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2-
FORWARD LOOKING STATEMENTS
Cautionary Information about Forward-Looking Statements
This Annual Report on Form 10-K
("Form 10-K" or this "Report") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of
1934. The1934, as amended (the "Exchange Act"), including statements
regarding urban-gro, Inc. contained in this Reportrelated to: future events; challenges we may face; growth strategy; expansion and future operations; the ability to recognize backlog as revenue; financial position; estimated or projected revenues, losses, costs, gross profit, earnings or other financial items; business strategy, prospects, plans and objectives of management; anticipated or pending investigations, legal claims, proceedings or litigation that
may involve or affect us; implementation of ESG initiatives; industry-specific trends, events or regulations and the impact of those trends, events and regulations on us or our financial performance; and updates to regulations and the impact of those regulations on us. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are
often, but not
historical in nature, particularly those that utilize terminologyalways, identified by the use of words such as
“may,” “will,” “should,” “likely,” “expects,” “anticipates,” “estimates,” “believes”"seek," "anticipate," "plan," "continue," "estimate," "expect," "may," "will," "project," "predict," "potential," "target," "intend," "could," "might," "should," "believe" and variations of such words or
“plans,”their negative and similar expressions. Forward-looking statements should not be read as a guarantee of future performance or
comparable terminology,results and may not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are
forward-looking statements based on
current expectationsmanagement’s belief, based on currently available information, as to the outcome and
assumptions, and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements.timing of future events
Important factors known to us that could cause such material differences are identified in this
Report. We undertakeReport, including the factors described in Part I, Item 1A, "Risk Factors," and other cautionary statements described in this Report on Form 10-K. These factors are not necessarily all of the important factors that could cause actual results or events to differ materially from those expressed in the forward-looking statements. Other unknown or unpredictable factors could also cause actual results or events to differ materially from those expressed in the forward-looking statements. urban-gro, Inc. is under no obligation to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any future disclosures we make on related subjects in future reports to the
SEC.Securities and Exchange Commission ("SEC").
PART I
ItemITEM 1.
Business.History
We wereBUSINESS
Background
urban-gro, Inc. (together with its wholly owned subsidiaries, collectively "urban-gro," "we," "us," or "the Company") was originally formed on March 20, 2014, as a Colorado limited liability company.
InOn March
10, 2017, we converted to a
Colorado corporation and
issued 193.3936722exchanged shares of our
Common Stockcommon stock for every
Member Interestmember's interest issued and outstanding on the date of conversion.
In August 2016, when still On October 29, 2020, we reincorporated as a Delaware corporation. On December 31, 2020, we effected a 1-for-6 reverse stock split with respect to our common stock. All information in this Report gives effect to this reverse stock split, including restating prior period reported amounts. On February 12, 2021, we completed an LLC, we undertook a private offeringuplisting to the Nasdaq Capital Market ("Nasdaq") under the ticker symbol "UGRO".
Overview
urban-gro is an integrated professional services and construction 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 member interests wherein we received subscriptions of $575,107employees’ 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 formcontrolled environment agriculture ("CEA") and industrial and other commercial ("Commercial") sectors. Our evolution, both organically and through the acquisition of 6,392 member interestsengineering, architecture, and construction management firms has enabled us to successfully diversify into the commercial sectors of the clients we serve, as well as the capabilities we offer, which we believe has helped insulate our business from any one sector. Even with this successful diversification, our main focus and value-add has always been and remains in providing solutions to our CEA clients, where we have experience and expertise in designing, engineering, building, and integrating complex environmental equipment systems into indoor CEA cultivation and retail facilities, and then providing ongoing maintenance, training, and support services to those same facilities.
We aim to work with our clients from inception of their project in a way that provides value throughout the life of their facility. Clients, regardless of sector they are in, engage us to deliver their vision because of our experience and expertise, and because our integrated, design-build solutions offer a value-add approach to design, engineering, procurement, construction-management, construction, and equipment integration, providing a single point of accountability across all aspects of a project.
For our CEA clients in particular, we create high-performance indoor cultivation facilities to grow specialty crops, including cannabis as well as produce such as leafy greens, vegetables, herbs and berries. We also provide design-build solutions for our CEA clients' retail facilities. We help our clients achieve operational efficiency and economic advantages through a full spectrum of professional services and programs focused on facility optimization and environmental health which establish facilities that allow clients to manage, operate and perform at the highest level throughout their entire cultivation lifecycle once they are up and running. For these CEA clients, our team provides services to meet the most stringent regulatory environments, whether they are energy efficiency goals, Good Agricultural and Collection Practices ("GACP"), or Good Manufacturing Practice ("GMP") and/or European Medicine Agency EU GMP ("EU/GMP") certification.
While we have successfully diversified our target markets across several commercial sectors, the majority of our clients are commercial CEA cultivators. We believe a key differentiation point that clients value is the depth of our employees’ and Company’s experience. As of December 31, 2023, we employed 130 full time employees, approximately two-thirds of which are considered experts in their areas of focus. Our team includes Designers (Architects, Interior Designers, Cultivation Space Planners), Engineers (Mechanical, Electrical, Plumbing, Controls, and Fire Protection), Construction Managers (Project Managers and Supervisors), and horticulturists. As a company, we have worked on over 1000 CEA projects, 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 design and build process that would impact operational stages. Our expertise translates into clients saving time, money, and resources through expertise that they can leverage without having to add headcount to their own operations. We provide this experience in addition to offering a platform of the highest quality equipment systems that can be integrated holistically into our clients’ facilities.
Since January 1, 2023, we have announced the following contracts:
•September 26, 2023 - Awarded contract for more than $11.0 million of design-build services with an existing client in the Hospitality & Recreation sector to be recognized over the next six quarters. While this contract has been started as of December 31, 2023, the Company now expects that the contract will take two quarters longer than expected to complete, therefore extending into 2025.
•October 2, 2023 - Secured contracts of nearly $8.0 million across four clients in the CEA sector to be recognized over the next four quarters. While the largest of these contracts, valued at approximately $7 million dollars, did start in the first quarter of 2024, the Company now it will be completed by the first quarter of 2025, one additional quarter more than had been forecast. The Company expects that the other three (3) accredited investors (approximately $90 per member interest,contracts will be completed in the previously announced timeframe.
•October 4, 2023 - Signed multiple contracts valued at more than $4.5 million to be recognized over the next two quarters. The Company expects that these contracts will be completed in the previously announced timeframe.
•November 30, 2023 - Awarded $9.6 million industrial design-build contract with an existing CPG client to be recognized over the next three quarters. While this contract did not start as anticipated in the fourth quarter of 2023, the value was increased to $11 million dollars with the addition of supplying mechanical equipment systems to the scope, it did kick off in the first quarter of 2024. The Company now expects that the contract will take one additional quarter over the previously announced timeframe to be completed.
•January 2, 2024 - Secures design-build contract valued at approximately $20.0 million of design-build services with an existing vertically integrated United States based multi-state cannabis cultivation and retail dispensary operator to be recognized over the next six quarters. This contract was not started as of December 31, 2023, but kicked off in the first quarter of 2024, and the Company still expects that the contract will be completed in the previously announced timeframe.
Our Solutions
Since commencing business in March 2014, we have expanded our ongoing operations across North America and Europe while diversifying our services offerings organically and through acquisitions into full design-build solutions by adding design, engineering, construction, and construction-management services, introducing new equipment solutions, products and services, and successfully diversifying into several additional commercial sectors beyond cannabis-focused CEA, including produce-focused CEA; or approximately $0.46 per sharevertical farming, healthcare, industrial, commercial packaged goods ("CPG"), and retail. We are a trusted partner and adviser to our clients and provide value to our clients regardless of the sector in which they sit or solution for which they are utilizing us.
As is detailed in the Project Delivery Comparison chart below, in the CEA sector, the advantages of the urban-gro design-build model vs the traditional owner-contracted model are clear. There is a single responsible party for our clients' needs from conception through operational start. This results in greater efficiencies throughout the design-build process and a faster speed to launch. Additionally, our experience and expertise within our sectors help to prevent costly mistakes for our clients.
Outlined below is an example of a complete end-to-end design-build project that demonstrates how we provide value to our clients over time.
Our design-build solution, when focused on indoor CEA, offers an integrated suite of in-house services and equipment systems that generally fall within the following categories:
•Service Solutions:
•Architectural Design, Engineering, and Construction Services – A comprehensive collection of services including:
i.Pre-Construction Services
ii.Cultivation Space Programming ("CSP")
iii.Architectural Design and Interior Design
iv.Engineering
v.Integrated Cultivation Design ("ICD")
vi.Owner's Representative Services / Construction Management ("CM")
vii.General Contracting ("GC")
•Additional Service Offerings including:
i.Facility and Equipment Commissioning Services
ii.gro-care® Crop and Asset Protection Services including Training Services, Equipment Maintenance Services, Asset Protection Program, and an Interactive Online Operating Support System ("OSS") for gro-care® and client document delivery and project management
iii.Property Condition Assessment ("PCA")
•Integrated Equipment Systems Solutions:
•Design, Source, and Integration of Complex Environmental Equipment Systems including Heating, Ventilation, and Air Conditioning ("HVAC") solutions, Environmental Controls, Fertigation, and Irrigation Distribution
•Value-Added Reselling ("VAR") of Cultivation Equipment Systems
•Strategic Vendor Relationships with Premier Manufacturers
Service Solutions
Architectural Design, Engineering, and Construction Services
We generate revenue by providing our clients with design-build service offerings that include architectural, interior, and engineering design, construction and construction management, as well as services for the operational stages of the facility. Our in-house architectural, interior design, engineering, construction and cultivation design services integrate design with pre-construction services and thereby reduce project schedule and capital investments.
Pre-Construction Services include providing a forecast summary of what it will take to get a high-performance facility built, giving initial indication and detailed analysis of budget, timeline/schedule, and potential large decision impacts including value analysis and value engineering options. The integration of Pre-Construction Services can expedite project completion, lower initial project costs, and help reduce costly change orders.
CSP is an early-stage engagement with stakeholders that provides an optimized basis of design including the interaction of people, plants, and processes. The output of CSP provides an optimized analysis of spatial needs based uponon stipulated criteria and can accelerate construction and regulatory approval paths, save stakeholders money and time, and enable a process-driven decision-making approach.
Architectural Design is the conversion rateimplementation of 193.3936722 shares per member interest issued when we converteda defined process from development of vision to built environment. Architecture includes the integration and coordination of all project required disciplines such as civil, landscape, structural, mechanical, plumbing and electrical engineering, fire protection, security, interior design, and other specialty disciplines. Our services are built around an integrated design process focused on the collaborative development of client-driven solutions. Specific to the CEA industry, our team’s understanding of the relationship between people, plants, and process helps clients maximize profits and efficiencies while minimizing capital investments, and operational and maintenance costs.
Interior Design involves branding and development of the interior aesthetic vision. Our collaborative and integrated approach from our award-winning team begins with inspiration boards focused on understanding the client’s aesthetic desires. Interior design is holistic and thereby includes all aspects of the building interiors from full branding to the selection and design of all finishes and interior systems. Common discussions beyond aesthetics include the cost, durability, and maintainability of systems presented.
Mechanical, Electrical, and Plumbing ("MEP") engineering design focuses on the entire building, not just the cultivation space, which in turn eliminates the "gap" between cultivation systems and the building systems. We provide engineered construction contract documents for mechanical, HVAC, plumbing and electrical systems required for the building permits necessary to obtain a Certificate of Occupancy. Our team evaluates client capabilities, needs, desires, and budget in development of recommended systems through a client-focused collaborative process culminating in the delivery of high-performance and low-maintenance systems.
ICD creates cultivation space-focused design layouts that integrate climate control, fertigation, benching, air flow, and lighting. Our ICD team’s deep understanding of cultivation systems provides the foundation for ensuring optimal space utilization as they utilize an integrated and collaborative design process focused on understanding, vetting, and implementing the client’s vision. Products utilized in the ICD’s basis-of-design ensures the integration of high-quality systems and product performance. These detailed ICD plans are taken through the construction document stage and are leveraged by our clients to efficiently solicit contractor bids.
Construction and Construction Management provides all the additional necessary parts to deliver our clients' projects, from the initial estimate and bid process, to subcontractor selection, and management of all construction details. Our skilled project managers, specialized within our clients' sectors, maintain knowledgeable open lines of communication with both clients, onsite superintendents, and internal and external construction partners to manage expectations, costs and schedules.
Our Additional Service Offerings
Our Facility and Equipment Commissioning Services provide a cultivation-level view of the complex system made up by each piece of equipment and ensures systems are running properly. Many of the current service options available to CEA cultivation clients are isolated to vendors providing post-sale service for a single piece of equipment. Our team confirms contractors and specialty trades are installing systems to the design intent allowing for rapid installation, continuous process improvement, and increased revenue for our clients.
gro-care® is a highly differentiated service offering that provides a combination of CEA cultivation facility commissioning and an asset protection program through training, equipment maintenance, on-demand support, standard operating procedures ("SOP"), and a client-specific OSS that acts as an online hub for clients’ ongoing services. Combined, this solution focuses on the troubleshooting, tuning, and support of a myriad of cultivation systems and equipment while further providing guidance for client interactions with tradespeople working on HVAC, electrical, and plumbing in the facility on an ongoing basis.
Our PCA offering provides value to all clients regardless of sector, but also adds unique value for our clients in the CEA sector. PCA includes researching historical records of the building as related to code issues, field documentation of existing conditions, a report of findings with materials systems categorized by condition, and a capital expenditure report for correction of any deficiencies. For our clients in the CEA sector, our PCA offering provides analysis of components specifically within CEA facilities, both with an eye towards critical cultivation and manufacturing systems as well as helping clients understand a facility's ability to meet any state regulations that may have evolved such as adherence to standards such as Current Good Manufacturing Practices ("cGMP"), EU-GMP, and/or World Health Organization guidelines on GACP. PCA provides necessary data for clients to understand options for optimizing operational performance, understanding deficiencies, and property preparing for necessary capital expenditures.
Integrated Equipment Solutions
While our engineers play an integral part in the design of most of the complex equipment systems that are then integrated into a corporation in 2017). These funds were used to (i) add two systems designers to expand our Cultivation Technologies team to support market demand; (ii) expand our operationsCEA facility, we also provide consultative reselling of more common solutions that we integrate into the expandingoverall design. For CEA, the environmental goal is to maintain a stable and consistent vapor pressure deficit ("VPD") according to the client’s priorities through environmental control of relative humidity and temperature during all stages of growth. There are four main variables in CEA that affect plant growth (and can impact VPD): (i) water and nutrients; (ii) environmental control; (iii) CO2; and (iv) lighting. The complex equipment systems that we design and procure for our clients play an important role in helping control and maintain the cultivation facility's environment for plants.
Design, Source, and Integration of Complex Environmental Equipment Systems
Complex Environment Systems for CEA include environmental controls, fertigation marketplaceand irrigation distribution, a complete line of water treatment and wastewater reclamation systems, and HVAC equipment systems.
As related to systems and equipment, the most significant and influential variable within a CEA facility is the ability to control and maintain the cultivation environment. This is accomplished through the integration of mechanical systems (HVAC), lighting, air movement systems, irrigation systems, and environmental controls. Maintaining a consistent desired temperature and humidity level within the cultivation spaces ensures less stress on plants. urban-gro designs these systems to fit within our clients'
budgets and provides our clients' facilities a more stable environment to maximize plant health and yields, minimize crop loss, minimize utility costs, save on capital equipment, and maximize sustainability.
Value-Added Reselling of Cultivation Equipment Systems
We act as States approving legalized cannabis increased, (iii) hire a mechanical engineer to begin vetting opportunities to add IP and technologyan experienced vendor providing VAR to our future business offering, (iv) hiredclients when selling vetted best-in-class commercial horticulture lighting solutions, rolling and automated container benching systems, specialty fans, fertigation/irrigation systems, environmental control systems, and microbial mitigation and odor reduction systems. The acquired knowledge of how each of these systems work in combination with and in tangent to the overall ecosystem is a strategic financial consultantsignificant benefit that our engineers and product experts offer to aidour clients. Not only are many competing products reviewed in compilingeach category with the intention of vetting the best solution, but we also continually search out and review competing technologies to ensure that only the best-in-class equipment systems are integrated into our projects. As such, we believe it will be imperative to maintain and to continue to develop close relationships with both existing and new leading technology and manufacturing providers.
Today, we typically do not sell any cultivation equipment systems individually as a
business forecast model;,one-time sale. The majority of equipment sales are sold as part of a larger all-encompassing project solution that spans over a 12 to 24 month period and
(v) fund working capital to support brand building marketing initiatives focused on trade show participationincludes design, engineering, and
an Increased on-hand inventory position.In May 2017, we commenced a private offering of our Common Stock wherein we received subscriptions of $2,546,000 from the sale of 2,546,000 shares, at $1 per share,both custom complex and more standard equipment systems.
Strategic Vendor Relationships with Premier Manufacturers
We work closely with leading technology and manufacturing providers to
76 investors, including 58 “accredited” investors, as that term is defined underdeliver an integrated solution designed to achieve the
Securities Act of 1933, as amended. These funds were used to repay debt, expansionstated objectives of our
existing business operations, new investment opportunitiesclients. We pride ourselves as being equipment agnostic – meaning we do not have allegiances to any single manufacturer – we offer the solution that will best meet the design and
working capital.Thereafter, on May 15, 2018, we filed a registration statement on Form S-1 with the US Securities and Exchange Commission (“SEC”) wherein we registered 4,157,936 sharesbudget constraints of our Common Stock withclients and design, engineer, and integrate whatever equipment fits the SEC. Our registration statement became effectiveclient's needs.
Revenues and Gross Profit Margins
As our business has evolved and diversified into design-build offerings, our margin profiles have changed. Professional service revenues for engineering design services contracts can be hundreds of thousands of dollars, depending on
August 8, 2018. As partthe spectrum of
this process we also filed a registration statement on Form 8-A, causing our Common Stock to be registered underservices desired by the
Securities Exchange Actclient and the size of
1934, as amended.In June 2018, we formed urban-gro Canada Technologies, Inc. as a wholly owned Canadian subsidiary company which we intend to utilize for all of our Canadian sales operationsthe facility. Construction design-build contracts can run in the future.
Our Company website iswww.urban-gro.com, which contain a descriptiontens of our Companymillions of dollars depending on the overall size of the facility. Equipment revenues for customized equipment systems can be millions of dollars, depending on the size of the cultivation facilities, the complexity and products, but such websitestypes of systems purchased by the client, and the information containednumber of systems purchased by the client. Sales of other products are typically of a recurring nature each month to a client and can be in the tens of thousands of dollars.
Targeted gross profit margins for each of the Company’s revenue categories are as follows:
•Professional services - greater than forty percent;
•Construction design-build services - greater than six percent;
•Customized equipment systems - greater than ten percent; and
•Other products revenues - greater than fifteen percent.
Gross profit margins are highly dependent on the complexity and size of the project.
Our Clients
We primarily market and sell our
websites are not part of this Report.solutions to clients in the CEA and Commercial sectors. In
addition, we also maintain branded technology product website under www.soleiltech.ag.Business Overview
We are an end-to-end agricultural solutions firm focused onthe CEA sector, our clients include operators and facilitators in both the cannabis and traditional agriculture produce growers. We provide design, engineering,markets in the United States, Canada, and technology implementationEurope. In the Commercial sector, we work with leading food and beverage consumer packaged goods companies in high-performance commercial cannabis cultivation facilities. Integration of systems through comprehensive design ensures a cohesive approach to cultivation that is both economical and regulatory compliant. We market our products and services throughout the United States, and Canada. During 2018clients in healthcare, higher education, and hospitality.
Environment, Social, and Governance
At urban-gro, we also made preliminary effortsrecognize the critical role that sustainable and responsible business practices play in shaping a resilient and prosperous future. In 2023, we partnered with an ESG service provider to proactively embark on projectsour corporate ESG journey. While we are not formally aligning with a specific framework, we are using the World Economic Forum (WEF)’s Stakeholder Capitalism Metrics as a guide for our reporting. The WEF has created a framework of ESG metrics and disclosures based on what it refers to as
the four pillars: Planet, People, Prosperity, and Governance. Currently in
other countriesthe final stages of development, our inaugural ESG report will be published on our website and will serve as
well, including Mexico, Jamaicaa reflection of our commitment to transparency and
Colombia.Revenuethe integration of ESG principles into our core business strategies.
urban-gro’s ESG initiative is generatedled by 1) workinga Board of Directors subcommittee which was formed in recognition of the increasing importance of sustainable and ethical business practices and responsible governance in the modern business landscape. In partnership with ownersthe broader Board of Directors, the ESG committee aims to:
•Strengthen the alignment of our corporate values
•Align stakeholder expectations
•Manage risk
•Ensure compliance
•Support investor relations
•Enhance the brand
•Boost innovation and efficiency
•Boost employee engagement
•Create long-term value
•Adapt to changing markets and trends
To better understand the topics most material to our business and actively engage stakeholders, urban-gro conducted a double materiality assessment to gain ‘inside-out’ and ‘outside-in’ perspectives. We engaged 29 internal and external stakeholders with a web-based materiality survey to gather quantitative and qualitative insights on impacts, risks, and opportunities. Analysis of this data identified 14 sustainability areas that present material impacts and opportunities for our organization. Of those 14, we prioritized the top five to inform our decision-making and reporting goals for the upcoming year. The top five topics are listed below:
•Data and Cybersecurity
•Business Ethics
•Diversity, Inclusion, and Equal Opportunity
•Energy Management
•Recruitment, Development, and Retention
Environment
Focus on environmental material matters, stakeholders emphasized energy and water management alongside clean technology to foster sustainable, efficient, and regulatory compliance in our operational practices. Climate adaptation and transition risk management were classified as essential in the Materiality Assessment in navigating the shift toward a low-carbon economy. As a professional services design-build firm focused on Controlled Environment Agriculture (CEA), our approach to sustainable facility design and engineer automatedconstruction has a direct impact on environmental well-being. We aim to be a part of the solution to the climate challenge by aligning with CEA industry best practices around water conservation and reuse, reduction of the carbon footprint associated with production and distribution, and increasing the efficiency of harvests. Our team has worked on over 1,000 CEA projects around the
world and combined with our team’s experience with Leadership in Energy and Environmental Design (LEED) and (EU)GMP facility certification, we are successfully reducing waste, water consumption, and carbon consumption across multiple market sectors. As technological advancement continues, we intend to work with our partners to incorporate more earth-friendly practices and solutions in CEA and other commercial sectors. Such concepts include, but are not limited to, active energy management, HVAC efficiency, and innovations in lighting.
By helping to reduce our clients’ footprints, we recognize the importance of measuring and reducing our own carbon footprint as well. While we have not formally begun measuring and reporting on our greenhouse gas (GHG) emissions due to our small size and the early nature of our operations, as we grow and add resources—or if the results of future stakeholder Materiality Assessments emphasize a growing interest in this metric—we will further investigate regular GHG emissions monitoring and reporting.
Social
Data and cybersecurity topped the social material matters, with the criticality of safeguarding data integrity, privacy, and resilience against cyberattacks essential to maintaining stakeholder trust, regulatory compliance, and business continuity. We understand the material effects that cybersecurity has on our business operations and have various measures in place to monitor and safeguard our information technology systems. These tactics include ongoing employee training, maintenance of backup and protective systems, for large commercial facilities, and 2) delivering recurring consumable product salesuse of modern endpoint detection and response tools. We operate in a fully cloud-based environment to enhance scalability, flexibility and resilience against damage, disruption, and unauthorized access. In 2023, we documented over 100 hours of company-wide training. Documented policies and requirements cover topics like data security, email, hardware and software compliance, network security, password policy, patch policy, purchasing policy, and technology integration. Soleil® Technologiesdisposal. A combination of these and other efforts like third-party supported internal and external pen testing, real-time backups, and full adoption of the NIST Cyber Security Framework 2.0 have resulted in a nearly 25-point advantage in urban-gro’s Microsoft Secure Score relative to other similar-sized businesses.
Promoting diversity and employee well-being is likewise crucial to building trust, fostering innovation and resilience, and driving long-term organizational success. In the Materiality Assessment, stakeholders noted how promoting diversity in the workforce enhances morale, productivity, and social cohesion within communities. By fostering an inclusive workplace culture, urban-gro not only meets societal expectations but also contributes to economic equity and social progress. In the spirit of this commitment, the Company introduced a ‘floating holiday’ in 2024 that allows each employee flexibility and choice when it comes to observing holidays. The ‘floating holiday’ aims to empower each of our proprietary IoT platform providing senseteam members to celebrate meaningful moments in a way that aligns with their values and control capabilities, allowingbeliefs. We are also proud supporters of several charities and associations including Teens for Food Justice, an organization that is catalyzing a youth-led movement to end food insecurity through high-capacity, school-based hydroponic farming. Our company and/or employees are also members of industry associations and trade groups like American Hort, Association for Vertical Farming, the operatorAmerican Society of Heating, Refrigeration, and Air-Conditioning (ASHRAE), the Georgia City-County Management Association (GCCMA), the Georgia Chapter of APPA (GAPPA), the Global Cannabis Network Collective (GCNC), the National Cannabis Industry Association (NCIA), and the National Cannabis Roundtable (NCR). At urban-gro, we understand that the workplace reflects the world around us, and we want to remotely monitorensure that everyone feels valued and respected.
Governance
From a governance perspective, prioritizing ethics, resilient business models, and effective governance was highlighted by stakeholders in the
crop, ensuring real-time protectionMateriality Assessment to bring integrity, adaptability, and sustained performance amidst evolving market landscapes. Stakeholders recognized how adherence to high ethical standards fosters transparency, accountability, and investor confidence. urban-gro takes a multi-pronged approach to guide a successful governance program and ensure that our stakeholders’ best interests are acted upon. This starts with our strong and diverse Board of
investments.Directors comprised of leaders from a variety of fields and backgrounds. The Board Diversity matrix is published annually on our website ir.urban-gro.com and within our proxy materials. Currently, we utilize four Board committees:
•The Audit Committee: Focuses on internal controls, risk management, and multi-discipline oversight enabled by its charter and structure.
•The Compensation Committee: Focuses on compensation principles, policies, and practices for all employees.
•The Nominating and Corporate Governance Committee: Oversees the Company’s corporate governance practices and procedures and recruits, nominates, and makes recommendations to retain Board members.
•The Environmental, Social, Governance Committee: Oversees the Company’s approach to ESG practices and procedures.
In addition to charters for the committees listed above, we have a Code of Business Ethics and Conduct along with documented policies related to Anti-Corruption/Code of Business Ethics, Whistleblower Policy and Hotline, Enterprise Risk Management, Independent Pay Consultant, and Insider Trading. By upholding governance excellence, we aim to mitigate risks and contribute to the stability and integrity of our business environment.
Costs and Effects of Compliance with Environmental Laws
Our current servicesbusiness operations are not subject to any material environmental laws, rules or regulations that would have an adverse material effect on our business operations or financial condition or result in a material compliance cost.
Growth Strategy
Our employees and
products include: | · | Full design, engineering, sales, and start-up commissioning of integrated cultivation systems that includes: |
| o | Environmental controls, fertigation and irrigation distribution; |
| o | Commercial grade light systems, includinglight-emitting diode (LED) and high-pressure sodium (HPS);
|
| o | Complete line of water treatment and reclamation systems;
|
| o | Rolling and automated bench systems;
|
| · | Integrated pest management plan design and product solutions; and |
| · | Soleil 360, an agriculture technology platform |
Since inception,the application of their acquired knowledge are our most valuable assets as an organization. Our growth strategy involves leveraging this considerable strength as a basis for growth across three pillars of focus and exploration. These three pillars allow us to continue to provide value to our current and future clients:
•Leverage our sector diversification and in-house capability offerings
•Focus on design-build solution
•Expand our regional client base
Leverage our Sector Diversification and In-House Capability Offerings
Our vision is to be a leading provider for purpose-built turnkey indoor CEA facilities. To that end, we have
serviced over 500 clients and
have designed and assisted in build out of over 75 facilities owned by some of the largest multi-state cannabis focused operating companies in both the United States and Canada. While no assurances can be provided, we forecast over a thousand customers will be purchasing our cultivation products bi-monthly by 2020, provided that additional countries and states in the US continue to adopt legislation approving the useseek to diversify our service capabilities to provide value to our clients through acting as a single point of medical or recreational marijuana.According to Viridian Capital Advisors, an estimated $13.8 billion was raised by cannabis companiesresponsibility in
2018. A significant portion of this capital is expected to be used for facility buildouts. New Cannabis Ventures reported that as of April 2018 there were over 7,000 cultivation licenses issued in the US. This number is rapidly increasing as more states enter the legal cannabis industry.our turnkey design-build, approach. While
no assurances can be provided, we
believe this gives us a large and growing market.To date, our revenues have been derived from sales to the cannabis industry. On average, our revenues have grown by 70% per year since 2015. During 2018 we provided services to over 1.2 million square feet of canopy to the cannabis industry.
Our primary business purpose is to engage directly with large scale indoor and greenhouse commercial cultivators growing high-value crops and design and engineer state of the art facilities and systems that focus on maximizing plants yields and lowering overall operational costs. We have and will continue to workexpand our services organically, we began this journey through the acquisition of engineering, architecture, and construction management firms over the last 18-month period. This in-house service capability diversification also brought with it a diversified client base that included clients from sectors outside of CEA. We expect to continue to compete successfully in all of these sectors as we believe it helps us attract the best talent, weather the downturns of any one sector, and continue to find growth and future returns for our shareholders.
We believe that acting as a single point of responsibility as a provider of turnkey design-build solutions, especially one with the depth and breadth of experience within all sectors that we've served, we can get our clients to market more quickly and more efficiently than others.
We intend to continue to leverage all our service capabilities within our design-build delivery model, across sectors, to grow operationsthe services and production facilitiesvalue we are providing to pursue strategiesour clients. As an example, some clients may currently only be engaged with us for architectural design - we plan to leverage our in-house model and take advantage of every opportunity to cross sell our other services such as engineering; or construction management or general contracting, to provide services, products,further value to our clients and other potential revenue-producing opportunitiesgrow our revenues and margin dollars.
Focus on Design-Build Solution
As written previously, through both organic and inorganic means, we have diversified our in-house service capabilities so that we are able to provide full turnkey design-build solutions to our clients. These design-build projects allow us to engage with a client at the conception of a project and act as a single point of responsibility to provide value throughout and beyond the project lifecycle. These design-build projects are also much larger from a revenue and project complexity perspective - instead of working on 100s of projects, our goal will be to grow through working on a smaller number of projects of a much larger size, allowing us to capture greater revenue and more margin dollars and overall, provide greater value to our clients. We expect these larger projects will also provide us with the foresight to more accurately forecast our future quarterly business performance.
Expand our Regional Client Base
While continuing to focus on building out our solution set and expanding our client base in all sectors, and more specifically establishing our end-to-end solution as the industry standard for CEA indoor cultivation in the
high value crop arenas. We engage directly with the ownership groups and growers at these facilities and strategically work with them to provide value-added services and industry best products that assist them in lowering production costs and increasing crop yields. We believe our customers work with us becauseU.S. market, we
save them time, money, and resources.In 2018, we accomplished several objectives, including the hiring and placement of our executive leadership team. We consider this a major milestone. To help us efficiently and effectively accomplish our growth objectives, management believes that hiring qualified, experienced persons and placing them into executive management is critical. During 2018 we hired George R. Pullar, our CFO; Larry Dodson, our CTO; Dan Droller, our EVP of Corporate and Business Development; and, Jonathan Nassar, our EVP of Sales. With this team in place, we believe we have the leadership necessary to help usalso plan to continue to expand our business. See “Part III, Item 10, Directors, Executive Officers and Corporate Governance”: included in our Proxy Statement, which has been incorporated herein as if set forth.
As discussed below we also increased our ownership in key technology companies. We believe that the additional investment into EDYZA (additional 5% ownership) and Total Grow Holdings (additional 10% ownership in 2018 and an additional 15% in 2019) will allow our technology team to continually integrate and solidify the Soleil Sense & Control platform to further gain meaningful and valuable insight from the mined data available in a closed-loop platform.
In 2018, we surpassed the 50-employee mark, and consequently, decided to seek out additional office space. The Company opened a satellite office in the downtown WeWork The Lab facility. This centrally located office allows us access to the larger technology and engineering talents pools located in the Denver metro area and the Denver Tech Center. Our technology team and design teams are now located in this facility. See “Item 2, Properties” below.
Current Business
Our intent is to continue to capture market share as the cannabis industry continues to develop and mature, and to leverage that experience and our technology development to penetrate the faster growing segments of the broader horticultural and agricultural industries.In the cannabis industry we engage directly with ownership groups and growers operating large indoor and outdoor greenhouse cultivation facilities and strategically work with them to provide value-added services and industry best products that assist them in lowering production costs and increasing crop yields.
