10-Q 1 ugro-20230930.htm 10-Q ugro-20230930
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission File Number: 001-39933
URBAN-GRO, INC.
(Exact name of registrant as specified in its charter)
Delaware46-5158469
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
1751 Panorama Point, Unit G
Lafayette, CO
80026
(720) 390-3880
(Address of principal executive offices)(Zip Code)(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par valueUGRO
NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated fileroAccelerated filero
Non-accelerated filerxSmaller reporting companyx
Emerging growth companyx
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the registrant’s only class of common stock outstanding as of October 26, 2023 was 11,670,580 shares.



TABLE OF CONTENTS

Item No.Page No.
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CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements related to future events, challenges we may face, business strategy, future performance, future operations, backlog, financial position, estimated or projected revenues and losses, projected costs, prospects, plans and objectives of management. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as “seek,” “anticipate,” “continue,” “estimate,” “expect,” “may,” “will,” “project,” “predict,” “potential,” “intend,” “could,” “should,” “believe,” and variations of such words or their negative and similar expressions. Forward-looking statements should not be read as a guarantee of future performance or results, and may not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on management’s belief, based on currently available information, as to the outcome and timing of future events. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those expressed in such forward-looking statements. When evaluating forward-looking statements, you should consider the risk factors and other cautionary statements described in this Quarterly Report on Form 10-Q and under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. We believe the expectations reflected in the forward-looking statements contained in this report are reasonable, but no assurance can be given that these expectations will prove to be correct. Forward-looking statements should not be unduly relied upon. Important factors that could cause actual results or events to differ materially from those expressed in forward-looking statements include, but are not limited to:
risks related to our operating strategy;
competition for projects in our markets;
our ability to predict and respond to new laws and governmental regulatory actions affecting our business, including foreign laws and governmental regulation;
risks related to delays in the grant of necessary licenses to clients and delays in passage of legislation expected to benefit our clients, which could delay the funding and start of projects;
our ability to successfully develop new and/or enhancements to our product offerings and develop a product mix to meet demand;
our ability to meet or exceed market expectations from analysts;
unfavorable economic conditions, increases in interest rates and restrictive financing markets that may cause customers to cancel contracts reflected in our backlog or cause sales to decrease;
our ability to successfully identify, manage and integrate acquisitions;
our ability to accurately estimate the overall risks, requirements or costs when we bid on or negotiate contracts that are ultimately awarded to us;
climate change and related laws and regulations;
our ability to manage our supply chain in a manner that ensures that we are able to obtain adequate raw materials, equipment and essential supplies in a timely manner and at favorable prices;
our ability to attract and retain key personnel;
risks associated with concentration of a large portion of our 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;
risks associated with customers or suppliers not fulfilling contracts;
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;
property damage and other claims and insurance coverage issues;
3


the outcome of litigation or disputes;
risks related to our information technology systems and infrastructure, including cybersecurity incidents;
risks to our reputation from negative publicity, social media posts or negative interpretations of our Environmental, Social and Governance (ESG) efforts;
our ability to maintain effective internal control over financial reporting; and
other events outside of our control.
These factors are not necessarily all of the important factors that could cause actual results or events to differ materially from those expressed in the forward-looking statements. Other unknown or unpredictable factors could also cause actual results or events to differ materially from those expressed in the forward-looking statements. Our future results will depend upon various other risks and uncertainties, including those described in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date on which any such statement is made, whether as a result of new information, future events or otherwise, except as required by law. You are advised, however, to consult any future disclosures we make on related subjects in future reports to the Securities and Exchange Commission (SEC).
4


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
URBAN-GRO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
September 30, 2023December 31, 2022
ASSETS
Current assets:
Cash$4,770,430 $12,008,003 
Accounts receivable, net18,341,489 15,380,292 
Contract receivables8,378,657 3,004,282 
Prepaid expenses and other assets3,268,279 4,164,960 
Total current assets34,758,855 34,557,537 
Non-current assets:
Property and equipment, net1,456,009 1,307,146 
Operating lease right of use assets, net2,217,738 2,618,825 
Investments 2,559,307 
Goodwill15,572,050 15,572,050 
Intangible assets, net4,634,672 5,450,687 
Total non-current assets23,880,469 27,508,015 
Total assets$58,639,324 $62,065,552 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable$22,194,304 $9,960,364 
Accrued expenses4,074,098 3,196,961 
Contract liabilities1,981,728 1,294,452 
Customer deposits969,888 2,571,161 
Contingent consideration161,947 2,799,287 
Promissory notes1,964,775 3,832,682 
Operating lease liabilities598,447 600,816 
Total current liabilities31,945,187 24,255,723 
Non-current liabilities:
Operating lease liabilities1,666,138 2,044,782 
Deferred tax liability865,802 1,033,283 
Total non-current liabilities2,531,940 3,078,065 
Total liabilities34,477,127 27,333,788 
Commitments and contingencies (note 10)
Stockholders’ equity
Preferred stock, $0.10 par value; 3,000,000 shares and 10,000,000 shares authorized as of September 30, 2023, and December 31, 2022, respectively; 0 shares issued and outstanding
  
Common stock, $0.001 par value; 30,000,000 shares and 100,000,000 shares authorized as of September 30, 2023, and December 31, 2022, respectively; 13,120,413 shares issued and 11,670,580 shares outstanding as of September 30, 2023; 12,220,593 shares issued and 10,770,760 shares outstanding as of December 31, 2022
13,120 12,221 
Additional paid-in capital88,268,286 84,882,982 
Treasury shares, cost basis: 1,449,833 shares at September 30, 2023 and at December 31, 2022
(12,045,542)(12,045,542)
Accumulated deficit(52,073,667)(38,117,897)
5


Total stockholders’ equity24,162,197 34,731,764 
Total liabilities and stockholders’ equity$58,639,324 $62,065,552 
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements
6


