Company Overview - urban-gro is an early-stage A/E/C (Architecture, Engineering, and Construction Management) company with over 1000 projects completed[9] - The company offers complete Design-Build and à la carte platform capabilities[9] - urban-gro serves multiple sectors including Controlled Environment Agriculture ("CEA"), Light Industrial, Healthcare, and more[9] - The company has four U S offices and one European office[8] Financial Performance - The company is focused on achieving positive Adjusted EBITDA[9, 39] - In FY 2021, CEA revenue was $21.6 million, representing 51% of total revenue[38] - In FY 2022, CEA revenue increased to $44 million, accounting for 96 8% of total revenue[38] - In FY 2023, CEA revenue was $21 4 million, representing 30% of total revenue[38] - For FY 2024 YTD, CEA revenue is $23 million, accounting for 64 5% of total revenue, while Non-CEA revenue is $12 1 million, accounting for 34 3% of total revenue[38] Strategic Focus - The company is focused on brand alignment and unification through corporate sector rebranding[9, 39] - The company sees opportunities in the CEA sector with potential rescheduling of Cannabis and passage of the SAFER Banking Bill[39]

Core Viewpoint - urban-gro, Inc. has appointed Sadler, Gibb & Associates LLC as its independent registered public accounting firm following a thorough evaluation process approved by the Board of Directors and the Audit Committee [1] Company Overview - urban-gro, Inc. is an integrated professional services and Design-Build firm that provides architectural, engineering, and construction management solutions primarily for the Controlled Environment Agriculture (CEA) sector, as well as industrial, healthcare, and other commercial sectors [2] - The company emphasizes innovation, collaboration, and creativity to enhance customer experiences and operates offices across North America and Europe [2]

Core Points - urban-gro, Inc. has appointed Sadler, Gibb & Associates LLC as its independent registered public accounting firm following a thorough evaluation process approved by the Board of Directors and Audit Committee [1] Company Overview - urban-gro, Inc. is an integrated professional services and Design-Build firm that provides architectural, engineering, and construction management solutions primarily for the Controlled Environment Agriculture (CEA) sector, as well as industrial, healthcare, and other commercial sectors [2] - The company emphasizes innovation, collaboration, and creativity to enhance customer experiences and operates offices across North America and Europe [2]

Financial Data and Key Metrics Changes - The company reported revenue of $15.5 million for Q1 2024, representing a sequential improvement of 4% from $15.0 million in Q4 2023, but a 7% decrease from $16.8 million in Q1 2023 [45] - The net loss was $2.1 million, or a negative $0.18 per diluted share, compared to a net loss of $5.1 million, or a negative $0.48 per diluted share in the prior year period [46] - Adjusted EBITDA improved by $2.7 million sequentially to a loss of $0.3 million in Q1 2024, marking a $3.1 million improvement compared to the prior year period [46] Business Line Data and Key Metrics Changes - Equipment Systems revenue decreased by $0.4 million, and services revenue decreased by $0.3 million, reflecting the downturn in the cannabis industry [27] - Gross profit was $3.1 million, or 20% of revenue, in Q1 2024, compared to 11% in Q4 2023 and 17% in the prior year period, driven by improved margins in services and construction design-build revenues [27] Market Data and Key Metrics Changes - Approximately 72% of revenues in Q1 2024 came from commercial sectors, while 28% came from Controlled Environment Agriculture (CEA) [24] - The company’s backlog as of March 31, 2024, was approximately $99 million, reflecting a sequential decrease of 10% [28] Company Strategy and Development Direction - The company is focused on diversifying revenue streams and reducing operating expenses, which has led to positive cash flow from operations and the strongest quarterly adjusted EBITDA results in two years [8][9] - The successful rescheduling of cannabis is seen as a significant catalyst for the industry, potentially leading to increased working capital for operators to reinvest in their businesses [22] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism about the future, indicating that they believe they have turned a corner and are well-positioned to build momentum through the end of the year [33][44] - The company is maintaining its revenue guidance of more than $84 million for 2024, which does not account for recent regulatory developments [42] Other Important Information - Operating expenses were $5.2 million in Q1 2024, a decrease of $1.2 million sequentially and $2.7 million year-over-year, attributed to expense optimization initiatives [13] - The company ended the quarter with $0.7 million in cash and a $2.0 million balance on its line of credit, indicating a stable cash position [28] Q&A Session Summary Question: Are operators engaging more in services due to the potential vote in Florida? - Management noted that there is cautious optimism and increased engagement from operators in Florida, with preparations underway for potential facility build-outs [30][31] Question: Can you provide more cadence on the remaining of 2024? - Management remains cautiously optimistic and believes they have turned a corner, with a strong backlog and reduced break-even levels [33] Question: What is the typical timing for projects in the cannabis industry? - Project timelines can range from nine months to two years, depending on size and location, with proactive involvement potentially shortening these timelines [39] Question: What percentage of the $99 million backlog is cannabis-related? - 76% of the backlog is related to Controlled Environment Agriculture (CEA), while 24% is from commercial sectors [68] Question: How does the rescheduling of cannabis impact future business? - The removal of the 280E tax burden is expected to significantly benefit cannabis operators, leading to increased reinvestment in their businesses [71][72]

