SECURITIES AND EXCHANGE COMMISSION
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedSeptember 30, 2022
March 31, 2023
urban-gro, Inc.
| Delaware | 46-5158469 | ||||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||
1751 Panorama Point, Lafayette, | 80026 | (720) 390-3880 | ||||||||||||
| (Address of principal executive offices) | (Zip Code) | (Registrant’s telephone number, including area code) | ||||||||||||
(720)390-3880
(Registrant’s telephone number, including area code)
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||||
| Common Stock, $0.001 par value | UGRO | NASDAQ | ||||||||||||||
No
x
o
| Large accelerated filer | o | Accelerated filer | o | ||||||||
| Non-accelerated filer | x | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
No
x
urban-gro, Inc.
FORM 10-Q
For the Quarterly Period Ended September 30, 2022
INDEX
| Item No. | Page No. | |||||||
risks related to our operating strategy;
urban-gro, Inc.
(unaudited)
(unaudited)
| September 30, 2022 | December 31, 2021 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 18,605,182 | $ | 34,592,190 | ||||
| Accounts receivable, net | 12,234,400 | 13,125,685 | ||||||
| Contract receivables | 1,270,902 | — | ||||||
| Inventories | 310,996 | 514,756 | ||||||
| Prepaid expenses and other current assets | 4,852,262 | 11,248,266 | ||||||
| Total current assets | 37,273,742 | 59,480,897 | ||||||
| Non-current assets: | ||||||||
| Property and equipment, net | 830,406 | 207,496 | ||||||
| Operating lease right of use assets, net | 1,193,161 | 689,704 | ||||||
| Investments | 2,546,574 | 4,210,358 | ||||||
| Goodwill | 12,127,124 | 7,992,121 | ||||||
| Intangible assets, net | 4,461,403 | 1,575,466 | ||||||
| Total non-current assets | 21,158,668 | 14,675,145 | ||||||
| Total assets | $ | 58,432,410 | $ | 74,156,042 | ||||
| Liabilities | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 6,508,946 | $ | 6,066,896 | ||||
| Contract liabilities | 2,026,161 | — | ||||||
| Accrued expenses | 5,747,624 | 3,878,278 | ||||||
| Customer deposits | 1,929,829 | 13,345,451 | ||||||
| Contingent consideration | 2,400,771 | 1,563,000 | ||||||
| Operating lease liabilities | 354,403 | 152,459 | ||||||
| Total current liabilities | 18,967,734 | 25,006,084 | ||||||
| Non-current liabilities: | ||||||||
| Deferred tax liability | 1,097,208 | 440,625 | ||||||
| Operating lease liabilities | 863,325 | 542,003 | ||||||
| Total non-current liabilities | 1,960,533 | 982,628 | ||||||
| Total liabilities | 20,928,267 | 25,988,712 | ||||||
| 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 | 11,949 | 11,588 | ||||||
| Additional paid in capital | 83,068,423 | 78,679,220 | ||||||
| Treasury shares, cost basis: shares as of September 30, 2022 and shares as of December 31, 2021 | (11,639,937 | ) | (7,683,490 | ) | ||||
| Accumulated deficit | (33,936,292 | ) | (22,839,988 | ) | ||||
| Total shareholders’ equity | 37,504,143 | 48,167,330 | ||||||
| Total liabilities and shareholders’ equity | $ | 58,432,410 | $ | 74,156,042 | ||||
See
| 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 | |||||||
urban-gro, Inc.
(unaudited)
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | ||||||||||||||||
| Equipment systems | $ | 3,879,272 | $ | 16,454,321 | $ | 31,024,187 | $ | 39,978,388 | ||||||||
| Services | 2,839,338 | 1,461,041 | 9,505,396 | 2,009,961 | ||||||||||||
| Construction design-build | 5,384,267 | - | 8,301,588 | - | ||||||||||||
| Consumable products | 265,416 | 372,449 | 871,488 | 1,165,115 | ||||||||||||
| Total Revenue | 12,368,293 | 18,287,811 | 49,702,659 | 43,153,464 | ||||||||||||
| Cost of Revenue | 9,775,697 | 14,029,677 | 38,706,102 | 33,332,303 | ||||||||||||
| Gross profit | 2,592,596 | 4,258,134 | 10,996,557 | 9,821,161 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | 5,792,418 | 3,584,247 | 14,758,506 | 8,181,506 | ||||||||||||
| Intangible asset amortization | 304,339 | 101,149 | 773,063 | 101,727 | ||||||||||||
| Business development | 3,299,864 | - | 3,299,864 | - | ||||||||||||
| Stock-based compensation | 96,767 | 506,034 | 1,860,767 | 1,096,441 | ||||||||||||
| Total operating expenses | 9,493,388 | 4,191,430 | 20,692,200 | 9,379,674 | ||||||||||||
| Income (loss) from operations | (6,900,792 | ) | 66,704 | (9,695,643 | ) | 441,487 | ||||||||||
| Non-operating income (expenses): | ||||||||||||||||
| Interest expense | (7,088 | ) | (4,331 | ) | (22,270 | ) | (326,397 | ) | ||||||||
| Interest income | 94,200 | 9,172 | 221,329 | 23,562 | ||||||||||||
| Write-down of investment | (1,710,358 | ) | - | (1,710,358 | ) | - | ||||||||||
| Interest expense – beneficial conversion of notes payable | - | - | - | (636,075 | ) | |||||||||||
| Loss on extinguishment of debt | - | - | - | (790,723 | ) | |||||||||||
| PPP Loan Forgiveness | - | - | - | 1,032,316 | ||||||||||||
| Other income (expense) | (210,399 | ) | (11,889 | ) | (147,528 | ) | (15,652 | ) | ||||||||
| Total non-operating income (expenses) | (1,833,645 | ) | (7,048 | ) | (1,658,827 | ) | (712,969 | ) | ||||||||
| Income (loss) before income taxes | (8,734,437 | ) | 59,656 | (11,354,470 | ) | (271,482 | ) | |||||||||
| Income tax expense (benefit) | (73,654 | ) | - | (258,166 | ) | - | ||||||||||
| Net income (loss) | $ | (8,660,783 | ) | $ | 59,656 | $ | (11,096,304 | ) | $ | (271,482 | ) | |||||
| Comprehensive income (loss) | $ | (8,660,783 | ) | $ | 59,656 | $ | (11,096,304 | ) | $ | (271,482 | ) | |||||
| Earnings (loss) per share: | ||||||||||||||||
| Earnings (loss) per share - basic | $ | (0.81 | ) | $ | 0.01 | $ | (1.05 | ) | $ | (0.03 | ) | |||||
| Earnings (loss) per share - dilutive | $ | (0.81 | ) | $ | 0.00 | $ | (1.05 | ) | $ | (0.03 | ) | |||||
| Weighted average share - basic | 10,674,796 | 11,440,255 | 10,577,453 | 10,177,482 | ||||||||||||
| Weighted average shares - dilutive | 10,674,796 | 12,204,530 | 10,577,453 | 10,177,482 | ||||||||||||
See
| 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 | |||||||||
urban-gro, Inc.