URBAN-GRO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023202220232022
Revenues:
Equipment systems$3,043,659 $3,879,272 $10,575,367 $31,024,187 
Services2,898,739 2,839,338 9,403,968 9,505,396 
Construction design-build14,813,486 5,384,267 36,068,435 8,301,588 
Other178,439 265,416 489,482 871,488 
Total revenues and other income20,934,323 12,368,293 56,537,252 49,702,659 
Cost of revenues:
Equipment systems2,766,116 3,212,285 9,287,704 26,132,828 
Services1,768,164 1,796,968 5,715,548 4,677,887 
Construction design-build13,413,067 4,570,506 32,605,681 7,263,206 
Other130,258 195,938 355,121 632,181 
Total cost of revenues18,077,605 9,775,697 47,964,054 38,706,102 
Gross profit2,856,718 2,592,596 8,573,198 10,996,557 
Operating expenses:
General and administrative5,000,846 5,792,418 17,974,049 14,758,506 
Stock-based compensation722,647 96,767 1,824,835 1,860,767 
Intangible asset amortization241,832 304,339 816,015 773,063 
Business development 3,299,864  3,299,864 
Total operating expenses5,965,325 9,493,388 20,614,899 20,692,200 
Loss from operations(3,108,607)(6,900,792)(12,041,701)(9,695,643)
Non-operating income (expense):
Interest expense(39,928)(7,088)(158,134)(22,270)
Interest income19,461 94,200 167,652 221,329 
Write-down of investment(258,492)(1,710,358)(258,492)(1,710,358)
Contingent consideration  (160,232) 
Loss on settlement  (1,500,000) 
Other income (expense)(28,605)(210,399)(172,344)(147,528)
Total non-operating income (expense)(307,564)(1,833,645)(2,081,550)(1,658,827)
Loss before income taxes(3,416,171)(8,734,437)(14,123,251)(11,354,470)
Income tax benefit48,383 73,654 167,481 258,166 
Net loss$(3,367,788)$(8,660,783)$(13,955,770)$(11,096,304)
Comprehensive loss$(3,367,788)$(8,660,783)$(13,955,770)$(11,096,304)
Loss per share - basic and diluted$(0.29)$(0.81)$(1.29)$(1.05)
Weighted average shares - basic and diluted11,649,79010,674,79610,859,82010,577,453
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements
7


URBAN-GRO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Treasury
Stock
Total
Stockholders’
Equity
SharesAmount
Balance, December 31, 202212,220,593$12,221 $84,882,982 $(38,117,897)$(12,045,542)$34,731,764 
Stock-based compensation— 479,641 — — 479,641 
Stock grant program vesting103,572103 (103)— —  
Stock issued for contingent consideration64,22464 191,855 — — 191,919 
Net loss— — (5,144,649)— (5,144,649)
Balance, March 31, 202312,388,389$12,388 $85,554,375 $(43,262,546)$(12,045,542)$30,258,675 
Stock-based compensation— 622,547 — — 622,547 
Stock grant program vesting86,02086 (86)— —  
Stock issued for contingent consideration582,000582 1,292,101 — — 1,292,683 
Net loss— — (5,443,333)— (5,443,333)
Balance, June 30, 202313,056,409$13,056 $87,468,937 $(48,705,879)$(12,045,542)$26,730,572 
Stock-based compensation— — 722,647 — — 722,647
Stock grant program vesting8,7729(9)— — 
Stock issued for contingent consideration55,2325576,711— — 76,766
Net loss— — — (3,367,788)— (3,367,788)
Balance, September 30, 202313,120,413$13,120 $88,268,286 $(52,073,667)$(12,045,542)$24,162,197 
Common StockAdditional
Paid-in
Capital
Accumulated
Deficit
Treasury
Stock
Total
Stockholders’
Equity
SharesAmount
Balance, December 31, 202111,588,110$11,588 $78,679,220 $(22,839,988)$(7,683,490)$48,167,330 
Stock-based compensation— 882,000 — — 882,000 
Treasury stock— — — (3,773,177)(3,773,177)
Stock exercised4,5555 28,792 — — 28,797 
Stock issued with exercise of warrants34,86335 (35)— —  
Net Loss— — (696,217)— (696,217)
Balance, March 31, 202211,627,528$11,628 $79,589,977 $(23,536,205)$(11,456,667)$44,608,733 
Stock-based compensation882,000882,000 
Stock issuance related to acquisition283,5152832,499,7172,500,000 
Net Loss(1,739,304)(1,739,304)
Balance, June 30, 202211,911,043$11,911 $82,971,694 $(25,275,509)$(11,456,667)$46,251,429 
Stock-based compensation— — 96,767 — — 96,767 
Treasury stock— — — — (183,270))(183,270)
Stock grant program vesting37,675 38 (38)— —  
Net loss— — — (8,660,783))— (8,660,783)
Balance, September 30, 202211,948,718$11,949 $83,068,423 $(33,936,292)$(11,639,937)$37,504,143 
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements
8


URBAN-GRO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended September 30,
20232022
Cash flows from operating activities:
Net loss$(13,955,770)(11,096,304)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization1,201,201 1,116,585 
Deferred income tax benefit(167,481)(258,166)
Stock-based compensation expense1,824,835 1,860,767 
Impairment of investment258,492 1,710,358 
Change in fair value of contingent consideration160,232  
Other, net561,518 (42,373)
Changes in operating assets and liabilities (net of acquired amounts):
Accounts receivable and contract receivables(8,782,141)2,222,194 
Prepaid expenses and other assets and property and equipment1,498,518 7,150,147 
Accounts payable, contract liabilities, and accrued expenses13,927,217 (97,142)
Change in contingent consideration from indemnification(917,699) 
Operating lease liability(529,746)(139,251)
Customer deposits(1,601,273)(11,415,622)
Net cash used in operating activities(6,522,097)(8,988,807)
Cash flows from investing activities:
Sale of investment2,326,472  
Business combinations, net of cash acquired (2,709,148)
Purchases of property and equipment(456,484)(252,902)
Net cash provided by (used in) investing activities1,869,988 (2,962,050)
Cash flows from financing activities:
Proceeds from issuance of common stock 28,796 
Repurchase of common stock (3,956,447)
Additions to promissory notes518,400  
Repayment of finance lease ROU liability(133,388)(108,500)
Payments to settle contingent consideration(479,365) 
Repayment of promissory notes(2,491,111) 
Net cash used in financing activities(2,585,464)(4,036,151)
Net change in cash(7,237,573)(15,987,008)
Cash at beginning of period12,008,003 34,592,190 
Cash at end of period$4,770,430 $18,605,182 
Supplemental cash flow information:
Cash paid for interest$21,334 $22,271 
Net cash paid for income taxes$165,228 $ 
Supplemental disclosure of non-cash investing and financing activities:
Stock issued for acquisitions$ $2,500,000 
Operating lease right of use assets and liabilities extension$295,631 $542,903 
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements
9


