the CEA industry.”

Hydrofarm said it will fund the acquisition using a combination of cash, the company’s credit facilities, and approximately $11.6 million in HYFM common stock. 

“Our success in the indoor growing market is rooted in our premium quality products and high level of service to our customers,” said Chris Mayer, President and CEO of Innovative Growers Equipment Inc. “Hydrofarm is a longtime customer of ours and we have been selling Hydrofarm’s superior line of lighting products for many years. We admire their deep understanding of indoor growing and look forward to joining the Hydrofarm team.”

$125 Million Loan

Hydrofarm also announced that it has entered into a new $125 million senior secured term loan facility. The Term Loan bears interest at a rate of either LIBOR (with a 1.00% floor) plus 5.50%, or an alternate base rate (with a 2.00% floor) plus 4.50% and matures on October 25, 2028. Hydrofarm intends to use the net proceeds from the Term Loan to fund the cash portion of the IGE purchase price and for general corporate purposes, which may include, among other things, repaying any outstanding balance under the company’s existing revolving credit facility and funding future M&A opportunities. Should additional capital needs arise, Hydrofarm can, per the terms of the Term Loan agreement, seek to upsize the facility. JPMorgan Chase Bank, N.A. acted as sole lead arranger and bookrunner for the Term Loan.


Debra BorchardtApril 29, 2021
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Hydroponic company Hydrofarm Holdings Group, Inc. (Nasdaq: HYFM) has had a busy week including reporting its quarterly earnings and announcing a huge offering that intends to raise $269 million. First things first, the earnings for the quarter ending March 31, 2021. Hydrofarm said it expects to deliver net sales in the range of $109 million to $111 million versus $66.9 million for the same time period in 2020. The company attributed the 65% in growth to higher net sales across multiple geographies, product categories, and its brand segments (its proprietary, preferred, and distributed brands).

Hydrofarm also said that its net income for the quarter will be in the range of $4.1 million to $4.9 million versus a net loss of ($3.1) million for the three months ended March 31, 2020. The adjusted EBITDA will be in the range of $8.9 million to $9.9 million versus $1.6 million for the three months ended March 31, 2020, an increase of approximately 490% calculated using the midpoint of the range.

The company said that the expected increases in net income and Adjusted EBITDA are due in part to (i) anticipated higher sales driven in part by the Company’s proprietary brands which it believes grew faster than its preferred and distributed brands in the first quarter of 2021 versus the same period in the prior year, (ii) anticipated higher gross profit resulting from the higher sales referenced above and a higher gross profit margin in the first quarter of 2021 versus the same period in the prior year primarily as a result of more favorable sales mix, and (iii) anticipated leverage on the company’s selling, general and administrative expenses which it expects were lower as a percentage of net sales in the first quarter of 2021 versus the same period in the prior year. At the end of the quarter, the company estimates that it had cash, cash equivalents, and restricted cash of approximately $62.0 million and an aggregate principal amount of debt outstanding of $1.1 million.

Offering

At the beginning of the week, Hydrofarm had announced a four million share offering. Two days later, it supersized the offering to 4,805,967 shares of its common stock at a price of $59.00 per share. The net proceeds are expected to be approximately $269.3 million.

Heavy 16 Acquisition

Also this week, Hydrofarm said it was buying Field 16, LLC, also known as HEAVY 16 in a deal valued at $78.1 million, consisting of $63.1 million in cash and $15 million of its common stock. The purchase price includes a potential earn-out payment of up to $2.5 million based on the achievement of certain performance metrics. In connection with the Acquisition, Hydrofarm said it intends to keep certain key employees of HEAVY 16.

HEAVY 16 is a leading manufacturer and supplier of branded plant nutritional products, with nine core products that are currently sold to approximately 300 retail stores across the U.S. The HEAVY 16 products feature a full line of premium nutrients with nine core products used in all stages of plant growth, helping to increase the yield and quality of crops. The company believes that the strategic combination of its leading distribution capabilities and HEAVY 16’s branded nutrient capabilities will enable the HEAVY 16 brand to rapidly grow across the company’s existing customer base.

In addition, the company believes there will be an opportunity to use its distribution platform outside the U.S. to offer the HEAVY 16 products internationally. Moreover, by broadening the Company’s proprietary branded offerings into the plant nutrients category, the Company anticipates that the Acquisition will also enable it to further serve the needs of its retail partners and commercial growers as it continues to penetrate the market. Hydrofarm will get approximately 70 SKUs in the nutrient category and a new 25,000 square foot manufacturing facility in Paramount, California with cutting-edge blending, bottling, and filling equipment.

Market Outlook

The global hydroponics market is estimated to account for $ 716.25 million in terms of value by the end of 2027, witnessing CAGR of 10.8% during the forecast period (2020-2027). In addition to cannabis, hydroponics can be used for many vegetables and crops such as cucumbers, tomatoes, peppers, herbs, lettuce, etc. Among these, tomatoes are expected to witness significant growth in the near future, due to a faster cultivation rate and requirement of less amount of water as compared to regularly farmed tomatoes.


Debra BorchardtDecember 2, 2020
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 The independent branded hydroponics company with a comprehensive distribution platform, Hydrofarm Holdings Group, Inc. said it was launching an initial public offering of 8,666,667 shares of its common stock. The initial public offering price is expected to be priced between $14.00 and $16.00 per share. Hydrofarm said it expects to grant the underwriters a 30-day option to purchase up to an additional 1,300,000 shares of its common stock. Hydrofarm has applied to list its shares of common stock on the Nasdaq Global Market under the symbol “HYFM.” The company is hoping to raise $118 million, but the over-allotment option could bring that to $136 million.

