UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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urban-gro, Inc.
FORM 10-Q
For the Quarterly Period Ended September 30, 2022
INDEX
| 2 |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements related to future events, challenges we may face, business strategy, future performance, future operations, backlog, financial position, estimated or projected revenues and losses, projected costs, prospects, plans and objectives of management. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as “seek,” “anticipate,” “plan,” “continue,” “estimate,” “expect,” “may,” “will,” “project,” “predict,” “potential,” “targeting,” “intend,” “could,” “might,” “should,” “believe,” “outlook” and variations of such words or their negative and similar expressions. Forward-looking statements should not be read as a guarantee of future performance or results, and may not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on management’s belief, based on currently available information, as to the outcome and timing of future events. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those expressed in such forward-looking statements. When evaluating forward-looking statements, you should consider the risk factors and other cautionary statements described in this Quarterly Report on Form 10-Q and under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. We believe the expectations reflected in the forward-looking statements contained in this report are reasonable, but no assurance can be given that these expectations will prove to be correct. Forward-looking statements should not be unduly relied upon. Important factors that could cause actual results or events to differ materially from those expressed in forward-looking statements include, but are not limited to:
| ● | risks related to our operating strategy; | |
| ● | competition for projects in our markets; | |
| ● | our ability to predict and respond to new laws and governmental regulatory actions affecting our business, including foreign laws and governmental regulation; | |
| ● | our ability to successfully develop new and/or enhancements to our product offerings and develop a product mix to meet demand; | |
| ● | our ability to meet or exceed market expectations from analysts; | |
| ● | unfavorable economic conditions, increases in interest rates and restrictive financing markets that may cause customers to cancel contracts reflected in our backlog or cause sales to decrease; | |
| ● | our ability to successfully identify, manage and integrate acquisitions; | |
| ● | our ability to accurately estimate the overall risks, requirements or costs when we bid on or negotiate contracts that are ultimately awarded to us; | |
| ● | climate change and related laws and regulations; | |
| ● | our ability to manage our supply chain in a manner that ensures that we are able to obtain adequate raw materials, equipment and essential supplies in a timely manner and at favorable prices; | |
| ● | our ability to attract and retain key personnel; | |
| ● | risks associated with concentration of a large portion of our business from a relatively small number of key clients/customers and the effect a loss of a key client/customer could have on our business; | |
| ● | risks associated with customers or suppliers not fulfilling contracts; | |
| ● | risks associated with reliance on key suppliers and risks such suppliers could change incentive programs that negatively affect our returns; | |
| ● | the impact of inflation on costs of labor, raw materials and other items that are critical to our business; | |
| ● | property damage and other claims and insurance coverage issues; | |
| ● | the outcome of litigation or disputes; | |
| ● | risks related to our information technology systems and infrastructure, including cybersecurity incidents; | |
| ● | our ability to maintain effective internal control over financial reporting; and | |
| ● | other events outside of our control. |
These factors are not necessarily all of the important factors that could cause actual results or events to differ materially from those expressed in the forward-looking statements. Other unknown or unpredictable factors could also cause actual results or events to differ materially from those expressed in the forward-looking statements. Our future results will depend upon various other risks and uncertainties, including those described in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date on which any such statement is made, whether as a result of new information, future events or otherwise, except as required by law. You are advised, however, to consult any future disclosures we make on related subjects in future reports to the SEC.
| 3 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
urban-gro, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| September 30, 2022 | December 31, 2021 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Contract receivables | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right of use assets, net | ||||||||
| Investments | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Total non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Contract liabilities | ||||||||
| Accrued expenses | ||||||||
| Customer deposits | ||||||||
| Contingent consideration | ||||||||
| Operating lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Deferred tax liability | ||||||||
| Operating lease liabilities | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders’ Equity | ||||||||
| Preferred stock, $ par value; shares authorized; and shares issued and outstanding | ||||||||
| Common stock, $ par value; shares authorized; issued and outstanding as of September 30, 2022, and issued and outstanding as of December 31, 2021 | ||||||||
| Additional paid in capital | ||||||||
| Treasury shares, cost basis: shares as of September 30, 2022 and shares as of December 31, 2021 | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements
| 4 |
urban-gro, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | ||||||||||||||||
| Equipment systems | $ | $ | $ | $ | ||||||||||||
| Services | ||||||||||||||||
| Construction design-build | ||||||||||||||||
| Consumable products | ||||||||||||||||
| Total Revenue | ||||||||||||||||
| Cost of Revenue | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Intangible asset amortization | ||||||||||||||||
| Business development | ||||||||||||||||
| Stock-based compensation | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ||||||||||||
| Non-operating income (expenses): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||||||
| Write-down of investment | ( | ) | ( | ) | ||||||||||||
| Interest expense – beneficial conversion of notes payable | ( | ) | ||||||||||||||
| Loss on extinguishment of debt | ( | ) | ||||||||||||||
| PPP Loan Forgiveness | ||||||||||||||||
| Other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total non-operating income (expenses) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax expense (benefit) | ( | ) | ( | ) | ||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Comprehensive income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Earnings (loss) per share: | ||||||||||||||||
| Earnings (loss) per share - basic | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Earnings (loss) per share - dilutive | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Weighted average share - basic | ||||||||||||||||
| Weighted average shares - dilutive | ||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
| 5 |
urban-gro, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(unaudited)
| Common Stock | Additional Paid in | Accumulated | Treasury | Total Shareholders’ Equity | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Treasury stock | - | ( | ) | ( | ) | |||||||||||||||||||
