Hydrofarm Holdings Group, Inc.: Form 10-Q for the period ended Jun 30, 2026

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 condensed consolidated financial statements and the notes contained elsewhere in this Quarterly Report on Form 10-Q and our 2025 Annual Report. This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance. Actual events or results may differ materially from forward-looking statements. 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 Item 1A. “Risk Factors” in our 2025 Annual Report. See “Special Note Regarding Forward-Looking Statements.”

Company Overview

We are a leading independent manufacturer and distributor of branded hydroponics equipment and supplies for controlled environment agriculture, including grow lights, climate control solutions, grow media and nutrients, as well as a broad portfolio of innovative, proprietary branded products. We primarily serve the U.S. and Canadian markets, and believe we are one of the leading companies in these markets in an otherwise 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 grow 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, who we connect with primarily through our proprietary online ordering platform. Our products are distributed across the United States and Canada through a diversified range of retailers of commercial and home gardening equipment and supplies. Our customers include specialty hydroponic retailers, commercial resellers and greenhouse builders, garden centers, hardware stores, and e-commerce retailers. Specialty hydroponic retailers can provide growers with specialized merchandise assortments and knowledgeable staff. Our logistics services business manages the receipt, warehousing, and distribution of multiple customer accounts, leveraging our warehouse space in multiple distribution centers in the U.S. and Canada. These logistics agreements and operating subleases are accounted for as an offset and reduction to facility expense within SG&A.

We have incurred recurring operating losses, negative cash flows from operations, have significant debt obligations due within the next twelve months due to an event of default on the Company's outstanding Term Loan and are not currently in compliance with certain Nasdaq listing requirements. These conditions and events, considered in the aggregate, raise substantial doubt about our ability to continue as a going concern.

The Company and its Board of Directors are exploring strategic alternatives to strengthen the Company’s liquidity and capital structure. In connection with such process, the Company and its financial advisors have engaged in ongoing discussions with lenders (the “Lenders”) under the Company’s Credit and Guaranty Agreement (as amended, the “Credit and Guaranty Agreement”) with FEAC Agent, LLC (as successor to JPMorgan Chase Bank, N.A.), as administrative agent for the Lenders (“FEAC”), and certain of the Company’s direct and indirect subsidiaries (the “Obligors”), pursuant to which the Company borrowed a $125.0 million senior secured term loan (the “Term Loan”). While these discussions have continued, on February 4, 2026, the Company elected to defer making the interest payment of approximately $2.8 million on the Term Loan. As a result of the Company’s failure to pay the interest within the grace period, an event of default occurred with respect to the Term Loan. On February 11, 2026, the Lenders, through the administrative agent, notified the Company of such event of the Specified Event of Default and informed the Company that the Administrative Agent or the Collateral Agent may exercise any rights and remedies provided under the Credit and Guaranty Agreement and related financing documents, but it did not seek to enforce such remedies as of such time. As a result of the Specified Event of Default, the Term Loan was reclassified to current portion of long-term debt from long-term debt and interest began accruing at a rate that is 2% per annum in excess of the interest rate otherwise payable.

On April 8, 2026, the Company entered into the Forbearance Agreement with the other Obligors, the Lenders, and FEAC, in connection with the Term Loan. Pursuant to the Forbearance Agreement, during the Forbearance Period (as defined in Note 11 – Debt to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q), solely with respect to the Specified Event of Default, neither the Administrative Agent nor any Lender shall, upon the terms and conditions expressly specified therein, take any action, commence any proceedings against any Obligor or any other person with respect to the enforcement of any of its or their rights or remedies under the Credit Documents or applicable law, other than as expressly described in the Forbearance Agreement. The Company, the Lenders, and FEAC agreed to extend the Forbearance Period under the Forbearance Agreement through and including August 31, 2026.

For additional information, see Note 2 – Liquidity and Going Concern to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and “ - Liquidity and Capital Resources - Availability and Use of Cash.”

