urban-gro(UGRO) - 2020 Q4 - Annual Report

PART I Business The company provides end-to-end engineering and design solutions for the Controlled Environment Agriculture market - urban-gro is an engineering and design services company for the Controlled Environment Agriculture (CEA) market, which includes indoor facilities, vertical farms, and greenhouses[16] - The company is expanding its focus from its historical base in cannabis cultivation to the vertical farming sub-segment for crops like leafy greens, herbs, and strawberries[16][17][50] - Services are offered in three main phases: Cultivation Space Programming (CSP), Integrated Cultivation Design (ICD), and full-facility Mechanical, Electrical, and Plumbing (MEP) engineering[22][24] - The company has key strategic vendor relationships, including an exclusive two-year global System Integrator Agreement with Fluence (lighting) and a multi-year agreement with Argus (automated control systems)[37][38] Targeted Gross Profit Margins by Category | Category | Gross Profit Margin | | :--- | :--- | | Engineering design services | 30% - 60% | | Customized equipment systems | Mid-teens% - Mid-30s% | | Consumable products | High-teens% - High-20s% | - Growth strategy is based on three pillars: expanding 'Expertise as a Service', geographical expansion into Europe, and market expansion into the commercial vertical farming segment[64][65][70] Risk Factors The company faces significant risks from its history of net losses, supplier and client concentration, and cannabis industry regulations - The COVID-19 pandemic has caused project delays and could materially adversely affect business, financial condition, and operations[110][111][112] - The company has a history of net losses, including a $5.1 million loss in 2020 and an $8.3 million loss in 2019, with negative operating cash flow in both years[114][115][118] - There is a significant dependency on third-party suppliers; sales of Fluence's LED lighting systems accounted for 33% of consolidated revenue for the year ended December 31, 2020[124] - The company has high client concentration risk; in 2020, two clients represented 25% and 13% of total revenue, respectively[126] - A majority of historical revenues are from clients in the legal cannabis industry, which is illegal under U.S. federal law, posing significant financial and legal risks[82][133][142] - The company does not anticipate paying any cash dividends on its common stock in the foreseeable future, intending to retain earnings for business growth[164] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[183] Properties The company's principal place of business is a leased facility in Lafayette, Colorado - The principal place of business is a leased 10,000 sq. ft. facility in Lafayette, CO, with a monthly rent of $12,000 and a lease expiring in August 2021[184] Legal Proceedings There are no material legal proceedings involving the company - There are no material legal proceedings involving the company[185] Mine Safety Disclosures This item is not applicable to the company's business - Not applicable[186] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company listed on Nasdaq in February 2021 via a public offering and does not plan to issue dividends - Completed a public offering on February 17, 2021, selling 6,210,000 shares at $10.00 per share for gross proceeds of $62.1 million[188] - The company's common stock was listed on the Nasdaq Capital Market under the symbol 'UGRO' in connection with the February 2021 offering[188] - The company has never paid dividends and does not anticipate paying them in the foreseeable future, retaining earnings for business development[194] - As of March 26, 2021, there were 6,846 holders of record for the Common Stock[193] Selected Financial Data As a smaller reporting company, this information is not required - The company is not required to provide this information as it qualifies as a smaller reporting company[198] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue grew 7% in 2020, but a shift to lower-margin equipment sales caused a net loss of $5.1 million Comparison of Operations (2020 vs. 2019) | Metric | 2020 | 2019 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $25.8M | $24.2M | +$1.6M | +7% | | Gross Profit | $5.7M | $6.6M | -$0.9M | -14% | | Gross Margin | 22% | 27% | -5 p.p. | - | | Operating Expenses | $8.5M | $12.5M | -$4.0M | -32% | | Net Loss | ($5.1M) | ($8.4M) | +$3.3M | -39% | | Net Loss Per Share | ($1.06) | ($1.90) | +$0.84 | - | - The decrease in gross profit margin was due to a revenue mix shift toward lower-margin equipment systems sales