We define our relationships with our customers through two areas comprised of design & integration services and agricultural technology:
We offer the following Design & Integration Services:
| · | Systems Design, Engineering & Integration |
| · | Start-up Commissioning and Post-Commissioning Services |
| · | Remote Monitoring and Support |
| · | Integrated Pest Management |
We also offer the following agricultural technology hardware and software solutions:
| · | Wired and wireless communications equipment that is used for the customer on-premise network, connecting our Sensing and Control systems |
| · | Cloud-based secure data services and back-end management and administration system |
| · | Customer graphical user interface (GUI) |
As a part of our design and integration services and ag-tech offerings, we offer the following cultivation systems and crop management products:
| · | Climate Control, Fertigation & Irrigation Distribution |
| · | Freshwater, Wastewater & Condensate Treatment Systems |
| · | LED , HPS, and CMH Light Planning and CAD Design |
| · | Rolltop and Automated Benches |
| · | Odor Mitigation & Air Sanitizing |
| · | Pesticides & Bio-controls |
| · | Fans & Industrial Spray Applicators |
| · | Fertilizer & Plant Nutrition Products |
Business Growth and Diversification
We are focused on driving shareholdersecuring and providing value by continually developingto clients in the technology platformCEA sector, and continue to develop and iterate on our marketing and outreach plans as the sector comes online slowly. We have thus far signed several engagements with CEA clients in multiple countries and look to continue our growth through this geographic expansion.
Our Competition
We believe that our experience and expertise combined with our complex end-to-end design-build solutions places us as a growing leader in the indoor-CEA sector. Within that CEA sector, we do face competition from companies that offer some, but not all, portions of an all-encompassing design-build facility solution. We compete for projects with other smaller and mid-sized companies that focus solely on architectural and interior design, engineering, construction, or product sales. For services, we see these competitors as offering similar specific area solutions, though not integrated nor as in depth on fertigation design. For product sales, we currently view our competition to be focused on predominantly commodity "off-the-shelf" items like lighting and other cultivation staple products, both pre-startup and post-startup. This competition comes from traditional wholesale horticulture dealers, online retailers, and some manufacturers who sell direct.
Greenhouse manufacturers and European systems integrators may increasingly seek to offer comprehensive product and service solutions to compete with our integrated solution, but they are primarily focused on the greenhouse industry, and not on indoor-CEA facilities. European systems integrators in particular are experienced and have a strong operating history in traditional horticulture and provide specialized, intensive, and large-scale solutions that revolve around greenhouse projects. Instead of competing with these integrators, we find ourselves working with them and combining synergies to work on projects together.
For our clients from non-CEA sectors such as Industrial, Food and Beverage CPG, Healthcare, Education, and Civic, we believe we face more competition from those who offer some, but not all, portions of a design-build facility solution but also those who employ the design-build methodology. We believe we compete successfully here because while the overall design-build projects come at higher revenues and margin dollars, the projects from non-CEA on which we typically engage are of a size that we addedbelieve is smaller than our design-build competitors are set up to take on. In addition, the majority of our non-CEA client base is developed from long-term relationships that provide our Company with a strategic advantage.
Regulation
As it relates to our business
plan in 2017 and focusing on bringing more intellectual property (“IP”) in-house. We are focused on integrating technologies including high density wireless sensors, machine learning, and artificial intelligence into our product offerings. We intend to diversify our sector sales strategy by targeting traditional horticulture operators with our service and systems to companies involved in growing herbs, microgreens, leafy greens and lettuce, strawberries, and vine crops including tomatoes, cucumbers, chilies and peppers. The technologies we have developed, deployed, and in continuous innovation are described below as Soleil® 360, Soleil® Sense and Soleil® Control, within the section on Product Branding and Strategy.Focusing on global agriculture and all high value crops, this technology is expected to allow us to offer our customers drastically better efficiencies while decreasing costs of production and increasing yields. There are no assurances this benefit will accrue.
Industry Partnerships
As a systems integrator we believe it is imperative for us to maintain close relationships with leading technology partners, and as such, we have attempted to integrate ourselvesconducted in the horticulture and agriculture industry, having formed strategic partnerships with a number of industry-leading solution providers like Edyza, Fluence Lighting, Priva, Argus, Total Grow Control, Netafim and Biobest Group NV. A brief description of these companies is as follows:
Edyza - Based in Irvine CA, Edyza is an advanced technology development company focusing on high-density IoT (Internet of Things), wireless networking and Cloud-based computing. Development includes proprietary designs of sensor nodes hardware and firmware, architecting wireless networks, and optimal use of network equipment such as Edge-servers, Gateways, wireless Hubs. Primary goals are to provide for high volume data acquisition and data visualizations, and software algorithm solutions.
Fluence Lighting -Fluence Bioengineering LED-based lighting systems are designed to provide high levels of photosynthetically active radiation (PAR) ideal for commercial cultivation and research applications from microgreens to cannabis. From sole-source indoor grow lighting to supplemental greenhouse lighting, Fluence custom tailors the light spectrum and form-factors to optimize plant growth and increase yields while consuming less energy and reducing operating costs versus legacy technologies. All of the LED-based grow lights are built in Austin, Texas. All grow lights are ETL listed and come with a 3-year or optional 5-year warranty.
Priva -Based in Ontario Canada, Priva provides building automation technology for the optimization of environmental conditions and process management for horticulture. Priva offers the best solutions for multiple indoor growing facilities from vertical farms to grow containers, warehouses to rooftop greenhouses. Priva’s solutions address water (hydroponics), climate & cultivation, and labor & management. Priva is a horticulture industry leader with more than 50 years of experience in horticulture developing algorithms for plant-based control strategies. These strategies create the best indoor growing solution when combined with Priva hardware and software modules.
Argus – Argus Controls, a division of Conviron, provides automated control systems for the horticulture and aquaculture industries. Argus systems provide three essential functions: 1) Fully integrated equipment control; 2) Advanced monitoring and alarms, and 3) Comprehensive data acquisition and management information. Argus capabilities include facilities automation and specialty monitoring and control applications to support the needs of cultivators. With over 30 years of leadership and innovation in control technology, Argus systems are used in horticulture and biotechnology research facilities, universities, aquaculture and aquaponics, and many other custom control applications at sites throughout the world.
Total Grow Control – Total Grow Control (TGC) provides advanced control systems for large scale indoor facilities. TGC provides cultivators with a control system that manages watering & nutrient delivery, lighting and environmental control. With internet-based monitoring, cultivators have access to up-to-the-minute operational performance as well as complete control via mobile devices.
Netafim - Netafim is recognized as the world leader in drip irrigation systems and agricultural projects. Since 1965, Israel based Netafim has been a pioneer in drippers, dripper lines, sprinklers and micro-emitters. Netafim also manufactures and distributes crop management technologies including monitoring and control systems, dosing systems, and crop management software.
Biobest Group NV –This company specializes in pollination and biological control. In 1987, Biobest was the first company to put bumblebees on the market. With thirty years of expertise, Biobest continues to deliver high quality products at all times by maintaining quality at every level: in the factory and during the transport in order to guarantee an optimal result in the crop. Biobest strongly focuses on research and development, providing tailored advice for crops worldwide.
Product Branding and Strategy; Soleil® 360 Ag-Tech Platform, Soleil® Sense and Soleil® Control Technologies
Soleil® 360 Ag-Tech Platform
Soleil Technologies is one of our divisions. The Soleil’s technology platform comprises a Cloud-based services back-end management and administration system, and an intuitive customer graphical user interface (GUI). It is built with the capability to handle over 22 billion records per annum, and several thousands of subscription-paying customers.
Soleil sensors are connected to the Soleil 360 Platform employing a robust, high performance, proprietary, tree-mesh wireless network topology. The user interface is designed for intuitive ease-of-use navigation of the customer’s systems, and as a universal user interface that will integrate all typically disparate systems within the grow environment.
The Soleil 360 business model is a subscription-based, high-value data services product. Hardware and network services remain the property of the company, and subscription fees provide for data hosting, data analysis, reporting and visualizations. The subscription sales contracts will increase adoption in the industry due to lower capital costs for acceptance and implementation by customers.
Standard and customized data visualizations are provided and available, and types and details are dependent on the subscribed level of service. Standard reporting consists of graphs and charts, and custom visualizations also include Augmented Reality and Mixed Reality data representations.
Soleil® Sense
The Soleil 360 technology platform utilizes Soleil Sensors to acquire data within the grow environment. Sensed data is transmitted over the wireless network and to Soleil 360 Cloud services. Data undergoes processing for reporting analysis and data visualizations important to the grower for actions and corrections to the grow environment equilibrium and balance. The current Soleil sensor product family includes sensing for temperature, humidity, carbon dioxide, organic compounds, barometric pressure, soil moisture, conductance (nutrients), and grow light output intensity. The combination of sensing with the environmental factors that are measured, are essential components to achieve the careful balance of a grow environment.
The platform leverages sensor data and machine-based learning in order to reduce operating costs and increase yields. Scalable to thousands of ultra-high-efficiency sensors, growers are able to access real-time, actionable data from anywhere in the world and use that insight to optimize growing conditions or address potential issues before they affect the crop.
Target applications goals of Soleil technologies are as complete solutions utilized by customers for increased operational efficiency, efficient use of hardware and network systems, reduced waste, all leading to improvements in profitability.
As water resources become scarce and transportation, energy, and labor costs rise,legalized cannabis-focused CEA (Controlled Environment Agriculture, the production of cannabis, vegetables, and flowers indoors) is quickly gaining popularity across the globe. The ability to precisely control environmental and plant conditions in a regulated, indoor environment helps optimize crop yield and quality. With just a few clicks, growers are able to assess temperature, moisture content, nutrient content, and pH—among other factors—in order to maintain ideal growing conditions. While existing substrate (soil) sensing technology is very costly to implement and is subject to scalability, wire, efficiency, and reliability constraints, the demand for real-time data is on the rise.
In addition to environmental and soil sensing, the same platform is being leveraged to economically monitor mission critical mechanical systems using vibration, energy consumption, and temperature. The sensors will alert cultivators to potential equipment failures like broken fans, clogged emitters, or inefficient HVAC systems.
Soleil® Control –Focus on Vertical Integration
As the cannabis industry consolidates and larger players enter, we believe that the ability to manage operations on a massive scale is a key differentiator that allows cultivators to drive higher yields at lower costs. Since our inception, our management has designed and engineered a multitude of projects that seek to leverage scale that also require complex and sophisticated climate and fertigation controls. Based on these insights and experiences we recognized that the current technology available in the agricultural space is not sufficient, scalable or flexible to meet the growing and complex demands of cultivators seeking to maximize yields in cannabis and modern horticulture and agriculture. In that light, we sought out new and highly sophisticated tools that brought together the latest in a broad spectrum of controls technologies.
In February 2018, we acquired a 5% interest in Total Grow Holdings, LLC ("TGH"), for $125,000. TGH was borne out of the highly complex petrochemical industry. This agreement also provides us with the right to purchase an additional5% on a fully diluted basis at the same valuation on or before August 31, 2018. We also have the right to name one of the three Board members to the company. The TGH technology and the management team experiences bring us the ability to meet our increasingly complex needs of supplying product and services to the larger sized cannabis grow operations that are being developed as the cannabis industry matures. TGH markets their products under the brand name Total Grow Control.
In the second quarter of 2018 we launched a co-branded product called Soleil® Control powered by Total Grow Control (TGC). The Soleil® Control platform combines climate, environmental and lighting controls.
In the second quarter of 2018 we also partnered with TGH to develop and launch a line of fertigation products in the form a Batch Fertigation System and an Inline Fertigation System. We believe these two systems position us to meet the needs of cultivators seeking to maintain strict nutrient recipe mixes in smaller controlled environment (Batch) and for those seeking to scale a fertigation system for more expansive cultivations (Inline.)
Soleil® Lighting Product Line
Over the course of the last several years as the cannabis market matured and grew more competitive, we witnessed downward pressure on the pricing and margins of grow light systems. In response to this evolution of the industry our lighting team sought a middle-market alternative to the high-end systems previously marketed. In 2016, we began manufacturing our own fixtures under the Soleil® brand. First to market was our 315W Ceramic Metal Halide system for vegetative growth stage. The following year, Soleil® introduced a 1000W Double-Ended High-Pressure Sodium (HPS) grow light system for the flower growth stage. This fixture features wireless control capability, dimming options, two reflector options (wide and narrow) to accommodate desired light distribution, and various hanging methods (greenhouse bracket, chain, unistrut bracket, custom brackets). Testing by a third-party lab has verified that the Soleil® HPS fixture delivers comparable intensity and light distribution relative to the most superior fixtures on the market. All Soleil® fixtures are ETL listed and assembled either at our facility in Colorado or at our partner’s facility in Asia.
While the prevalence of LED lighting is growing in the horticulture market, traditional HID Lighting still maintains the majority of the market share. Industry indicators suggest that trend will continue as LED systems are tested in facilities and the price of technology decreases to achieve a reasonable ROI.
Opti-Dura® Cultivation Product & Equipment Offering
Since commencement of adult-use legalization in 2014, the price of legal, commercially produced cannabis has dropped from highs of $5,000 per lb., to below $1,000 per lb. in some mature state markets. We expect this trend to continue as additional states adopt legal cannabis. We believe this is a positive develop as it drives out the black and grey markets.
With lower product prices there is increased interest in reducing cultivation costs through procurement of new products and equipment. We have created a high-quality, value-driven “house brand” of cultivation products and equipment. Our sourcing of cultivation products and equipment has been researched and developed by cultivators – those who know first-hand the quality and specifications desired by cultivators.
Our OPTI-DURA product line includes:
| · | OPTI-DURA Large-Scale Pesticide Applicators - Many cannabis cultivators have grown from small operations over the years. As they have grown, they have kept application processes that are out-of-date and inefficient for larger-scale operations. Our OPTI-DURA commercial pesticide applicators are made in America and built by farmers. They are a must-have for commercial cannabis facilities utilizing high pressures and special spray nozzles that help get under the leaves where pests like to hide. We are an exclusive distributor of the heaviest duty sprayers on the market. |
| · | OPTI-DURA Nutrients and Fertilizers – Currently in development, OPTI-DURA nutrients and fertilizers are expected to significantly reduce the price of these key components to cultivation. The nutrient and fertilizer lines will enable cultivators to “dial in” the needs of specific strains for high quality, consistent cannabis. |
SALES STRATEGY
“The urban-gro® Systems Integration Solution”
Our sales team is comprised of one Executive Vice President, five Regional Sales Directors, two Sales Associates, and one contract Sales Management Company. These “relationship ambassadors” are located across the U.S. and their sole responsibility is to find, build, and support customer relationships. The internal sales management team is compensated with a base salary and are additionally leveraged on a commission structure tied to quarterly revenues and gross profits.
When the technical sell window opens on a specific opportunity, we provide the appropriate technical expert whom is able to quickly and effectively explain a proposed solution to resolve customer’s specific challenges. While we only sell solutions, we believe the true value is in the expertise behind the product. Services like full fertigation and irrigation distribution design in CAD, light plan layout design, air flow design, air sanitizing and odor mitigation design, bench layout design, and complete system commissioning are all services that our customers pay us for.
We believe this technical sales process requires true segment, expertise, which we also believe has not been readily available to cannabis companies.As a systems integrator we employ a team of segment-specific educated and technical experts with deep experience in each of the five solution segments, including:
| · | Environmental Sense and Control |
| · | Fertigation and Irrigation Distribution Design and Engineering, |
| · | Integrated Pest Management (IPM) |
Our team includes highly talented and educated individuals including individuals with a Master’s degree in Business Administration, Plant Science, Horticulture, Biology, and post-secondary degrees in Environmental Science, Horticulture, Agricultural Engineering, and Electrical/Mechanical/Controls.We rely on these technical experts in their areas of expertise to find and vet the best-in-class solutions, and then educate and inform our customers on best solution use and techniques.
In addition to leads generated from the execution of our marketing strategy, for additional new business opportunities, we focus on referrals generated from our relationships with industry partners, and from contract referral agents. By offering a referral program to consultants whose primary business model is to help their clients set up cultivation facilities from the design stage through cultivation, we ensure access to a strong network of commercial cultivators.
MARKETING STRATEGY
urban-gro Brand Strategy:For the Life of the Grow
Our existing customer base consists of large-scale commercial cannabis cultivators located throughout the United States, Canada, and around the world. We provide customers with services and solutions throughout the life of their grow — from system design and engineering, through compliance and competitiveness—our team of scientists and experts understand the regulations challenges, and opportunities unique to cultivators. The following outlines the various stages of cultivation operation and defines the ways in which we serve the needs of cultivators and their stakeholders.
Early-Stage Engagement/ Planning & Building Consensus
| · | Cultivation Systems Expertise | Early-stage engagement with stakeholders builds consensus -- saving stakeholders money and time through smart, informed decision making. |
| · | Systems & Space Programming | Early-stage engagement with stakeholders builds consensus -- saving stakeholders money and time through smart, informed decisions. |
| · | Specification & Design | Guaranteed Design Professionally designed layouts for irrigation, climate control, benches, fans, and lighting ensure optimal space utilization and product performance. |
| · | Actionable Data | Soleil® Sense and Control Technology’s high-density wireless network provides real-time data-driven monitoring for a complete picture of a cultivation. |
| · | Durable Products | Fertigation systems, rolling bench systems, HAF / VAF fans and commercial sprayers are effective and efficient. |
Today’s cultivation systemsfor each region are extremely complex. Our team of project managers and engineers support the installation process by coordinating with a client’s engineers and stakeholders to avoid project bottlenecks and support construction trades. Our commissioning team ensure that the equipment is installed according to the design and operatesdetailed as committed.
In addition, our team of IPM technologists and pest control advisors understand the complex cannabis cultivation laws around the country and assists our clients in maintaining their grow in compliance with the evolving legislation.
Through our IPM (integrated pest management) subscription service, we work with cultivators to provide cutting-edge pesticide and biocontrol regimens that adhere to a client’s regulatory environment. Our procurement team leverages our national buying power to ensure the best product value. These are consumables that commercial cultivators purchase on a regular basis. They include pesticides, nutrients and fertilizers and are paid for prior to ship or on terms for existing customers. Net 30-day terms are offered to existing customers and lines are increased according to account history.
Our Soleil® climate sensors and environmental controls offer real-time data to make informed decisions to optimize crop environments, preventing crop loss through actionable alerts and programmed responses to conditions.
We generate our profits based on the value we provide for design, engineering, and systems expertise. We begin projects by using a proprietary project estimation tool that inputs multiple variables about the size and complexity of a potential new facility or a retrofitted facility. The output of the tool estimates the dollar amount of design and engineering time, systems, materials, project management, and miscellaneous costs necessary to provide a system that meets the needs of the customer. Once the project estimate is determined, a design fee and project deposit are determined. The design fee is a function of the complexity of the controls system, the number of irrigation zones, types of nutrients used, and the number of individual plants that require individual irrigation. The project deposit is between 10% and 15% of total project cost and varies based complexity and type of systems.
When the customer approves the estimate and pays the respective fee and deposit, our designers and engineers begin configuring and customizing the system. When a final design is approved by the customer, we then determine a final cost for time and materials and provides a final quote to meet all specifications. We then collect an order deposit to begin the procurement process. Within two weeks of system readiness, we collect a final deposit from the customer. We then ship the final system to our customer. Once the system is installed by the customer’s chosen mechanical, electrical and plumbing contractors we dispatch an engineering team to commission the system.
To date, the cost to our customers for our systems have ranged between $75,000 and $2,500,000, depending upon depending on the size of cultivation, the complexity of systems, types, and the number of systems utilized from our product portfolio. We do not provide financing.
Subsequent Event
Effective March 7, 2019, we acquired 100% of the stock of Impact Engineering, Inc., a provider of mechanical and electrical engineering services. Since 2009, Impact has operated in the cannabis industry under the dba “Grow2Guys”. We issued an aggregate of 500,000 shares of our Common Stock in exchange for all of the issued and outstanding stock of Impact Engineering (hereinafter referred to as “Impact” or “Grow2Guys”).
We believe this acquisition will allow us to consolidate our internal fertigation design team with the Mechanical, Electrical, and Plumbing design team of Impact. The consolidation of this group allows us the opportunity to continue to deliver integrated designs for all of the key systems in a large, commercial grow. With the ability to have Professionally Engineered (PE) stamping to all of our designs, this solution will also bring considerable cost reduction opportunities to our customers.
Grow2Guys has provided full-service mechanical, electrical, and plumbing (MEP) engineering services for commercial owners since 1982. Its services include:
| · | HVAC engineering and design; |
| · | plumbing engineering and design; |
| · | electrical engineering and design; and |
| · | documentation for the building permits necessary to obtain Certificate of Occupancy. |
Impact has provided design and engineering services for over 300 cannabis related facilities across North America, including cultivation and extraction facilities, dispensaries, and MIP kitchens. The firm’s customer base includes U.S. and Canadian single facility owners and multi-state operators with cultivation facilities ranging from 5,000 square feet to over 200,000 square feet. With this industry-specific experience, Impact has developed significant expertise in cannabis facility design and engineering, which we believe compliments our current operations. Impact is licensed to provide professional engineering services and stamp drawings in 47 states.
During each of its past two fiscal years Impact generated revenues in excess of $700,000, with 5 figure net profits in each year. Management expects that this accretive acquisition will have an immediate positive impact on our revenues and favorably impact our goal of attaining profitability in the near future.
As a result of the acquisition, Impact is now a wholly-owned subsidiary of our Company, allowing us to engage with cultivators earlier in the design process. While no assurances can be provided, we believe that this avenue for early engagement will support our continued growth in the cannabis sector, providing facility design, products, solutions, and agricultural technology. Through the acquisition of Impact we expect to expand our cultivation system design operations which, together with our full-service MEP engineering services, should allow us to effectively engage customers much earlier during the building design stage. Our firms’ combined experience allows us to now offer the market a united team highly experienced in the end-to-end design and delivery of optimized cultivation systems.
Management believes the acquisition of Impact will improve our ability to better serve our current and future customer base by expanding on the fully integrated products and services that we currently offer. While we have acquired Impact for coordinated building and cultivations systems design, we intend to continue to expand our current relationships, as well as to develop new relationships with regional MEP engineering firms in other regions throughout North America.
With the addition of the Impact team our number of employees expands with the addition of five full-time employees, including 37-year mechanical engineering veteran and founder of Impact, Brian Zimmerman, who is a licensed professional engineer (PE). Other added positions include a project manager and three mechanical designers. As part of the terms of the acquisition we entered into an employment agreement with Mr. Zimmerman, who shall remain as the President of Impact. Impact will operate at our downtown Denver offices located at WeWork, The Lab, 4th floor, Room 4A, 2420 17th St., Denver, CO 80202.
Growth by Acquisitions
As discussed above, our management is always aware of other related companies and how they may positively impact our business. We have already consummated two acquisitions and intend to continue to engage in what we believe to be synergistic acquisitions or joint ventures with unrelated companies that we believe will enhance our business plan. Ultimately, our intent is to become a national or internationally branded cultivation company. One of the principal reasons why we have elected to become a reporting, trading company is to allow us to utilize our securities as compensation for these potential acquisitions. There are no assurances we will become a reporting, trading company or if we are so successful, that we will be able to consummate additional acquisitions using our securities as consideration, or at all.
There are numerous things that will need to occur in order to allow us to implement this aspect of our business plan and there are no assurances that any of these developments will occur, or if they do occur, that we will be successful in fully implementing our plan. Among other things, the most important developments that need to occur include the legalization and commercialization of marijuana in the United States Until this occurs, we will be unable to fully integrate all aspects of the marijuana industry under our corporate umbrella.
If we are successful, the acquisition of related, complimentary businesses is expected to increase revenues and profits by providing a broader range of services in vertical markets which are consolidated under one parent, thus reducing overhead costs by streamlining operations and eliminating duplicitous efforts and costs. There are no assurances that we will increase profitability if we are successful in acquiring other synergistic companies.
Management will seek out and evaluate related, complimentary businesses for acquisition. The integrity and reputation of any potential acquisition candidate will first be thoroughly reviewed to ensure it meets with management’s standards. Once targeted as a potential acquisition candidate, we will enter into negotiations with the potential candidate and commence due diligence evaluation of each business, including its financial statements, cash flow, debt, location and other material aspects of the candidate’s business. One of the principal reasons for our filing of our registration statement of which this Report is a part and the filing of an application to list our securities for trading is our intention to utilize the issuance of our securities as part of the consideration that we will pay for these proposed acquisitions. If we are successful in our attempts to acquire synergistic companies utilizing our securities as part or all of the consideration to be paid, our current shareholders will incur dilution.
In implementing a structure for a particular acquisition, we may become a party to a merger, consolidation, reorganization, joint venture, or licensing agreement with another corporation or entity. We may also acquire stock or assets of an existing business. On the consummation of a transaction, we do not intend that our present management and shareholders will no longer be in control of our Company.
As part of our investigation, our officers and directors will meet personally with management and key personnel, may visit and inspect material facilities, obtain independent analysis of verification of certain information provided, check references of management and key personnel, and take other reasonable investigative measures, to the extent of our limited financial resources and management expertise. The manner in which we participate in an acquisition will depend on the nature of the opportunity, the respective needs and desires of us and other parties, the management of the acquisition candidate and our relative negotiation strength.
We will participate in an acquisition only after the negotiation and execution of appropriate written agreements. Although the terms of such agreements cannot be predicted, generally such agreements will require some specific representations and warranties by all of the parties thereto, will specify certain events of default, will detail the terms of closing and the conditions which must be satisfied by each of the parties prior to and after such closing, will outline the manner of bearing costs, including costs associated with our attorneys and accountants, will set forth remedies on default and will include miscellaneous other terms.
Depending upon the nature of the acquisition, including the financial condition of the acquisition company, as a reporting company under the Securities Exchange Act of 1934 (the “34 Act”), it may be necessary for such acquisition candidate to provide independent audited financial statements. If so required, we will not acquire any entity which cannot provide independent audited financial statements within a reasonable period of time after closing of the proposed transaction. If such audited financial statements are not available at closing, or within time parameters necessary to insure our compliance with the requirements of the 34 Act, or if the audited financial statements provided do not conform to the representations made by the candidate to be acquired in the closing documents, the closing documents will provide that the proposed transaction will be voidable, at the discretion of our present management. If such transaction is voided, the agreement will also contain a provision providing for the acquisition entity to reimburse us for all costs associated with the proposed transaction.
As of the date of this Report we have no agreement with any other entity to acquire such company or be acquired. We are engaged in discussions with various unaffiliated companies but there are no assurances that these discussions will result in any definitive agreement. We have not commenced due diligence activities on any other company, nor have we reach even a verbal agreement with any third party as to the terms and conditions of any such acquisition. There is no significant material acquisition that is probable to be consummated and there are no assurances that any such acquisition will occur in the future.
Competition
We have several niche competitors in the cannabis industry who offer limited solutions and some similar products as those offered by us, including many who have greater financial resources than we currently have available. Our competitors include wholesale horticulture dealers, but we believe their models are different than ours. To differentiate our model, we vet the ‘best in class’ solutions and that is the only product that we sell. For example, horticulture dealers such as Griffin Greenhouse sell thousands of products. Due to the extreme depth of their product line, their sales associates may know a couple of ‘features’ about a specific product, whereas our employees are trained specifically on not only why our product solutions are the best option for our customer, but on how they are to be used in order to reach their maximum effectiveness.
We market ourselves as a one-stop, “turnkey” provider of agricultural technology systems. The notion of being turnkey does separate us from other players in the industry who only specialize in a specific part of the entire process need to design, engineer and deliver these systems. The closest complete solution providers are greenhouse manufacturers like Connelly's and Nexus, but these providers do not provide design and engineering expertise for these large systems.
We do not believe we compete against electrical, mechanical or plumbing contractors (MEPs) but we do require their expertise to in providing the implementation of our systems. Our customers are required to directly contract with local MEPs to implement the solutions according to our design and the customer specifications.
We also do not experience significant competition from online sales or direct manufacturers. Direct manufacturers provide highly customized systems that require expertise to configure to specific customer needs, so direct manufacturers must partner with companies like us to customize, configure and deliver quality solutions.
In addition, we also compete with electrical contractors, online retailers and manufacturer direct sales.
There can be no guarantees that in the future other companies will not enter this arena by developing products that are in direct competition with us. We anticipate the presence as well as entry of other companies in this market space, but acknowledge that we may not be able to establish, or if established, maintain a competitive advantage. Some of these companies may have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales and marketing resources. This may allow them to respond more quickly than us to market opportunities. It may also allow them to devote greater resources to the marketing, promotion and sale of their products and or services. These competitors may also adopt more aggressive pricing policies and make more attractive offers to existing and potential customers, employees, strategic partners, distribution channels and advertisers. Increased competition is likely to result in price reductions, reduced gross margins and a potential loss of market share.
Government Regulation
While we do not generate revenuesany revenue from the direct sale of cannabis products, we have historically, and may continue to, offer our solutions to indoor cultivators that are engaged in assisting companies who are so engaged in various start up aspects of the cannabis industry. MarijuanaTetrahydrocannabinol ("THC"), one of the main active chemicals in cannabis, is a Schedule-ISchedule I controlled substance and is illegal under federal law. Even in those states in which the use of marijuanacannabis has been legalized, its use remains a violation of federal laws.
A Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The Department of Justice defines Schedule
1I controlled substances as
“the"the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence.
”" If the
Federal Governmentfederal government decides to enforce the Controlled Substances Act
in Colorado with respect to
marijuana,cannabis, persons that are charged with distributing, possessing with intent to distribute, or growing
marijuanacannabis could be subject to fines and terms of imprisonment, the maximum being life imprisonment and a $50 million fine. Any such change in the
Federal Government’sfederal government’s enforcement of current federal laws could cause significant financial damage to us. While we do not intend to harvest, distribute or sell cannabis, we may be irreparably harmed by a change in enforcement by the federal or state governments.
As of the date of this report, there are 33 states and the District of Columbia allow their citizens to use Medical Marijuana. The District of Columbia and 10 states -- Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont and Washington -- have adopted the most expansive laws legalizing marijuana for recreational use. Most recently, Michigan voters approved a ballot measure permitting adults age 21 and over to purchase and possess recreational-use marijuana. Vermont became the first state earlier this year to legalize marijuana for recreational use through the legislative process, rather than via a ballot measure. Vermont's law allows for adults age 21 and over to grow and possess small amounts of cannabis. However, it does not permit the sale of nonmedical cannabis. Some other state laws similarly decriminalized marijuana but did not initially legalize retail sales.
The state laws are in conflict with the Federal Controlled Substances Act, which makes marijuana use and possession illegal on a national level. If the federal government decides to enforce the Controlled Substances Act with respect to marijuana, persons that are charged with distributing, possessing with intent to distribute, or growing marijuana could be subject to fines and imprisonment, the maximum being life imprisonment and a $50 million fine. Any such change in the federal government’s enforcement of current federal laws will cause significant financial damage to us.
Previously, the Obama administration took the position that it was not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical marijuana. The Trump administration has revised this policy. Specifically, the Attorney General vacated the Cole Memorandum in favor of deferral of any enforcement of federal regulation to the individual states Department of Justice/US Attorney. However, certain other protections remain in place via budgetary element embedment (Rohrabacher-Farr amendment now referred to as the Rohrabacher-Blumenauer Amendment), which limits funding of any enforcement of anti-cannabis legislation. The Department of Justice has stated that it will continue to enforce the Controlled Substance Act with respect to marijuana to prevent:
| · | the distribution of marijuana to minors; |
| · | criminal enterprises, gangs and cartels receiving revenue from the sale of marijuana; |
| · | the diversion of marijuana from states where it is legal under state law to other states; |
| · | state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity; |
| · | violence and the use of firearms in the cultivation and distribution of marijuana; |
| · | driving while impaired and the exacerbation of other adverse public health consequences associated with marijuana use; |
| · | the growing of marijuana on public lands; and |
| · | marijuana possession or use on federal property. |
Since the use of marijuanaTHC is illegal under federal law, most federally chartered banks will not accept for deposit funds from businesses involved with marijuana.cannabis. Consequently, businesses involved in the marijuanacannabis industry often have trouble finding agenerally bank willing to accept their business. The inability to open bank accounts may make it difficult for our clients to operate. There does appears to be recent movement to allowwith state-chartered banks and credit unions towho provide banking to the industry, but as of the date of this Report there are only nominal entities that have been formed that offer these services.
industry.
Although cultivation and distribution of marijuanacannabis for medical use is permitted in many states, providedsubject to compliance with applicable state and local laws, rules, and regulations, marijuanaTHC is illegal under federal law. Strict enforcement of federal law regarding marijuana would likelycannabis could result in the inability to proceed withmaterial adverse effects on our business plan and could expose us and our management to potential criminal liability and subject their properties to civil forfeiture.revenues. Though the cultivation and distribution of marijuanacannabis containing THC remains illegal under federal law, H.R. 83, enacted by Congress on December 16, 2014, provides that none of the
funds made available to the DOJ pursuant to the 2015 Consolidated and Further Continuing Appropriations Act may be used to prevent states from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical
marijuana.cannabis. While this appropriations measure has remained in effect from 2016 through 2022, continued re-authorization cannot be guaranteed. If this appropriations rider is no longer in effect, the risk of federal enforcement and override of state cannabis laws would increase. However, state laws do not supersede the prohibitions set forth in the federal drug laws.
For a comprehensive and up to date perspective on this process and current states and territories cannabis laws please refer to the following link: http://www.mpp.org/states/key-marijuana-policy-reform.html
In order to participate in either the medical or
recreationaladult use sides of the
marijuanacannabis industry,
in Colorado and elsewhere, all businesses
and employees must obtain licenses from the state and
for businesses, local jurisdictions.
Colorado issues four types of business licenses including cultivation, manufacturing, dispensing, and testing. In addition,
in most jurisdictions, all owners and employees must obtain an occupational license to be permitted to own or work in a facility.
All applicantsApplicants for licenses undergo a background investigation, including a criminal record check for all owners and employees.