(unaudited)
| Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
| Common Stock | Additional Paid in | Accumulated | Treasury | Total Shareholders’ Equity | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
| Balance, June 30, 2022 | 11,911,043 | $ | 11,911 | $ | 82,971,694 | $ | (25,275,509 | ) | $ | (11,456,667 | ) | $ | 46,251,429 | |||||||||||
| Stock-based compensation | - | - | 96,767 | - | - | 96,767 | ||||||||||||||||||
| Treasury stock | - | - | - | - | (183,270 | ) | (183,270 | ) | ||||||||||||||||
| Stock grant program vesting | 37,675 | 38 | (38 | ) | - | - | - | |||||||||||||||||
| Net income (loss) for period ended September 30, 2022 | - | - | - | (8,660,783 | ) | - | (8,660,783 | ) | ||||||||||||||||
| Balance, September 30, 2022 | 11,948,718 | $ | 11,949 | $ | 83,068,423 | $ | (33,936,292 | ) | $ | (11,639,937 | ) | $ | 37,504,143 | |||||||||||
| Common Stock | Additional Paid in | Accumulated | Treasury | Total Shareholders’ Equity | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
| Balance, June 30, 2021 | 11,222,914 | $ | 11,223 | $ | 75,227,775 | $ | (22,295,459 | ) | $ | (3,474,270 | ) | $ | 49,469,269 | |||||||||||
| Stock-based compensation | - | - | 506,034 | - | - | 506,034 | ||||||||||||||||||
| Stock issuance related to acquisition | 202,066 | 202 | 1,999,798 | - | - | 2,000,000 | ||||||||||||||||||
| Stock issued in conversion of warrants | 4,078 | 4 | (4 | ) | - | - | - | |||||||||||||||||
| Stock grant program vesting | 68,681 | 68 | (68 | ) | - | - | - | |||||||||||||||||
| Common stock repurchased | - | - | - | - | (3,427,541 | ) | (3,427,541 | ) | ||||||||||||||||
| Stock Options Exercised | 33,105 | 33 | 202,797 | - | - | 202,830 | ||||||||||||||||||
| Net income (loss) for period ended September 30, 2021 | - | - | - | 59,656 | - | 59,656 | ||||||||||||||||||
| Balance, September 30, 2021 | 11,530,844 | 11,530 | $ | 77,936,332 | $ | (22,235,803 | ) | $ | (6,901,811 | ) | $ | 48,810,248 | ||||||||||||
| Common Stock | Additional Paid in | Accumulated | Treasury | Total Shareholders’ Equity | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
| Balance, December 31, 2021 | 11,588,110 | $ | 11,588 | $ | 78,679,220 | $ | (22,839,988 | ) | $ | (7,683,490 | ) | $ | 48,167,330 | |||||||||||
| Stock-based compensation | - | - | 1,860,767 | - | - | 1,860,767 | ||||||||||||||||||
| Treasury stock | - | - | - | - | (3,956,447 | ) | (3,956,447 | ) | ||||||||||||||||
| Stock grant program vesting | 37,675 | 38 | (38 | ) | - | - | - | |||||||||||||||||
| Stock exercised | 4,555 | 5 | 28,792 | - | - | 28,797 | ||||||||||||||||||
| Stock issuance related to acquisition | 283,515 | 283 | 2,499,717 | - | - | 2,500,000 | ||||||||||||||||||
| Stock issued with exercise of warrants | 34,863 | 35 | (35 | ) | - | - | - | |||||||||||||||||
| Net income (loss) for period ended September 30, 2022 | - | - | - | (11,096,304 | ) | - | (11,096,304 | ) | ||||||||||||||||
| Balance, September 30, 2022 | 11,948,718 | $ | 11,949 | $ | 83,068,423 | $ | (33,936,292 | ) | $ | (11,639,937 | ) | $ | 37,504,143 | |||||||||||
| Common Stock | Additional Paid in | Accumulated | Treasury | Total Shareholders’ Equity | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
| Balance, December 31, 2020 | 4,718,714 | $ | 4,719 | $ | 14,553,438 | $ | (21,964,321 | ) | $ | - | $ | (7,406,164 | ) | |||||||||||
| Stock-based compensation | - | - | 1,096,441 | - | - | 1,096,441 | ||||||||||||||||||
| Beneficial conversion feature | - | - | 636,075 | - | - | 636,075 | ||||||||||||||||||
| Conversion of Bridge Financing | 254,425 | 254 | 1,907,971 | - | - | 1,908,225 | ||||||||||||||||||
| Stock grant program vesting | 85,267 | 85 | (85 | ) | - | - | - | |||||||||||||||||
| Stock issuance related to offering, net of offering costs of $4,596,257 | 6,210,000 | 6,210 | 57,497,533 | - | - | 57,503,743 | ||||||||||||||||||
| Stock issuance related to acquisition | 202,066 | 202 | 1,999,798 | - | - | 2,000,000 | ||||||||||||||||||
| Common stock repurchased | - | - | - | - | (6,901,811 | ) | (6,901,811 | ) | ||||||||||||||||
| Stock issued with exercise of warrants | 22,490 | 22 | 9,974 | - | - | 9,996 | ||||||||||||||||||
| Stock Options Exercised | 37,882 | 38 | 235,187 | - | - | 235,225 | ||||||||||||||||||
| Net income (loss) for period ended September 30, 2021 | - | - | - | (271,482 | ) | - | (271,482 | ) | ||||||||||||||||
| Net income (loss) | - | - | - | (271,482 | ) | - | (271,482 | ) | ||||||||||||||||
| Balance, September 30, 2021 | 11,530,844 | $ | 11,530 | $ | 77,936,332 | $ | (22,235,803 | ) | $ | (6,901,811 | ) | $ | 48,810,248 | |||||||||||
See
| 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 | ||||||||||||||||||||||||
urban-gro, Inc.
