ugro-20230331

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________.

Commission File Number: 001-39933

URBAN-GRO, INC.

(Exact name of registrant as specified in its charter)


Delaware						46-5158469
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

1751 Panorama Point, Unit G

Lafayette, CO

80026

(720) 390-3880

(Address of principal executive offices)

(Zip Code)

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

UGRO

NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	x	Smaller reporting company	x
		Emerging growth company	x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares of the registrant’s only class of common stock outstanding as of April 24, 2023 was 10,938,556 shares.

TABLE OF CONTENTS


Item No.		Page No.
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	5
	Unaudited Condensed Consolidated Balance Sheets	5
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss	6
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity	7
	Unaudited Condensed Consolidated Statements of Cash Flows	8
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	25

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Mine Safety Disclosures	26
Item 5.	Other Information	26
Item 6.	Exhibits	27
	Signatures	28

CAUTIONARY INFORMATION 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,” “intend,” “could,” “should,” “believe,” 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, 2022. 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;

•risks related to delays in the grant of necessary licenses to clients and delays in passage of legislation expected to benefit our clients, which could delay the funding and start of projects

•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;

•risks to our reputation from negative publicity, social media posts or negative interpretations of our ESG efforts;

•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, 2022. 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.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (unaudited)

URBAN-GRO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)


	March 31, 2023		December 31, 2022
ASSETS
Current assets:
Cash	$	7,327,485	$	12,008,003
Accounts receivable, net	22,069,269		15,380,292
Contract receivables	2,817,407		3,004,282
Prepaid expenses and other assets	4,685,529		4,164,960
Total current assets	36,899,690		34,557,537
Non-current assets:
Property and equipment, net	1,366,761		1,307,146
Operating lease right of use assets, net	2,542,644		2,618,825
Investments	2,572,103		2,559,307
Goodwill	15,572,050		15,572,050
Intangible assets, net	5,140,667		5,450,687
Total non-current assets	27,194,225		27,508,015
Total assets	$	64,093,915	$	62,065,552
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	14,865,846	$	9,960,364
Accrued expenses	5,215,255		3,196,961
Contract liabilities	2,413,423		1,294,452
Customer deposits	2,355,609		2,571,161
Contingent consideration	2,537,291		2,799,287
Promissory note	2,908,213		3,832,682
Operating lease liabilities	606,648		600,816
Total current liabilities	30,902,285		24,255,723
Non-current liabilities:
Operating lease liabilities	1,964,804		2,044,782
Deferred tax liability	968,151		1,033,283
Total non-current liabilities	2,932,955		3,078,065

Commitments and contingencies (note 10)

Stockholders’ equity
Preferred stock, $0.10 par value; 10,000,000 shares authorized; 0 shares issued and outstanding	—		—
Common stock, $0.001 par value; 100,000,000 shares authorized; 12,388,389 issued and 10,938,556 outstanding as of March 31, 2023, and 12,220,593 issued and 10,770,760 outstanding as of December 31, 2022	12,388		12,221
Additional paid-in capital	85,554,375		84,882,982
Treasury shares, cost basis: 1,449,833 shares as of March 31, 2023 and as of December 31, 2022	(12,045,542)		(12,045,542)
Accumulated deficit	(43,262,546)		(38,117,897)
Total stockholders’ equity	30,258,675		34,731,764
Total liabilities and stockholders’ equity	$	64,093,915	$	62,065,552

The accompanying unaudited notes are an integral part of these condensed consolidated financial statements

URBAN-GRO, INC..

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (unaudited)


	Three Months Ended March 31,
	2023		2022
Revenues:
Equipment systems	$	2,911,823	$	17,067,344
Services	3,470,653		3,638,507
Construction design-build	10,205,952		—
Other	176,957		347,018
Total revenues and other income	16,765,385		21,052,869
Cost of revenues:
Equipment systems	2,477,505		13,974,779
Services	1,997,423		1,929,248
Construction design-build	9,315,993		—
Other	132,616		246,822
Total cost of revenues	13,923,537		16,150,849
Gross profit	2,841,848		4,902,020

Operating expenses:
General and administrative	7,098,858		4,725,301
Stock-based compensation	479,641		882,000
Intangible asset amortization	310,020		162,500
Total operating expenses	7,888,519		5,769,801
Loss from operations	(5,046,671)		(867,781)