Colorado has also enacted stringent regulations governing the facilities and operations of marijuana businesses. All facilities are required to be licensed by the state and local authorities and are subject to comprehensive security and surveillance requirements. In addition, each facility is subject to extensive regulations that govern its businesses practices, which includes mandatory seed-to-sale tracking and reporting, health and sanitary standards, packaging and labeling requirements, and product testing for potency and contaminants.
Laws and regulations affecting the medical marijuanacannabis industry are constantly changing, which could detrimentally affect our existing and proposed operations. Local, state and federal medical marijuanacannabis laws and regulations are broad in scope and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or alter our business plan. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our operations. It is also possible that regulationsRegulations may be enacted in the future that willmay be directly applicable to our business. These ever-changing regulations could even affect federal tax policies that may make it difficult to claim tax deductions on our returns. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on itsour business.
Canadian Regulations
Summary
Intellectual Property
The success of
our business depends, in part, on our ability to maintain and protect our proprietary technologies, information, processes and know-how. We rely primarily on patent, trademark, copyright and trade secret laws in the
Cannabis ActOn October 17, 2018, the Cannabis Act came into force as law with the effect of legalizing adult recreational use of cannabis across Canada. The Cannabis Act replaced the ACMPRU.S. and the IHR, both of which came into forcesimilar laws in other countries, confidentiality agreements and procedures and other contractual arrangements to protect our technology and confidential information. Our patents are limited to certain sensors that we obtain from third party manufacturers that do not contribute materially to our sales or profitability. Our trademarks are solely for branding purposes, although we no longer sell any goods or services under the Controlled Drugs and Substances Act (Canada) (the “CDSA”), which previously permitted access to cannabis for medical purposes for only those Canadians who had been authorized to use cannabis by their health care practitioner. The ACMPR replaced the Marihuana for Medical Purposes Regulations (Canada) (the “MMPR”), which was implemented in June 2013. The MMPR replaced the Marihuana Medical Access Regulations (Canada) (the “MMAR”) which was implemented in 2001. The MMPR and MMAR were initial steps in the Government of Canada’s legislative path towards the eventual legalization and regulating recreational and medical cannabis.
The Cannabis Act permits the recreational adult use of cannabis and regulates the production, distribution and sale of cannabis and related oil extracts in Canada, for both recreational and medical purposes. Under the Cannabis Act, Canadians who are authorized by their health care practitioner to use medical cannabis have the option of purchasing cannabis from one of the producers licensed by Health Canada and are also able to register with Health Canada to produce a limited amount of cannabis for their own medical purposes or to designate an individual who is registered with Health Canada to produce cannabis on their behalf for personal medical purposes.
Pursuant to the Cannabis Act, subject to provincial regulations, individuals over the age of 18 are be able to purchase fresh cannabis, dried cannabis, cannabis oil, and cannabis plants or seeds and are able to legally possess up to 30 grams of dried cannabis, or the equivalent amount in fresh cannabis or cannabis oil. The Cannabis Act also permits households to grow a maximum of four cannabis plants. This limit applies regardless of the number of adults that reside in the household. In addition, the Cannabis Act provides provincial and municipal governments the authority to prescribe regulations regarding retail and distribution, as well as the ability to alter some of the existing baseline requirements of the Cannabis Act, such as increasing the minimum age for purchase and consumption.
Provincial and territorial governments in Canada have made varying announcements on the proposed regulatory regimes for the distribution and sale of cannabis for adult-use purposes. For example, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Yukon and the Northwest Territories have chosen the government-regulated model for distribution, whereas Saskatchewan and Newfoundland & Labrador have opted for a private sector approach. Alberta, Ontario, Manitoba, Nunavut and British Columbia have announced plans to pursue a hybrid approach of public and private sale and distribution.
In connection with the new framework for regulating cannabis in Canada, the Federal Government has introduced new penalties under the Criminal Code (Canada), including penalties for the illegal sale of cannabis, possession of cannabis over the prescribed limit, production of cannabis beyond personal cultivation limits, taking cannabis across the Canadian border, giving or selling cannabis to a youth and involving a youth to commit a cannabis-related offence.
On July 11, 2018, the Canadian Federal Government published regulations in the Canada Gazette to support the Cannabis Act, including the Cannabis Regulations, the new Industrial Hemp Regulations, along with proposed amendments to the Narcotic Control Regulations and certain regulations under the Food and Drugs Act (Canada). The Industrial Hemp Regulations and the Cannabis Regulations, among other things, outline the rules for the legal cultivation, processing, research, analytical testing, distribution, sale, importation and exportation of cannabis and hemp in Canada, including the various classes of licenses that can be granted, and set standards for cannabis and hemp products. The Industrial Hemp Regulations and the Cannabis Regulations include strict specifications for the plain packaging and labelling and analytical testing of all cannabis products as well as stringent physical and personnel security requirements for all federally licensed production sites. The Industrial Hemp Regulations and the Cannabis Regulations also maintain a distinct system for access to cannabis. With the Cannabis Act now in force, cannabis has ceased to be regulated under the CDSA and is instead regulated under the Cannabis Act, and both the ACMPR and the IHR have been repealed effective October 17, 2018.
On June 7, 2018, Bill-C45 passed the third reading in the Senate with a number of amendments to the language of the Cannabis Act. More specifically, the Senate proposed:
| · | establishing a committee of the Senate and a committee of the House of Commons to undertake a comprehensive review of the administration and operation of the Cannabis Act; |
| · | assisting provinces and territories to facilitate the development of workplace impairment policies; |
| · | allowing provinces to place restrictions on the ability of individuals to engage in home cultivation; |
| · | that law enforcement be provided with the appropriate tools and resources to address concerns about continued illicit production, diversion, and sale of cannabis to youth, including preventing the sharing of marihuana among young adults by rendering it a ticketable offense; |
| · | that the prices set for cannabis products and the applicable taxes reflect the dual objective of minimizing the health dangers of cannabis consumption and undercutting the illicit market of cannabis; |
| · | mandatory health warnings for cannabis products, including warnings about the danger of smoking cannabis, the danger of exposure to second-hand cannabis smoke, and the risks of combining cannabis and tobacco; |
| · | testing procedures for THC content be standardized to ensure accurate measurement to better protect consumer health and safety; |
| · | that forthcoming regulations for edible products and other forms of cannabis ensure that product packaging is child-resistant and does not appeal to young people, and that the type of available products should be strictly limited; |
| · | adequate and ongoing funding for sustained, evidence-based cannabis education and prevention programs to provide Canadians, especially young Canadians, with knowledge about the health risks of cannabis use, including on-going research initiatives on the impact of cannabis use on the developing brain; and that the federal government commit to on-going educational initiatives to ensure youth are informed on the effects of cannabis use; |
| · | to prohibit licensees under the Cannabis Act to distribute branded merchandise, such as T-shirts and baseball caps and imposing a moratorium on loosening the regulations on the branding, marketing, and promotion of cannabis for 10 years; |
| · | to set aggressive targets, comparable to the successful Federal Tobacco Control Strategy, to reduce the number of youth and adult cannabis users; and |
| · | to ensure that the Cannabis Tracking System be operational upon the coming-into-force of the Cannabis Act. |
Security Clearances
The Cannabis Regulations require that certain people associated with cannabis licensees, including individuals occupying a “key position” directors, officers, large shareholders and individuals identified by the Minister of Health, must hold a valid security clearance issued by the Minister of Health. Officers and directors of a parent corporation must be security cleared.
Under the Cannabis Regulations, the Minister of Health may refuse to grant security clearances to individuals with associations to organized crime or with past convictions for, or an association with, drug trafficking, corruption or violent offences. Individuals who have histories of nonviolent, lower-risk criminal activity (for example, simple possession of cannabis, or small-scale cultivation of cannabis plants) are not precluded from participating in the legal cannabis industry, and the grant of security clearance to such individuals is at the discretion of the Minister of Health and such applications will be reviewed on a case-by-case basis.
Cannabis Tracking System
Under theCannabis Act, the Minister of Health is authorized to establish and maintain a national cannabis tracking system. The Cannabis Regulations set out a national cannabis tracking system to track cannabis throughout the supply chain to help prevent diversion of cannabis into, and out of, the illicit market. The Cannabis Regulations also provides the Minister of Health with the authority to make a ministerial order that would require certain persons named in such order to report specific information about their authorized activities with cannabis, in the form and manner specified by the Minister of Health.
Cannabis Products
The Cannabis Regulations set out the requirements for the sale of cannabis products at the retail level permit the sale of dried cannabis, cannabis oil, fresh cannabis, cannabis plants, and cannabis seeds, including in such forms as “pre-rolled” and in capsules. The THC content and serving size of cannabis products is limited by the Cannabis Regulations. The sale of edibles containing cannabis and cannabis concentrates was not initially permitted, however the federal government anticipates that such products will be legalized within one year following the coming into force of the Cannabis Act.
Employees
Soleil brand. As of the date of this Report, we employ 58 persons, including 4 executive officers, 9 inthe following summarizes the status of our cultivation equipment division, 8 in our warehouse, 10 in sales, 3 in finance, 4 in customer implementation, 3 in marketing, , 2 in corporate development 6 in technology 4 in environmental scienceregistrations, pending applications, and 5 new employees who were previously employed by Impact Engineering, who we acquired subsequent to December 31, 2018. See “Growth by Acquisition – Subsequent Event” above. issued U.S. patents:
Trademarks
We
also utilizehave received the
services of three independent contractors focused on business development, and a revolving number of referral agents.Our employees work at will and are not represented by a collective bargaining unit. We believe our relationship with our employees is excellent. We require all our employees and consultants to sign a confidentiality and non-disclosure agreement. Our success relies on our ability to hire additional employees, particularly on the sales side in markets around the world. We believe there are numerous high quality people to choose from throughout our area of operations.
Trademarks and Patents
following trademark registrations:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trademark | | Jurisdiction | | Registration Number | | Registration Date | | Status |
| URBAN-GRO | | United States | | 4618322 | | October 07, 2014 | | Registered |
| URBAN-GRO | | United Kingdom | | 3266415 | | January 19, 2018 | | Registered |
| URBAN-GRO | | European Union | | 017391806 | | October 31, 2018 | | Registered |
| URBAN-GRO | | Canada | | 1930075 | | November 13, 2018 | | Registered |
| URBAN-GRO | | WIPO | | 1548013 | | July 08, 2020 | | Registered |
| URBAN-GRO | | United Kingdom | | UK0081548013 | | July 08, 2020 | | Registered |
| URBAN-GRO | | Canada (Madrid) | | A0098111 | | July 08, 2020 | | Registered |
| URBAN-GRO | | European Union (Madrid) | | A0098111 | | July 08, 2020 | | Registered |
| URBAN-GRO | | United States | | 97213742 | | February 7, 2023 | | Registered |
| SOLEIL | | United States | | 5209707 | | May 23, 2017 | | Registered |
| SOLEIL | | United Kingdom | | 3266410 | | March 09, 2018 | | Registered |
| SOLEIL | | Canada | | 1083969 | | October 07, 2020 | | Registered |
| SOLEIL | | European Union | | 017391781 | | September 11, 2018 | | Registered |
| SOLEIL | | United Kingdom | | UK00917391781 | | September 08, 2018 | | Registered |
| OPTI-DURA | | United States | | 5770091 | | June 04, 2019 | | Registered |
| OPTI-DURA | | Canada | | TMA1070145 | | January 20, 2020 | | Registered |
| GRO-CARE | | European Union | | 1560748 | | August 24, 2020 | | Registered |
| GRO-CARE | | European Union | | 017391806 | | October 29, 2019 | | Registered |
| GRO-CARE | | United Kingdom | | UK00917391806 | | October 29, 2018 | | Registered |
| GRO-CARE | | Canada (Madrid) | | A0099548 | | August 24, 2020 | | Registered |
| GRO-CARE | | WIPO | | A0099548 | | August 24, 2020 | | Registered |
We have applied for and
received or are awaiting receipt of the following
pending registrations with the US Patent and Trademark Organization:trademark registrations: | Application | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trademark | | Mark / PatentJurisdiction | | OwnerApplication Number | | Filing Date | | CountryStatus |
85950395URBAN-GRO | | MarkUnited States | | URBAN-GRO88898690 | | June 04, 2014May 03, 2020 | | USARegistered
Reg. No. 4,618,322
Pending |
87199613URBAN-GRO | | MarkUnited States | | OPTI-DURA97213778 | | OctoberJanuary 11, 20162022 | | USAAllowed – Intent to UsePending |
86340114GRO-CARE | | MarkUnited States | | SOLEIL88898692 | | July 17, 2014May 03, 2020 | | USAPending |
Patents
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Title | | Registered
Reg. No. 5,209,707
Jurisdiction | | Application Number | | Filing Date | | Patent Number and Issue Date | | Status |
87425701Sensor bus architecture for modular sensor systems | | MarkUnited States | | SOLEIL15/626,085 | | April 26, 2017USA | Pending |
87671876 | Mark | SOLIEL GIVES YOUR CROP A VOICE | November 3, 2017 | USA | Pending |
15/626,085 | Patent | URBAN-GRO | June 17, 2017 | | USA10,499,123
(December 3, 2019) | | Office Action Issued January 3, 2019
Expire in 2037 |
15/626,079 | Patent | URBAN-GRO | June 17, 2017 | USA | Office Action Issued December 28, 2018 |
We have also applied for trademark registrations for these Marks in other countries as well, including Canada, the UK and with the European Union.
Application | Mark | Filing Date | Country | Status |
1930075 | URBAN-GRO | November 13, 2018 | Canada | Pending |
1864717 | OPTI-DURA | October 26, 2017 | Canada | Pending |
1864713 | SOLEIL | October 26, 2017 | Canada | Pending |
3266410 | SOLEIL | October 26, 2017 | UK | Registered
Reg. No. 3,266,410
|
3266415 | URBAN-GRO | October 26, 2017 | UK | Registered
Reg. No. 3,266,415
|
017391781 | SOLEIL | October 26, 2017 | EU | Registered
Reg. No. 017391781
|
017391806 | URBAN-GRO | October 26, 2017 | EU | Pending |
| | | | |
We have also applied for trademark registrations for these Marks in other countries as well, including Canada, the UK and with the European Union.
Patents.Provided that we execute definitive agreements with Edyza, as part of the proposed business relationship we will be assigned the ownership of the following two patent rights:See “BUSINESS – Investment into Edyza Sensors”
Patent Application 1: Sensor Rods
Edyza has filed a provisional patent under “Mizi Technology” that supports the modular system used within the Edyza Mizi soil moisture sensor which can serve several purposes. This patent will be converted to a non-provisional patent by 06/19/2017.
Application Number | 62/351,989 |
Filing Date | 06/19/2016 |
Title | Modular sensor architecture for soil and water analysis at various depths from the surface | | United States | | 15/626,079 | | June 17, 2017 | | 10,405,069
(September 3, 2019) | | Issued
Expire in 2037 |
Inventor(s)Modular sensor architecture for soil and water analysis at various depths from the surface | | Rana Basheer and Atul Patel
Applicant(s)United States | | Rana Basheer and Atul Patel16/519,800 | | July 23, 2019 | | 10,955,402
(March 23, 2021) | | Issued
Expire in 2037 |
This
We rely on trade secret protection and confidentiality agreements to safeguard our interests with respect to proprietary know-how that is not patentable and processes for which patents are difficult to enforce. We believe that many elements of our design and
engineering processes involve proprietary know-how, technology or data that are not covered by patents or patent application provides the foundationapplications, including technical processes, test equipment designs, algorithms and procedures.
Our policy is for
critical claims that create aour employees to enter into confidentiality and proprietary information agreements with us to address intellectual property protection
for both modularity in hardware designissues and
modularity in sensing data. This enables the extensionrequire our employees to assign to us all of the
product lineinventions, designs and technologies they develop during the course of employment with us. However, we might not have entered into
different grow mediums.Patent Application 2: Moisturesuch agreements with all applicable personnel, and Salinity Measurements
A second provisional patent is being prepared and filed forsuch agreements might not be self-executing. Moreover, such individuals could breach the measurement of moisture and salinity as a factor of soil resistance and capacitance. Pursuant to the proposed terms of the joint venture with Edyza, this patent will be assigned to us, provided definitive agreements are executed by the parties, of which there is no assurance. Edyza will continue to work on the processing of the patent until it is converted to a non-provisional status.
We also acknowledge that certain protections normally available to us related to design or other utility patents in the cannabis industry would not currently be enforceable under federal law.
such agreements.
We attempt to protect our intellectual property via the deployment of non-disclosure agreements with both prospectsprospective clients and business partners as well as licensees. There are no assurances thatlicensees; however, these non-disclosure agreements willmay not prevent a third party from infringing upon our rights.
Human Capital
As of December 31, 2023, we employed 130 employees, all of which were full-time employees. This is a decrease of 22 employees (14%) from December 31, 2022. Our employees are critical to our continued success. With approximately two-thirds of our employees considered experts, we view our employees and the depth and breadth of their experience and expertise as our competitive advantage. As such, we strive to provide an environment where urban-gro employees can have a fulfilling and productive career. We offer industry-leading employee benefits and programs to ensure the diverse needs of our employees and their families are met, including access to healthcare choices, continued growth opportunities for career development, and resources such as 401(k) plans and counseling to support their financial well-being.
The table below summarizes the change in full-time employee headcount that has occurred by quarter for the years ended December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| Fourth
Quarter | | Third
Quarter | | Second
Quarter | | First
Quarter | | Fourth
Quarter | | Third
Quarter | | Second
Quarter | | First
Quarter |
| Beginning of period headcount | 131 | | 137 | | 165 | | 152 | | 115 | | 121 | | 98 | | 86 |
| Net change in headcount | (1) | | (6) | | (28) | | 13 | | 13 | | (6) | | 3 | | 12 |
| Emerald acquisition | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 20 | | 0 |
| DVO acquisition | 0 | | 0 | | 0 | | 0 | | 24 | | 0 | | 0 | | 0 |
| Ending of period headcount | 130 | | 131 | | 137 | | 165 | | 152 | | 115 | | 121 | | 98 |
Available Information
Our internet address is www.urban-gro.com and our investor relations internet address is ir.urban-gro.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports can be found on our investor relations website, free of charge, as soon as reasonably practical after we electronically file such material with, or furnish it to, the SEC. Information contained on our website is not incorporated by reference into this Form 10-K. The SEC maintains a public website, www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that that file electronically with the SEC.
ItemITEM 1A.
Risk Factors.RISK FACTORS
An investment in our common stock involves a high degree of risk. You should carefully consider the following risks and all of the other information contained in this report before deciding whether to invest in our common stock. If any of the following risks are realized, our business, financial condition and results of operations could be materially and adversely affected. In that event, the trading price of our common stock could decline and you could lose all or part of your investment in our common stock. Additional risks of which we are not presently aware or that we currently believe are immaterial may also harm our business and results of operations. Some statements in this report, including such statements in the following risk factors, constitute forward-looking statements. See the section entitled Cautionary Information about Forward-Looking Statements in Part I of this Report.
Risks Related to Our Operations
We have a relatively limited history of operations, a history of losses, and our future earnings, if any, and cash flows may be volatile, resulting in uncertainty about our prospects generally.
We were initially organized as a limited liability company in the State of Colorado on March 20, 2014. In March 2017, we converted into a corporation and on February 12, 2021, we completed an uplisting to Nasdaq under the ticker symbol "UGRO." The following is a summary of our recent historical operating performance:
•During the year ended December 31, 2023, we generated revenue of $71.5 million and incurred a net loss of $18.7 million.
•During the year ended December 31, 2022, we generated revenue of $67.0 million and incurred a net loss of $15.3 million.
•During the year ended December 31, 2021, we generated revenue of $62.1 million and incurred a net loss of $0.9 million.
•During the year ended December 31, 2020, we generated revenue of $25.8 million and incurred a net loss of $5.1 million.
Our lack of a significant history and the evolving nature of the market in which we operate make it likely that there are risks inherent to our business that are yet to be recognized by us or others, or not fully appreciated, and that could result in us suffering further losses. As a result of the foregoing, an investment in our securities necessarily involves uncertainty about the stability of our operating results, cash flows and, ultimately, our prospects generally.
We had negative cash flow from operations for the fiscal years ended December 31, 2023 and December 31, 2022.
We had negative cash flow from operations of $11.2 million for the fiscal year ended December 31, 2023 and $12.6 for the fiscal year ended December 31, 2022. To the extent that we have negative cash flow from operations in future periods, we may need to allocate a portion of our cash reserves to fund such negative cash flow. We may also be required to raise additional funds through the issuance of equity or debt securities. We may not be able to generate positive cash flow from our operations and additional capital or other types of financing may not be available when needed or on terms favorable to us.
Our architecture, engineering, design, and construction management services have been used and may continue to be contracted for use in emerging industries that may be subject to quickly changing and inconsistent laws, regulations, practices and perceptions.
Although the demand for our architecture, engineering, design, and construction management services may be negatively impacted depending on how laws, regulations, administrative practices, judicial interpretations, and consumer perceptions develop, we cannot reasonably predict the nature of such developments or the effect, if any, that such developments could have on our business. We will continue to encounter risks and uncertainty relating to our operations that may be difficult to overcome.
We may continue to incur losses in the near future, which may impact our ability to implement our business strategy and adversely affect our financial condition.
While we are focused significantly on controlling our operating expenses by managing variable expenses, employee count, and marketing activities in order to become cash flow positive, these measures may adversely affect our future operating results if we are unable to support the business effectively. In turn, this would have a negative impact on our financial condition and potentially our share price.
We may not become profitable or generate sufficient profits from operations in the future. If our revenues do not continue to grow or our gross profits deteriorate substantially, we are likely to continue to experience losses in future periods. Collectively, this may impact our ability to implement our business strategy and adversely affect our financial condition. This potentially would have a negative impact on our share price.
We may become subject to additional regulation of CEA facilities.
Our engineering and design services are focused on facilities that grow a wide variety of crops that are subject to regulation by the United States Food and Drug Administration and other federal, state or foreign agencies. Changes to any regulations and laws
that could complicate the engineering of these CEA facilities, such as waste water treatment and electricity-related mandates, make it possible that potential related enforcement could decrease the demand for our services, and in turn negatively impact our revenues and business opportunities.
Competition in our industry is intense.
There are many competitors in the horticulture industry, including many who offer somewhat categorically similar equipment solutions and services as those offered by us. In the future other companies may enter this arena by developing solutions that directly compete with us. We anticipate the presence as well as entry of other companies in this market space and acknowledge that we may not be able to establish, or if established to maintain, a competitive advantage. Some of these companies have longer operating histories, greater name recognition, larger client bases and significantly greater financial, technical, sales and marketing resources. This may allow them to respond more quickly than us to market opportunities. It may also allow them to devote greater resources to the marketing, promotion and sale of their products and/or services. These competitors may also adopt more aggressive pricing policies and make more attractive offers to existing and potential clients, employees, strategic partners, distribution channels and advertisers. Increased competition is likely to result in price reductions, reduced gross margins and a potential loss of market share.
We depend upon third-party suppliers for the equipment solutions that we sell.
We depend on outside manufacturers for the equipment solutions that we sell. While we believe that there are sufficient sources of supply available, if the third-party suppliers were to cease production or otherwise fail to supply us with products in sufficient quantities on a timely basis and we were unable to contract on acceptable terms for these equipment type products with alternative suppliers, our ability to sell these solutions would be materially adversely affected. If a sole source supplier was to go out of business, we may be unable to find a replacement for such source in a timely manner or at all. If a sole source supplier were to be acquired by a competitor, that competitor may elect not to sell to us in the future. Any inability to secure required products or to do so on appropriate terms could have a materially adverse impact on the business, financial condition, results of operations or prospects of urban-gro.
We have historically depended on a small number of clients for a substantial portion of our revenue. If we fail to retain or expand our client relationships, or if a significant client were to terminate its relationship with us or reduce its purchases, our revenue could decline significantly.
During the year ended December 31, 2023, two clients represented 43% of total revenue. During the year ended December 31, 2022 three clients represented 40% of total revenue. Although we have been able to successfully generate substantial sales to different clients over time, we may not be able to continue to do this in the future. Our operating results for the foreseeable future could continue to depend on substantial sales to a small number of clients. Our clients have no purchase commitments and may cancel, change or delay purchases with little or no notice or penalty. As a result of this, our revenue could fluctuate materially and could be materially and disproportionately impacted by purchasing decisions of any client. Clients who represented a substantial portion of our historical revenue may decide to purchase products and services from other providers in the future, which could cause our revenue to decline materially and negatively impact our financial condition and results of operations. If we are unable to diversify our client base, we will continue to be susceptible to risks associated with client concentration.
A portion of our business depends on our clients obtaining appropriate licenses from various licensing agencies.
A portion of our business depends on our clients obtaining appropriate licenses from various licensing agencies. Any or all licenses necessary for our clients to operate their businesses may not be obtained, retained or renewed. If a licensing body were to determine that one of our clients had violated applicable rules and regulations, there is a risk the license granted to that client could be revoked, which could adversely affect future sales to that client and our operations. Our existing clients may not be able to retain their licenses going forward and new licenses may not be granted to existing and new market entrants.
System security risks, data protection breaches, cyber-attacks and systems integration issues could disrupt our internal operations or services provided to clients.
Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack or otherwise exploit any security vulnerabilities of the products that we may sell in the future. Such disruptions could adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales, lower profits, or lost clients resulting from these disruptions could adversely affect our financial results, stock price and reputation.
We may be forced to litigate to defend our intellectual property rights, or to defend against claims by third parties against urban-gro relating to intellectual property rights.
We may be forced to litigate to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of other parties’ proprietary rights. Any such litigation could be very costly and could distract our management from focusing on operating our business. The existence and/or outcome of any such litigation could harm our business.
We may not be able to successfully identify, consummate or integrate acquisitions or to successfully manage the impacts of such transactions on our operations.
Part of our business strategy includes pursuing synergistic acquisitions. We have expanded, and plan to continue to expand, our business by making strategic acquisitions and regularly seeking suitable acquisition targets to enhance our growth. Material acquisitions, dispositions and other strategic transactions involve a number of risks, including: (i) the potential disruption of our ongoing business; (ii) the distraction of management away from the ongoing oversight of our existing business activities; (iii) incurring indebtedness; (iv) the anticipated benefits and cost savings of those transactions not being realized fully, or at all, or taking longer to realize than anticipated; (v) an increase in the scope and complexity of our operations; and (vi) the loss or reduction of control over certain of our assets.
The pursuit of acquisitions may pose certain risks to us. We may not be able to identify acquisition candidates that fit our criteria for growth and profitability. Even if we are able to identify such candidates, we may not be able to acquire them on terms or financing satisfactory to us. We will incur expenses and dedicate attention and resources associated with the review of acquisition opportunities, whether or not we consummate such acquisitions.
Additionally, even if we are able to acquire suitable targets on agreeable terms, we may not be able to successfully integrate their operations with ours. Achieving the anticipated benefits of any acquisition will depend in significant part upon whether we integrate such acquired businesses in an efficient and effective manner. We may not be able to achieve the anticipated operating and cost synergies or long-term strategic benefits of our acquisitions within the anticipated timing or at all. The benefits from any acquisition will be offset by the costs incurred in integrating the businesses and operations. We may also assume liabilities in connection with acquisitions to which we would not otherwise be exposed. An inability to realize any or all of the anticipated synergies or other benefits of an acquisition as well as any delays that may be encountered in the integration process, which may delay the timing of such synergies or other benefits, could have an adverse effect on our business, results of operations and financial condition.
Risks Related to the Legal Cannabis Industry
To date, the majority of our revenues have come from providing architecture and engineering design services and selling equipment systems into facilities prior to the facility becoming operational. The majority of our revenues to date have been generated from clients that operate in the legal cannabis industry.
We are broadening our market reach beyond the legal cannabis industry and are placing a smallersubstantial sales effort on expansion into the rapidly growing non-cannabis CEA vertical farming sector as well as the Commercial sector. However, on a historic basis, the majority of our clients to whom we provide facility architecture and engineering design services and sell equipment systems prior to the facility becoming operational have primarily been in the legal cannabis industry. In addition to selling directly to these clients, we also sell our equipment solutions to third parties, such as general contractors and other intermediaries, like equipment leasing companies. The majority of these solutions have been resold into the legal cannabis industry. A significant decrease in demand in the legal cannabis industry could have a material adverse effect on our revenues and the success of our business.
The cannabis industry in the U.S. is an emerging industry and has only been legalized in some states while remaining illegal in others and under U.S. federal law. Federal Prohibition makes it difficult to accurately forecast the demand for our solutions in this specific industry. Losing clients from this industry may have a material adverse effect on our revenues and the success of our business.
The legal cannabis industry is not mature in the United States and has been legalized in only some states and remains illegal in others and under U.S. federal law, making it difficult to accurately forecast demand for our solutions. Revenues could materially decline if the U.S. Department of Justice ("DOJ") enforces federal law against the industry and some of our clients are negatively impacted.
The legal cannabis industry in the U.S. remains in state of flux, and many aspects of this industry’s development and evolution cannot be accurately predicted. Therefore, losing any clients could have a material adverse effect on our business. While we have attempted to identify our business risks in the legal cannabis industry, investors should carefully consider that there are other
risks that cannot be foreseen or are not described in this Report, which could materially and adversely affect our business and financial performance.
As cannabis remains illegal under United States federal law, we may have to stop providing equipment systems and services to companies who are engaged in cannabis cultivation and other cannabis-related activities.
Cannabis, which is referred to as "Marijuana" in the Controlled Substances Act, is currently classified as a Schedule I controlled substance under the Controlled Substances Act and is illegal under United States federal law. It is illegal under United States federal law to grow, cultivate, sell or possess cannabis for any purpose or to assist or conspire with those who do so. Additionally, 21 U.S.C. 856 makes it illegal to "knowingly open, lease, rent, use, or maintain any place, whether permanently or temporarily, for the purpose of manufacturing, distributing, or using any controlled substance." Even in those states in which the use of cannabis has been authorized under state law, its use remains a violation of federal law. Since federal law criminalizing the use of cannabis is not preempted by state laws that legalize its use, strict enforcement of federal law regarding cannabis may result in the inability of our clients that are involved in the cannabis industry to proceed with their operations, which would adversely affect our operations.
Our solutions are used by legal and licensed cannabis growers. While we are not aware of any threatened or current federal or state law enforcement actions against any supplier of equipment that might be used for cannabis cultivation, law enforcement authorities, in their attempt to regulate the illegal use of cannabis, may seek to bring an action or actions against us under the Controlled Substances Act for assisting or conspiring with persons engaged in the cultivation of cannabis.
There is also a risk that our activities could be deemed to be facilitating the selling or distribution of cannabis in violation of the Controlled Substances Act. Although federal authorities have not focused their resources on such tangential or secondary violations of the Controlled Substances Act, nor have they threatened to do so, with respect to the sale of equipment that might be used by legal and licensed cannabis cultivators, or with respect to any supplies marketed to participants in the medical and recreational cannabis industry, if the federal government were to change its practices, or were to expend its resources investigating and prosecuting providers of equipment that could be usable by participants in the medical or recreational cannabis industry, such actions could have a materially adverse effect on our operations and the sales of our products and services.
As a company with clients operating in the legal cannabis industry, we face many particular and evolving risks associated with that industry, including uncertainty of United States federal enforcement and the need to renew temporary safeguards.
The "FinCEN Memo" dated February 14, 2014, de-prioritizes enforcement of the Bank Secrecy Act against financial institutions and cannabis related businesses which utilize them. This memorandum appears to be a standalone document and is presumptively still in effect. At any time, however, the Department of the Treasury, Financial Crimes Enforcement Network, could elect to rescind the FinCEN Memo. This would make it more difficult for our clients and potential clients to access the U.S. banking systems and conduct financial transactions, which would adversely affect our operations.
In 2014, Congress passed a spending bill ("2015 Appropriations Bill") containing a provision ("Appropriations Rider") blocking federal funds and resources allocated under the 2015 Appropriations Bill from being used to "prevent such States from implementing their own State medical marijuana law." The Appropriations Rider seemed to have prohibited the federal government from interfering with the ability of states to administer their medical cannabis laws, although it did not codify federal protections for medical cannabis patients and producers. Moreover, despite the Appropriations Rider, the Justice Department maintains that it can still prosecute violations of the federal cannabis ban and continue cases already in the courts. Additionally, the Appropriations Rider must be re-enacted every year. While it has been continued every year since 2015, including most recently in 2022, continued re-authorization of the Appropriations Rider cannot be guaranteed. If the Appropriation Rider is no longer in effect, the risk of federal enforcement and override of state cannabis laws would increase.
Further legislative development beneficial to our operations is not guaranteed.
Among other things, the business of our clients in the legal cannabis industry involves the cultivation, distribution, manufacture, storage, transportation and/or sale of cannabis products in compliance with applicable state law. The success of our business with respect to these clients depends on the continued development of the cannabis industry and the activity of commercial business and government regulatory agencies within the industry. The continued development of the legal cannabis industry is dependent upon continued legislative and regulatory authorization of cannabis at the state level and a continued laissez-faire approach by federal enforcement agencies. Any number of factors could slow or halt progress in this area. Further regulatory progress beneficial to the industry cannot be assured. While there may be ample public support for legislative action, numerous factors impact the legislative and regulatory process, including election results, scientific findings or general public events. Any one of these factors could slow or halt progressive legislation relating to cannabis and the current tolerance for the use of cannabis by consumers, which could adversely affect our operations.
