10-Q/A: Urban-Gro Restates Q1 2024 Financials Due to Accounting Errors, Reports Net Loss

Urban-Gro, Inc. restated its Q1 2024 financials due to accounting errors related to deferred tax liabilities, reporting a net loss of $2.56 million.

Summary

• Urban-Gro, Inc. has restated its previously issued consolidated financial statements for the three months ended March 31, 2024, due to accounting errors discovered during a re-audit of its 2023 financial statements.
• The errors primarily relate to deferred tax liabilities associated with historical share-purchase acquisitions.
• The company's previous accounting firm, BF Borgers CPA PC, was dismissed following SEC proceedings, and Sadler, Gibb & Associates, LLC was appointed as the new independent public accounting firm.
• The restated financials show a net loss of $2.56 million for the three months ended March 31, 2024, compared to a net loss of $5.25 million for the same period in 2023.
• Revenue for the quarter was $15.4 million, a decrease of 8% compared to $16.8 million in the prior year.
• The company's management has concluded that the company's disclosure controls and procedures for the affected period were not effective because of material weaknesses in its internal controls over financial reporting.
• The company is implementing remediation plans to address the material weaknesses in internal control over financial reporting.
• As of February 18, 2025, the number of outstanding shares of the registrant's common stock was 12,696,557.

Sentiment

Score: 4

Explanation: The sentiment is neutral to slightly negative. While the company has reduced its net loss and operating expenses, the restatement of financials, revenue decline, and existing material weaknesses in internal control over financial reporting are concerning. The potential need for a capital raise also adds uncertainty.

Positives

• The net loss decreased from $5.25 million in Q1 2023 to $2.56 million in Q1 2024.
• Operating expenses decreased by $2.6 million, or approximately 32%, to $5.5 million for the three months ended March 31, 2024 compared to $8.1 million for the three months ended March 31, 2023.
• Gross profit as a percentage of revenues increased due to improved margins in Services and Construction design-build revenues.
• Net cash provided by operating activities was $0.6 million.

Negatives

• The company restated its Q1 2024 financials due to accounting errors.
• Revenue decreased by 8% to $15.4 million from $16.8 million in the same period last year.
• The company reported a net loss of $2.56 million for Q1 2024.
• The company's management concluded that the company's disclosure controls and procedures for the affected period were not effective because of material weaknesses in its internal controls over financial reporting.
• As of March 31, 2024, the company had negative working capital of $6.6 million.
• As of March 31, 2024, the company had cash of $0.6 million.

Risks

• The company has produced multiple consecutive years of net losses and negative cash flows, raising substantial doubt about its ability to continue as a going concern.
• The company's disclosure controls and procedures were not effective as of March 31, 2024 because of the material weaknesses in its internal control over financial reporting.
• The company faces risks related to its operating strategy, competition, and ability to predict and respond to new laws and regulations.
• Unfavorable economic conditions, increases in interest rates, and restrictive financing markets may cause customers to cancel contracts or decrease sales.
• The company faces risks associated with concentration of a large portion of its business from a relatively small number of key clients/customers and the effect a loss of a key client/customer could have on our business.
• The company faces risks associated with customers or suppliers not fulfilling contracts.
• The company faces risks associated with reliance on key suppliers and risks such suppliers could change incentive programs that negatively affect our returns.
• The impact of inflation on costs of labor, raw materials and other items that are critical to our business.

Future Outlook

The company has recently taken actions to strengthen its liquidity, including decreasing headcount and operating expenses to expedite the Company's path to cash flow positive results. If necessary, the Company will seek to raise capital by issuing additional equity shares either through a private placement or on the open market. The Company may also seek to obtain additional debt financing for which there can be no guarantee. Management has concluded that these recent positive steps alleviate any substantial doubt about the Company's ability to continue its operations, and meet its financial obligations, for twelve moths from the date these consolidated financial statements are issued.

Management Comments

• Management intends to continue maintaining a full valuation allowance on the Company's deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.

Industry Context

Urban-Gro operates in the Controlled Environment Agriculture (CEA) sector, which is subject to evolving regulations and market conditions. The company's performance is influenced by the level of capital spending by CEA operators, particularly in the cannabis and produce markets. The company also serves the commercial sector, including food and beverage companies, healthcare, higher education, and hospitality.

Comparison to Industry Standards

• It is difficult to compare Urban-Gro's results directly to industry standards without specific data on competitors.
• However, the company's focus on integrated professional services and design-build solutions is a common approach in the CEA sector.
• Companies like Hydrofarm and Scotts Miracle-Gro also operate in the broader controlled environment agriculture market, but their business models and product offerings differ from Urban-Gro's.
• The restatement of financial statements due to accounting errors is a serious issue that can negatively impact investor confidence and potentially lead to regulatory scrutiny, as seen with other companies facing similar situations.

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 may be concerned about the restatement of financials and the material weaknesses in internal control over financial reporting.
• Employees may be affected by the company's cost-cutting measures, including headcount reductions.
• Customers may be impacted by the company's ability to deliver projects on time and within budget.
• Suppliers may be affected by the company's financial performance and ability to pay its obligations.

Next Steps

• The company is implementing remediation plans to address the material weaknesses in internal control over financial reporting.
• The company will continue to monitor market conditions and adjust its operating strategy as needed.
• The company will seek to raise capital if necessary to support its operations and growth.

Key Dates