(unaudited)
| 2022 | 2021 | |||||||
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net income (loss) | $ | (11,096,304 | ) | $ | (271,482 | ) | ||
| Adjustments to reconcile net income (loss) from operations: | ||||||||
| Depreciation and amortization | 1,116,585 | 263,932 | ||||||
| Deferred income tax benefit | (258,166 | ) | ||||||
| Amortization of deferred financing costs | - | 103,632 | ||||||
| Loss on extinguishment of debt | - | 790,723 | ||||||
| PIK interest | (46,574) | - | ||||||
| Interest on convertible notes | - | 53,725 | ||||||
| Impairment of investment | 1,710,358 | - | ||||||
| Stock-based compensation expense | 1,860,767 | 1,096,441 | ||||||
| Beneficial conversion of Bridge notes | - | 636,075 | ||||||
| Inventory write-offs | (60,799 | ) | 26,792 | |||||
| Bad debt expense | 65,000 | 28,248 | ||||||
| PPP loan forgiveness | - | (1,032,316 | ) | |||||
| Changes in operating assets and liabilities (net of acquired amounts): | ||||||||
| Accounts receivable | 2,222,194 | (3,229,513 | ) | |||||
| Inventories | 264,559 | (94,101 | ) | |||||
| Prepayments and other assets | 6,885,588 | (5,237,138 | ) | |||||
| Accounts payable and accrued expenses | (97,142 | ) | 2,672,135 | |||||
| Operating leases | (139,251 | ) | - | |||||
| Customer deposits | (11,415,622 | ) | 4,517,732 | |||||
| Net Cash Provided By (Used In) Operating Activities | (8,988,807 | ) | 324,885 | |||||
| Cash Flows from Investing Activities | ||||||||
| Business combinations, net of cash acquired | (2,709,148 | ) | (5,551,642 | ) | ||||
| Purchases of property and equipment | (252,902 | ) | (189,815 | ) | ||||
| Net Cash Used In Investing Activities | (2,962,050 | ) | (5,741,457 | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Repurchase of common stock | (3,956,447 | ) | (6,901,811 | ) | ||||
| Proceeds from issuance of Common Stock, net of offering costs | - | 58,405,686 | ||||||
| Repayment of debt | - | (5,755,845 | ) | |||||
| Proceeds from stock issuance | 28,796 | - | ||||||
| Payment of finance lease ROU liability | (108,500 | ) | - | |||||
| Net Cash Provided By (Used In) Financing Activities | (4,036,151 | ) | 45,748,030 | |||||
| Net Increase (Decrease) in Cash | (15,987,008 | ) | 40,331,458 | |||||
| Cash at Beginning of Period | 34,592,190 | 184,469 | ||||||
| Cash at End of Period | $ | 18,605,182 | $ | 40,515,927 | ||||
| Supplemental Cash Flow Information: | ||||||||
| Interest paid | $ | 22,271 | $ | 222,765 | ||||
| Operating lease right of use asset | $ | 421,049 | $ | - | ||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Stock issued related to acquisitions | $ | 2,500,000 | $ | 2,000,000 | ||||
| Operating lease right of use assets and liabilities extension | $ | 542,903 | $ | 632,725 | ||||
| PPP Loan Forgiveness | $ | - | $ | 1,032,316 | ||||
See
| 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 | $ | — | |||||||
urban-gro, Inc.
$2,908,213 $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 following Three Months Ended September 30, Nine Months Ended September 30,We alsoFurther, 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.Acquisitionsand 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) On (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(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 $7.8of $7.7 million, (the “Initial Emerald Purchase Price”), which represented $7.0 million in initial purchase price and an estimated $0.8 million inafter working capital adjustments.The Initial Emerald Purchase Priceadjustments, was payable as follows: $3.3 comprised of (i) $3.4 million in cash, to the Emerald Sellers, net of satisfaction of Emerald’s outstanding debt of approximately $0.4 million; and shares(ii) $2.5 million of the Company’s common stock, valued at $2.5 and (iii) $1.8 million issuedof estimated contingent consideration earnout payable to the Emerald Sellers. The valueSellers over the term of the sharesearnout. The total contingent earnout payable to the Emerald Sellers is $2.0 million. Effective January 1, 2023, the terms of the Company’s common stock issued at closing was determinedcontingent consideration earnout provision were amended providing for the entire contingent consideration of up to $2.0 million to be earned based uponsolely on the daily volume weighted average closing price (“VWAP”) of the Company’s common stock in the ten trading days prior to the signing datecontinued employment of the Emerald Acquisition Agreement.The Emerald Sellers may earn up to $2.0 million offor a two year period. This resulted in the Company recording additional contingent consideration (the “Emerald Contingent Consideration”) based onexpense of $160,232 in the performancefirst quarter of Emerald during the 2-year period following the Emerald Closing Date. 2023. The Emerald Contingent Considerationremaining contingent consideration earnout is payable quarterly in shares of the Company’s common stock for a two-year period and will be equal to 35% of Emerald’s Quarterly Gross Profit (as defined inwith the Emerald Acquisition Agreement). The value of such shares will bebeing determined based upon the VWAPvolume-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 Profitquarterly gross profit is calculated.of Emerald as follows:8Purchase 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) SCHEDULE OF INITIAL ACQUISITION OF TARGET COMPANIES Purchase Price $ 7,671,557 Allocation of Purchase Price: Cash $ 622,641 Accounts receivable $ 2,666,811 Contract receivable $ 494,456 Prepayments and other assets $ 38,086 Property and equipment $ 403,008 ROU asset $ 82,408 Goodwill $ 4,135,006 Intangible assets $ 3,659,000 Accrued expenses $ 2,361,302 Contract liabilities $ 1,071,399 ROU liability $ 82,408 Deferred tax liability $ 914,750 pro formapro-forma amounts reflect the Company’s results as if the acquisition of Emerald had occurred on January 1, 2021.2022. These pro formapro-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.SCHEDULE OF SUPPLEMENTAL INFORMATION ON UNAUDITED PRO-FORMA BASIC OF ACQUISITION 2022 2021 2022 2021 Revenue 12,368,293 25,911,249 61,384,107 58,974,083 Net Income (loss) (8,597,133 ) 561,630 (10,155,899 ) (15,053 )
| 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) | |||||||
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 $10.5 million (the “2WR Purchase Price”), which represented $9.1 million in purchase price and an estimated $1.4 million in working capital adjustments.
The 2WR Purchased Shares were payable as follows: $6.5 million in cash, net of the satisfaction of 2WR’s outstanding debt of $0.5 million; and shares of the Company’s common stock valued at $2.0 million issued to the 2WR Sellers (the “2WR Closing Payment Shares”). The value of the shares of the Company’s common stock issued at closing was determined based upon the daily VWAP of the Company’s common stock in the ten trading days prior to the signing date of the 2WR Purchase Agreement.