Hydrofarm is not a newcomer to indoor growing, but it has targeted the cannabis industry as an area for expansion. The company had net sales for nine months in 2020 of $254 million. The net income was $2.1 million for that same time period. The proceeds are to be used for repaying existing indebtedness, for acquisitions, for working capital, and other general corporate purposes. The company has $113 million in total long-term debt.

Cannabis Restrictions

Despite the company’s desire to work with cannabis it also faces restrictions due to the company’s loans. According to the company’s prospectus, it states, “The Term Loan Agreement prohibits the Subsidiary Obligors from selling our products directly to cannabis growers or cultivators, or to sellers or retailers that sell only to the cannabis industry. The Encina Credit Facility prohibits the Subsidiary Obligors from selling our products to the cannabis industry. As a result, the Subsidiary Obligors do not sell our products directly to the cannabis industry, cannabis growers or cultivators, or to sellers or retailers that sell only to the cannabis industry. We are in compliance with the terms set forth by the Term Loan Agreement and the Encina Credit Facility and maintain policies and procedures that are designed to promote and achieve continued compliance with these requirements.” The company said it sells its products through third-party retailers and resellers which do not exclusively sell to the cannabis industry.

Reputation Risk?

Hydrofarm seems like it is preparing the company for cannabis to become legal and then be able to freely work with the industry, but in the meantime, it is clearly trying to distance itself from its customer base. The filing noted, “Damage to our reputation can be the result of the actual or perceived occurrence of any number of events, and could include any negative publicity, whether true or not. Cannabis has often been associated with various other narcotics, violence, and criminal activities, the risk of which is that our retailers and resellers that transact with cannabis businesses might attract negative publicity. There is also a risk that the action(s) of other participants, companies, and service providers in the cannabis industry may negatively affect the reputation of the industry as a whole and thereby negatively impact our reputation.”

“Today, we believe that a majority of the CEA equipment and supplies we sell to our customers is ultimately purchased by participants in the cannabis industry, though we do not sell to participants in the cannabis industry directly.”

Former Hostess Brands CEO

Mr. Toler has served as our Chief Executive Officer and Chairman of our board of directors since January 1, 2019. Prior to joining Hydrofarm in 2019, Mr. Toler was the Chief Executive Officer of Hostess Brands, Inc. (Nasdaq: TWNK), a food and beverage company, from May 2014 to March 2018. Under his leadership, Hostess successfully re-established the iconic Hostess brand as a leader within the sweet baked goods category, returned the company to profitability, and transitioned Hostess from a private to a public company. Mr. Toler has over 35 years of executive leadership experience in supply chain management and consumer packaged goods, including previously having served as Chief Executive Officer of AdvancePierre Foods, from September 2008 to August 2013, and President of Pinnacle Foods. He has also held executive roles at Campbell Soup Company, Nabisco, and Procter & Gamble. Mr. Toler served on the board of directors of Collier Creek Holdings from September 2018 to September 2020, Hostess Brands from May 2014 to March 2018, AdvancePierre Foods from 2008 to 2013 and Pinnacle Foods from 2007 to 2008. In addition, Mr. Toler has also served as a senior advisor at Oaktree Capital Management, an investment management firm, from September 2013 to April 2014. Mr. Toler holds a B.A. in Business Management and Economics from North Carolina State University. Mr. Toler was selected to serve as Chairman of our board of directors because of his 35 years of executive leadership experience in supply chain management and consumer packaged goods.


William SumnerNovember 1, 2018
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Hydrofarm Holdings Group, an independent manufacturer and wholesaler of agricultural products and hydroponic equipment, announced that is has completed a $55 million equity financing round. In addition to strategic and institutional investors, the financing round including an investment from one of the largest private equity firms in the cannabis industry, Serruya Private Equity (SPE).

Annually, Hydrofarm brings in roughly $250 million in revenue, making the company significantly larger than many of the major players in the cannabis industry, such as MedMen ($39.8 million) or Aurora Cannabis (CAD$18 million). The company plans to use the financing to help fund growth opportunities in the global cannabis market; which includes mergers and acquisitions, expanding its distribution capability, and growing its product offerings and service capabilities.

“We are very excited about the significant growth opportunity in the broader global cannabis end market,” said SPE Managing Director, Michael Serruya. “Hydrofarm represents a unique opportunity to help the industry grow by creating a one-stop shop for all market participants to purchase hydroponics equipment and horticultural products, through its network of authorized resellers, for high quality, efficient cultivation.”

With more than four decades of experience in hydroponics and indoor gardening, Hydrofarm is poised to become a powerful force in the legal cannabis industry. As a manufacturer and distributor of hydroponic equipment and supplies, Hydrofarm has access to more than 1,500 hydroponic and gardening retailers across North America and touts over 5,000 product SKUs ranging from nutrients and lighting solutions.

“The strong investor response to this financing is a testament to Hydrofarm’s business strategy and position as one of the dominant players in the industry, as well as demand to participate in the growth of the global cannabis industry though an established, U.S. domiciled and federally-legal company,” said Adam Stern, CEO of SternAegis Ventures and Head of Private Equity Banking of Aegis Capital.


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