URBAN-GRO, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION, ACQUISITIONS, AND LIQUIDITY
Organization
urban-gro, Inc. (“we,” “us,” “our,” the “Company,” or “urban-gro”) is an integrated professional services and design-build firm. We offer value-added architectural, engineering, and construction management solutions to the Controlled Environment Agriculture (“CEA”), industrial, healthcare, and other commercial sectors. Innovation, collaboration, and a commitment to sustainability drive our team to provide exceptional customer experiences. To serve our horticulture clients, we engineer, design and manage the construction of indoor CEA facilities and then integrate complex environmental equipment systems into those facilities. Through this work, we create high-performance indoor cultivation facilities for our clients to grow specialty crops, including leafy greens, vegetables, herbs, and plant-based medicines. Our custom-tailored approach to design, construction, procurement, and equipment integration provides a single point of accountability across all aspects of indoor growing operations. We also help our clients achieve operational efficiency and economic advantages through a full spectrum of professional services and programs focused on facility optimization and environmental health. Further, we serve a broad range of commercial and governmental entities, providing them with planning, consulting, architectural, engineering and construction design-build services for their facilities. We aim to work with our clients from the inception of their project in a way that provides value throughout the life of their facility. We are a trusted partner and advisor to our clients and offer a complete set of engineering and managed services complemented by a vetted suite of select cultivation equipment systems.
Acquisitions
DVO
Effective October 31, 2022, the Company entered into an agreement with Dawson Van Orden, Inc. ("Seller" or "DVO") and DVO's shareholders (the "DVO Shareholders") to acquire substantially all of the operating assets and liabilities of DVO, a Texas based engineering firm with significant experience in indoor CEA. The purchase price of $6.1 million, after working capital adjustments, was comprised of (i) $1.2 million in cash, (ii) a $3.8 million Seller's promissory note, and (iii) $1.1 million of the Company's common stock. The Seller's promissory note was initially to be paid out over four quarters beginning in January 2023. In the third quarter of 2023, a portion of that quarter’s note payment was extended to the first quarter of 2024. The Seller’s promissory note balances as of September 30, 2023, and December 31, 2022, were $1,446,375 and $3,832,682, respectively. The purchase price excludes up to $1.1 million of contingent consideration earnout that may become payable to the Seller dependent on the continued employment of the DVO Shareholders. The contingent consideration earnout is payable, at the Company’s discretion, in cash or shares of the Company’s common stock with the value of such shares being determined based upon the volume-weighted average price ("VWAP") of the Company’s common stock in the ten trading days prior to the end of the applicable quarter for which the quarterly gross profit is calculated.
The Company accounted for the acquisition as follows:
Purchase price$6,072,366 
Allocation of purchase price:
Accounts receivable, net$1,134,909 
Right of use asset$1,197,310 
Property and equipment$229,058 
Goodwill$3,444,926 
Intangible assets$1,276,000 
Accrued expenses$(12,527)
Right of use liability$(1,197,310)
Pro-forma disclosure of the DVO acquisition is not required as the historical results of DVO were not material to the Company's consolidated financial statements. Acquired goodwill from DVO represents the value expected to arise from organic growth and an opportunity to expand into a well-established market for the Company.
10


Emerald
Effective April 29, 2022, the Company acquired all of the issued and outstanding capital stock of Emerald Construction Management, Inc. (“Emerald”) from its shareholders (the “Emerald Sellers”). The purchase price of $7.7 million, after working capital adjustments, was comprised of (i) $3.4 million in cash, (ii) $2.5 million of the Company’s common stock, and (iii) $1.8 million of estimated contingent consideration earnout payable to the Emerald Sellers over the term of the earnout. The total contingent earnout payable to the Emerald Sellers is $2.0 million. Effective January 1, 2023, the terms of the contingent consideration earnout provisions were amended providing for the entire contingent consideration of up to $2.0 million to be earned based solely on the continued employment of the Emerald Sellers for a two-year period. This resulted in the Company recording additional contingent consideration expense of $160,232 in the first quarter of 2023. Per the amendment, the remaining contingent consideration earnout is payable quarterly, at the Company’s discretion, in cash or in shares of the Company’s common stock with the value of such shares being determined based upon the VWAP of the Company’s common stock in the ten trading days prior to the end of the applicable quarter.

The Company accounted for the acquisition as follows:
Purchase Price$7,671,557 
Allocation of Purchase Price:
Cash$622,641 
Accounts receivable, net$2,666,811 
Contract receivables$494,456 
Prepayments and other assets$38,086 
Property and equipment$403,008 
Right of use asset$82,408 
Goodwill$4,135,006 
Intangible assets$3,659,000 
Accrued expenses$(2,361,302)
Contract liabilities$(1,071,399)
Right of use liability$(82,408)
Deferred tax liability$(914,750)
The following pro-forma amounts reflect the Company’s results as if the acquisition of Emerald had occurred on January 1, 2022. These pro-forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results of the acquisition to reflect the additional amortization of intangibles.
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023202220232022
Revenues:
Equipment systems$3,043,659 $3,879,272 $10,575,367 $31,024,187 
Services2,898,739 2,839,338 9,403,968 9,505,396 
Construction design-build14,813,486 5,384,267 36,068,435 19,983,037 
Other178,439 265,416 489,482 871,488 
Total revenues and other income20,934,323 12,368,293 56,537,252 61,384,108 
Net loss$(3,367,788)$(11,893,644)$(13,955,770)$(13,443,932)
Acquired goodwill from Emerald represents the value expected to arise from organic growth and an opportunity for the Company to expand into a well-established market.
11


Per the Emerald Acquisition Agreement and Plan of Merger (the “Emerald Acquisition Agreement”), when the Company acquired all of the issued and outstanding capital stock of Emerald, the Emerald Sellers indemnified the Company for any material liabilities, losses, and actions or inaction which took place prior to the acquisition and that were not disclosed as part of the transaction. To that end, a pre-acquisition Emerald project incurred a substantial loss that was not disclosed in the Emerald Acquisition Agreement. The majority shareholder of Emerald has agreed to indemnify the Company for the loss, which is currently estimated to be $2.3 million (the “Indemnified Loss”). In the second quarter of 2023, the Company offset $1.0 million of the Indemnified Loss against the total remaining contingent consideration and certain other liabilities owed to the majority shareholder of Emerald thereby resulting in a net amount due from the majority shareholder of Emerald to $1.3 million. Further, the Company has agreed to satisfy up to $1.2 million of the Indemnified Loss in the event a certain Emerald project is above a 7% profit margin, on a dollar for dollar basis.
Liquidity and Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements are available to be issued.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Condensed Consolidated Financial Statements
The Company has prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the SEC for condensed financial reporting. The condensed consolidated financial statements are unaudited and, in the Company’s opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of the Company’s condensed consolidated balance sheets, condensed consolidated statements of operations and comprehensive loss, condensed consolidated statements of stockholders’ equity and condensed consolidated statements of cash flows for the periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted in accordance with regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Significant Accounting Policies
For a detailed discussion about the Company’s significant accounting policies, refer to Note 2 — Summary of Significant Accounting Policies, in the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. During the nine months ended September 30, 2023, there were no material changes made to the Company’s significant accounting policies.
Use of Estimates
In preparing condensed consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of assets and liabilities at the date of the condensed consolidated financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates. Significant estimates include estimated revenues earned under construction design-build contracts; estimated useful lives and potential impairment of long-lived assets, intangibles and goodwill; inventory write-offs; allowance for deferred tax assets; and allowance for bad debt.
Reclassification
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
Balance Sheet Classifications
The Company includes in current assets and liabilities the following amounts that are in connection with construction contracts that may extend beyond one year: contract assets and contract liabilities (including retainage invoiced to customers contingent upon anything other than the passage of time), capitalized costs to fulfill contracts, retainage payable to sub-contractors and accrued losses on uncompleted contracts. A one-year time period is used to classify all other current assets and liabilities when not otherwise prescribed by the applicable accounting principles.
12