The legal cannabis industry could face strong opposition from other industries.
We believe that established businesses in other industries may have a strong economic interest in opposing the development of the cannabis industry. Cannabis may be seen by companies in other industries as an attractive alternative to their products, including recreational cannabis as an alternative to alcohol, and medical cannabis as an alternative to various commercial pharmaceuticals. Many industries that could view the emerging legal cannabis industry as an economic threat are well established, with vast economic and United States federal and state lobbying resources. Companies within these industries could use their resources to attempt to slow or reverse legislation legalizing cannabis. Any inroads these companies make in halting or impeding legislative initiatives that would be beneficial to the legal cannabis industry could have a detrimental impact on our clients and, in turn on our operations.
The legality of cannabis could be reversed in one or more states.
The voters or legislatures of states in which cannabis has already been legalized could potentially repeal applicable laws which permit the operation of both legal medical and retail cannabis businesses. These actions might force us to cease operations in one or more states entirely.
Changing legislation and evolving interpretations of law, which could negatively impact our clients and, in turn, our operations.
Laws and regulations affecting the legal medical and adult-use cannabis industry are constantly changing, which could detrimentally affect our clients involved in that industry and, in turn, our operations. Local, state and federal cannabis laws and regulations are often broad in scope and subject to constant evolution and inconsistent interpretations, which could require our clients and ourselves to incur substantial costs associated with modification of operations to ensure compliance. In addition, violations of these laws, or allegations of such violations, could disrupt our clients’ business and result in a material adverse effect on our operations. In addition, regulations may be enacted in the future that will limit the amount of cannabis growth or related products that our commercial clients are authorized to produce. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our operations.
Regulatory scrutiny of the legal cannabis industry may negatively impact our ability to raise additional capital.
The business activities of certain of our clients rely on newly established and/or developing laws and regulations in multiple jurisdictions. These laws and regulations are rapidly evolving and subject to change with minimal notice. Regulatory changes may adversely affect our profitability or cause us to cease operations entirely. The legal cannabis industry may come under the scrutiny or further scrutiny by the United States Food and Drug Administration (the "FDA"), the SEC, the DOJ, the Financial Industry Regulatory Authority or other federal, state or nongovernmental regulatory authorities or self-regulatory organizations that supervise or regulate the production, distribution, sale or use of cannabis for medical or nonmedical purposes in the United States. The FDA currently is authorized to promulgate regulations for and oversight of CBD products. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any proposals will become law. The regulatory uncertainty surrounding the industry that we service may adversely affect our business and operations, including without limitation, the costs to remain compliant with applicable laws and the impairment of our ability to raise additional capital.
Banking regulations could limit access to banking services.
Since the use of cannabis is illegal under federal law, federally chartered banks will not accept deposit funds from businesses involved with cannabis. Consequently, businesses involved in the legal cannabis industry often have trouble finding a bank willing to accept their business. The inability to open bank accounts may make it difficult for our clients in the legal cannabis industry to operate and their reliance on cash can result in a heightened risk of theft, which could harm their businesses and, in turn, harm our business. Additionally, some courts have denied legal cannabis-related businesses bankruptcy protection, thus, making it very difficult for lenders to recoup their investments, which may limit the willingness of banks to lend to our clients and to us.
A drop in the retail price of cannabis products may negatively impact our business.
The fluctuations in economic and market conditions that impact the prices of commercially grown cannabis, such as increases in the supply of cannabis and decreases in demand for cannabis, could have a negative impact on our clients that are legal cannabis producers, and therefore could negatively impact our business.
Our contracts may not be legally enforceable in the United States.
Many of our historic contracts, and those we may enter into in the future, relate to services that are ancillary to the legal cannabis industry and other activities that are not legal under U.S. federal law and under some state laws. As a result, we may face difficulties in enforcing our contracts in U.S. federal and certain state courts.
Risks Related to Ownership of Our Common Stock
Our stock price could be extremely volatile. As a result, shareholders may not be able to resell their shares at or above the price they paid for them.
The market price of our common stock may be highly volatile and could be subject to wide fluctuations. Volatility in the market price of our common stock, as well as general economic, market or political conditions, may prevent shareholders from being able to sell their shares at or above the price they paid for their shares and may otherwise negatively affect the liquidity of our common stock. Shareholders may experience a decrease, which could be substantial, in the value of their stock, including decreases unrelated to our operating performance or prospects, and shareholders could lose part or all of their investment. The price of our common stock has been, and could continue to be, subject to wide fluctuations in response to a number of factors, including those described elsewhere in this Report and others such as:
•our ability to generate revenues sufficient to achieve profitability and positive cash flow;
•competition in our industry and our ability to compete effectively;
•our ability to attract, recruit, retain and develop key personnel and qualified employees;
•reliance on significant clients and third-party suppliers;
•our ability to successfully identify and complete acquisitions and effectively integrate those acquisitions into our operations;
•our actual or anticipated operating and financial results, including how those results vary from the expectations of management, securities analysts and investors;
•changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to us or other industry participants;
•developments in our business or operations or our industry sectors generally;
•any future offerings by us of our common stock;
•any coordinated trading activities or large derivative positions in our common stock, for example, a "short squeeze" (a short squeeze occurs when a number of investors take a short position in a stock and have to buy the borrowed securities to close out the position at a time that other short sellers of the same security also want to close out their positions, resulting in a surge in stock prices, i.e., demand is greater than supply for the stock sold short);
•legislative or regulatory changes affecting our industry generally or our business and operations specifically;
•the operating and stock price performance of companies that investors consider to be comparable to us;
•announcements of strategic developments, acquisitions, restructurings, dispositions, financings and other material events by us or our competitors;
•actions by our current shareholders, including future sales of common shares by existing shareholders, including our directors and executive officers;
•proposed or final regulatory changes or developments;
•anticipated or pending regulatory investigations, proceedings, or litigation that may involve or affect us; and
•the other factors described under Risk Factors in Part I, Item 1A of this Report.
In response to any one or more of these events, the market price of shares of our common stock could decrease significantly. In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock
price. This type of litigation could result in substantial costs and divert our management’s attention and resources and could also require us to make substantial payments to satisfy judgments or to settle litigation.
Shareholders may be diluted by future issuances of preferred stock or additional common stock in connection with our incentive plans, acquisitions or otherwise; future sales of such shares in the public market, or the expectations that such sales may occur, could lower our stock price.
Our certificate of incorporation authorizes us to issue shares of our common stock and options, rights, warrants and appreciation rights relating to our common stock for the consideration and on the terms and conditions established by our Board in its sole discretion. We could issue a significant number of shares of common stock in the future in connection with investments or acquisitions. Any of these issuances could dilute our existing shareholders, and such dilution could be significant. Moreover, such dilution could have a material adverse effect on the market price for the shares of our common stock.
The future issuance of shares of preferred stock with voting rights may adversely affect the voting power of the holders of shares of our common stock, either by diluting the voting power of our common stock if the preferred stock votes together with the common stock as a single class, or by giving the holders of any such preferred stock the right to block an action on which they have a separate class vote, even if the action were approved by the holders of our shares of our common stock.
The future issuance of shares of preferred stock with dividend or conversion rights, liquidation preferences or other economic terms favorable to the holders of preferred stock could adversely affect the market price for our common stock by making an investment in the common stock less attractive. For example, investors in the common stock may not wish to purchase common stock at a price above the conversion price of a series of convertible preferred stock because the holders of the preferred stock would effectively be entitled to purchase common stock at the lower conversion price, causing economic dilution to the holders of common stock.
We do not anticipate paying any cash dividends on our common stock in the foreseeable future.
We currently intend to retain our future earnings, if any, for the foreseeable future, to fund the development and growth of our business. We do not intend to pay any dividends to holders of our common stock in the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our Board taking into account various factors, including our business, operating results and financial condition, current and anticipated cash needs, plans for expansion, any legal or contractual limitations on our ability to pay dividends under our loan agreements or otherwise. As a result, if our Board does not declare and pay dividends, the capital appreciation in the price of our common stock, if any, will be our shareholders only source of gain on an investment in our common stock, and shareholders may have to sell some or all of their common stock to generate cash flow from their investment.
If securities or industry analysts do not publish research or reports about our business, or if they downgrade their recommendations regarding our common stock, its trading price and volume could decline.
We expect the trading market for our common stock to be influenced by the research and reports that industry or securities analysts publish about us, our business or our industry. If no additional securities or industry analysts commence coverage of our company, the trading price for our stock may be negatively impacted. If one or more of our covering analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline and our common stock to be less liquid. Moreover, if one or more of the analysts who cover us downgrades our stock or publishes inaccurate or unfavorable research about our business, or if our results of operations do not meet their expectations, our stock price could decline.
Taking advantage of the reduced disclosure requirements applicable to "emerging growth companies" may make our common stock less attractive to investors.
We qualify as an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012 ("JOBS Act"). An emerging growth company may take advantage of certain reduced reporting and other requirements that are otherwise generally applicable to public companies, as described above. We currently intend to take advantage of each of these exemptions. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make a comparison of our financial statements with the financial statements of a public company that is not an emerging growth company, or the financial statements of an emerging growth company that has opted out of using the extended transition period, difficult or impossible because of the potential differences in accounting standards used. We could be an emerging growth company until December 31, 2023. We cannot predict if investors will find our common stock less attractive if we elect to rely on these exemptions, or if taking advantage of these exemptions would result in less active trading or more volatility in the price of our common stock.
Provisions of our certificate of incorporation and bylaws may delay or prevent a take-over that may not be in the best interests of our shareholders.
Provisions of our certificate of incorporation and bylaws may be deemed to have anti-takeover effects, which include when and by whom special meetings of our shareholders may be called, and may delay, defer or prevent a takeover attempt.
In addition, our certificate of incorporation authorizes the issuance of up to 3,000,000 shares of preferred stock with such rights and preferences determined from time to time by our Board. None of our preferred shares are currently issued or outstanding. Our Board may, without shareholder approval, issue preferred shares with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of our common stock.
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain executive management and qualified Board members.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, and other applicable securities rules and regulations. Compliance with these rules and regulations involves significant legal and financial compliance costs, may make some activities more difficult, time-consuming or costly and may increase demand on our systems and resources, particularly after we are no longer an "emerging growth company," as defined in the JOBS Act. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. We may need to hire more employees in the future or engage outside consultants, which will increase our costs and expenses.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us, and our business may be adversely affected.
However, for as long as we remain an "emerging growth company," we may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not "emerging growth companies" including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an "emerging growth company." December 31, 2023 was our last day as an emerging growth company, and we will no longer be eligible for these exemptions going forward.
As a result of disclosure of information in this Report and in filings required of a public company, our business and financial condition are highly visible, which may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not
required to include this disclosureresult in litigation or are resolved in our
Form 10-K annual report.favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results. We are subject to ongoing regulatory burdens resulting from our public listing.
We continually work with our legal, accounting and financial advisors to identify those areas in which changes should be made to our financial management control systems to manage our obligations as a public company listed on Nasdaq. These areas include corporate governance, corporate controls, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas, including our internal controls over financial reporting. However, these and other measures that we might take may not be sufficient to allow us to satisfy our obligations as a public company listed on Nasdaq on a timely basis. In addition, compliance with reporting and other requirements applicable to public companies listed on Nasdaq creates additional costs for us and requires the time and attention of management. The additional costs that we incur,
the timing of such costs and the impact that management’s attention to these matters may adversely affect our business and operating results.
General Risk Factors
We are highly dependent on our management team, and the loss of our executive officers or other key employees could harm our ability to implement our strategies, impair our relationships with clients and adversely affect our business, results of operations and growth prospects.
Our success depends, in large degree, on the skills of our management team and our ability to retain, recruit and motivate key officers and employees. Our senior executive leadership team has significant experience, and their knowledge and relationships would be difficult to replace. Leadership changes will occur from time to time, and we cannot predict whether significant resignations will occur or whether we will be able to recruit additional qualified personnel. Competition for senior executives and skilled personnel in the horticulture industry is intense, which means the cost of hiring, paying incentives and retaining skilled personnel may continue to increase.
We need to continue to attract and retain key personnel and to recruit qualified individuals to succeed existing key personnel to ensure the continued growth and successful operation of our business. In addition, as a provider of custom-tailored horticulture solutions, we must attract and retain qualified personnel to continue to grow our business, and competition for such personnel can be intense. Our ability to effectively compete for senior executives and other qualified personnel by offering competitive compensation and benefit arrangements may be restricted by cash flow and other operational restraints. The loss of the services of any senior executive or other key personnel, or the inability to recruit and retain qualified personnel in the future, could have a material adverse effect on our business, financial condition or results of operations. In addition, to attract and retain personnel with appropriate skills and knowledge to support our business, we may offer a variety of benefits, which could reduce our earnings or have a material adverse effect on our business, financial condition or results of operations.
Our insurance may not adequately cover our operating risk.
We have insurance to protect our assets, operations and employees. While we believe our insurance coverage addresses all material risks to which we are exposed and is adequate and customary in our current state of operations, such insurance is subject to coverage limits and exclusions and may not be available for the risks and hazards to which we are exposed. In addition, such insurance may not be adequate to cover our liabilities or may not be generally available in the future or, if available, premiums may not be commercially justifiable. If we were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if we were to incur such liability at a time when we are not able to obtain liability insurance, our business, results of operations and financial condition could be materially adversely affected.
We may be exposed to currency fluctuations.
Although our revenues and expenses are expected to be predominantly denominated in United States dollars, we 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 we may operate may have a material adverse effect on our business, financial condition and operating results. We may, in the future, establish a program to hedge a portion of our foreign currency exposure with the objective of minimizing the impact of adverse foreign currency exchange movements. However, even if we develop a hedging program, there can be no assurance that it will effectively mitigate currency risks.
Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.
U.S. generally accepted accounting principles ("U.S. GAAP") and related pronouncements, implementation guidelines and interpretations with regard to a wide variety of matters that are relevant to our business, such as, but not limited to, revenue recognition, stock-based compensation, trade promotions, and income taxes are highly complex and involve many subjective assumptions, estimates and judgments by our management. Changes to these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported results.
Our ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially adversely affect our business and the value of our common stock.
Our reputation is a valuable component of our business. Threats to our reputation can come from many sources, including adverse sentiment about our industry generally, unethical practices, employee misconduct, failure to deliver minimum standards of
service or quality, compliance deficiencies, and questionable or fraudulent activities of our clients. Negative publicity regarding our business, employees, or clients, with or without merit, may result in the loss of clients, investors and employees, costly litigation, a decline in revenues and increased governmental regulation. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results and the value of our common stock may be materially adversely affected.
Increased attention to climate change and ESG matters may adversely impact our business.
We are subject to a variety of risks arising from ESG matters. ESG matters include increasing attention to climate change, climate risk, expectations on companies to address climate change, hiring practices, the diversity of the work force, racial and social justice issues involving the Company’s personnel, customers and third parties with whom it otherwise does business, and investor and societal expectations regarding ESG matters and disclosures.
Risks arising from ESG matters may adversely affect, among other things, reputation and the market price of our stock. Further, we may be exposed to negative publicity based on the identity and activities of those we do business with and the public’s view of the approach and performance of our customers and business partners with respect to ESG matters. Any such negative publicity could arise from adverse news coverage in traditional media and could also spread through the use of social media platforms. Our relationships and reputation with our existing and prospective customers and third parties with which we do business could be damaged if we were to become the subject of any such negative publicity. This, in turn, could have an adverse effect on our ability to attract and retain customers and employees and could have a negative impact on the market price for our stock. Investors have begun to consider the steps taken and resources allocated by financial institutions and other commercial organizations to address ESG matters when making investment and operational decisions. Certain investors are beginning to incorporate the business risks of climate change and the adequacy of companies’ responses to the risks posed by climate change and other ESG matters into their investment theses. These shifts in investing priorities may result in adverse effects on the market price of our stock to the extent investors determine we have not made sufficient progress on ESG matters.
In addition, customers, employees, regulators and suppliers have also been focused on ESG matters. Companies that do not adapt to or comply with ESG expectations and standards, or that are perceived to have not responded appropriately to the growing concern regarding ESG issues, regardless of whether there is a legal requirement to do so, may suffer from reputational damage and other adverse consequences. To the extent ESG matters negatively impact our reputation, we may not be able to compete as effectively to recruit or retain employees, which may adversely affect our operations.
Further, growing public concern about climate change has resulted in the increased focus of local, state, regional, national and international regulatory bodies on greenhouse gas emissions and climate change issues. Policy changes and changes in federal, state and local legislation and regulations based on concerns about climate change, including regulations aimed at limiting greenhouse gas emissions and the implementation of "green" building codes, could result in increased capital expenditures on our existing properties (for example, to improve their energy efficiency) without a corresponding increase in revenue, resulting in adverse impacts to our results of operations.
In March 2024, the SEC issued final rules on climate change disclosure requirements that will require disclosure of climate-related information by all registrants. To the extent new rules impose additional reporting obligations on us, we could face increased costs. The SEC has also announced that it is scrutinizing climate-change related disclosures in public filings, increasing the potential for enforcement if the SEC were to allege that our existing climate disclosures are misleading or deficient. However, any assessment of the potential impact of future climate change legislation, regulations or industry standards, as well as any international treaties and accords, is uncertain given the wide scope of potential regulatory change.
The current political climate and military actions in Eastern Europe could result in disruption to our operations.
Expansion into Europe to meet the demand for our services could be disrupted by the ongoing military actions in Eastern Europe. If we are unable to continue our expansion into Europe, or our expansion requires greater capital than we have budgeted, our operating results and the value of our common stock may be materially adversely affected.
Further, the conflict has led to increases in the cost of energy and the potential for energy shortages, especially in Europe. The European energy crisis has continued in 2023 amid the Russia and Ukraine war, fueling supply uncertainties and increasing the risk of energy shortages across Europe due to the lack of gas from Russia. This resulted in decisive measures implemented by the European Union to help manage security of supply and establish new sources of gas. Our customers and potential customers experienced a rapid increase in energy costs and our expectation is that the energy cost inflation will continue into 2024.
Failure to retain our existing workforce and to attract qualified new personnel in the current labor market could adversely affect our business and results of operations.
The current U.S. labor shortage has and may continue to impact our ability to hire and retain qualified personnel and may impact our ability to operate our business effectively. We may experience a labor shortage preventing us from filling targeted staffing
levels. A labor shortage may also impact our ability to attract qualified new personnel. Additionally, the COVID pandemic has changed the way businesses operate with companies allowing employees to work remotely from home or in hybrid work models. We may not be able to attract, hire or retain qualified personnel if competing companies offer a more desirable work model.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Cybersecurity Risks
We rely on information technology systems and networks to process, transmit, and store electronic information in our operations, including our proprietary business information and that of our customers, suppliers, and employees. We use various information technology systems and networks to manage our operations and maintain effective internal control over financial reporting. We also collect and store sensitive data, including intellectual property, proprietary business information, and personal information of our customers, suppliers, and employees, in our data centers and on our networks. The secure operation of these information technology systems and networks, and the processing and maintenance of this information, are critical to our business operations and strategy.
Despite our security measures, our information technology systems and networks may be subject to damage, disruption, or unauthorized access due to a variety of factors, including cyberattacks by computer hackers, computer viruses, ransomware, phishing, denial-of-service attacks, physical or electronic break-ins, employee error or malfeasance, power outages, natural disasters, or other catastrophic events. Any such damage, disruption, or unauthorized access could compromise our networks and the information stored there could be accessed, publicly disclosed, lost, or stolen. Any such access, disclosure, or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption to our operations, damage to our reputation, loss of customers, potential harm to our competitive position, and additional costs to remediate the issue.
Cybersecurity Practices
We have implemented various measures to manage our risk of information technology systems and networks damage, disruption, or unauthorized access, including employee training, monitoring of our systems and networks, maintenance of backup and protective systems, and use of modern endpoint detection and response tools which are integrated into urban-gro's risk management systems and processes. We also operate in a fully cloud-based environment, which enhances our scalability, flexibility, and resilience and utilize 3rd parties to perform early internal and external vulnerability assessment and risk identification. We have established extensive backup and recovery procedures to ensure the continuity of our operations in a cyber incident. We also maintain cyber liability insurance coverage as part of our comprehensive risk management program. However, these measures may not be sufficient to prevent, detect, or mitigate the impact of such damage, disruption, or unauthorized access. Moreover, the regulatory environment related to information security, data protection, and privacy is increasingly demanding and complex, and compliance with applicable laws and regulations may result in significant costs or require changes in our business practices that could adversely affect our operations.
Cybersecurity Leadership
Our Board of Directors is actively involved in overseeing our cybersecurity risk management. Our Board of Directors receives quarterly updates on our cybersecurity posture, threats, and incidents from our Senior Vice President of Technology. Our Board of Directors also delegates certain oversight functions to our Audit Committee, which reviews our cybersecurity policies, procedures, controls, and audit results. Our Board of Directors and our Audit Committee regularly assess the adequacy of our cybersecurity risk management framework and the effectiveness of our mitigation strategies.
Our cybersecurity operations are led by our Senior Vice President of Technology, who has over 20 years of experience in the field of cybersecurity. He is responsible for developing and implementing our cybersecurity strategy, policies, standards, and practices. He also oversees our cybersecurity team, which includes a staff member who recently completed his master's degree in cybersecurity. Our cybersecurity team monitors, detects, responds, and reports on cybersecurity threats and incidents, and coordinates with our internal and external stakeholders to ensure the security of our information assets.
urban-gro adheres to the NIST Cybersecurity Framework 2.0, which provides a set of standards, guidelines, and best practices to manage cybersecurity-related risks. We have developed and documented our systems disaster recovery plan, which outlines the roles, responsibilities, and procedures for restoring our critical systems and data in the event of a cyber incident. We have
also crafted over 12 internal policies to help maintain a secure environment, such as our information security policy, our data classification policy, our incident response policy, and our password policy. We regularly conduct phishing simulations, vulnerability scans, penetration tests, and audits to test the effectiveness of our controls and backups, and to identify and remediate any gaps or weaknesses in our cybersecurity posture.
Cybersecurity Incidents
Despite our efforts to prevent and mitigate cybersecurity incidents, we cannot guarantee that we will not experience any breaches, disruptions, or unauthorized access to our information technology systems and networks. We have experienced, and may continue to experience, cybersecurity incidents that could have a material adverse effect on our business, financial condition, results of operations, and prospects. For example, in 2019, we were a victim of a wire fraud scheme, in which a fraudulent party compromised the email account of one of our employees and sent a fraudulent wire transfer request to our bank. We believe the bank did not follow its verification procedures and executed the wire transfer without our authorization. Please see Legal Proceedings section for more information. After this incident, we implemented multi-factor authentication (MFA) across all our systems and email accounts, to prevent unauthorized access and impersonation. We also enhanced our internal controls and training to prevent and detect wire fraud and other cyber risks.
ItemITEM 2.
Properties.PROPERTIES
Our principal place of business is located at 1751 Panorama Point, Units F andUnit G, Lafayette, COColorado, 80026. This location is leased and consists of approximately 10,000 square feet, including approximately 3,500 square feet of office space and 6,500 square feet of warehouse space. The relevant lease expires August 31, 2020, but contains a one-year extension, at our discretion. We pay monthly rent of $7,500, through August 2018, and $7,750 for the remaining term of the lease. We believeAdditionally, we will require additional spacehave six other office leases in the near future to facilitate our anticipated growth. We are currently looking at finding additional or new space.In 2018, we surpassed the 50-employee mark,United States and consequently, decided to seek out additionalone office space. We opened a satellite office in the downtown WeWork The Lab facility. This centrally located office allows us access to the larger technology and engineering talents poolslease located in the Denver metro area and the Denver Tech Center This location doesNetherlands. We currently do not work on leased space. Rather, it provides for a Membership Agreement. The Membership Agreement began in November 2018 and terminates in April 2019. We pay monthly rent of $13,160 through the end of the lease. The membership provides for offices for 23 persons, plus conference room availability and other business related amenities.
We entered into a lease agreement with Bravo Lighting a related party, to sublease office space for 12 months commencing in September 2017, which was renewed in September 2018. Minimum lease payments are $24,000 in 2019.
We lease two cars for the use of our employees, which lease commenced in December 2017. Annual lease payments of $11,550 are required through termination of the leases in December 2020.
We are also currently considering expanding the physical presence of our operations by opening satellite offices in California and the Northeast US but have not identified specific locations as of the date of this Report.
own any property. ItemITEM 3.
Legal Proceedings.We have incurred a sales tax liability involving sales we made during 2015 and 2016 in 7 separate states. We were incorrectly advised by our prior accounting firm that we were exempt from the obligation to pay sales tax on these sales. We have set up payment plans with the various taxing agencies to relieve the obligation. The payment plans require monthly payments in various amounts for a period of 12 months or less ending August 2019. Additionally, as of December 31, 2018, we had collected $37,745 from customers for sales tax obligations resulting in a $39,377 receivable from customers for sales tax obligations as of December 31, 2018. We believe it is more likely than not that the majority of the balance can be relieved by the customers providing us with evidence that the sales tax due was paid directly to the state. This will also reduce the amount of the liability we owe to the taxing agencies. We estimate our current maximum liability to be $401,281
Other than disclosed above, fromLEGAL PROCEEDINGS
From time to time, we become involved in or are threatened with what we considerlegal disputes. While most of these disputes are not likely to have a material effect on our business, financial condition, or operations, the following matters are deemed by the Company to be immaterial disputes. Currently,material either due to the costs of litigation or the potential negative impacts to the Company should these matters not be resolved in our favor:
•Great Green Theory – On June 10, 2022, 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. 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. Emerald has settled two subcontractor suits against Emerald for non-payment to them of which Emerald has not received payment from Great Green Theory.
◦Accounts receivable and accounts payable related to Great Green Theory – 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 $1.3 million as a receivable and $0.4 million as a payable to sub-contractors on the opening balance sheet as of the date of the acquisition.
◦Legal Costs to collect Great Green Theory accounts receivable – The Company has agreed to split the legal costs of this claim until the funds are recovered or until the claim of liquidated damages is relieved. Total estimated legal costs associated with this claim are approximately $0.3 million. The Company recorded 50% of this amount as a liability on the opening balance sheet as of the date of the acquisition.
•Pullar – urban-gro’s former Chief Financial Officer, George Pullar, filed a suit in the District Court of Boulder County, Colorado against urban-gro and Bradley Nattrass, in his capacity as urban-gro’s CEO, claiming breach of fiduciary duty. The claims stem from a settlement agreement with Mr. Pullar and allegations that Mr. Nattrass and urban-gro 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 – urban-gro was sued on July 29, 2021, by Crest Ventures, LLC 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 Nasdaq. urban-gro joined as a third-party defendant, Andrew Telsey, for breach of fiduciary duty and fraud. urban-gro also counter-claimed
Crest Ventures, LLC for fraud and declaratory judgment. Mr. Telsey was urban-gro's counsel at the time and he claims he was also a member of Crest Ventures. urban-gro entered into a finder's fee agreement with Crest Ventures for a potential M&A transaction. Crest Ventures and Mr. Telsey claim the finder's fee agreement also applies to the uplisting onto the Nasdaq. urban-gro denies these claims, believes Crest Ventures and Mr. Telsey are perpetrating fraud, and Mr. Telsey breached his fiduciary duties as legal counsel for urban-gro in the transaction. We believe we have substantial defenses to the claim asserted in this lawsuit and intend to vigorously defend this action. On August 11, 2023, the Company entered into a settlement agreement and mutual release (the “Settlement Agreement”) with Crest Ventures, LLC and Andrew Telsey to settle all claims in the litigation filed in the District Court for Arapahoe County, Colorado, Case No. 2021CV31301. Pursuant to the Settlement Agreement, the Company made a payment of $1,500,000 to Crest Ventures, LLC on September 7, 2023. In connection with this settlement, the Company recorded a loss in the second quarter of 2023 of $1,500,000 in accordance with GAAP related to loss contingencies. The case was dismissed with prejudice by the Court on October 5, 2023.
•Sunflower Bank – urban-gro filed a lawsuit on November 5, 2021, against Sunflower Bank in the District Court for Boulder County, Colorado related to fraudulent wire transfers of approximately $5.1 million that were made from our accounts at Sunflower Bank in October 2021. During 2022, $1.7 million of these funds were returned to us and we received $0.25 million from our insurance company. We sued Sunflower Bank for $3.4 million, exclusive of the insurance proceeds, under a theory of breach of contract, negligence, and breach of UCC standards, as we believed that Sunflower Bank failed to follow industry standard procedures designed to prevent such a theft and was therefore liable for the unrecovered balance. Sunflower Bank filed counterclaims against us for breach of contract and negligence. urban-gro entered into a settlement agreement with Sunflower bank and received $2.4 million in settlement proceeds on March 27, 2023. The case was dismissed with prejudice on March 29, 2023.
There can be no assurance that future developments related to pending claims filed in the future, whether as a result of adverse outcomes or as a result of significant defense costs, will not involved in any legal proceedings, nor are we aware of any legal proceedings threatened or in which any director or officer or any of their affiliates is a party adverse to our Company or hashave a material interest adverse to us.effect on urban-gro's financial condition, results of operations or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not
Applicable.
PART II
ItemITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
On February 17, 2021, we completed a public offering of 6,210,000 shares of our common stock, inclusive of the dateunderwriters’ full overallotment, at $10.00 per share for total gross offering proceeds of this Report there is no market for our Common Stock.$62,100,000. In December 2018connection with the offering, we caused a licensed market maker to file an application with FINRA to list our Common Stock for trading. While no assurances can be provided and based upon oral conversations that have occurred with OTC Markets, we hopereceived approval to list our common stock foron Nasdaq Capital Market under the symbol "UGRO." Prior to the offering, shares of our common stock were quoted on the OTC Markets Group, Inc. OTCQX Marketplace under the symbol "UGRO." Although our shares were quoted on the OTCQX Marketplace from October 7, 2019 through February 11, 2021, because trading on the OTCQX Marketplace was infrequent and limited in volume, the prices at which such transactions occurred did not necessarily reflect the price that would have been paid for our common stock in a more liquid market. There can
The trading price of our common stock has been, and may continue to be,
no assurances thatsubject to wide price fluctuations in response to various factors, many of which are beyond our
Common Stock will be approved for listing on the OTCQX, or any other existing U.S. trading market.Holders
control, including those described in Part I, Item 1A, "Risk Factors."
HOLDERS
As of
the date of this ReportMarch 16, 2024, we had
12589 holders of record
forof our Common
Shares.See “DESCRIPTION OF SECURITIES.”Dividend Policy
WeStock. The number of shareholders of record does not include beneficial owners of our common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries.
DIVIDENDS
Since our inception, we have not paid any dividends
sinceon our
incorporationcommon stock, and
do not anticipate the payment of dividends inwe currently expect that, for the foreseeable
future. At present, our policy is to retainfuture, all earnings, if any,
to develop and market our products. The payment of dividendswill be retained for use in the
development and operation of our business. In the future,
will depend upon, among other factors, our
earnings, capital requirements,Board may decide, at its discretion, whether dividends may be declared and
operating financial conditions. The Securities Enforcement and Penny Stock Reform Actpaid to holders of 1990
The Securities and Exchange Commission has also adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system).
While our common stock has not been approved for trading as of the date of this report, we expect that if and when so approved our Common Stock will be defined as a “penny stock” under the Securities and Exchange Act. It is anticipated that our Common Stock will remain a penny stock until such time as the market price exceeds $5.00 per share.
The classification of penny stock makes it more difficult for a broker-dealer to sell the stock into a secondary market, which makes it more difficult for a purchaser to liquidate his/her investment. Any broker-dealer engaged by the purchaser for the purpose of selling his or her shares in us will be subject to Rules 15g-1 through 15g-10 of the Securities and Exchange Act. Rather than creating a need to comply with those rules, some broker-dealers will refuse to attempt to sell penny stock.
The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the Commission, which:
| · | contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; |
| · | contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation to such duties or other requirements of the Securities Act of 1934, as amended; |
| · | contains a brief, clear, narrative description of a dealer market, including "bid" and "ask" prices for penny stocks and the significance of the spread between the bid and ask price; |
REPORTS
| · | contains a toll-free telephone number for inquiries on disciplinary actions; |
| · | defines significant terms in the disclosure document or in the conduct of trading penny stocks; and |
| · | contains such other information and is in such form (including language, type, size and format) as the Securities and Exchange Commission shall require by rule or regulation. |
The broker-dealer also must provide, prior to effecting any transaction in a penny stock, to the customer:
| · | the bid and offer quotations for the penny stock; |
| · | the compensation of the broker-dealer and its salesperson in the transaction; |
| · | the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and |
| · | monthly account statements showing the market value of each penny stock held in the customer's account. |
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements will have the effect of reducing the trading activity in the secondary market for our stock because it will be subject to these penny stock rules. Therefore, stockholders may have difficulty selling their securities.
Stock Transfer Agent
The stock transfer agent for our securities is Corporate Stock Transfer, Inc. Their address is 3200 Cherry Creek South Drive, Suite 430, Denver, Colorado, 80209. Their phone number is (303) 282-4800.
Reports
We are subject to certain reporting requirements and furnish annual financial reports to our
stockholders,shareholders, certified by our independent accountants, and furnish unaudited quarterly financial reports in our quarterly reports filed electronically with the SEC. All reports and information filed by us can be found at the SEC website, www.sec.gov.
