UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20212022
☐ 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: 000-52898001-39933
urban-gro, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 46-5158469 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1751 Panorama Point, Unit G Lafayette, CO |
80026 | |
(Address of principal executive offices) | (Zip Code) |
(720) 390-3880 (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.001 par value | UGRO | 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 ☒☐ No ☐☒
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 ☒ No ☐
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 filer ☐ | Accelerated filer ☐ | |
Non-accelerated filer ☒ | Smaller reporting company ☒ | |
Emerging growth company ☒ |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant’s only class of common stock outstanding as of August 6, 202115, 2022 was shares.
urban gro,urban-gro, Inc.
FORM 10-Q
For the Quarterly Period Ended June 30, 20212022
INDEX
2 |
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the(this “Report”) contains 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”). Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. The statements regarding urban-gro, Inc. contained in this Report that are not historical in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “likely,” “expects,” “anticipates,” “estimates,” “believes” or “plans,” or comparable terminology, are forward-looking statements based on current expectations and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on our behalf. We caution readers regarding certain forward-looking statements in this Report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission (the “SEC”).
Important factors known to us that could cause such material differences are identified in this Report, including the factors described in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2020.2021. Except as required by applicable law, we undertake no obligation to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any future disclosures we make on related subjects in future reports to the SEC.
3 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
urban-gro, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, | December 31, | |||||||||||||||
2021 | 2020 | June 30, 2022 | December 31, 2021 | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash | $ | 50,444,738 | $ | 184,469 | $ | 22,767,595 | $ | 34,592,190 | ||||||||
Accounts receivable, net | 2,977,167 | 915,052 | 14,903,543 | 13,125,685 | ||||||||||||
Contract receivables | 543,687 | — | ||||||||||||||
Inventories | 627,276 | 537,104 | 398,098 | 514,756 | ||||||||||||
Related party receivable | 5,626 | 61,678 | ||||||||||||||
Prepayments and other assets | 6,212,891 | 3,547,068 | ||||||||||||||
Prepaid expenses and other current assets | 6,142,613 | 11,248,266 | ||||||||||||||
Total current assets | 60,267,698 | 5,245,371 | 44,755,536 | 59,480,897 | ||||||||||||
Non-current assets: | ||||||||||||||||
Property and equipment, net | 96,734 | 129,444 | 864,022 | 207,496 | ||||||||||||
Operating lease right of use assets, net | 22,222 | 88,889 | 708,876 | 689,704 | ||||||||||||
Investments | 1,710,358 | 1,710,358 | 4,210,358 | 4,210,358 | ||||||||||||
Goodwill | 902,067 | 902,067 | 10,636,284 | 7,992,121 | ||||||||||||
Other assets | 83,936 | 84,514 | ||||||||||||||
Intangible assets, net | 4,886,740 | 1,575,466 | ||||||||||||||
Total non-current assets | 2,815,317 | 2,915,272 | 21,306,280 | 14,675,145 | ||||||||||||
Total assets | $ | 63,083,015 | $ | 8,160,643 | $ | 66,061,816 | $ | 74,156,042 | ||||||||
Liabilities | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 2,265,840 | $ | 653,998 | $ | 7,946,023 | $ | 6,066,896 | ||||||||
Contract liabilities | 671,685 | — | ||||||||||||||
Accrued expenses | 1,971,405 | 1,798,494 | 3,381,263 | 3,878,278 | ||||||||||||
Deposits | 9,354,279 | 4,878,863 | ||||||||||||||
Notes payable | - | 1,854,500 | ||||||||||||||
Revolving Facility | - | 3,403,143 | ||||||||||||||
Term Loan, net | - | 1,868,320 | ||||||||||||||
Customer deposits | 3,286,073 | 13,345,451 | ||||||||||||||
Contingent consideration | 2,612,678 | 1,563,000 | ||||||||||||||
Operating lease liabilities | 22,222 | 88,889 | 283,727 | 152,459 | ||||||||||||
Total current liabilities | 13,613,746 | 14,546,207 | 18,181,449 | 25,006,084 | ||||||||||||
Non-current liabilities: | ||||||||||||||||
Notes payable | - | 1,020,600 | ||||||||||||||
Operating lease liabilities | 427,826 | 542,003 | ||||||||||||||
Deferred tax liability | 1,201,112 | 440,625 | ||||||||||||||
Total non-current liabilities | - | 1,020,600 | 1,628,938 | 982,628 | ||||||||||||
Total liabilities | 13,613,746 | 15,566,807 | 19,810,387 | 25,988,712 | ||||||||||||
Shareholders’ equity (deficit): | ||||||||||||||||
Shareholders’ Equity | ||||||||||||||||
Preferred stock, $ | par value; shares authorized; shares issued and outstanding- | – | — | — | ||||||||||||
Common stock, $ | par value; shares authorized; issued and outstanding as of June 30, 2021, and shares issued and outstanding as of December 31, 202011,223 | 4,719 | ||||||||||||||
Common stock, $ | par value; shares authorized; issued and outstanding as of June 30, 2022, and issued and outstanding as of December 31, 202111,911 | 11,588 | ||||||||||||||
Additional paid in capital | 75,227,775 | 14,553,438 | 82,971,694 | 78,679,220 | ||||||||||||
Treasury shares, cost basis: | shares as of June 30, 2021(3,474,270 | ) | - | |||||||||||||
Treasury shares, cost basis: | shares as of June 30, 2022 and shares as of December 31, 2021(11,456,667 | ) | (7,683,490 | ) | ||||||||||||
Accumulated deficit | (22,295,459 | ) | (21,964,321 | ) | (25,275,509 | ) | (22,839,988 | ) | ||||||||
Total shareholders’ equity (deficit) | 49,469,269 | (7,406,164 | ) | |||||||||||||
Total shareholders’ equity | 46,251,429 | 48,167,330 | ||||||||||||||
Total liabilities and shareholders’ equity (deficit) | $ | 63,083,015 | $ | 8,160,643 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 66,061,816 | $ | 74,156,042 |
See accompanying notes to unaudited condensed consolidated financial statements
4 |
urban-gro, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited)
2021 | 2020 | 2021 | 2020 | 1 | 2 | 3 | 4 | |||||||||||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||
Equipment systems | $ | 12,179,316 | $ | 3,108,162 | $ | 23,524,066 | $ | 6,589,747 | $ | 10,077,572 | $ | 12,179,316 | $ | 27,144,916 | $ | 23,524,066 | ||||||||||||||||
Construction design-build | 2,917,321 | - | 2,917,321 | - | ||||||||||||||||||||||||||||
Services | 3,027,556 | 288,407 | 6,666,062 | 548,920 | ||||||||||||||||||||||||||||
Consumable products | 363,574 | 270,434 | 792,667 | 635,186 | 259,054 | 363,574 | 606,072 | 792,667 | ||||||||||||||||||||||||
Services | 288,407 | 626,668 | 548,920 | 1,041,334 | ||||||||||||||||||||||||||||
Total Revenue | 12,831,297 | 4,005,264 | 24,865,653 | 8,266,267 | 16,281,503 | 12,831,297 | 37,334,371 | 24,865,653 | ||||||||||||||||||||||||
Cost of Revenue | 9,908,913 | 2,811,812 | 19,302,626 | 5,959,327 | 12,779,557 | 9,908,913 | 28,930,405 | 19,302,626 | ||||||||||||||||||||||||
Gross profit | 2,922,384 | 1,193,452 | 5,563,027 | 2,306,940 | 3,501,946 | 2,922,384 | 8,403,966 | 5,563,027 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
General and administrative | 2,400,828 | 1,560,499 | 4,597,835 | 3,655,907 | 4,240,658 | 2,400,417 | 8,965,957 | 4,597,257 | ||||||||||||||||||||||||
