UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
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urban-gro, Inc.
FORM 10-Q
For the Three-Month Period Ended March 31, 2022
INDEX
| 2 |
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) contains 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”). Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. The statements regarding urban-gro, Inc. contained in this Report that are not historical in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “likely,” “expects,” “anticipates,” “estimates,” “believes” or “plans,” or comparable terminology, are forward-looking statements based on current expectations and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on our behalf. We caution readers regarding certain forward-looking statements in this Report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission (the “SEC”).
Important factors known to us that could cause such material differences are identified in this Report, including the factors described in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2021. Except as required by applicable law, we undertake no obligation to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise. 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)
| March 31, 2022 | December 31, 2021 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| 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 | $ | $ | ||||||
| Accrued expenses | ||||||||
| Customer deposits | ||||||||
| Contingent consideration | ||||||||
| Operating lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Operating lease liabilities | ||||||||
| Deferred tax liability | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Preferred stock, $ par value; shares authorized; shares issued and outstanding | - | |||||||
| Common stock, $ par value; shares authorized; issued and outstanding as of March 31, 2022, and issued and outstanding as of December 31, 2021 | ||||||||
| Additional paid in capital | ||||||||
| Treasury shares, cost basis: shares as of March 31, 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 March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | ||||||||
| Equipment systems | $ | $ | ||||||
| Services | ||||||||
| Consumable products | ||||||||
| Total Revenue | ||||||||
| Cost of Revenue | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| General and administrative | ||||||||
| Stock-based compensation | ||||||||
| Total operating expenses | ||||||||
| Income (loss) from operations | ( | ) | ||||||
| Non-operating income (expenses): | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Interest income | - | |||||||
| Interest expense – beneficial conversion of notes payable | - | ( | ) | |||||
| Loss on extinguishment of debt | - | ( | ) | |||||
Other income (expense) | ( | ) | ||||||
| Total non-operating income (expenses) | ( | ) | ||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ||||
| Deferred income tax benefit | - | |||||||
| Net income (loss) | $ | ( | ) | $ | ( | ) | ||
| Comprehensive income (loss) | $ | ( | ) | $ | ( | ) | ||
| Earnings (loss) per share: | ||||||||
| Net loss per share - basic and diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average shares used in computation | ||||||||
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, December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||
| Treasury stock | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||
| Stock options exercised | - | - | ||||||||||||||||||||||
| Stock issued with exercise of warrants | ( | ) | - | |||||||||||||||||||||
| Net income (loss) | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||
| Balance, March 31, 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 $ | ||||||||||||||||||||||||
| Treasury stock | – | - | ( | ) | ( | ) | ||||||||||||||||||
| Stock issued with exercise of warrants | ||||||||||||||||||||||||
| Net income (loss) | – | ( | ) | ( | ) | |||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
| 6 |
urban-gro, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net income (loss) | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net income (loss) from operations: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of deferred financing costs | - | |||||||
| Loss on extinguishment of debt | - | |||||||
| Interest on convertible notes | - | |||||||
| Stock-based compensation expense | ||||||||
| Beneficial conversion of Bridge notes | - | |||||||
| Inventory write-offs | ( | ) | ||||||
| Bad debt expense | ||||||||
| Changes in operating assets and liabilities (net of acquired amounts): | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Prepayments and other assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ||||||||
| Operating leases | ( | ) | - | |||||
| Deferred tax liability | ( | ) | - | |||||
| Customer deposits | ( | ) | ( | ) | ||||
| Net Cash Provided By (Used In) Operating Activities | ( | ) | ||||||
| Cash Flows from Investing Activities | ||||||||
| Purchases of property and equipment | ( | ) | - | |||||
| Net Cash Used In Investing Activities | ( | ) | - | |||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from issuance of Common Stock, net of offering costs | ||||||||
| Repurchase of Common Stock | ( | ) | ( | ) | ||||
| Repayment of notes payable | - | ( | ) | |||||
| 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 | $ | $ | ||||||
| Income taxes | - | - | ||||||
| Operating lease right of use asset | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements
| 7 |
urban-gro, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND ACQUISITIONS, BUSINESS PLAN, AND LIQUIDITY
Organization
urban-gro, Inc. (“our,” the “Company,” or “urban-gro”) is a fully integrated architectural design, engineering, procurement, and construction management (“E.P.C.”) design-build firm specializing in the indoor controlled environment agriculture (“CEA”) industry. To serve our horticulture clients, we engineer and design 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, 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 and engineering design 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
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 “Sellers”), and Sam Andras, an individual (the “Sellers Representative”) entered into a Stock Purchase Agreement (the “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 “Purchased Shares”) from the Sellers. In connection with the acquisition of the Purchased Shares, 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
Purchased Shares had an initial purchase price of up to $
| Purchase Price | $ | |||
| Allocation of Purchase Price: | ||||
| Cash | $ | |||
| Accounts receivable, net | $ | |||
| Prepayments and other assets | $ | |||
| Property and equipment | $ | |||
| Goodwill | $ | |||
| Intangible assets | $ | |||
| Accrued expenses | $ | |||
| Deferred tax liability | $ |
| 8 |
The following pro forma amounts reflect the Company’s results as if the acquisition of the 2WR Entities had occurred on January 1, 2020. 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, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | ||||||||
| 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.
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 three months ended March 31, 2022, there were no material changes made to the Company’s significant accounting policies.
| 9 |
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 design 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.
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 $
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:
| March 31, 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:
| March 31, 2022 | December 31, 2021 | |||||||
| Investment in Edyza | $ | $ | ||||||
| Investment in XSF | ||||||||
| $ | $ | |||||||
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.
| 10 |
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, LLC invested $
NOTE 6 – GOODWILL & INTANGIBLE ASSETS
Goodwill
The
Company recorded goodwill in conjunction with the initial acquisition of Impact Engineering, Inc. (“Impact”) on March 7,
2019 and the 2WR Entities on July 30, 2021. The goodwill balance as of March 31, 2022 and December 31, 2021 is $
Intangible Assets Other Than Goodwill
Intangible assets as of March 31, 2022 and December 31, 2021 consisted of the following:
| March 31, 2022 | ||||||||||||
| Cost | Accumulated Amortization | Net Book Value | ||||||||||
| Finite-lived intangible assets: | ||||||||||||
| Customer relationships | ||||||||||||
| Trademarks and trade names | ||||||||||||
| Backlog and Other | ||||||||||||
| Total finite-lived intangible assets: | ||||||||||||
| Indefinite-lived intangible assets: | ||||||||||||
| Patents | ||||||||||||
| Trade name | ||||||||||||
| 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 March 31, 2022, is summarized below:
| Estimated Future | ||||
| Amortization Expense | ||||
| Remainder of 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total | ||||
Amortization
expense for intangible assets for the three months ended March 31, 2022 and 2021 was $
NOTE 7 – ACCRUED EXPENSES
Accrued expenses are summarized as follows:
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accrued operating expenses | $ | $ | ||||||
| Accrued wages and related expenses | ||||||||
| Accrued 401(k) | ||||||||
| Accrued sales tax payable | ||||||||
| $ | $ | |||||||
| 11 |
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:
| March 31, | March 31, | |||||||
| Company Customer Number | 2022 | 2021 | ||||||
C000001462 | % | % | ||||||
C000001140 | % | * | ||||||
C000000114 | % | * | ||||||
C000001472 | % | * | ||||||
C000001660 | * | % | ||||||
C000001210 | * | % | ||||||
Customers exceeding 10% of accounts receivable:
| March 31, | December 31, | |||||||
| Company Customer Number | 2022 | 2021 | ||||||
C000001462 | % | % | ||||||
C000001140 | * | % | ||||||
C000000114 | % | * | ||||||
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:
| March 31, | March 31, | |||||||
| Company Vendor Number | 2022 | 2021 | ||||||
V000001029 | % | % | ||||||
V000000453 | % | % | ||||||
V000001372 | % | % | ||||||
V000001326 | * | % | ||||||
Vendors exceeding 10% of accounts payable:
| March 31, | December 31, | |||||||
| Company Vendor Number | 2022 | 2021 | ||||||
V000001029 | % | * | ||||||
V000000453 | % | % | ||||||
V000001372 | * | % | ||||||
V000001326 | * | % | ||||||
*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, the Swiss franc, 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 three months ended March 31, 2022 and 2021 was $and $, respectively, based on the vesting schedule of the stock grants and options.
| Grants unissued as of December 31, 2021 | ||||
| Grants awarded | ||||
| Forfeiture/Cancelled | ( | ) | ||
| Grants Vested | ( | ) | ||
| Grants unissued as of March 31, 2022 |
| 12 |
As of March 31, 2022, the Company has $ million in unrecognized share-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 | $ | |||||||||||
| Expired | $ | |||||||||||
| Exercised | ( | ) | - | $ | ||||||||
| Stock options outstanding as of March 31, 2022 | $ | |||||||||||
| Stock options exercisable as of March 31, 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 March 31, 2022, the Company has $ million in unrecognized share-based compensation expense related to these stock options. The aggregate intrinsic value of the options outstanding and exercisable at March 31, 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 three months ended March 31, 2021, the Company repurchased
shares of common stock at an average price of $ per share, for a total price of $
NOTE 11 – WARRANTS
The following table shows warrant activity for the three months ended March 31, 2022.
| Number of shares | Weighted Average Exercise Price | |||||||
| Warrants outstanding as of December 31, 2021 | $ | |||||||
| Exercised | ( | ) | $ | |||||
| Terminated – cashless exercise | ( | ) | $ | |||||
| Warrants outstanding as of March 31, 2022 | $ | |||||||
| Warrants exercisable as of March 31, 2022 | $ | |||||||
| 13 |
The
weighted-average life of the warrants is
NOTE 12 – INCOME TAXES
The Company has experienced losses for both book and tax purposes since inception. The deferred income tax benefit for the three months ended March 31, 2022 relates to the reduction in the deferred tax liability associated with the amortization of the intangible assets from the acquisition of the 2WR Entities.
NOTE 13 – SUBSEQUENT EVENTS
The Company has evaluated events and transaction occurring subsequent to March 31, 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 March 13, 2022, the Company, Emerald Merger Sub, Inc. (“Merger Sub”), Emerald Construction Management, Inc. (“Emerald”), Christopher W. Cullens, Charles W. Cullens, and Green Stone Property LLC (“Green Stone” and, collectively with Christopher W. Cullens and Charles W. Cullens, the “Sellers”), and, solely in his capacity as the Seller Representative, Christopher W. Cullens (the “Seller Representative”) entered into an Acquisition Agreement and Plan of Merger (the “Acquisition Agreement”), pursuant to which Emerald merged with and into Merger Sub and the Company purchased all of Sellers’ membership interest in CTS Strategies, LLC (the “CTS Interest”). The transactions pursuant to the Acquisition Agreement were completed on April 29, 2022.
Pursuant
to the Acquisition Agreement, the initial purchase price for Emerald (the “Initial Purchase Price”) was $
| 14 |
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 a fully integrated architectural design, engineering, procurement, and construction management (“E.P.C.”) design-build firm specializing in indoor Controlled Environment Agriculture (“CEA”). 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 engineer and design 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, 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 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 complemented by a vetted suite of select cultivation equipment systems. We can 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.
| 15 |
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 Management Services – A comprehensive collection of services including: |
| i. | Pre-Construction Services | |
| ii. | Cultivation Space Programming Planning (“CSP”) | |
| iii. | Architectural Design | |
| 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: |
| ● | 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. | |
| ● | Value-Added Reselling (“VAR”) of Cultivation Equipment Systems | |
| ● | Strategic Vendor Relationships with Premier Manufacturers |
The majority of our clients are commercial CEA cultivators. 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 125 individuals. 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 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 impact 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.
Results Of Operations
Comparison of Results of Operations for the three months ended March 31, 2022 and 2021
During the three months ended March 31, 2022, we generated revenues of $21.1 million compared to revenues of $12.0 million during the three months ended March 31, 2021, an increase of $9.1 million, or 76%. Equipment systems revenue increased $5.7 million, primarily due to an increase in cultivation equipment sales, services revenue increased $3.4 million, primarily from the acquisition of the 2WR Entities, and consumable product sales decreased $0.1 million.
During the three months ended March 31, 2022, cost of revenues was $16.2 million compared to $9.4 million during the three months ended March 31, 2021, an increase of $6.8 million, or 72%. This increase is directly attributable to the increase in revenues indicated above.
Gross profit was $4.9 million (23% of revenues) during the three months ended March 31, 2022, compared to $2.6 million (22% of revenue) during the three months ended March 31, 2021. Gross profit as a percentage of revenues increased primarily due to an increase in higher margin services revenues.
Operating expenses increased by $3.3 million, or 132%, to $5.8 million for the three months ended March 31, 2022 compared to $2.5 million for the three months ended March 31, 2021. This was due to a $2.7 million increase in general operating expenses, mainly due to an increase in salary, marketing, and travel expenses, in part related to the acquisition of the 2WR Entities, and a $0.6 million increase in stock-based compensation expense, primarily due to an increase in the number of employees included under the plan.
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Non-operating income was $0.1 million for the three months ended March 31, 2022, compared to non-operating expense of $1.7 million for the three months ended March 31, 2021, a change of $1.8 million (104%). Interest expense, decreased by $0.3 million to $0.0 million compared to $0.3 million in the three months ended March 31, 2021, due to the elimination of debt. Other income increased by $0.1 million due to the interest earned on the XS Financial investment. The Company incurred a $0.8 million loss on the extinguishment of debt and a $0.6 million interest expense related to the conversion of debt to equity at a discount to the offering price for the three months ended March 31, 2021.