Market Conditions and Restructuring Plans

We have experienced adverse financial results which we believe are primarily a result of an agricultural oversupply impacting our market and resulting in a decrease in indoor and outdoor cultivation. The extent to which these market conditions will continue to negatively impact our business and results of operations is uncertain and difficult to predict at this time. We believe COVID-19 may have provided a positive demand impact for the Company in 2020 and 2021 from shelter-in-place orders in the United States, a possible negative supply chain impact from workforce disruption at international and domestic suppliers, and a possible negative growth rate impact in the periods since, due to agricultural oversupply initiated during the height of COVID-related shelter-in-place orders in 2020 and 2021. In addition, we believe demand for our products has been negatively impacted by the extended period to enact reform of U.S. federal regulations, including cannabis rescheduling, which have been slow to develop and possibly leading cannabis operators to reduce investments in our products, particularly durable goods. In addition, we believe our financial results have been negatively impacted by hydroponic retail store closings and, in some cases, associated accounts receivable allowances.

During the fourth quarter of fiscal 2025, as a result of industry conditions, primarily attributable to an agricultural oversupply impacting our market and resulting in a decrease in indoor and outdoor cultivation, as well as continued declines in operating cash flows and profitability, we assessed our long-lived assets for impairment and recorded an impairment charge of $232.2 million. Of such impairment charge, $228.4 million was related to finite-lived intangible assets and $3.8 million was related to property, plant, and equipment. The loss was recorded in Impairments in the consolidated statement of operations for the year ended December 31, 2025. We estimated fair value based on the income approach and market approach. Under the income approach, we estimated the fair value of the asset group on the present value of estimated future cash flows, which we considered to be a level 3 unobservable input in the fair value hierarchy.

During the second quarter of 2025, we initiated the 2025 Restructuring Plan to reduce our product portfolio and operational footprint to decrease costs and improve efficiency. The 2025 Restructuring Plan actions entail (i) eliminating a significant portion of our product portfolio, primarily underperforming distributed brands, to improve supply chain and operational focus, (ii) further reductions in our distribution center network and manufacturing footprint, and (iii) corresponding headcount reductions. Since the 2025 Restructuring Plan's inception, we have incurred estimated restructuring costs of $11.1 million. The charges were primarily associated with non-cash inventory write-downs, which were recorded in cost of goods sold on the condensed consolidated statements of operations, and cash and non-cash charges which primarily comprised of charges incurred to relocate and terminate certain facilities. We do not anticipate the 2025 Restructuring Plan and related actions will result in additional material restructuring charges, and anticipate annual cost savings of over $5 million plus additional working capital benefits. The 2025 Restructuring Plan is expected to be completed during 2026.

On April 30, 2026, the Company completed the closing of the previously announced agreement with Quality Horticulture, a family-owned Canadian garden center and horticultural distribution company, pursuant to which Quality Horticulture will serve as the exclusive Canadian distributor of our proprietary portfolio of nutrients, plant additives, grow media, horticultural lighting and environmental control products, including House & Garden, Grotek, Gaia Green, PHOTOBIO, SunBlaster and Active Aqua. The transaction is part of our strategic plan to streamline our operations and improve the focus on our proprietary brands and core product categories.

We continue to evaluate our product portfolio and supply chain, in order to improve efficiency, lower our costs and reduce footprint. We are also evaluating other opportunities to sell excess owned land, not currently being used in operations, to supplement our cash position and potential contract manufacturing or other outsourcing arrangements. Depending on the length and severity of the industry and market conditions, including the fluid and complex international tariff and trade policies, impacting our business, our ability to successfully negotiate with lenders and key vendors, and the pursuit of additional financing or strategic alternatives, it is possible we may execute additional restructuring plan actions and incur future associated charges, and we may not be able to realize the full extent of our anticipated cost savings.

Additionally, the amount we will ultimately realize as benefits associated with our restructuring plans could differ materially from our estimates, and we may incur additional non-cash charges in future periods depending on our ability to execute asset sales or pursue other alternatives. For additional information, see the Item 1A. "Risk Factors" in our 2025 Annual Report, including the risk entitled “Our restructuring activities may increase our expenses and cash expenditures, and may not have the intended effects.”

We maintain an allowance for excess and obsolete inventory that is based upon assumptions about future demand and market conditions. While we believe our estimates of charges relating to our 2025 Restructuring Plan, long-lived assets, inventory obsolescence, and accounts receivable allowances are reasonable, it is possible that we may incur additional charges in the future and actual results may differ significantly from these estimates and assumptions.