Contract Assets and Liabilities
The timing between when the Company collects cash from its construction design-build customers can create a contract asset or contract liability. Refer to Note 3 - Revenue from Contracts with Customers for further discussion of the Company's contract assets and liabilities.
Recently Issued Accounting Standards
As of September 30, 2023, and through the filing of this report, no Accounting Standards Updates have been issued and not yet adopted that are applicable to the Company and that would have a material effect on the Company’s unaudited condensed consolidated financial statements and related disclosures.
NOTE 3 – REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company recognizes revenue predominantly from the sale of equipment systems, services, construction design-build, and from other various immaterial contracts with customers from its CEA and Commercial sectors. The table below presents the revenue by source for the three and nine months ended September 30, 2023, and 2022:

CEACommercialTotal
For the three months ended
September 30,
For the three months ended
September 30,
For the three months ended
September 30,
202320222023202220232022
Equipment systems$3,043,659 $3,879,272 $ $ $3,043,659 $3,879,272 
Services723,996 1,815,025 2,174,743 1,024,313 2,898,739 2,839,338 
Construction design-build1,866,394 357,885 12,947,092 5,026,382 14,813,486 5,384,267 
Other178,439 265,416   178,439 265,416 
Total revenues and other income$5,812,488 $6,317,598 $15,121,835 $6,050,695 $20,934,323 $12,368,293 
Relative percentage28 %51 %72 %49 %100 %100 %

CEACommercialTotal
For the nine months ended
September 30,
For the nine months ended
September 30,
For the nine months ended
September 30,
202320222023202220232022
Equipment systems$10,575,367 $31,024,187 $ $ $10,575,367 $31,024,187 
Services3,538,683 5,877,320 5,865,285 3,628,076 9,403,968 9,505,396 
Construction design-build2,657,343 1,160,759 33,411,092 7,140,829 36,068,435 8,301,588 
Other489,482 871,488   489,482 871,488 
Total revenues and other income$17,260,875 $38,933,754 $39,276,377 $10,768,905 $56,537,252 $49,702,659 
Relative percentage31 %78 %69 %22 %100 %100 %

Under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, a performance obligation is a promise in a contract with a customer, to transfer a distinct good or service to the customer. Equipment systems contracts are lump sum contracts, which require the performance of some, or all, of the obligations under the contract for a specified amount. Service revenue contracts, which include both architectural and engineering designs, generally contain multiple performance obligations which can span across multiple phases of a project and are generally set forth in the contract as distinct milestones. The majority of construction design-build contracts have a single performance obligation, as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. Some contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the project life cycle (design and construction).

The transaction price for service contracts and construction design-build contracts is allocated to each distinct performance obligation and recognized as revenue when, or as, each performance obligation is satisfied. When there are multiple performance obligations under the same service contract, the Company allocates the transaction price to each performance obligation based on the standalone selling price. In general, payment terms are fixed at the time of the contract and are not subject to discounts, incentives, payment bonuses, credits or penalties, unless negotiated in an amendment.

13


When establishing the selling price to the customer, the Company uses various observable inputs. For equipment systems, the stand-alone selling price is determined by forecasting the expected costs of the products, and then adding in the appropriate margins established by management. For service revenues and construction design-build revenues, the Company estimates the selling price by reference to certain physical characteristics of the project, which include the facility size, the complexity of the design, and the mechanical systems involved, which are indicative of the scope and complexity for those services. Significant judgments are typically not required with respect to the determination of the transaction price based on the nature of the selling prices of the products and services delivered and the collectability of those amounts. Accordingly, the Company does not consider estimates of variable consideration to be constrained.

The Company recognizes equipment systems, services, and construction design-build revenues when the performance obligation with the customer is satisfied. For satisfaction of equipment system revenues, the Company recognizes revenue when control of the promised good transfers to the customer, which predominately occurs at the time of shipment. For service revenues, satisfaction occurs as the services related to the distinct performance obligations are rendered or completed in exchange for consideration in an amount for which the Company is entitled. The time period between recognition and satisfaction of performance obligations is generally within the same reporting period; thus, there are no material unsatisfied or partially unsatisfied performance obligations for product or service revenues at the end of the reporting period.

Construction design-build revenues are recognized as the Company's obligations are satisfied over time, using the ratio of project costs incurred to estimated total costs for each contract because of the continuous transfer of control to the customer as all of the work is performed at the customer’s site and, therefore, the customer controls the asset as it is being constructed. This continuous transfer of control to the customer is further supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay the Company for costs incurred plus a reasonable profit and take control of any work in process. This cost-to-cost measure is used for our construction design-build contracts because management considers it to be the best available measure of progress on these contracts.

Contract modifications through change orders, claims and incentives are routine in the performance of the Company’s construction design-build contracts to account for changes in the contract specifications or requirements. In most instances, contract modifications are not distinct from the existing contract due to the significant integration of services provided in the contract and are accounted for as a modification of the existing contract and performance obligation. Either the Company or its customers may initiate change orders, which may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of completion of the work. Change orders that are unapproved as to both price and scope are evaluated as claims. The Company considers claims to be amounts in excess of approved contract prices that the Company seeks to collect from its customers or others for customer-caused delays, errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes of unanticipated additional contract costs.

The timing of when the Company bills customers on long-term construction design-build contracts is generally dependent upon agreed-upon contractual terms, which may include milestone billings based on the completion of certain phases of the work, or when services are provided. When as a result of contingencies, billings cannot occur until after the related revenue has been recognized, the result is unbilled revenue which is included in contract assets. Additionally, when the Company receives advances or deposits from customers before revenue is recognized, the result is deferred revenue which is included in contract liabilities. Retainage subject to conditions other than the passage of time are included in contract assets and contract liabilities.

Contract assets represent revenues recognized in excess of amounts paid or payable (contract receivables) to the Company on uncompleted contracts. Contract liabilities represent the Company’s obligation to perform on uncompleted contracts with customers for which the Company has received payment or for which contract receivables are outstanding.