Item
UNREGISTERED SALES OF EQUITY SECURITIES
During the quarter ended December 31, 2023, we issued the following securities that were not registered under the Securities Act:
•During the quarter ended, December 31, 2023, the Company issued shares of the Company's common stock to satisfy contingent consideration purchase price liabilities for the Emerald and DVO acquisitions as follows:
◦Emerald - 85,639 shares at an average price per share of $1.31.
◦DVO - 110,486 shares at an average price per share of $1.33.
The foregoing issuances of restricted shares of common stock were issued under Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. The Company believes the issuance of the foregoing restricted shares was exempt from registration as a privately negotiated, isolated, non-recurring transaction not involving a public solicitation. No commissions were paid regarding the share issuances, and the share certificates were issued with a Rule 144 restrictive legend.
Purchase of Equity Securities by Issuer and Affiliated Purchasers
During the year ended December 31, 2023, the Company did not repurchase common stock. The Company’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. 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 of $9.1 million, under this program. As of December 31, 2023, we have $1.4 million remaining under the repurchase program.
ITEM 6.
Selected Financial Data.As a smaller reporting company, we are not required to provide this information.
[RESERVED]
Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our results of operations and financial condition should be read in conjunctiontogether with our auditedthe financial statements and related notes theretoand the other financial information included herein. In connection with,elsewhere in this Report. Such discussion and because we desire to take advantageanalysis reflects our historical results of the “safe harbor” provisionsoperations and financial position. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussionvarious factors, including those set forth under "Risk Factors" and "Cautionary Information about Forward-Looking Statements" and elsewhere in this ReportReport. All share and in any other statement made by, orper share amounts presented herein have been restated to reflect the implementation of the 1-for-6 reverse stock split as if it had occurred at the beginning of the earliest period presented.
OVERVIEW AND HISTORY – SEE "ITEM 1. BUSINESS" FOR A FURTHER DESCRIPTION OF OUR HISTORY AND BACKGROUND
urban-gro is an integrated professional services and Design-Build firm. 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
behalf, whether or not in future filings withability to generate revenue from our clients through the
Securities and Exchange Commission. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on our behalf. We disclaim any obligation to update forward looking statements.Overview
We were originally formed on March 20, 2014, as a Colorado limited liability company. In March 2017, we converted to a corporation and issued 193.3936722 sharesbilling of our Common Stock for every Member Interest issuedemployees’ time spent on client projects. We offer value-added architectural, engineering, systems procurement and outstanding on the date of conversion.
We are an agricultural technology systems integrator that provides full designintegration, and expertise on climate and automated control of fertigation/irrigation systems, lighting systems, environmental, substrate and inventory monitoring, water treatment systems, integrated pest managementconstruction solutions and a complete line of cultivation equipment targeting growers of the world’s highest value crops including cannabis, tomatoes, strawberries, chilies and peppers, and leaf lettuce. While it is our intention to expand our operations to additional applications, to date, all of our revenues have been generatedcustomers operating in the CEA and Commercial sectors. In the CEA sector, our clients include operators and facilitators in both the cannabis industry.
We engage directlyand produce markets in the business of manufacturing, distributingUnited States, Canada, and selling lighting, pest management, fertigation, water and other products toEurope. In the medical and recreational cannabis industry in states where operation of a cannabis production facility has been legalized. We have and will continue toCommercial sector, we work with grow operationsleading Food and production facilities to pursue strategies to provide services, products,Beverage CPG companies in the United States, and clients in other potential revenue-producing opportunities with respect tocommercial sectors including light industrial, healthcare, higher education, laboratories, and hospitality. During 2021 and 2022, we made the cannabis industry in those states where the same is lawful. We engage directly with the ownership groups and growers at large indoor and outdoor greenhouse cultivation facilities and strategically work with them to provide value-added services and industry best products that assist them in lowering production costs and increasing crop yields. While earmarking the emerging cannabis market as our principal target market, we are also marketing to customers outside of the cannabis industry to diversify our operations.
Our executive office is located at 1751 Panorama Point, Unit G, Lafayette, CO 80026, and our phone number is (720) 390-3880. We also maintain offices in Denver, CO. Our Company website iswww.urban-gro.com, which contain a description of our Company and products, but such websites and the information contained on our websites are not part of this Report. In addition, we also maintain branded product websites of www.soleiltech.ag and www.opti-dura.com.
following acquisitions:
•July 2021 - Three affiliated architecture design companies (the "2WR Entities")
•April 2022 - A construction Design-Build firm ("Emerald")
•October 2022 - An engineering firm ("DVO")
Comparison of Results of Operations for the years ended December 31,
2018 compared to 20172023 and 2022
During the year ended December 31, 2018,2023, we generated revenues of $20,050,776,$71.5 million compared to revenues of $12,298,015$67.0 million during the year ended December 31, 2017,2022, an increase of $7,752,761 (63%)$4.5 million, or 7%. This increase in revenues is attributable to sales of cultivation technology systems, which increased by $2,520,960. We generate revenue both from (i) working with facility owners to design and build out new facilities, and (ii) selling consumable products once existing facilities are operational. While this increase may be attributable to the general growthnet result of the cannabis industryfollowing changes in North Americaindividual revenue components:
•Construction design-build revenues increased $26.4 million, primarily due to significant organic growth within this group;
•Services revenue decreased $0.9 million, which has provided us with additional sales opportunities, we also believe that this increase in revenue occurred primarily as awas the result of a decrease in revenues in our increased emphasis on our cultivation technologies segment. Revenueexisting business due to negative market conditions in thisthe CEA sector;
•Equipment systems revenue stream increaseddecreased $20.7 million due to negative market conditions in the CEA sector and a reduction in capital equipment spending by $2,520,960(138%) compared tocustomers; and
•Other revenue decreased $0.3 million.
During the
yearsyear ended December 31,
2017, as a result2023, cost of
increased sales in water treatment systems, fans and benches. During the years ended December 31, 2018, our fertigation revenue also increased by $3,286,894(87.5%), from the comparable period in 2017, which we attributerevenues was $61.3 million compared to
the continued expansion of the cannabis industry in both the US and Canada. As cannabis cultivation projects increase in size there is a larger demand for fertigation controls, which we meet through the sale of our Argus line of products. Our sales of consumables also increased by $876,749 (35.7%)$52.8 million during the year ended December 31,
2018 compared to 2017.As we have previously disclosed, in 2016 we began diversifying our business, moving from a lighting distribution company to emphasizing cultivation technologies. In 2015, we were considered a value added reseller of P.L. grow light systems, with 97% of our revenues generated from lighting related product sales. In order to grow our business we made a strategic decision to:
| · | focus on building/positioning our brand as an ancillary national market leader delivering best in class value-added product solutions to Cannabis cultivators; |
| · | expand our sales reach to extend across the US; and |
| · | expand our product offering to include a full line of other cultivation equipment and products used by cannabis cultivators. |
Today, we believe we are a leading systems integrator that provides commercial cannabis cultivators with a one-stop, complete “turnkey” solution covering (i) engineering / MEP & System design, (ii) project management, (iii) systems sales, (iv) project commissioning, and (v) re-occurring consumable product sales.
Cost of sales increased to $13,892,025 during the years ended December 31, 2018, compared to $9,244,329 during 2017,2022, an increase of $4,647,696. These increases are$8.4 million, or 16%. This increase is directly relatedattributable to our increased revenues.
Operating expenses also increased during the years ended December 31, 2018 compared to 2017 by $4,542,506, from $5,416,829increase in the years ended December 31, 2017, to $9,959,335 in 2018. Marketing expense increased by $666,008 due to increases in advertising expenses, business development and costsrevenues indicated above.
Gross profit was $10.3 million (14% of attendance at trade shows. General and administrative expense increased by $2,715,511 due to our expanding work force. During 2018 our number of employees increased by 20, including additional members of management, which increased compensation expense. Additional expenses were incurred arising out of increased technology professional staffing in anticipation of launching our Soleil® sensor platform. Professional fees also increased by $18,125, from $603,466revenue) during the year ended December 31, 2017,2023, compared to $621,591 in 2018 due to increased legal and accounting fees and general business consultants. Travel expense increased by $82,531 due to our expanding sales and marketing to additional jurisdictions. Stock compensation expense for$14.2 million (21% of revenue) during the yearsyear ended December 31, 20182022. 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 2017 was $1,245,826 and $84,839, respectively, based onservices revenue.
Operating expenses increased by $0.1 million, or 0%, to $27.0 million for the
vesting schedule of the stock grants.Through repayment of debt and conversion of previously existing debt to equity, interest expense in the yearsyear ended December 31, 2018 decreased to $119,961,2023 compared to $216,576 incurred during 2017.
$26.8 million for the year ended December 31, 2022. 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; and
•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
$3,895,873 during$18.7 million for the year ended December 31,
2018 ($0.162023, or a net loss per
share),share of $1.66, compared to a net loss of
$2,577,395 during$15.3 million for the year ended December 31,
2017 ($0.112022, or a net loss per
share).Liquidityshare of $1.44.
NON-GAAP FINANCIAL MEASURES
The Company uses the supplemental financial measure of Adjusted Earnings before Interest, Taxes, Depreciation and
Capital ResourcesAmortization ("Adjusted EBITDA") as a measure of our operating performance. Adjusted EBITDA is not calculated in accordance with U.S. GAAP and it is not a substitute for other measures prescribed by U.S. GAAP such as net income (loss), income (loss) from operations, and cash flows from operating activities. We define Adjusted EBITDA as net income (loss) attributable to urban-gro, Inc., determined in accordance with U.S. GAAP, excluding the effects of certain operating and non-operating expenses including, but not limited to, interest expense/income, income taxes/benefit, depreciation of tangible assets, amortization of intangible assets, impairment losses, unrealized exchange gains/losses, debt forgiveness and extinguishment, stock-based compensation expense, acquisition costs, and other nonrecurring expenses that we do not believe reflect our core operating performance.
Our Board and management team focus on Adjusted EBITDA as a key performance and compensation measure. We believe that Adjusted EBITDA assists us in comparing our operating performance over various reporting periods because it removes from our operating results the impact of items that our management believes do not reflect our core operating performance.
The following table reconciles net loss attributable to the Company to Adjusted EBITDA for the periods presented:
| | | | | | | | | | | | | | |
| Years Ended December 31, | |
| 2023 | | 2022 | |
| Net loss | $ | (18,681,061) | | | $ | (15,277,909) | | |
| Interest expense | 271,686 | | | 54,579 | | |
| Interest income | (173,895) | | | (329,012) | | |
| 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) | | |
| | | | |
| Non-recurring legal fees | 1,249,133 | | | 352,173 | | |
| 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 (non-GAAP) | $ | (9,712,173) | | | $ | (3,887,049) | | |
BACKLOG
Backlog is a financial measure that generally reflects the dollar value of revenue that the Company expects to realize in the future. Although backlog is not a term recognized under U.S GAAP, it is a common measure used by companies operating in our industries. We report backlog for the following revenue categories: (i) Equipment Systems; (ii) Construction Design-Build; and (iii) Services. We define backlog for Equipment Systems and Services as signed contracts, with Equipment Systems contracts generally requiring receipt of a customer deposit prior to being included in backlog. Construction Design-Build backlog is comprised of construction projects once the contract is awarded and to the extent we believe funding is probable. Our Construction Design/Build backlog consists of uncompleted work on contracts in progress and contracts for which we have executed a contract but have not commenced the work. For uncompleted work on contracts in progress, we include (i) executed change orders, (ii) pending change orders for which we expect to receive confirmation in the ordinary course of business, and (iii) claims that we have made against our customers for which we have determined we have a legal basis under existing contractual arrangements and as to which we consider collection to be probable.
Backlog for each of our revenue categories as of December 31, 2023 and December 31, 2022 is reflected in the following tables:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| CEA | | Commercial | | Total | | Relative Percentage |
| (in millions) |
| Equipment systems | $ | 1 | | | $ | — | | | $ | 1 | | | 1 | % |
| Services | $ | 3 | | | $ | 4 | | | $ | 7 | | | 6 | % |
| Construction design-build | $ | 73 | | | $ | 29 | | | $ | 102 | | | 93 | % |
| Total backlog | $ | 77 | | | $ | 33 | | | $ | 110 | | | 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 | | | 6 | % |
| Services | $ | 4 | | | $ | 2 | | | $ | 6 | | | 6 | % |
Construction design-build (1) | $ | 67 | | | $ | 15 | | | $ | 82 | | | 88 | % |
| Total backlog | $ | 76 | | | $ | 17 | | | $ | 93 | | | 100 | % |
| Relative percentage | 82 | % | | 18 | % | | 100 | % | | |
| | | | | | | |
| Note: 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, 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. In addition, some customer contracts also contain task orders that are signed under master contracts pursuant to which we perform work only when the customer awards specific task orders to us.
Contracts in our Construction Design-Build backlog may be canceled or modified at the election of the customer. Many Construction Design-Build projects are added to our contract backlog and completed within the same fiscal year and therefore may not be reflected in our beginning or quarter-end Construction Design-Build backlog amounts.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2018,2023, 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, 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. These construction working capital balances are described in further detail in our consolidated financial statements, including the accompanying notes.
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. 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
cash equivalentsreject 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
$1,178,852.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:
Net cash used in operating activities was $2,285,136$11.2 million during the year ended December 31, 2023. 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 2018, comparednet operating assets and liabilities of $2.7 million. 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 $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 provided by
operatinginvesting activities
was $1.7 million for the year ended December 31, 2023, primarily from the sale of
$244,661our investment in
2017.XS Financial for $2.3 million offset by the acquisition of property, plant and equipment of $0.6 million. We
anticipate that overhead costs and other expenses will increase in the futurehad no material commitments for capital expenditures as
we continue to expand our operations.Cash flowsof December 31, 2023.
Net cash used in investing activities were $1,264,803 in 2018 comparedwas $4.5 million for the year ended December 31, 2022. This use of cash was due to $612,543$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
in 2017. Cash flows provided by financing activities
were $3,072,000 in 2018, compared to $2,007,210 provided bywas $1.4 million for the year ended December 31, 2023. Cash used from financing activities during the year ended December 31,
2017.During2023 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,
2018, 558,833 shares of Common Stock previously reserved for issuance2022. This decrease in cash primarily relates to
employees, vested and were issued.The significant increase in customer deposits was due to an increase in customer orders. Customer orders require prepayments before the design work is commenced and before any material is ordered from the vendor. Prepayments are booked the customer deposits liability account when received. When the product ships to the customer, the customer is invoiced and an accounts receivable balance is created for the customer. The deposit is then moved from the customer deposit account to the customer accounts receivable account to clear the receivable. Our standard policy is to collect the following before action is taken: a 10% design deposit, 40% order deposit, and a 50% shipping deposit. We expect customer deposits to be relieved from the deposits account no longer than 12 months for each project. The net cash$4.4 million used in operationsthe repurchase of common stock and $1.0 million paid for prepaymentsacquisition related contingent consideration.
Material Cash Requirements:
Our material cash requirements include payments on the promissory note associated with the DVO acquisition and advancesoperating lease payments. These obligations are described in detail in our consolidated financial statements, including the accompanying notes.
INFLATION
Inflation has resulted in increased costs for
payments madeour customers. In addition, the U.S. Government has responded to
vendorsinflation by raising interest rates, which has increased the cost of capital for
prepayments on orders. Due toour customers. We believe this has resulted in some customers delaying projects, reducing the
increase inscope of projects
weor potentially canceling projects, as well as increased
our prepayments to order materials from our vendors.In May 2017, we commenced a private offeringcosts of our Common Stock wherein we received aggregate subscriptions of $2,546,000 fromoperations, which has negatively impacted the sale of 2,546,000 shares, at $1 per share, to 76 investors, including 58 “accredited” investors, as that term is defined under the Securities Act of 1933, as amended. These funds were used to repay debt, expansion of our existing business operations, new investment opportunities and working capital.
We currently have five other notes outstanding, four of which are unsecured. Two of the note holders agreed to convert $300,000 and $200,000 of their respective notes into shares of our Common Stock as part of our private placement of Common Stock in 2017, leaving a balance of $80,000 and $100,000, respectively. Interest accrues at 20.4% and 18% per annual on these notes. Both are unsecured and due June 30, 2019. The third note has a principal balance of $300,000, accrues interest at the rate of 19.8% per annual and was due to mature March 23, 2018. In March 2018 this note was extended for one year. In consideration for the lender’s agreement to extend this note we issued 6,000 warrants, each exercisable to purchase one share of our Common Stock at a price of $1 per share for a term of five years. Interest is paid twice monthly. In March 2019, we paid the lender $35,000 to reduce the principal balance to $265,000 and extended the maturity to April 30, 2019.
In October 2018, we received a $1 million unsecured loan from James Lowe, a director, which is due on or before April 30, 2019. The loan has a one-time origination fee of $12,500. Interest accrues at the rate of 12% per annum and is paid monthly. As additional consideration for the loan we granted Mr. Lowe an option to purchase 30,000 shares of our common stock at an exercise price of $1.20 per share, which option is exercisable for a period of five (5) years. The loan is guaranteed by Messrs. Nattrass and Gutierrez, two of our officers, directors and our principal shareholders.
Effective November 20, 2018, we entered into a letter of intent (“LOI”) with Hydrofarm Holdings Group, Inc. (“Hydrofarm”) whereby Hydrofarm would acquire all of our issued and outstanding common stock (the “Merger”). The LOI provided that Hydrofarm would extend to us a secured, interest only, note payable upon execution of the LOI. The note is secured by all of our currently existing and future assets. Interest accrues at 8% per year and is paid quarterly. The note matures on the earlier of: (a) 90 days after the date of abandonment of the Merger; (b) acceleration of the note payable due to our being in default; or (c) December 2023. Although the Merger has not been abandoned and the LOI has not been terminated by either party, there are currently no discussions between the parties pertaining to the Merger and we believe the note payable should be classified as a current maturity. The Hydrofarm note requires us to obtain the permission of Hydrofarm to engage in various activities, including additional financing. In February 2019 we provided applicable notice of our agreement with 4Front discussed herein to raise additional debt and/or equity. Hydrofarm provided their consent, which reaffirms our belief that the relevant note remains in good standing.
Our management estimates that we will need up to an additional $5 million in capital to fully implement our current business plan. We estimate we will need approximately $2.5 million for advanced inventory purchases and $1 million for expanding operations, including retaining additional professionals in technology, design and engineering and in commissioning services. While no assurances can be provided we anticipate that a portion of these funds will be provided from our cash flow. However, if we do not generate sufficient cash flow, or if additional expenditures and acquisitions are identified and we cannot use our securities as compensation, we will need additional capital to continue to implement our business plan. While we believe we will be able to raise these funds in either debt or equity, we have no agreement with any third party to provide us the same and there can be no assurances that we will be able to raise any capital on commercially reasonable terms, or at all. If we require additional capital and are unable to raise the same, it could have a material negative impact on our results of operations.
Subsequent Event
Effective January 9, 2019, we executed a letter agreement with 4Front Capital Partners, Inc., Toronto, Canada (“4Front), whereby 4Front agreed to act as our exclusive placement agent in connection with a proposed private offering of up to $6 million of either debt or equity securities, or a combination of the same, at a price to be determined, on a “best efforts” basis.
Inflation
Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the year ended December 31, 2018.
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. We believe the current inflationary environment has negatively impacted our customers which has led to delays in our customers starting projects, which in turn has delayed our customers from signing contracts with us.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical Accounting Policies and Estimates
Critical Accounting Estimates
Our
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, and accompanying noteswhich have been prepared in accordance with U.S. GAAP.generally accepted accounting principles in the United States. The preparation of these financial statements requires managementus to make estimates judgments and assumptionsjudgments that affect reportedthe amounts of assets, liabilities, revenues and expenses. We continuallyexpenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate the accounting policies andour estimates used to prepare the financial statements. The estimates are based on historical experience and on various other assumptions that are believed to be reasonable under current factsthe circumstances, the results of which form the basis for making judgments about the carrying values of assets and circumstances.liabilities that are not readily apparent from other sources. Actual amounts and results couldmay differ from these estimates made by management.under different assumptions or conditions. Please refer to
Note 2 – Summary of Significant Accounting Policies set forth immediately following the signature page of this Report for more information on our significant accounting policies. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
From time
Please refer to time,Recently Issued Accounting Pronouncements in Note 2 – Summary of Significant Accounting Policies set forth immediately following the FASB or other standards setting bodies issuesignature page of this Report for information on new authoritative accounting pronouncements. Updates to the FASB ASCs are communicated through issuance of an Accounting Standards Update ("ASU"). Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our financial statements upon adoption.In February 2016, the FASB issued ASU 2016-02 “Leases”, which together with subsequent amendments is included in ASC 842, “Leases”. Most significantly, ASC 842 requires a lessee to recognize on the statement of financial position a liability to make lease payments and an asset with respect to its right to use the underlying asset for the lease term. Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the statements of operations. ASC 842 also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. The update is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period. Early adoption is permitted. The Company is adopting ASC 2016-02 effective January 1, 2019 under the modified retrospective method with respect to lease contracts in effect as of the adoption date. The adoption of ASC 2016-02 will increase our assets and liabilities by approximately $139,000 as of January 1, 2019 due to the recognition of right-of-use assets and lease liabilities with respect to operating leases. The Company does not believe the adoption of ASC 842 will have a material effect on its financial position, results of operations or cash flows
In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements in Nonemployee Share-Based Payment Accounting” which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. Under the guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date, which may lower their cost and reduce volatility in the income statement. The update is effective for fiscal years beginning after December 31, 2018, including interim reporting periods within that reporting period. Early adoption is permitted. The Company is adopting ASU 2018-07 effective January 1, 2019 and does not believe the adoption of ASU 2018-07 will have a material effect on its financial position, results of operations or cash flows.
There are other various updates recently issued by the FASB, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company's financial position, results of operations or cash flows.
Management has reviewed all other recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial condition or the results of our operations.
Off-Balance Sheet Arrangements
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors.
Item 7a. Quantitative And Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide this information.
ItemITEM 8.
Financial Statements And Supplementary DataFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information required by this Item are set forth immediately following the signature page and are incorporated herein by reference.
ItemITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.none
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.
ItemITEM 9A.
Controls and Procedures.Disclosure Controls and Procedures
Disclosure Controls and Procedures–CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our
Chief Executive OfficerCEO and
Chief Financial Officer,CFO, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange
Act of 1934, as amended (the “Exchange Act”)Act) as of the end of the period covered by this Report.
These controls are designed to ensure that information required to be disclosed in the reports we file or submit pursuant to the
Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission,SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO to allow timely decisions regarding required disclosure.
Based on this evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of December 31,
2018,2023, at reasonable assurance levels.
We believe that our financial statements presented in this
annual report on Form 10-KReport fairly present, in all material respects, our financial position, results of operations, and cash flows for all periods presented herein.
Inherent Limitations – Our management, including our Chief Executive OfficerCEO and Chief Financial Officer,CFO, does not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. In particular, many of our current processes rely upon manual reviews and processes to ensure that neither human error nor system weakness has resulted in erroneous reporting of financial data.
Changes in Internal Control over Financial Reporting –
There were no changes in our internal control over financial reporting during our fiscal year ended December 31,
2018,2023, 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.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.
Management Report on Internal Control over Financial Reporting
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act. Those rules define internal control over financial reporting as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| · | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| · | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and the receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the Company; and |
| · | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the company’s assets that could have a material effect on the financial statements. |
•Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and the receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31,
2018.2023 and concluded that the Company’s internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. In making this assessment, our management used the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO)("COSO").
Based on its assessment, management has concluded that as
This Report does not include an attestation report of December 31, 2018, our disclosure controls and procedures andregistered public accounting firm regarding internal control over financial reporting were ineffective, basedreporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in part on the issues discussed above.this Report.
Item 9b. Other Information
None.
ITEM 9B. OTHER INFORMATION None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning our directors and officers is incorporated by reference to our Definitive Proxy Statement on Schedule 14A to be filed with the Securities and Exchange CommissionSEC within 120 days after the end of our fiscal year.
ITEM 11.
EXECUTIVE COMPENSATION
Information concerning our directors and officers is incorporated by reference to our Definitive Proxy Statement on Schedule 14A to be filed with the Securities and Exchange CommissionSEC within 120 days after the end of our fiscal year.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning our directors and officers is incorporated by reference to our Definitive Proxy Statement on Schedule 14A to be filed with the Securities and Exchange CommissionSEC within 120 days after the end of our fiscal year.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information concerning our directors and officers is incorporated by reference to our Definitive Proxy Statement on Schedule 14A to be filed with the Securities and Exchange CommissionSEC within 120 days after the end of our fiscal year.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.SERVICES
Information concerning our directors and officers is incorporated by reference to our Definitive Proxy Statement on Schedule 14A to be filed with the
Securities and Exchange CommissionSEC within 120 days after the end of our fiscal year.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES.
A list of financial statements filed herewith is contained is set forth on page F-1 of the financial statements that immediately follow the signature page of this Report and is incorporated by reference herein. The financial statement schedules have been omitted because they are not required, not applicable or the information has been included in our financial statements. The exhibits required by this Item
15. Exhibits, Financial Statements Schedules.Theare contained in the Exhibit Index beginning on the following exhibitspage of this Annual Report on Form 10-K and are included with this report:
incorporated herein by reference.
EXHIBIT INDEX
| | | | | | | | |
Exhibit
No. | | Exhibit No. | | Description |
| | |
| 2.1 | | |
| 21.1 | |
| 3.4 | | |
| 31.1 | |
| 4.1 | | |
| | |
| 10.1 | | |
| | |
| 10.2 | | Form of Secured Promissory Note (incorporated by reference to Exhibit 10.2 to Form 8-K filed on December 18, 2023). |
| | |
| 10.3 | | Form of Security Agreement (incorporated by reference to Exhibit 10.3 to Form 8-K filed on December 18, 2023). |
| | |
| 10.4 | | Form of Continuing Guaranty (incorporated by reference to Exhibit 10.4 to Form 8-K filed on December 18, 2023). |
| | |
| 21.1 | | |
| | |
| 23.1 | | |
| | |
| 24.1 | | |
| | |
| 31.1 | | |
| | |
| 31.2 | | |
| | |
3232.1 | | |
The following exhibits have previously been filed with the Securities and Exchange Commission on the date indicated.
10.1 | | Letter Agreement between Edyza, Inc. and Registrant (incorporated by reference to Form S-1 Registration Statement filed on May 15, 2018)Inline XBRL Label Linkbase Document. |
| | |
| 101.PRE | | Inline XBRL Presentation Linkbase Document. |
| 10.2 | | Intellectual Property Purchase and Assignment Agreement between Edyza, Inc. and Registrant (incorporated by reference to Form S-1 Registration Statement filed on May 15, 2018)
| 104 | | |
10.3 | | Membership Interest Purchase Agreement between Total Grow Holdings, LLC and Registrant dated February 15, 2018 (incorporated by reference to Form S-1Registration Statement filed on May 15, 2018) |
| | |
10.4 | | Business Lease between JW Properties, LLC and Registrant dated July 22, 2015 (incorporated by reference to Form S-1Registration Statement filed on May 15, 2018) |
| | |
10.5 | | Commercial Lease Agreement between Bravo Lighting, LLC and Registration (incorporated by reference to Form S-1 Registration Statement filed on May 15, 2018) |
| | |
10.6 | | Promissory Note from Registrant to Bravo Lighting, LLC dated July 31, 2016 (incorporated by reference to Form S-1/A Registration Statement filed on July 11, 2018) |
| | |
10.8 | | Form of Common Stock Purchase Warrant issued to Michael Sandy Bank dated April 19, 2018 (incorporated by reference to Form S-1/A Registration Statement filed on July 11, 2018) |
| 29 | Cover Page Interactive Data File (embedded within the Inline XBRL document). |
*Denotes a management contract or compensatory plan or arrangement.
ITEM 16. FORM 10-K SUMMARY
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned thereunder duly authorized.
| | | | | | | | |
| URBAN-GRO, INC. | |
| | | |
Dated: April 1, 2019Date: March 27, 2024 | By: | /s/ Bradley Nattrass | |
| | Bradley Nattrass Principal
Chairperson of the Board of Directors and Chief Executive Officer
| |
| | | |
| | | |
| By: | /s/ George R. Pullar | |
| | George R. Pullar,
Principal Financial and Accounting Officer
| |
| | | |
In accordance
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Bradley Nattrass, his or her true and lawful attorney-in-fact and agent, with the Exchange Act,full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that such attorney-in-fact and agent, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
indicatedand on
April 1, 2019.the dates indicated. | | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | |
| /s/ Bradley Nattrass | | Chairperson of the Board of Directors and Chief Executive Officer | | March 27, 2024 |
Bradley Nattrass Director | | (Principal Executive Officer) | | |
| | | | |
| /s/ Richard A. Akright | | Chief Financial Officer | | March 27, 2024 |
| Richard A. Akright | | (Principal Financial Officer) (Principal Accounting Officer) | | |
| | | | |
/s/ Octavio Gutierrez | |
Octavio Gutierrez, Director | |
| |
| |
/s/ George R. Pullar | |
George R. Pullar, Director | |
| |
| |
| /s/ Lewis O. Wilks | | Director | | March 27, 2024 |
Lewis O. Wilks Director | | | | |
| | | | |
| /s/ David Hsu | | Director | | March 27, 2024 |
| David Hsu | | | | |
| | | | |
| /s/ Sonia Lo | | Director | | March 27, 2024 |
| Sonia Lo | | | | |
| | | | |
| /s/ Anita Britt | | Director | | March 27, 2024 |
/s/ James H. DennedyAnita Britt | | | | |
| James H. Dennedy, Director | | | |
| |
| |
/s/ Lance Galey | |
Lance Galey, Director | |
| |
| |
| /s/ James Lowe | | Director | | March 27, 2024 |
James Lowe Director | |
| |
INDEX TO FINANCIAL STATEMENTS
| | | | | |
| Page No. |
| | |
| | F-2 |
| | |
Audited Financial Statements: | | |
| | |
| | F-3 |
| | |
| | F-4 |
| | |
| | F-5 |
| | |
| | F-6 |
| | |
| | F-7 |
Report of Independent Registered Public Accounting Firm
To the shareholders and the
boardBoard of
directorsDirectors of urban-gro, Inc.
and subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of urban-gro, Inc.
and subsidiaries (the "Company") as of December 31,
20182023 and
2017,2022, the related consolidated statements of operations
shareholders deficitand comprehensive loss, shareholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
20182023 and
2017,2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.
Going Concern Uncertainty
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s operating losses, accumulated deficits, and operating cash outflows raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our
auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our
auditsaudit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our
auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our
audits provideaudit provides a reasonable basis for our opinion.
BF Borgers CPA PC (PCAOB ID 5041)
We have served as the
Company'sCompany’s auditor since 2017.