[PART I. FINANCIAL INFORMATION](index=5&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section provides the unaudited financial statements and management's analysis for the first quarter of 2024 [Financial Statements (Unaudited)](index=5&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) The company reported a reduced net loss of $2.1 million in Q1 2024, driven by improved gross margin and lower operating expenses despite a 7% revenue decline [Unaudited Condensed Consolidated Balance Sheets](index=5&type=section&id=Unaudited%20Condensed%20Consolidated%20Balance%20Sheets) Total assets decreased to $56.1 million and liabilities to $37.5 million as of March 31, 2024, primarily due to changes in accounts receivable and contract liabilities Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | **Total Current Assets** | $33,229 | $40,952 | | **Total Assets** | $56,130 | $64,379 | | **Total Current Liabilities** | $35,483 | $42,111 | | **Total Liabilities** | $37,545 | $44,308 | | **Total Stockholders' Equity** | $18,586 | $20,071 | [Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss](index=6&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) Q1 2024 revenues decreased 7% to $15.5 million, but improved gross margin and reduced operating expenses led to a net loss of $2.1 million, down from $5.1 million Q1 2024 vs Q1 2023 Statement of Operations (in thousands) | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | **Total Revenues** | $15,543 | $16,765 | | **Gross Profit** | $3,116 | $2,842 | | *Gross Margin* | *20.0%* | *17.0%* | | **Loss from Operations** | $(2,064) | $(5,047) | | **Net Loss** | $(2,142) | $(5,145) | | **Net Loss per Share** | $(0.18) | $(0.48) | [Unaudited Condensed Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) Stockholders' equity decreased to $18.6 million as of March 31, 2024, primarily due to the net loss, partially offset by stock-based compensation - The change in stockholders' equity during Q1 2024 was primarily driven by a **net loss of $2.14 million** and **stock-based compensation of $0.66 million**[18](index=18&type=chunk) [Unaudited Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Operating cash flow turned positive at $0.3 million in Q1 2024, a significant improvement from a $4.3 million use of cash in the prior year Q1 2024 vs Q1 2023 Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | **Net cash provided by (used in) operating activities** | $329 | $(4,273) | | **Net cash provided by (used in) investing activities** | $8 | $(134) | | **Net cash used in financing activities** | $(758) | $(274) | | **Net change in cash** | $(420) | $(4,681) | | **Cash at end of period** | $693 | $7,327 | [Notes to Unaudited Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) Notes detail accounting policies, revenue recognition, debt facilities, and significant customer concentration, with the Commercial sector contributing 72% of Q1 2024 revenue - The company operates as an integrated professional services and design-build firm in the **Controlled Environment Agriculture (CEA)** and other commercial sectors[20](index=20&type=chunk) - In Q1 2024, the **Commercial sector contributed 72% ($11.1 million)** of total revenue, with the **CEA sector contributing 28% ($4.4 million)**[35](index=35&type=chunk) - One customer accounted for **42% of total revenues** for the three months ended March 31, 2024[69](index=69&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes the 7% revenue decline to CEA market conditions, while improved gross margin and a 34% reduction in operating expenses significantly narrowed the net loss, with backlog decreasing to $99 million Q1 2024 vs Q1 2023 Key Metrics | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Revenues | $15.5 million | $16.8 million | | Gross Profit | $3.1 million | $2.8 million | | Gross Margin | 20% | 17% | | Operating Expenses | $5.2 million | $7.9 million | | Net Loss | $2.1 million | $5.1 million | - The decrease in operating expenses was primarily due to a **$2.8 million reduction in general and administrative costs**, including the elimination of an incentive retention plan[89](index=89&type=chunk) - Total backlog was **$99 million** as of March 31, 2024, a decrease from **$110 million** at year-end 2023, with construction design-build projects comprising **94%**[95](index=95&type=chunk)[96](index=96&type=chunk) - As of March 31, 2024, the company had **negative working capital of $2.3 million** and had drawn **$2.0 million** from its **$10.0 million line of credit**[100](index=100&type=chunk)[101](index=101&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=30&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, the registrant is not required to provide information for this item[105](index=105&type=chunk) [Controls and Procedures](index=30&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of March 31, 2024, with no material changes in internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were **effective** as of March 31, 2024[108](index=108&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter[110](index=110&type=chunk) [PART II. OTHER INFORMATION](index=31&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section provides updates on legal proceedings, risk factors, equity sales, and other miscellaneous information [Legal Proceedings](index=31&type=section&id=Item%201.