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The following table provides information about contract assets and contract liabilities from contracts with customers:

September 30,
2023
December 31, 2022
Contract assets:
Revenue recognized in excess of amounts paid or payable (contract receivables) to the Company on uncompleted contracts (contract asset), excluding retainage$7,726,013 $2,874,141 
Retainage included in contract assets due to being conditional on something other than solely passage of time652,644 130,141 
Total contract assets$8,378,657 $3,004,282 
September 30,
2023
December 31, 2022
Contract liabilities:
Payments received or receivable (contract receivables) in excess of revenue recognized on uncompleted contracts (contract liability)$1,954,561 $1,294,452 
Retainage included in contract liabilities due to being conditional on something other than solely passage of time27,167  
Total contract liabilities$1,981,728 $1,294,452 

Trade accounts receivable, net of allowance for doubtful accounts, balances from contracts with customers within the accompanying condensed consolidated balance sheets as of September 30, 2023, and December 31, 2022, were $15,237,726 and $12,466,180, respectively.

Non-trade accounts receivable as of September 30, 2023, and December 31, 2022, were $3,103,763 and $2,914,112, respectively. Non-trade accounts receivable as of September 30, 2023, were comprised of the remaining Indemnified Loss receivable from the majority shareholder of Emerald further detailed in Note 1 – Organization, Acquisitions, and Liquidity and miscellaneous non-trade accounts receivable of $591,850. Non-trade accounts receivable as of December 31, 2022, were comprised of miscellaneous non-trade accounts receivable totaling $514,112 and non-trade accounts receivable related to litigation involving fraudulent wire transactions of $2,400,000. On March 27, 2023, the Company entered into an agreement to settle this litigation and received a cash payment of $2,400,000 on March 27, 2023.

For equipment systems contracts, the Company’s predominant policy is to collect deposits from customers at the beginning of the contract and the balance of the contract payment prior to shipping. The Company does, in some cases, collect deposits or retainers as down payments on service contracts. Consumable products orders may be paid for in advance of shipment or for recurring customers with credit, payment terms of 30 days or less may be extended by the Company. Customer payments that have been collected prior to the performance obligation being recognized are recorded as customer deposit liabilities on the balance sheet. When the performance obligation is satisfied and all the criteria for revenue recognition are met, revenue is recognized. In certain situations when the customer has paid the deposit and services have been performed but the customer chooses not to proceed with the contract, the Company is entitled to keep the deposit and recognize revenue.
NOTE 4 – RELATED PARTY TRANSACTIONS
A director of the Company is an owner of Cloud 9 Support, LLC (“Cloud 9”) and Potco LLC (“Potco”). Cloud 9 purchases materials from the Company for use with its customers and Potco purchases equipment from the Company for use in its cultivation facility. Another director of the Company is working on a vertical farming innovation model with a group of CEA experts (“the CEA Consortium”). The CEA Consortium contracts services from the Company related to their business model. The table below presents the revenues for these related party entities for the three and nine months ended September 30, 2023, and 2022:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023202220232022
Revenues - Cloud 9$ $1,571 $462 $13,383 
Revenues - Potco139,031 1,080 987,268 12,480 
Revenues - CEA Consortium
$245,000 $ $245,000 $ 
Total revenues from related party transactions$384,031 $2,651 $1,232,730 $25,863 
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The table below presents the accounts receivable from these related party entities as of September 30, 2023, and December 31, 2022:
September 30, 2023December 31, 2022
Accounts receivable - Cloud 9$ $3,920 
Accounts receivable - Potco240,615 20,174 
Accounts receivable - CEA Consortium
$245,000 $ 
Total accounts receivable due from related party transactions$485,615 $24,094 
NOTE 5 – PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets are comprised of prepayments paid to vendors to initiate orders, prepaid services and fees, inventories, and other assets. These amounts are summarized as follows:
September 30,
2023
December 31, 2022
Vendor prepayments$1,564,039 $2,459,389 
Prepaid services and fees1,410,639 1,346,430 
Inventories250,845 320,372 
Other assets42,756 38,769 
Total Prepaid expenses and other assets$3,268,279 $4,164,960 
NOTE 6 – PROPERTY AND EQUIPMENT, NET
Property and equipment balances are summarized as follows:
September 30,
2023
December 31, 2022
Computers and technology equipment$294,322 $232,405 
Furniture and fixtures321,859 234,389 
Leasehold improvements228,760 306,719 
Vehicles432,823 456,797 
Software971,684 685,580 
Research and development87,425  
Other equipment58,525 58,525 
Accumulated depreciation(939,389)(667,269)
Total Property and equipment, net$1,456,009 $1,307,146 
Depreciation expense totaled $131,137 and $222,411 for the three months ended September 30, 2023, and 2022, respectively, and totaled $385,186 and $343,524 for the nine months ended September 30, 2023, and 2022, respectively.
NOTE 7 – INVESTMENTS
The components of investments as of September 30, 2023, and December 31, 2022, are summarized as follows:
Edyza XS FinancialTotal
Balances as of December 31, 2022$ $2,559,307 $2,559,307 
Paid-in-kind interest 25,657 25,657 
Impairment$ $(258,492)(258,492)
Sale of investment$ $(2,326,472)(2,326,472)
Balances as of September 30, 2023$ $ $ 
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Edyza
The Company has a strategic investment in Edyza, Inc. (“Edyza”), a hardware and software technology company that enables dense sensor networks in agriculture, healthcare, and other environments that require precise micro-climate monitoring. The Company measures this investment at cost, less any impairment changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.
During the third quarter of 2022, the Company fully impaired this investment, resulting in an impairment expense of $1.7 million. The Company determined that the intent and ability to retain its investment for a period of time sufficient to allow for any anticipated recovery had passed, causing an “other than temporary loss”. The Company will continue to monitor any future changes to this impairment and seek to recover any remaining value of its 19.5% ownership.
XS Financial
On October 30, 2021, the Company participated in a convertible note offering of Xtraction Services, Inc., a/k/a XS Financial Inc. (CSE: XSF) (OTCQB: XSHLF) ("XSF"), a specialty finance company providing CAPEX financing solutions, including equipment leasing, to CEA companies in the United States. The Company invested $2.5 million of a total $43.5 million raised by XSF. Prior to any Nasdaq listing, the investment incurs 9.5% interest payable, of which, 7.5% is cash interest and 2.0% is interest paid in kind. Subsequent to any Nasdaq listing by XSF, the investment incurs 8.0% cash interest. The debt was to mature on October 28, 2023, with a one-year option at the sole discretion of XSF to extend the maturity date. In addition, the Company received 1,250,000 warrants denominated in Canadian dollars ("C$") with a C$0.45 exercise price as subject to the warrant instrument. No value was attributed to the warrants at the time of the investment. In August 2023, the Company entered into an agreement to sell back its investment to XSF for $2.3 million and cancel the warrants. The Company received the $2.3 million in proceeds on August 30, 2023. In connection with the agreement to sell the investment, the Company recorded an impairment loss of $0.3 million.
NOTE 8 – GOODWILL & INTANGIBLE ASSETS
Goodwill
The Company has recorded goodwill in conjunction with the acquisitions it has completed. The goodwill balances as of September 30, 2023, and December 31, 2022, were $15.6 million and $15.6 million, respectively. Goodwill is not amortized. The Company did not record any impairment charges related to goodwill for the three or nine months ended September 30, 2023, and 2022.
Intangible Assets Other Than Goodwill
Intangible assets as of September 30, 2023, and December 31, 2022, consisted of the following:
As of September 30, 2023
CostAccumulated AmortizationNet Book Value
Finite-lived intangible assets:
Customer relationships$4,212,100 $(854,317)$3,357,783 
Trademarks and trade names1,778,000 (574,517)1,203,483 
Backlog and other768,113 (722,998)45,115 
Total finite-lived intangible assets:6,758,213 (2,151,832)4,606,381 
Indefinite-lived intangible assets:
Trade name28,291 — 28,291 
Total indefinite-lived intangible assets28,291 — 28,291 
Total intangible assets, net$6,786,504 $(2,151,832)$4,634,672 
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As of December 31, 2022
CostAccumulated AmortizationNet Book Value
Finite-lived intangible assets:
Customer relationships$4,212,100 $(401,997)$3,810,103 
Trademarks and trade names1,778,000 (307,817)1,470,183 
Backlog and other768,113 (626,003)142,110 
Total finite-lived intangible assets:6,758,213 (1,335,817)5,422,396 
Indefinite-lived intangible assets:
Trade name28,291 — 28,291 
Total indefinite-lived intangible assets28,291 — 28,291 
Total intangible assets, net$6,786,504 $(1,335,817)$5,450,687 
Amortization expense for intangible assets totaled $241,832 and $304,339 for the three months ended September 30, 2023, and 2022, respectively, and totaled $816,015 and $773,063 for the nine months ended September 30, 2023, and 2022, respectively.
The estimated future amortization expense for intangible assets subject to amortization as of September 30, 2023, is summarized below:
For the years ending December 31,Estimated Future
Amortization Expense
Remainder of 2023$250,010 
2024959,788 
2025959,788 
2026918,205 
2027693,555 
Thereafter825,035 
Total estimated future amortization expense$4,606,381 
NOTE 9 – ACCRUED EXPENSES
Accrued expenses are summarized as follows:
September 30,
2023
December 31,
2022
Accrued operating expenses$571,739 $515,858 
Accrued wages and related expenses1,724,528 639,614 
Accrued 401(k)25,235 262,599 
Accrued sales tax payable1,752,596 1,778,890 
Total accrued expenses$4,074,098 $3,196,961 
Accrued sales tax payable is comprised of amounts due to various states and Canadian provinces.
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NOTE 10 – OPERATING LEASE LIABILITIES AND COMMITMENTS AND CONTINGENCIES
The Company has eight operating office lease liabilities and one finance office lease liability with an imputed annual interest rate of 8.0%. Five of the leases were assigned to the Company in connection with its various acquisitions. The remaining lease terms range from less than a year to 6 years, as of September 30, 2023. The following is a summary of operating lease liabilities:
September 30,
2023
December 31,
2022
Operating lease liabilities related to right of use assets$2,264,585 $2,645,598 
Less current operating lease liabilities(598,447)(600,816)
Non-current operating lease liabilities$1,666,138 $2,044,782 
The following is a schedule showing total future minimum lease payments:
For the years ending December 31,
Minimum
Lease Payments
Remainder of 2023$203,836 
2024754,076 
2025573,133 
2026404,751 
2027346,812 
Thereafter335,903 
Total minimum lease payments2,618,511 
Less: Amount representing interest(353,926)
Net lease obligations$2,264,585 
From time to time, the Company is involved in routine litigation that arises in the ordinary course of business. There are no ongoing legal proceedings for which management believes the ultimate outcome would have a material adverse effect on the Company’s results of operations and cash flows.
On August 11, 2023, the Company entered into a settlement agreement (the “Settlement Agreement”) with Crest Ventures, LLC (“Crest”) and Andrew Telsey to settle all claims in the litigation filed in the District Court for Arapahoe County, Colorado, Case No. 2021CV31301. Pursuant to the Settlement Agreement, the Company paid $1,500,000 to Crest on September 7, 2023. In connection with this settlement, the Company recorded a loss in the second quarter of 2023 of $1,500,000 in accordance with GAAP related to loss contingencies.
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NOTE 11 – RISKS AND UNCERTAINTIES
Concentration Risk
The table below shows customers who account for 10% or more of the Company’s total revenues and 10% or more of the Company’s accounts receivable for the periods presented:
Customers exceeding 10% of revenue
Three Months Ended
September 30,
Nine Months Ended
September 30,
Company Customer Number2023202220232022
C000001462* **12 %
C000001140* **16 %
C00000218720 %*23 %*
C000001696*12 %**
C00000234518 %***
C00000246321 %*16 %*
*Amounts less than 10%
Customers exceeding 10% of accounts receivable
Company Customer NumberSeptember 30,
2023
December 31,
2022
C000002151* 10 %
C00000218724 %24 %
C00000234510 %*
*Amounts less than 10%
The table below shows vendors who account for 10% or more of the Company’s total purchases and 10% or more of the Company’s accounts payable for the periods presented:
Vendors exceeding 10% of purchases
Three Months Ended
September 30,
Nine Months Ended
September 30,
Company Vendor Number2023202220232022
V000001029***19 %
V00000242513 %***
V000002275**12 %*
V00000229014 %***
V000001326*10 %**
V00000245218 %*12 %*
*Amounts less than 10%
20


Vendors exceeding 10% of accounts payable
Company Vendor NumberSeptember 30,
2023
December 31,
2022
V000001910* 11 %
V00000245211 %*
V00000227516 %*
*Amounts less than 10%
Foreign Exchange Risk
Although our revenues and expenses are expected to be predominantly denominated in United States dollars, we may be exposed to currency exchange fluctuations. Recent events in the global financial markets have been coupled with increased volatility in the currency markets. Fluctuations in the exchange rate between the U.S. dollar, the Canadian dollar, the Euro, and the currency of other regions in which we may operate may have a material adverse effect on our business, financial condition and operating results. We may, in the future, establish a program to hedge a portion of our foreign currency exposure with the objective of minimizing the impact of adverse foreign currency exchange movements. However, even if we develop a hedging program, it may not mitigate currency risks.
NOTE 12 – STOCK-BASED COMPENSATION
Based on the vesting schedule of the grants of restricted stock units (“RSU” or “RSUs”) and options, stock-based compensation expense totaled $722,647 and $96,767 for the three months ended September 30, 2023, and 2022, respectively, and totaled $1,824,835 and $1,860,767 for the nine months ended September 30, 2023, and 2022, respectively.