Intangible asset amortization | 306,225 | 411 | 468,725 | 578 | ||||||||||||||||||||||||||||
Stock-based compensation | 299,602 | 559,904 | 590,407 | 992,549 | 882,000 | 299,602 | 1,764,000 | 590,407 | ||||||||||||||||||||||||
Total operating expenses | 2,700,430 | 2,120,403 | 5,188,242 | 4,648,456 | 5,428,883 | 2,700,430 | 11,198,682 | 5,188,242 | ||||||||||||||||||||||||
Income (loss) from operations | 221,954 | (926,951 | ) | 374,784 | (2,341,516 | ) | (1,926,937 | ) | 221,954 | (2,794,716 | ) | 374,784 | ||||||||||||||||||||
Non-operating income (expenses): | ||||||||||||||||||||||||||||||||
Interest expense | (4,624 | ) | (365,709 | ) | (322,067 | ) | (664,343 | ) | (7,658 | ) | (4,624 | ) | (15,317 | ) | (322,067 | ) | ||||||||||||||||
Interest income | 47,275 | 11,531 | 127,126 | 14,390 | ||||||||||||||||||||||||||||
Interest expense – beneficial conversion of notes payable | - | - | (636,075 | ) | - | - | - | - | (636,075 | ) | ||||||||||||||||||||||
Loss on extinguishment of debt | - | - | (790,723 | ) | - | - | - | - | (790,723 | ) | ||||||||||||||||||||||
Impairment of investment | - | (310,000 | ) | - | (310,000 | ) | ||||||||||||||||||||||||||
PPP Loan Forgiveness | 1,032,316 | 1,032,316 | - | 1,032,316 | - | 1,032,316 | ||||||||||||||||||||||||||
Other income | 7,798 | 32,690 | 10,626 | 50,258 | ||||||||||||||||||||||||||||
Other income (expense) | 71,563 | (3,733 | ) | 62,874 | (3,764 | ) | ||||||||||||||||||||||||||
Total non-operating income (expenses) | 1,035,490 | (643,019 | ) | (705,923 | ) | (924,085 | ) | 111,180 | 1,035,490 | 174,683 | (705,923 | ) | ||||||||||||||||||||
Income (loss) before income taxes | 1,257,444 | (1,569,970 | ) | (331,138 | ) | (3,265,601 | ) | (1,815,757 | ) | 1,257,444 | (2,620,033 | ) | (331,138 | ) | ||||||||||||||||||
Income tax expense (benefit) | - | – | - | – | (76,453 | ) | - | (184,512 | ) | - | ||||||||||||||||||||||
Net income (loss) | $ | 1,257,444 | $ | (1,569,970 | ) | $ | (331,138 | ) | $ | (3,265,601 | ) | $ | (1,739,304 | ) | $ | 1,257,444 | $ | (2,435,521 | ) | $ | (331,138 | ) | ||||||||||
Comprehensive income (loss) | $ | 1,257,444 | $ | (1,569,970 | ) | $ | (331,138 | ) | $ | (3,265,601 | ) | $ | (1,739,304 | ) | $ | 1,257,444 | $ | (2,435,521 | ) | $ | (331,138 | ) | ||||||||||
Earnings (loss) per share: | ||||||||||||||||||||||||||||||||
Earnings (loss) per share - basic | $ | 0.11 | $ | (0.33 | ) | $ | (0.03 | ) | $ | (0.69 | ) | $ | (0.17 | ) | $ | 0.11 | $ | (0.23 | ) | $ | (0.03 | ) | ||||||||||
Earnings (loss) per share - dilutive | $ | 0.11 | $ | (0.33 | ) | $ | (0.03 | ) | $ | (0.69 | ) | $ | (0.17 | ) | $ | 0.11 | $ | (0.23 | ) | $ | (0.03 | ) | ||||||||||
Weighted average share - basic | 11,220,580 | 4,792,462 | 9,535,630 | 4,765,047 | 10,508,972 | 11,220,580 | 10,527,975 | 9,535,630 | ||||||||||||||||||||||||
Weighted average shares - dilutive | 11,725,282 | 4,792,462 | 9,535,630 | 4,765,047 | 10,508,972 | 11,725,282 | 10,527,975 | 9,535,630 |
See accompanying notes to unaudited condensed consolidated financial statements
5 |
urban-gro, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(unaudited)
Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
Common Stock | Additional Paid in | Accumulated | Treasury | Total Shareholders’ Equity | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
Balance, March 31, 2021 | 11,218,137 | $ | 11,218 | $ | 75,091,357 | $ | (23,552,903 | ) | $ | (2,975,000 | ) | $ | 48,574,672 | |||||||||||
Stock-based compensation | - | - | 299,602 | - | - | 299,602 | ||||||||||||||||||
Stock grant program vesting | ||||||||||||||||||||||||
Stock grant program vesting, shares | ||||||||||||||||||||||||
Beneficial conversion feature | ||||||||||||||||||||||||
Conversion of Bridge Financing | ||||||||||||||||||||||||
Conversion of Bridge Financing, shares | ||||||||||||||||||||||||
Stock issued with exercise of warrants | ||||||||||||||||||||||||
Stock issued with exercise of warrants, shares | ||||||||||||||||||||||||
Clawback of stock granted | ||||||||||||||||||||||||
Clawback of stock granted, shares | ||||||||||||||||||||||||
Stock issued loan revisions | ||||||||||||||||||||||||
Stock issued loan revisions, shares | ||||||||||||||||||||||||
Stock issuance related to debt | ||||||||||||||||||||||||
Stock issuance related to debt, shares | ||||||||||||||||||||||||
Warrant issuance related to debt | ||||||||||||||||||||||||
Stock issuance related to offering, net of offering costs of $195,574 | - | - | (195,574 | ) | - | - | (195,574 | ) | ||||||||||||||||
Common stock repurchased | - | - | - | - | (499,270 | ) | (499,270 | ) | ||||||||||||||||
Stock Options Exercised | 4,777 | 5 | 32,390 | - | - | 32,395 | ||||||||||||||||||
Net income (loss) for period ended June 30, 2021 | - | - | - | 1,257,444 | - | 1,257,444 | ||||||||||||||||||
Balance, June 30, 2021 | 11,222,914 | $ | 11,223 | $ | 75,227,775 | $ | (22,295,459 | ) | $ | (3,474,270 | ) | $ | 49,469,269 |
Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
Common Stock | Additional Paid in | Accumulated | Treasury | Total Shareholders’ Equity | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
Balance, March 31, 2022 | 11,627,528 | $ | 11,628 | $ | 79,589,977 | $ | (23,536,205 | ) | $ | (11,456,667 | ) | $ | 44,608,733 | |||||||||||
Stock-based compensation | - | - | 882,000 | - | - | 882,000 | ||||||||||||||||||
Treasury stock | - | - | - | - | - | - | ||||||||||||||||||
Stock options exercised | - | - | - | - | - | - | ||||||||||||||||||
Stock issuance related to acquisition | 283,515 | 283 | 2,499,717 | - | - | 2,500,000 | ||||||||||||||||||
Net income (loss) for period ended June 30, 2022 | - | - | - | (1,739,304 | ) | - | (1,739,304 | ) | ||||||||||||||||
Balance, June 30, 2022 | 11,911,043 | $ | 11,911 | $ | 82,971,694 | $ | (25,275,509 | ) | $ | (11,456,667 | ) | $ | 46,251,429 |
Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||
Common Stock | Additional Paid in | Accumulated | Total Shareholders’ Equity | |||||||||||||||||
Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||
Balance, March 31, 2020 | 4,784,885 | $ | 4,785 | $ | 12,986,974 | $ | (18,586,257 | ) | $ | (5,594,498 | ) | |||||||||
Stock-based compensation | – | – | 559,904 | – | 559,904 | |||||||||||||||
Stock grant program vesting | 20,278 | 20 | (20 | ) | – | – | ||||||||||||||
Net income (loss) for period ended June 30, 2020 | – | – | – | (1,569,970 | ) | (1,569,970 | ) | |||||||||||||
Balance, June 30, 2020 | 4,805,163 | $ | 4,805 | $ | 13,546,858 | $ | (20,156,227 | ) | $ | (6,604,564 | ) |
Common Stock | Additional Paid in | Accumulated | Treasury | Total Shareholders’ Equity | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
Balance, March 31, 2021 | 11,218,137 | $ | 11,218 | $ | 75,091,357 | $ | (23,552,903 | ) | $ | (2,975,000 | ) | $ | 48,574,672 | |||||||||||
Stock-based compensation | - | - | 299,602 | - | - | 299,602 | ||||||||||||||||||
Stock issuance related to offering, net of offering costs of $195,574 | - | - | (195,574 | ) | - | - | (195,574 | ) | ||||||||||||||||
Common stock repurchased | - | - | - | - | (499,270 | ) | (499,270 | ) | ||||||||||||||||
Stock Options Exercised | 4,777 | 5 | 32,390 | - | - | 32,395 | ||||||||||||||||||
Net income (loss) for period ended June 30, 2021 | - | - | - | 1,257,444 | - | 1,257,444 | ||||||||||||||||||
