URBAN-GRO, INC. The following discussion and analysis of our results of operations and financial condition should be read together with the financial statements and related notes and the other financial information included elsewhere in this Report. Such discussion and analysis reflects our historical results of operations 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 various factors, including those set forth under "Risk Factors" and "Cautionary Information about Forward-Looking Statements" and elsewhere in this Report. All share and per 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 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 employees' 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 CEA and Commercial sectors. In the CEA sector, our clients include operators and facilitators in both the cannabis and produce markets inthe United States ,Canada , andEurope . In the Commercial sector, we work with leading Food and Beverage CPG companies inthe United States , and clients in other commercial sectors including healthcare, higher education, and hospitality. During 2021 and 2022, we made the 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")
RESULTS OF OPERATIONS
Comparison of Results of Operations for the years ended
During the year endedDecember 31, 2022 , we generated revenues of$67.0 million compared to revenues of$62.1 million during the year endedDecember 31, 2021 , an increase of$4.9 million , or 8%. This increase in revenues is the net result of the following changes in individual revenue components:
•Construction design-build revenues increased
•Services revenue increased
•Equipment systems revenue decreased
•Other revenue decreased
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During the year ended December 31, 2022 , cost of revenues was $52.8 million
compared to $47.4 million during the year ended December 31, 2021 , an increase
of $5.47 million , or 12%. This increase is directly attributable to the increase
in revenues indicated above.
Gross profit was $14.2 million (21% of revenue) during the year ended
December 31, 2022 , compared to $14.8 million (24% of revenue) during the year
ended December 31, 2021 . Gross profit as a percentage of revenues decreased
overall due to the offsetting effects of the following: initiation of lower
margin construction design-build revenue (10% gross profit margin); margins on
equipment systems revenue, which made up 89% of total revenues in 2021 and 50%
of total revenues in 2022, declined from 24% in 2021 to 16% in 2022; and an
increase in services revenue which had a 52% gross profit margin in 2022.
Operating expenses increased by
•a$7.1 million increase in general and administrative expenses due to an increase in personnel, salaries, marketing, and travel expenses attributable to the acquisitions, investments made to service our backlog and future growth, and expansion intoEurope ;
•a one-time
•a
•a
Non-operating expense was$3.0 million for the year endedDecember 31, 2022 , compared to$0.7 million for the year endedDecember 31, 2021 , an increase of$2.3 million . This increase was primarily due to a$2.7 million expense from the impairment of the Edyza investment of$1.7 million and an impairment recorded upon settlement of a wire fraud receivable of$1.0 million , as well as a$0.4 million expense recognized from the remeasurement of contingent consideration from the 2WR acquisition. As a result of the above, we incurred a net loss of$15.3 million for the year endedDecember 31, 2022 , or a net loss per share of$1.44 , compared to a net loss of$0.9 million for the year endedDecember 31, 2021 , or a net loss per share of$0.09 . 31 --------------------------------------------------------------------------------
NON-GAAP FINANCIAL MEASURES
The Company uses the supplemental financial measure of Adjusted Earnings before
Interest, Taxes, Depreciation and Amortization ("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,
2022 2021
Net loss $ (15,277,909) $ (875,667)
Interest expense 54,579 334,056
Interest expense - beneficial conversion of notes payable - 636,075
Interest income (329,012) -
Income tax benefit (322,092) -
Depreciation and amortization 1,483,065 495,276
EBITDA $ (14,391,369) Loss on extinguishment of debt - 790,723 PPP loan forgiveness - (1,032,316) Non-recurring legal fees 352,173 126,246 One-time employee expense 819,089 125,000 Contingent consideration 436,905 - Business development 3,299,864 - Impairment loss 2,660,934 - Stock-based compensation 2,571,785 1,840,913 Transaction costs 347,317 238,495 Adjusted EBITDA$ (3,903,302) $ 2,678,801 32
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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 underU.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, 2022
CEA Commercial Total Relative Percentage
(in millions)
Equipment systems $ 5 $ - $ 5 5 %
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 .