The 2WR Purchase Agreement provides for additional earnout payments (“2WR Earnout Payments”) to the 2WR Sellers of up to an aggregate amount of $2.0 million, payable in cash or unregistered shares of the Company’s common stock in the Buyer’s sole discretion. The 2WR Earnout Payments are payable quarterly for a two-year period and will be equal to 20% of the 2WR Entities’ quarterly gross profit (as defined in the 2WR Purchase Agreement). The value of the 2WR Closing Payment Shares was determined based upon the VWAP of the Company’s common stock in the ten trading days prior to the issuance of such shares. If paid in shares, the value of 2WR Earnout Payments will be determined based upon the VWAP of the Company’s common stock in the ten trading days prior to the end of the applicable quarter. The Company accounted for the acquisition of the 2WR Entities as follows:
SCHEDULE OF INITIAL ACQUISITION OF TARGET COMPANIES
| Purchase Price | $ | 10,058,536 | ||
| Allocation of Purchase Price: | ||||
| Cash | $ | 950,690 | ||
| Accounts receivable | $ | 1,676,208 | ||
| Prepayments and other assets | $ | 42,752 | ||
| Property and equipment | $ | 9,351 | ||
| Goodwill | $ | 7,090,054 | ||
| Intangible assets | $ | 1,762,500 | ||
| Accrued expenses | $ | 1,032,394 | ||
| Deferred tax liability | $ | 440,625 |
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.
SCHEDULE OF SUPPLEMENTAL INFORMATION ON UNAUDITED PRO-FORMA BASIC OF ACQUISITION
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | 12,368,293 | 19,225,173 | 49,702,659 | 47,842,906 | ||||||||||||
| Net Income (loss) | (8,660,783 | ) | 389,217 | (11,096,304 | ) | 1,022,095 | ||||||||||
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.
2022. Contract Assets and Liabilities 2022. . 1,931,280 - Three Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30, Nine Months Ended September 30, Nine September 30, purchases payable Weighted Average Remaining Life (Years) Weighted Average Exercise Price grant. The fair value of the options is calculated using the Black-Scholes pricing model based on the estimated market value of the underlying common stock at the valuation measurement date, $0. As of March 31, 2023, we have $1.4 million remaining under the repurchase program. Number of shares Weighted Average Exercise Price March 31, 2023. $0. Equipment systems revenue decreased $14.2 million due to negative market conditions in the cannabis sector and a reduction in capital equipment spending by customers; and Services revenue decreased $0.2 million; above and was further impacted by the change in individual revenue components. The following table reconciles net income (loss) attributable to the Company to Adjusted EBITDA for the periods presented: Nine Months Ended September 30, - 526,750 154,306 1,116,585 263,932 EBITDA (8,294,799) 209,121 (10,436,944) 931,360 39,182 - September 30, 2022 December 31, 2021 Certain Construction Net cash used in operating activities was $4.3 million. This use of cash is the net effect of the net loss of $5.1 million, offset by non-cash expenses of $1.3 million, and a reduction in net operating assets and liabilities of $0.4 million. The $0.4 million reduction in net operating assets and liabilities is due to the net effects of a $0.2 million decrease in customer deposits, a $7.1 million increase in accounts payable and accrued expenses, a $0.3 million decrease in prepayments and other assets, and a $6.8 million increase in accounts receivable. Accounts receivable increased from the balance as of December 31, 2022 primarily due to an increase in receivables from our major customer. This customer is a Fortune 500 company and is in the process of transitioning their accounts payable processing to an offshoring system. We are working directly with this customer to ensure that all of our invoices are being properly processed and will be paid on a timely basis going forward. March 31, 2023. We maintain strategies to mitigate the impact of higher material, energy and commodity costs, including cost reduction, alternative sourcing strategies, and passing along cost increase to customers, which may offset only a portion of the adverse impact. stock. Statements. 2023.income (loss),loss, condensed consolidated statements of shareholders’stockholders’ 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, 2021.2021.2022. During the ninethree months ended September 30, 2022,March 31, 2023, there were no material changes made to the Company’s significant accounting policies.include: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;write-offs; allowance for deferred tax assets; and allowance for bad debt.11For the three months ended March 31, 2023 CEA Commercial Total Relative Percentage Equipment systems $ 2,911,823 $ — $ 2,911,823 17% Services 1,577,026 1,893,627 3,470,653 21% Construction design-build 383,524 9,822,428 10,205,952 61% Other 176,957 — 176,957 1% Total revenues and other income $ 5,049,330 $ 11,716,055 $ 16,765,385 100% Relative percentage 30 % 70 % 100 % For the three months ended March 31, 2022 CEA Commercial Total Relative Percentage Equipment systems $ 17,067,344 $ — $ 17,067,344 81% Services 2,170,351 1,468,156 3,638,507 17% Construction design-build — — — —% Other 347,018 — 347,018 2% Total revenues and other income $ 19,584,713 $ 1,468,156 $ 21,052,869 100% Relative percentage 93 % 7 % 100 % recognized,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,recognized; the result is deferred revenue, which is included in contract liabilities.Retainages Retainage subject to conditions other than the passage of time are included in contract assets and contract liabilities.March 31, 2023 December 31, 2022 Contract assets: Revenue recognized in excess of amounts paid or payable (contract receivables) to the Company on uncompleted contracts (contract asset), excluding retainage $ 2,795,428 $ 2,874,141 Retainage included in contract assets due to being conditional on something other than solely passage of time 21,979 130,141 Total contract assets $ 2,817,407 $ 3,004,282 March 31, 2023 December 31, 2022 Contract liabilities: Payments received or receivable (contract receivables) in excess of revenue recognized on uncompleted contracts (contract liability) $ 2,197,355 $ 1,294,452 Retainage included in contract liabilities due to being conditional on something other than solely passage of time 216,068 — Total contract liabilities $ 2,413,423 $ 1,294,452 SeptemberMarch 31, 2023, and December 31, 2022, were $21,069,269and $12,466,180, respectively.2022:SCHEDULE OF CONTRACT ASSETS AND LIABILITIES Contract assets Revenue recognized in excess of amounts paid or payable (contract receivables) to the Company on uncompleted contracts (contract asset), excluding retainage $ 1,009,760 Retainage included in contract assets due to being conditional on something other than solely passage of time 261,142 Total contract assets $ 1,270,902 Contract liabilities Payments received or receivable (contract receivables) in excess of revenue recognized on uncompleted contracts (contract liability), excluding retainage $ 2,095,432 Retainage included in contract liabilities due to being conditional on something other than solely passage of time (69,271 ) Total contract liabilities $ 2,026,161 34 – RELATED PARTY TRANSACTIONSis an entity owned by James Lowe, a director of the Company.and Potco LLC (“Potco”). Cloud 9 purchases materials from the Company for use with its customers.customers and Potco purchases equipment from the Company for use in its cultivation facility. Total sales to Cloud 9 from the Company were $13,383$0 and $99,556 during the nine months ended September 30, 2022, and 2021, respectively, and $1,571 and $5,349$5,807 during the three months ended September 30,March 31, 2023, and 2022, respectively. Total sales to Potco from the Company were $479,897 and 2021,$11,400 during the three months ended March 31, 2023, and 2022, respectively. Outstanding receivables from Cloud 9 as of September 30, 2022March 31, 2023 and December 31, 20212022 totaled $5,623$0 and $6,797$3,920 respectively.