Balance, June 30, 2021 | 11,222,914 | 11,223 | $ | 75,227,775 | $ | (22,295,459 | ) | $ | (3,474,270 | ) | $ | 49,469,269 |
Common Stock | Additional Paid in | Accumulated | Treasury | Total Shareholders’ Equity | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
Balance, December 31, 2021 | 11,588,110 | $ | 11,588 | $ | 78,679,220 | $ | (22,839,988 | ) | $ | (7,683,490 | ) | $ | 48,167,330 | |||||||||||
Stock-based compensation | - | - | 1,764,000 | - | - | 1,764,000 | ||||||||||||||||||
Treasury stock | - | - | - | - | (3,773,177 | ) | (3,773,177 | ) | ||||||||||||||||
Stock option exercised | - | - | - | - | - | - | ||||||||||||||||||
Stock exercised | 4,555 | 5 | 28,792 | - | - | 28,797 | ||||||||||||||||||
Stock Issuance related to acquisition | 283,515 | 283 | 2,499,717 | - | - | 2,500,000 | ||||||||||||||||||
Stock issued with exercise of warrants | 34,863 | 35 | (35 | ) | - | - | - | |||||||||||||||||
Net income (loss) for period ended June 30, 2022 | - | - | - | (2,435,521 | ) | - | (2,435,521 | ) | ||||||||||||||||
Balance, June 30, 2022 | 11,911,043 | $ | 11,911 | $ | 82,971,694 | $ | (25,275,509 | ) | $ | (11,456,667 | ) | $ | 46,251,429 |
Common Stock | Additional Paid in | Accumulated | Treasury | Total Shareholders’ Equity | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
Balance, December 31, 2020 | 4,718,714 | $ | 4,719 | $ | 14,553,438 | $ | (21,964,321 | ) | $ | – | $ | (7,406,164 | ) | |||||||||||
Stock-based compensation | - | - | 590,407 | - | - | 590,407 | ||||||||||||||||||
Beneficial conversion feature | - | - | 636,075 | - | - | 636,075 | ||||||||||||||||||
Conversion of Bridge Financing | 254,425 | 254 | 1,907,971 | - | - | 1,908,225 | ||||||||||||||||||
Stock grant program vesting | 16,586 | 17 | (17 | ) | - | - | - | |||||||||||||||||
Stock issuance related to offering, net of offering costs of $4,596,257 | 6,210,000 | 6,210 | 57,497,533 | - | - | 57,503,743 | ||||||||||||||||||
Stock issuance related to offering, net of offering costs | 6,210,000 | 6,210 | 57,497,533 | - | - | 57,503,743 | ||||||||||||||||||
Common stock repurchased | - | - | - | - | (3,474,270 | ) | (3,474,270 | ) | ||||||||||||||||
Stock issued with exercise of warrants | 18,412 | 18 | 9,978 | - | - | 9,996 | ||||||||||||||||||
Stock Options Exercised | 4,777 | 5 | 32,390 | - | - | 32,395 | ||||||||||||||||||
Net income (loss) for period ended June 30, 2021 | - | - | - | (331,138 | ) | - | (331,138 | ) | ||||||||||||||||
Net income (loss) | - | - | - | (331,138 | ) | - | (331,138 | ) | ||||||||||||||||
Balance, June 30, 2021 | 11,222,914 | $ | 11,223 | $ | 75,227,775 | $ | (22,295,459 | ) | $ | (3,474,270 | ) | $ | 49,469,269 |
See accompanying notes to unaudited condensed consolidated financial statements
6 |
urban-gro, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) (Continued)CASH FLOWS
(unaudited)
Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
Common Stock | Additional Paid in | Accumulated | Treasury | Total Shareholders’ Equity | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
Balance, December 31, 2020 | 4,718,714 | $ | 4,719 | $ | 14,553,438 | $ | (21,964,321 | ) | $ | – | $ | (7,406,164 | ) | |||||||||||
Stock-based compensation | - | - | 590,407 | - | - | 590,407 | ||||||||||||||||||
Beneficial conversion feature | - | - | 636,075 | - | - | 636,075 | ||||||||||||||||||
Conversion of Bridge Financing | 254,425 | 254 | 1,907,971 | - | - | 1,908,225 | ||||||||||||||||||
Stock grant program vesting | 16,586 | 17 | (17 | ) | - | - | - | |||||||||||||||||
Stock issuance related to offering, net of offering costs of $4,596,257 | 6,210,000 | 6,210 | 57,497,533 | - | - | 57,503,743 | ||||||||||||||||||
Common stock repurchased | - | - | - | - | (3,474,270 | ) | (3,474,270 | ) | ||||||||||||||||
Stock issued with exercise of warrants | 18,412 | 18 | 9,978 | - | - | 9,996 | ||||||||||||||||||
Stock Options Exercised | 4,777 | 5 | 32,390 | - | - | 32,395 | ||||||||||||||||||
Net income (loss) for period ended June 30, 2021 | - | - | - | (331,138 | ) | - | (331,138 | ) | ||||||||||||||||
Balance, June 30, 2021 | 11,222,914 | $ | 11,223 | $ | 75,227,775 | $ | (22,295,459 | ) | $ | (3,474,270 | ) | $ | 49,469,269 |
Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||
Common Stock | Additional Paid in | Accumulated | Total Shareholders’ Equity | |||||||||||||||||
Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||
Balance, December 31, 2019 | 4,701,552 | $ | 4,702 | $ | 11,877,590 | $ | (16,890,626 | ) | $ | (5,008,334 | ) | |||||||||
Stock-based compensation | – | – | 992,549 | – | 992,549 | |||||||||||||||
Clawback of stock granted | (16,667 | ) | (17 | ) | 17 | – | – | |||||||||||||
Stock grant program vesting | 20,278 | 20 | (20 | ) | – | – | ||||||||||||||
Stock issued loan revisions | 16,667 | 16 | 99,984 | – | 100,000 | |||||||||||||||
Stock issuance related to debt | 83,333 | 83 | 499,917 | – | 500,000 | |||||||||||||||
Warrant issuance related to debt | – | – | 76,822 | – | 76,822 | |||||||||||||||
Net income (loss) for period ended June 30, 2020 | – | – | – | (3,265,601 | ) | (3,265,601 | ) | |||||||||||||
Net income (loss) | – | – | – | (3,265,601 | ) | (3,265,601 | ) | |||||||||||||
Balance, June 30, 2020 | 4,805,163 | $ | 4,805 | $ | 13,546,858 | $ | (20,156,227 | ) | $ | (6,604,564 | ) |
1 | 2 | |||||||
Six Months Ended June 30, | ||||||||
2022 | 2021 | |||||||
Cash Flows from Operating Activities | ||||||||
Net income (loss) | $ | (2,435,521 | ) | $ | (331,138 | ) | ||
Adjustments to reconcile net income (loss) from operations: | ||||||||
Depreciation and amortization | 589,835 | 109,625 | ||||||
Deferred income tax benefit | (184,512 | ) | ||||||
Amortization of deferred financing costs | - | 103,632 | ||||||
Loss on extinguishment of debt | - | 790,723 | ||||||
Interest on convertible notes | - | 53,725 | ||||||
Stock-based compensation expense | 1,764,000 | 590,407 | ||||||
Beneficial conversion of Bridge notes | - | 636,075 | ||||||
Inventory write-offs | (84,942 | ) | 26,792 | |||||
Bad debt expense | 30,000 | 28,248 | ||||||
PPP loan forgiveness | - | (1,032,316 | ) | |||||
Changes in operating assets and liabilities (net of acquired amounts): | ||||||||
Accounts receivable | 663,955 | (2,034,311 | ) | |||||
Inventories | 201,600 | (116,964 | ) | |||||
Prepayments and other assets | 6,073,732 | (3,732,753 | ) | |||||
Accounts payable and accrued expenses | (1,320,152 | ) | 1,729,802 | |||||
Operating leases | (163,054 | ) | - | |||||
Customer deposits | (10,059,378 | ) | 4,475,416 | |||||
Net Cash Provided By (Used In) Operating Activities | (4,924,437 | ) | 1,296,963 | |||||
Cash Flows from Investing Activities | ||||||||
Business combinations, net of cash acquired | (2,709,148 | ) | - | |||||
Purchases of property and equipment | (374,630 | ) | (9,670 | ) | ||||
Net Cash Used In Investing Activities | (3,083,778 | ) | (9,670 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Proceeds from issuance of Common Stock, net of offering costs | - | 58,203,091 | ||||||
Repurchase of Common Stock | (3,773,177 | ) | (3,474,270 | ) | ||||
Repayment of notes payable | - | (5,755,845 | ) | |||||
Proceeds from stock issuance | 28,797 | - | ||||||
Payment of finance lease ROU liability | (72,000 | ) | - | |||||
Net Cash Provided By (Used In) Financing Activities | (3,816,380 | ) | 48,972,976 | |||||
Net Increase (Decrease) in Cash | (11,824,595 | ) | 50,260,269 | |||||
Cash at Beginning of Period | 34,592,190 | 184,469 | ||||||
Cash at End of Period | $ | 22,767,595 | $ | 50,444,738 | ||||
Supplemental Cash Flow Information: | ||||||||
Interest paid | $ | 15,317 | $ | 218,453 | ||||
Operating lease right of use asset | $ | 52,733 | $ | - | ||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Stock issued related to acquisitions | $ | 2,500,000 | $ | - | ||||
PPP Loan Forgiveness | $ | - | $ | 1,032,316 |
See accompanying notes to unaudited condensed consolidated financial statements
7 |
urban-gro, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
2021 | 2020 | |||||||
Six Months Ended June 30, | ||||||||
2021 | 2020 | |||||||
Cash Flows from Operating Activities | ||||||||
Net loss | $ | (331,138 | ) | $ | (3,265,601 | ) | ||
Adjustments to reconcile net loss from operations: | ||||||||
Depreciation and amortization | 109,625 | 120,410 | ||||||
Amortization of deferred financing costs | 103,632 | 203,721 | ||||||
Loss on extinguishment of debt | 790,723 | – | ||||||
Interest on convertible notes | 53,725 | – | ||||||
Stock-based compensation expense | 590,407 | 992,549 | ||||||
Beneficial conversion of Bridge notes | 636,075 | - | ||||||
Impairment of investment | - | 310,000 | ||||||
Gain on disposal of assets | - | 3,468 | ||||||
Inventory write-offs | 26,792 | 25,528 | ||||||
Bad debt expense | 28,248 | 25,239 | ||||||
PPP loan forgiveness | (1,032,316 | ) | – | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (2,034,311 | ) | 613,723 | |||||
Inventories | (116,964 | ) | (324,981 | ) | ||||
Prepayments and other assets | (3,732,753 | ) | (158,687 | ) | ||||
Accounts payable and accrued expenses | 1,729,802 | (2,149,312 | ) | |||||
Deposits | 4,475,416 | 441,518 | ||||||
Net Cash Provided By (Used In) Operating Activities | 1,296,963 | (3,162,425 | ) | |||||
Cash Flows from Investing Activities | ||||||||
Purchases of property and equipment | (9,670 | ) | (85,331 | ) | ||||
Net Cash Used In Investing Activities | (9,670 | ) | (85,331 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Proceeds from issuance of Revolving Facility | - | 2,207,432 | ||||||
Proceeds from issuance of Term Loan | - | 2,000,000 | ||||||
Proceeds from Revolving Facility advances | - | 1,205,525 | ||||||
Repurchase of Common Stock | (3,474,270 | ) | – | |||||
Proceeds from issuance of Common Stock, net of offering costs | 58,203,091 | – | ||||||
Long-term note payable | - | 1,020,600 | ||||||
Debt financing costs | - | (545,501 | ) | |||||
Repayment of debt | (5,755,845 | ) | (2,686,522 | ) | ||||
Net Cash Provided by Financing Activities | 48,972,976 | 3,201,534 | ||||||
Net Increase in Cash | 50,260,269 | (46,222 | ) | |||||
Cash at Beginning of Period | 184,469 | 448,703 | ||||||
Cash at End of Period | $ | 50,444,738 | $ | 402,481 | ||||
Supplemental Cash Flow Information: | ||||||||
Interest Paid | $ | 218,435 | $ | 664,343 | ||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Debt financing costs booked in equity | $ | - | $ | 676,822 | ||||
PPP Loan Forgiveness | $ | 1,032,316 | $ | - |
See accompanying notes to unaudited condensed consolidated financial statements
urban-gro, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – GENERALORGANIZATION, ACQUISITIONS, AND LIQUIDITY
Organization
urban-gro, Inc. (“we,” “us,” “our,our,” the “Company,” or “urban-gro”) is a leadingan integrated professional services and design-build firm. We offer value-added architectural, engineering, and design services company focused onconstruction management solutions to the sustainableControlled Environment Agriculture (“CEA”), industrial, healthcare, and other commercial indoorsectors. Innovation, collaboration, and a commitment to sustainability drive our team to provide exceptional customer experiences. To serve our horticulture market. Weclients, we engineer and design indoor controlled environment agriculture (“CEA”)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, 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 which establish facilities that allow clients to manage, operate and perform at the highest level throughout their entire cultivation lifecycle once they are up and running.
We also serve a broad range of commercial and governmental entities, providing them with planning, consulting, architectural and engineering design services for their facilities. We aim to work with our clients from 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.
Basis of PresentationAcquisitions
Emerald
On April 29, 2022 (the “Emerald Closing Date”), the Company acquired all of the issued and outstanding capital stock (the “Emerald Acquisition”) of Emerald Construction Management, Inc. (“Emerald”) from their shareholders (collectively, the “Emerald Sellers”). The aggregate purchase price for the Emerald Acquisition was $7.8 million (the “Emerald Purchase Price”), which represented $7.0 million in initial purchase price and an estimated $0.8 million in working capital adjustments.
The Emerald Purchase Price was payable as follows: $3.3 million in cash to the Emerald Sellers, net of satisfaction of Emerald’s entire outstanding debt of approximately $0.4 million; shares of the Company’s common stock valued at $2.5 million transferred to the Emerald Sellers; and up to $2.0 million of contingent consideration (the “Emerald Contingent Consideration”) which can be earned by and payable to the Emerald Sellers based on the performance of Emerald during the 2-year period following the Emerald Closing Date. The Emerald Contingent Consideration is payable quarterly for a two-year period and will be equal to 35% of the Quarterly Gross Profit (as defined in the Emerald Acquisition Agreement). The value of the shares of the Company’s common stock to be issued for the Closing Payment Shares (as defined in the Emerald Acquisition Agreement) was determined based upon the daily volume weighted average closing price of the Company’s common stock in the ten trading days prior the signing date of the Emerald Acquisition Agreement. Any Emerald Contingent Consideration amounts earned by and payable to the Emerald Sellers is payable in shares of the Company’s common stock. The value of the shares of the Company’s common stock to be issued for the Emerald Contingent Consideration will be determined based upon the daily volume weighted average closing price of the Company’s common stock in the ten trading days prior to the end of the applicable annual quarter the Quarterly Gross Profit is calculated.
SCHEDULE OF INITIAL ACQUISITION OF TARGET COMPANIES
1 | ||||
Purchase Price | $ | 7,667,328 | ||
Allocation of Purchase Price: | ||||
Cash | $ | 622,641 | ||
Accounts receivable, net | $ | 3,015,500 | ||
Contract receivable | $ | 697,019 | ||
Prepayments and other assets | $ | 38,086 | ||
Property and equipment | $ | 403,008 | ||
ROU asset | $ | 82,408 | ||
Goodwill | $ | 2,644,162 | ||
Intangible assets | $ | 3,780,000 | ||
Accrued expenses | $ | 2,111,302 | ||
Contract liabilities | $ | 476,786 | ||
ROU liability | $ | 82,408 | ||
Deferred tax liability | $ | 945,000 |
The following pro forma amounts reflect the Company’s results as if the acquisition of Emerald had occurred on January 1, 2021. These consolidated financial statements are presented in United States dollars andpro forma amounts have been preparedcalculated after applying the Company’s accounting policies and adjusting the results of the acquisition to reflect the additional amortization of intangibles.
SCHEDULE OF SUPPLEMENTAL INFORMATION ON UNAUDITED PRO-FORMA BASIC OF ACQUISITION
1 | 2 | 3 | 4 | |||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Revenue | 18,718,087 | 16,775,744 | 49,015,819 | 33,062,834 | ||||||||||||
Net Income (loss) | (1,556,748 | ) | 1,040,701 | (1,456,161 | ) | (263,650 | ) |
Acquired goodwill from Emerald represents the value expected to arise from organic growth and an opportunity to expand into a well-established market for the Company.
2WR
On June 28, 2021, the Company’s wholly-owned subsidiary, urban-gro Architect Holdings, LLC (the “Buyer”), and the 2WRCO Shareholders, the 2WRGA Shareholders, the MJ12 Shareholders, and the 2WRMS Shareholders (collectively, the “2WR Sellers”), and Sam Andras, an individual (the “Sellers Representative”) entered into a Stock Purchase Agreement (the “2WR Purchase Agreement”), pursuant to which the Buyer would purchase all of the issued and outstanding capital stock of 2WR of Colorado, Inc., a Colorado corporation (“2WRCO”), 2WR of Georgia, Inc., a Georgia corporation (“2WRGA”), MJ12 Design Studio, Inc., a Colorado corporation (“MJ12”) (collectively, the “2WR Purchased Shares”) from the 2WR Sellers. In connection with the acquisition of the 2WR Purchased Shares, the Buyer entered into an affiliate relationship with 2WR of Mississippi, P.C., a Mississippi professional corporation (“2WRMS” and together with 2WRCO, 2WRGA and MJ12, the “2WR Entities”). The transaction closed on July 30, 2021.
The 2WR Purchased Shares had an initial purchase price of up to $7.1 million, which purchase price was subject to customary working capital adjustments (the “2WR Purchase Price”). At closing, the 2WR Purchase Price was paid in accordance with United States generally acceptedthe form of wire transfer of immediately available funds and the issuance of unregistered shares (the “2WR Closing Payment Shares”) of the Company’s common stock, par value $ , which 2WR Closing Payment Shares had an aggregate stated value of $2.0 million. Additionally, the 2WR Purchase Agreement provides for additional earnout payments (“2WR Earnout Payments”) to the 2WR Sellers of up to an aggregate amount of $2.0 million, payable in cash or unregistered shares of the Company’s common stock in the Buyer’s sole discretion. The 2WR Earnout Payments are payable quarterly for a two-year period and will be equal to 20% of the 2WR Entities’ Quarterly Gross Profit (as defined in the 2WR Purchase Agreement). The value of the shares of the Company’s common stock issued in the transaction was determined based upon the daily volume weighted average closing price of the Company’s common stock in the ten trading days prior to the issuance of such shares. The Company accounted for the acquisition of the 2WR Entities as follows:
SCHEDULE OF INITIAL ACQUISITION OF TARGET COMPANIES
Purchase Price | $ | 10,058,536 | ||
Allocation of Purchase Price: | ||||
Cash | $ | 950,690 | ||
Accounts receivable, net | $ | 1,676,208 | ||
Prepayments and other assets | $ | 42,752 | ||
Property and equipment | $ | 9,351 | ||
Goodwill | $ | 7,090,054 | ||
Intangible assets | $ | 1,762,500 | ||
Accrued expenses | $ | 1,032,394 | ||
Deferred tax liability | $ | 440,625 |
8 |
The following pro forma amounts reflect the Company’s results as if the acquisition of the 2WR Entities had occurred on January 1, 2020. These pro forma amounts have been calculated after applying the Company’s accounting principles (“GAAP”). On December 31, 2020, we effectedpolicies and adjusting the results of the acquisition to reflect the additional amortization of intangibles.
SCHEDULE OF SUPPLEMENTAL INFORMATION ON UNAUDITED PRO-FORMA BASIC OF ACQUISITION
1 | 2 | 3 | 4 | |||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Revenue | 16,281,503 | 14,868,933 | 37,334,371 | 28,617,733 | ||||||||||||
Net Income (loss) | (1,739,304 | ) | 1,358,395 | (2,435,521 | ) | 732,592 |
Acquired goodwill from the 2WR Entities represents the value expected to arise from organic growth and an opportunity to expand into a 1-for-6 reverse stock split with respect to our common stock. All share and per share information in these consolidated financial statements gives effect to this reverse stock split, including restating prior period reported amounts.well-established market for the Company.
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 income (loss), condensed consolidated statements of shareholders’ deficitequity (deficit) 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 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, 2020.2021.
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 2020Annual Report on Form 10-K.10-K for the year ended December 31, 2021. During the six months ended June 30, 2021,2022, 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 includeinclude: estimated revenues earned under construction design-build contracts; estimated useful lives and potential impairment of long-lived assets, intangibles and goodwill,goodwill; inventory write offs,offs; allowance for deferred tax assets,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.
Recently Issued Accounting PronouncementsBalance Sheet Classifications
FromThe 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.
Contracts Receivable
Contracts receivable includes billed and unbilled amounts for services provided to customers for which the Company has an unconditional right to payment. Billed and unbilled amounts for which payment is contingent on anything other than the passage of time are included in contract assets and contract liabilities on a contract-by-contract basis. When payment of the Financial Accounting Standards Board (the “FASB”)retainage is contingent upon the Company fulfilling its obligations under the contract it does not meet the criteria to be included in contracts receivable and remains in the contract’s respective contract asset or other standards setting bodies issue new accounting pronouncements. contract liability, determined on a contract-by-contract basis. Retainage for which the Company has an unconditional right to payment that is only subject to the passage of time are included in contracts receivable.
The FASB issues updates to new accounting pronouncements throughCompany provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Contracts receivable is ordinarily due 30 days after the issuance of an Accounting Standards Update (“ASU”). Unless otherwise discussed,the invoice. Accounts past due more than 60 days are considered delinquent. Interest continues to accrue on delinquent accounts until the account is past due more than one year, at which time interest accrual ceases and does not resume until the account is no longer classified as delinquent, Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer.
9 |
Contract Assets and Liabilities
The timing of when the Company believes that the impact of recently issued guidance, whether adopted or to be adopted in the future,bills their customers on long-term construction contracts is not expected to have a material impactgenerally 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 in unbilled revenue, which is included in contract assets. Additionally, the Company may receive advances or deposits from customers before revenue is recognized, resulting in deferred revenue, which is included in contract liabilities.
Retainage for which the Company has an unconditional right to payment that is only subject to the passage of time are classified as contracts receivable. Retainage subject to conditions other than the passage of time do not meet the definition of a receivable and are therefore included in contract assets and contract liabilities, as determined on a contract-by-contract basis.
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 financial statements upon adoption.obligation to perform on uncompleted contracts with customers for which the Company has received payment or for which contract receivables are outstanding.
SCHEDULE OF CONTRACT ASSETS AND LIABILITIES
Contract assets | ||||
Revenue recognized in excess of amounts paid or payable (contract receivables) to the Company on uncompleted contracts (contract asset), excluding retainage | $ | 261,920 | ||
Retainage included in contract assets due to being conditional on something other than solely passage of time | 281,767 | |||
Total contract assets | $ | 543,687 | ||
Contract liabilities | ||||
Payments received or receivable (contract receivables) in excess of revenue recognized on uncompleted contracts (contract liability), excluding retainage | $ | (672,699 | ) | |
Retainage included in contract liabilities due to being conditional on something other than solely passage of time | 1,014 | |||
Total contract liabilities | $ | (671,685 | ) |
NOTE 3 – RELATED PARTY TRANSACTIONS
Cloud 9 Support, LLC (“Cloud 9”), a company is an entity owned by James Lowe, a director and shareholder,of the Company. Cloud 9 purchases materials from the Company.Company for use with its customers. Total sales to Cloud 9 from the Company were $93,205 11,813and $247,157 93,205for during the six months ended June 30, 2021,2022, and 2020,2021, respectively, and $79,199 5,606and $114,285 79,199during the three months ended June 30, 20212022 and 2020,2021, respectively. Outstanding receivables from Cloud 9 as of June 30, 20212022 and December 31, 20202021 totaled $5,626 4,052and $61,6786,797, respectively.