and away from higher-margin services revenue[210][211] Adjusted EBITDA Reconciliation (Non-GAAP) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net Loss | ($5,073,695) | ($8,350,573) | | Adjusted EBITDA | ($652,091) | ($3,277,577) | - As of Dec 31, 2020, the company had a working capital deficit of $9.3 million, but management believes the February 2021 IPO alleviated going concern doubts[220] Cash Flow Summary | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($3.6M) | ($2.5M) | | Net Cash Used in Investing Activities | ($0.2M) | ($2.9M) | | Net Cash Provided by Financing Activities | $3.5M | $2.9M | Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, this information is not required - The company is not required to provide this information as it qualifies as a smaller reporting company[238] Financial Statements and Supplementary Data The required financial statements and supplementary data are included following the signature page of the report - The financial statements required by this item are set forth following the signature page of the report[239] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no disagreements with its accountants - None reported[240] Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective as of year-end 2020 - Management concluded that disclosure controls and procedures were effective as of December 31, 2020[242] - Management assessed internal control over financial reporting as effective as of December 31, 2020, based on the COSO framework[247] - No material changes in internal control over financial reporting occurred during the fiscal year ended December 31, 2020[244] Other Information The company reports no other information for this item - None[249] PART III Directors, Executive Officers, Corporate Governance, Compensation, and Related Party Transactions Required information is incorporated by reference from the company's forthcoming 2021 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 within 120 days after fiscal year-end[251][252][253] PART IV Exhibits, Financial Statement Schedules This section provides an index of all exhibits filed as part of the Form 10-K - A list of financial statements is set forth on page F-1; financial statement schedules are omitted as they are not required or applicable[257] - The Exhibit Index lists all filed documents, including corporate governance documents, material contracts, and SEC certifications[258][259][260] Financial Statements Consolidated Financial Statements The company's 2020 financials show a net loss of $5.1 million and a stockholders' deficit of $7.4 million Consolidated Balance Sheet Summary (As of Dec 31) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Total Current Assets | $5.2M | $4.0M | | Total Assets | $8.2M | $7.4M | | Total Current Liabilities | $14.5M | $12.3M | | Total Liabilities | $15.6M | $12.4M | | Total Stockholders' Deficit | ($7.4M) | ($5.0M) | Consolidated Statement of Operations Summary (Year Ended Dec 31) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Total Revenue | $25.8M | $24.2M | | Gross Profit | $5.7M | $6.6M | | Loss from Operations | ($2.7M) | ($5.9M) | | Net Loss | ($5.1M) | ($8.4M) | | Net Loss Per Share | ($1.06) | ($1.90) | Consolidated Statement of Cash Flows Summary (Year Ended Dec 31) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Cash from Operating Activities | ($3.6M) | ($2.5M) | | Cash from Investing Activities | ($0.2M) | ($1.1M) | | Cash from Financing Activities | $3.5M | $2.9M | | Net (Decrease) in Cash | ($0.3M) | ($0.7M) | | Cash at End of Period | $0.2M | $0.4M | Notes to Consolidated Financial Statements The notes detail significant concentration risks, related-party transactions, and the impact of the 2021 IPO - The February 2021 IPO, which raised gross proceeds of $62.1 million, alleviated conditions that had previously raised substantial doubt about the company's ability to continue as a going concern[294][391] - The company has significant related-party transactions, including a $1 million note payable to an entity owned by a director, which was converted into a bridge financing note[334][338] - In February 2020, the company entered into a credit agreement for a C$2.7M term loan and a C$5.4M revolving facility, which was fully repaid post-IPO in February 2021[353][360] - Significant concentration risk exists; for 2020, two customers represented 38% of total revenue and one vendor accounted for 33% of total purchases[366][367] - As of December 31, 2020, the company had approximately $11.4 million of U.S. federal net operating loss (NOL) carryforwards to offset future taxable income[386][392]