Hydrofarm Archives - Green Market Report

Adam JacksonAugust 9, 2022
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5min1310

Hydrofarm Holdings Group, Inc. (Nasdaq: HYFM) slumped in trading on Tuesday as it posted second-quarter results that missed expectations — showing that consumer demand for hydroponics remained flat as a lack of regulatory guidance and recessionary pressures facing the sector persist. The company released its financial results for the second quarter ending June 30, 2022.

The company missed revenue expectations as it delivered approximately $97.5 million in revenue during the period — missing the Yahoo Finance average analyst estimate for revenues of $111.32 million.

Hydrofarm reported net sales of $97.5 million for the second quarter, versus $133.8 million for the same period last year, and is lowering its guidance for 2022 revenue. The company said that declining valuation trends within the industry and in the broader market “adversely impacted the company’s market valuation since its last quarterly report and triggered a full evaluation of the goodwill arising from prior acquisitions.”

The company’s new forecasted range for revenue is $330 million$347 million, far below a range of $480 and $520 in the previous quarter. Adjusted EBITDA guidance is estimated to be a loss of $16 million$25 million, down from previous quarter expectations of $46 to $54 million profit.

“Our second quarter results reflect the ongoing impact of the hydroponic industry recession in the U.S. and Canada,” CEO Bill Toler said. “Nonetheless, we took positive steps to lower our cost structure and maintain a solid liquidity position.”

The company also reported a second-quarter 2022 GAAP net loss of $203.3 million versus a net income of $2.3 million in the same period last year. Diluted loss per share in the fourth quarter was $4.53 versus diluted earnings per share of four cents in the same period last year.

Adjusted EBITDA saw a loss of $6.8 million in the second quarter of 2022, compared to earnings of $16.2 million in the same period last year. The company said that the decrease was primarily related to lower gross profit due to a decline in net sales and an additional inventory reserve of $10.2 million. It also attributes the losses to lower net sales and falling gross profit margins — as well as higher labor and freight costs.

The company said it had $27.4 million in cash, cash equivalents, and restricted cash, an aggregate principal amount of debt outstanding of $126.7 million — including $0 drawn on the company’s revolving credit facility, approximately $124.4 million in principal balance on its Term Loan and approximately $2.4 million in finance leases and other debt — $15.3 million in contingent payments and approximately $70 million of available borrowing capacity under its revolving credit agreement.

Hydrofarm decreased its net debt by approximately $14.1 million during the second quarter by improving its working capital position and controlling costs. The company said it was in compliance with all debt covenants as of June 30, 2022.

Lowered Outlook

With the new guidance, Hydrofarm expects approximately $330.0 million to $347.0 million in net sales “combined with some further reduction to account for the holiday-shortened months in the fourth quarter.”

In October 2021, Hydrofarm lowered its outlook from a range of $565 million to $590 million of net sales to approximately $470 million to $490 million – a sign of just how bad sales have plunged.

The company — whose president stepped down in June — also said that it incurred severance costs during the period as it cut part of its workforce “to optimize our cost structure.”


Adam JacksonAugust 3, 2022
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6min3801

Hydrofarm Holdings Group, Inc. (Nasdaq: HYFM) stock plunged by 28% in early trading to lately sell at roughly $2.35 after the hydroponic company reported declining sales following the market close on Tuesday. Hydrofarm said it is looking to shave down its costs and restructure as deflated earnings continue to tap its pockets.

The manufacturer and distributor of hydroponics equipment and supplies for controlled environment agriculture, the company released a preliminary unaudited financial report card for its second quarter ending June 30, 2022.

Hydrofarm posted estimated net sales of $96.0 million to $97.5 million, versus $133.8 million for the same period last year, representing a dip of approximately 28% calculated using the midpoint of the range. This also missed the Yahoo Finance average analyst estimate for revenues of $126 million.