%20Legal%20Proceedings) No new material legal proceedings were initiated or terminated, nor were there material developments in ongoing proceedings during Q1 2024 - No new material legal proceedings were initiated or terminated during the period, and there were no material developments in ongoing proceedings[113](index=113&type=chunk) [Risk Factors](index=31&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors were reported from those disclosed in the Annual Report on Form 10-K for fiscal year 2023 - There have been no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2023[114](index=114&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=31&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company did not repurchase any of its equity securities during the first quarter of 2024 - The company did not repurchase any of its equity securities during the period covered by the report[116](index=116&type=chunk) [Defaults Upon Senior Securities](index=31&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) No defaults upon senior securities were reported - None[117](index=117&type=chunk) [Mine Safety Disclosures](index=31&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's operations - Not Applicable[118](index=118&type=chunk) [Other Information](index=31&type=section&id=Item%205.%20Other%20Information) No other material information was reported - None[119](index=119&type=chunk) [Exhibits](index=32&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and Inline XBRL documents - Exhibits filed include **CEO and CFO certifications** under Sarbanes-Oxley Sections 302 and 906, and various **Inline XBRL documents**[121](index=121&type=chunk)

[Management Commentary and Strategic Outlook](index=1&type=section&id=Management%20Commentary%20and%20Strategic%20Outlook) Management emphasizes successful diversification, significant Q1 bottom-line improvement from cost reductions, and anticipates cannabis reclassification as a major industry catalyst - The company's diversification strategy is leveraging its professional services talent to evolve into a multi-sector focused firm[3](index=3&type=chunk) - Q1 performance showed solid bottom-line improvement on both a sequential and year-over-year basis, aided by reductions in operating expenses[3](index=3&type=chunk) - The potential reclassification of cannabis from Schedule I to Schedule III is anticipated to be a significant industry catalyst, expected to increase operator working capital for reinvestment in facilities[3](index=3&type=chunk) [First Quarter 2024 Financial Performance](index=1&type=section&id=First%20Quarter%202024%20Financial%20Performance) Q1 2024 saw revenue of **$15.5 million**, improved gross margin to **20%**, and significantly reduced net loss and Adjusted EBITDA loss, reflecting strong cost control Q1 2024 Key Financial Metrics | Metric | Q1 2024 | Q4 2023 | Q1 2023 | YoY Change (%) | QoQ Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue (in millions) | $15.5 | $15.0 | $16.7 | -7 | +4 | | Gross Profit (in millions) | $3.1 | $1.7 | $2.8 | +10.7 | +82.4 | | Gross Margin (%) | 20 | 11 | 17 | +300 bps | +900 bps | | Net Loss (in millions) | ($2.1) | ($4.7) | ($5.1) | +58 | +55 | | Adjusted EBITDA (in millions) | ($0.3) | ($3.0) | ($3.4) | +91 | +90 | | GAAP Net Loss per Share | ($0.18) | ($0.40) | ($0.48) | +62.5 | +55 | - General and Administrative (G&A) expenses were significantly reduced to **$4.3 million**, a decrease of **$2.8 million** year-over-year and **$1.2 million** sequentially[6](index=6&type=chunk)[8](index=8&type=chunk) - The improvement in Adjusted EBITDA was primarily driven by the company's previously announced **$8 million** G&A expense optimization and resource reallocation initiative[10](index=10&type=chunk) - Cash stood at **$0.7 million** at quarter-end, down from **$1.1 million** in the prior quarter. The balance on the lending facility was reduced by **$0.5 million** to **$2.0 million**[10](index=10&type=chunk) [Backlog as of March 31, 2024](index=3&type=section&id=Backlog%20as%20of%20March%2031%2C%202024) As of March 31, 2024, total project backlog reached approximately **$99 million**, with **94%** attributed to construction design-build projects Backlog by Revenue Category (as of March 31, 2024) | Revenue Category | Amount (in millions) | Percentage of Total (%) | | :--- | :--- | :--- | | Construction design-build | $93 | 94 | | Professional services | $5 | 5 | | Equipment systems | $1 | 1 | | **Total backlog** | **$99** | **100** | [Full Year 2024 Guidance](index=3&type=section&id=Revenue%20and%20Adjusted%20EBITDA%20Guidance%20-%202024) The company reaffirms its full-year 2024 guidance, projecting consolidated revenues exceeding **$84 million** and positive Adjusted EBITDA - The company reaffirms its guidance for fiscal year 2024, projecting consolidated revenues of more than **$84 million** and the achievement of positive Adjusted EBITDA[12](index=12&type=chunk) [Financial Statements](index=7&type=section&id=Financial%20Statements) This section presents unaudited condensed consolidated financial statements, including balance sheets, statements of operations, and reconciliations of GAAP to non-GAAP measures [Condensed Consolidated Balance Sheets](index=7&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of March 31, 2024, the balance sheet reports total assets of **$56.1 million**, total liabilities of **$37.5 million**, and total stockholders' equity of **$18.6 million** Condensed Consolidated Balance Sheets (unaudited) | (in thousands) | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | **Total current assets** | $33,229 | $40,952 | | **Total assets** | **$56,130** | **$64,379** | | **Total current liabilities** | $35,483 | $42,111 | | **Total liabilities** | **$37,545** | **$44,308** | | **Total stockholders' equity** | **$18,586** | **$20,071** | [Condensed Consolidated Statements of Operations](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) For Q1 2024, the company reported **$15.5 million** in revenue and a net loss of **$2.1 million**, or **($0.18)** per share, a significant improvement year-over-year Condensed Consolidated Statements of Operations (unaudited, for three months ended March 31) | (in thousands) | 2024 | 2023 | | :--- | :--- | :--- | | Total revenues | $15,543 | $16,765 | | Gross profit | $3,116 | $2,842 | | Total operating expenses | $5,180 | $7,889 | | Loss from operations | ($2,064) | ($5,047) | | **Net loss** | **($2,142)** | **($5,145)** | | **Net loss per share** | **($0.18)** | **($0.48)** | [Reconciliation of GAAP to Non-GAAP Measures](index=9&type=section&id=Reconciliation%20of%20GAAP%20to%20Non-GAAP%20Measures) This