Outstanding receivables from Potco as of March 31, 2023 and December 31, 2022 totaled $541,850 and $20,174 respectively.1245 – PREPAYMENTSPREPAID EXPENSES AND OTHER ASSETSPrepaymentsand prepaid services and fees.fees, inventories, and other assets. The prepaid expenses and other assets balances are summarized as follows:SCHEDULE OF PREPAID BALANCES September 30, 2022 December 31, 2021 Vendor prepayments $ 3,317,075 $ 10,652,962 Prepaid services and fees 1,485,170 587,505 Other assets 50,017 7,799 Prepayments and other assets $ 4,852,262 $ 11,248,266 March 31, 2023 December 31, 2022 Vendor prepayments $ 3,211,513 $ 2,459,389 Prepaid services and fees 1,105,792 1,346,430 Inventories 329,455 320,372 Other assets 38,769 38,769 Total Prepaid expenses and other assets $ 4,685,529 $ 4,164,960 56 – PROPERTY AND EQUIPMENT, NETMarch 31, 2023 December 31, 2022 Computers and technology equipment $ 256,515 $ 232,405 Furniture and fixtures 243,900 234,389 Leasehold improvements 306,719 306,719 Vehicles 452,822 456,797 Software 793,944 685,580 Other equipment 58,525 58,525 Accumulated depreciation (745,664) (667,269) Total Property and equipment, net $ 1,366,761 $ 1,307,146 SCHEDULE OF COST METHOD INVESTMENTS Edyza XS Financial Balances at December 31, 2021 $ 1,710,358 $ 2,500,000 Impairment (1,710,358 ) - PIK interest - 46,574 Balances at September 30, 2022 $ - $ 2,546,574 Edyza XS Financial Total Balances as of December 31, 2022 $ — $ 2,559,307 $ 2,559,307 Paid-in-kind interest — 12,796 12,796 Balances as of March 31, 2023 $ — $ 2,572,103 $ 2,572,103 three months ended September 30,third quarter of 2022, the Company has fully impaired this investment.investment, resulting in an impairment recorded of $1.7 million. The Company notesdetermined that the intent and ability to retain its investment for a period of time sufficient to allow for any anticipated recovery hashad 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 19.5%19.5% ownership. The loss recorded in the three and nine months ended September 30, 2022 was $1.7 million.Company’s wholly-owned subsidiary UGFS, LLC, a Colorado limited liability company (“UGFS”),Company participated in a convertible note offering of Xtraction Services, Inc., a/k/a XS Financial Inc. (CSE: XSF) (OTCQB: XSHLF) (“XSF”("XSF"), a specialty finance company providing CAPEX financing solutions, including equipment leasing, to Controlled Environment Agriculture (CEA)CEA companies in the United States. UGFSThe Company invested $2,500,000$2,500,000 of a total $43,500,000$43,500,000 raised by XSF. The investment is convertible into equity and incurs 9.50% interest payable in cash (8.0%) and payment-in-kind Notes (“PIK”) (1.5%) priorPrior to any Nasdaq listing, the investment incurs 9.5% interest payable, of which, 7.5% is cash interest and 8.0%2.0% is interest afterpaid in kind. Subsequent to any Nasdaq listing pursuant toby XSF, the Note Purchase Agreement.investment incurs 8.0% cash interest. The debt matures on October 28, 2023,, with a one-year option at the sole discretion of XSF to extend the maturity date at the option of XSF.date. In addition, UGFSthe Company received 1,250,000 warrants denominated in Canadian dollars ("C$") with a CAD$ exercise price pursuantas subject to the Warrantwarrant instrument. No value was attributed to the warrants at the time of the investment in XFS.
investment.1368 – GOODWILL & INTANGIBLE ASSETSSeptember 30, 2022March 31, 2023 and December 31, 20212022 were $12,127,124$15,572,050 and $7,992,121,$15,572,050, respectively. Goodwill is not amortized. There is no goodwill for income tax purposes. The Company did not record any impairment charges related to goodwill for the periodsthree months ended September 30, 2022March 31, 2023 and 2021.September 30, 2022March 31, 2023 and December 31, 20212022 consisted of the following:As of March 31, 2023 Cost Accumulated Amortization Net Book Value Finite-lived intangible assets: Customer relationships $ 4,212,100 $ (553,450) $ 3,658,650 Trademarks and trade names 1,778,000 (396,717) 1,381,283 Backlog and other 768,113 (695,670) 72,443 Total finite-lived intangible assets: 6,758,213 (1,645,837) 5,112,376 Indefinite-lived intangible assets: Trade name 28,291 — 28,291 Total indefinite-lived intangible assets 28,291 — 28,291 Total intangible assets, net $ 6,786,504 $ (1,645,837) $ 5,140,667 SCHEDULE OF FINITE-LIVED INTANGIBLE ASSETS September 30, 2022 Finite-lived intangible assets: Cost Accumulated Amortization Net Book Value Customer relationships $ 2,987,100 $ 243,940 $ 2,743,160 Trademarks and trade names 1,737,000 253,241 1,483,759 Backlog and Other 713,837 551,920 161,917 Total finite-lived intangible assets: 5,437,937 1,049,101 4,388,836 Indefinite-lived intangible assets: Patents 44,276 - 44,276 Trade name 28,291 - 28,291 Total indefinite-lived intangible assets: 72,567 - 72,567 Total Intangible assets, net $ 5,510,504 $ 1,049,101 $ 4,461,403 December 31, 2021 Cost Accumulated Amortization Net Book Value Customer relationships $ 834,100 $ 49,649 $ 784,451 Trademarks and trade names 499,000 41,583 457,417 Backlog and Other 518,404 184,806 333,598 Total $ 1,851,504 $ 276,039 $ 1,575,466 As of December 31, 2022 Cost Accumulated Amortization Net Book Value Finite-lived intangible assets: Customer relationships $ 4,212,100 $ (401,997) $ 3,810,103 Trademarks and trade names 1,778,000 (307,817) 1,470,183 Backlog and other 768,113 (626,003) 142,110 Total finite-lived intangible assets: 6,758,213 (1,335,817) 5,422,396 Indefinite-lived intangible assets: Trade name 28,291 — 28,291 Total indefinite-lived intangible assets 28,291 — 28,291 Total intangible assets, net $ 6,786,504 $ (1,335,817) $ 5,450,687 September 30, 2022,March 31, 2023, is summarized below:SCHEDULE OF FUTURE AMORTIZATION EXPENSES OF INTANGIBLE ASSETS Estimated Future Amortization Expense Remainder of 2022 $ 263,428 2023 883,978 2024 799,111 2025 799,111 Thereafter 1,643,208 Total $ 4,388,836 Amortization expense for intangible assets for the nine months ended September 30, 2022 and 2021 was $773,063 and $101,727, respectively. Amortization expense for intangible assets for the three months ended September 30, 2022 and 2021 was $304,339 and $101,149, respectively.14For the years ending December 31, Estimated Future
Amortization ExpenseRemainder of 2023 $ 756,005 2024 959,788 2025 959,788 2026 918,205 2027 693,555 Thereafter 825,035 Total estimated future amortization expense $ 5,112,376 79 – ACCRUED EXPENSESMarch 31,
2023December 31,
2022Accrued operating expenses $ 1,520,517 $ 515,858 Accrued wages and related expenses 1,697,058 639,614 Accrued 401(k) 95,732 262,599 Accrued sales tax payable 1,901,948 1,778,890 Total accrued expenses $ 5,215,255 $ 3,196,961 SCHEDULE OF ACCRUED EXPENSESMarch 31,
2023December 31,
