What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-28 compared with 2023-03-30 · 45 added, 40 removed, 124 unchanged (41% of the section changed)

8 unchanged sentences

urban-gro is an integrated professional services and Design-Build firm.

Our business focuses primarily on providing fee-based knowledge-based services as well as the value-added reselling of equipment.

Our business focuses primarily on providing fee-based professional services, Design-Build solutions, as well as the value-added reselling and integration of equipment systems.

We derive income from our ability to generate revenue from our clients through the billing of our employees’ time spent on client projects.

We offer value-added architectural, engineering, systems procurement and integration, and construction design-build solutions to customers operating in the CEA and Commercial sectors.

We offer value-added architectural, engineering, systems procurement and integration, and construction solutions to customers operating in the CEA and Commercial sectors.

In the CEA sector, our clients include operators and facilitators in both the cannabis and produce markets in the United States, Canada, and Europe.

In the Commercial sector, we work with leading Food and Beverage CPG companies in the United States, and clients in other commercial sectors including healthcare, higher education, and hospitality.

In the Commercial sector, we work with leading Food and Beverage CPG companies in the United States, and clients in other commercial sectors including light industrial, healthcare, higher education, laboratories, and hospitality.

During 2021 and 2022, we made the following acquisitions:

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This increase in revenues is the net result of the following changes in individual revenue components:

• Construction design-build revenues increased $19.8 million as a result of the acquisition of Emerald;

• Services revenue increased $7.8 million, primarily from the acquisition of the 2WR Entities;

• Equipment systems revenue decreased $22.2 million due to negative market conditions in the cannabis sector and a reduction in capital equipment spending by customers;

• Construction design-build revenues increased $26.4 million, primarily due to significant organic growth within this group;

• Services revenue decreased $0.9 million, which was the result of a decrease in revenues in our existing business due to negative market conditions in the CEA sector;

• Equipment systems revenue decreased $20.7 million due to negative market conditions in the CEA sector and a reduction in capital equipment spending by customers;

• Other revenue decreased $0.3 million.

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Gross profit was $10.3 million (14% of revenue) during the year ended December 31, 2023, compared to $14.2 million (21% of revenue) during the year ended December 31, 2022.

Gross profit as a percentage of revenues decreased overall due to the offsetting effects of the following:

initiation of lower margin construction design-build revenue (10% gross profit margin);

margins on equipment systems revenue, which made up 89% of total revenues in 2021 and 50% of total revenues in 2022, declined from 24% in 2021 to 16% in 2022;

and an increase in services revenue which had a 52% gross profit margin in 2022.

Gross profit as a percentage of revenues decreased overall due to increases in lower margin construction design-build revenue combined with decreases in higher margin equipment systems and services revenue.

Operating expenses increased by $0.1 million, or 0%, to $27.0 million for the year ended December 31, 2023 compared to $26.8 million for the year ended December 31, 2022.

This increase was due to:

• a $7.1 million increase in general and administrative expenses due to an increase in personnel, salaries, marketing, and travel expenses attributable to the acquisitions, investments made to service our backlog and future growth, and expansion into Europe;

• a one-time $3.3 million business development expense related to satisfying a lighting issue encountered by a major customer;

• a $0.7 million increase in stock-based compensation expense due to increased personnel;

• a $0.8 million increase in intangible asset amortization related to the acquisitions.

Non-operating expense was $3.0 million for the year ended December 31, 2022, compared to $0.7 million for the year ended December 31, 2021, an increase of $2.3 million.

This increase was primarily due to a $2.7 million expense from the impairment of the Edyza investment of $1.7 million and an impairment recorded upon settlement of a wire fraud receivable of $1.0 million, as well as a $0.4 million expense recognized from the remeasurement of contingent consideration from the 2WR acquisition.

This increase was due to the net effects of the following:

• a $3.8 million increase in general and administrative expenses due to an increase in legal fees defending lawsuits, increases in the average number of personnel and increases in construction design-build revenue which increased business insurance and lease costs;

• a $3.3 million decrease in a one-time business development expense related to satisfying an equipment lighting issue encountered by a major customer;

• a $0.4 million decrease in share based compensation due to a reduction in the number of employees who received grants in 2023 as compared to 2022.

Non-operating expense was $2.2 million for the year ended December 31, 2023, compared to $3.0 million for the year ended December 31, 2022, a decrease of $0.7 million.