section reconciles GAAP Net Loss to non-GAAP Adjusted EBITDA and Adjusted Net Loss, showing Q1 2024 Adjusted EBITDA of **($0.3 million)** and Adjusted Net Loss of **($1.5 million)** Net Loss (GAAP) to Adjusted EBITDA (Non-GAAP) Reconciliation | (in thousands) | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | **Net loss (GAAP)** | **($2,141.5)** | **($5,144.6)** | | Depreciation and amortization | $434.6 | $404.1 | | Stock-based compensation | $656.6 | $479.6 | | Reduction in force costs | $443.8 | $0.0 | | Other adjustments | $238.4 | $458.3 | | **Adjusted EBITDA (non-GAAP)** | **($294.3)** | **($3,394.2)** | Net Loss (GAAP) to Adjusted Net Loss (Non-GAAP) Reconciliation | (in thousands, except per share data) | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | **Net loss (GAAP)** | **($2,141.5)** | **($5,144.6)** | | Non-recurring adjustments, net of taxes | $682.2 | $908.3 | | **Adjusted net loss (non-GAAP)** | **($1,459.3)** | **($4,236.3)** | | **Adjusted net loss per share (non-GAAP)** | **($0.12)** | **($0.39)** | [Use of Non-GAAP Financial Information](index=5&type=section&id=Use%20of%20Non-GAAP%20Financial%20Information) The company utilizes non-GAAP measures like Adjusted EBITDA and Adjusted Net Loss to provide a clearer view of core operating performance by excluding non-recurring or non-cash expenses - Adjusted EBITDA is defined as GAAP net income (loss) excluding interest, taxes, depreciation, amortization, stock-based compensation, and other one-time or non-recurring expenses[15](index=15&type=chunk) - Management and the board of directors use Adjusted EBITDA as a key performance and compensation measure to compare performance across reporting periods by removing items not reflective of core operations[15](index=15&type=chunk) - The company acknowledges that non-GAAP measures have limitations and may be defined differently by other companies, potentially making direct comparisons difficult[18](index=18&type=chunk)

Part I [Business](index=4&type=section&id=Item%201.%20Business) urban-gro, Inc. is an integrated professional services and design-build firm specializing in Controlled Environment Agriculture (CEA) and Commercial sectors, offering turnkey solutions and diversifying beyond cannabis CEA - The company operates as an integrated professional services and construction design-build firm, offering solutions to Controlled Environment Agriculture (CEA) and other Commercial sectors[15](index=15&type=chunk) - As of December 31, 2023, the company employed **130 full-time employees**, a **14% decrease** from the previous year, with approximately two-thirds considered experts in their fields[18](index=18&type=chunk)[85](index=85&type=chunk) Announced Contracts (Since Jan 1, 2023) | Announcement Date | Value | Sector | Expected Recognition Period | | :--- | :--- | :--- | :--- | | Sep 26, 2023 | > $11.0M | Hospitality & Recreation | Extended into 2025 (originally 6 quarters) | | Oct 2, 2023 | ~$8.0M | CEA | Extended into Q1 2025 (originally 4 quarters) | | Oct 4, 2023 | > $4.5M | N/A | Next 2 quarters (on track) | | Nov 30, 2023 | $11.0M (increased from $9.6M) | Industrial CPG | Extended by one quarter (originally 3 quarters) | | Jan 2, 2024 | ~$20.0M | Cannabis CEA | Next 6 quarters (on track) | Targeted Gross Profit Margins by Revenue Category | Revenue Category | Targeted Gross Profit Margin | | :--- | :--- | | Professional services | > 40% | | Construction design-build services | > 6% | | Customized equipment systems | > 10% | | Other products revenues | > 15% | [Growth Strategy](index=17&type=section&id=Growth%20Strategy) The company's growth strategy focuses on leveraging diversified capabilities, pursuing larger turnkey projects, and expanding its regional client base, especially in the European CEA market - The growth strategy is based on three main pillars: leveraging sector diversification and in-house capabilities, focusing on comprehensive design-build solutions, and expanding the regional client base with a specific focus on Europe[59](index=59&type=chunk)[64](index=64&type=chunk) [Regulation](index=18&type=section&id=Regulation) Serving the cannabis-focused CEA segment exposes the company to significant regulatory risks due to federal prohibition of THC, potentially harming business operations and client relationships - While not selling cannabis, the company serves clients in the industry, facing financial damage risk from federal enforcement due to THC's Schedule I controlled substance status[71](index=71&type=chunk)[72](index=72&type=chunk) - The Rohrabacher-Farr amendment, preventing DOJ interference with state medical cannabis laws since 2014, requires annual re-authorization which is not guaranteed[76](index=76&type=chunk) [Human Capital](index=23&type=section&id=Human%20Capital) As of December 31, 2023, urban-gro had 130 full-time employees, a 14% decrease from 2022, with its experienced workforce considered a key competitive advantage Quarterly Headcount Changes (2022-2023) | Quarter | 2023 Ending Headcount | 2022 Ending Headcount | | :--- | :--- | :--- | | Q1 | 165 | 98 | | Q2 | 137 | 121 | | Q3 | 131 | 115 | | Q4 | 130 | 152 | [Risk Factors](index=23&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant operational risks including historical net losses, negative cash flow, client concentration, and the federal illegality of cannabis, alongside stock-related risks like price volatility Historical Operating Performance | Year Ended Dec 31 | Revenue | Net Loss | | :--- | :--- | :--- | | 2023 | $71.5M | $18.7M | | 2022 | $67.0M | $15.3M | | 2021 | $62.1M | $0.9M | | 2020 | $25.8M | $5.1M | - The company experienced negative cash flow from operations of **$11.2 million** in FY2023 and **$12.6 million** in FY2022[91](index=91&type=chunk) - Significant client concentration risk exists, with **two clients accounting for 43% of total revenue in 2023** and **three clients representing 40% in 2022**[100](index=100&type=chunk) - The majority of historical revenues have been generated from clients in the legal cannabis industry, which is subject to significant regulatory risk due to federal prohibition[107](index=107&type=chunk)[108](index=108&type=chunk) [Cybersecurity](index=43&type=section&id=Item%201C.