Lakewood, CO
April 1, 2019
March 27, 2024
CONSOLIDATED BALANCE SHEETS| | | December 31, | | | December 31, | |
| | | 2018 | | | 2017 | |
| | | | | | | |
| Assets | | | | | | | | |
| Current Assets | | | | | | | | |
| Cash | | $ | 1,178,852 | | | $ | 1,656,791 | |
| Accounts receivable, net | | | 501,191 | | | | 642,553 | |
| Inventory | | | 1,214,224 | | | | 1,124,714 | |
| Related party receivable | | | 122,356 | | | | 13,540 | |
| Prepayments and advances | | | 928,682 | | | | 859,277 | |
| Total current assets | | | 3,945,305 | | | | 4,296,875 | |
| | | | | | | | | |
| Non-current assets | | | | | | | | |
| Property, plant, and equipment, net | | $ | 441,141 | | | $ | 224,824 | |
| Investments | | | 1,261,649 | | | | 400,000 | |
| Other assets | | | 96,669 | | | | 44,693 | |
| Total non-current assets | | | 1,799,459 | | | | 669,517 | |
| | | | | | | | | |
| Total assets | | $ | 5,744,764 | | | $ | 4,966,392 | |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Current liabilities | | | | | | | | |
| Accounts payable | | $ | 1,630,893 | | | $ | 1,338,661 | |
| Accrued expenses | | | 1,144,142 | | | | 1,256,115 | |
| Related party payable | | | 18,802 | | | | 93,394 | |
| Customer deposits | | | 3,298,609 | | | | 3,151,250 | |
| Short term notes payable | | | 3,478,869 | | | | 188,000 | |
| Total current liabilities | | | 9,571,315 | | | | 6,027,420 | |
| | | | | | | | | |
| Non-current liabilities | | | | | | | | |
| Long term notes payable | | $ | – | | | $ | 300,000 | |
| Total long-term liabilities | | | – | | | | 300,000 | |
| | | | | | | | | |
| Total liabilities | | | 9,571,315 | | | | 6,327,420 | |
| | | | | | | | | |
| Commitments and contingencies, note 10 | | | | | | | | |
| | | | | | | | | |
| Equity | | | | | | | | |
| Preferred stock, $0.1 par value; 10,000,000 shares authorized; 0 shares issued and outstanding as of December 31, 2018 and December 31, 2017 | | | – | | | | – | |
| Common stock, $0.001 par value; 100,000,000 shares authorized; 25,229,833 and 25,046,000 shares issued and outstanding as of December 31, 2018, and December 31, 2017 respectively | | | 25,230 | | | | 25,036 | |
| Additional Paid in Capital | | | 4,688,272 | | | | 3,258,116 | |
| Retained earnings / (deficit) | | | (8,540,053 | ) | | | (4,644,180 | ) |
| Total equity (deficit) | | | (3,826,551 | ) | | | (1,361,028 | ) |
| Total liabilities and equity | | $ | 5,744,764 | | | $ | 4,966,392 | |
See
| | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 |
| ASSETS | | | |
| Current assets: | | | |
| Cash | $ | 1,112,504 | | | $ | 12,008,003 | |
| Accounts receivable, net | 26,991,739 | | | 15,380,292 | |
| Contract receivables | 10,071,951 | | | 3,004,282 | |
| Prepaid expenses and other current assets | 2,775,682 | | | 4,164,960 | |
| Total current assets | 40,951,876 | | | 34,557,537 | |
| Non-current assets: | | | |
| Property and equipment, net | 1,419,393 | | | 1,307,146 | |
| Operating lease right of use assets, net | 2,041,217 | | | 2,618,825 | |
| Investments | — | | | 2,559,307 | |
| Goodwill | 15,572,050 | | | 15,572,050 | |
| Intangible assets, net | 4,394,507 | | | 5,450,687 | |
| Total non-current assets | 23,427,167 | | | 27,508,015 | |
| Total assets | $ | 64,379,043 | | | $ | 62,065,552 | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 25,411,243 | | | $ | 9,960,364 | |
| Contract liabilities | 8,063,325 | | | 1,294,452 | |
| Accrued expenses | 4,071,231 | | | 3,196,961 | |
| Customer deposits | 603,046 | | | 2,571,161 | |
| Contingent consideration | 49,830 | | | 2,799,287 | |
| Notes payable | 3,204,840 | | | 3,832,682 | |
| Operating lease liabilities | 707,141 | | | 600,816 | |
| Total current liabilities | 42,110,656 | | | 24,255,723 | |
| Non-current liabilities: | | | |
| Operating lease liabilities | 1,380,362 | | | 2,044,782 | |
| Deferred tax liability | 817,419 | | | 1,033,283 | |
| Total non-current liabilities | 2,197,781 | | | 3,078,065 | |
| | | |
| Total liabilities | 44,308,437 | | | 27,333,788 | |
| Commitments and contingencies (note 11) | | | |
| | | |
| Shareholders’ equity: | | | |
| Preferred stock, $0.10 par value; 3,000,000 shares authorized; 0 shares issued and outstanding as of December 31, 2023, and 10,000,000 shares authorized; 0 shares issued and outstanding as of December 31, 2022 | — | | | — | |
| Common stock, $0.001 par value; 30,000,000 shares authorized; 13,522,669 issued and 12,072,836 outstanding as of December 31, 2023, and 100,000,000 shares authorized; 12,220,593 shares issued and 10,770,760 outstanding as of December 31, 2022 | 13,523 | | | 12,221 | |
| Additional paid-in capital | 88,901,583 | | | 84,882,982 | |
| Treasury shares, cost basis: 1,449,833 shares as of December 31, 2023 and 1,449,833 as of December 31, 2022 | (12,045,542) | | | (12,045,542) | |
| Accumulated deficit | (56,798,958) | | | (38,117,897) | |
| Total shareholders’ equity | 20,070,606 | | | 34,731,764 | |
| Total liabilities and shareholders’ equity | $ | 64,379,043 | | | $ | 62,065,552 | |
The accompanying notes toare an integral part of these consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME| | | For The Years Ended | |
| | | December 31, | | | December 31, | |
| | | 2018 | | | 2017 | |
| Revenue | | $ | 20,050,776 | | | $ | 12,298,015 | |
| | | | | | | | | |
| Cost of goods sold | | | 13,892,025 | | | | 9,244,329 | |
| Gross profit | | | 6,158,751 | | | | 3,053,686 | |
| | | | | | | | | |
| Operating expenses | | | | | | | | |
| Marketing | | $ | 1,068,629 | | | $ | 402,621 | |
| General and administrative | | | 7,644,880 | | | | 4,929,369 | |
| Stock Compensation | | | 1,245,826 | | | | 84,839 | |
| Total operating expenses | | | 9,959,335 | | | | 5,416,829 | |
| | | | | | | | | |
| Loss from operations | | | (3,800,584 | ) | | | (2,363,143 | ) |
| | | | | | | | | |
| Other Income (Expenses) | | | | | | | | |
| Other income | | | 24,672 | | | | 2,324 | |
| Interest expense | | | (119,961 | ) | | | (216,576 | ) |
| Total other expenses, net | | | (95,289 | ) | | | (214,252 | ) |
| | | | | | | | | |
| Income Tax expense | | | – | | | | – | |
| | | | | | | | | |
| Net income (loss) | | $ | (3,895,873 | ) | | $ | (2,577,395 | ) |
| | | | | | | | | |
| Comprehensive income (loss) | | $ | (3,895,873 | ) | | $ | (2,577,395 | ) |
| | | | | | | | | |
| Earnings (loss) per share | | | | | | | | |
| Net loss per share - basic and diluted | | $ | (0.16 | ) | | $ | (0.11 | ) |
| | | | | | | | | |
| Weighted average outstanding shares for the periods ended December 31, 2018 and December 31, 2017- basic and diluted* | | | 24,848,239 | | | | 23,315,227 | |
*Weighted shares outstanding for the period ended December 31, 2017 were recalculated from partnership units to common stock shares with a conversion rate of 193.3936722 shares for each LLC unit.
SeeLOSS
| | | | | | | | | | | |
| For the Years Ended
December 31, |
| 2023 | | 2022 |
| Revenues: | | | |
| Equipment systems | $ | 12,675,645 | | | $ | 33,333,574 | |
| Services | 11,923,920 | | | 12,862,308 | |
| Construction design-build | 46,254,967 | | | 19,822,901 | |
| Other | 688,241 | | | 1,011,151 | |
| Total revenues and other income | 71,542,773 | | | 67,029,934 | |
| Cost of revenues: | | | |
| Equipment systems | 11,085,306 | | | 27,963,258 | |
| Services | 7,222,968 | | | 6,225,634 | |
| Construction design-build | 42,442,858 | | | 17,905,172 | |
| Other | 500,079 | | | 730,151 | |
| Total cost of revenues | 61,251,211 | | | 52,824,215 | |
| Gross profit | 10,291,562 | | | 14,205,719 | |
| | | |
| Operating expenses: | | | |
| General and administrative | 23,713,773 | | | 19,911,276 | |
| Stock-based compensation | 2,199,046 | | | 2,571,785 | |
| Intangible asset amortization | 1,056,180 | | | 1,059,779 | |
| Business development | — | | | 3,299,864 | |
| Total operating expenses | 26,968,999 | | | 26,842,704 | |
| Loss from operations | (16,677,437) | | | (12,636,985) | |
| | | |
| Non-operating income (expenses): | | | |
| Interest expense | (271,686) | | | (54,579) | |
| Interest income | 173,895 | | | 329,012 | |
| Contingent consideration | (160,232) | | | (436,905) | |
| Write-down of investment | (258,492) | | | (2,660,933) | |
| Loss on settlement | (1,500,000) | | | — | |
| Other income (expense) | (202,973) | | | (139,611) | |
| Total non-operating income (expenses) | (2,219,488) | | | (2,963,016) | |
| Loss before income taxes | (18,896,925) | | | (15,600,001) | |
| | | |
| Income tax benefit | 215,864 | | | 322,092 | |
| Net loss | $ | (18,681,061) | | | $ | (15,277,909) | |
| | | |
| Comprehensive loss | $ | (18,681,061) | | | $ | (15,277,909) | |
| | | |
| Loss per share – basic and diluted | $ | (1.66) | | | $ | (1.44) | |
| Weighted average shares – basic and diluted | 11,264,414 | | 10,610,841 |
The accompanying notes
toare an integral part of these consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' DEFICITFOR THE YEARS ENDED December 31, 2017 and 2018
| | | | | | | | | | | | Additional | | | Retained Earnings | | | Total | |
| | | Members' | | | Common Stock | | | Paid in | | | (accumulated | | | Shareholders' | |
| | | Equity | | | Shares | | | Amount | | | Capital | | | deficits) | | | Deficit | |
| Balance, December 31, 2016 | | $ | 742,313 | | | | – | | | $ | – | | | $ | – | | | $ | (2,066,785 | ) | | $ | (1,324,472 | ) |
| Common stock converted from LLC Units | | | (742,313 | ) | | | 22,500,000 | | | | 22,500 | | | | 719,813 | | | | – | | | | – | |
| Common stock issued in settlement of debt | | | – | | | | 500,000 | | | | 500 | | | | 499,500 | | | | – | | | | 500,000 | |
| Sale of common stock | | | – | | | | 2,046,000 | | | | 2,036 | | | | 1,953,966 | | | | – | | | | 1,956,002 | |
| Stock based compensation | | | – | | | | – | | | | – | | | | 84,837 | | | | – | | | | 84,837 | |
| Net loss for year ended December 31, 2017 | | | – | | | | – | | | | – | | | | – | | | | (2,577,395 | ) | | | (2,577,395 | ) |
| Balance, December 31, 2017 | | $ | – | | | | 25,046,000 | | | $ | 25,036 | | | $ | 3,258,116 | | | $ | (4,644,180 | ) | | $ | (1,361,028 | ) |
| Clawback of stock granted | | | – | | | | (375,000 | ) | | | (375 | ) | | | 375 | | | | – | | | | – | |
| Payment of outstanding balance for PPM | | | – | | | | – | | | | – | | | | 80,000 | | | | – | | | | 80,000 | |
| Stock based compensation | | | – | | | | – | | | | – | | | | 1,345,825 | | | | – | | | | 1,345,825 | |
| Stock Grant Program Vesting | | | – | | | | 558,833 | | | | 568 | | | | (568 | ) | | | – | | | | – | |
| Warrants | | | – | | | | – | | | | – | | | | 4,525 | | | | – | | | | 4,525 | |
| Net loss for year ended December 31, 2017 | | | – | | | | – | | | | – | | | | – | | | | (3,895,873 | ) | | | (3,895,873 | ) |
| Balance, December 31, 2018 | | $ | – | | | | 25,229,833 | | | $ | 25,230 | | | $ | 4,688,272 | | | $ | (8,540,053 | ) | | $ | (3,826,551 | ) |
SeeSTOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional
Paid in
Capital | | Accumulated Deficit | | Treasury
Stock | | Total
Shareholders’
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 | — | | | — | | | 2,571,785 | | | — | | | — | | | 2,571,785 | |
| Common stock repurchased | — | | | — | | | — | | | — | | | (4,362,052) | | | (4,362,052) | |
| Stock issuance related to acquisition | 555,390 | | | 555 | | | 3,603,258 | | | — | | | — | | | 3,603,813 | |
| Stock issued in conversion of warrants | 34,863 | | | 35 | | | (35) | | | — | | | — | | | – | |
| Stock grant program vesting | 37,675 | | | 38 | | | (38) | | | — | | | — | | | – | |
| Stock options exercised | 4,555 | | | 5 | | | 28,792 | | | — | | | — | | | 28,797 | |
| Net loss | — | | | — | | | — | | | (15,277,909) | | | — | | | (15,277,909) | |
| Balance, December 31, 2022 | 12,220,593 | | | $ | 12,221 | | | $ | 84,882,982 | | | $ | (38,117,897) | | | $ | (12,045,542) | | | $ | 34,731,764 | |
| Stock-based compensation | | | | | 2,199,046 | | | — | | | | | 2,199,046 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Stock issued for contingent consideration | 897,581 | | | 897 | | | 1,819,960 | | | — | | | — | | | 1,820,857 | |
| Stock grant program vesting | 404,495 | | | 405 | | | (405) | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Net loss | — | | | — | | | — | | | (18,681,061) | | | — | | | (18,681,061) | |
| Balance, December 31, 2023 | 13,522,669 | | | $ | 13,523 | | | $ | 88,901,583 | | | $ | (56,798,958) | | | $ | (12,045,542) | | | $ | 20,070,606 | |
The accompanying notes
toare an integral part of these consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | For the years ended | |
| | | December 31, | | | December 31, | |
| | | 2018 | | | 2017 | |
| Cash Flows from Operating Activities | | | | | | | | |
| Net Loss | | $ | (3,895,873 | ) | | $ | (2,577,395 | ) |
| Adjustment to reconcile net loss from operations: | | | | | | | | |
| Depreciation and amortization | | | 154,136 | | | | 75,605 | |
| Warrant expense | | | 3,394 | | | | – | |
| Inventory write-offs | | | 77,531 | | | | 82,404 | |
| Bad debt expense | | | 106,464 | | | | 141,288 | |
| Stock compensation expense | | | 1,245,826 | | | | 84,839 | |
| Changes in Operating Assets and Liabilities | | | | | | | | |
| Accounts receivable | | | (73,917 | ) | | | (286,642 | ) |
| Inventory | | | (167,040 | ) | | | (331,203 | ) |
| Prepayments and advances | | | (69,409 | ) | | | (742,231 | ) |
| Other assets | | | (19,275 | ) | | | (3,995 | ) |
| Accounts payable | | | 217,640 | | | | 421,380 | |
| Accrued expenses | | | (11,973 | ) | | | 608,541 | |
| Customer deposits | | | 147,360 | | | | 2,772,070 | |
| Net Cash Provided by (Used in) Operating Activities | | | (2,285,136 | ) | | | 244,661 | |
| | | | | | | | | |
| Cash Flows from Investing Activities | | | | | | | | |
| Purchase of investment | | | (861,649 | ) | | | (400,000 | ) |
| Purchases of property and equipment | | | (369,480 | ) | | | (204,494 | ) |
| Purchases of intangible assets | | | (33,674 | ) | | | (8,049 | ) |
| Net Cash Used Provided By (Used In) Investing Activities | | | (1,264,803 | ) | | | (612,543 | ) |
| | | | | | | | | |
| Cash Flows from Financing Activities | | | | | | | | |
| Issuance of capital stock | | | 80,000 | | | | 1,956,002 | |
| Proceeds from issuance of notes payable | | | 2,000,000 | | | | 300,000 | |
| Proceeds from related party loan | | | 1,000,000 | | | | – | |
| Repayment of notes payable | | | (8,000 | ) | | | (248,792 | ) |
| Net Cash Provided by (Used In) Financing Activities | | | 3,072,000 | | | | 2,007,210 | |
| | | | | | | | | |
| Net Increase (Decrease) in Cash | | | (477,939 | ) | | | 1,639,328 | |
| Cash at Beginning of Period | | | 1,656,791 | | | | 17,463 | |
| Cash at End of Period | | | 1,178,852 | | | | 1,656,791 | |
| | | | | | | | | |
| Supplemental Cash Flow Information: | | | | | | | | |
| Interest Paid | | | 119,961 | | | | 216,576 | |
| Income Tax Paid | | | – | | | | – | |
| | | | | | | | | |
| Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | |
| Common stock issued to reduce convertible and promissory notes payable | | | – | | | | (500,000 | ) |
| Common stock retired | | | 375 | | | | | |
See
| | | | | | | | | | | |
| For the Years Ended
December 31, |
| 2023 | | 2022 |
| Cash flows from operating activities: | | | |
| Net loss | $ | (18,681,061) | | | $ | (15,277,909) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Depreciation and amortization | 1,636,667 | | | 1,483,065 | |
| Deferred income tax benefit | (215,864) | | | (322,092) | |
| | | |
| Stock-based compensation expense | 2,199,046 | | | 2,571,785 | |
| Impairment of investment | 258,492 | | | 2,660,933 | |
| Change in fair value of contingent consideration | 160,232 | | | 436,905 | |
| Other, net | 735,760 | | | 54,858 | |
| Changes in operating assets and liabilities (net of acquired amounts): | | | |
| Accounts receivable and contract receivables | (19,245,685) | | | (2,517,745) | |
| Prepaid expenses and other assets and property and equipment | 2,161,898 | | | 8,397,707 | |
| Accounts payable, contract liabilities, and accrued expenses | 23,374,027 | | | 1,087,807 | |
| Change in contingent consideration from indemnification | (917,699) | | | — | |
| Operating lease liability | (690,404) | | | (413,770) | |
| Customer deposits | (1,968,115) | | | (10,774,290) | |
| Net cash used in operating activities | (11,192,706) | | | (12,612,746) | |
| | | |
| Cash flows from investing activities: | | | |
| Sale of investments | 2,326,472 | | | – | |
| Purchases of property and equipment | (615,170) | | | (580,347) | |
| Business combinations, net of cash acquired | — | | | (3,871,452) | |
| Net cash provided by (used in) investing activities | 1,711,302 | | | (4,451,799) | |
| | | |
| Cash flows from financing activities: | | | |
| Proceeds from issuance of common stock, net of offering costs | — | | | 28,796 | |
| Repurchase of common stock | — | | | (4,362,052) | |
| Additions to notes payable | 3,018,400 | | | — | |
| Repayment of finance lease ROU liability | (176,572) | | | (146,000) | |
| | | |
| Payments to settle contingent consideration | (479,362) | | | (1,040,386) | |
| Repayments of notes payable | (3,776,561) | | | – | |
| | | |
| Net cash used in financing activities | (1,414,095) | | | (5,519,642) | |
| | | |
| Net change in cash | (10,895,499) | | | (22,584,187) | |
| Cash at beginning of period | 12,008,003 | | | 34,592,190 | |
| Cash at end of period | $ | 1,112,504 | | | $ | 12,008,003 | |
The accompanying notes
to financial statementsurban-gro, Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
NOTE 1 – ORGANIZATION, BASIS OF PRESENTATION AND LIQUIDITY
Urban-gro Inc. (the “Company”), is a Colorado corporation that was founded in 2014 as a limited liability company before converting to a corporation on March 10, 2017. The Company isare an end-to-end agricultural solutions firm focused on cannabis and traditional agriculture produce growers. It provides design, engineering, and technology implementation in high-performance commercial cannabis cultivation facilities. The types of integrated cultivation systems include environment controls and automated fertigation and irrigation systems, commercial-grade light systems including light-emitting diode (LED) and high-pressure sodium (HPS) grow light systems, a complete line of water treatment solutions, rolling and automated benching systems, fans, and odor mitigation systems. Post start-up, the Company also markets a line of Integrated Pest Management products as well as an agriculture technology platform. The Company markets its products and services throughout the United States and Canada. During 2018 the Company also made preliminary efforts on projects in other countries as well, including Mexico, Jamaica and Colombia.
In June 2018, the Company formed urban-gro Canada Technologies, Inc. as a wholly owned Canadian subsidiary company which it intends to utilize for all of its Canadian sales operations. As of December 31, 2018 this subsidiary is still in the preparation for operations with our Canadian customers.
Basis of Presentation
These consolidated financial statements are presented in United States dollars and have been prepared in accordance with United States generally accepted accounting principles (“GAAP”).
Business Plan
The Company’s diversification plans have led to the strategic decision to focus on brand as an ancillary national market leader delivering the best in class value added product solutions to cannabis cultivators. Management has implemented the following actions to increase profit margins and generate positive operating cash flow: 1) Establish strategic partnerships with our vendors to decrease costs; 2) Implement design fees associated with designing environmental controls and fertigation systems; 3) Create a commissioning team and charge commissioning fees for training staff and starting up new environmental controls and fertigation systems; 4) Sell best-in-class systems, and 5) Design and implement integrated pest management plans for our customers and sell biological controls and pesticides to these customers. While no assurances can be provided, management believes these objectives will increase the Company’s gross profit and increase cash provided by operations.
Liquidity
Since inception the Company has incurred operating losses and has funded its operations primarily through issuance of equity securities, unsecured debt, and operating revenue. As of December 31, 2018, the Company had an accumulated deficit of $8,540,053, working capital deficit of $5,626,010, and negative stockholders’ equity of $3,826,551. The Company has evaluated its projected cash flows and believes that its cash and cash equivalents of $1,178,852 as of December 31, 2018, will be sufficient to fund the Company’s operations through at least twelve months from the issuance dateintegral part of these consolidated financial statements
urban-gro, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
| | | | | | | | | | | |
| For the Years Ended
December 31, |
| 2023 | | 2022 |
| Supplemental cash flow information: | | | |
| Cash paid for interest | $ | 142,388 | | | $ | 28,147 | |
| Net cash paid for income taxes | $ | 185,910 | | | $ | 16,253 | |
| | | |
| Supplemental disclosure of non-cash investing and financing activities: | | | |
| Stock issued for acquisitions | $ | — | | | $ | 3,603,813 | |
| Operating lease right of use assets and liabilities extension | $ | — | | | $ | 1,929,121 | |
The accompanying notes are an integral part of these consolidated financial statements
urban-gro, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND ACQUISITIONS, BUSINESS PLAN, AND LIQUIDITY
Organization
urban-gro, Inc. ("we," "us," "our," the "Company," or at least through March 31, 2020. Future financings, if necessary, may not be available"urban-gro") is an integrated professional services and design-build firm. We offer value-added architectural, engineering, and construction management solutions to the Controlled Environment Agriculture ("CEA"), industrial, healthcare, and other commercial sectors. Innovation, collaboration, and a commitment to sustainability drive our team to provide exceptional customer experiences. To serve our horticulture clients, we engineer, design and manage the construction of indoor CEA facilities and then integrate complex environmental equipment systems into those facilities. Through this work, we create high-performance indoor cultivation facilities for our clients to grow specialty crops, including leafy greens, vegetables, herbs, and plant-based medicines. Our custom-tailored approach to design, construction, procurement, and equipment integration provides a single point of accountability across all aspects of indoor growing operations. We also help our clients achieve operational efficiency and economic advantages through a full spectrum of professional services and programs focused on facility optimization and environmental health which establish facilities that allow clients to manage, operate and perform at the highest level throughout their entire cultivation lifecycle once they are up and running. Further, we serve a broad range of commercial and governmental entities, providing them with planning, consulting, architectural, engineering and construction design-build services for their facilities. We aim to work with our clients from the inception of their project in a way that provides value throughout the life of their facility. We are a trusted partner and advisor to our clients and offer a complete set of engineering and managed services complemented by a vetted suite of select cultivation equipment systems.
Acquisitions
DVO
Effective October 31, 2022, the Company entered into an agreement with Dawson Van Orden, Inc. ("Seller" or "DVO") and DVO's shareholders (the "DVO Shareholders") to acquire substantially all of the operating assets and liabilities of DVO, a Texas-based engineering firm with significant experience in indoor CEA. The purchase price of $6.1 million, after working capital adjustments, was comprised of (i) $1.2 million in cash, (ii) a $3.8 million Seller's promissory note, and (iii) $1.1 million of the Company's common stock. The Seller's promissory note was initially to be paid out over four quarters beginning in January 2023. In the third quarter of 2023, a portion of that quarter’s note payment was extended to the first quarter of 2024. The Seller’s promissory note balances as of December 31, 2023, and December 31, 2022, were $575,240and $3,832,682, respectively. The purchase price excludes up to $1.1 million of contingent consideration earnout that may become payable to the sellers dependent on the continued employment of the DVO Shareholders. The contingent consideration earnout is payable, at acceptable terms,the Company’s discretion, in cash or at all. Salesshares of additional equity securities would resultthe Company’s common stock with the value of such shares being determined based upon the volume-weighted average price ("VWAP") of the Company’s common stock in the dilutionten trading days prior to the end of equity intereststhe applicable quarter for which the quarterly gross profit is calculated.
The Company accounted for the acquisition as follows:
| | | | | |
| Purchase price | $ | 6,072,366 | |
| |
| Allocation of purchase price: | |
| Accounts receivable, net | $ | 1,134,909 | |
| Right of use asset | $ | 1,197,310 | |
| Property and equipment | $ | 229,058 | |
| Goodwill | $ | 3,444,926 | |
| Intangible assets | $ | 1,276,000 | |
| Accrued expenses | $ | (12,527) | |
| Right of use liability | $ | (1,197,310) | |
Pro-forma disclosure of current shareholders.the DVO acquisition is not required as the historical results of DVO were not material to the Company's consolidated financial statements. Acquired goodwill from DVO represents the value expected to arise from organic growth and an opportunity to expand into a well-established market for the Company.
Emerald/UG Construction, Inc.
Effective April 29, 2022, the Company acquired all of the issued and outstanding capital stock of Emerald Construction Management, Inc. ("Emerald") from its shareholders (the "Emerald Sellers"). The purchase price of $7.7 million, after working capital adjustments, was comprised of (i) $3.4 million in cash, (ii) $2.5 million of the Company’s common stock, and (iii) $1.8 million of estimated contingent consideration earnout payable to the Emerald Sellers over the term of the earnout. The total contingent earnout payable to the Emerald Sellers is $2.0 million. Effective January 1, 2023, the terms of the contingent consideration earnout provisions were amended providing for the entire contingent consideration of up to $2.0 million to be earned based solely on the continued employment of the Emerald Sellers for a two year period following the closing of the Emerald acquisition. This resulted in the Company recording additional contingent consideration expense of $160,232 in the first quarter of 2023. Per the amendment, the remaining contingent consideration earnout is payable quarterly, at the Company’s discretion, in cash or in shares of the Company’s common stock with the value of such shares being determined based upon the VWAP of the Company’s common stock in the ten trading days prior to the end of the applicable quarter.Effective November 21, 2023, Emerald changed its name to UG Construction, Inc.
The Company accounted for the acquisition as follows:
| | | | | |
| Purchase price | $ | 7,671,557 | |
| |
| Allocation of purchase price: | |
| Cash | $ | 622,641 | |
| Accounts receivable, net | $ | 2,666,811 | |
| Contract receivable | $ | 494,456 | |
| Prepayments and other assets | $ | 38,086 | |
| Property and equipment | $ | 403,008 | |
| Right of use asset | $ | 82,408 | |
| Goodwill | $ | 4,135,006 | |
| Intangible assets | $ | 3,659,000 | |
| Accrued expenses | $ | (2,361,302) | |
| Contract liabilities | $ | (1,071,399) | |
| Right of use liability | $ | (82,408) | |
| Deferred tax liability | $ | (914,750) | |
The following pro-forma amounts reflect the Company’s results as if the acquisition of Emerald had occurred on January 1, 2022. These factspro-forma amounts have been calculated after applying the Company’s accounting policies and conditions raiseadjusting the results of the acquisition to reflect the additional amortization of intangibles.
| | | | | | | | | | | |
| For the Years Ended
December 31, |
| 2023 | | 2022 |
| Revenues: | | | |
| Equipment systems | 12,675,645 | | | 33,333,574 | |
| Services | 11,923,920 | | | 12,862,308 | |
| Construction design-build | 46,254,967 | | | 31,504,349 | |
| Other | 688,241 | | | 1,011,151 | |
| Total revenues and other income | 71,542,773 | | | 78,711,382 | |
| | | |
| Net loss | $ | (18,681,061) | | | $ | (13,268,226) | |
Acquired goodwill from Emerald represents the value expected to arise from organic growth and an opportunity to expand into a well-established market for the Company.
Per the Emerald Acquisition Agreement and Plan of Merger (the “Emerald Acquisition Agreement”), when the Company acquired all of the issued and outstanding capital stock of Emerald, the Emerald Sellers indemnified the Company for any material liabilities, losses, and actions or inaction which took place prior to the acquisition and that were not disclosed as part of the transaction. To that end, a pre-acquisition Emerald project incurred a substantial doubt about our abilityloss that was not disclosed in the Emerald Acquisition Agreement. The majority shareholder of Emerald has agreed to indemnify the Company for the loss, which is currently estimated to be $2.4 million (the “Indemnified Loss”). In the second quarter of 2023, the Company offset $1.0 million of the Indemnified Loss against the total remaining contingent consideration and certain other liabilities owed to the majority shareholder of Emerald thereby resulting in a net amount due from the majority shareholder of Emerald to $1.4 million. Further, the Company has agreed to satisfy up to $1.2 million of the Indemnified Loss in the event a certain Emerald project is above a 7% profit margin, on a dollar for dollar basis.
Liquidity and Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates realization of assets and our independent registered public accounting firm has included an explanatory paragraph regarding going concern qualificationthe satisfaction of liabilities in its audit report. However, our management believes the $2,500,000 committed by 4front Capital Partner as described in Note 16 Subsequent events, should provide sufficient liquiditynormal course of business within one year after the date the consolidated financial statements are available to meet our obligations as they become due for a reasonable period of time. While we believe that these liquidity plan measures will be adequate to satisfy our liquidity requirements for the twelve months ending March 31, 2020 there is no assurance that the liquidity plan will be successfully implemented. Failure to successfully implement the liquidity plan may have a material adverse effect on our business, results of operations and financial position, and may adversely affect our ability to continue as a going concern. If we do not become consistently profitable, our accumulated deficit will grow larger and our cash balances will decline further, and we will require additional financing to continue operations. Any such financing may not be accessible on acceptable terms, if at all. If we cannot generate sufficient cash or obtain additional financing, we may be required to downsize our business further or discontinue our operations altogether.issued.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation, Principles of Consolidation and Business Combinations
These consolidated financial statements include the accounts of urban-gro, Inc. and its wholly owned subsidiaries. They are presented in United States dollars and have been prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of the SEC for condensed financial reporting.The condensed consolidated financial statements are audited and, in the Company’s opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of the Company’s condensed consolidated balance sheets, condensed consolidated statements of operations and comprehensive loss, condensed consolidated statements of stockholders’ equity and condensed consolidated statements of cash flows for the periods presented.
Acquisitions of businesses are accounted for using the acquisition method of accounting (Accounting Standards Codification 805-10-225). The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition date fair values of the assets transferred, liabilities incurred to the former owners of the acquired entities and the equity interests issued in exchange for control of the acquired entities. Acquisition related costs are recognized in net income (loss) as incurred.
In preparing consolidated financial statements in conformity with
U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reported
period.periods. Actual results could differ from those estimates. Significant estimates include estimated
revenues earned under percentage of completion construction contracts, professional service contracts, estimated useful lives and potential impairment of
propertylong-lived assets and
equipment,goodwill, inventory
write offs,write-offs, allowance for deferred tax assets and deferred tax liabilities, and allowance for
bad debt.Reclassification
Going Concern Assessment
With the implementation of, ASC No. 205-40, beginning
Certain prior year amounts have been reclassified for consistency with the current year ended December 31, 2016presentation. These reclassifications had no effect on the reported results of operations.
Balance Sheet Classifications
The Company includes in current assets and liabilities the following amounts that are in connection with construction contracts that may extend beyond one year: contract assets and contract liabilities (including retainage invoiced to customers contingent upon anything other than the passage of time), capitalized costs to fulfill contracts, retainage payable to sub-contractors and accrued losses on uncompleted contracts. A one-year time period is used to classify all annualother current assets and interim periods thereafter, we assess going concern uncertaintyliabilities when not otherwise prescribed by the applicable accounting principles.
Contract Assets and Liabilities
The timing between when Company collects cash from its construction design-build customers can create a contract asset or contract liability. Please refer to Note 3 - Revenue from Contracts with Customers for our consolidated financial statements to determine if we have sufficient cashfurther discussion of the Company's contract assets and cash equivalentsliabilities.
Functional and Reporting Currency and Foreign Currency Translation
The functional and reporting currency of the Company and its subsidiaries is US dollars. All transactions in currencies other than US dollars are translated into US dollars on
hand and working capital to operate for a period of at least one year from the date
of the
consolidated financial statementstransaction. Any exchange gains and losses related to these transactions are
issued or are available to be issued, which is referred torecognized in the current period earnings as
the “look - forward period” as defined by ASC No. 205-40. As part of this assessment, based on conditions that are known and reasonably knowable to us, we will consider various scenarios, forecasts, projections, and estimates, and make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and our ability to delay or curtail those expenditures or programs, among other
factors, if necessary, within the look-forward period in accordance with ASC No 205-40.income (expense).
Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash,
and cash equivalents, accounts receivable, accounts payable,
notes payablepromissory note and other current assets and liabilities. We value our financial assets and liabilities using fair value measurements. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:
•Level 1: Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access. •Level 2: Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated with observable market data. •Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs. The carrying amount of our cash,
and cash equivalents, accounts receivable, accounts payable,
promissory note, and other current assets and liabilities in our consolidated financial statements approximates fair value because of the short-term nature of the
instruments.instruments as of December 31, 2023 and 2022. Investments in non-marketable equity securities are carried at cost less other-than-temporary
impairments. The carrying amountimpairments as of
our notes payable and convertible debt at December 31,
20182023 and
December 31, 2017 approximates their fair values based on our incremental borrowing rates.2022.
There have been no changes in Level 1, Level 2, and Level 3 categorizations and no changes in valuation techniques for these assets or liabilities for the years ended December 31,
20182023 and
2017.2022.
Cash
and Cash EquivalentsThe Company considers all highly liquid short-term cash investments with an original maturity of three months or less to be cash equivalents. As of December 31,
20182023 and
2017,2022, the Company did not maintain any cash equivalents. The Company maintains cash with financial institutions that may from time to time exceed federally-insured limits. The Company has
not experienced any losses relatedInsured Cash Sweep programs in place with its financial institutions to
ensure that these
excess funds are also federally-insured. There are no restricted or compensating cash balances
and believes the risk to be minimal.