This decrease was primarily due to a $1.5 million loss on settlement and a $0.3 million impairment loss in 2023 compared to a $2.7 million impairment loss recorded in 2022.

As a result of the above, we incurred a net loss of $18.7 million for the year ended December 31, 2023, or a net loss per share of $1.66, compared to a net loss of $15.3 million for the year ended December 31, 2022, or a net loss per share of $1.44.

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Interest expense 271,686 54,579

Interest expense – beneficial conversion of notes payable — 636,075

Interest income (173,895) (329,012)

Income tax benefit (322,092) —

Federal and state income tax (provisions) (215,864) (322,092)

Federal and state income tax payments 185,910 16,253

Depreciation and amortization 1,636,667 1,483,065

EBITDA $ (16,976,557) $ (14,375,116)

Loss on extinguishment of debt — 790,723

PPP loan forgiveness — (1,032,316)

Non-recurring legal fees 1,249,133 352,173

One-time employee expense 819,089 125,000

Contingent consideration 436,905 –

Business development 3,299,864 —

One-time employee expenses — 819,089

Contingent consideration - change in fair value 160,232 436,905

Contingent consideration - DVO acquisition 278,559 —

Reduction in force costs 346,725 —

One time business development expenses – 3,299,864

Impairment loss 258,492 2,660,934

Loss on settlement 1,500,000 –

Retention incentive 1,242,000 –

Stock-based compensation 2,199,046 2,571,785

Transaction costs 30,197 347,317

Adjusted EBITDA $ (3,903,302) $ 2,678,801

Adjusted EBITDA (non-GAAP) $ (9,712,173) $ (3,887,049)

Backlog is a financial measure that generally reflects the dollar value of revenue that the Company expects to realize in the future.

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Percentages may not add up due to rounding.

(1) Construction design-build revenue and backlog relate to the operations of Emerald, which was acquired by the Company on April 29, 2022.

December 31, 2022

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Services $ 4 $ 2 $ 6 6 %

Construction design-build (1)

$ 67 $ 15 $ 82 88 %

Total backlog

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Percentages may not add up due to rounding.

(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 December 31, 2023, we expected approximately 57% of our Construction Design-Build backlog to be completed in the next 12 months.

At December 31, 2022, one customer accounted for 46% of total backlog.

At December 31, 2023, three customers were each in excess of 10% of total backlog and in total they accounted for 74% of total backlog.

At December 31, 2022, three customers were in excess of 10% of total backlog and in total they accounted for 81% of our total backlog.

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.

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LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2022, we had working capital of $10.3 million, compared to working capital of $34.5 million as of December 31, 2021, a decrease of $24.2 million.

As of December 31, 2023, we had negative working capital of $1.2 million, compared to positive working capital of $10.3 million as of December 31, 2022, a decrease of $11.5 million.

This decrease in working capital was primarily due to a decrease in cash of $10.9 million (which is further detailed below) and the net effects of reductions in customer deposits of $2.0 million and prepaid expenses and other current assets of $1.4 million.

The reductions in customer deposits and prepaid expenses and other current assets

corresponds to a reduction in customer orders for equipment systems which is reflected in the reduction in equipment systems backlog from December 31, 2021 to December 31, 2022 outlined in Backlog above.

The reductions in customer deposits and prepaid expenses and other current assets corresponds to a reduction in customer orders for equipment systems which is reflected in the reduction in equipment systems backlog from December 31, 2022 to December 31, 2023 outlined in Backlog above.

Due to the acquisition of Emerald in 2022, the Company includes in working capital contract receivables and liabilities related to construction projects.

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As of December 31, 2023, we had cash of $1.1 million, which represented a decrease of $10.9 million from $12.0 million as of December 31, 2022.

As of December 31, 2021, we had cash of $34.6 million, which represented an increase of $34.4 million from $0.2 million as of December 31, 2020.

Changes in cash during 2023 and 2022 are discussed below.

On December 13, 2023, UG Construction, Inc, ("UG Construction"), a wholly owned subsidiary of the Company, entered into an interest only asset based revolving loan agreement ("the Line of Credit") with Gemini Finance Corp.

("Lender") pursuant to which Lender extended to UG Construction the Line of Credit in an amount not to exceed $10.0 million to be used to assist UG Construction and the Company with cash management.