In October 2018, we issued a $1,000,000 unsecured note payable to Cloud 9, an entity owned by James Lowe, a director of the Company, which originally became due April 30, 2019 (the “James Lowe Note”). The James Lowe Note was personally guaranteed by Bradley Nattrass, our Chief Executive Officer, and Octavio Gutierrez. The loan had a one-time origination fee of $12,500. Interest accrued at the rate of 12% per annum and was paid monthly. As additional consideration for the James Lowe Note, we granted Mr. Lowe (as designee of Cloud9 Support) an option to purchase shares of our common stock at an exercise price of $ per share, which option is exercisable for a period of . The due date for the James Lowe Note was extended in May 2019 to December 31, 2019 and the interest rate was decreased to 9% per year. In consideration for Cloud9 Support extending the maturity date of the note and reducing the interest rate, we issued shares of our common stock to Mr. Lowe (as designee of Cloud9 Support).
On February 21, 2020, we entered into an agreement to amend the James Lowe Note to extend the maturity date therein from December 31, 2019 to the date which is the earlier of 60 days following the date: (a) on which demand for repayment is made by the lenders under the Credit Agreement, as described in Note 9, (which is now only applicable in the case of an event of default under the Credit Agreement because of the removal of the demand feature pursuant to the First Amendment to the Credit Agreement); or (b) which is the maturity date under the Credit Agreement.
In addition, on February 25, 2020, the Company entered into a subordination, postponement and standstill agreement with Cloud9 Support (the “Subordination Agreement”) pursuant to which Cloud 9 Support agreed to postpone and subordinate all payments due under the promissory note until the facilities under the Credit Agreement have been fully and finally repaid. The term for the Subordination Agreement will continue in force as long as the Company is indebted to the agent or lenders under the Credit Agreement. In consideration for Cloud9 Support’s agreement to extend the maturity date of the promissory note and to enter into the Subordination Agreement, we issued shares of common stock to Mr. Lowe (as designee of Cloud 9 Support).
On December 15, 2020, James Lowe agreed to convert the $1,000,000 James Lowe Note plus $4,500 of accrued interest (the “New James Lowe Note”) into a convertible note bridge financing (see “Bridge Financing” in Note 8 – Notes Payable). The New James Lowe Note carries interest at the rate of 12% and matures on December 31, 2021. The New James Lowe Note plus accrued interest was mandatorily converted into shares of our common stock on February 17, 2021 in connection with the other Bridge Financing notes.
NOTE 4 – PREPAYMENTS AND OTHER ASSETS
Prepayments and other assets are comprised of prepayments paid to vendors to initiate orders and prepaid services and fees. The prepaid balances are summarized as follows:
SCHEDULE OF PREPAID BALANCES
June 30, | December 31, | |||||||
2021 | 2020 | |||||||
Vendor prepayments | $ | 5,699,972 | $ | 2,676,493 | ||||
Prepaid services and fees | 512,919 | 365,931 | ||||||
Deferred financing asset (See Note 9 - Debt) | - | 504,644 | ||||||
Prepayments and other assets | $ | 6,212,891 | $ | 3,547,068 |
June 30, 2022 | December 31, 2021 | |||||||
Vendor prepayments | $ | 5,348,733 | $ | 10,652,962 | ||||
Prepaid services and fees | 761,697 | 587,505 | ||||||
Other assets | 32,183 | 7,799 | ||||||
Prepayments and other assets | $ | 6,142,613 | $ | 11,248,266 |
NOTE 5 – INVESTMENTS
The components of investments are summarized as follows:
SCHEDULE OF COST METHOD INVESTMENTS
June 30, 2022 | December 31, 2021 | |||||||
Investment in Edyza | $ | 1,710,358 | $ | 1,710,358 | ||||
Investment in XSF | 2,500,000 | 2,500,000 | ||||||
Investment | $ | 4,210,358 | $ | 4,210,358 |
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. The balance as of June
10 |
XS Financial
On October 30, 2021, the Company’s wholly-owned subsidiary UGFS, LLC, a Colorado limited liability company (“UGFS”), 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 Controlled Environment Agriculture (CEA) companies in the United States. UGFS invested $2,500,000 of a total $43,500,000 raised by XSF. The investment is convertible into equity and December 31, 2020incurs 9.50% interest payable in cash (8.0%) and payment-in-kind Notes (1.5%) prior to any Nasdaq listing and 8.0% interest after any listing, pursuant to the Note Purchase Agreement. The debt matures on October 28, 2023, with a one-year option to extend the maturity date at the option of XSF. In addition, UGFS received 1,250,000 warrants with a CAD$ exercise price pursuant to the Warrant instrument. No value was $1,710,358.attributed to the warrants at the time of the investment in XFS.
NOTE 6 – GOODWILL & INTANGIBLE ASSETS
Goodwill
The Company has recorded goodwill in conjunction with the initial acquisition of Impact Engineering, Inc. (“Impact”) on March 7, 2019.acquisitions it has completed. The goodwill balancebalances as of June 30, 20212022 and December 31, 2020 is2021 were $10,636,284 and $902,0677,992,121., respectively. Goodwill is not amortized. There is no goodwill for income tax purposes. The Company did not record any impairment charges related to goodwill for the periods ended June 30, 2022 and 2021.
Intangible Assets Other Than Goodwill
Intangible assets as of June 30, 2022 and December 31, 2021 consisted of the following:
SCHEDULE OF FINITE-LIVED INTANGIBLE ASSETS
June 30, 2022 | ||||||||||||
Cost | Accumulated Amortization | Net Book Value | ||||||||||
Finite-lived intangible assets: | ||||||||||||
Customer relationships | $ | 2,665,100 | $ | 152,584 | $ | 2,502,516 | ||||||
Trademarks and trade names | 2,195,000 | 148,018 | 2,046,982 | |||||||||
Backlog and Other | 708,837 | 444,162 | 264,675 | |||||||||
Total finite-lived intangible assets: | 5,558,937 | 744,764 | 4,814,173 | |||||||||
Indefinite-lived intangible assets: | ||||||||||||
Patents | 44,276 | - | 44,276 | |||||||||
Trade name | 28,291 | - | 28,291 | |||||||||
Total Intangible assets, net | $ | 5,631,504 | $ | 744,764 | $ | 4,886,740 |
December 31, 2021 | ||||||||||||
Cost | Accumulated Amortization | Net Book Value | ||||||||||
Customer relationships | $ | 834,100 | $ | 49,649 | $ | 784,451 | ||||||
Trademarks and trade names | 499,000 | 41,583 | 457,417 | |||||||||
Backlog and Other | 518,404 | 184,806 | 333,598 | |||||||||
$ | 1,851,504 | $ | 276,039 | $ | 1,575,466 |
The estimated future amortization expense for intangible assets subject to amortization as of June 30, 2022, is summarized below:
SCHEDULE OF FUTURE AMORTIZATION EXPENSES OF INTANGIBLE ASSETS
Estimated Future | ||||
Amortization Expense | ||||
Remainder of 2022 | $ | 577,253 | ||
2023 | 907,610 | |||
2024 | 819,944 | |||
2025 | 819,944 | |||
Thereafter | 1,689,422 | |||
Total | $ | 4,814,173 |
Amortization expense for intangible assets for the six months ended June 30, 2022 and 2020.2021 was $468,725 and $578, respectively. Amortization expense for intangible assets for the three months ended June 30, 2022 and 2021 was $306,225 and $411, respectively.
NOTE 7 – ACCRUED EXPENSES
Accrued expenses are summarized as follows:
SCHEDULE OF ACCRUED EXPENSES
June 30, | December 31, | |||||||
2021 | 2020 | |||||||
Accrued operating expenses | $ | 588,276 | $ | 717,503 | ||||
Accrued wages and related expenses | 661,696 | 408,907 | ||||||
Accrued interest expense | - | 99,258 | ||||||
Accrued sales tax payable | 721,433 | 572,826 | ||||||
Accrued expenses | $ | 1,971,405 | $ | 1,798,494 |
Accrued sales tax payable is comprised of amounts due to various states and Canadian provinces for 2015 through 2020.