| Stock grant program vesting | ( | ) | ||||||||||||||||||||||
| Net income (loss) for period ended September 30, 2022 | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Common Stock | Additional Paid in | Accumulated | Treasury | Total Shareholders’ Equity | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Stock issuance related to acquisition | ||||||||||||||||||||||||
| Stock issued in conversion of warrants | ( | ) | ||||||||||||||||||||||
| Stock grant program vesting | ( | ) | ||||||||||||||||||||||
| Common stock repurchased | - | ( | ) | ( | ) | |||||||||||||||||||
| Stock Options Exercised | ||||||||||||||||||||||||
| Net income (loss) for period ended September 30, 2021 | - | |||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Common Stock | Additional Paid in | Accumulated | Treasury | Total Shareholders’ Equity | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Treasury stock | - | ( | ) | ( | ) | |||||||||||||||||||
| Stock grant program vesting | ( | ) | ||||||||||||||||||||||
| Stock exercised | ||||||||||||||||||||||||
| Stock issuance related to acquisition | ||||||||||||||||||||||||
| Stock issued with exercise of warrants | ( | ) | ||||||||||||||||||||||
| Net income (loss) for period ended September 30, 2022 | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Common Stock | Additional Paid in | Accumulated | Treasury | Total Shareholders’ Equity | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Beneficial conversion feature | - | |||||||||||||||||||||||
| Conversion of Bridge Financing | ||||||||||||||||||||||||
| Stock grant program vesting | ( | ) | ||||||||||||||||||||||
| Stock issuance related to offering, net of offering costs of $ | ||||||||||||||||||||||||
| Stock issuance related to acquisition | ||||||||||||||||||||||||
| Common stock repurchased | - | ( | ) | ( | ) | |||||||||||||||||||
| Stock issued with exercise of warrants | ||||||||||||||||||||||||
| Stock Options Exercised | ||||||||||||||||||||||||
| Net income (loss) for period ended September 30, 2021 | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
| 6 |
urban-gro, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net income (loss) | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net income (loss) from operations: | ||||||||
| Depreciation and amortization | ||||||||
| Deferred income tax benefit | ( | ) | ||||||
| Amortization of deferred financing costs | ||||||||
| Loss on extinguishment of debt | ||||||||
| PIK interest | ( | |||||||
| Interest on convertible notes | ||||||||
| Impairment of investment | ||||||||
| Stock-based compensation expense | ||||||||
| Beneficial conversion of Bridge notes | ||||||||
| Inventory write-offs | ( | ) | ||||||
| Bad debt expense | ||||||||
| PPP loan forgiveness | ( | ) | ||||||
| Changes in operating assets and liabilities (net of acquired amounts): | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Prepayments and other assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Operating leases | ( | ) | ||||||
| Customer deposits | ( | ) | ||||||
| Net Cash Provided By (Used In) Operating Activities | ( | ) | ||||||
| Cash Flows from Investing Activities | ||||||||
| Business combinations, net of cash acquired | ( | ) | ( | ) | ||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net Cash Used In Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Repurchase of common stock | ( | ) | ( | ) | ||||
| Proceeds from issuance of Common Stock, net of offering costs | ||||||||
| Repayment of debt | ( | ) | ||||||
| Proceeds from stock issuance | ||||||||
| Payment of finance lease ROU liability | ( | ) | ||||||
| Net Cash Provided By (Used In) Financing Activities | ( | ) | ||||||
| Net Increase (Decrease) in Cash | ( | ) | ||||||
| Cash at Beginning of Period | ||||||||
| Cash at End of Period | $ | $ | ||||||
| Supplemental Cash Flow Information: | ||||||||
| Interest paid | $ | $ | ||||||
| Operating lease right of use asset | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Stock issued related to acquisitions | $ | $ | ||||||
| Operating lease right of use assets and liabilities extension | $ | $ | ||||||
| PPP Loan Forgiveness | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements
| 7 |
urban-gro, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION, ACQUISITIONS, AND LIQUIDITY
Organization
urban-gro, Inc. (“we,” “us,” “our,” the “Company,” or “urban-gro”) is an integrated professional services and design-build firm. We offer value-added architectural, engineering, and construction management solutions to the Controlled Environment Agriculture (“CEA”), industrial, healthcare, and other commercial sectors. Innovation, collaboration, and a commitment to sustainability drive our team to provide exceptional customer experiences. To serve our horticulture clients, we engineer, design and manage the construction of indoor CEA facilities and then integrate complex environmental equipment systems into those facilities. Through this work, we create high-performance indoor cultivation facilities for our clients to grow specialty crops, including leafy greens, vegetables, herbs, and plant-based medicines. Our custom-tailored approach to design, construction, procurement, and equipment integration provides a single point of accountability across all aspects of indoor growing operations. We also help our clients achieve operational efficiency and economic advantages through a full spectrum of professional services and programs focused on facility optimization and environmental health which establish facilities that allow clients to manage, operate and perform at the highest level throughout their entire cultivation lifecycle once they are up and running. We also serve a broad range of commercial and governmental entities, providing them with planning, consulting, architectural, engineering and construction design-build services for their facilities. We aim to work with our clients from inception of their project in a way that provides value throughout the life of their facility. We are a trusted partner and advisor to our clients and offer a complete set of engineering and managed services complemented by a vetted suite of select cultivation equipment systems.
Acquisitions
Emerald
On
April 29, 2022 (the “Emerald Closing Date”), the Company acquired all of the issued and outstanding capital stock (the
“Emerald Acquisition”) of Emerald Construction Management, Inc. (“Emerald”) from its shareholders
(collectively, the “Emerald Sellers”) through a forward merger into a wholly owned subsidiary of urban-gro, which has
subsequently changed its name post-merger to Emerald Construction Management, Inc. The aggregate initial purchase price for the
Emerald Acquisition was $
The
Initial Emerald Purchase Price was payable as follows: $
The Emerald Sellers may earn up
to $
| 8 |
| Purchase Price | $ | |||
| Allocation of Purchase Price: | ||||
| Cash | $ | |||
| Accounts receivable | $ | |||
| Contract receivable | $ | |||
| Prepayments and other assets | $ | |||
| Property and equipment | $ | |||
| ROU asset | $ | |||
| Goodwill | $ | |||
| Intangible assets | $ | |||
| Accrued expenses | $ | |||
| Contract liabilities | $ | |||
| ROU liability | $ | |||
| Deferred tax liability | $ |
The following pro forma amounts reflect the Company’s results as if the acquisition of Emerald had occurred on January 1, 2021. These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results of the acquisition to reflect the additional amortization of intangibles.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | ||||||||||||||||
| Net Income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
Acquired goodwill from Emerald represents the value expected to arise from organic growth and an opportunity to expand into a well-established market for the Company.
2WR
On
June 28, 2021, the Company’s wholly-owned subsidiary, urban-gro Architect Holdings, LLC (the “Buyer”), and the 2WRCO
Shareholders, the 2WRGA Shareholders, the MJ12 Shareholders, and the 2WRMS Shareholders (collectively, the “2WR Sellers”),
and Sam Andras, an individual entered into a Stock Purchase Agreement (the “2WR Purchase
Agreement”), pursuant to which the Buyer would purchase all of the issued and outstanding capital stock of 2WR of Colorado, Inc.,
a Colorado corporation (“2WRCO”), 2WR of Georgia, Inc., a Georgia corporation (“2WRGA”), MJ12 Design Studio,
Inc., a Colorado corporation (“MJ12”) (collectively, the “2WR Purchased Shares”) from the 2WR Sellers. In connection
with the acquisition of the 2WR Purchased Shares, the Buyer entered into an affiliate relationship with 2WR of Mississippi, P.C., a Mississippi
professional corporation (“2WRMS” and together with 2WRCO, 2WRGA and MJ12, the “2WR Entities”). The transaction
closed on July 30, 2021. The aggregate initial purchase price for the 2WR Purchased Shares was $
| 9 |
The
2WR Purchased Shares were payable as follows: $
The 2WR Purchase Agreement provides
for additional earnout payments (“2WR Earnout Payments”) to the 2WR Sellers of up to an aggregate amount of $
| Purchase Price | $ | |||
| Allocation of Purchase Price: | ||||
| Cash | $ | |||
| Accounts receivable | $ | |||
| Prepayments and other assets | $ | |||
| Property and equipment | $ | |||
| Goodwill | $ | |||
| Intangible assets | $ | |||
| Accrued expenses | $ | |||
| Deferred tax liability | $ |
The following pro forma amounts reflect the Company’s results as if the acquisition of the 2WR Entities had occurred on January 1, 2021. These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results of the acquisition to reflect the additional amortization of intangibles.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | ||||||||||||||||
| Net Income (loss) | ( | ) | ( | ) | ||||||||||||
Acquired goodwill from the 2WR Entities represents the value expected to arise from organic growth and an opportunity to expand into a well-established market for the Company.
Liquidity and Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements are available to be issued.
| 10 |
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Condensed Consolidated Financial Statements
The Company has prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the SEC for condensed financial reporting. The condensed consolidated financial statements are unaudited and, in the Company’s opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of the Company’s condensed consolidated balance sheets, condensed consolidated statements of operations and comprehensive income (loss), condensed consolidated statements of shareholders’ equity (deficit) and condensed consolidated statements of cash flows for the periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Significant Accounting Policies
For a detailed discussion about the Company’s significant accounting policies, refer to Note 2 — “Summary of Significant Accounting Policies,” in the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. During the nine months ended September 30, 2022, there were no material changes made to the Company’s significant accounting policies.
Use of Estimates
In preparing condensed consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of assets and liabilities at the date of the condensed consolidated financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates. Significant estimates include: estimated revenues earned under construction design-build contracts; estimated useful lives and potential impairment of long-lived assets, intangibles and goodwill; inventory write offs; allowance for deferred tax assets; and allowance for bad debt.
Reclassification
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
Balance Sheet Classifications
The Company includes in current assets and liabilities the following amounts that are in connection with construction contracts that may extend beyond one year: contract assets and contract liabilities (including retainage invoiced to customers contingent upon anything other than the passage of time), capitalized costs to fulfill contracts, retainage payable to sub-contractors and accrued losses on uncompleted contracts. A one-year time period is used to classify all other current assets and liabilities when not otherwise prescribed by the applicable accounting principles.
| 11 |
Contract Assets and Liabilities
The timing of when the Company bills customers on long-term construction contracts is generally dependent upon agreed-upon contractual terms, which may include milestone billings based on the completion of certain phases of the work, or when services are provided. When as a result of contingencies, billings cannot occur until after the related revenue has been recognized, the result is unbilled revenue, which is included in contract assets. Additionally, the Company may receive advances or deposits from customers before revenue is recognized, the result is deferred revenue, which is included in contract liabilities.
Retainages subject to conditions other than the passage of time are included in contract assets and contract liabilities.
Contract assets represent revenues recognized in excess of amounts paid or payable (contract receivables) to the Company on uncompleted contracts. Contract liabilities represent the Company’s obligation to perform on uncompleted contracts with customers for which the Company has received payment or for which contract receivables are outstanding.
The following table provides information about contract assets and contract liabilities from contracts with customers as of September 30, 2022:
| Contract assets | ||||
| Revenue recognized in excess of amounts paid or payable (contract receivables) to the Company on uncompleted contracts (contract asset), excluding retainage | $ | |||
| Retainage included in contract assets due to being conditional on something other than solely passage of time | ||||
| Total contract assets | $ | |||
| Contract liabilities | ||||
| Payments received or receivable (contract receivables) in excess of revenue recognized on uncompleted contracts (contract liability), excluding retainage | $ | |||
| Retainage included in contract liabilities due to being conditional on something other than solely passage of time | ( | ) | ||
| Total contract liabilities | $ |
NOTE 3 – RELATED PARTY TRANSACTIONS
Cloud
9 Support, LLC (“Cloud 9”) is an entity owned by James Lowe, a director of the Company. Cloud 9 purchases materials from
the Company for use with its customers. Total sales to Cloud 9 from the Company were $
| 12 |
NOTE 4 – PREPAYMENTS AND OTHER ASSETS
Prepayments and other assets are comprised of prepayments paid to vendors to initiate orders and prepaid services and fees. The prepaid balances are summarized as follows:
| September 30, 2022 | December 31, 2021 | |||||||
| Vendor prepayments | $ | $ | ||||||
| Prepaid services and fees | ||||||||
| Other assets | ||||||||
| Prepayments and other assets | $ | $ | ||||||
NOTE 5 – INVESTMENTS
The components of investments are summarized as follows:
| Edyza | XS Financial | |||||||
| Balances at December 31, 2021 | $ | $ | ||||||
| Impairment | ( | ) | ||||||
| PIK interest | ||||||||
| Balances at September 30, 2022 | $ | $ | ||||||
Edyza
The Company has a strategic investment in Edyza, Inc. (“Edyza”), a hardware and software technology company that enables dense sensor networks in agriculture, healthcare, and other environments that require precise micro-climate monitoring. The Company measures this investment at cost, less any impairment changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.