Lender will consider requests under the Line of Credit, which Lender may accept or reject in its discretion, until September 12, 2024 ("the Initial Term"), subject to an automatic extension for an additional nine-,month term until May 12, 2025.

provided that UG Construction is in compliance with all the terms of the applicable loan documents and Lender has not sent a written notice of non-renewal at least 60 days prior to expiration of the Initial Term.

The Line of Credit contains standard events of default and representations and warranties by UG Construction and the Lender and the Company has entered into a Continuing Guaranty pursuant to which the Company will guarantee repayment of the loans associated with the Line of Credit (the “Guaranty Agreement”).

Loans made under the Line of Credit earns interest at a monthly rate of one and seventy-five hundredths percent (1.75%).

As of December 31, 2023, we had borrowed $2.5 million under the Line of Credit.

Operating Activities:

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This use of cash was the net effect of the net loss of $18.7 million, offset by non-cash expenses of $4.8 million, and a reduction in net operating assets and liabilities of $2.7 million.

The $4.2 million reduction in net operating assets and liabilities was due to the net effects of a $10.8 million decrease in customer deposits, a $1.1 million increase in accounts payable and accrued expenses, a $8.2 million decrease in prepayments and other assets, and a $2.5 million increase in accounts receivable.

The $2.7 million reduction in net operating assets and liabilities was due to the net effects of a $23.4 million increase in accounts payable, contract liabilities and accrued expenses, a $2.2 million decrease in prepayments and other assets, offset by an $19.2 million increase in accounts receivable and a decrease in contract assets, customer deposits, operating lease liability, and contingent consideration of $3.6 million.

Net cash used in operating activities was $12.6 million during the year ended December 31, 2022.

This use of cash was the net effect of the net loss of $15.3 million, offset by non-cash expenses of $6.9 million, and a decrease in net operating assets and liabilities of $4.2 million.

The $3.6 million decrease in net operating assets and liabilities was due to the net effects of a $10.5 million increase in accounts receivable, an $8.1 million increase in prepayments and other assets, an $8.5 million increase in customer deposits, and a $6.5 million increase in accounts payable and accrued expenses.

The $4.2 million decrease in net operating assets and liabilities was primarily due to the net effects of a $2.5 million increase in accounts receivable, a $10.8 million increase in customer deposits, offset by a $1.1 million increase in accounts payable and accrued expenses, and an $8.4 million increase in prepayments and other assets.

Investing Activities:

Net cash used in investing activities was $4.5 million for the year ended December 31, 2022.

This use of cash was due to $0.6 million for the purchase of fixed assets needed for our growing workforce and $3.9 million in net cash used to acquire Emerald and DVO.

Net cash provided by investing activities was $1.7 million for the year ended December 31, 2023, primarily from the sale of our investment in XS Financial for $2.3 million offset by the acquisition of property, plant and equipment of $0.6 million.

We had no material commitments for capital expenditures as of December 31, 2023.

Net cash used in investing activities was $4.5 million for the year ended December 31, 2022.

This use of cash was due to $5.5 million from the acquisition of the 2WR Entities, $2.5 million to acquire an investment in XS Financial and $0.3 million for the purchase of fixed assets.

This use of cash was due to $3.9 million from the acquisition of the DVO Entities and $0.6 million for the purchase of fixed assets.

Financing Activities:

Net cash used by financing activities was $5.5 million for the year ended December 31, 2022, compared to $44.3 million cash provided by financing activities during the year ended December 31, 2021.

Cash used from financing activities during the year ended December 31, 2022 primarily relates to $4.4 million used in the repurchase of common stock and $1.0 million paid for acquisition related contingent consideration.

Net cash provided by financing activities was $44.3 million for the year ended December 31, 2021.

This increase in cash was the net effect of $57.7 million raised from the issuance of common stock in connection with our uplisting to Nasdaq offset by repurchases of common stock of $7.7 million and repayments of debt of $5.8 million.

Net cash used by financing activities was $1.4 million for the year ended December 31, 2023.

Cash used from financing activities during the year ended December 31, 2023 primarily relates to cash provided by our line of credit and other financing agreements of $3.0 million offset by $3.8 million of payments made on the promissory note related to the DVO acquisition and $0.7 million of payments made for the contingent consideration and finance lease.

Net cash used by financing activities was $5.5 million for the year ended December 31, 2022.

This decrease in cash primarily relates to $4.4 million used in the repurchase of common stock and $1.0 million paid for acquisition related contingent consideration.

Material Cash Requirements:

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis