Hydrofarm Holdings Group, Inc. (“Hydrofarm”) (Nasdaq: HYFM), a
leading distributor and manufacturer of hydroponics equipment and
supplies, announced it has entered into an agreement to acquire
Field 16, LLC, the manufacturer and distributor of HEAVY 16, a line
of premium plant nutrients (collectively “HEAVY 16”). The company’s
first acquisition since its December 2020 initial public offering,
the move further enhances Hydrofarm’s already robust portfolio of
high-performance, innovative and proprietary branded products in
the lighting, climate control, nutrients and growing media
categories.
“As a leading hydroponics company, a key
component of our growth strategy is to bring dynamic brands like
HEAVY 16 under the Hydrofarm umbrella and continue to solidify our
position as the acquirer of choice in this highly fragmented and
fast-growing industry,” said Bill Toler, Chairman and Chief
Executive Officer of Hydrofarm. “Controlled environment agriculture
is in the midst of a revolution and poised to be the most
significant new market category to emerge in a generation.”
Subject to customary closing conditions, the
transaction is expected to be completed in May 2021. Upon
completion of the transaction. HEAVY 16 CEO Aaron Berkowitz will
join the Hydrofarm senior management team as he continues to lead
the HEAVY 16 business. In addition, HEAVY 16 Founder and
Chief Agronomist Bryce Patterson will continue to work alongside
Mr. Berkowitz as Chief Agronomist, focusing on research and
development, customer experience, and integration efforts.
“Since HEAVY 16’s inception, our innovation has
been driven by listening to local farmers and using the
highest-grade ingredients to formulate a potent and streamlined
nutrient regimen to help them achieve their goals. As the first
line of nutrients to be manufactured under the Hydrofarm umbrella,
we now have the opportunity to further accelerate the development
and introduction of solutions that empower growers to operate more
effectively and sustainably as this transformative industry
continues to evolve,” said Mr. Berkowitz. “We are thrilled to join
the Hydrofarm family of brands as we explore new frontiers in the
CEA space together.”
Paramount, Calif.-based HEAVY 16 delivers 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. Available across the U.S. in more than 300 retail stores,
HEAVY 16 products provide a streamlined system for achieving even
the most demanding agricultural goals.
The strategic combination of Hydrofarm’s leading
distribution capabilities and HEAVY 16’s branded nutrient
manufacturing capabilities will enable the highly respected HEAVY
16 brand to grow more rapidly across the combined company’s
customer base. The acquisition also fits squarely with Hydrofarm’s
strategy to acquire branded manufacturers in key CEA product
categories, such as plant nutrients. Hydrofarm expects HEAVY 16 to
generate approximately $23 million in net sales across the full
calendar year 2021, representing significant growth from the prior
year. HEAVY 16’s profit margin profile will be accretive to
Hydrofarm and as a result, the Company expects the acquisition will
enhance the Company’s adjusted EBITDA margin for the 2021 fiscal
year.
Hydrofarm will fund the full transaction
consideration of up to $78.1 million using a combination of cash,
the Company’s existing credit facility and $15.0 million in newly
issued HYFM common stock. The referenced transaction consideration
includes a potential earn out payment of up to $2.5 million based
on achievement of certain performance metrics. The Company expects
the transaction to be accretive to earnings in 2021 and beyond. The
transaction represents an acquisition value of less than 7x HEAVY
16’s estimated 2021 Adjusted EBITDA, excluding synergies but
including the net present value of tax benefits resulting from the
transaction.
Rothschild & Co. is serving as financial
advisor and Cozen O’Connor is serving as legal advisor to
Hydrofarm.
Preliminary First Quarter 2021
Financial Results
The Company also announced the following
preliminary unaudited financial results for its first quarter ended
March 31, 2021:
- The Company estimates that net
sales will range between $109 million to $111 million, as compared
to $66.9 million for the three months ended March 31, 2020, an
increase of approximately 65% calculated using the midpoint of the
range. The growth in net sales was broad and diverse, with higher
net sales expected across multiple geographies, product categories
and brand segments, including the Company’s proprietary, preferred
and distributed brands.
- Net income is expected to range
between $4.1 million and $4.9 million, as compared to a net loss of
($3.1) million for the three months ended March 31, 2020.
- Adjusted EBITDA is estimated to be
between $8.9 million to $9.9 million, as compared to $1.6 million
for the three months ended March 31, 2020, an increase of
approximately 490% calculated using the midpoint of the range.
- As of March 31, 2021, 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, as well as $50.0 million of
available borrowing capacity under its revolving credit
agreement.
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.
Preliminary results remain subject to the
completion of normal quarter-end accounting procedures and
adjustments and are subject to change.
Non-GAAP Financial
Presentation
The Company reports its financial results in
accordance with U.S. GAAP. However, management believes that
certain non-GAAP financial measures provide investors with
additional useful information in evaluating the Company’s
performance and that excluding certain items that may vary
substantially in frequency and magnitude period-to-period from net
income (loss) provides useful supplemental measures that assist in
evaluating its ability to generate earnings and to more readily
compare these metrics between past and future periods. These
non-GAAP financial measures may be different than similarly titled
measures used by other companies.
The Company defines Adjusted EBITDA as net
income (loss) excluding interest expense, income taxes,
depreciation and amortization, share-based compensation, employer
payroll taxes on share-based compensation and other unusual and/or
infrequent costs (i.e., impairment, restructuring and other
expenses, acquisition-related expenses, loss on debt extinguishment
and other income, net), which the Company does not consider in its
evaluation of ongoing operating performance.
The reconciliation below is to preliminary net
income and management has not completed its review of these items;
therefore, actual results could differ significantly. The following
table reconciles the preliminary Adjusted EBITDA range of $8.9
million to $9.9 million to the preliminary net income range of
$4.1 million to $4.9 million for the three months ended
March 31, 2021:
|
Range |
|
|
Three Months Ended |
|
|
March 31, 2021 |
|
|
(in millions) |
|
Net Income Range |
$ |
4.1 |
|
$ |
4.9 |
|
|
Interest expense |
|
0.1 |
|
|
0.1 |
|
|
Income taxes |
|
0.6 |
|
|
0.8 |
|
|
Depreciation and amortization |
|
1.6 |
|
|
1.6 |
|
|
Impairment, restructuring and other |
|
0.0 |
|
|
0.0 |
|
|
Acquisition expenses (1) |
|
0.6 |
|
|
0.6 |
|
|
Other income, net |
|
(0.1 |
) |
|
(0.1 |
) |
|
Stock-based compensation (2) |
|
1.3 |
|
|
1.3 |
|
|
Loss on debt extinguishment |
|
0.7 |
|
|
0.7 |
|
|
Adjusted EBITDA Range |
$ |
8.9 |
|
$ |
9.9 |
|
|
|
|
|
|
|
|
______________________
(1) Acquisition expenses includes
consulting, transaction services and legal fees incurred for the
signed and pending HEAVY 16 acquisition and certain potential
acquisitions.(2) Stock-based compensation also includes the
amount of employer payroll taxes on stock-based compensation.
The following table reconciles Adjusted EBITDA
to the net loss of $3.1 million for the three months ended
March 31, 2020:
|
Three Months
Ended |
|
|
March 31, 2020 |
|
|
(in millions) |
|
Net Loss |
$ |
(3.1 |
) |
|
Interest expense |
|
2.8 |
|
|
Income taxes |
|
0.1 |
|
|
Depreciation and amortization |
|
1.8 |
|
|
Impairment, restructuring and other |
|
0.0 |
|
|
Acquisition expenses |
|
0.0 |
|
|
Other income, net |
|
0.0 |
|
|
Stock-based compensation |
|
0.0 |
|
|
Loss on debt extinguishment |
|
0.0 |
|
|
Adjusted EBITDA |
$ |
1.6 |
|
|
|
|
|
|
|
Non-GAAP Financial Measures
We report our financial results in accordance
with generally accepted accounting principles in the United States
(“GAAP”). However, management believes that certain non-GAAP
financial measures provide investors with additional useful
information in evaluating our performance and that excluding
certain items that may vary substantially in frequency and
magnitude period-to-period from net income (loss) provides useful
supplemental measures that assist in evaluating our ability to
generate earnings and to more readily compare these metrics between
past and future periods. These non-GAAP financial measures may be
different than similarly titled measures used by other
companies.
To supplement our audited consolidated financial
statements which are prepared in accordance with GAAP, we use
“Adjusted EBITDA”, “Adjusted EBITDA as a percent of net sales”,
“Pro Forma Adjusted Net Income” and “Pro Forma Adjusted Net Income
per Diluted Share” which are non-GAAP financial measures. Our
non-GAAP financial measures should not be considered in isolation
from, or as substitutes for, financial information prepared in
accordance with GAAP. There are several limitations related to the
use of our non-GAAP financial measures as compared to the closest
comparable GAAP measures. Some of these limitations include:
We define Adjusted
EBITDA as net income (loss) excluding interest
expense, income taxes, depreciation and amortization, share-based
compensation, employer payroll taxes on share-based compensation
and other unusual and/or infrequent costs (i.e., impairment,
restructuring and other expenses, loss on debt extinguishment and
other income, net), which we do not consider in our evaluation of
ongoing operating performance.
Conference Call
The Company plans to release full financial
results for its first quarter ended March 31, 2021 on May 13, 2021
at 5:00 PM ET. The conference call can be accessed live over the
phone by dialing 201-389-0879. A replay will be available after the
call until Thursday, May 20, 2021 and can be accessed by dialing
412-317-6671. The passcode is 13718921. The conference call will
also be webcast live and archived on the corporate website at
www.hydrofarm.com, under the “Investors” section.
About Hydrofarm Holdings Group,
Inc.Hydrofarm is a leading distributor and manufacturer of
controlled environment agriculture equipment and supplies,
including high-intensity grow lights, climate control solutions,
and growing media, as well as a broad portfolio of innovative and
proprietary branded products. For more than 40 years, Hydrofarm has
helped growers in the U.S. and Canadian markets make growing easier
and more productive. The Company’s mission is to empower
growers, farmers and cultivators with products that enable greater
quality, efficiency, consistency and speed in their grow
projects. For additional information, please visit:
www.hydrofarm.com
About HEAVY 16HEAVY 16 is a
California-based plant nutrient company specialized in blending
professional-grade, artisan-quality formulations for the world’s
most discerning growers. HEAVY 16 utilizes the highest-grade
ingredients, concentrated into complex blends, to create a
streamlined plant nutrient regimen that drives quality results on
every harvest. Visit www.HEAVY16.com for information about our
grower-preferred line of nutrients.
Cautionary Note Regarding
Forward-Looking Statements
Statements contained in this press release,
other than statements of historical fact, which address activities,
events and developments that the Company expects or anticipates
will or may occur in the future, including, but not limited to,
information regarding the future economic performance and financial
condition of the Company, the plans and objectives of the Company’s
management, and the Company’s assumptions regarding such
performance and plans are “forward-looking statements” within the
meaning of the U.S. federal securities laws that are subject to
risks and uncertainties. These forward-looking statements generally
can be identified as statements that include phrases such as
“guidance,” “outlook,” “projected,” “believe,” “target,” “predict,”
“estimate,” “forecast,” “strategy,” “may,” “goal,” “expect,”
“anticipate,” “intend,” “plan,” “foresee,” “likely,” “will,”
“should” or other similar words or phrases. Actual results could
differ materially from the forward-looking information in this
release due to a variety of factors, including, but not limited
to: The ongoing COVID-19 pandemic could have a material
adverse effect on the Company’s business, results of operation,
financial condition and/or cash flows; Interruptions in the
Company's supply chain, whether due to COVID-19 or otherwise could
adversely impact expected sales growth and operations; The highly
competitive nature of the Company’s markets could adversely affect
its ability to maintain or grow revenues; Certain of the Company’s
products may be purchased for use in new or emerging industries or
segments, including the cannabis industry, and/or be subject to
varying, inconsistent, and rapidly changing laws, regulations,
administrative and enforcement approaches, and consumer perceptions
and, among other things, such laws, regulations, approaches and
perceptions may adversely impact the market for the Company’s
products; Compliance with environmental and other public health
regulations or changes in such regulations or regulatory
enforcement priorities could increase the Company’s costs of doing
business or limit the Company’s ability to market all of its
products; Damage to the Company’s reputation or the reputation of
its products or products it markets on behalf of third parties
could have an adverse effect on its business; If the Company is
unable to effectively execute its e-commerce business, its
reputation and operating results may be harmed; The Company’s
operations may be impaired if its information technology systems
fail to perform adequately or if it is the subject of a data breach
or cyber-attack; The Company may not be able to adequately protect
its intellectual property and other proprietary rights that are
material to the Company’s business; Acquisitions, other strategic
alliances and investments could result in operating and integration
difficulties, dilution and other harmful consequences that may
adversely impact the Company’s business and results of operations.
Additional detailed information concerning a number of the
important factors that could cause actual results to differ
materially from the forward-looking information contained in this
release is readily available in the Company’s publicly filed
Registration Statement on Form S-1 and will also be included in
quarterly, annual and other reports. The Company disclaims any
obligation to update developments of these risk factors or to
announce publicly any revision to any of the forward-looking
statements contained in this release, or to make corrections to
reflect future events or developments.
Investor Relations:ICRFitzhugh Taylor
ir@hydrofarm.com
Media Contacts:The LAKPR
GroupHannah Arnold, 202-559-9171, harnold@lakpr.comLynn Trono,
323-672-8226, ltrono@lakpr.com-or-HydrofarmLisa Gallagher,
513-505-2334, lgallagher@hydrofarm.com
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