The Company has adopted the 2021 Omnibus Stock Incentive Plan, as amended (the “Omnibus Incentive Plan”), which provides for the issuance of incentive stock options, grants of RSUs, and stock-based awards to employees, directors, and consultants of the Company to reward and attract employees and compensate the Company’s Board of Directors (the “Board”) and vendors when applicable. The Omnibus Incentive Plan is administered by the Company's Board. Grants of RSUs under the Omnibus Incentive Plan are valued at no less than the market price of the stock on the date of grant. The fair value of the options is calculated using the Black-Scholes pricing model based on the estimated market value of the underlying common stock at the valuation measurement date, the remaining contractual term of the options, risk-free interest rate and expected volatility of the price of the underlying common stock of 100%. There is a moderate degree of subjectivity involved when estimating the value of stock options with the Black-Scholes option pricing model as the assumptions used are moderately judgmental. Grants of RSUs and stock options are sometimes offered as part of an employment offer package, to ensure continuity of service or as a reward for performance. Grants of RSUs and stock options typically require a 1-to-3-year period of continued employment or service performance before the grant of RSUs or stock options vest. No cash flow effects are anticipated for grants of RSUs or stock options.
The following schedule shows grants of RSU activity for the nine months ended September 30, 2023:
Number of
Shares
Grants of RSUs unvested as of December 31, 2022494,859
Grants of RSUs524,609
Forfeiture/cancelled(11,291)
Grants of RSUs vested and issued(437,928)
Grants of RSUs unvested as of September 30, 2023570,249
As of September 30, 2023, the Company has $1.5 million in unrecognized stock-based compensation expense related to these grants of RSUs.
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The following schedule shows stock option activity for the nine months ended September 30, 2023.
Number of Shares Weighted
Average
Remaining
Life (Years)
Weighted
Average
Exercise
Price
Stock options outstanding as of December 31, 2022669,388 7.9$6.77 
Issued 0$ 
Forfeited(7,105)0$9.39 
Exercised 0$ 
Stock options outstanding as of September 30, 2023662,283 7.4$6.77 
Stock options exercisable as of September 30, 2023618,651 6.3$6.30 
As of September 30, 2023, the Company has $0.1 million in unrecognized stock-based compensation expense related to these stock options. The aggregate intrinsic value of the options outstanding and exercisable as of September 30, 2023, is $0.
NOTE 13 – STOCKHOLDERS’ EQUITY
On May 24, 2021, the Board authorized a stock repurchase program to purchase up to $5.0 million of the currently outstanding shares of the Company’s common stock, over a period of 12 months through open market purchases, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. On January 18, 2022, the Board authorized a $2.0 million increase to the stock repurchase program, to a total of $7.0 million. On February 2, 2022, the Board authorized an additional $1.5 million increase to the stock repurchase, to a total of $8.5 million. On September 12, 2022, the Board authorized an additional $2.0 million increase to the stock repurchase, to a total of $10.5 million. In total, the Company has repurchased 1,099,833 shares of common stock at an average price per share of $8.25 for a total of $9.1 million, under this program.
During the nine months ended September 30, 2023, the Company did not repurchase shares of common stock. During the nine months ended September 30, 2022, the Company repurchased 419,088 shares of common stock at an average price per share of $9.02, for a total price of $3.8 million under this program. As of September 30, 2023, we have $1.4 million remaining under the repurchase program.
In February 2021, the Company repurchased 350,000 shares of common stock with an average price per share of $8.50, for a total of $3.0 million, outside of any stock repurchase or publicly announced program.
NOTE 14 – WARRANTS
The following table shows warrant activity for the nine months ended September 30, 2023.
Number of
Shares
Weighted
Average
Remaining
Life (Years)
Weighted Average Exercise Price
Warrants outstanding as of December 31, 2022311,4992.8$12.32 
Exercised 0$ 
Expired(1,000)0$6.00 
Warrants outstanding as of September 30, 2023310,4992.1$12.34 
Warrants exercisable as of September 30, 2023310,4992.1$12.34 
The aggregate intrinsic value of the warrants outstanding and exercisable as of September 30, 2023, is $0.
NOTE 15 – INCOME TAXES
The Company has experienced cumulative losses for both book and tax purposes since inception. The potential future recovery of any tax assets that the Company may be entitled to due to these accumulated losses is uncertain and any tax assets that the Company may be entitled to have been fully reserved based on management’s current estimates. 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. The deferred income tax benefit for the three and nine months ended September 30, 2023, and 2022 relates to the reduction in the deferred tax liability associated with the amortization of the intangible assets from the acquisitions
22


of the 2WR Entities and Emerald. The Company records state income taxes paid during the year within the Other income (expense) financial statement line item.
NOTE 16 – SUBSEQUENT EVENTS
None.
23


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein. See also “Forward Looking Statements” on pages 3 - 4 of this Report.
OVERVIEW AND HISTORY
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 controlled environment agriculture (“CEA”) and industrial and other commercial (“Commercial”) sectors. In the CEA sector, our clients include operators and facilitators in both the cannabis and produce markets in the United States, Canada, and Europe. In the Commercial sector, we work with leading food and beverage commercial packaged goods (“CPG”) companies in the United States, and clients in other commercial sectors including healthcare, higher education, and hospitality. During 2022 and 2021, we made the following acquisitions:
October 2022 - An engineering firm (“DVO”)
April 2022 - A construction design-build firm (“Emerald”)
July 2021 - Three affiliated architecture design companies (the “2WR Entities”)
RESULTS OF OPERATIONS
Comparison of Results of Operations for the three months ended September 30, 2023 and 2022
During the three months ended September 30, 2023, we generated revenues of $20.9 million compared to revenues of $12.4 million during the three months ended September 30, 2022, an increase of $8.6 million, or 69%. This increase in revenues is the net result of the following changes in individual revenue components:
Equipment systems revenue decreased $0.8 million due to negative market conditions in the CEA sector and a reduction in capital equipment spending by customers;
Services revenue was flat, which was the result of a decrease in revenues in our existing business due to negative market conditions in the CEA sector offset by an increase in revenues from the DVO acquisition;
Construction design-build revenue increased $9.4 million, primarily due to significant organic growth of our construction design-build revenue; and
Other revenues decreased $0.1 million.
During the three months ended September 30, 2023, cost of revenues was $18.1 million compared to $9.8 million during the three months ended September 30, 2022, an increase of $8.3 million, or 85%. This increase is directly attributable to the overall increase in revenues indicated above and was further impacted by the change in individual revenue components.
Gross profit was $2.9 million (14% of revenues) during the three months ended September 30, 2023, compared to $2.6 million (21% of revenue) during the three months ended September 30, 2022. The overall gross profit as a percentage of revenues decreased primarily due to an increase in lower margin construction design-build revenue.
Operating expenses decreased by $3.5 million, or 37%, to $6.0 million for the three months ended September 30, 2023, compared to $9.5 million for the three months ended September 30, 2022. This overall decrease in operating expenses was the result of the net effects of the following:
a $0.8 million decrease in general and administrative operating expenses due to the offsetting effects of (i) decreases in salary and personnel related costs, (ii) increased legal expenses and (iii) implementation of an incentive retention plan in 2023 that, at its inception, was expected to result in total expense of $1.3 million in 2023 ($0.5 million in the first quarter, $0.2 million in the second quarter, $0.3 million in the third quarter and $0.3 million in the fourth quarter);
a $0.6 million increase in stock-based compensation expense, due to the three months ended September 30, 2022 expense including a reduction for unvested stock grants for employees who were no longer employed by the Company; and
24