Trade Accounts Receivable
Trade accounts receivables are carried at the original invoiced amounts less an allowance for doubtful accounts. As of December 31,
20182023 and
2017,2022, the balance of allowance for doubtful accounts was
$18,920$306,496 and
$63,455,$103,653, respectively. The
allowancesallowance for doubtful accounts
areis calculated based on a detailed review of certain individual customer accounts and an estimation of the overall economic conditions affecting the
Company'sCompany’s customer base. The Company reviews a
customer'scustomer’s credit history before extending credit to the customer. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additions to the allowance would be required. A provision is made against accounts receivable to the extent they are considered unlikely to be collected. Occasionally, the Company will write off
bad debtbad-debt directly to the
bad debtbad-debt expense account when the balance is determined to be
uncollectable. Bad debtuncollectible. Bad-debt expense for the years ended December 31,
20182023 and
20172022 was
$106,464$566,569 and
$141,288,$110,000, respectively.
Non-trade Accounts Receivable
Non-trade accounts receivable consist of amounts due to the Company outside of our normal operating business. As of December 31, 2023 and 2022, the Company had a total of $3,134,452 and $2,914,112 of non-trade accounts receivable, respectively. Non trade accounts receivable as of December 31, 2023 were comprised of the remaining Indemnified Loss receivable from the majority shareholder of Emerald further detailed in Note 1 – Organization, Acquisitions, and Liquidity and miscellaneous non-trade accounts receivable of $498,043. As of December 31, 2022, non-trade accounts receivables was comprised of miscellaneous non-trade accounts receivables totaling $514,112, and non-trade accounts receivable related to litigation involving fraudulent wire transactions of $2,400,000. On March 27, 2023, the Company entered into an agreement to settle this litigation and received a cash payment of $2,400,000 on March 27, 2023. In connection with the settlement the Company recorded an impairment in the fourth quarter of 2022 of $950,576.
Inventories,
consisting entirely of finished goods, are stated at the lower of cost or net realizable
value. Inventoryvalue, with cost
is determined using the
weighted average cost method. The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions.
All inventory is finished goods and no raw products or work in progress is recorded on the balance sheets. Write-downs and write-offs are charged to cost of goods sold at the realization of change in value. Once written down, inventories are carried at this lower
cost basis until sold or scrapped.
There are no raw products or work in process inventories recorded on the balance sheets.
Property, Plant, and Equipment,
Netnet
Property and equipment is stated at cost less accumulated depreciation and impairment. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses other depreciation methods (generally accelerated) for tax purposes where appropriate. No impairment charges were recorded for the
twelve monthsyears ended December 31,
20182023 and
2017.2022.
The estimated useful lives for significant property and equipment categories are as follows:
| | | | | |
Computer and Technology Equipmenttechnology equipment | 3 years |
Furniture and Equipmentequipment | 5 years |
Leasehold Improvementsimprovements | Lease term |
| Vehicles | 3 years |
Other Equipment equipment | 3 or 5 years |
| Software | 3 years |
Operating Lease Right of Use Assets
Operating lease right of use assets are stated at cost less accumulated depreciation, amortization and impairment. The Company has various operating and finance equipment and office leases with an imputed annual interest rate of 8%.
The Company’s intangible assets, consistingconsist of legal fees for application of patents and trademarks, as well as customer relationships, trademarks and license fees paid for inspection services,trade names and backlog from the acquisitions of DVO, 2WR and Emerald. Our patents and trademarks are recorded at cost. Patentscost, while the intangibles from our acquisitions are recorded at fair value and trademarks, once approved, will beare amortized using the straight-line method over an estimated life, generally 5 years for patents, and 10 to 205 years for trademarks. License fees are amortized over 10 years.trademarks and trade names, 7 years for customer relationships, and 1 year for backlog. Intangible assets are includedreported in “other assets”the "Intangible Asset" line on the balance sheets. sheet.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is not amortized but is tested for impairment annually and at any time when events or circumstances suggest impairment may have occurred.
The net balancetesting for impairment consists of a comparison of the fair value of the reporting unit with its carrying amount. If the carrying amount of the reporting unit, including goodwill, exceeds the fair value, an impairment will be recognized equal to the difference between the carrying value of the reporting unit’s goodwill and the implied fair value of the goodwill. In testing goodwill for impairment, we determine the estimated fair value of our reporting units based upon a discounted future cash flow analysis. Goodwill, trade names and patents are our only indefinite-lived intangible assets. Definite-lived intangible assets for December 31, 2018are amortized using the straight-line method over the shorter of their contractual term or estimated useful lives.
Impairment of Long-lived Assets
The Company evaluates potential impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and
2017 was $63,755 and $31,054, respectively. Amortization expense totaled $974 and $0 foreventual disposition of the
years ended December 31, 2018 and 2017, respectively.Equity Investments
Inasset. An impairment will be recognized as the first quarteramount by which the carrying amount of 2018, the Company adopted ASU 2016-01, “Financial Instruments — Overall (Subtopic 825-10)”. Under ASU 2016-01, entities no longer use the cost method of accounting for equity investments but can instead elect a measurement alternative for equity investments that do not havelong-lived asset exceeds its fair value.
Investments
Investments without readily determinable fair values and
dofor which the Company does not
qualify forhave the
practical expedient in ASC 820, “Fair Value Measurement”ability to
estimate fair value using the NAV per share method. After management’s assessment of its two equity investments, management concluded that these two investments should beexercise significant influence are accounted for
using the measurement alternative. Under the alternative, the Company measures these investments at cost
less any impairment, plus or minus changes resulting fromwith adjustments for observable
price changes in
orderly transactions for an identicalprices or
similar investment of the same issuer, and the Company has to make a separate election to use the alternative for each eligible investment and has to apply the alternative consistently from period to period until the investment’s fair value becomes readily determinable. ASU further requires that the Company should use prospective method for all equity investments without readily determinable fair values.Revenue Recognition
The Company recognizes revenue in accordance with ASC 606,Revenue from Contracts with Customers,, which requires that five basic steps be followed to recognize revenue: (1) a legally enforceable contract that meets criterialcriteria standards as to composition and substance is identified; (2) performance obligations relating to provision of goods or services to the customer are identified; (3) the transaction price, with consideration given to any variable, noncash, or other relevant consideration, is determined; (4) the transaction price is allocated to the performance obligations; and (5) revenue is recognized when control of goods or services is transferred to the customer with consideration given to whether that control happens over time or not. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the productsservices and servicesproducts delivered and the collectability of those amounts.
The Company derives revenue predominately from the sale of equipment systems, services, construction design-build, and from other various immaterial contracts with customers. Please refer to Note 3 - Revenue from Contracts with Customers for additional discussion.
Customer
DepositTheDeposits
For equipment systems contracts, the Company’s policy is to collect deposits from customers at the beginning of the
project priorcontract. Please refer to
Note 3 - Revenue from Contracts with Customers for further discussion of the
design phase. TheCompany's customer
payments received are recorded as a customer deposit liability on the balance sheets. When the project is complete and meets all the criteria for revenue recognition, the deposit is recorded against the customer’s accounts receivable balance. In certain situations when the customer has paid the deposit and design work has been completed but the customer chooses not to proceed with the project, the Company may keep the deposit and book it to revenue.deposits.
Cost of
Goods SoldRevenues
The Company’s policy is to recognize cost of
goods soldrevenues in the same manner as, and in conjunction with, revenue recognition. The Company’s cost of revenues includes the costs directly attributable to revenue recognized and includes expenses related to the purchasing of products
and providing services, costs related to construction design-build contracts, fees for third-party commissions, and shipping costs. Total shipping costs included in the cost of
goods soldrevenues for the years ended December 31,
20182023 and
2017 was $490,5262022 were $256,345 and
$198,822,$893,517, respectively.
Income Taxes
Advertising Costs
The Company files a federal income tax returnexpenses advertising costs in the United States. In addition, itperiods the costs are incurred. Prepayments made under contracts are included in prepaid expenses and expensed when the advertisement is run. Total advertising expense incurred for the years ended December 31, 2023 and 2022 was $516,522 and $504,738, respectively.
Stock-Based Compensation
The Company periodically issues shares of its common stock and stock options to employees, directors, and consultants in non-capital raising transactions for fees and services. The Company accounts for stock grants and stock options issued to employees and directors with the award being measured at its fair value at the date of grant and amortized ratably over the vesting period. The Company accounts for stock issued to consultants with the value of the stock compensation based upon the measurement date as determined at the grant date of the award.
Warrants
The Company estimates the fair value of warrants at the respective balance sheet dates using the Black-Scholes option-pricing model based on the estimated market value of the underlying common stock at the valuation measurement date, the remaining contractual term, risk-free interest rate, and expected volatility of the price of the underlying common stock. There is a moderate degree of subjectivity involved when using option pricing models to estimate the warrants and the assumptions used in the Black-Scholes option-pricing model are moderately judgmental.
Income Taxes
The Company files income tax returns in
the United States, Canada, and the Netherlands, and state and local
jurisdictions as applicable.tax returns in applicable jurisdictions. Provisions for current income tax liabilities, if any, would be calculated and accrued on income and expense amounts expected to be included in the income tax returns for the current year. Income taxes reported in earnings, if any, would also include deferred income tax provisions.
Deferred income tax assets and liabilities, if any, would be computed on differences between the financial statement
bases and tax bases of assets and liabilities at the enacted tax rates. Changes in deferred income tax assets and liabilities would be included as a component of income tax expense. The effect on deferred income tax assets and liabilities attributable to changes in enacted tax rates would be charged or credited to income tax expense in the period of enactment. Valuation allowances would be established for certain deferred tax assets when realization is not likely.
Assets and liabilities would be established for uncertain tax positions taken or positions expected to be taken in income tax returns when such positions, in the
judgementjudgment of the Company, do not meet a more-likely-than-not threshold based on the technical merits of the positions. Valuation allowances would be established for certain deferred tax assets when realization is not likely.
Loss per Share
Advertising Costs
The Company expenses advertisings costs in the periods the costs are incurred. Prepayments made under contracts are included in prepaid expenses and expensed when the advertisement is run. Total advertising expense incurred for the years ended December 31, 2018 and 2017 was $153,878 and $54,412, respectively.
Derivative financial instruments
The Company accounts for its warrants issued in accordance with the GAAP accounting guidance under ASC 480, “Distinguishing Liabilities from Equity”. The Company estimated the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option pricing based on the estimated market value of the underlying common stock at the valuation measurement date, the remaining contractual term, risk-free interest rate, and expected volatility of the price of the underlying common stock. There is a moderate degree of subjectivity involved when using option pricing models to estimate the warrants and the assumptions used in the Black-Scholes option-pricing model are moderately judgmental.
Share Based Compensation
The Company periodically issue shares of its common stock to employees and consultants in non-capital raising transactions for fees and services.
The Company accounts for stock issued to non-employees in accordance with ASC 505-50,Equity, whereas the value of the stock compensation is based upon the measurement date as determined at either (a) the date at which a performance commitment is reached, or (b) at the date at which the necessary performance to earn the equity instruments is complete.
The Company accounts for stock grants issued and vesting to employees based on ASC 718,Compensation – Stock Compensation, whereas the award is measured at its fair value at the date of grant and is amortized ratably over the vesting period. Accounting for stock-based compensation to employees requires the measurement and recognition of compensation expense for all share-based payment awards made to employees based on estimated fair values. The Company also estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from our estimates.
Earnings (Loss) Per Share
The Company computes net
earnings (loss) per share under ASC subtopic 260-10, Earnings Per Share, Basic earnings or loss per share
(“EPS”) is computed by dividing net
income (loss)loss available to common
stockholdersshareholders by the weighted average number of common shares outstanding for the period. Diluted
EPS isearnings per share would be computed by dividing net
income (loss)loss by the weighted-average of all potentially dilutive shares of common stock that were outstanding during the periods presented.
The diluted earnings per share calculation is not presented as it results in an anti-dilutive calculation of net loss per share.
The treasury stock method
iswould be used
in calculatingto calculate diluted
EPSearnings per share for potentially dilutive stock options and share purchase
warrants, whichwarrants. This method assumes that any proceeds received from the exercise of in-the-money stock options and share purchase warrants would be used to purchase common shares at the average market price for the period.
Recently Issued Accounting Pronouncements
From time to time, the
FASBFinancial Accounting Standards Board (the "FASB") or other standards setting bodies issue new accounting pronouncements.
The FASB issues updates to new accounting pronouncements through the issuance of an Accounting Standards Update ("ASU"). Unless otherwise discussed, the Company believes that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on the Company’s
consolidated financial statements upon adoption.
In February 2016,November 2023, the FASB issued ASU 2016-02 “Leases”Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07), which together with subsequent amendments is included in ASC 842, “Leases”. Most significantly, ASC 842 requires a lessee to recognizean enhanced disclosure of significant segment expenses on the statement of financial position a liability to make lease paymentsan annual and an asset with respect to its right to use the underlying asset for the lease term. Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the statements of operations. ASC 842 also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. The update isinterim basis. This ASU will be effective for fiscal years beginning after December 15, 2018, including2023, and interim reporting periods within that reporting period. Early adoption is permitted. The Company is adopting ASC 2016-02 effective January 1, 2019 under the modified retrospective method with respect to lease contracts in effect as of the adoption date. The adoption of ASC 2016-02 will increase our assets and liabilities by approximately $139,000 as of January 1, 2019 due to the recognition of right-of-use assets and lease liabilities with respect to operating leases.fiscal years beginning after December 15, 2024. The Company does not believe the adoption of ASC 842 willexpect this ASU to have a material effectan impact on its consolidated financial position, results of operations or cash flows
statements.
In
June 2018,December 2023, the FASB issued ASU
2018-07, “Compensation – Stock CompensationNo. 2023-09, Income Taxes (Topic
718)740): Improvements
to Income Tax Disclosures (ASU 2023-09), which requires greater disaggregation of information in
Nonemployee Share-Based Payment Accounting” which simplifies the
accounting for share-based paymentseffective tax rate reconciliation, income taxes paid disaggregated by jurisdiction, and certain other amendments related to
nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. Under theincome tax disclosures. This guidance
the measurement of equity-classified nonemployee awards will be
fixed at the grant date, which may lower their cost and reduce volatility in the income statement. The update is effective for fiscal years beginning after December
31, 2018, including interim reporting periods within that reporting period. Early adoption is permitted.15, 2024. The Company
is adoptingwill be evaluating the impact of this ASU
2018-07 effective January 1, 2019 and does not believe the adoption of ASU 2018-07 will have a material effect on its
consolidated financial
position, results of operations or cash flows.statements.
There are other various updates recently issued by the FASB, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company'sCompany’s financial position, results of operations or cash flows.
Management has reviewed all other recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on the Company's financial condition or the results of our operations.
NOTE 3 – REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company recognizes revenue predominantly from the sale of equipment systems, services, construction design-build, and from other various immaterial contracts with customers from its CEA and Commercial sectors. The table below presents the revenue by source for the years ended December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, 2023 |
| CEA | | Commercial | | Total | | Relative Percentage |
| Equipment systems | $ | 12,675,645 | | | $ | — | | | $ | 12,675,645 | | | 18% |
| Services | 3,820,338 | | | 8,103,582 | | | 11,923,920 | | | 17% |
| Construction design-build | 4,391,087 | | | 41,863,880 | | | 46,254,967 | | | 65% |
| Other | 688,241 | | | — | | | 688,241 | | | 1% |
| Total revenues and other income | $ | 21,575,311 | | | $ | 49,967,462 | | | $ | 71,542,773 | | | 100% |
| Relative percentage | 30 | % | | 70 | % | | 100 | % | | |
| | | | | | | |
| Note: Percentages may not calculate due to rounding. | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, 2022 |
| CEA | | Commercial | | Total | | Relative Percentage |
| Equipment systems | $ | 33,333,574 | | | $ | — | | | $ | 33,333,574 | | | 50% |
| Services | 8,016,433 | | | 4,845,875 | | | 12,862,308 | | | 19% |
| Construction design-build | 1,664,538 | | | 18,158,363 | | | 19,822,901 | | | 30% |
| Other | 1,011,151 | | | — | | | 1,011,151 | | | 2% |
| Total revenues and other income | $ | 44,025,696 | | | $ | 23,004,238 | | | $ | 67,029,934 | | | 100% |
| Relative percentage | 66 | % | | 34 | % | | 100 | % | | |
| | | | | | | |
| Note: Percentages may not calculate due to rounding. | | | | | | | |
Under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, a performance obligation is a promise in a contract with a customer, to transfer a distinct good or service to the customer. Equipment systems contracts are lump sum contracts, which require the performance of some, or all, of the obligations under the contract for a specified amount. Service revenue contracts, which include both architectural and engineering designs, generally contain multiple performance obligations which can span across multiple phases of a project and are generally set forth in the contract as distinct milestones. The majority of construction design-build contracts have a single performance obligation, as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. Some contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the project life cycle (design and construction).
The transaction price for service contracts and construction design-build contracts is allocated to each distinct performance obligation and recognized as revenue when, or as, each performance obligation is satisfied. When there are multiple performance obligations under the same service contract, the Company allocates the transaction price to each performance obligation based on the standalone selling price. In general, payment is fixed at the time of the contract and are not subject to discounts, incentives, payment bonuses, credits, and penalties, unless negotiated in an amendment.
When establishing the selling price to the customer, the Company uses various observable inputs. For equipment systems, the stand-alone selling price is determined by forecasting the expected costs of the products, and then adding in the appropriate margins established by management. For service revenues and construction design-build revenues, the Company estimates the selling price by reference to certain physical characteristics of the project, which include the facility size, the complexity of the design, and the mechanical systems involved, which are indicative of the scope and complexity for those services. Significant judgments are typically not required with respect to the determination of the transaction price based on the nature of the selling prices of the products and services delivered and the collectability of those amounts. Accordingly, the Company does not consider estimates of variable consideration to be constrained.
The Company recognizes equipment systems, services, and construction design-build revenues when the performance obligation with the customer is satisfied. For satisfaction of equipment system revenues, the Company recognizes revenue when control of the promised good transfers to the customer, which predominately occurs at the time of shipment. For service revenues, satisfaction occurs as the services related to the distinct performance obligations are rendered or completed in exchange for consideration in an amount for which the Company is entitled. The time period between recognition and satisfaction of performance obligations is generally within the same reporting period; thus, there are no material unsatisfied or partially unsatisfied performance obligations for product or service revenues at the end of the reporting period.
Construction design-build revenues are recognized as the Company's obligations are satisfied over time, using the ratio of project costs incurred to estimated total costs for each contract because of the continuous transfer of control to the customer as all of the work is performed at the customer’s site and, therefore, the customer controls the asset as it is being constructed. This continuous transfer of control to the customer is further supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay the Company for costs incurred plus a reasonable profit and take control of any work in process. This cost-to-cost measure is used for our construction design-build contracts because management considers it to be the best available measure of progress on these contracts.
Contract modifications through change orders, claims and incentives are routine in the performance of the Company’s construction design-build contracts to account for changes in the contract specifications or requirements. In most instances, contract modifications are not distinct from the existing contract due to the significant integration of services provided in the contract and are accounted for as a modification of the existing contract and performance obligation. Either the Company or its customers may initiate change orders, which may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of completion of the work. Change orders that are unapproved as to both price and scope are evaluated as claims. The Company considers claims to be amounts in excess of approved contract prices that the Company seeks to collect from its customers or others for customer-caused delays, errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes of unanticipated additional contract costs.
The timing of when the Company bills customers on long-term construction design-build contracts is generally dependent upon agreed-upon contractual terms, which may include milestone billings based on the completion of certain phases of the work, or when services are provided. When as a result of contingencies, billings cannot occur until after the related revenue has been recognized; the result is unbilled revenue, which is included in contract assets. Additionally, the Company may receive advances or deposits from customers before revenue is recognized; the result is deferred revenue, which is included in contract liabilities. Retainage subject to conditions other than the passage of time are included in contract assets and contract liabilities.
Contract assets represent revenues recognized in excess of amounts paid or payable (contract receivables) to the Company on uncompleted contracts. Contract liabilities represent the Company’s obligation to perform on uncompleted contracts with customers for which the Company has received payment or for which contract receivables are outstanding.
The following table provides information about contract assets and contract liabilities from contracts with customers:
| | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 |
| Contract assets: | | | |
| Revenue recognized in excess of amounts paid or payable (contract receivables) to the Company on uncompleted contracts (contract asset), excluding retainage | $ | 9,364,915 | | | $ | 2,874,141 | |
| Retainage included in contract assets due to being conditional on something other than solely passage of time | 707,036 | | | 130,141 | |
| Total contract assets | $ | 10,071,951 | | | $ | 3,004,282 | |
| | | |
| As of December 31, |
| 2023 | | 2022 |
| Contract liabilities: | | | |
| Payments received or receivable (contract receivables) in excess of revenue recognized on uncompleted contracts (contract liability) | $ | 8,009,018 | | | $ | 1,294,452 | |
| Retainage included in contract liabilities due to being conditional on something other than solely passage of time | 54,307 | | | — | |
| Total contract liabilities | $ | 8,063,325 | | | $ | 1,294,452 | |
Trade accounts receivable, net of allowance for doubtful accounts, balances from contracts with customers within the accompanying balance sheets as of December 31, 2023, and 2022, were $23,857,287 and $12,466,180, respectively.
For equipment systems contracts, the Company’s predominant policy is to collect deposits from customers at the beginning of the contract and the balance of the contract payment prior to shipping. The Company does, in some cases, collect deposits or retainers as down payments on service contracts. Consumable products orders may be paid for in advance of shipment or for recurring customers with credit, payment terms of 30 days or less may be extended by the Company. Customer payments that have been collected prior to the performance obligation being recognized are recorded as customer deposit liabilities on the balance sheet. When the performance obligation is satisfied and all the criteria for revenue recognition are met, revenue is recognized. In certain situations when the customer has paid the deposit and services have been performed but the customer chooses not to proceed with the contract, the Company is entitled to keep the deposit and recognize revenue. Of the outstanding customer deposit balance of $2,571,161 at December 31, 2022, $2,569,321 was recognized as revenue in the year ended December 31, 2023. Of the customer deposit balance of $13,345,451 at December 31, 2021, $13,186,579 was recognized as revenue in the year ended December 31, 2022.
NOTE
34 – RELATED PARTY TRANSACTIONS
The Company purchases some cultivation products from Bravo Lighting d/b/a Bravo Enterprises (“Bravo”) and enviro-glo, manufacturers and a distributor of commercial building lighting and other product solutions with common control by the Company’s CEO, Bradley Nattrass and CDO Octavio Gutierrez. Purchases from Bravo and Enviro-Glo for the years ended December 31, 2018 and 2017 were $276,443 and $526,002, respectively. Outstanding receivables from Bravo and Enviro-Glo as of December 31, 2018 and 2017 totaled $43,120 and $13,540, respectively. Net outstanding payables incurred for purchases of inventory and other services to Bravo and Enviro-Glo as of December 31, 2018 and 2017 totaled $5,562 and $93,394, respectively.
The Company also entered into a lease agreement with Bravo Lighting, a related party, to sublease office space for 12 months commencing in September 2018. Minimum monthly lease payments are $24,000 for the remainder
A director of the
leases.The Company has consulted withis an owner of Cloud 9 Support, LLC a company owned by James Lowe, a board member(“Cloud 9”) and debt holder. Cost of Services provided byPotco LLC (“Potco”). Cloud 9 Support, LLC during the years ended December 31, 2018 and 2017 were 84,746 and $58,196, respectively. Cloud 9 Support LLC also purchases materials from the Company for use with their customers. Total sales to Cloud 9 Support, LLCits customers and Potco purchases equipment from the Company duringfor use in its cultivation facility. Another director of the yearsCompany is working on a vertical farming innovation model with a group of CEA experts (“the CEA Consortium”). The CEA Consortium contracts services from the Company related to their business model. The table below presents the revenues for these related party entities for the twelve months ended December 31, 20182023, and 2017 were $370,948 and $312,041, respectively. Outstanding receivables2022:
| | | | | | | | | | | | | | |
| | Twelve Months Ended
December 31, |
| | 2023 | | 2022 |
| Revenues - Cloud 9 | | $ | 462 | | | $ | 13,383 | |
| Revenues - Potco | | 987,268 | | | 12,480 | |
| Revenues - CEA Consortium | | $ | 245,000 | | | $ | — | |
| Total revenues from related party transactions | | $ | 1,232,730 | | | $ | 25,863 | |
The table below presents the accounts receivable from
Cloud 9 Support, LLCthese related party entities as of December 31,
20182023, and
2017 totaled $79,235 and $42,237, respectively. Net outstanding payables incurred for purchases of inventory and other services to Cloud 9 Support, LLC as of December 31,
2018 and 2017 totaled $13,240 and $7,168, respectively.In October 2018, the Company received a $1 million unsecured loan from James Lowe, a director, which is due on or before April 30, 2019. The loan has a one-time origination fee of $12,500. Interest accrues at the rate of 12% per annum and is paid monthly. As additional consideration for the loan the Company granted Mr. Lowe an option to purchase 30,000 shares of its common stock at an exercise price of $1.20 per share, which option is exercisable for a period of five (5) years. The loan is guaranteed by Messrs. Nattrass and Gutierrez, two of the Company’s officers, directors and our principal shareholders.
| | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| Accounts receivable - Cloud 9 | $ | — | | | $ | 3,920 | |
| Accounts receivable - Potco | 163,088 | | | 20,174 | |
| Accounts receivable - CEA Consortium | $ | 245,000 | | | $ | — | |
| Total accounts receivable due from related party transactions | $ | 408,088 | | | $ | 24,094 | |
NOTE
45 – PREPAYMENTS &
ADVANCESOTHER ASSETS
Prepayments and
Advances isother assets are comprised of
advances paid to employees, prepaid services and fees and prepayments paid to vendors to initiate
orders.orders and prepaid services and fees. The prepaid balances are summarized as follows:
| | | December 31, | | | December 31, | |
| | | 2018 | | | 2017 | |
| Advances to Employees | | $ | – | | | $ | 4,960 | |
| Prepaid Services and Fees | | | 152,204 | | | | 8,875 | |
| Vendor Prepayments | | | 776,478 | | | | 845,442 | |
| | | $ | 928,682 | | | $ | 859,277 | |
| | | | | | | | | | | | | | |
| As of December 31, | |
| 2023 | | 2022 | |
| Vendor prepayments | $ | 1,124,118 | | | $ | 2,459,389 | | |
| Prepaid services and fees | 1,379,949 | | | 1,346,430 | | |
| Inventories | 228,858 | | | 320,372 | | |
| Other assets | 42,757 | | | 38,769 | | |
| Total prepaid expenses and other assets | $ | 2,775,682 | | | $ | 4,164,960 | | |
NOTE
56 - PROPERTY PLANT & EQUIPMENT, NET
Property Plant and Equipment balances are summarized as follows:
| | | December 31, | | | December 31, | |
| | | 2018 | | | 2017 | |
| Computers & Technology Equip | | $ | 61,910 | | | $ | 37,366 | |
| Furniture and Fixtures | | | 30,162 | | | | 24,825 | |
| Leasehold Improvements | | | 143,215 | | | | 143,215 | |
| Vehicles | | | 132,875 | | | | 149,028 | |
| Software | | | 233,783 | | | | 6,550 | |
| R&D Assets | | | 84,031 | | | | – | |
| Other Equipment | | | 65,140 | | | | 20,653 | |
| Accumulated depreciation | | | (309,975 | ) | | | (156,813 | ) |
| Property plant and equipment, net | | $ | 441,414 | | | $ | 224,824 | |
| | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 |
| Computers and technology equipment | $ | 294,322 | | | $ | 232,405 | |
| Furniture and fixtures | 325,485 | | | 234,389 | |
| Leasehold improvements | 228,760 | | | 306,719 | |
| Vehicles | 432,823 | | | 456,797 | |
| Software | 1,087,569 | | | 685,580 | |
| Other equipment | 145,951 | | | 58,525 | |
| Accumulated depreciation | (1,095,517) | | | (667,269) | |
| Total property plant and equipment, net | $ | 1,419,393 | | | $ | 1,307,146 | |
Depreciation expense for the years ended December 31, 20182023 and 20172022 totaled $153,162$580,487 and $75,605,$423,286, respectively. The components of investments are summarized as follows:
| | | | | | | | | | | | | | | | | |
| XS Financial | | Edyza | | Total |
| Balances, as of December 31, 2022 | $ | 2,559,307 | | | $ | — | | | $ | 2,559,307 | |
| Impairment | (258,492) | | | — | | | (258,492) | |
| Paid in kind interest | 25,657 | | | – | | | 25,657 | |
| Sale of investment | (2,326,472) | | | $ | — | | | (2,326,472) | |
| Balances, as of December 31, 2023 | $ | — | | | $ | — | | | $ | — | |
XS Financial
On October 30, 2021, the Company participated in a convertible note offering of Xtraction Services, Inc., a/k/a XS Financial Inc. (CSE: XSF) (OTCQB: XSHLF) ("XSF"), a specialty finance company providing CAPEX financing solutions, including equipment leasing, to CEA companies in the United States. The Company invested $2,500,000 of a total $43,500,000 raised by XSF. Prior to any Nasdaq listing, the investment incurs 9.5% interest payable, of which, 7.5% is cash interest and 2.0%. is interest paid in kind. Subsequent to any Nasdaq listing, the investment incurs 8.0% interest. The debt matures on October 28, 2023, with a one-year option at the sole discretion of XSF to extend the maturity date. In November 2017,addition, the Company received 1.25 million warrants denominated in Canadian dollars ("C$") with a C$0.45 share price as subject to the warrant instrument. No value was attributed to the warrants at the time of the investment. In August 2023, the Company entered into an agreement to sell back its investment to XSF for $2.3 million and cancel the warrants. The Company received the $2.3 million in proceeds on August 30, 2023. In connection with Edyza Sensors, Inc., (”Edyza”), whereinthe agreement to sell the investment, the Company became Edyza’s exclusive agricultural partner in Edyza’s attempt to provide wireless sensors to the cultivation solutions offered by therecorded an impairment loss of $0.3 million.
Edyza
The Company to the cannabis industry. As part of the terms of this agreement, Edyza has assigned the Company all of their global rights to two patent pending applications for sensor rods and moisture and salinity measurements, along with any additional patent rights that may arise as a result of this collaboration. In addition, in 2017 Edyza issued the Company a Simple Agreement for Future Equity, to provide the Company with an ownership intereststrategic investment in Edyza, Inc. ("Edyza"), a hardware and software technology company that enables dense sensor networks in the principal amount of $400,000, issued when Edyza engaged in a priced round of investment or liquidation occurs. In August 2018, the Company terminated the Simple Agreement for Future Equity in exchange for 442,685 shares of Edyza Common Stock issued at a conversion price per share of $0.0903577. In 2018 the Company also purchased an additional 442,685 shares of Edyza common stock for $400,000. As of December 31, 2018, $325,000 has been paid to Edyza. Future payments of $75,000 are due in January 2019. As of December 31, 2018, the Company owned 885,370 shares of Edyza Common Stock, equal to a current ownership percentage of 10% on a fully diluted basis of Edyza’s issuedagriculture, healthcare, and outstanding securities.other environments that require precise micro-climate monitoring. The Company measures this investment at cost, less any impairment plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. As
During the third quarter of
December 31, 2018,2022, the Company
determinedfully impaired this investment. The Company notes that
nothe intent and ability to retain its investment for a period of time sufficient to allow for any anticipated recovery has passed, causing an "other than temporary loss." The Company will continue to monitor any future changes to this impairment
is necessary given the recent valuations and
no change in qualitative factors.seek to recover any remaining value of its 19.5% ownership. The impairment recorded was $1.7 million.
NOTE 8 – GOODWILL & INTANGIBLE ASSETS
Goodwill
The Company has
partneredrecorded goodwill in conjunction with
Total Grow Holdings, LLC (d/b/a/ Total Grow Control, LLC) (“TGH”) to develop and launch a line of environmental controls and fertigation/irrigation distribution products in the form of a Batch Fertigation System and an Inline Fertigation System. In February 2018, the Company entered into an agreement with TGH to purchase 5% of TGH’s membership interests on a fully diluted basis for $125,000.acquisitions it has completed. The
agreement also contains two separate options for the Company to purchase additional membership interests in TGH and a purchase right for the Company to acquire all of the outstanding membership interests in TGH. The first option was exercisable from July 1, 2018 thru August 31, 2018 and allowed the Company to acquire an additional 5% of TGH’s membership interests on a fully diluted basis for $150,000. The second option is exercisable from February 15, 2019 thru May 15, 2019 and allows the Company to acquire an additional 15% of TGH’s membership interests on a fully diluted basis for $525,000. The purchase right is exercisable from May 15, 2019 thru February 15, 2020 and allows the Company to acquire all of the outstanding membership interests in TGH based on a total valuation of TGH of $7,500,000. In July 2018, the Company elected to exercise the first option and purchased an additional 5% of TGH’s fully diluted membership interests for $150,000. In January 2019 the Company and TGH negotiated the terms of the second option and the Company elected to purchase an additional 15% of TGH’s fully diluted member interests for $525,000. As of December 31, 2018, the Company had paid TGH $158,000 for the additional 5% fully diluted membership interests. Future payments of $36,000 are due every two weeks through May 2019 until the remaining balance of $367,000 has been paid. As of March 31, 2019, the Company had made total payments of $336,000. The Company has capitalized an additional $15,766 in legal fees associated with the purchases of the TGH membership interests. As of December 31, 2018, the Company’s fully diluted ownership interest in TGH is less than 20% and, the Company measures these investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. As of December 31, 2018, the Company determined that no impairment of its investment in TGH is necessary given the recent valuations and no change in qualitative factors.NOTE 7 – COST OF PATENTS
Costs of patents, which consist of legal costs paid to third parties to establish a patent, are capitalized until such time that the patents are approved and issued or rejected. If approved, capitalized costs are amortized using the straight-line method over the estimated lives of the patents, generally five years. There are no issued patentsgoodwill balances as of December 31, 20182023 and 2017.