2022Operating lease liabilities related to right of use assets $ 2,571,452 $ 2,645,598 Less current portion (606,648) (600,816) Long term $ 1,964,804 $ 2,044,782 For the years ending December 31, Remainder of 2023 $ 858,972 2024 750,076 2025 573,133 2026 404,751 2027 346,812 Thereafter 335,903 Total minimum lease payments 3,269,647 Less: Amount representing interest (698,195) Net lease obligations $ 2,571,452 September 30, December 31, 2022 2021 Accrued operating expenses $ 1,053,367 $ 628,871 Business development accrual Accrued wages and related expenses 1,017,949 1,887,124 Accrued 401(k) 158,091 23,520 Accrued sales tax payable 1,586,937 1,338,763 Accrued expenses $ 5,747,624 $ 3,878,278 811 – RISKS AND UNCERTAINTIESrevenue:revenueThree Months Ended
March 31,Company Customer Number 2023 2022 C000001462 * 25 % C000001140 * 16 % C000000114 * 11 % C000001472 * 11 % C000002187 43 % * C000002336 17 % * *Amounts less than 10% SCHEDULES OF CONCENTRATION OF RISK Company Customer Number 2022 2021 2022 2021 C000001462 * 58 % 12 % 51 % C000001140 * * 16 % * C000001696 12 % * * * receivable: September 30, December 31, Company Customer Number 2022 2021 C000001462 * 41 % C000001140 14 % 23 % C000002187 22 % *
receivable15As of
March 31,As of
December 31,Company Customer Number 2023 2022 C000002151 * 10 % C000002187 41 % 24 % C000002336 14 % * *Amounts less than 10% purchases: Three Months Ended
September 30, Three Months Ended
September 30,
Months Ended Nine Months Ended
September 30, Company Vendor Number 2022 2021 2022 2021 V000001029 * 10 % 19 % * V000000453 * 18 % * 13 % V000001326 10 % 18 % * 13 % V000001372 * 15 % * 15 % Three Months Ended
March 31,Company Vendor Number 2023 2022 V000001029 * 26 % V000000453 * 19 % V000002275 19 % * V000001372 * 11 % *Amounts less than 10% payable: September 30, December 31, Company Vendor Number 2022 2021 V000000453 * 20 % V000001372 * 33 % V000001326 * 12 % V000001740 14 % * V000001818 15 % * *Amounts less than 10%As of
March 31,As of
December 31,Company Vendor Number 2023 2022 V000001910 * 11 % V000002275 20 % * *Amounts less than 10% the Company’sour revenues and expenses are expected to be predominantly denominated in United States dollars, the Companywe 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 Companywe may operate may have a material adverse effect on the Company’sour business, financial condition and operating results. The CompanyWe may, in the future, establish a program to hedge a portion of the Company’sour foreign currency exposure with the objective of minimizing the impact of adverse foreign currency exchange movements. However, even if the Company developswe develop a hedging program, there can be no assurance that it will effectivelymay not mitigate currency risks.912 – STOCK-BASED COMPENSATIONninethree months ended September 30,March 31, 2023 and 2022 was $479,641 and 2021 was $ and $,$882,000, respectively, based on the vesting schedule of the stock grants and options. Stock-based compensation expense forDuring the three months ended September 30, 2022March 31, 2023, 103,572 shares were issued to employees and 2021 was $directors for grants that vested December 31, 2022.96,767$, respectively, based onstock-based awards to employees, directors, and consultants of the vesting scheduleCompany to reward and attract employees and compensate the Company’s Board of Directors (the “Board”) and vendors when applicable. The Incentive Plans are administered by the Company's Board. Stock grants under the Incentive Plans are valued at the price of the stock grants and options. No cash flow effects are anticipated for stock grants.SCHEDULE OF STOCK GRANT ACTIVITYNumber ofsharesGrants unissued as of December 31, 2021153,673Issued542,584Forfeiture/Cancelled(139,226)Grants Vested(62,172)Grants unissued as of September 30, 2022494,85916Asdate of September 30, 2022, the Company has $ million in unrecognized stock-based compensation expense related to these stock grants.SCHEDULE OF STOCK GRANT VESTING PERIODS Number of Shares Stock options outstanding as of December 31, 2021 641,337 $ 6.27 Issued 76,246 $ 10.48 Forfeiture/Expired (40,982 ) 6.81 $ 6.05 Exercised (4,555 ) - $ 6.00 Stock options outstanding as of September 30, 2022 672,046 $ 6.76 Stock options exercisable as of September 30, 2022 462,798 $ 5.66 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 %100%.As There is a moderate degree of September 30, 2022,subjectivity involved when estimating the Company has $value of0.3 million in unrecognized stock-based compensation expense relatedtheseensure continuity of service or as a reward for performance. Stock grants and stock options. options typically require a 1 to 3 year period of continued employment or service performance before the stock grant or stock option vests. No cash flow effects are anticipated for stock grants.Number of
SharesGrants unvested as of December 31, 2022 494,859 Grants awarded 238,071 Forfeiture/cancelled (3,533) Grants vested (103,572) Grants unvested as of March 31, 2023 625,825 Number of Shares Unrecognized Stock Compensation Expense As of December 31, 231,192 $ 940,043 2023 205,374 694,076 2024 47,315 120,173 2025 141,944 — 2026 625,825 $ 1,754,292 Number of Shares Weighted
Average
Remaining
Life (Years)Weighted
Average
Exercise
PriceStock options outstanding as of December 31, 2022 669,388 7.9 $ 6.77 Issued — 0 $ — Forfeited (2,803) 0 $ 9.39 Exercised — 0 $ — Stock options outstanding as of March 31, 2023 666,585 7.6 $ 6.77 Stock options exercisable as of March 31, 2023 618,651 6.5 $ 6.30 Number of Shares Unrecognized Stock Compensation Expense As of March 31, 36,286 $ 125,518 2023 11,648 39,044 2024 47,934 $ 164,562 September 30, 2022March 31, 2023 is $.1013 – SHAREHOLDERS’STOCKHOLDERS’ EQUITY of Directors authorized a stock repurchase program to purchase up to $5.0$5.0 million of the currently outstanding shares of the Company’s common stock, over a period of 12 months through open market purchases, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. On January 18, 2022, the Board of Directors authorized a $2.0$2.0 million increase to the stock repurchase program, to a total of $7.0$7.0 million. On February 2, 2022, the Board of Directors authorized an additional $1.5$1.5 million increase to the stock repurchase, to a total of $8.5$8.5 million. On September 12, 2022, the Board of Directors authorized an additional $2$2 million increase to the stock repurchase, to a total of $10.5$10.5 million.During the nine months ended September 30, 2022, In total, the Company has repurchased 1,099,833 shares of common stock at an average price per share of $,$8.25 for a total price of $4.0$9.1 million, under this program.September 30,March 31, 2023, the Company did not repurchase shares of common stock. During the three months ended March 31, 2022, the Company repurchased 419,088 shares of common stock at an average price per share of $,$9.02, for a total price of $0.2 million. During the nine months ended September 30, 2021, the company repurchased shares of common stock at an average price per share of $, for a total price of $4.0 million. During the three months ended September 30, 2021, the Company repurchased shares of common stock at an average price per share of $, for a total of $3.4 million. In total, the Company has repurchased shares of common stock at an average of $ per share, for a total price of $8.7$3.8 million under this program.$,$8.50, for a total of $3.0 $3.0 million, outside of any stock repurchase or publicly announced program.17 1114 – WARRANTSninethree months ended September 30, 2022.SCHEDULE OF WARRANT ACTIVITY Warrants outstanding as of December 31, 2021 374,088 $ 11.26 Exercised (18,196 ) $ 6.00 Terminated – cashless exercise (44,393 ) $ 6.00 Warrants outstanding as of September 30, 2022 311,499 $ 12.32 Warrants exercisable as of September 30, 2022 311,499 $ 12.32 Number of
SharesWeighted
Average
Exercise PriceWarrants outstanding as of December 31, 2022 311,499 $ 12.32 Exercised — $ — Terminated – cashless exercise — $ — Warrants outstanding as of March 31, 2023 311,499 $ 12.32 Warrants exercisable as of March 31, 2023 311,499 $ 12.32 2.10 years.1.6. The aggregate intrinsic value of the warrants outstanding and exercisable as of September 30, 2022March 31, 2023 is $0.1215 – BUSINESS DEVELOPMENTDuring 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 $1.3 million of replacement lighting equipment and accrued an additional $2.0 million of expense for the remaining order total for shipments delivered in October 2022. The total business development expense recorded in the three months ended September 30, 2022 was $3.3 million. This expense is a one-time expense. NOTE 13 – INCOME TAXESand nine month periodsmonths ended September 30,March 31, 2023 and 2022 relates to the reduction in the deferred tax liability associated with the amortization of the intangible assets from the acquisitions of the Emerald2WR Entities and 2WR Entities.Emerald.1416 – SUBSEQUENT EVENTSThe 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 $7.3 million. The asset acquisition of DVO was completed on October 31, 2022 by urban-gro Engineering, Inc., d/b/a DVO, a wholly owned subsidiary of the Company. The Company funded the $7.3 million purchase price, which includes a contingent consideration of up to $1.1 million paid in cash or equity at the Company’s discretion, with $1.3 million in cash, a promissory note of $3.8 million to be paid out over four quarters, and $1.1 million of its common stock at a pre-set price of $ per share.18Overview and History Inc. (“we,” “us,” “our,” the “Company,” or “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. 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 managementdesign-build solutions to customers operating in the Controlled Environment Agriculture (“CEA”), industrial, healthcare,CEA and other commercialCommercial 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. WithinIn 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,include operators and plant-based medicines. Our custom-tailored approach to design, procurement,facilitators in both the cannabis and equipment integration provides a single point of accountability across all aspects of indoor growing operations. We also help our clients achieve operational efficiencyproduce markets in the United States, Canada, 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 atEurope. In the highest level throughout their entire cultivation lifecycle once they are up and running.We aim toCommercial sector, we work with ourleading food and beverage commercial packaged goods (“CPG”) companies in the United States, and 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
19Our 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 Servicesii.Cultivation Space Planning (“CSP”)iii.Architectural Designiv.Engineeringv.Integrated Cultivation Design (“ICD”)vi.Construction Management (“CM”)●An ongoing service offering including:i.Facility and Equipment Commissioning Servicesii.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 Systemsiii.Strategic Vendor Relationships with Premier ManufacturersHistorically, 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 ofincluding healthcare, higher education, and hospitality. During 2022 and 2021, we made the key points of our differentiation that clients value is the depth of experience of our employees and our Company. We currently employ following acquisitions: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.October 2022 - An engineering firm (“DVO”)20Results of OperationsJuly 2021 - Three affiliated architecture design companies (the “2WR Entities”)September 30,March 31, 2023 and 2022 and 2021September 30, 2022,March 31, 2023, we generated revenues of $12.4$16.8 million compared to revenues of $18.3$21.1 million during the three months ended September 30, 2021,March 31, 2022, a decrease of $5.9$4.3 million, or 32%20%. This decrease in revenues is athe net 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.September 30, 2022,March 31, 2023, cost of revenues was $9.8$13.9 million compared to $14.0$16.2 million during the three months ended September 30, 2021,March 31, 2022, a decrease of $4.2$2.2 million, or 30%14%. This decrease is directly attributable to the overall decrease in revenues indicated above.$2.6$2.8 million (21%(17% of revenues) during the three months ended September 30, 2022,March 31, 2023, compared to $4.2$4.9 million (23% of revenue) during the three months ended September 30, 2021.March 31, 2022. Gross profit as a percentage of revenues decreased primarily due to a decrease in higher margin equipment systems revenue as well as an increase in lower margin Constructionconstruction 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.$5.3$2.1 million, or 126%37%, to $9.5$7.9 million for the three months ended September 30, 2022March 31, 2023 compared to $4.2$5.8 million for the three months ended September 30, 2021.March 31, 2022. This was due to a one-time $3.3 millionoverall increase in business development costs as well asoperating expenses was the result of the net effects of the following: a $2.2$2.4 million increase in general and administrative operating expenses in part due to an increase(i) increases in salary marketing, and travel expensespersonnel related costs attributable to the acquisitions of the 2WR EntitiesDVO and Emerald entities, (ii) increased legal expenses and (iii) implementation of an incentive retention plan in 2023; a $0.4 million decrease in stock-based compensation expense, primarily due to a reduction in the eliminationnumber of unvested stock grants for employees no longer employed by the Company,receiving stock-based compensation; and a $0.2$0.1 million increase in intangible asset amortization due solely to increased intangibles associated with the acquisitions of Emerald and DVO.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.$8.7$5.1 million for the three months ended September 30, 2022,March 31, 2023, or a net loss per share of ($0.81),$0.48, 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 2021During 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.21During 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$0.07 for the ninethree months ended September 30, 2021, or a net loss per share of ($0.03).March 31, 2022.board of directorsBoard 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.22Three Months Ended