We are closely monitoring the recent tariff and trade policy actions taken by the United States and foreign governments. The situation remains fluid due to the rapidly changing global trade environment, and we continue to evaluate the potential implications of these actions on our business including net sales and profitability. High tariffs on imported products from China or other countries, or new tariffs from other countries, have impacted and could impact the cost of certain products and may negatively impact our financial performance. We have been able to help mitigate the impacts of tariffs through filing for refunds to the extent available to us, negotiations with vendors, and through passing nominal price increases to our customers, but we may be unable to quickly and effectively react to additional tariff and trade policy actions which may impact our business.

Results of Operations—Comparison of three and six months ended June 30, 2026 and 2025

The following table sets forth our unaudited interim condensed consolidated statements of operations for the three and six months ended June 30, 2026, and 2025, including amounts and percentages of net sales for each period and the period-to-period change in dollars and percent (amounts in thousands):

Net sales

Net sales for the three months ended June 30, 2026, were $23.2 million, a decrease of $16.0 million, or 40.9% compared to the same period in 2025. Net sales for the six months ended June 30, 2026, were $51.7 million, a decrease of $28.0 million, or 35.2% compared to the same period in 2025.

The 40.9% decrease in net sales for the three months ended June 30, 2026, as compared to the same period in 2025, was primarily due to a 37.0% reduction in volume and mix of products sold and a 4.0% decrease in price. This decline was largely driven by the previously mentioned industry oversupply and discontinuation of certain distributed brands. The 35.2% decrease in net sales for the six months ended June 30, 2026, as compared to the same period in 2025, was primarily due to a 31.9% reduction in volume and mix of products sold and a 3.8% decrease in price. This decline was largely driven by the previously mentioned industry oversupply and discontinuation of certain distributed brands.

Gross profit

Gross profit for the three months ended June 30, 2026, was $2.6 million, a decrease of $0.2 million, or 5.7%, compared to the same period in 2025. Our gross profit margin percentage increased to 11.3% for the three months ended June 30, 2026, from 7.1% in the same period in 2025. The increase in gross profit margin for the three months ended June 30, 2026 was largely driven by a $2.3 million decrease in restructuring charges from the prior year period, as well as selling a higher proportion of proprietary brand products. The gross profit margin percentage increase was partially offset by higher freight and labor costs as a percentage of net sales and lower manufacturing production volumes in certain grow media products.

Gross profit for the six months ended June 30, 2026, was $4.5 million, a decrease of $5.2 million, or 53.8%, compared to the same period in 2025. Our gross profit margin percentage decreased to 8.6% for the six months ended June 30, 2026, from 12.1% in the same period in 2025. Our gross profit margin percentage for the six months ended June 30, 2026 decreased primarily due to higher freight and labor costs as a percentage of net sales and the aforementioned lower manufacturing production volumes in certain grow media products, which more than offset a $0.9 million decrease in restructuring charges from the prior year period and the benefit from selling a higher proportion of proprietary brand products.

The decreases in gross profit for all periods presented were primarily due to the aforementioned lower net sales.

Selling, general and administrative expenses

SG&A expenses for the three months ended June 30, 2026, were $10.1 million, a decrease of $6.1 million, or 37.7% compared to the same period in 2025. SG&A expenses decreased in several areas, including as a result of our cost-saving and restructuring initiatives: (i) a $6.0 million decrease in amortization and depreciation primarily due to intangible asset impairments in 2025, (ii) a $1.2 million decrease in facility expenses, and (iii) a $1.1 million decrease in employee compensation costs, including lower salaries and benefits, stock-based compensation, and performance bonus. The SG&A savings were partially offset by restructuring charges of $2.3 million during the period and costs associated with the Company's strategic alternatives.

SG&A expenses for the six months ended June 30, 2026, were $20.6 million, a decrease of $13.4 million, or 39.3% compared to the same period in 2025. SG&A expenses decreased in several areas, including as a result of our cost saving and restructuring initiatives: (i) a $11.9 million decrease in amortization and depreciation primarily due to intangible asset impairments in 2025, (ii) a $2.4 million decrease in employee compensation costs, including lower salaries and benefits, stock-based compensation, and performance bonus, and (iii) a $1.7 million decrease in facility expenses. The SG&A savings were partially offset by restructuring charges of $3.1 million during the period and costs associated with the Company's strategic alternatives.