2022 were $15,572,050 and $15,572,050. Goodwill is not amortized. The Company did not record any impairment charges related to goodwill for the years ended December 31, 2023 and 2022.Intangible Assets Other Than Goodwill
Intangible assets as of December 31, 2023 and 2022 consisted of the following:
| | | | | | | | | | | | | | | | | |
| As of December 31, 2023 |
| Cost | | Accumulated Amortization | | Net Book Value |
| Finite-lived intangible assets: | | | | | |
| Customer relationships | $ | 4,212,100 | | | $ | (1,004,749) | | | $ | 3,207,351 | |
| Trademarks and trade names | 1,778,000 | | | (663,417) | | | 1,114,583 | |
| Backlog and other | 768,113 | | | (723,831) | | | 44,282 | |
| Total finite-lived intangible assets: | 6,758,213 | | | (2,391,997) | | | 4,366,216 | |
| 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 | | | $ | (2,391,997) | | | $ | 4,394,507 | |
| | | | | | | | | | | | | | | | | |
| 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 | |
Amortization expense for intangible assets subject to amortization for the years ended December 31, 2023 and 2022 was $1,056,180 and $1,059,779, respectively. The estimated future amortization expense for intangible assets subject to amortization at December 31, 2023, is summarized below:
| | | | | | | | |
| For the years ending December 31, | | Estimated Future Amortization Expense |
| 2024 | | $ | 969,633 | |
| 2025 | | 959,788 | |
| 2026 | | 918,205 | |
| 2027 | | 693,555 | |
| 2028 | | 554,540 | |
| Thereafter | | 270,495 | |
| Total estimated future amortization expense | | $ | 4,366,216 | |
NOTE
89 – ACCRUED EXPENSES
Accrued expenses are summarized as follows:
| | | December 31, | | | December 31, | |
| | | 2018 | | | 2017 | |
| Accrued operating expenses | | | 240,941 | | | | 153,946 | |
| Accrued stock compensation expense | | | – | | | | 100,000 | |
| Accrued wages and related expenses | | | 490,961 | | | | 377,305 | |
| Accrued Interest | | | 10,958 | | | | – | |
| Accrued sales tax payable | | | 401,282 | | | | 624,864 | |
| | | $ | 1,144,142 | | | $ | 1,256,115 | |
| | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 |
| Accrued operating expenses | $ | 834,144 | | | $ | 515,858 | |
| Accrued wages and related expenses | 1,428,364 | | | 639,614 | |
| Accrued 401(k) | 66,642 | | | 262,599 | |
| Accrued interest expense | 26,000 | | | — | |
| Accrued sales tax payable | 1,716,081 | | | 1,778,890 | |
| Total accrued expenses | $ | 4,071,231 | | | $ | 3,196,961 | |
Accrued sales tax payable is comprised of prior period sales tax payableamounts due to various states and Canadian provinces for the years ended December 2015, 2016,2017 through 2023.
NOTE 10 – PROMISSORY NOTE AND DEBT
The table below shows outstanding promissory note and 2017. The Company has set up payment plans with the various taxing agencies to relieve the obligation. The payment plans require monthly payments in variousdebt amounts for a period of 12 months or less ending August 2019. Additionally, as of December 31, 2018,2023 and 2022.
| | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 |
| Line of credit | $ | 2,500,000 | | | $ | — | |
| DVO note | 575,240 | | | 3,832,682 | |
| Other financing agreements | 129,600 | | | – | |
| Total | $ | 3,204,840 | | | $ | 3,832,682 | |
| Less current maturities | (3,204,840) | | | (3,832,682) | |
| Long Term | — | | | – | |
On December 13, 2023, UG Construction, Inc. d/b/a Emerald Construction Management, 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 a secured line of credit in an amount not to exceed $10,000,000, to be used to assist UG Construction and the Company with cash management. Lender will consider requests for advances 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 have 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 shall be evidenced by a Secured Promissory Note - Revolving issued by UG Construction to the Lender (the “Promissory Note”), and each draw on the Promissory Note shall be due and payable on or before 180 days after such draw is funded to UG Construction; provided that, such draw is also subject to a mandatory pre-payment upon UG Construction’s receipt of payment for any invoice previously submitted and approved for financing by Lender. Lender will receive a security interest in UG Construction’s Collateral (as defined in the “Security Agreement” entered into as part of the Line of Credit). The Promissory Note earns interest at a monthly rate of one and seventy-five hundredths percent (1.75%).
In connection with entering in the Line of Credit, the Company has a $39,377 receivable from customers for sales tax obligations. The balanceagreed to issue to Bancroft Capital, LLC (the “Placement Agent”) cash and warrant compensation in two separate tranches, the first being earned upon closing of the receivable is bookedLine of Credit and the remainder of which will be due if and when UG Construction draws more than $4,500,000 from the Line of Credit. Both instances are detailed as follows:
1. At closing of the Line of Credit, the Placement Agent earned a cash fee of $200,000. In addition to the cash fee, the Company will issue to the Placement Agent or its designees, $200,000 worth of warrants (the “Placement Agent’s Warrants”) to purchase the Company’s common stock at a price per share equal to 110% of the daily volume weighted average closing price of the Company’s common stock on the Nasdaq exchange for a period consisting of ten (10) consecutive trading days ending on and inclusive of the trading day of the Closing. The Placement Agent’s Warrants will be exercisable at any time and from time to time, in whole or in part, during the four and a half-year period commencing six (6) months from the date of issuance. The Placement Agent’s Warrants will provide for registration rights (including a one-time demand registration right and unlimited piggyback rights), cashless exercise and customary anti-dilution provisions (for stock dividends and splits) and anti-dilution protection (adjustment in the number and price of such warrants and the shares underlying such warrants) resulting from corporate events (which would include dividends, reorganizations, mergers, etc.).
2. If and when Emerald draws more than $4,500,000 from the Line of Credit, the Placement Agent will earn an additional cash fee of $200,000, and an additional $200,000 worth of Placement Agent’s Warrants to purchase the Company’s common stock at a price per share equal to 110% of the daily volume weighted average closing price of the Company’s common stock on the Nasdaq exchange for a period consisting of ten (10) consecutive trading days ending on and inclusive of the trading day of the date that the draws exceeding $4,500,000 were to take place.
As part of the Asset Purchase Agreement of DVO, a non-negotiable promissory note in the aggregate principal amount of $3,806,250, payable to DVO was issued effective November 1, 2022 (the "DVO Promissory Note"). The principal amount, together with the simple interest accrued on the unpaid principal amount outstanding was to be paid by the Company on a quarterly basis for the first four consecutive quarters, with the first payment paid in January 2023, and the remaining three payments due ten days following the end of each subsequent fiscal quarter thereafter until the earlier of the end of the fourth full fiscal quarter following the closing date December 31, 2023 or the payment in full of all amounts due. In the third quarter of 2023, a portion of that quarter’s note payment was extended to the first quarter of 2024. The DVO Promissory Note may be prepaid in whole or in part at any time without premium or penalty; provided, that each payment shall be accompanied by payment of all unpaid costs, fees and expenses, if any, which are due plus all accrued and unpaid interest due as of the date of such prepayment.
The outstanding principal balance under trade receivables. Asthe DVO Promissory Note shall bear simple interest at a variable rate per annum equal to the rate of interest most recently published by JP Morgan Chase & Co. as the "prime rate" (the "Prime Rate"). Initially, interest will accrue at the Prime Rate as of the date of the DVO Promissory Note. The interest rate will be adjusted on a quarterly basis as of the first day of each full fiscal quarter following the first full fiscal quarter after the closing date to the then current Prime Rate. In connection with the extension of the DVO Promissory Note payment to the first quarter of 2024, the interest rate was revised to a fixed rate of 10%, with principal and interest to be paid on a weekly basis.
The other financing agreements relate to short-term financing of the Company's insurance policies and are at an average interest rate of 13.6%.
NOTE 11 – OPERATING LEASE LIABILITIES AND COMMITMENTS AND CONTINGENCIES
The Company has seven operating office lease liabilities and one finance office lease liability with an imputed annual interest rate of 8%. Five of the leases were assigned to the Company in connection with the acquisitions of 2WR, Emerald, and DVO. The remaining lease terms range from less than a year to 5 years, as of December 31,
2018, the Company has collected $37,745 from customers for sales tax obligations. The Company believes it is more likely than not that the majority of the balance can be relieved by the customers providing the Company with evidence that the sales tax due was paid directly to the state. This will also reduce the amount of the liability the Company owes to the taxing agencies.NOTE 9 – NOTES PAYABLE AND CURRENT PORTION OF NOTES PAYABLE
Unsecured note payable balances totaled $3,478,869 and $488,000 at December 31, 2018 and December 31, 2017, respectively. Interest expense incurred on the unsecured notes payable was $119,961 and $216,576 for the years ended December 31, 2018 and 2017, respectively.
The following is a summary of notes payable excluding related party notes payable:
| | | December 31, | | | December 31, | |
| | | 2018 | | | 2017 | |
| | | | | | | |
| Unsecured, interest-free, note payable with JW Properties, LLC. Principal is re-paid monthly with a maturity date of May 31, 2018. | | $ | – | | | $ | 8,000 | |
| | | | | | | | | |
| Unsecured, interest only, note payable with Chris Parkes. Interest payments due monthly at an annual rate of 20.4%. Note payable revised in December 2018 amending principal due and extending maturity date to June 30, 2019. On May 9, 2017, as part of the private placement offering of the Company's common stock, the individual converted part of this note into 300,000 common shares of the Company at $1.00 per share. | | | 80,000 | | | | 80,000 | |
| | | | | | | | | |
| Unsecured, interest only, note payable with David Parkes. Interest payments due monthly at an annual rate of 18.0%. Note payable revised in December 2018 amending principal due and extending maturity date to June 30, 2019. On May 9, 2017, as part of the private offering of the Company's common stock, the individual converted part of this note into 200,000 common shares of the Company at $1.00 per share. | | | 100,000 | | | | 100,000 | |
| | | | | | | | | |
| Unsecured, interest only, note payable with Michael S. Bank. Interest at 19.8% per year is paid twice per month. The note contains a demand re-payment provision that can be executed by Mr. Bank at any time by providing a one-time notice. The Company may re-pay any part or the entire principal sum at any time with penalty and abatement of interest expense from date of early payment. The note includes six thousand warrants, each exercisable to purchase one share of the Company's common stock at a price of $1.00 per share. In March, 2019, the Company repaid $35,000 of the principle and extended the maturity date to April 30, 2019. | | | 298,869 | | | | 300,000 | |
| | | | | | | | | |
| Unsecured, interest only, note payable with Cloud9 Support Inc. The note is personally guaranteed by the Company’s two majority shareholders who are also the Company’s CEO and COO. Interest at 12.0% per year is paid monthly. The note includes additional consideration of 30,000 options at an exercise price of $1.20. The note matures on April 30, 2019. | | | 1,000,000 | | | | – | |
| | | | | | | | | |
| Note Payable with Hydrofarm Holdings Group. Interest accrues at 8.0% per year and is paid quarterly. The note matures on the earlier of: (a) 90 days after the date that the Company and Hydrofarm abandon the Merger; (b) acceleration of the note payable due to the Company being in default; or (c) December 2023. | | | 2,000,000 | | | | – | |
| | | | | | | | | |
| Total | | $ | 3,478,869 | | | $ | 488,000 | |
| Less current maturities | | | (3,478,869 | ) | | | (188,000 | ) |
| Long Term | | $ | – | | | $ | 300,000 | |
Effective November 20, 2018, the Company entered into a letter of intent (“LOI”) with Hydrofarm Holdings Group, Inc. (“Hydrofarm”) whereby Hydrofarm agreed to acquire all of the Company’s issued and outstanding common stock (the “Merger”). Pursuant to the terms of the LOI Hydrofarm extended to the Company a secured, interest only note in the principal amount of $5 million. The note is secured by all of our currently existing and future assets Although the Merger has not been abandoned and the LOI has not been terminated by either party, there are currently no discussions between the parties pertaining to the Merger and the Company believes the note payable should be classified as a current maturity. The Hydrofarm note requires the Company to obtain the permission of Hydrofarm to engage in various activities, including additional financing. In February 2019 the Company provided applicable notice of an agreement to raise additional debt and/or equity. Hydrofarm provided their consent, which reaffirms the belief that the relevant note remains in good standing.
operating lease liabilities: | | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 |
| Operating lease liabilities related to right of use assets | $ | 2,087,503 | | | $ | 2,645,598 | |
| Less current portion | (707,141) | | | (600,816) | |
| Long term | $ | 1,380,362 | | | $ | 2,044,782 | |
NOTE 10 – COMMITMENTS AND CONTINGENCIES
The Company leases an office and warehouse in Lafayette, Colorado. The lease ends on November 30, 2020.
The Company entered into a lease agreement with Bravo Lighting, a related party, to sublease office space for 12 months commencing in September 2018.
The Company entered a lease agreement to rent additional office space in Denver, CO. The lease began in November 2018 and terminates in April 2019.
The Company leased two cars for the use of its employees in December 2017, which ends in November 2020. The Company leased an additional car in August 2018. The lease ends in July 2021.
The Company leased a townhouse for employee housing in September 2018. The lease ends in May 2019.
The following is a schedule showing
total future minimum lease payments:
| Year ending | | Total Minimum | |
| December 31, | | Lease Payments | |
| 2019 | | | 199,190 | |
| 2020 | | | 78,588 | |
| 2021 | | | 3,000 | |
| 2022 | | | – | |
| 2023 | | | – | |
| | | | | | | | |
| For the years ending December 31, | | Minimum Lease Payments |
| 2024 | | $ | 754,076 | |
| 2025 | | 573,133 | |
| 2026 | | 404,751 | |
| 2027 | | 346,812 | |
| 2028 | | 253,415 | |
| Thereafter | | 82,488 | |
| Total minimum lease payments | | $ | 2,414,675 | |
| Less: Amount representing interest | | $ | (327,172) | |
| Net lease obligations | | $ | 2,087,503 | |
From time to time, the Company is involved in routine litigation that arises in the ordinary course of business. There are no legal proceedings for which management believes the ultimate outcome would have a material adverse effect on the Company’s results of operations and cash flows.
On August 11, 2023, the Company entered into a settlement agreement (the “Settlement Agreement”) with Crest Ventures, LLC (“Crest”) and Andrew Telsey to settle all claims in the litigation filed in the District Court for Arapahoe County, Colorado, Case No. 2021CV31301. Pursuant to the Settlement Agreement, the Company paid $1,500,000 to Crest on September 7, 2023. In connection with this settlement, the Company recorded a loss in the second quarter of 2023 of $1,500,000 in accordance with GAAP related to loss contingencies.
NOTE
1112 – RISKS AND UNCERTAINTIES
The tables below show customers who account for 10% or more of the years ended December 31, 2018, two unrelatedCompany’s total revenues and 10% or more of the Company’s accounts receivable for the periods presented:
Customers exceeding 10% of revenue
| | | | | | | | | | | | | | |
| | For the Years Ended
December 31, |
| Company Customer Number | | 2023 | | 2022 |
| C000001462 | | * | | 10 | % |
| C000001140 | | * | | 13 | % |
| C000002463 | | 15 | % | | * |
| C000002187 | | 28 | % | | 17 | % |
Customers exceeding 10% of accounts receivable
| | | | | | | | | | | | | | |
| | As of December 31, |
| Company Customer Number | | 2023 | | 2022 |
| C000002151 | | * | | 10 | % |
| C000002187 | | 57 | % | | 24 | % |
| | | | |
| *Amounts less than 10% | | | | |
The table below shows vendors
composed 18% and 11%who account for 10% or more of
total purchases. During the
year ended December 31, 2017, two unrelated vendors composed 21% and 13% of total purchases. See Note 3 for discussion of related party transactions. For the years ended December 31, 2018 and 2017, purchases from Bravo represented 2% and 5% ofCompany’s total purchases
respectively. Forand 10% or more of the
years ended December 31, 2018 and 2017, purchases from Cloud 9 Support LLC, represented 1% and 1% of total purchases, respectively.The Company’s primary suppliers of automated environmental controls and fertigation represented 46% and 16% of total accounts payable outstanding as of December 31, 2018 and 2017, respectively.
Duringfor the year ended December 31, 2018, one customer represented 14% of total revenue. During the year ended December 31, 2017, no customer represented more thanperiods presented:
Vendors exceeding 10% of
total revenue. | | | | | | | | | | | | | | |
| | For the Years Ended
December 31, |
| Company Vendor Number | | 2023 | | 2022 |
| V000001029 | | * | | 13 | % |
| V000002275 | | 11 | % | | * |
| | | | |
| *Amounts less than 10% | | | | |
NOTE 12 – STOCK COMPENSATION
In January 2017,
Vendors exceeding 10% of accounts payable:
| | | | | | | | | | | | | | |
| | As of December 31, |
| Company Vendor Number | | 2023 | | 2022 |
| V000002275 | | 13 | % | | * |
| V000001910 | | * | | 11 | % |
| | | | |
| *Amounts less than 10% | | | | |
Foreign Exchange Risk
Although our revenues and expenses are expected to be predominantly denominated in United States dollars, we may be exposed to currency exchange fluctuations. Recent events in the
Company implementedglobal 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 we may operate may have a
stock grantmaterial adverse effect on our business, financial condition and operating results. We may, in the future, establish a program to
reward and attract employeeshedge a portion of our foreign currency exposure with
common stock. Stock grants are offered as partthe objective of
minimizing the
employment offer package, to insure continuityimpact of
employment or asadverse foreign currency exchange movements. However, even if we develop a
reward for performance. Each of these grants requires a specific tenure of employment before the grant vests.Stockhedging program, it may not mitigate currency risks.
NOTE 13 – STOCK-BASED COMPENSATION
Stock-based compensation expense for the years ended December 31,
20182023 and
20172022 was
$1,245,826$2,199,046 and
$84,837,$2,571,785, respectively based on the vesting schedule of the stock grants and options. During the year ended December 31,
2018, 558,8332023, 510,720 shares vested and were issued to
employees. No cash flow affects are anticipated for stock grants.employees and directors. During the year ended December 31, 2018, the Company reserved 2,141,5002022, 62,172 shares of common stock for issuancevested and were issued to employees and directors. No cash flow effects are anticipated for stock grants.
The Company has adopted the 2021 Omnibus Stock Incentive Plan, as amended (the “Omnibus Incentive Plan”), which
will vest after a periodprovides for the issuance of
1, 2 or 3 years of employment. The fair valueincentive stock options, stock grants and stock-based awards to employees, directors, and consultants of the
stock is $2,141,500 based on the average share price of $1.00. The following schedule shows stock grant activity for the year ended December 31, 2018.Total Grants awarded as of December 31, 2017 | | | 310,000 | |
Grants awarded | | | 2,141,500 | |
Forfeiture/Cancelled | | | 90,000 | |
Grants vested | | | 558,833 | |
Total Grants awarded as of December 31, 2018 | | | 1,802,667 | |
The following table summarizes stock grant vesting periods.
| | | | |
| Amount of Shares | | | Year Ending December 31, |
| | 688,499 | | | 2019 |
| | 632,500 | | | 2020 |
| | 481,668 | | | 2021 |
| | 1,802,667 | | | |
In January 2018, the Company implemented a stock option plan to reward and attract employees and compensate the Company’s Board of Directors (the “Board”) and vendors for services. Stock options are offered as partwhen applicable. The Omnibus Incentive Plan is administered by the Company's Board. Grants of an employment offer package, to insure continuity of service or as a reward for performance. The stock option plan authorizes 3,000,000 shares of common stock. 1,259,000 options have been awardedRSUs under the Omnibus Incentive Plan asare valued at no less than the market price of December 31, 2018 and no options were awarded asthe stock on the date of December 31, 2017.grant. The fair value of the options is $1,126,003calculated using the Black-Scholes option pricing model based on the estimated market value of the underlying common stock at the valuation measurement date, of $0.90, the remaining contractual term of the options, of 10 years, risk-free interest rate of 2.75% and expected volatility of the price of the underlying common stock of 100%. There is a moderate degree of subjectivity involved when usingestimating the value of stock options with the Black-Scholes option pricing models to estimate the options andmodel as the assumptions used in the Black Scholes option-pricing model are moderately judgmental. 100,000Stock grants and stock options have vestedare sometimes offered as part of December 31, 2018.an
employment offer package, to ensure continuity of service or as a reward for performance. Stock grants and stock options typically require a 1 to 3 year period of continued employment or service performance before the stock grant of RSUs or stock option vests.
The following schedule shows grants of RSU activity for the years ended December 31, 2023 and 2022:
| | | | | |
| Number of
Shares |
| Grants unissued as of December 31, 2021 | 153,673 |
| Grants awarded | 542,584 |
| Forfeiture/cancelled | (139,226) | |
| Grants vested | (62,172) |
| Grants unissued as of December 31, 2022 | 494,859 |
| Grants awarded | 633,269 |
| Forfeiture/Cancelled | (23,139) |
| Grants vested | (510,720) |
| Grants unissued as of December 31, 2023 | 594,269 |
The following table summarizes grants of RSU vesting periods:
| | | | | | | | | | | | | | |
Number of
Shares | | Unrecognized Stock
Compensation Expense | | As of December 31, |
| 436,210 | | $ | 890,461 | | | 2024 |
| 158,059 | | 182,418 | | | 2025 |
| 594,269 | | $ | 1,072,879 | | | |
The following schedules show stock option activity for the
yearyears ended December 31,
2018. | | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted Average Remaining Life (Years) | | Weighted Average Exercise Price |
| Stock options outstanding as of December 31, 2021 | 641,337 | | 7.55 | | $ | 6.27 | |
| Issued | 76,246 | | 9.00 | | $ | 10.48 | |
| Exercised | (4,555) | | 0.00 | | $ | 6.00 | |
| Forfeited | (43,640) | | 6.25 | | $ | 6.04 | |
| Stock options outstanding at December 31, 2022 | 669,388 | | 7.85 | | $ | 6.77 | |
| Stock options exercisable at December 31, 2022 | 618,651 | | 6.74 | | $ | 6.30 | |
| | | Number of
Shares | | | Weighted Average Remaining
Life (Years) | | | Weighted Average
Exercise
Price | |
| Stock options outstanding as of December 31, 2017 | | | – | | | | – | | | | – | |
| Issued | | | 1,259,000 | | | | | | | | | |
| Exercised | | | – | | | | | | | | | |
| Expired | | | 75,000 | | | | | | | | | |
| Stock options outstanding at December 31, 2018 | | | 1,184,000 | | | | 9.68 | | | $ | 1.15 | |
| Stock options exercisable at December 31, 2018 | | | 100,000 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted Average Remaining Life (Years) | | Weighted Average Exercise Price |
| Stock options outstanding as of December 31, 2022 | 669,388 | | 7.85 | | $ | 6.77 | |
| Issued | 0 | | 0.00 | | $ | — | |
| Exercised | 0 | | 0.00 | | $ | — | |
| Forfeited | (7,105) | | 0.00 | | $ | 9.39 | |
| Stock options outstanding at December 31, 2023 | 662,283 | | 7.85 | | $ | 6.77 | |
| Stock options exercisable at December 31, 2023 | 655,538 | | 7.85 | | $ | 6.30 | |
The following table summarizes stock option vesting
periods.| Number of Shares | | | Year Ending December 31, |
| | 415,830 | | | 2019 |
| | 385,831 | | | 2020 |
| | 282,339 | | | 2021 |
| | 1,084,000 | | | |
NOTE 13 – SHAREHOLDER’S EQUITY AND MEMBER’S DEFICIT
periods under the Incentive Plans:
| | | | | | | | | | | | | | |
Number of
Shares | | Unrecognized Stock
Compensation Expense | | As of December 31, |
| 6,745 | | $ | 29,372 | | | 2024 |
| 6,745 | | $ | 29,372 | | | |
The
Company was formed by Bradley Nattrassaggregate intrinsic value of the stock options outstanding and
Octavio Gutierrez on March 20, 2014, as a Colorado limited liability company with equity contributions totaling $100 from each member. In November 2016 when still an LLC, the Company undertook a private offering of member interests wherein the Company received subscriptions of $575,107 in the form of 6,392 member interests to three (3) accredited investors (approximately $90 per member interest).On December 31, 2016, the Company issued 8,008 membership units to key employees. On December 31, 2016 the Company issued 1,943 membership units to vendors for services provided. Total outstanding membership unitsexercisable at December 31, 2016, were 116,343.
2023 is $0.
NOTE 14 – STOCKHOLDERS’ EQUITY
On February 17, 2021, we completed an offering of 6,210,000 shares of our common stock, inclusive of the underwriters full over allotment, at $10.00 per share for total gross offering proceeds of $62,100,000. In connection with this offering, we received approval to list our common stock on the Nasdaq Capital Market under the symbol "UGRO."
On May 24, 2021, we announced that the Board authorized a stock repurchase program to purchase up to $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 authorized a $2.0 million increase to the stock repurchase program, to a total of $7.0 million. On February
2017, under2, 2022, the Board authorized an additional $1.5 million increase to the stock repurchase, to a
351 Exchange Agreement,total of $8.5 million. On September 12, 2022, the
members convertedBoard authorized an
aggregateadditional $2 million increase to the stock repurchase, for a total of
116,343 membership interests into 22,500,000$10.5 million. During the twelve months ended December 31, 2023 the Company did not repurchase shares of common stock. During the twelve months ended December 31, 2022, the Company repurchased 594,918 shares of common stock
(193.3936722 to 1). The effective dateat an average price per share of $7.33, for
a total price of $4.4 million. In total, the
exchange was February 23, 2017.As of December 2018, the Company’s authorized capital consisted of 100,000,000Company has repurchased 1,099,833 shares of common stock $0.001 par valueat an average price per share and 10,000,000 shares of preferred stock, par value $0.10 per share.
$8.25 for a total of $9.1 million, under this program. As of December 31, 2017, there were 25,046,0002023, we have $1.4 million remaining under the repurchase program.
In February 2021, the Company repurchased 350,000 shares of common stock
issued and outstanding.In March 2018,with an executive left the Company and returned 375,000 common shares as partaverage price per share of the related separation agreement. The Company retired the shares and reduced its issued and outstanding$8.50, for a total of $3.0 million, outside of any stock by 375,000 shares.
As of December 31, 2018, there were no shares of preferred stock issuedrepurchase or outstanding and 25,229,833 shares of common stock issued and outstanding.
publicly announced program.
NOTE
14 -15 – INCOME TAXES
The Company accounts for income taxes in accordance with the asset and liability method prescribed in ASC 740,
“Accounting"Accounting for Income
Taxes”.Taxes." The Company has adopted the provisions of ASC 740-10-25, which provides recognition criteria and a related measurement model for uncertain tax positions taken or expected to be taken in income tax returns. ASC 740-10-25 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. Tax positions that meet the more likely than not threshold are then measured using a probability weighted approach recognizing the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company had no tax positions relating to open income tax returns that were considered to be uncertain.
The Company determined the valuation allowances are established when management determines is more likely than not that some portion or all of the deferred tax asset will not be realized.
The Company has experienced
substantialcumulative losses for both book and tax purposes since
inception and has no tax provision for the years ended December 31, 2018 and 2017.inception. The potential future recovery of any tax assets that the Company may be entitled to due to these accumulated losses is uncertain and
theseany tax assets
arethat that the Company may be entitled to have been fully reserved based on management’s current estimates.
Management intends to continue maintaining a full valuation allowance on the Company’s deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. The Company’s estimateddeferred income tax benefit for the year ended December 31, 2023 relates to the reduction in the deferred tax liability associated with the amortization of the intangible assets from the acquisitions of the DVO, Emerald and 2WR Entities.
As of December 31, 2023, the Company had approximately $35,479,242 of operating loss carryforwards
and expiration dates for
United States tax purposes,
areexpiring as follows:
2016 - $1,618,386
•$2,182,354 expiring in 20362017 -2037
•$33,296,888 with no expiration
As of December 31, 2022, the Company had approximately $19,346,059 of operating loss carryforwards for United States tax
purposes, expiring as follows:
• $2,182,354 expiring in 2037
2018 - $3,060,443 expiring in 2038
• $17,163,705 with no expiration
Realization of operating loss carryforwards to offset future operating income for tax purposes are subject to various limitations including change of ownership and current year taxable income percentage limitations.
The Company has no credit carryforwards for tax purposes.
The Company’s
primary filing jurisdictions are the United States, Canada, and the Netherlands. Due to the Company’s net operating loss carryforwards, the Company’s income tax returns
since inception areremain subject to examination by
federal, foreign and most state taxing
jurisdictions.authorities for all tax years.
NOTE
1516 –
DERIVATIVE FINANCIAL INSTRUMENTSBUSINESS DEVELOPMENT
During 2021, the Company purchased lights from one of its international vendors to fulfill an order for a major customer. Subsequent to the sale, delivery and installation of the lights, the customer noted the lights were not performing as the manufacturer had stipulated. The Company issued one roundperformed tests of warrants relatedthe lights and confirmed the performance metrics did not meet the manufacturer’s specifications. The Company worked with the customer to determine a debt transactionlighting solution of replacement lights, sourced from the vendor, that were issued on April 19, 2018. These were valued onwould 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 date permatter, the signed agreementsCompany 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.
In total, the Company delivered $3.3 million of replacement lighting equipment to the customer and
issuance on April 19, 2018 Inrecorded the full amount as a business development expense during the year ended December 31, 2022. NOTE 17 – WARRANTS
The following table
summarizesshows warrant activity for the
Company’s outstanding warrants as ofyears ended December 31,
20182023 and
December 31, 2017:| | | December 31, | | | December 31, | |
| | | 2018 | | | 2017 | |
| | | Number of shares | | | Weighted Average Exercise Price | | | Number of shares | | | Weighted Average Exercise Price | |
| Warrants outstanding, beginning of period | | | – | | | | – | | | | – | | | | – | |
| Warrants issued | | | 6,000 | | | $ | 1.00 | | | | – | | | | – | |
| Warrants exercised | | | – | | | | – | | | | – | | | | – | |
| Warrants outstanding, end of period | | | 6,000 | | | $ | 1.00 | | | | – | | | | – | |
| Warrants exercisable, end of period | | | 6,000 | | | $ | 1.00 | | | | – | | | | – | |
2022:
| | | | | | | | | | | |
| Number of shares | | Weighted Average Exercise Price |
| Warrants outstanding as of December 31, 2021 | 374,088 | | $ | 11.26 | |
| Exercised | (18,196) | | $ | 6.00 | |
| Terminated – cashless exercise | (44,393) | | $ | 6.00 | |
| Expired | 0 | | $ | — | |
| Warrants outstanding as of December 31, 2022 | 311,499 | | $ | 12.32 | |
| Warrants exercisable as of December 31, 2022 | 311,499 | | $ | 12.32 | |
| | | | | | | | | | | |
| Number of shares | | Weighted Average Exercise Price |
| Warrants outstanding as of December 31, 2022 | 311,499 | | $ | 12.32 | |
| Exercised | 0 | | $ | — | |
| Terminated | 0 | | $ | — | |
| Issued for line of credit | 175,531 | | $ | 1.25 | |
| Expired loan extension | (1,000) | | | $ | 6.00 | |
| Warrants outstanding as of December 31, 2023 | 486,030 | | $ | 8.33 | |
| Warrants exercisable as of December 31, 2023 | 486,030 | | $ | 8.33 | |
The fair value of the warrants is calculated using the Black-Scholes pricing model based on the estimated market value of the underlying common stock at the valuation measurement date, the contractual term of the options, the risk-free interest rate at the date of grant and expected volatility of the price of the underlying common stock of 100%. There is a moderate degree of subjectivity involved when estimating the value of warrants with the Black-Scholes option pricing model as the assumptions used are moderately judgmental.
The weighted-average
remaining contractual life
forof the warrants
outstanding and exercisable at December 31, 2018 is
4.25 years, and the4.04 years. The aggregate intrinsic value of the warrants outstanding and exercisable at December 31,
20182023 is $0.
In October 2018, for consideration of the loan the Company granted Mr. Lowe an option to purchase 30,000 shares of its common stock at an exercise price of $1.20 per share, which option is exercisable for a period of five (5) years.
NOTE
1618 – SUBSEQUENT EVENTS
Effective January 9, 2019, the Company executed a letter agreement with 4Front Capital Partners, Inc., Toronto, Canada (“4Front), whereby 4Front agreed to act as the Company’s exclusive placement agent in connection with a proposed private offering of up to $6 million of either debt or equity securities, or a combination of the same, at a price to be determined, on a “best efforts” basis.
Effective March 7, 2019, the Company acquired 100% of the stock of Impact Engineering, Inc. (“Impact”), a provider of mechanical and electrical engineering services. Management believes the acquisition of Impact will improve the Company’s ability to better serve its current and future customer base by expanding on the fully integrated products and services offered by the Company.
In connection with the acquisition of Impact, the Company issued 500,000 shares of the Company’s common stock to the owner of Impact. The fair value of each share of common stock was determined to be $2.00 by management of the Company, resulting in a total purchase price for Impact of $1,000,000. The assets and liabilities associated with the purchase of Impact are estimated to be negligible and the Company expects that the majority of the purchase price will be reflected as goodwill. Legal and other costs associated with the acquisition were approximately $50,000 and will be expensed by the Company.