a $3.3 million decrease in a one-time business development expense related to satisfying a lighting issue encountered by a major customer.
Non-operating expense was $0.3 million for the three months ended September 30, 2023, compared to non-operating expense of $1.8 million for the three months ended September 30, 2022, a change of $1.5 million. This change was primarily due to a $1.7 million impairment loss recorded in the three months ended September 30, 2022.
As a result of the above, we incurred a net loss of $3.4 million for the three months ended September 30, 2023, or a net loss per share of $0.29, compared to a net loss of $8.7 million for the three months ended September 30, 2022, or a net loss per share of $0.81.
Comparison of Results of Operations for the nine months ended September 30, 2023 and 2022
During the nine months ended September 30, 2023, we generated revenues of $56.5 million compared to revenues of $49.7 million during the nine months ended September 30, 2022, an increase of $6.8 million, or 14%. This increase in revenues is the net result of the following changes in individual revenue components:
Equipment systems revenue decreased $20.4 million due to negative market conditions in the CEA sector and a reduction in capital equipment spending by customers;
Services revenue decreased $0.1 million which was the net result of a decrease in our existing business due to negative market conditions in the CEA sector offset by increased revenues in the commercial sectors resulting from our expanded business development efforts outside of the CEA market;
Construction design-build revenue increased $27.8 million, due to significant organic growth of our construction design-build revenue in addition to the Emerald acquisition being included in our operating results for nine months in 2023 and only five months in 2022; and
Other revenues decreased $0.4 million.
During the nine months ended September 30, 2023, cost of revenues was $48.0 million compared to $38.7 million during the nine months ended September 30, 2022, an increase of $9.3 million, or 24%. This increase is directly attributable to the change in individual revenue components driven by a decrease in higher margin equipment systems revenue as well as an increase in lower margin construction design-build revenue.
Gross profit was $8.6 million (15% of revenues) during the nine months ended September 30, 2023, compared to $11.0 million (22% of revenue) during the nine months ended September 30, 2022. The overall gross profit as a percentage of revenues decreased primarily due to an increase in lower margin construction design-build revenue as well as a decrease in higher margin equipment systems revenue. The decrease in services gross profit for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 is primarily attributable to better time tracking on service projects due to system upgrades implemented in the first quarter of 2023.
Operating expenses decreased by $0.1 million, or 0%, to $20.6 million for the nine months ended September 30, 2023, compared to $20.7 million for the nine months ended September 30, 2022. This overall decrease in operating expenses was the result of the net effects of the following:
a $3.2 million increase in general and administrative operating expenses due to (i) increases in salary and personnel related costs attributable to the acquisitions of the DVO and Emerald entities, (ii) increased legal expenses and (iii) implementation of an incentive retention plan in 2023 that, at its inception, was expected to result in total expense of $1.3 million in 2023 ($0.5 million in the first quarter, $0.2 million in the second quarter, $0.3 million in the third quarter and $0.3 million in the fourth quarter); and
a $3.3 million decrease in in a one-time business development expense related to satisfying a lighting issue encountered by a major customer.
Non-operating expense was $2.1 million for the nine months ended September 30, 2023, compared to non-operating expense of $1.7 million for the nine months ended September 30, 2022, an increase of $0.4 million.
As a result of the above, we incurred a net loss of $14.0 million for the nine months ended September 30, 2023, or a net loss per share of $1.29, compared to a net loss of $11.1 million for the nine months ended September 30, 2022, or a net loss per share of $1.05.
25


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 accounting principles generally accepted in the United States of America (“GAAP”) and it is not a substitute for other measures prescribed by 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 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 of investments, foreign exchange gains and losses, debt forgiveness and extinguishment, stock-based compensation expense, and non-recurring legal and acquisition costs, 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 income (loss) attributable to the Company to Adjusted EBITDA for the periods presented:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2023202220232022
Net loss (GAAP)$(3,367,788)$(8,660,783)$(13,955,770)$(11,096,304)
Interest expense39,928 7,088 158,134 22,270 
Interest income(19,461)(94,200)(167,652)(221,329)
Federal and state income tax (benefit) expense(48,383)(73,654)(167,481)(258,166)
Depreciation and amortization372,969 526,750 1,201,201 1,116,585 
EBITDA (non-GAAP)(3,022,735)(8,294,799)$(12,931,568)$(10,436,944)
Non-recurring legal fees284,641 205,486 769,252 276,246 
Contingent consideration - change in fair value— — 160,232 — 
Contingent consideration - DVO acquisition78,181 — 204,878 — 
One time business development expenses— 3,299,864 — 3,299,864 
Reduction in force costs31,987 — 334,540 — 
One-time employee expenses— 670,095 — 787,691 
Impairment loss258,492 1,710,358 258,492 1,710,358 
Loss on settlement— — 1,500,000 — 
Retention incentive300,000 942,000 — 
Stock-based compensation722,647 96,767 1,824,835 1,860,767 
Transaction costs29,141 39,182 91,079 258,111 
Adjusted EBITDA (non-GAAP)$(1,317,646)$(2,273,047)$(6,846,260)$(2,243,907)
26


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 under generally accepted accounting principles in the United States (“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) Services; and (iii) Construction design-build. We define backlog for Equipment Systems and Services as signed contracts, with Equipment Systems contracts generally requiring receipt of a customer deposit. 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 September 30, 2023, and December 31, 2022, is reflected in the following tables:

September 30, 2023
CEACommercial TotalRelative Percentage
(in millions)
Equipment systems$$— $%
Services%
Construction design-build (1)
53 24 77 92 %
Total backlog$