urban-gro(UGRO) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Unaudited consolidated financial statements for Q3 2019 show asset and liability growth, revenue increase, but a wider net loss due to rising operating expenses, with a going concern warning Unaudited Consolidated Balance Sheets Total assets increased to $10.1 million and liabilities to $15.4 million by Sep 30, 2019, worsening the shareholders' deficit to -$5.3 million Consolidated Balance Sheet Highlights (as of Sep 30, 2019 vs. Dec 31, 2018) | Metric | Sep 30, 2019 | Dec 31, 2018 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $10,141,839 | $5,744,764 | +76.5% | | Cash | $3,505,636 | $1,178,852 | +197.4% | | Goodwill | $871,230 | $– | N/A | | Total Liabilities | $15,407,311 | $9,571,315 | +61.0% | | Customer Deposits | $4,224,531 | $3,298,609 | +28.1% | | Notes Payable | $4,150,000 | $3,478,869 | +19.3% | | Convertible Debentures, net | $1,762,969 | $– | N/A | | Total Shareholders' Deficit | ($5,265,472) | ($3,826,551) | +37.6% | Unaudited Consolidated Statements of Operations Nine-month revenue grew 16% to $17.1 million with improved gross margins, but a 50% surge in operating expenses led to a net loss of $5.7 million Nine Months Ended September 30, 2019 vs 2018 | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Revenue | $17,056,737 | $14,680,295 | +16.2% | | Gross Profit | $5,527,289 | $4,304,732 | +28.4% | | Gross Margin | 32.4% | 29.3% | +3.1 pts | | Loss from Operations | ($4,054,086) | ($2,083,560) | +94.6% | | Net Loss | ($5,719,404) | ($2,128,506) | +168.7% | | Net Loss Per Share | ($0.22) | ($0.09) | +144.4% | Three Months Ended September 30, 2019 vs 2018 | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Revenue | $5,583,064 | $5,336,631 | +4.6% | | Gross Profit | $1,932,099 | $1,634,376 | +18.2% | | Gross Margin | 34.6% | 30.6% | +4.0 pts | | Loss from Operations | ($1,392,822) | ($839,998) | +65.8% | | Net Loss | ($2,809,530) | ($846,808) | +231.8% | | Net Loss Per Share | ($0.11) | ($0.03) | +266.7% | Unaudited Consolidated Statements of Cash Flows Operating cash flow improved to a $86,299 use, while financing activities provided $3.3 million, resulting in a $2.3 million increase in cash for the nine months Cash Flow Summary (Nine Months Ended September 30) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net Cash (Used In) / Provided By Operating Activities | ($86,299) | $195,681 | | Net Cash Used In Investing Activities | ($894,168) | ($1,073,300) | | Net Cash Provided by Financing Activities | $3,307,251 | $72,000 | | Net Increase (Decrease) in Cash | $2,326,784 | ($805,619) | | Cash at End of Period | $3,505,636 | $851,172 | Notes to Consolidated Financial Statements Notes detail the company's cannabis industry business, the Impact Engineering acquisition, significant liquidity issues with a $14.3 million accumulated deficit, and the conversion of $2.565 million convertible debentures - The company is an end-to-end engineering design, equipment integration, and facility optimization company primarily serving commercial cannabis operators[19] - Acquired 100% of Impact Engineering, Inc. on March 7, 2019, for 500,000 shares of common stock, resulting in $871,230 of goodwill[22] - The company has significant operating losses, an accumulated deficit of $14.3 million, and a working capital deficit of $6.6 million, which raises substantial doubt about its ability to continue as a going concern[25] - Recorded a $506,000 write-down of its investment in TGH in anticipation of selling its ownership interest back to TGH[68] - Raised $2,565,000 through an offering of convertible debentures and warrants. The debentures and accrued interest converted into 1,102,513 common shares on October 16, 2019, following a liquidity event (OTCQX listing and effective registration statement)[74][94] - For the nine months ended Sep 30, 2019, one vendor accounted for 15% of total purchases and one customer represented 15% of total revenue, indicating concentration risk[78][80] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 16% revenue growth and improved gross margins, offset by a 50% surge in operating expenses, leading to a larger net loss and a need for $3.5 million in additional funding Results Of Operations Nine-month revenue increased 16% to $17.1 million with improved gross margins, but a 50% rise in operating expenses led to a $5.7 million net loss, prompting cost reduction initiatives - Nine-month revenue increased by $2.4 million (16%) YoY, primarily from lighting ($1.5M increase) and environmental sciences ($0.5M increase)[106] - Gross profit margin for the nine-month period increased to 32% in 2019 from 29% in 2018 due to an increased focus on higher-margin services[109] - Nine-month operating expenses increased by 50% YoY, primarily due to an expanding workforce and a $960,053 increase in stock compensation expense[110] - Cost reduction initiatives implemented in August 2019 include reducing employees by 15 (expected savings of $1.8M), cutting marketing by $500k, and eliminating outsourced product development[115] Liquidity and Capital Resources The company needs an additional $3.5 million in funding, facing challenges in traditional banking due to the cannabis industry, and gross debt increased to $6.7 million - The company requires an aggregate of $6,000,000 in total funding and has raised approximately $2,500,000 to date, leaving a need for an additional $3,500,000[122] - The company is unable to establish traditional banking relationships for financing due to cannabis being a Schedule 1 controlled substance under federal law[123] - Net cash provided by financing activities was $3.3 million for the nine months ended Sep 30, 2019, primarily from $2.565 million in convertible debentures and a $970,000 sale of future receivables[130] - Gross debt (excluding operating leases) increased by $3.2 million to $6.7 million as of September 30, 2019, compared to year-end 2018[132] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the registrant is not required to provide market risk disclosures - As a smaller reporting company, the registrant is not required to provide the information requested under this item[136] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2019, with no material changes to internal controls - Based on an evaluation, the CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2019[139] - There were no changes in internal control over financial reporting during the period that have materially affected, or are reasonably likely to materially affect, internal controls[141] PART II. OTHER INFORMATION Legal Proceedings No material legal claims have been brought against the company, nor have any been threatened - There are no material claims brought against the company or threatened[143] Risk Factors As a smaller reporting company, urban-gro, Inc. is not required to provide risk factor information - The company is a smaller reporting company and is not required to provide risk factor information[144] Unregistered Sales of Equity Securities and Use of Proceeds The company issued 1,751,633 common shares as employee grants during the nine months ended September 30, 2019, under Section 4(a)(2) exemption - Issued 1,751,633 shares of Common Stock in the nine months ended September 30, 2019, as part of employee grants[145] Defaults Upon Senior Securities No defaults upon senior securities were reported - None[146] Other Information No other material information was reported - None[148] Exhibits This section lists filed exhibits, including CEO and CFO certifications and XBRL data files - Exhibits filed include CEO and CFO certifications (Section 302 and 906) and XBRL interactive data files[149][150]