10-K/A: Urban-Gro Restates Financials, Reports \$25.4 Million Net Loss for 2023

Urban-Gro restates its financial statements for 2022 and 2023 due to accounting errors, reporting a \$25.4 million net loss for 2023 compared to a \$15.3 million net loss in 2022.

Summary

• Urban-Gro has restated its consolidated financial statements for the years ended December 31, 2023 and 2022, due to accounting errors related to deferred tax liabilities and other issues discovered during a re-audit.
• The company dismissed its previous independent registered public accounting firm, BF Borgers CPA PC, and appointed Sadler, Gibb & Associates, LLC as its new independent public accounting firm.
• For the year ended December 31, 2023, Urban-Gro generated revenues of \$69.9 million and incurred a net loss of \$25.4 million, or a net loss per share of \$2.34.
• This compares to revenues of \$66.3 million and a net loss of \$15.3 million, or a net loss per share of \$1.41, for the year ended December 31, 2022.
• The increase in revenue was primarily driven by a \$25.5 million increase in construction design-build revenues, offset by decreases in equipment systems and services revenue.
• Operating expenses increased by \$6.1 million to \$33.2 million for 2023, including goodwill and intangible asset impairments of \$6.2 million.
• As of December 31, 2023, the company had negative working capital of \$5.1 million and cash of \$1.1 million.
• The company has identified material weaknesses in its internal control over financial reporting and is undertaking remedial measures.
• Urban-Gro entered into a \$2.1 million term loan with Grow Hill, LLC on October 1, 2024, and amended its agreement with Bancroft Capital, LLC on October 2, 2024.
• The company settled a lawsuit with Robert Pullar on January 31, 2025, for \$250,000 and a warrant to purchase 75,000 shares of common stock.

Sentiment

Score: 3

Explanation: The sentiment is negative due to the restatement of financials, increased net loss, and material weaknesses in internal controls. However, there are some positives such as revenue growth and efforts to improve liquidity.

Positives

• Revenue increased by 5% from 2022 to 2023, driven by growth in construction design-build revenues.
• The company is taking steps to strengthen its liquidity by decreasing headcount and operating expenses.
• A new line of credit was established to assist with cash management.
• The company is working to remediate material weaknesses in internal controls.
• The company is expanding into the Commercial sector.

Negatives

• The company experienced a significant net loss of \$25.4 million in 2023.
• There was a decrease in higher margin equipment systems and services revenue.
• Operating expenses increased significantly due to impairments and legal fees.
• The company had negative working capital of \$5.1 million as of December 31, 2023.
• Material weaknesses were identified in internal control over financial reporting.
• The company had to restate previously issued financial statements.

Risks

• The company has a limited operating history and a history of losses, resulting in uncertainty about its prospects.
• The company may need to raise additional funds through the issuance of equity or debt securities.
• The company operates in emerging industries that may be subject to quickly changing and inconsistent laws and regulations.
• The company faces intense competition in the various sectors in which it operates.
• The company depends on third-party suppliers for the equipment solutions that it sells.
• The company has historically depended on a small number of clients for a substantial portion of its revenue.
• The company's business depends on its clients obtaining appropriate licenses from various licensing agencies.
• System security risks, data protection breaches, and cyber-attacks could disrupt the company's internal operations or services provided to clients.
• The company may be forced to litigate to defend its intellectual property rights.
• The company may not be able to successfully identify, consummate, or integrate acquisitions.
• The company's stock price could be extremely volatile.
• Shareholders may be diluted by future issuances of preferred stock or additional common stock.
• The company does not anticipate paying any cash dividends on its common stock in the foreseeable future.
• The company has identified material weaknesses in its internal control over financial reporting.
• The company is highly dependent on its management team, and the loss of its executive officers or other key employees could harm its ability to implement its strategies.
• The company's insurance may not adequately cover its operating risk.
• The company may be exposed to currency fluctuations.
• Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could significantly affect the company's financial results.
• The company's ability to maintain its reputation is critical to the success of its business, and the failure to do so may materially adversely affect its business and the value of its common stock.
• Increased attention to climate change and ESG matters may adversely impact the company's business.
• The current political climate and military actions in Eastern Europe could result in disruption to the company's operations.
• Failure to retain the company's existing workforce and to attract qualified new personnel in the current labor market could adversely affect its business and results of operations.

Future Outlook

The company is focused on controlling operating expenses and becoming cash flow positive, while also broadening its market reach beyond the legal cannabis industry into the non-cannabis CEA vertical farming sector and the Commercial sector.

Industry Context

The company operates in the CEA and Commercial sectors, providing services and solutions to customers in the cannabis, produce, food and beverage, and other commercial industries. The legal cannabis industry is an emerging industry with evolving regulations, while the non-cannabis CEA vertical farming sector is rapidly growing.

Comparison to Industry Standards

• It is difficult to provide a direct comparison to industry standards without specific details on comparable companies and projects.
• However, the company's financial performance can be assessed against industry benchmarks for revenue growth, gross margins, and operating expenses for companies in the professional services, design-build, and equipment solutions sectors.
• For example, companies like AECOM, Jacobs Engineering Group, and Tetra Tech in the engineering and construction industry could be considered for benchmarking purposes, focusing on their revenue growth and margin performance.
• In the CEA space, comparing against companies like AppHarvest or Local Bounti could provide insights, though these companies have different business models.

Corporate Governance

Legal Proceedings

• On August 11, 2023, the Company entered into a settlement agreement with Crest Ventures, LLC and Andrew Telsey to settle all claims in the litigation filed in the District Court for Arapahoe County, Colorado, Case No. 2021CV31301.
• On Friday, January 31, 2025, the parties entered a settlement agreement, without any admission of liability or wrongdoing, to settle all claims associated with the litigation in exchange for a cash payment by the Company to Pullar of \$250,000 and an issuance of a warrant to purchase up to 75,000 shares of common stock with an exercise price per share of \$1.00.

Related Party Transactions

• A director of the company is an owner of Cloud 9 Support, LLC (Cloud 9) and Potco LLC (Potco).
• Another director of the company is working on a vertical farming innovation model with a group of CEA experts (the CEA Consortium).

Stakeholder Impact

• Shareholders: Restatement of financials and increased net loss may negatively impact shareholder value.
• Employees: Cost-cutting measures and potential restructuring may impact employees.
• Customers: Focus on improving services and solutions may benefit customers.
• Suppliers: Potential changes in sourcing strategies may impact suppliers.
• Creditors: Debt obligations and financial performance may impact creditors.

Next Steps

• The company is undertaking remedial measures to address material weaknesses in internal control over financial reporting.
• The company will continue to focus on controlling operating expenses and becoming cash flow positive.
• The company will continue to broaden its market reach beyond the legal cannabis industry.
• The company will continue to work with the vendor to resolve the original defective lighting issue, including, claims for reimbursement of the expense.

Key Dates

Keywords

financial restatement, net loss, revenue, goodwill impairment, internal control, liquidity, debt, acquisitions, legal cannabis, CEA, urban-gro, UGRO