%20Cybersecurity) The company manages cybersecurity risks through employee training, cloud-based systems, NIST framework adherence, and board oversight, having enhanced security measures like MFA after a 2019 wire fraud incident - The company has implemented security measures including employee training, a fully cloud-based environment, and adherence to the NIST Cybersecurity Framework 2.0[165](index=165&type=chunk)[168](index=168&type=chunk) - In 2019, the company was a victim of a wire fraud scheme, which prompted the implementation of multi-factor authentication (MFA) across all systems[171](index=171&type=chunk) [Legal Proceedings](index=45&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in several material legal disputes, including a $1.3 million breach of contract claim against Great Green Theory, and recently settled cases with Crest Ventures for $1.5 million and Sunflower Bank for $2.4 million - Settled a lawsuit with Crest Ventures, LLC for **$1.5 million** in Q2 2023, paid in September 2023[174](index=174&type=chunk) - Settled a lawsuit against Sunflower Bank related to fraudulent wire transfers, receiving **$2.4 million** in settlement proceeds on March 27, 2023[174](index=174&type=chunk) - A subsidiary is involved in a lawsuit with Great Green Theory over an unpaid amount of approximately **$1.3 million**, with counterclaims for **$1.0 million** in liquidated damages[173](index=173&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=48&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on Nasdaq under 'UGRO', has 89 record holders, does not pay dividends, and has **$1.4 million** remaining on its **$10.5 million** stock repurchase program - The company has not paid any dividends since inception and does not anticipate paying any in the foreseeable future[180](index=180&type=chunk) - The Board has authorized a stock repurchase program of up to **$10.5 million**, with **$9.1 million** repurchased and **$1.4 million** remaining as of December 31, 2023[185](index=185&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=50&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) FY2023 revenues increased 7% to **$71.5 million**, but a shift to lower-margin construction work reduced gross margin to **14%** and increased net loss to **$18.7 million**, while cash decreased to **$1.1 million** despite a new **$10 million** line of credit Comparison of Operations (FY 2023 vs. FY 2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $71.5M | $67.0M | +7% | | Gross Profit | $10.3M | $14.2M | -27% | | Gross Margin | 14% | 21% | -7 p.p. | | Net Loss | ($18.7M) | ($15.3M) | +22% | | Adjusted EBITDA | ($9.7M) | ($3.9M) | +149% | Backlog Comparison (in millions) | Category | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Equipment systems | $1M | $5M | | Services | $7M | $6M | | Construction design-build | $102M | $82M | | **Total backlog** | **$110M** | **$93M** | - As of December 31, 2023, the company had cash of **$1.1 million**, a decrease of **$10.9 million** from year-end 2022, with working capital turning negative to **($1.2) million** from **$10.3 million**[204](index=204&type=chunk)[205](index=205&type=chunk) - In December 2023, a subsidiary entered into a **$10.0 million** asset-based revolving line of credit to manage cash flow, borrowing **$2.5 million** by year-end[206](index=206&type=chunk) [Controls and Procedures](index=57&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no public accounting firm attestation due to its emerging growth company status - Based on their evaluation, the CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[224](index=224&type=chunk) - Management assessed the effectiveness of internal control over financial reporting using the COSO framework (2013) and concluded it was effective as of December 31, 2023[230](index=230&type=chunk) Part III [Directors, Executive Officers, Corporate Governance, Compensation, Security Ownership, and Related Transactions](index=59&type=section&id=Items%2010-14) Information for Items 10 through 14, covering directors, executive officers, corporate governance, compensation, security ownership, and related transactions, is incorporated by reference from the company's definitive 2024 proxy statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Registrant's definitive proxy statement to be filed with the SEC[236](index=236&type=chunk)[237](index=237&type=chunk)[238](index=238&type=chunk) Part IV [Exhibits, Financial Statement Schedules](index=60&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists financial statements and provides an index of all exhibits, including agreements, bylaws, and certifications, with financial statement schedules omitted as not applicable - This section contains the index of exhibits filed with the Form 10-K, including various agreements, certifications, and the company's clawback policy[243](index=243&type=chunk)[246](index=246&type=chunk) Financial Statements [Consolidated Financial Statements](index=65&type=section&id=Consolidated%20Financial%20Statements) The consolidated financial statements for FY2023 and FY2022 reveal a significant decline in liquidity and profitability, with cash decreasing to **$1.1 million**, net loss increasing to **$18.7 million**, and total liabilities rising to **$44.3 million** Consolidated Balance Sheet Highlights (As of Dec 31) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Cash | $1.1M | $12.0M | | Total Current Assets | $41.0M | $34.6M | | Goodwill | $15.6M | $15.6M | | Total Assets | $64.4M | $62.1M | | Total Current Liabilities | $42.1M | $24.3M | | Total Liabilities | $44.3M | $27.3M | | Total Shareholders' Equity | $20.1M | $34.7M | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Total Revenues | $71.5M | $67.0M | | Gross Profit | $10.3M | $14.2M | | Loss from Operations | ($16.7M) | ($12.6M) | | Net Loss | ($18.7M) | ($15.3M) | | Loss per Share | ($1.66) | ($1.44) | Consolidated Statement of Cash Flows Highlights (Year Ended Dec 31) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | ($11.2M) | ($12.6M) | | Net cash provided by (used in) investing activities | $1.7M | ($4.5M) | | Net cash used in financing activities | ($1.4M) | ($5.5M) | | **Net change in cash** | **($10.9M)** | **($22.6M)** | [Notes to Consolidated Financial Statements](index=73&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail financial statement explanations, including DVO and Emerald acquisitions, a significant revenue shift from Equipment Systems to Construction Design-Build, and high customer concentration with one customer accounting for **28%** of 2023 revenue Revenue Breakdown by Source (FY 2023 vs. FY 2022) | Revenue Source | 2023 Revenue | 2022 Revenue | | :--- | :--- | :--- | | Equipment systems | $12.7M | $33.3M | | Services | $11.9M | $12.9M | | Construction design-build | $46.3M | $19.8M | | Other | $0.7M | $1.0M | | **Total** | **$71.5M** | **$67.0M** | Revenue Breakdown by Sector (FY 2023 vs. FY 2022) | Sector | 2023 Revenue | 2022 Revenue | | :--- | :--- | :--- | | CEA | $21.6M (30%) | $44.0M (66%) | | Commercial | $50.0M (70%) | $23.0M (34%) | | **Total** | **$71.5M** | **$67.0M** | - Customer concentration risk is high, with one customer (C000002187) accounting for **28% of total revenue** and **57% of accounts receivable** in 2023[363](index=363&type=chunk)[365](index=365&type=chunk) - The company fully impaired its **$1.7 million** investment in Edyza, Inc. during the third quarter of 2022[346](index=346&type=chunk)

Financial Data and Key Metrics Changes - Year-over-year CEA revenues decreased by $22 million or 36%, while commercial revenues increased by $27 million or 36%, indicating a reversal from 2022 trends and highlighting the value of diversification [2] - Equipment revenues decreased to a three-year low of $13 million, representing a $21 million or 62% decrease from 2022 and a $43 million or 77% decrease from 2021 [2] - Net loss for Q4 2023 was $4.7 million or a negative $0.40 per diluted share, compared to a net loss of $4.2 million or a negative $0.39 per diluted share in the prior year [11] - Total revenue for the full year 2023 was $71.5 million, a 6.7% increase from $67 million in the prior year [11] Business Line Data and Key Metrics Changes - Construction design build revenue decreased by $1.3 million, professional services revenue decreased by $0.8 million, and equipment systems revenue decreased by $0.2 million in Q4 2023 [55] - The backlog as of December 31, 2023, was approximately $110 million, a $26 million or 40% sequential increase over Q3 2023, with $102 million in construction design build, $7 million in professional services, and $1 million in equipment systems contracts [4] Market Data and Key Metrics Changes - The prolonged multiyear compression of equipment revenues due to continued softness in the CEA sector remains a significant headwind for financial performance [2] - The company has identified significant regulatory changes that could serve as catalysts to reignite the cannabis market, potentially providing a material lift to future financial performance [2] Company Strategy and Development Direction - The company is focused on sector diversification, with significant efforts made to optimize and align SG&A expenses, which are expected to result in positive adjusted EBITDA in 2024 [9][10] - The company plans to continue building out its business development focus in commercial sectors and integrate innovative initiatives [54] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence that 2024 will be a step-up year, expecting to deliver positive adjusted EBITDA, with a focus on executing contracts and managing project timelines effectively [9][10] - The management team acknowledged the disappointing performance in Q4 but emphasized that all delayed contracts are still active and expected to generate revenue in 2024 [9][12] Other Important Information - The company has reduced SG&A expenses by more than $8 million on an annualized basis, which is expected to positively impact results in 2024 [4][11] - The company entered 2024 with $1.1 million in cash and $2.5 million drawn on a $10 million working capital line of credit, providing necessary flexibility to manage working capital needs [66] Q&A Session Summary Question: Can you expand on the project delays and cost revisions in the quarter? - Management noted that three projects were delayed, impacting revenue recognition, but all contracts remain active and are expected to generate revenue in Q1 2024 [12][9] Question: How does the recent cannabis legislation in Germany affect your strategy? - Management indicated that while they are pulling back some expenses in Germany, they are maintaining key experts and keeping communication open for future opportunities as the market develops [23][22] Question: What is the outlook for the cannabis sector and potential regulatory catalysts? - Management highlighted the potential impact of the SAFER Banking Act and rescheduling of cannabis, which could significantly improve working capital for operators and lead to increased demand for their services [86][36]