NOTE 8 – NOTES PAYABLE
The following is a summary of notes payable excluding related party notes payable:
SCHEDULE OF NOTES PAYABLE
June 30, | December 31, | |||||||
2021 | 2020 | |||||||
Paycheck Protection Program (“PPP”) loan entered into on April 16, 2020. The Company applied for and has been notified that the full amount of the loan, which was used for eligible expenditures for payroll and other expenses described in the CARES Act was forgiven on June 11, 2021. | $ | - | 1,020,600 | |||||
Convertible notes related to bridge financing. See Bridge Financing Notes below. | - | 1,854,500 | ||||||
Total | - | 2,875,100 | ||||||
Less current maturities | - | (1,854,500 | ) | |||||
Long Term | $ | - | $ | 1,020,600 |
During the fourth quarter of 2020 the Company entered into bridge financing notes (the “Bridge Financing Notes”) totaling $1,854,500. The Bridge Financing Notes are a combination of $1,004,500 in the New James Lowe Note (See Note 3 – Related Party Transactions), $350,000 received in November 2020, and an additional $500,000 received in December 2020. The Bridge Financing Notes carry interest at the rate of 12% and mature on December 31, 2021. The Bridge Financing Notes will be mandatorily converted upon the closing of a sale of the securities of the Company, whether in a private placement or pursuant to an effective registration statement under the Securities Act, resulting in at least $2,500,000 of gross proceeds to the Company (a “Qualified Offering”). In the event of a Qualified Offering, the outstanding principal and interest of the Bridge Financing Notes will be converted into the identical security issued at such Qualified Offering at 75% of the per security price paid by investors in connection with the Qualified Offering. The Offering described in Note 12 – Shareholders Equity, was a Qualified Offering and the Bridge Financing Notes were converted into equity in connection with the Offering on February 17, 2021.
June 30, | December 31, | |||||||
2022 | 2021 | |||||||
Accrued operating expenses | $ | 673,034 | $ | 628,871 | ||||
Accrued wages and related expenses | 800,322 | 1,887,124 | ||||||
Accrued 401(k) | 163,941 | 23,520 | ||||||
Accrued sales tax payable | 1,743,966 | 1,338,763 | ||||||
Accrued expenses | $ | 3,381,263 | $ | 3,878,278 |
11 |
NOTE 9 – DEBT
The Company’s borrowings as of June 30, 2021 and December 31, 2020 consisted of the following:
SCHEDULE OF DEBT
June 30, | December 31, | |||||||
2021 | 2020 | |||||||
Revolving Facility | $ | - | $ | 3,403,143 | ||||
Term Loan, net of unamortized debt issuance costs | - | 1,868,320 | ||||||
Total | - | 5,271,463 | ||||||
Less current debt due within one year | - | (5,271,463 | ) | |||||
Total long-term debt | $ | - | $ | - |
On February 21, 2020, we entered into a letter agreement (the “Credit Agreement”) by and among the Company, as borrower, urban-gro Canada Technologies Inc. and Impact., as guarantors, the lenders party thereto (the “Lenders”), and Bridging Finance Inc., as administrative agent for the Lenders (the “Agent”). The Credit Agreement, which was denominated in Canadian dollars (C$), was comprised of (i) a 12-month senior secured demand term loan facility in the amount of C$2.7 million ($2.0 million), which was funded in its entirety on the closing date (the “Term Loan”); and (ii) a 12-month demand revolving credit facility of up to C$5.4 million ($4.0 million), which could be drawn from time to time, subject to the terms and conditions set forth in the Credit Agreement and described further below (the “Revolving Facility,” and together with the Term Loan, the “Facilities”). The Credit Agreement was personally guaranteed by the Company’s CEO and Chairman, Brad Nattrass, and was to be in place for the original term of the Credit Agreement (1 year) plus a 1-year extension period at the discretion of the Lender as provided in the Credit Agreement.
The final maturity date of the Facilities was initially stipulated in the Credit Agreement as the earlier of (i) demand, and (ii) the date that is 12 months after the closing date, with a potential extension to the date that is 24 months after the closing date (the “Initial Maturity Date”). The Facilities bore interest at the annual rate established and designated by the Bank of Nova Scotia as the prime rate, plus 11% per annum. Accrued interest on the outstanding principal amount of the Facilities was due and payable monthly in arrears, on the last business day of each month, and on the Initial Maturity Date.
The Revolving Facility could initially be borrowed and re-borrowed on a revolving basis by the Company during the term of the Facilities, provided that borrowings under the Revolving Facility were limited by a loan availability formula equal to the sum of (i) 90% of insured accounts receivable, (ii) 85% of investment grade receivables, (iii) 75% of other accounts receivable, (iv) 50% of eligible inventory, and (v) the lesser of C$4.05 million ($3.0 million) and (A) 75% of uncollected amounts on eligible signed equipment orders for equipment systems contracts and (B) 85% of uncollected amounts on eligible signed professional services order forms for design contracts. The Revolving Facility could be prepaid in part or in full without a penalty at any time during the term of the Facilities, and the Term Loan could be prepaid in full or in part without penalty subject to 60 days prior notice in each case subject to certain customary conditions.
On September 4, 2020, the Company executed an amendment to the Credit Agreement (the “First Amendment”) whereas the Facilities described above were due on December 31, 2021 (the “Revised Maturity Date”). The First Amendment also increased the rate at which the Facilities will bear interest to the annual rate established and designated by the Bank of Nova Scotia as the prime rate, plus 12% per annum.
As a result of the First Amendment, the Company was required to prepay, on or before January 31, 2021, $1,000,000 of the balance of the Term Loan and begin making monthly payments of $100,000 on the balance on the Term Loan starting on March 1, 2021. Additionally, the Company was required to make monthly payments of $50,000 on the balance under the Revolving Facility beginning October 1, 2020 and could make no more draws under the Revolving Facility.
The Company incurred $1,314,868 of debt issuance costs in connection with these Facilities, of which $676,822 was non-cash in the form of Common Stock and warrant issuances. The Company estimated the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option pricing based on the market value of the underlying Common Stock at the valuation measurement date of $, the remaining contractual terms of the warrants of 5 years, risk free interest rate of 1.14% an expected volatility of the price of the underlying Common Stock of 100%. The Company recorded the debt issuance costs as either a deferred financing asset or a direct reduction of the loan obligation based on the pro-rata value of the Revolving Facility and Term Loan, respectively, on the closing date. The debt issuance costs were being amortized as interest expense over the life of the Facilities, until the Revised Maturity Date. On February 17, 2021, the Company repaid all amounts outstanding under the Credit Agreement and expensed the remaining unamortized debt issuance costs as loss on extinguishment of debt. As of December 31, 2020, there were $504,644 and $252,322 of unamortized debt issuance costs remaining related to the Revolving Facility and Term Loan, respectively.
NOTE 108 – RISKS AND UNCERTAINTIES
Concentration Risk
DuringThe table below shows customers who account for 10% or more of the six months ended June 30, 2021 one client represented 46%Company’s total revenues and another client represented 15%10% or more of total revenue, compared to the six months ended June 30, 2020 where two other clients represented 17% each of total revenue. DuringCompany’s accounts receivable for the three months ended June 30, 2021, one client represented 60periods presented:% and another client represented 11% of total revenue, compared to the three months ended June 30, 2020, when two other clients represented 25% and 11% of total revenue. At June 30, 2021 one client represented 75% and another client represented 15% of total outstanding accounts receivable. At December 31, 2020, one client represented 23% and another client represented 17% of total outstanding accounts receivable.
Customers exceeding 10% of revenue:
SCHEDULES OF CONCENTRATION OF RISK
Three Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
Company Customer Number | 2022 | 2021 | 2022 | 2021 | ||||||||||||
C000001462 | * | 59 | % | 16 | % | 46 | % | |||||||||
C000001140 | 25 | % | * | 20 | % | * | ||||||||||
C000001660 | * | * | * | 15 | % | |||||||||||
C000001661 | * | 11 | % | * | * | |||||||||||
C000000819 | 14 | % | * | * | * |
During the six months ended June 30, 2021, 16Customers exceeding 10% of accounts receivable:%
June 30, | December 31, | |||||||
Company Customer Number | 2022 | 2021 | ||||||
C000001462 | * | 41 | % | |||||
C000001140 | 23 | % | 23 | % | ||||
C000002151 | 12 | % | * |
The table below shows vendors who account for 10% or more of the Company’s total purchases were from one vendor compared to 15% from another vendor for the six months ended June 30, 2020. During the three months ended June 30, 2021, one vendor represented 25%and 10% or more of the Company’s total purchases, compared toaccounts payable for the three months ended June 30, 2020, where a separate vendor consistedperiods presented:
Vendors exceeding 10% of purchases:
15%
Three Months Ended June 30, | Three Months Ended June 30, | Six | Six Months Ended June 30, | |||||||||||||
Company Vendor Number | 2022 | 2021 | 2022 | 2021 | ||||||||||||
V000001029 | 23 | % | * | 25 | % | 10 | % | |||||||||
V000001350 | * | 17 | % | * | 16 | % | ||||||||||
V000000453 | * | * | 12 | % | * | |||||||||||
V000001372 | * | 25 | % | * | 15 | % | ||||||||||
V000001326 | * | * | * | 10 | % | |||||||||||
V000001280 | 19 | % | * | * | * |
Vendors exceeding 10% of the Company’s total purchases. At June 30, 2021, one vendor represented 35% of total accounts payable. At December 31, 2020, a separate vendor represented payable:
25% of total accounts payable.