Interest expense

Interest expense for the three months ended June 30, 2026, was $3.5 million, an increase from $3.4 million of interest expense recorded in the same period in the prior year. Interest expense for the six months ended June 30, 2026, was $9.3 million, an increase from $6.8 million of interest expense recorded in the same period in the prior year. The increase for the six months ended June 30, 2026, was primarily due to the acceleration of our Term Loan discount and deferred financing costs triggered by the Specified Event of Default.

Other income (expense), net

Other income, net for the three months ended June 30, 2026, was less than $0.1 million, compared to other expense, net of $0.2 million during the same period in the prior year. Other expense, net for the six months ended June 30, 2026, was $0.1 million, compared to other expense, net of $0.2 million during the same period in the prior year.

Income taxes

We recorded income tax benefits of $0.2 million and $0.3 million for the three and six months ended June 30, 2026, respectively, representing effective tax rates of 2.1% and 1.3%, respectively. Our effective tax rates for the three and six months ended June 30, 2026, differ from the federal statutory rate of 21% primarily due to U.S. and foreign jurisdictions in full valuation allowance. The income tax benefit for the three and six months ended June 30, 2026, was primarily due to certain benefits in Canadian jurisdictions, partially offset by foreign taxes in Spain and U.S. state taxes.

We recorded income tax benefits of $0.1 million and less than $0.1 million for the three and six months ended June 30, 2025, respectively, representing effective tax rates of 0.6% and 0.1%, respectively. Our effective tax rates for the three and six months ended June 30, 2025, differ from the federal statutory rate of 21% primarily due to U.S. and foreign jurisdictions in full valuation allowance. The income tax benefit for the three and six months ended June 30, 2025, was primarily due to certain benefits in Canadian jurisdictions, partially offset by foreign taxes in certain jurisdictions and U.S. state taxes.

Liquidity and Capital Resources

Cash Flow from Operating, Investing, and Financing Activities

Comparison of the six months ended June 30, 2026, and June 30, 2025

The following table summarizes our cash flows for the six months ended June 30, 2026, and 2025 (amounts in thousands):

Operating Activities

Net cash used in operating activities was $0.7 million for the six months ended June 30, 2026. The net cash usage was primarily due to a $25.2 million net loss, partially offset by net non-cash items of $12.3 million and a $12.2 million net cash inflow from a decrease in working capital. The $12.2 million net decrease in working capital was primarily comprised of a $9.0 million decrease of inventories, a $6.3 million increase in accrued expenses and other current liabilities, a $1.1 million decrease in prepaid expenses and other current assets, and a $1.0 million increase of accounts payable, partially offset by a $3.7 million decrease of lease liabilities and a $1.8 million decrease in deferred revenue. The increase in accrued expenses and other current liabilities was primarily attributable to accrued interest, which increased to $8.3 million as of June 30, 2026 from $1.9 million as of December 31, 2025. The Company is continuing to consolidate its operations in connection with restructuring and related cost saving initiatives which has contributed to the aforementioned decrease in inventory.

Net cash used in operating activities was $10.0 million for the six months ended June 30, 2025. The net cash usage was primarily due to a $31.2 million net loss and a $3.8 million net cash outflow from an increase in working capital, partially offset by net non-cash items of $25.0 million. The $3.8 million net increase in working capital was primarily comprised of a $3.9 million decrease of lease liabilities, a $2.3 million decrease in accrued expenses and other current liabilities, partially offset by a $2.9 million decrease in inventory. During the six months ended June 30, 2025, we paid $6.9 million in cash interest.

Investing Activities

Net cash from investing activities was $1.4 million for the six months ended June 30, 2026, compared to net cash used in investing activities of $0.5 million for the six months ended June 30, 2025. The net cash from investing activities for the six months ended June 30, 2026 was primarily due to the sale of property, plant and equipment. We did not have any significant capital expenditures of property, plant and equipment during the six months ended June 30, 2026. The net cash used in investing activities for the six months ended June 30, 2025 was primarily due to capital expenditures of property, plant and equipment.