March 31,2023 2022 Net loss $ (5,144,649) $ (696,217) Interest expense 73,216 7,658 Interest income (73,131) (79,852) Income tax benefit (65,132) (108,060) Depreciation and amortization 404,069 218,278 EBITDA (4,805,627) (658,193) Non-recurring legal fees 216,739 161,546 Contingent consideration - change in fair value 160,232 — Contingent consideration - DVO acquisition 46,267 — Retention incentive 450,000 — Stock-based compensation 479,641 882,000 Transaction costs 35,078 55,225 Adjusted EBITDA $ (3,417,670) $ 440,578 Three 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 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 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 Design-Build;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-Builddesign-build backlog is comprised of construction projects once the contract is awarded and to the extent we believe funding is probable. Our Construction Design/Builddesign/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, 2021table (in millions of $):tables:Revenue Category June 30, 2022 March 31, 2022 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.March 31, 2023 CEA Commercial Total Relative Percentage (in millions) Equipment systems $ 5 $ — $ 5 5 % Services 2 2 4 4 % 67 29 96 91 % Total backlog $ 74 $ 31 $ 105 100 % Relative percentage 70 % 30 % 100 % Note: Percentages may not add up due to rounding. December 31, 2022 CEA Commercial Total Relative Percentage (in millions) Equipment systems $ 5 $ — $ 5 5 % Services 4 2 6 6 % 67 15 82 88 % Total backlog $ 76 $ 17 $ 93 100 % Relative percentage 82 % 18 % 100 % Note: Percentages may not add up due to rounding. September 30, 2022,March 31, 2023, we expected approximately 70%40% of our Construction Design-Builddesign-build backlog to be completed in the next 12 months. At September 30,March 31, 2023 and December 31, 2022, one customer accounted for 63%40% and 46% of total backlog.
backlog, respectively.23Design-Builddesign-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.Design-Builddesign-build backlog may be canceled or modified at the election of the customer. Many Construction Design-Builddesign-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-Builddesign-build backlog amounts.Liquidity and Capital ResourcesSeptember 30,March 31, 2023, we had working capital of $6.0 million, compared to working capital of $10.3 million as of December 31, 2022, a decrease of $4.3 million. This decrease in working capital was primarily due to a decrease in cash (which is further detailed below) and the net effects of an increase in accounts payable and accrued expenses of $7.1 million and an increase of accounts receivable of $6.8 million. Due to the acquisition of Emerald in 2022, the Company includes in working capital contract receivables and liabilities related to construction projects. These construction working capital balances are described in further detail in our consolidated financial statements, including the accompanying notes.$18.6$7.3 million, which represented a decrease of $16.0$4.7 million from December 31, 20212022 due to the following changes during the ninethree months ended September 30, 2022:March 31, 2023:●Net cash used in operating activities was $9.0 million. This use 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.InflationAlthough our operations, are influenced by general economic conditions, we do not believe that inflation had a material effect on ourwhich has negatively impacted the results of our operations during the nine monthsquarter ended September 30, 2022.Critical Accounting Policies and Estimates2021.2022. During the ninethree months ended September 30, 2022,March 31, 2023, there were no material changes made to the Company’s significant accounting policies.24Off-Balance Sheet ArrangementsWe areandwe are not required to provide the information under this Item pursuant to Regulation S-K.information.Disclosure Controls and Procedures – September 30, 2022,March 31, 2023, at reasonable assurance levels. – – ninethree months ended September 30, 2022,March 31, 2023, 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.25While mostMost of these disputes are not likely to have a material effect on our business, financial condition, or operations,operations. No new material legal proceedings were initiated or terminated during the following matters are deemedperiod covered by this report and there have been no material developments in the Company to be material either due toproceedings identified in Part 1, Item 3 of our annual report on form 10-K for 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.oAccount 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.oLegal 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.
year ended December 31, 2022.●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.26 following table summarizesCompany’s Board 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 at any time. On May 24, 2021, the Board 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 1.1 million shares at an average price per share of $8.25 for a total of $9.1 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.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.Emerald andthree months ended, March 31, 2023, we issued 64,224 shares at a price per share of $2.99 as payment for contingent consideration associated with the 2WR Acquisitionsacquisition.valued at a price per share of $8.82 for a 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.issuanceissuances of the foregoing restricted shares waswere exempt from registration as each was 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.None.27NovemberMay 10, 2022.URBAN-GRO, INC. By: /s/ Bradley Nattrass Bradley Nattrass PrincipalChairperson of the Board of Directors and Chief Executive Officer a duly authorized officer(Principal Executive Officer) By: /s/ Richard Akright Richard A. Akright Chief Financial Officer (Principal Financial Officer and Officer)(Principal Accounting OfficerOfficer)