Non-operating income (expense):
Interest expense	(73,216)		(7,658)
Interest income	73,131		79,852
Contingent consideration	(160,232)		—
Other expense	(2,793)		(8,690)
Total non-operating income (expense)	(163,110)		63,504
Loss before income taxes	(5,209,781)		(804,277)

Income tax benefit	65,132		108,060
Net loss	$	(5,144,649)	$	(696,217)

Comprehensive loss	$	(5,144,649)	$	(696,217)

Loss per share - basic and diluted	$	(0.48)	$	(0.07)
Weighted average shares - basic and diluted	10,772,705		10,508,972

The accompanying unaudited notes are an integral part of these condensed consolidated financial statements

URBAN-GRO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Treasury Stock		Total Stockholders’ Equity
	Shares	Amount
Balance, December 31, 2022	12,220,593	$	12,221	$	84,882,982	$	(38,117,897)	$	(12,045,542)	$	34,731,764
Stock-based compensation	—	—		479,641		—		—		479,641
Stock grant program vesting	103,572	103		(103)		—		—		—
Stock issued for contingent consideration	64,224	64		191,855		—		—		191,919
Net loss for period ended March 31, 2023	—	—		—		(5,144,649)		—		(5,144,649)
Balance, March 31, 2023	12,388,389	$	12,388	$	85,554,375	$	(43,262,546)	$	(12,045,542)	$	30,258,675


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Treasury Stock		Total Stockholders’ Equity
	Shares	Amount
Balance, December 31, 2021	11,588,110	$	11,588	$	78,679,220	$	(22,839,988)	$	(7,683,490)	$	48,167,330
Stock-based compensation	—	—		882,000		—		—		882,000
Treasury stock purchases	—	—		—		—		(3,773,177)		(3,773,177)
Stock options exercised	4,555	5		28,792		—		—		28,797
Stock issued in conversion of warrants	34,863	35		(35)		—		—		—
Net loss for period ended March 31, 2022	—	—		—		(696,217)		—		(696,217)
Balance, March 31, 2022	11,627,528	$	11,628	$	79,589,977	$	(23,536,205)	$	(11,456,667)	$	44,608,733

The accompanying unaudited notes are an integral part of these condensed consolidated financial statements

URBAN-GRO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Three Months Ended March 31,
	2023		2022
Cash flows from operating activities:
Net loss	$	(5,144,649)	$	(696,217)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	404,069		218,278
Deferred income tax benefit	(65,132)		(108,060)
Stock-based compensation expense	479,641		882,000
Change in fair value of contingent consideration	160,232		—
Other, net	327,189		(56,921)
Changes in operating assets and liabilities (net of acquired amounts):
Accounts receivable	(6,827,927)		(354,181)
Prepaid expenses and other assets	(334,525)		1,439,679
Accounts payable and accrued expenses	7,118,280		1,092,601
Operating lease liability	(174,592)		(33,913)
Customer deposits	(215,552)		(6,110,537)
Net cash used in operating activities	(4,272,966)		(3,727,271)

Cash flows from investing activities:
Purchases of property and equipment	(133,833)		(32,336)
Net cash used in investing activities	(133,833)		(32,336)

Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering costs	—		28,797
Repurchase of common stock	—		(3,773,177)
Repayment of finance lease ROU liability	(43,410)		(36,000)
Payments to settle contingent consideration	(230,309)		—
Net cash used in financing activities	(273,719)		(3,780,380)

Net change in cash	(4,680,518)		(7,539,987)
Cash at beginning of period	12,008,003		34,592,190
Cash at end of period	$	7,327,485	$	27,052,203

Supplemental cash flow information:
Cash paid for interest	$	6,475	$	7,658
Net cash paid for income taxes	$	23,487	$	55,120

Supplemental disclosure of non-cash investing and financing activities:
Operating lease right of use assets and liabilities extension	$	101,264	$	—

The accompanying unaudited notes are an integral part of these condensed consolidated financial statements

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. Further, we 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 the 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

DVO

Effective October 31, 2022, the Company entered into an agreement with Dawson Van Orden, Inc. ("Seller" or "DVO") and DVO's shareholders (the "DVO Shareholders") to acquire substantially all of the operating assets and liabilities of DVO, a Texas based engineering firm with significant experience in indoor CEA. The purchase price of $6.1 million, after working capital adjustments, was comprised of (i) $1.2 million in cash, (ii) a $3.8 million Seller's promissory note, and (iii) $1.1 million of the Company's common stock. The Seller's promissory note is to be paid out over four quarters beginning in January 2023. The Seller’s promissory note balances as of March 31, 2023, and December 31, 2022, were $2,908,213 and $3,832,682, respectively. The purchase price excludes up to $1.1 million of contingent consideration earnout that may become payable to the Seller dependent on the continued employment of the DVO Shareholders. The contingent consideration earnout is payable in cash or shares of the Company's common stock at the discretion of the Company.