Losses Build

The net loss is expected to range between $210.4 million and $200.4 million, versus a net income of $2.3 million in the same period last year. The net loss range includes estimated non-cash expenses of $189.6 million in goodwill impairment and $10.2 million in inventory reserve recorded at the end of the second quarter.  The company said that declining valuation trends within the industry and in the broader market “adversely impacted the company’s market valuation since its last quarterly report and triggered a full evaluation of the goodwill arising from prior acquisitions.”

The company also posted estimated adjusted EBITDA losses in the range of $8.4 million to $6.9 million, versus a $16.2 million gain in the same period last year.  It attributes the losses to lower net sales and falling gross profit margins — as well as higher labor and freight costs.

“We took positive steps during the second quarter to lower our cost structure and maintained a solid liquidity position,” CEO Bill Toler said. “However, the hydroponics industry recession in the U.S. and Canada continued to alter normal seasonal patterns and impacted our results. While we experienced encouraging results in March and April, sales trends weakened in the second half of the second quarter, disrupting our expected sales mix and resulting in net sales, net loss and Adjusted EBITDA below our internal expectations for the full quarter.”

The company said it has $27.4 million in cash, cash equivalents, and restricted cash, an aggregate principal amount of debt outstanding of $126.7 million – including $0 drawn on the company’s revolving credit facility, approximately $124.4 million in principal balance on its Term Loan and approximately $2.4 million in finance leases and other debt.

Toler continued, “Through our team’s net working capital management, we increased our cash position, lowered our net debt and maintained a solid liquidity position during the second quarter. Our team has also enacted additional expense-cutting measures, to further reduce our costs. When coupled with our prior cost savings actions, we estimate that we have reduced our costs by approximately $14.0 million on an annualized basis.”

Hydrofarm also has $15.3 million in contingent payments and can borrow around $71 million capacity under its revolving credit agreement. The company lowered its net debt by approximately $14.1 million during the second quarter by improving its working capital position and controlling costs. The company said it was in compliance with all debt covenants at the end of the period.

“Sales trends in July suggest that the overall industry continues to face headwinds and that typical seasonal patterns may not apply for the duration of this year,” Toler said. “For these reasons, we are revising downward our estimates for the remainder of the year. While we expect the industry to return to growth in the future, as highly populated states in the Eastern U.S. actively implement adult-use cannabis legislation and more mature states in the Western U.S. normalize, predicting the exact timing of a return to historical growth remains a challenge for the industry.

As a result, he said, “we will continue to focus on further cost-saving opportunities and liquidity actions to ensure that our leadership position in the hydroponics industry strengthens during this industry downturn.”

Lowered Outlook

With the new guidance, Hydrofarm expects approximately $330.0 million to $347.0 million in net sales “combined with some further reduction to account for the holiday-shortened months in the fourth quarter.” In October 2021, Hydrofarm lowered its outlook from a range of $565 million to $590 million of net sales to approximately $470 million to $490 million – a sign of just how bad sales have plunged.

The company — whose president stepped down in June — also said that it incurred severance costs during the period as it cut part of its workforce “to optimize our cost structure.”


Debra BorchardtJune 22, 2022

6min3211

When Scotts Miracle-Gro (NYSE: SMG) first began telling shareholders that its hydroponic subsidiary Hawthorne was slowing in sales, it seemed like a temporary situation. That might not be the case. A new in-depth report by Wells Fargo analyst Chris Carey based on survey data collected by Cannabiz Media is depressing, to say the least. Reality bites.

Carey’s response to the study has promoted him to downgrade shares of Scotts to Equal Weight and roping his price target to $85 (from $115). The stock was lately selling at $75. He also cut his price targets on Hydrofarm (NASDAQ: HYFM) to $4 from $7 and GrowGeneration (NASDAQ: GRWG) to $3.50 from $4.00.