Deferred income tax benefit increased by $0.1 million.
As a result of the above, we incurred a net loss of $0.7 million for the three months ended March 31, 2022, or a net loss per share of $0.07, compared to a net loss of $1.6 million for the three months ended March 31, 2021, or a net loss per share of $0.20.
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 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 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.
The following table reconciles net loss attributable to the Company to Adjusted EBITDA for the periods presented:
| Three months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net Loss | $ | (696,217 | ) | $ | (1,588,582 | ) | ||
| Interest expense | 7,658 | 317,443 | ||||||
| Interest expense – BCF | - | 636,075 | ||||||
| Interest income | (79,852 | ) | - | |||||
| Income tax benefit | (108,060 | ) | - | |||||
| Depreciation and amortization | 218,278 | 55,685 | ||||||
| EBITDA | (658,193 | ) | (579,379 | ) | ||||
| Loss on extinguishment of debt | - | 790,723 | ||||||
| Stock-based compensation | 882,000 | 290,805 | ||||||
| Transaction costs | 55,225 | 6,687 | ||||||
| Non-recurring legal fees | 161,546 | - | ||||||
| Adjusted EBITDA | $ | 440,578 | $ | 508,836 | ||||
BACKLOG
Our backlog as of March 31, 2022 was approximately $22 million. Our backlog as of December 31, 2021 was approximately $30 million. The current backlog consists of $16 million of equipment systems and $6 million of services to be performed. We define backlog as signed contracts for which deposits have been received. Historically, the majority of our backlog has been retired and converted into revenue within two quarters.
Liquidity and Capital Resources
As of March 31, 2022, we had cash of $27.1 million, which represented a decrease of $7.5 million from December 31, 2021 due to the changes outlined below.
Net cash used by operating activities was $3.8 million during the three months ended March 31, 2022 This use of cash is primarily the net effects of a $6.1 million reduction in customer deposits offset by a $1.1 million increase in accounts payable and accrued expenses, and a $1.2 million increase in prepayments and other assets. As of March 31, 2022, we had $7.2 million in customer deposits compared to $13.3 million as of December 31, 2021. We require prepayments from customers before any design work is commenced and before any material is ordered from the vendor. These prepayments are booked to the customer deposits liability account when received. We expect customer deposits to be relieved from the deposits account no longer than 12 months for each project. As of March 31, 2022, we had $10.1 million of vendor prepayments compared to $11.2 million as of December 31, 2021. As of March 31, 2022, we had $11.0 million in accounts payable and accrued expenses compared to $9.9 million as of December 31, 2021.
Net cash used in investing activities was $0.0 million for the three months ended March 31, 2022. We have no material commitments for capital expenditures as of March 31, 2022.
Net cash used by financing activities was $3.8 million for the three months ended March 31, 2022. Cash used in financing activities during the three months ended March 31, 2022 primarily relates to $3.7 million used in treasury shares acquired.
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 three months ended March 31, 2022.
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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 three months ended March 31, 2022, there were no material changes made to the Company’s significant accounting policies.
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 March 31, 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 three months ended March 31, 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:
| ● | Crest Ventures, LLC – We have been sued in a putative 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 – We have 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. We are suing Sunflower Bank for the remaining $3.3 million 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. 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| Exhibit
No. |
Description | |
| 2.1 | Acquisition Agreement and Plan of Merger (incorporated by reference to Exhibit 2.1 to Form 8-K filed March 14, 2022). | |
| 2.2 | First Amendment to Acquisition Agreement and Plan of Merger (incorporated by reference to Exhibit 2.2 to Form 8-K filed May 2, 2022). | |
| 3.1 | Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to Form 8-K filed October 30, 2020). | |
| 3.2 | Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Form 8-K filed January 5, 2021). | |
| 3.3 | Bylaws (incorporated by reference to Exhibit 3.4 to Form 8-K filed October 30, 2020). | |
| 3.4 | Amendment No. 1 to Bylaws (incorporated by reference to Exhibit 3.1 to Form 8-K filed January 12, 2021). | |
| 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Schema Document | |
| 101.CAL | Inline XBRL Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Definition Linkbase Document | |
| 101.LAB | Inline XBRL Label Linkbase Document | |
| 101.PRE | Inline XBRL Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (Embedded within the Inline XBRL document) |
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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 May 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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