The Company accounted for the acquisition as follows:


Purchase price	$	6,072,366

Allocation of purchase price:
Accounts receivable, net	$	1,134,909
Right of use asset	$	1,197,310
Property and equipment	$	229,058
Goodwill	$	3,444,926
Intangible assets	$	1,276,000
Accrued expenses	$	(12,527)
Right of use liability	$	(1,197,310)

Pro-forma disclosure of the DVO acquisition is not required as the historical results of DVO were not material to the Company's consolidated financial statements. Acquired goodwill from DVO represents the value expected to arise from organic growth and an opportunity to expand into a well-established market for the Company.

Emerald

Effective April 29, 2022, the Company acquired all of the issued and outstanding capital stock of Emerald Construction Management, Inc. (“Emerald”) from its shareholders (the “Emerald Sellers”). The purchase price of $7.7 million, after working capital adjustments, was comprised of (i) $3.4 million in cash, (ii) $2.5 million of the Company’s common stock, and (iii) $1.8 million of estimated contingent consideration earnout payable to the Emerald Sellers over the term of the earnout. The total contingent earnout payable to the Emerald Sellers is $2.0 million. Effective January 1, 2023, the terms of the contingent consideration earnout provision were amended providing for the entire contingent consideration of up to $2.0 million to be earned based solely on the continued employment of the Emerald Sellers for a two year period. This resulted in the Company recording additional contingent consideration expense of $160,232 in the first quarter of 2023. The remaining contingent consideration earnout is payable quarterly in shares of the Company’s common stock with the value of such shares being determined based upon the volume-weighted average price ("VWAP") of the Company’s common stock in the ten trading days prior to the end of the applicable quarter for which the quarterly gross profit is calculated.

The Company accounted for the acquisition as follows:


Purchase Price	$	7,671,557

Allocation of Purchase Price:
Cash	$	622,641
Accounts receivable, net	$	2,666,811
Contract receivables	$	494,456
Prepayments and other assets	$	38,086
Property and equipment	$	403,008
Right of use asset	$	82,408
Goodwill	$	4,135,006
Intangible assets	$	3,659,000
Accrued expenses	$	(2,361,302)
Contract liabilities	$	(1,071,399)
Right of use liability	$	(82,408)
Deferred tax liability	$	(914,750)

The following pro-forma amounts reflect the Company’s results as if the acquisition of Emerald had occurred on January 1, 2022. 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 March 31,
	2023		2022
Revenues:
Equipment systems	$	2,911,823	$	17,067,344
Services	3,470,653		3,638,507
Construction design-build	10,205,952		9,244,863
Other	176,957		347,018
Total revenues and other income	16,765,385		30,297,732

Net loss	$	(5,144,649)	$	(3,511)

Acquired goodwill from Emerald represents the value expected to arise from organic growth and an opportunity for the Company to expand into a well-established market.

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.

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 loss, condensed consolidated statements of stockholders’ equity 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, 2022.

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, 2022. During the three months ended March 31, 2023, 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.

Contract Assets and Liabilities

The timing between when Company collects cash from its construction design-build customers can create a contract asset or contract liability. Please refer to Note 3 - Revenue from Contracts with Customers for further discussion of the Company's contract assets and liabilities.

Recently Issued Accounting Standards

As of March 31, 2023, and through the filing of this report, no Accounting Standards Updates have been issued and not yet adopted that are applicable to the Company and that would have a material effect on the Company’s unaudited condensed consolidated financial statements and related disclosures.

NOTE 3 – REVENUE FROM CONTRACTS WITH CUSTOMERS

The Company recognizes revenue predominantly from the sale of equipment systems, services, construction design-build, and from other various immaterial contracts with customers from its CEA and Commercial sectors.

SEC Form 10-Q filed by urban-gro Inc.