During
the three months ended September 30, 2022, the Company has fully impaired this investment. The Company notes that the intent and
ability to retain its investment for a period of time sufficient to allow for any anticipated recovery has passed, causing an
“other than temporary loss.” The Company will continue to monitor any future changes to this impairment and seek to
recover any remaining value of its
XS Financial
On
October 30, 2021, the Company’s wholly-owned subsidiary UGFS, LLC, a Colorado limited liability company (“UGFS”), participated
in a convertible note offering of Xtraction Services, Inc., a/k/a XS Financial Inc. (CSE: XSF) (OTCQB: XSHLF) (“XSF”), a
specialty finance company providing CAPEX financing solutions, including equipment leasing, to Controlled Environment Agriculture (CEA)
companies in the United States. UGFS invested $
| 13 |
NOTE 6 – GOODWILL & INTANGIBLE ASSETS
Goodwill
The
Company has recorded goodwill in conjunction with the acquisitions it has completed. The goodwill balances as of September 30, 2022 and
December 31, 2021 were $
Intangible Assets Other Than Goodwill
Intangible assets as of September 30, 2022 and December 31, 2021 consisted of the following:
| September 30, 2022 | ||||||||||||
| Finite-lived intangible assets: | Cost | Accumulated Amortization | Net Book Value | |||||||||
| Customer relationships | $ | $ | $ | |||||||||
| Trademarks and trade names | ||||||||||||
| Backlog and Other | ||||||||||||
| Total finite-lived intangible assets: | ||||||||||||
| Indefinite-lived intangible assets: | ||||||||||||
| Patents | ||||||||||||
| Trade name | ||||||||||||
| Total indefinite-lived intangible assets: | ||||||||||||
| Total Intangible assets, net | $ | $ | $ | |||||||||
| December 31, 2021 | ||||||||||||
| Cost | Accumulated Amortization | Net Book Value | ||||||||||
| Customer relationships | $ | $ | $ | |||||||||
| Trademarks and trade names | ||||||||||||
| Backlog and Other | ||||||||||||
| $ | $ | $ | ||||||||||
The estimated future amortization expense for intangible assets subject to amortization as of September 30, 2022, is summarized below:
| Estimated Future | ||||
| Amortization Expense | ||||
| Remainder of 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total | $ | |||
Amortization
expense for intangible assets for the nine months ended September 30, 2022 and 2021 was $
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NOTE 7 – ACCRUED EXPENSES
Accrued expenses are summarized as follows:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accrued operating expenses | $ | $ | ||||||
| Business development accrual | ||||||||
| Accrued wages and related expenses | ||||||||
| Accrued 401(k) | ||||||||
| Accrued sales tax payable | ||||||||
| $ | $ | |||||||
NOTE 8 – RISKS AND UNCERTAINTIES
Concentration Risk
The table below shows customers who account for 10% or more of the Company’s total revenues and 10% or more of the Company’s accounts receivable for the periods presented:
Customers exceeding 10% of revenue:
Three Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| Company Customer Number | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| C000001462 | * | % | % | % | ||||||||||||
| C000001140 | * | * | % | * | ||||||||||||
| C000001696 | % | * | * | * | ||||||||||||
Customers exceeding 10% of accounts receivable:
| September 30, | December 31, | |||||||
| Company Customer Number | 2022 | 2021 | ||||||
| C000001462 | * | % | ||||||
| C000001140 | % | % | ||||||
| C000002187 | % | * | ||||||
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The table below shows vendors who account for 10% or more of the Company’s total purchases and 10% or more of the Company’s accounts payable for the periods presented:
Vendors exceeding 10% of purchases:
| Three Months Ended September 30, | Three Months Ended September 30, | Nine September 30, | Nine Months Ended September 30, | |||||||||||||
| Company Vendor Number | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| V000001029 | * | % | % | * | ||||||||||||
| V000000453 | * | % | * | % | ||||||||||||
| V000001326 | % | % | * | % | ||||||||||||
| V000001372 | * | % | * | % | ||||||||||||
Vendors exceeding 10% of accounts payable:
| September 30, | December 31, | |||||||
| Company Vendor Number | 2022 | 2021 | ||||||
| V000000453 | * | % | ||||||
| V000001372 | * | % | ||||||
| V000001326 | * | % | ||||||
| V000001740 | % | * | ||||||
| V000001818 | % | * | ||||||
*Amounts less than 10%
Foreign Exchange Risk
Although the Company’s revenues and expenses are expected to be predominantly denominated in United States dollars, the Company may be exposed to currency exchange fluctuations. Recent events in the global financial markets have been coupled with increased volatility in the currency markets. Fluctuations in the exchange rate between the U.S. dollar, the Canadian dollar, the Euro, and the currency of other regions in which the Company may operate may have a material adverse effect on the Company’s business, financial condition and operating results. The Company may, in the future, establish a program to hedge a portion of the Company’s foreign currency exposure with the objective of minimizing the impact of adverse foreign currency exchange movements. However, even if the Company develops a hedging program, there can be no assurance that it will effectively mitigate currency risks.
Stock-based compensation expense for the nine months ended September 30, 2022, and 2021 was $ and $, respectively, based on the vesting schedule of the stock grants and options. Stock-based compensation expense for the three months ended September 30, 2022 and 2021 was $ and $, respectively, based on the vesting schedule of the stock grants and options. No cash flow effects are anticipated for stock grants.
Number of shares | ||||
| Grants unissued as of December 31, 2021 | ||||
| Issued | ||||
| Forfeiture/Cancelled | ( | ) | ||
| Grants Vested | ( | ) | ||
| Grants unissued as of September 30, 2022 | ||||
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As of September 30, 2022, the Company has $ million in unrecognized stock-based compensation expense related to these stock grants.
| Number of Shares | Weighted Average Remaining Life (Years) | Weighted Average Exercise Price | ||||||||||
| Stock options outstanding as of December 31, 2021 | $ | |||||||||||
| Issued | $ | |||||||||||
| Forfeiture/Expired | ( | ) | $ | |||||||||
| Exercised | ( | ) | - | $ | ||||||||
| Stock options outstanding as of September 30, 2022 | $ | |||||||||||
| Stock options exercisable as of September 30, 2022 | $ | |||||||||||
The fair value of the options is calculated using the Black-Scholes pricing model based on the market value of the underlying common stock at the valuation measurement date of $, the remaining contractual term of the options of years, risk-free interest rate of % and expected volatility of the price of the underlying common stock of %.
As of September 30, 2022, the Company has $ million in unrecognized stock-based compensation expense related to these stock options. The aggregate intrinsic value of the options outstanding and exercisable at September 30, 2022 is $.
NOTE 10 – SHAREHOLDERS’ EQUITY
On
May 24, 2021, the Board of Directors authorized a stock repurchase program to purchase up to $
During the nine months ended September 30, 2022, the Company repurchased
shares of common stock at an average price per share of $, for a total price of $
In
February 2021, the Company repurchased shares
of common stock with an average price per share of
$,
for a total of $
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NOTE 11 – WARRANTS
The following table shows warrant activity for the nine months ended September 30, 2022.
Number of shares | Weighted Average Exercise Price | |||||||
| Warrants outstanding as of December 31, 2021 | $ | |||||||
| Exercised | ( | ) | $ | |||||
| Terminated – cashless exercise | ( | ) | $ | |||||
| Warrants outstanding as of September 30, 2022 | $ | |||||||
| Warrants exercisable as of September 30, 2022 | $ | |||||||
The
weighted-average life of the warrants is
NOTE 12 – BUSINESS DEVELOPMENT
During 2021, the Company purchased lights from one of its international vendors to fulfill an order for a major customer. Subsequent to the sale, delivery and installation of the lights, the customer noted the lights were not performing as the manufacturer had stipulated. The Company performed tests of the lights and confirmed the performance metrics did not meet the manufacturer’s specifications. The Company worked with the customer to determine a lighting solution of replacement lights, sourced from the vendor, that would meet their needs. The customer has been a key customer to the Company and the Company expects to continue to do significant business with the customer in the future. In order to immediately satisfy the customer in this matter, during the third quarter of 2022, the Company agreed to supply the replacement lighting solution to the customer at the Company’s expense while the Company continues to work with the vendor to resolve the original defective lighting issue, including, claims for reimbursement of the expense.
During
the three months ended and at September 30, 2022, the Company delivered $
NOTE 13 – INCOME TAXES
The Company has experienced losses for both book and tax purposes since inception. The deferred income tax benefit for the three and nine month periods ended September 30, 2022 relates to the reduction in the deferred tax liability associated with the amortization of the intangible assets from the acquisitions of the Emerald and 2WR Entities.
NOTE 14 – SUBSEQUENT EVENTS
The Company has evaluated events and transaction occurring subsequent to September 30, 2022 up to the date of this filing of these condensed consolidated financial statements. These statements contain all necessary adjustments and disclosures resulting from that evaluation.
On
October 10, 2022, the Company signed a binding term sheet to acquire substantially all of the operating assets of Dawson Van Orden,
Inc. (“DVO”), an engineering firm with significant experience in indoor CEA, for a total purchase consideration of up to
$
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein. See also “Forward Looking Statements” on page 3 of this Report.
Overview and History
urban-gro, Inc. (“we,” “us,” “our,” the “Company,” or “urban-gro”) is an integrated professional services and design-build firm. We offer value-added architectural, engineering, and construction management solutions to the Controlled Environment Agriculture (“CEA”), industrial, healthcare, and other commercial sectors. Innovation, collaboration, and a commitment to sustainability drive our team to provide exceptional customer experiences.
On October 31, 2022, we acquired substantially all of the operating assets of Dawson Van Order, Inc, an engineering firm. On April 29, 2022, we acquired Emerald Construction Management, a general contracting and construction management firm. On July 30, 2021, we acquired three architecture design firms (2WR Colorado, Inc, 2WR Georgia, Inc. and MJ12 Design Studios, Inc., collectively the “2WR Entities”) from their shareholders. The 2WR Entities were under common ownership and management. We design and build high performance facilities in several sectors. Within the CEA sector, we design these facilities and while building them, we then integrate complex environmental equipment systems into them. Through this work, we create high-performance indoor cultivation facilities for our clients to grow specialty crops, including leafy greens, vegetables, herbs, and plant-based medicines. Our custom-tailored approach to design, procurement, and equipment integration provides a single point of accountability across all aspects of indoor growing operations. We also help our clients achieve operational efficiency and economic advantages through a full spectrum of professional services and programs focused on facility optimization and environmental health which establish facilities that allow clients to manage, operate and perform at the highest level throughout their entire cultivation lifecycle once they are up and running.
We aim to work with our clients in all sectors from inception of their project in a way that provides value throughout the life of their facility. We are a trusted partner and advisor to our clients and offer a complete set of design, engineering, construction management, and managed services. Within the CEA sector, this is complemented by a vetted suite of select cultivation equipment systems. We provide these services in a turnkey fashion, operating as a single point of responsibility for our clients, or they can pick and choose from the variety of services we offer. Outlined below is an example of a complete project that demonstrate how we provide value to our clients
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Our indoor commercial cultivation solution offers an integrated suite of services and equipment systems that generally fall within the following categories:
| ● | Service Solutions: |
| ● | Design, Engineering, and Construction Design-Build Services – A comprehensive collection of services including: |
| i. | Pre-Construction Services | |
| ii. | Cultivation Space Planning (“CSP”) | |
| iii. | Architectural Design | |
| iv. | Engineering | |
| v. | Integrated Cultivation Design (“ICD”) | |
| vi. | Construction Management (“CM”) |
| ● | An ongoing service offering including: |
| i. | Facility and Equipment Commissioning Services | |
| ii. | Gro-Care Crop and Asset Protection Services including Training Services, Equipment Maintenance Services, Crop Protection Program, and an Interactive Online Operating Support System (“OSS”) for Gro-Care |
| ● | Integrated Equipment Solutions: |
| i. | Design, Source, and Integration of Complex Environmental Equipment Systems Including Purpose-Built Heating, Ventilation, and Air Conditioning (“HVAC”) solutions, Environmental Controls, Fertigation, and Irrigation Distribution. | |
| ii. | Value-Added Reselling (“VAR”) of Cultivation Equipment Systems | |
| iii. | Strategic Vendor Relationships with Premier Manufacturers |
Historically, the majority of our clients are commercial CEA cultivators. However, through our acquisitions we have seen our client base across the industrial, healthcare, and other commercial sectors grow as well. We believe one of the key points of our differentiation that clients value is the depth of experience of our employees and our Company. We currently employ approximately 140 individuals, inclusive of the DVO acquisition. Approximately two-thirds of our employees are considered experts in their areas of focus, and our team includes Designers (Architects, Interior Designers, Cultivation Space Planners), Professional Engineers (Mechanical, Electrical, Plumbing), Engineers (Controls, and Agricultural), Construction Managers (superintendents, supervisors, project managers) and individuals with Masters Degrees in Plant Science, Horticulture, and Business Administration. As a company, we have worked on 1000s of projects and well over 500 projects at indoor CEA facilities and believe that the experience of our team and Company provides clients with the confidence that will proactively keep them from making common costly mistakes during the build out process that impacts operational stages. Our expertise translates into clients saving time, money, and resources through expertise that they can leverage without having to add headcount to their own operations. We provide this experience in addition to offering a platform of the highest quality equipment systems that can be integrated holistically into our clients’ facilities.