Financing Activities

Net cash used in financing activities was $0.3 million for the six months ended June 30, 2026, primarily driven by finance lease principal payments.

Net cash used in financing activities was $5.1 million for the six months ended June 30, 2025, primarily driven by (i) $4.9 million of Term Loan repayments relating to required quarterly payments of principal and payments made in conjunction with the IGE Asset Sale reinvestment provision, and (ii) finance lease principal payments of $0.2 million.

Availability and Use of Cash

As of June 30, 2026, we had $6.6 million in cash, cash equivalents and restricted cash and a working capital deficit of $108.1 million. We have incurred recurring operating losses, negative cash flows from operations, and have significant debt obligations due within the next twelve months. These conditions and events, considered in the aggregate, raise substantial doubt about our ability to continue as a going concern.

Our plans to address these conditions include reducing costs through restructuring and other initiatives, including facility consolidations, headcount reductions, and focusing on our proprietary brand offerings. To improve liquidity, we are negotiating with lenders and key vendors, and are pursuing additional financing or strategic alternatives including the sale of assets or businesses, or through an offering of equity securities. Any potential such event may be subject to provisions referenced in the Term Loan, such as subjecting us to make mandatory prepayments prior to the originally stated maturity date. Although we believe such plans, if executed, should provide us with liquidity to meet our needs, successful completion of such plans is dependent on numerous factors, many of which are beyond our control as further discussed in Item 1A. "Risk Factors" included in this Quarterly Report on Form 10-Q and in our 2025 Annual Report.

During the second quarter of 2026, we sold approximately 38 acres of the 120 acres of excess owned land at the Goshen, New York location for $1.4 million. On July 31, 2026, the Company, through its wholly owned subsidiaries Aurora International, LLC, an Oregon limited liability company and Aurora Peat Products ULC, an Alberta unlimited liability corporation, entered into a Share Purchase Agreement with 2817049 Alberta Ltd., an Alberta corporation. Pursuant to the terms of the Share Purchase Agreement, Seller sold to Buyer and Buyer purchased from Seller all the issued and outstanding shares of APP for $16 million, subject to adjustments set forth in the Share Purchase Agreement. The net proceeds from the Transaction will be applied to reduce outstanding debt, including outstanding interest, under the Term Loan. The Share Purchase Agreement contains customary representations and warranties of the parties, covenants and indemnification provisions. The representations, warranties and covenants contained in the Share Purchase Agreement were made solely for the benefit of the parties to the Share Purchase Agreement and may be subject to limitations agreed upon by the contracting parties. In connection with the Share Purchase Agreement, the Seller and Buyer entered into a secured promissory note on the Closing Date, pursuant to which the Buyer issued, in favor of the Seller, a promissory note in the principal amount of $5 million, representing a deferred portion of the purchase price payable to the Seller under the Share Purchase Agreement. The secured promissory note was assigned to the lenders of the Company's Term Loan. Cash obligations in connection with the close of the transaction are estimated to be up to $3.1 million.

Term Loan

On October 25, 2021, we and certain of our direct and indirect subsidiaries entered into the Term Loan with JPMorgan Chase Bank, N.A., as administrative agent for the lenders, pursuant to which we borrowed a $125 million senior secured term loan. The Term Loan was amended by Amendment No. 1 effective as of June 27, 2023, to replace the LIBOR referenced rates with SOFR referenced rates. Pursuant to Amendment No. 1, any Term Loan that constitutes a Eurodollar Rate Loan that is outstanding as of the Amendment No. 1 closing date shall continue until the end of the applicable interest period for such Eurodollar Rate Loan and the provisions of the Term Loan applicable thereto shall continue and remain in effect (notwithstanding the occurrence of the Amendment No. 1 closing date) until the end of the applicable interest period for such Eurodollar Rate Loan, after which such provisions shall have had no further force or effect. Such Eurodollar Rate Loan shall subsequently either be an ABR Loan or a Term Benchmark Loan. The ABR Loans shall bear interest at the Alternate Base Rate (with a 2.0% floor) plus 4.50%, and Term Benchmark Loans shall bear interest at the Adjusted Term SOFR Rate (with a 1.0% floor) plus 5.50%. As of the date of filing the 2025 Annual Report, the ABR Loan and Term Benchmark Loan credit spreads of 4.50% and 5.50%, respectively, within the Amendment No. 1 had not changed from the credit spreads in the original Term Loan. On April 8, 2026, we, the Lenders and the Agents entered into Amendment No. 2 to the Credit and Guaranty Agreement. Amendment No. 2 amends the Term Loan to, among other things, (i) replace JPMorgan with FEAC as the administrative agents; and (ii) require each credit party to covenant and agree to (A) regularly provide certain liquidity reports and cash flow forecasts, (B) regularly provide certain aging reports and inventory reports, and (C) maintain a minimum liquidity of $1 million.