[Financial Performance and Outlook](index=1&type=section&id=Financial%20Performance%20and%20Outlook) This section details urban-gro's 2023 financial performance, including revenue growth, increased losses, and 2024 guidance [2023 Financial Highlights & 2024 Guidance](index=1&type=section&id=2023%20Financial%20Highlights%20%26%202024%20Guidance) Urban-gro reported increased 2023 revenue but wider losses, while forecasting 2024 revenue growth and a return to positive Adjusted EBITDA Full Year 2023 Results vs. 2022 | Metric | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Revenue | $71.5 million | $67.0 million | | Net Loss | $(18.7) million | $(15.3) million | | Adjusted EBITDA | $(9.7) million | $(3.9) million | 2024 Guidance and Q1 2024 Preliminary Guidance | Period | Metric | Guidance/Preliminary Result | | :--- | :--- | :--- | | **Full Year 2024** | Revenue | > $84.0 million (>17.4% growth) | | | Adjusted EBITDA | Positive | | **Q1 2024** | Revenue | ≥ $15.0 million | | | Adjusted EBITDA | ≥ $(0.5) million | [Management Commentary](index=1&type=section&id=Management%20Commentary) Management emphasizes 2023 diversification, $110 million backlog, cost reductions, and optimism for cannabis regulatory catalysts - In 2023, revenue sources reversed from 2022, with **70% from commercial sectors** and **30% from Controlled Environment Agriculture (CEA)**, demonstrating the success of the company's diversification strategy[2](index=2&type=chunk) - The company implemented annualized cost reductions of **over $8 million** to better align its cost structure, which is expected to help generate sustained positive Adjusted EBITDA in 2024[2](index=2&type=chunk) - The company sees potential industry catalysts from the rescheduling of cannabis, the SAFER Banking Act, and new state approvals for adult-use cannabis, which could drive demand for Design-Build projects[2](index=2&type=chunk)[5](index=5&type=chunk) [Fourth Quarter 2023 Financial Results](index=3&type=section&id=Fourth%20Quarter%202023%20Financial%20Results) Q4 2023 revenue declined to $15.0 million, gross profit fell, and both net and Adjusted EBITDA losses increased Q4 2023 vs. Q4 2022 Financial Performance | Metric | Q4 2023 | Q4 2022 | | :--- | :--- | :--- | | Revenue | $15.0 million | $17.3 million | | Gross Profit | $1.7 million | $3.2 million | | Gross Margin | 11% | 19% | | Net Loss | $(4.7) million | $(4.2) million | | Adjusted EBITDA | $(3.0) million | $(1.7) million | - The decrease in Q4 revenue was driven by a **$1.3 million decline in construction Design-Build revenue** and a **$0.8 million decline in professional services revenue**[5](index=5&type=chunk) - Operating expenses increased by **$0.2 million to $6.4 million**, primarily due to higher legal expenses[7](index=7&type=chunk) [Full Year 2023 Financial Results](index=3&type=section&id=Summary%20Full%20Year%202023%20Financial%20Results) Full year 2023 revenue grew to $71.5 million, but gross profit declined, and net and Adjusted EBITDA losses expanded Full Year 2023 vs. 2022 Financial Performance | Metric | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Revenue | $71.5 million | $67.0 million | | Gross Profit | $10.3 million | $14.2 million | | Gross Margin | 14.4% | 21.0% | | Net Loss | $(18.7) million | $(15.3) million | | Adjusted EBITDA | $(9.7) million | $(3.9) million | - The revenue increase was driven by a **$26.4 million rise in construction revenue**, offset by a **$20.7 million drop in equipment systems revenue** due to reduced demand in the CEA market[10](index=10&type=chunk) - Operating expenses remained flat at approximately **$27.0 million**, as a **$3.8 million increase in G&A expenses** was offset by a **$3.3 million reduction in a one-time business development expense** from the prior year[12](index=12&type=chunk) [Backlog Analysis](index=5&type=section&id=Backlog%20as%20of%20December%2031%2C%202023) Total backlog increased to **$110 million** as of December 31, 2023, primarily driven by construction Design-Build contracts Backlog Change from Dec 31, 2022 to Dec 31, 2023 (in millions) | Category | Beginning Backlog (2022) | Revenue Recognized | Backlog Additions | Ending Backlog (2023) | | :--- | :--- | :--- | :--- | :--- | | Equipment Systems | $5 | $(13) | $9 | $1 | | Services | $6 | $(12) | $13 | $7 | | Construction Design-Build | $82 | $(46) | $66 | $102 | | **Total Backlog** | **$93** | **$(71)** | **$88** | **$110** | - Total backlog as of December 31, 2023, was approximately **$110 million**, a sequential increase of **$26 million from Q3 2023** and an increase from **$93 million at the end of 2022**[1](index=1&type=chunk)[16](index=16&type=chunk)[17](index=17&type=chunk) [2024 Financial Guidance](index=5&type=section&id=Revenue%20and%20Adjusted%20EBITDA%20Guidance%20-%20Full%20Year%202024%20and%20First%20Quarter%202024) The company forecasts 2024 revenue exceeding $84 million and positive Adjusted EBITDA, with strong Q1 professional services 2024 Financial Guidance | Period | Metric | Guidance | | :--- | :--- | :--- | | **Full Year 2024** | Revenue | > $84 million | | | Adjusted EBITDA | Positive | | **First Quarter 2024** | Revenue | > $15 million | | | Adjusted EBITDA | > $(0.5) million | - Robust professional services revenues are expected in Q1 2024, which is considered a strong leading indicator of future construction and equipment demand[19](index=19&type=chunk) - Gross margins are expected to improve year-over-year in 2024 as a result of expense reductions implemented in 2023[19](index=19&type=chunk) [Consolidated Financial Statements](index=9&type=section&id=Consolidated%20Financial%20Statements) This section presents the company's consolidated balance sheets and statements of operations, detailing financial position and performance [Consolidated Balance Sheets](index=9&type=section&id=CONSOLIDATED%20BALANCE%20SHEETS) As of December 31, 2023, total assets increased slightly, cash decreased, and liabilities rose while equity declined Key Balance Sheet Items (As of December 31) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Cash | $1.1 million | $12.0 million | | Total Current Assets | $41.0 million | $34.6 million | | Total Assets | $64.4 million | $62.1 million | | Accounts Payable | $25.4 million | $10.0 million | | Total Current Liabilities | $42.1 million | $24.3 million | | Total Liabilities | $44.3 million | $27.3 million | | Total Shareholders' Equity | $20.1 million | $34.7 million | [Consolidated Statements of Operations and Comprehensive Loss](index=10&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS%20AND%20COMPREHENSIVE%20LOSS) Total revenues increased to $71.5 million in 2023, but gross profit declined, and net loss widened to $18.7 million Revenue by Segment (For the Years Ended December 31) | Revenue Segment | 2023 | 2022 | | :--- | :--- | :--- | | Equipment systems | $12,675,645 | $33,333,574 | | Services | $11,923,920 | $12,862,308 | | Construction design-build | $46,254,967 | $19,822,901 | | **Total revenues** | **$71,542,773** | **$67,029,934** | Profitability Summary (For the Years Ended December 31) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Gross Profit | $10,291,562 | $14,205,719 | | Loss from Operations | $(16,677,437) | $(12,636,985) | | Net Loss | $(18,681,061) | $(15,277,909) | | Loss per share | $(1.66) | $(1.44) | [Non-GAAP Financial Measures](index=7&type=section&id=Non-GAAP%20Financial%20Measures) This section provides reconciliations of GAAP net loss to non-GAAP Adjusted EBITDA and adjusted net loss [Reconciliation of Net Loss to Adjusted EBITDA](index=11&type=section&id=NON-GAAP%20ADJUSTED%20EBITDA%20RECONCILIATION%20TO%20NET%20LOSS) Adjusted EBITDA loss widened to $9.7 million in 2023, with key adjustments including stock-based compensation - Adjusted EBITDA is defined as net income (loss) excluding items like interest, taxes, depreciation, amortization, stock-based compensation, and other non-recurring expenses that management believes do not reflect core operating performance[21](index=21&type=chunk) Adjusted EBITDA Reconciliation Summary (For the Years Ended December 31) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Loss | $(18,681,061) | $(15,277,909) | | EBITDA | $(16,976,557) | $(14,375,116) | | **Adjusted EBITDA** | **$(9,712,173)** | **$(3,887,049)** | [Reconciliation of GAAP Net Loss to Non-GAAP Adjusted Net Loss and EPS](index=13&type=section&id=NET%20LOSS%20%28GAAP%29%20RECONCILIATION%20TO%20ADJUSTED%20NET%20LOSS%20%28NON-GAAP%29%20AND%20EPS) Non-GAAP adjusted net loss for 2023 was $13.6 million, or $(1.21) per share, after adjusting for non-recurring items GAAP vs. Non-GAAP Net Loss and EPS (For the Year Ended December 31, 2023) | Metric | GAAP | Non-GAAP (Adjusted) | | :--- | :--- | :--- | | Net Loss | $(18,681,061) | $(13,615,723) | | Loss per Share | $(1.66) | $(1.21) | GAAP vs. Non-GAAP Net Loss and EPS (For the Year Ended December 31, 2022) | Metric | GAAP | Non-GAAP (Adjusted) | | :--- | :--- | :--- | | Net Loss | $(15,277,909) | $(4,880,852) | | Loss per Share | $(1.44) | $(0.46) |

Financial Data and Key Metrics Changes - Revenue for Q3 2023 was $20.9 million, representing an 11% sequential increase from $18.8 million in Q2 2023 and a 69% increase from $12.4 million in Q3 2022 [36][28] - Adjusted EBITDA improved by $0.7 million sequentially to negative $1.3 million in Q3 2023, which is an improvement of $1.0 million compared to the prior year period [20][28] - Net loss for Q3 2023 was $3.4 million, or a negative $0.29 per diluted share, compared to a net loss of $8.7 million, or a negative $0.081 per diluted share in the prior year period [38][28] Business Line Data and Key Metrics Changes - The increase in revenue was driven by a $9.4 million increase in organic growth of construction design build revenue, reflecting increases in the number of projects and average project size outside of the Controlled Environment Agriculture (CEA) sector [18][28] - More than two-thirds of revenue this quarter was generated from sectors outside of CEA, indicating a successful diversification strategy [10][28] Market Data and Key Metrics Changes - The backlog as of September 30, 2023, was approximately $84 million, reflecting a 6% sequential increase and a 25% increase compared to the prior year [40][28] - The CEA sector continues to face challenges, with equipment revenues compressed by a weak cannabis market, resulting in a decline of over $20 million in revenue during the first nine months of 2023 [30][28] Company Strategy and Development Direction - The company has evolved into a multi-sector focused professional services consulting firm, leveraging its professional services to build additional revenue streams [27][28] - The diversification strategy has insulated the company from broader weaknesses in the cannabis and vertical farming segments, allowing it to maintain a strong team and prepare for future demand [9][11] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in returning to positive adjusted EBITDA, supported by an increasing backlog and pipeline [22][28] - The company anticipates revenues of approximately $30 million in Q4 2023, which would represent a new record, and expects to achieve breakeven to slightly positive adjusted EBITDA [33][28] Other Important Information - The company entered into a nondilutive asset-based lending facility for up to $8 million, primarily backed by construction receivables, to better manage working capital [24][59] - The leadership team demonstrated commitment by voluntarily opting to take stock instead of up to 50% of their base salary during Q3 [15][28] Q&A Session Summary Question: Details on the nondilutive asset-backed facility - The facility is backed by receivables, primarily construction receivables, and is for up to $8 million [24] Question: Insights on end markets and backlog allocation - More than two-thirds of the backlog is still in the controlled farming space, but the company anticipates growth on both CEA and non-CEA sides [48] Question: Confidence in achieving $30 million in quarterly revenue - Management indicated that there are many projects in the sales funnel expected to come to fruition, supporting the revenue target [49] Question: Potential inflection points in the cannabis market - Management noted that regulatory delays are a significant barrier, but they remain optimistic about future opportunities as licenses are awarded [51][105] Question: Update on international market focus - The company is focusing on the Netherlands, the U.K., and Germany, with ongoing discussions about design and build projects [81][109] Question: Future M&A activity - Currently, the focus is on generating cash and growing organically, with M&A not being a near-term priority [85] Question: Ability to win contracts outside of CEA - The company is successfully winning contracts by leveraging expertise and providing comprehensive service packages [90]