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Results of Operations
Comparison of Results of Operations for the three months ended September 30, 2022 and 2021
During the three months ended September 30, 2022, we generated revenues of $12.4 million compared to revenues of $18.3 million during the three months ended September 30, 2021, a decrease of $5.9 million, or 32%. This decrease in revenues is a result of the following changes in individual revenue components:
| ● | Equipment systems revenue decreased $12.6 million due to a reduction in capital equipment spending by customers; | |
| ● | Services revenue increased $1.4 million, primarily from the acquisition of the 2WR Entities; | |
| ● | Construction design-build revenue increased $5.4 million, exclusively from the acquisition of Emerald; and | |
| ● | Consumable product sales decreased $0.1 million. |
During the three months ended September 30, 2022, cost of revenues was $9.8 million compared to $14.0 million during the three months ended September 30, 2021, a decrease of $4.2 million, or 30%. This decrease is directly attributable to the overall decrease in revenues indicated above.
Gross profit was $2.6 million (21% of revenues) during the three months ended September 30, 2022, compared to $4.2 million (23% of revenue) during the three months ended September 30, 2021. Gross profit as a percentage of revenues decreased primarily due to an increase in lower margin Construction design-build revenue offset by an increase in higher margin services revenue. Margins on equipment systems revenues did not materially impact the change in the overall gross profit percentages.
Operating expenses increased by $5.3 million, or 126%, to $9.5 million for the three months ended September 30, 2022 compared to $4.2 million for the three months ended September 30, 2021. This was due to a one-time $3.3 million increase in business development costs as well as a $2.2 million increase in general and administrative operating expenses in part due to an increase in salary, marketing, and travel expenses attributable to the acquisitions of the 2WR Entities and Emerald, a $0.4 million decrease in stock-based compensation expense, primarily due to the elimination of unvested stock grants for employees no longer employed by the Company, and a $0.2 million increase in intangible asset amortization due solely to the acquisitions of the 2WR Entities and Emerald.
Non-operating expense was $1.8 million for the three months ended September 30, 2022, compared to non-operating expenses of $0.0 million for the three months ended September 30, 2021, an increase of $1.8 million. This was primarily due to a $1.7 million loss from the impairment of the Edyza investment.
Deferred income tax benefit increased by $0.1 million due to the acquisitions of the 2WR Entities and Emerald.
As a result of the above, we incurred a net loss of $8.7 million for the three months ended September 30, 2022, or a net loss per share of ($0.81), compared to net income of $0.1 million for the three months ended September 30, 2021, or a fully diluted net income per share of $0.0.
Comparison of Results of Operations for the nine months ended September 30, 2022 and 2021
During the nine months ended September 30, 2022, we generated revenues of $49.7 million compared to revenues of $43.2 million during the nine months ended September 30, 2021, an increase of $6.5 million, or 15%. This increase in revenues is a result of the following changes in individual revenue components:
| ● | Equipment systems revenue decreased $9.0 million primarily due to a decrease in capital equipment spending by our customers; | |
| ● | Services revenue increased $7.5 million due primarily to the acquisition of the 2WR Entities; | |
| ● | Construction design-build revenue increased $8.3 million exclusively due to the acquisition of Emerald; and | |
| ● | Consumable product sales decreased $0.3 million. |
| 21 |
During the nine months ended September 30, 2022, cost of revenues was $38.7 million compared to $33.3 million during the nine months ended September 30, 2021, an increase of $5.4 million, or 16%. This increase is directly attributable to the increase in revenues indicated above.
Gross profit was $11.0 million (22% of revenues) during the nine months ended September 30, 2022 compared to $9.8 million (23% of revenue) during the nine months ended September 30, 2021. Gross profit as a percentage of revenues decreased primarily due to an increase in lower margin construction design-build revenues offset by an increase in higher margin services revenues. Margins on equipment systems revenues did not materially impact the change in the overall gross profit percentages.
Operating expenses increased by $11.3 million, or 121%, to $20.7 million for the nine months ended September 30, 2022 compared to $9.4 million for the nine months ended September 30, 2021. This was due to a one-time $3.3 million increase in business development costs as well as a $6.5 million increase in general and administrative expenses, mainly due to an increase in salary, marketing, and travel expenses, in part related to the acquisitions of the 2WR Entities and Emerald, a $0.8 million increase in stock-based compensation expense, primarily due to an increase in the number of total employees included under the plan, and a $0.7 million increase in intangible asset amortization from the acquisitions of Emerald and the 2WR Entities.
Non-operating expense was $1.7 million for the nine months ended September 30, 2022, compared to non-operating expense of $0.7 million for the nine months ended September 30, 2021, a change of $1.0 million. Interest expense decreased by $0.3 million in the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, due to the elimination of debt. Interest income increased by $0.2 million due to the interest earned on the XS Financial investment. The Company recorded a $1.7 million loss from the write-down of the Edyza investment in the nine months ended September 30, 2022. For the nine months ended September 30, 2021, the Company incurred a $1.0 million gain from the forgiveness of the PPP Loan, a $0.8 million loss on the extinguishment of debt, and $0.6 million in interest expense related to the conversion of debt to equity at a discount to the offering price.
Deferred income tax benefit increased by $0.3 million due to the acquisitions of the 2WR Entities and Emerald.
As a result of the above, we incurred a net loss of $11.1 million for the nine months ended September 30, 2022, or a net loss per share of ($1.05), compared to a net loss of $0.3 million for the nine months ended September 30, 2021, or a net loss per share of ($0.03).
NON-GAAP FINANCIAL MEASURES
The Company uses the supplemental financial measure of Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) as a measure of our operating performance. Adjusted EBITDA is not calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and it is not a substitute for other measures prescribed by GAAP such as net income (loss), income (loss) from operations, and cash flows from operating activities. We define Adjusted EBITDA as net income (loss) attributable to urban-gro, Inc., determined in accordance with GAAP, excluding the effects of certain operating and non-operating expenses including, but not limited to, interest expense/income, income taxes/benefit, depreciation of tangible assets, amortization of intangible assets, impairment of investments, unrealized exchange losses, debt forgiveness and extinguishment, stock-based compensation expense, and non-recurring legal and acquisition costs, that we do not believe reflect our core operating performance.
Our board of directors and management team focus on Adjusted EBITDA as a key performance and compensation measure. We believe that Adjusted EBITDA assists us in comparing our operating performance over various reporting periods because it removes from our operating results the impact of items that our management believes do not reflect our core operating performance.