The Term Loan matures on October 25, 2028, and is secured by a first lien on our non-working capital assets and a second lien on our working capital assets.

The principal amounts of the Term Loan are scheduled to be repaid in consecutive quarterly installments in amounts equal to 0.25% of the original principal amount of the Term Loan on the last day of each fiscal quarter commencing March 31, 2022, with the balance of the Term Loan payable on the Maturity Date. We are also required to make mandatory prepayments in the event of (i) achieving certain excess cash flow criteria, including the achievement and maintenance of a specific leverage ratio, (ii) certain asset sales that are collateral, or (iii) upon the issuance, offering, or placement of new debt obligations. In accordance with this provision, we made prepayments of $4.6 million during of 2025 for an asset sale completed in 2024. The prepayments reduced our required quarterly installment amounts to zero for the remaining term.

The Term Loan requires us to maintain certain reporting requirements, affirmative covenants, and negative covenants. On February 4, 2026, we elected to defer making an interest payment of approximately $2.8 million on the Term Loan. As a result of our failure to pay the interest within the grace period, an event of default occurred with respect to the Term Loan. On February 11, 2026, the lenders, through the administrative agent, notified us of the Specified Event of Default and informed us that the administrative agent or the collateral agent may exercise any rights and remedies provided under the Term Loan agreement and related financing documents, but it did not seek to enforce such remedies as of such time.

On the Forbearance Effective Date, the Company entered into the Forbearance Agreement with the other Obligors, the Lenders, and FEAC, in connection with the Term Loan. Pursuant to the Forbearance Agreement, during the Forbearance Period (as defined in Note 11 – Debt to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q), solely with respect to the Specified Event of Default, neither the Administrative Agent nor any Lender shall, upon the terms and conditions expressly specified therein, take any action, commence any proceedings against any Obligor or any other person with respect to the enforcement of any of its or their rights or remedies under the Credit Documents or applicable law, other than as expressly described in the Forbearance Agreement. The Company, the Lenders, and FEAC agreed to extend the Forbearance Period under the Forbearance Agreement through and including August 31, 2026.

As of June 30, 2026, and December 31, 2025, the outstanding principal balance on the Term Loan was $114.4 million.

Revolving Credit Facility

On March 29, 2021, we and certain of our subsidiaries entered into the Revolving Credit Agreement with JPMorgan, as administrative agent, issuing bank and swingline lender for a revolving line of credit up to $50 million (the "Revolving Credit Facility") which was subsequently amended several times to, among other things, modify the maximum aggregate borrowing limit, transition the interest rate benchmark from LIBOR to SOFR, and extend the maturity date. We use the terms Revolving Credit Agreement and Revolving Credit Facility interchangeably.

As of December 31, 2025, we had zero borrowed under the Revolving Credit Facility. On February 17, 2026, we entered into the Termination Agreement to terminate the Revolving Credit Agreement. Pursuant to the terms of the Termination Agreement, the parties agreed to terminate the Revolving Credit Agreement subject to the survival of each of the provisions of the Revolving Credit Agreement and Loan Documents (as defined in the Revolving Credit Agreement) and in the certificates delivered in connection with or pursuant to the Revolving Credit Agreement that survive termination of the Revolving Credit Agreement.