The report reached out to thousands of growers to ultimately develop a list of ~500 licensed cannabis cultivators responding across 6 states, via online surveys and hours of phone conversations. The study found that “Overall, 62% of cultivators feel “bad” or “terrible” about their current markets vs only 8% that feel “good” or “great”. When asked “what is going well for your business today?” ~20% responded with the equivalent of “nothing.” California was by far the state with the lowest sentiment with 70% of cultivators feeling “terrible” about the market, 16% feeling “bad” and only 5% ‘good’ or ‘great’.” The critical point here is that California has the worst outlook and it accounts for almost a third of the overall cannabis market. 

While other hydroponic companies have stated in earnings releases that they believed the landscape would improve by the end of the year, this report suggests otherwise. “Most growers we surveyed are not expecting things to improve in the near term, with only 14% expecting improvement in 6 months or less. Interestingly, 46% of respondents don’t know when things might improve underscoring the lack of visibility that has plagued the industry. While some capacity exiting is one of the few bright spots for the industry, we would likely need to see a higher level of exits or reduction in production to become more constructive.” When almost half of the growers say they have no idea when their market will improve, it’s not only a bad sign for farmers but the entire industry.

Stress Points

The survey uncovered the issues causing the stress at the beginning of the cannabis food chain. Declining wholesale prices led the way, followed by burdensome compliance requirements, taxes, illicit market competition and lack of distribution. Small growers can’t compete with the cost efficiencies of corporate cannabis and as the prices fall for their products, they are losing money. One grower told the group that they thought they’d sell cannabis anywhere between $1800 and $2200 a pound, but instead it’s going for $400 a pound. A California cultivator said he was selling cannabis at $200 a pound and paying $150 a pound in taxes. 

The survey on prices found that 60% said they were selling cannabis for under $750 a pound. 14% were selling between $751 and $1250, 18% were selling a pound between $1251 and $1500, and the rest (9%) were above $1500. They say they aren’t hitting the cost of production and many are considering selling their licenses or just giving up. 

The respondents seemed mixed on the effects of the illicit market. Some cited it as a major problem with these players flooding the market, while others didn’t think it was as big an issue as the regulatory requirements. Compliance requirements were a major stumbling block with one growing mentioning METRC as a challenge to deal with.

Plowing Ahead

The really sad part of the report was all the comments of cultivators wanting out. With little positive outlook and no idea when things will get better, many expressed the desire to just give up.  37% said that they have thought about leaving the industry but haven’t taken any steps to exit yet. Some are continuing to keep plowing ahead. The report said, “Cultivators indicated intentions to purchase soil (61%) and nutrients (73%) next 6 months, but just 32% have plans to buy lighting.” Only 18% of respondents described plans to decrease cultivation in the next 12 months compared to 35% planning to increase. 

However, in a standard investor philosophy, a correction can ultimately be a good thing. If lots of cultivators leave the industry, that will eventually lead to less supply and higher prices. Yet, a correction like this would take a long time to trickle down, and in the meantime, there is little positive to point to.


StaffMay 10, 2022
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Hydrofarm Holdings Group, Inc. (Nasdaq: HYFM) announced financial results for its first quarter ended March 31, 2022, with net sales remaining flat at $111.4 million, which missed the Yahoo Finance average analyst estimates for revenues of $129 million. The net loss was ($23.3) million, or a loss of ($0.52) per diluted share, compared to a net income of $4.9 million, or $0.13 per diluted share. This also missed the estimates for earnings of ($0.06). Hydrofarm gave a 2022 forecast for net sales of approximately $480 million to $520 million.

Bill Toler, Chairman and Chief Executive Officer of Hydrofarm, said, “Over the past year, our team has strengthened our business through a number of initiatives, including our five acquisitions, the expansion of our distribution and manufacturing footprint, and the creation of new leadership roles. While we remain optimistic about the health of our business and our long-term potential, our ability to reap the benefits of our actions has been impacted by the agricultural oversupply that has hampered cannabis growing activity across the US and Canada. This dynamic was apparent in our first-quarter results.”

Hydrofarm attributed the lackluster growth to an approximate 2.1% decrease in the volume of products sold, offset by an approximate 2.2% increase in price and mix of products sold, and an approximate 0.1% decline from unfavorable foreign exchange rates. The company though believes the market will improve by the end of the year. Hydrofarm expects a sequential improvement from negative organic growth in the first quarter to positive organic growth in the fourth. Capital expenditures are expected to be approximately $8.0 million to $10.0 million and an estimated tax provision is between $0 and $3 million for the full year, excluding the large discrete tax benefit of $8.5 million recognized in Q1 2022.

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


Debra BorchardtMarch 1, 2022
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4min1010

Hydrofarm Holdings Group, Inc. (Nasdaq: HYFM) announced financial results for its fourth quarter and full fiscal year ended December 31, 2021. In the fourth quarter, Hydrofarm‘s net sales increased 26.3% to $110.4 million compared to $87.4 million. This beat the Yahoo Finance estimate for $105 million in revenues. The growth in the volume of products sold was related entirely to recently acquired brands, which offset a decline in organic sales.

The net loss attributable to common stockholders was ($11.0) million, or ($0.25) per diluted share, compared to a net loss of ($10.0) million, or ($0.43) per diluted share. The pro forma adjusted net loss was ($2.3) million, or ($0.05) per pro forma diluted share, compared to a pro forma adjusted net income of $0.5 million, or $0.02 per pro forma diluted share. This missed the estimate of earnings of $0.03.

For the full year, Hydrofarm reported that the net sales increased 40.1% to $479.4 million compared to $342.2 million. The net income attributable to common stockholders was $13.4 million, or $0.31 per diluted share, compared to a net loss of ($9.9) million, or ($0.46) per diluted share. Pro forma adjusted net income was $25.4 million, or $0.59 per pro forma diluted share, compared to $7.3 million, or $0.21 per pro forma diluted share.

“While we posted solid top-line growth during the fourth quarter, our overall results were impacted by industry agricultural oversupply, which we discussed on our last earnings call, as well as higher freight and labor costs,” said Bill Toler, Chairman and Chief Executive Officer of Hydrofarm. “For the full year 2021, we’re pleased to report successful results as we grew our top line by 40%, including organic net sales growth of over 18%. We also completed five acquisitions that further strengthened our branded product portfolio and manufacturing capabilities. To further support our manufacturing, we expanded our distribution centers and production space by nearly 70%. And importantly, we more than doubled our adjusted EBITDA to $47 million for the year, which is within our previously provided guidance range.”

Outlook

The company gave the following outlook for the full fiscal year 2022 for net sales growth between 20% and 28%, or approximately $575.0 million to $615.0 million and adjusted EBITDA of $63.0 million to $74.0 million, representing approximately 11.0% to 12.0% of net sales for the full fiscal year. the company said that the modest full-year organic growth and strong full-year M&A growth; organic growth is heavily weighted toward the back-half of the year with sequential improvement from negative organic growth in 1Q to positive organic growth in 3Q. This assumes industry recovery throughout 2022, as well as expected growth both in the Company’s commercial channel and in its proprietary brand portfolio. They also said that pricing and cost-saving initiatives will help to mitigate the impact of rising input, freight, and labor costs. Capital expenditures are forecast to be approximately $8.0 million to $12.0 million.

Mr. Toler added, “As we look ahead, we believe we have several momentum builders in the new year, including growth expected both in the commercial channel and in our proprietary brand portfolio. Additionally, in late 2021 and early 2022, we acted on several margin-enhancing initiatives to reduce costs and mitigate inflationary pressures, including increasing prices where appropriate, as well as right-sizing our headcount as we have begun realizing synergies from our 2021 acquisitions. Together with our unique position as a leading ‘picks and shovels’ supplier to the CEA industry and a strong balance sheet that can support future growth, we remain excited about our prospects in 2022 and beyond.”

 

 


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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8min1480

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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6min1394

 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.


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The Green Market Report focuses on the financial news of the rapidly growing cannabis industry. Our target approach filters out the daily noise and does a deep dive into the financial, business and economic side of the cannabis industry. Our team is cultivating the industry’s critical news into one source and providing open source insights and data analysis


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