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The following table reconciles net income (loss) attributable to the Company to Adjusted EBITDA for the periods presented:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net Income (Loss) | $ | (8,660,783 | ) | $ | 59,656 | $ | (11,096,304 | ) | $ | (271,482 | ) | |||||
| Interest expense | 7,088 | 4,331 | 22,270 | 326,397 | ||||||||||||
| Interest expense – beneficial conversion feature | – | – | – | 636,075 | ||||||||||||
| Interest income | (94,200 | ) | (9,172 | ) | (221,329 | ) | (23,562 | ) | ||||||||
| Income tax benefit | (73,654 | ) | – | (258,166 | ) | - | ||||||||||
| Depreciation and amortization | 526,750 | 154,306 | 1,116,585 | 263,932 | ||||||||||||
EBITDA | (8,294,799) | 209,121 | (10,436,944) | 931,360 | ||||||||||||
| Impairment loss | 1,710,358 | – | 1,710,358 | – | ||||||||||||
| Loss on extinguishment of debt | – | – | – | 790,723 | ||||||||||||
| Stock-based compensation | 96,767 | 506,034 | 1,860,767 | 1,096,441 | ||||||||||||
| Transaction costs | 39,182 | 141,052 | 276,246 | 198,609 | ||||||||||||
| One-time employee expenses | 670,095 | 125,000 | 787,691 | 125,000 | ||||||||||||
| Business development | 3,299,864 | – | 3,299,864 | – | ||||||||||||
| Non-recurring legal fees | 205,486 | – | 258,111 | - | ||||||||||||
| PPP loan forgiveness | – | – | – | (1,032,316 | ) | |||||||||||
| Adjusted EBITDA | $ | (2,273,047 | ) | $ | 981,207 | $ | (2,243,907 | ) | $ | 2,109,817 | ||||||
BACKLOG
Backlog is a financial measure that generally reflects the dollar value of revenue that the Company expects to realize in the future. Although backlog is not a term recognized under generally accepted accounting principles in the United States (“GAAP”), it is a common measure used by companies operating in our industries. We report backlog for the following revenue categories: (i) Equipment Systems; (ii) Construction Design-Build; and (iii) Services. We define backlog for Equipment Systems and Services as signed contracts, with Equipment Systems contracts generally requiring a receipt of a customer deposit. Construction Design-Build backlog is comprised of construction projects once the contract is awarded and to the extent we believe funding is probable. Our Construction Design/Build backlog consists of uncompleted work on contracts in progress and contracts for which we have executed a contract but have not commenced the work. For uncompleted work on contracts in progress, we include (i) executed change orders, (ii) pending change orders for which we expect to receive confirmation in the ordinary course of business, and (iii) claims that we have made against our customers for which we have determined we have a legal basis under existing contractual arrangements and as to which we consider collection to be probable.
Our backlog as of September 30, 2022, June 30, 2022, March 31, 2022, and December 31, 2021 for each of our revenue categories is reflected in the following table (in millions of $):
| Revenue Category | September 30, 2022 | June 30, 2022 | March 31, 2022 | December 31, 2021 | ||||||||||||
| Equipment Systems | $ | 5 | $ | 7 | $ | 16 | $ | 25 | ||||||||
| Construction Design-Build (1) | 56 | 10 | NA | NA | ||||||||||||
| Services | 6 | 5 | 6 | $ | 5 | |||||||||||
| Total Backlog | $ | 67 | $ | 22 | $ | 22 | $ | 30 | ||||||||
(1) - Construction Design-Build revenue and backlog relate to the operations of Emerald which was acquired by the Company on April 29, 2022.
Historically, the majority of our Equipment Systems and Services backlog has been retired and converted into revenue within two quarters. At September 30, 2022, we expected approximately 70% of our Construction Design-Build backlog to be completed in the next 12 months. At September 30, 2022, one customer accounted for 63% of total backlog.
| 23 |
Certain Construction Design-Build contracts contain options that are exercisable at the discretion of our customer to award additional work to us, without requiring us to go through an additional competitive bidding process. In addition, some customer contracts also contain task orders that are signed under master contracts pursuant to which we perform work only when the customer awards specific task orders to us.
Contracts in our Construction Design-Build backlog may be canceled or modified at the election of the customer. Many Construction Design-Build projects are added to our contract backlog and completed within the same fiscal year and therefore may not be reflected in our beginning or quarter-end Construction Design-Build backlog amounts.
Liquidity and Capital Resources
As of September 30, 2022, we had cash of $18.6 million, which represented a decrease of $16.0 million from December 31, 2021 due to the following changes during the nine months ended September 30, 2022:
| ● | Net cash used in operating activities was $9.0 million. This use of cash is the net effect of the net loss of $11.2 million, offset by non-cash expenses of $4.4 million, and a reduction in net operating assets and liabilities of $2.3 million. The $2.3 million reduction in net operating assets and liabilities is due to the net effects of an $11.4 million decrease in customer deposits, a $0.1 million decrease in accounts payable and accrued expenses, a $6.9 million decrease in prepayments and other assets, and a $2.2 million decrease in accounts receivable. The decrease in accounts receivable includes $1.8 million recovered from the bank wire fraud lawsuit. | |
| ● | Net cash used in investing activities was $3.0 million, primarily from the acquisition of Emerald. We have no material commitments for capital expenditures as of September 30, 2022. | |
| ● | Net cash used in financing activities was $4.0 million, primarily due to the repurchase of shares of the Company’s common stock. |
Inflation
Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the nine months ended September 30, 2022.
Critical Accounting Policies and Estimates
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion about the Company’s significant accounting policies, refer to Note 2 — “Summary of Significant Accounting Policies,” in the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. During the nine months ended September 30, 2022, there were no material changes made to the Company’s significant accounting policies.
| 24 |
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company and are not required to provide the information under this Item pursuant to Regulation S-K.
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Disclosure Controls and Procedures – Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report.
These controls are designed to ensure that information required to be disclosed in the reports we file or submit pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO to allow timely decisions regarding required disclosure.
Based on this evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of September 30, 2022, at reasonable assurance levels.
We believe that our financial statements presented in this Form 10-Q fairly present, in all material respects, our financial position, results of operations, and cash flows for all periods presented herein.
Inherent Limitations – Our management team, including our CEO and CFO, does not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. In particular, many of our current processes rely upon manual reviews and processes to ensure that neither human error nor system weakness has resulted in erroneous reporting of financial data.
Changes in Internal Control over Financial Reporting – There were no changes in our internal control over financial reporting during the nine months ended September 30, 2022, which were identified in conjunction with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we become involved in or are threatened with legal disputes. While most of these disputes are not likely to have a material effect on our business, financial condition, or operations, the following matters are deemed by the Company to be material either due to the costs of litigation or the potential negative impacts to the Company should these matters not be resolved in our favor:
| ● | Great Green Theory – Emerald filed a lien and brought a suit in the Superior Court of Berkshire, Massachusetts to foreclose on the lien against Great Green Theory Land, LLC and Great Green Theory Cultivation, LLC who are the owners of the land and a construction project in Lee, Massachusetts. Emerald is claiming breach of contract and quantum merit against Great Green Theory for failure to pay approximately $1.3 million in payment applications, of which approximately half of that amount is due and owed to subcontractors on the project. Great Green Theory has filed counterclaims against Emerald claiming liquidated damages of approximately $1.0 million for alleged unjustifiable delays on the project and alleging construction defects in the project. Two subcontractors on the project have brought suit against Emerald for non-payment to them of which Emerald has not received payment from Great Green Theory. |
| o | Account Receivable of $0.5 million acquired in Emerald transaction – The selling Emerald shareholders have agreed to indemnify and defend the Company for any litigation or judgement stemming from this lawsuit. The Company has recorded the full $0.5 million as a receivable on the opening balance sheet as of the date of the acquisition. | |
| o | Legal Costs to collect the Account Receivable of $0.5 million – The Company has agreed to split the legal costs of this claim until the funds are recovered or until the claim of liquidated damages is relieved. Total estimated legal costs associated with this claim are approximately $0.3 million. The Company recorded 50% of this amount as a liability on the opening balance sheet as of the date of the acquisition. |
| ● | Pullar – urban-gro’s former Chief Financial Officer, George Pullar filed a suit in the District Court of Boulder County, Colorado against urban-gro and Bradley Nattrass, in his capacity as urban-gro’s CEO, claiming breach of fiduciary duty. urban-gro has since been dismissed without prejudice from the suit. The remaining claim stems from a settlement agreement with Mr. Pullar and allegations that Mr. Natrrass failed to share enough non-public material information about urban-gro’s plans for fundraising that would have impacted Mr. Pullar’s decision to enter into the settlement agreement. urban-gro’s director and officer liability insurance carrier has indicated coverage is available to Mr. Nattrass for this suit. We believe we have substantial defenses to the claim asserted in this lawsuit and intend to vigorously defend this action. | |
| ● | Crest Ventures, LLC – The Company has been sued in a breach of contract case in the District Court for Arapahoe County, Colorado. The allegations in the action are based on a claim that Crest Ventures, LLC is entitled to commission compensation on the February 2021 uplisting of our common stock to the Nasdaq Capital Market. We believe we have substantial defenses to the claim asserted in this lawsuit and intend to vigorously defend this action. | |
| ● | Sunflower Bank – The Company has filed a lawsuit against Sunflower Bank related to fraudulent wire transfers of approximately $5.1 million that were made from our accounts at Sunflower Bank in October 2021. As of the date of this Report, $1.8 million of these funds have been returned to us and we subsequently received $0.3 million from our insurance company. We are suing Sunflower Bank for the remaining $3.3 million, inclusive of the insurance proceeds, under a theory of breach of contract, negligence, and breach of UCC standards, as we believe that Sunflower Bank failed to follow industry standard procedures designed to prevent such a theft and is therefore liable for the unrecovered balance. Sunflower Bank has filed counterclaims against us for breach of contract and negligence. We expect Sunflower Bank, Sunflower Bank’s insurers, and/or our insurer to reimburse us for the remaining balance. |
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Stock Repurchase Program
The following table summarizes purchases by us of our common stock during the three months ended September 30, 2022:
| (a) | (b) | (c) | (d) | |||||||||||||
| Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number (or approximate dollar value ) of shares that may be purchased under the plan(s) | ||||||||||||
| July 1 – July 31, 2022 | - | - | 924,003 | $ | 18,333 | |||||||||||
| August 1 – August 31, 2022 | - | - | 924,003 | $ | 18,333 | |||||||||||
| New Program Authorization (1) | $ | 2,000,000 | ||||||||||||||
| September 1 – September 30, 2022 | 63,123 | 2.90 | 987,126 | $ | 1,835,063 | |||||||||||
| Total | 63,123 | 2.90 | 987,126 | $ | 1,835,063 | |||||||||||
| (1) | The Company’s Board of Directors has authorized the Company to repurchase common stock through a variety of methods, including open market repurchases, purchases by contract (including, without limitation, 10b5-1 and 10b-18 plans), and/or privately negotiated transactions. The amount, timing, or prices of repurchases, may vary based on market conditions and other factors. The Program does not have an expiration date and can be modified or terminated by the Board of Directors at any time. On May 24, 2021, the Board of Directors authorized a stock repurchase program to purchase up to $5.0 million of outstanding shares of the Company’s common stock. On January 18, 2022, the Board authorized a $2.0 million increase to the stock repurchase program, to a total of $7.0 million. On February 2, 2022, the Board authorized an additional $1.5 million increase to the stock repurchase, to a total of $8.5 million. On September 12, 2022, the Board authorized an additional $2.0 million increase to the stock repurchase program, to a total of $10.5 million. Since inception of the stock repurchase programs, the Company has repurchased 1.0 million shares at an average price per share of $8.78 for a total of $8.7 million. In February 2021, the Company repurchased 350,000 shares of common stock with an average price per share of $8.50, for a total of $3.0 million, outside of any stock repurchase or publicly announced program. |
Unregistered Shares Issued in Connection with the Emerald and 2WR Acquisitions
On April 29, 2022, the Company issued 283,515 shares of the Company’s common stock valued at $2.5 million as part of the Initial Purchase Price of the Emerald Acquisition as more fully described in Note 1 to the Unaudited Condensed Consolidated Financial Statements above.
On June 28, 2021, the Company issued 202,066 shares of the Company’s common stock valued at $2.0 million as part of the initial consideration paid pursuant to the 2WR Purchase Agreement as more fully described in Note 1 to the Unaudited Condensed Consolidated Financial Statements above.
The foregoing issuances of restricted shares of common stock were issued under Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. The Company believes the issuance of the foregoing restricted shares was exempt from registration as a privately negotiated, isolated, non-recurring transaction not involving a public solicitation. No commissions were paid regarding the share issuances, and the share certificates were issued with a Rule 144 restrictive legend.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 10 2022.
| URBAN-GRO, INC. | ||
| By: | /s/ Bradley Nattrass | |
| Bradley Nattrass, | ||
| Principal Executive Officer, a duly authorized officer | ||
| By: | /s/ Richard Akright | |
| Richard A. Akright, Principal Financial Officer and Principal Accounting Officer | ||
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