The aforementioned financing arrangements and other transactions are more fully described in the notes to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Cash and Cash Equivalents

The cash, cash equivalents and restricted cash balances of $6.6 million and $6.3 million at June 30, 2026, and December 31, 2025, respectively, included $3.7 million and $2.9 million, respectively, held by foreign subsidiaries.

Material Cash Requirements

Our estimated material cash requirements include (i) anticipated principal and interest payments on our Term Loan, (ii) finance lease payments, (iii) operating lease payments, as well as other purchase obligations to support our operations. Variable rates on our Term Loan are subject to change as further described in Item 3. Quantitative and Qualitative Disclosures About Market Risk. Refer to Item 1. Financial Statements, Note 11 – Debt, Note 8 – Leases, and Note 15 – Commitments and Contingencies for details relating to our material cash requirements for debt, our leasing arrangements, including future maturities of our operating lease liabilities, and purchase obligations, respectively. From time to time in the normal course of business, we will enter into agreements with suppliers which provide favorable pricing in return for a commitment to purchase minimum amounts of inventory over a defined time period.

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 Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of the 2025 Annual Report and include the discussion of estimates used in indefinite lived intangible assets, long-lived tangible and finite-lived intangible assets, and inventory valuation. 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 Quarterly Report on Form 10-Q, and actual results could differ materially from the amounts reported.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, refer to Note 3 – Basis of Presentation and Significant Accounting Policies — Recent accounting pronouncements, to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Market risk is the risk of economic losses due to adverse changes in financial market prices and rates. Our primary market risk has been interest rate, foreign currency and inflation risk. We do not have material exposure to commodity risk.

Interest Rate Risk

We are exposed to interest rate risk through our variable rate debt. As of June 30, 2026, we had $114.4 million of Term Loan debt that is subject to variable interest rates that are based on SOFR or an alternate base rate. Refer to Item 1. Financial Statements, Note 11 – Debt for details relating to the debt. If the rates were to increase by 100 basis points from the rates in effect as of June 30, 2026, our interest expense on the variable-rate debt would increase by an average of $1.2 million annually, or $1.1 million annually considering the paydown of debt related to the sale of APP. There are inherent limitations in the sensitivity analysis presented, primarily due to the assumptions that interest rate changes would be instantaneous, while SOFR changes regularly. We do not currently hedge our interest rate risks, but may determine to do so in the future.

Foreign Currency Risk

The functional currencies of our foreign subsidiary operations are predominantly in the Canadian dollar ("CAD") and the Euro. For the purposes of presenting these condensed consolidated financial statements, the assets and liabilities of subsidiaries with CAD or Euro functional currencies are translated into U.S. dollars ("USD") using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average rate prevailing during the period with exchange differences impacting other comprehensive income (loss) in equity. Therefore, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, principally the CAD. We are impacted by changes in foreign currency exchange rates when we sell product in currencies different from the currency in which costs were incurred. The functional currencies and our purchasing and sales activities primarily include USD, CAD and Euro. As these currencies fluctuate against each other, and other currencies, we are exposed to foreign currency exchange rate risk on sales, purchasing transactions, and labor. To date, we have not entered into any foreign currency exchange contracts and currently do not expect to enter into foreign currency exchange contracts for trading or speculative purposes.

Inflation Risk

Our results of operations and financial condition are presented based on historical costs. We cannot provide assurances that our results of operations and financial condition will not be materially impacted by inflation in the future.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation and supervision of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Company's management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the periods covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

For a discussion of risk factors, please read Item 1A, "Risk Factors" in our 2025 Annual Report. Such risk factors continue to be relevant to an understanding of our business, financial condition and operating results. As of the date of this Quarterly Report on Form 10-Q, there have been the following material changes with respect to such risk factors:

We are currently not in compliance with the continued listing standards of Nasdaq, and if we are unable to regain compliance, our common stock may be delisted from the exchange.

Our common stock is currently listed for trading on the Nasdaq under the symbol “HYFM”. The continued listing of our common stock on Nasdaq is subject to our compliance with a number of listing standards, including Nasdaq Listing Rule 5550(b)(1) to maintain a minimum of $2.5 million in stockholders’ equity (the “Minimum Stockholders’ Equity Requirement”) or the alternative requirements of Nasdaq Listing Rule 5550(b)(2)-(3) of having a market value of listed securities of at least $35 million or net income from continuing operations of $500,000 in the most recently completed fiscal year or two of the last three most recently completed fiscal years (the “Alternative Requirement”). As of December 31, 2025, we had a stockholders' deficit of approximately $(63) million, the market value of our listed securities was below $35 million as of the date of our 2025 Annual Report, and we realized a net loss in each of the past three fiscal years. Accordingly, we do not meet the requirements of the Minimum Stockholders’ Equity Requirement or Alternative Requirement.

On April 1, 2026, we received a letter (the “Letter”) from the Listing Qualifications Department of the Nasdaq indicating that we were not in compliance with the Minimum Stockholders’ Equity Requirement for continued listing on the Nasdaq, under Nasdaq Listing Rule 5550(b)(1), because our stockholders’ deficit of $(63) million as reported in our 2025 Annual Report was below the required minimum of $2.5 million, and because, as of March 31, 2026, we did not meet the Alternative Requirement relating to the market value of listed securities of $35 million or net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years.

On June 16, 2026, we received a letter from Nasdaq indicating that, based on Nasdaq’s review of the Company’s plan submitted on May 18, 2026 and related materials submitted on June 8, 2026, Nasdaq has granted the Company an extension to regain compliance with the Minimum Stockholders’ Equity Requirement. On July 2, 2026, we received a determination letter from Nasdaq notifying us that we did not meet the terms of the extension granted by Nasdaq to regain compliance with the Minimum Stockholders’ Equity Requirement (the “Nasdaq Determination Letter”). The Nasdaq Determination Letter stated that we may request an appeal of this determination at a hearing before the Nasdaq Hearing Panel (the “Panel”) by July 9, 2026. On July 9, 2026, we timely requested a hearing before the Panel, which stayed any further action by Nasdaq at least pending completion of the hearing process and the expiration of any extension period that may be granted by the Panel.

On July 6, 2026, we also received a letter from Nasdaq indicating that we are not in compliance with the minimum bid price requirement for continued listing on Nasdaq under Listing Rule 5550(a)(2) (the “Bid Price Requirement”) because we had not maintained a minimum closing bid price of $1 per share for the prior 30 consecutive business days. The Bid Price Requirement provides us a compliance period of 180 calendar days in which to regain compliance. If at any time during the 180-day period, the closing bid price of our common stock is at least $1 for a minimum of ten consecutive business days, Nasdaq will provide written confirmation to us of compliance. In the event that we do not regain compliance with the Bid Price Requirement, we may be eligible for additional time. The Company intends to monitor the closing bid price of its common stock and is considering its options to regain compliance with the Bid Price Requirement.

We are considering all options available to us to regain compliance with the Minimum Stockholders’ Equity Requirement and Bid Price Requirement. However, there can be no assurance that we will be able to regain compliance with the Minimum Stockholders’ Equity Requirement and Bid Price Requirement or will otherwise be in compliance with other applicable Nasdaq Listing Rules, that the Panel will grant the Company an additional extension period to remain listed on Nasdaq, or that the Panel will be successful.

If we fail to regain compliance with the Nasdaq continued listing standards, after any compliance period, if granted, or we fail to comply with other continued listing requirements, Nasdaq will provide notice that our common stock will be subject to delisting, which could adversely affect our ability to raise additional financing through the public or private sale of equity securities, would significantly affect the ability of investors to trade our securities and would negatively affect the value and liquidity of our common stock. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities. If our common stock is delisted by Nasdaq, the price of our common stock may decline and our common stock may be eligible to trade on the OTC Bulletin Board, another over-the-counter quotation system, or on the pink sheets where an investor may find it more difficult to dispose of their common stock or obtain accurate quotations as to the market value of our common stock. A delisting from Nasdaq and failure to obtain listing on another market or exchange would subject our common stock to so-called penny stock rules that impose additional sales practice and market-making requirements on broker-dealers who sell or make a market in such securities. Further, if we are delisted, we would incur additional costs under requirements of state “blue sky” laws in connection with any sales of our securities. These requirements could severely limit the market liquidity of our common stock and the ability of our stockholders to sell our common stock in the secondary market.