December 31, 2021
CEA Commercial Total Relative Percentage
(in millions)
Equipment systems $ 25 $ - $ 25 83 %
Services 3 2 5 17 %
Total backlog $ 28 $ 2 $ 30 100 %
Relative percentage 93 % 7 % 100 %
Note: Percentages may not add up due to
rounding.
Historically, the majority of our Equipment Systems and Services backlog has
been retired and converted into revenue within two quarters. At December 31,
2022 , we expected approximately 60% of our Construction Design-Build backlog to
be completed in the next 12 months. At December 31, 2022 , one customer accounted
for 46% of 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 ofDecember 31, 2022 , we had working capital of$10.3 million , compared to working capital of$34.5 million as ofDecember 31, 2021 , a decrease of$24.2 million . This decrease in working capital was primarily due to a decrease in cash of$22.6 million (which is further detailed below) and the net effects of reductions in customer deposits of$10.8 million and prepaid expenses and other current assets of$7.4 million . The reductions in customer deposits and prepaid expenses and other current assets 33 -------------------------------------------------------------------------------- corresponds to a reduction in customer orders for equipment systems which is reflected in the reduction in equipment systems backlog fromDecember 31, 2021 toDecember 31, 2022 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
Operating Activities:
Net cash used in operating activities was$12.6 million during the year endedDecember 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 reduction in net operating assets and liabilities of$4.2 million . The$4.2 million reduction in net operating assets and liabilities was due to the net effects of a$10.8 million decrease in customer deposits, a$1.1 million increase in accounts payable and accrued expenses, a$8.2 million decrease in prepayments and other assets, and a$2.5 million increase in accounts receivable. Net cash used in operating activities was$1.6 million during the year endedDecember 31, 2021 . This use of cash was the net effect of the net loss of$0.9 million , offset by non-cash expenses of$2.9 million , and a decrease in net operating assets and liabilities of$3.6 million . The$3.6 million decrease in net operating assets and liabilities was due to the net effects of a$10.5 million increase in accounts receivable, an$8.1 million increase in prepayments and other assets, an$8.5 million increase in customer deposits, and a$6.5 million increase in accounts payable and accrued expenses.
Investing Activities:
Net cash used in investing activities was$4.5 million for the year endedDecember 31, 2022 . This use of cash was due to$0.6 million for the purchase of fixed assets needed for our growing workforce and$3.9 million in net cash used to acquire Emerald and DVO. We had no material commitments for capital expenditures as ofDecember 31, 2022 . Net cash used in investing activities was$8.3 million for the year endedDecember 31, 2021 . This use of cash was due to$5.5 million from the acquisition of the 2WR Entities,$2.5 million to acquire an investment in XS Financial and$0.3 million for the purchase of fixed assets.
Financing Activities:
Net cash used by financing activities was$5.5 million for the year endedDecember 31, 2022 , compared to$44.3 million cash provided by financing activities during the year endedDecember 31, 2021 . Cash used from financing activities during the year endedDecember 31, 2022 primarily relates to$4.4 million used in the repurchase of common stock and$1.0 million paid for acquisition related contingent consideration. Net cash provided by financing activities was$44.3 million for the year endedDecember 31, 2021 . This increase in cash was the net effect of$57.7 million raised from the issuance of common stock in connection with our uplisting to Nasdaq offset by repurchases of common stock of$7.7 million and repayments of debt of$5.8 million .
Material Cash Requirements:
Our material cash requirements include payments on the promissory note associated with the DVO acquisition and operating 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 our customers. In addition, theU.S. Government has responded to inflation by raising interest rates, which has increased the cost of capital for our customers. We believe this has resulted in some customers delaying projects, reducing the scope of projects or potentially canceling projects, as well as increased costs of our operations, which has negatively impacted the results of our operations during the year endedDecember 31, 2022 . 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. 34 --------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles inthe United States . The preparation of these financial statements requires us to make estimates and judgments that affect the amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates 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
Please refer to Recently Issued Accounting Pronouncements in Note 2 - Summary of Significant Accounting Policies set forth immediately following the signature page of this Report for information on new authoritative accounting guidance.
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.
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