urban-gro(US:UGRO)2024-03-28 13:00Part I Business 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 sectors15 - 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 fields1885 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 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 Europe5964 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 status7172 - The Rohrabacher-Farr amendment, preventing DOJ interference with state medical cannabis laws since 2014, requires annual re-authorization which is not guaranteed76 Human Capital 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 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 FY202291 - Significant client concentration risk exists, with two clients accounting for 43% of total revenue in 2023 and three clients representing 40% in 2022100 - 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 prohibition107108 Cybersecurity 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 2.0165168 - In 2019, the company was a victim of a wire fraud scheme, which prompted the implementation of multi-factor authentication (MFA) across all systems171 Legal Proceedings 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 2023174 - Settled a lawsuit against Sunflower Bank related to fraudulent wire transfers, receiving $2.4 million in settlement proceeds on March 27, 2023174 - 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 damages173 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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 future180 - 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, 2023185 Management's Discussion and Analysis of Financial Condition and Results of Operations 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 million204205 - 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-end206 Controls and Procedures 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, 2023224 - Management assessed the effectiveness of internal control over financial reporting using the COSO framework (2013) and concluded it was effective as of December 31, 2023230 Part III Directors, Executive Officers, Corporate Governance, Compensation, Security Ownership, and Related Transactions 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 SEC236237238 Part IV Exhibits, Financial Statement Schedules 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 policy243246 Financial Statements Consolidated Financial Statements 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 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 2023363365 - The company fully impaired its $1.7 million investment in Edyza, Inc. during the third quarter of 2022346