June 30, | December 31, | |||||||
Company Vendor Number | 2022 | 2021 | ||||||
V000001029 | 33 | % | * | |||||
V000000453 | * | 20 | % | |||||
V000001372 | * | 33 | % | |||||
V000001326 | * | 12 | % |
*Amounts less than 10%
Coronavirus PandemicForeign Exchange Risk
The outbreak of COVID-19, a novel strain of coronavirus first identifiedAlthough the Company’s revenues and expenses are expected to be predominantly denominated in China, which has spread acrossUnited States dollars, the globe including the U.S., has had an adverse impact on our operations and financial condition. The responseCompany may be exposed to this coronavirus by federal, state and local governmentscurrency 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. has resulteddollar, the Canadian dollar, the Euro, and the currency of other regions in significant market and business disruptions across many industries and affecting businesses of all sizes. This pandemic has also caused significant stock market volatility and further tightened capital access for most businesses. Given thatwhich the COVID-19 pandemic and its disruptions are of an unknown duration, they could have an adverse effect on our liquidity and profitability.
The ultimate magnitude of COVID-19, including the extent of its impact on our financial and operational results, which could be material, will depend on the length of time that the pandemic continues, its effect on the demand for our products and our supply chain, the effect of governmental regulations imposed in response to the pandemic, as well as uncertainty regarding all of the foregoing. We cannot at this time predict the full impact of the COVID-19 pandemic, but it couldCompany may operate may have a larger material adverse effect on ourthe Company’s business, financial condition resultsand operating results. The Company may, in the future, establish a program to hedge a portion of operations and cash flows beyond what is discussed within this Report.the Company’s foreign currency exposure with the objective of minimizing the impact of adverse foreign currency exchange movements. However, even if the Company develops a hedging program, there can be no assurance that it will effectively mitigate currency risks.
Stock-based compensation expense for the six months ended June 30, 20212022, and 20202021 was $and $, respectively, based on the vesting schedule of the stock grants and options. Stock basedStock-based compensation expense for the three months ended June 30, 20212022 and 20202021 was $ 882,000 and $, respectively, based on the vesting schedule of the stock grants and options. No cash flow effects are anticipated for stock grants.
SCHEDULE OF STOCK GRANT ACTIVITY
Grants | ||||
Grants | ||||
Grants | ||||
) | ||||
Grants Vested | (16,667 | ) | ||
Grants unissued as of June 30, 2022 | 758,566 | |||
Grants outstanding, ending | 758,566 |
12 |
As of June 30, 2021,2022, the Company has $ million in unrecognized share-based compensation expense related to these stock grants.
Stock Options:
SCHEDULE OF STOCK OPTION ACTIVITYGRANT VESTING PERIODS
Number of Shares | Weighted Average Remaining Life (Years) | Weighted Average Exercise Price | Number of Shares | Weighted Average Remaining Life (Years) | Weighted Average Exercise Price | |||||||||||||||||||||
Stock options outstanding as of December 31, 2020 | 638,278 | $ | 6.48 | |||||||||||||||||||||||
Stock options outstanding as of December 31, 2021 | 641,337 | $ | 6.27 | |||||||||||||||||||||||
Issued | 55,833 | $ | 6.00 | 44,410 | $ | 10.48 | ||||||||||||||||||||
Expired | (18,444) | $ | 7.89 | - | - | $ | - | |||||||||||||||||||
Exercised | (4,777) | - | $ | 6.78 | (4,555 | ) | - | $ | (6.00 | ) | ||||||||||||||||
Stock options outstanding at June 30, 2021 | 670,890 | $ | 6.39 | |||||||||||||||||||||||
Stock options exercisable at June 30, 2021 | 365,362 | $ | 6.46 | |||||||||||||||||||||||
Stock options outstanding as of June 30, 2022 | 681,192 | $ | 6.55 | |||||||||||||||||||||||
Stock options exercisable as of June 30, 2022 | 579,169 | $ | 6.41 |
The fair value of the options is calculated using the Black-Scholes pricing model based on the market value of the underlying common stock at the valuation measurement date of $ , the remaining contractual term of the options of years, risk-free interest rate of % and expected volatility of the price of the underlying common stock of %.
As of June 30, 2021,2022, the Company has $ million in unrecognized share-based compensation expense related to these stock options. The aggregate intrinsic value of the options outstanding and exercisable at June 30, 20212022 is $.
NOTE 1210 – SHAREHOLDERS’ EQUITY
In March 2020, an executive left the Company and returned common shares as part of the related separation agreement. The Company retired the shares and reduced its issued and outstanding stock by shares.
On February 17, 2021, we completed an offering of shares of our common stock, inclusive of the underwriters full overallotment, at $per share for total gross offering proceeds of $62,100,000. In connection with this offering, we received approval to list our common stock on the Nasdaq Capital Market under the symbol “UGRO”.
On May 24, 2021, we announced that the Board of Directors 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. UnderOn January 18, 2022, the Board of Directors authorized a $2.0 million increase to the stock repurchase program, to a total of $7.0 million. On February 2, 2022, the Board of Directors authorized an additional $1.5 million increase to the stock repurchase, to a total of $8.5 million. During the six months ended June 30, 2022, the Company repurchased shares of common stock at an average price per share of $ , for a total price of $3.8 million under this program,program. The Company did not repurchase any shares during the three-months ended June 30, 2022. In total, the Company has repurchased shares of common stock asat an average of $ per share, for a total price of $8.5 million, under this program.
For the three and six months ended June 30, 2021.2021, the Company repurchased under this program, and repurchased shares of common stock at an average price of $ per share, for a total price of $3.0million outside of the stock repurchase program.
NOTE 1311 – WARRANTS
The following table shows warrant activity for the six months ended June 30, 2021.2022.
SCHEDULE OF WARRANT ACTIVITY
Number of shares | Weighted Average Exercise Price | |||||||
Warrants outstanding as of December 31, 2020 | 202,752 | $ | 13.64 | |||||
Exercised | (18,412 | ) | $ | 24.00 | ||||
Issued in connection with equity offering | 310,500 | $ | 12.50 | |||||
Expired | (116,674 | ) | $ | 18.00 | ||||
Warrants outstanding as of June 30, 2021 | 377,166 | $ | 11.16 | |||||
Warrants exercisable as of June 30, 2021 | 377,166 | $ | 11.16 |
Number of shares | Weighted Average Exercise Price | ||||||||
Warrants outstanding as of December 31, 2021 | 374,088 | $ | 11.26 | ||||||
Exercised | (18,196 | ) | $ | 6.00 | |||||
Terminated – cashless exercise | (44,393 | ) | $ | 6.00 | |||||
Warrants outstanding as of June 30, 2022 | 311,499 | $ | 12.32 | ||||||
Warrants exercisable as of June 30, 2022 | 311,499 | $ | 12.32 |
13 |
The fair value of the warrants issued in connection with the equity offering were calculated using the Black-Scholes pricing model based on the market value of the underlying common stock at the valuation measurement date of $10.00, the remaining contractual term of the options of 5 years, risk-free interest rate of 0.57% and expected volatility of the price of the underlying common stock of 100%.
The weighted-average life of the warrants is 2.202.3 years. The aggregate intrinsic value of the warrants outstanding and exercisable atas of June 30, 20212022 is $0.
NOTE 12 – INCOME TAXES
The Company has experienced losses for both book and tax purposes since inception. The deferred income tax benefit for the three and six month periods ended June 30, 2022 relates to the reduction in the deferred tax liability associated with the amortization of the intangible assets from the acquisitions of the Emerald and 2WR Entities.
NOTE 1413 – SUBSEQUENT EVENTS
The Company has evaluated events and transaction occurring subsequent to June 30, 20212022 up to the date of this filing of these condensed consolidated financial statements. These statements contain all necessary adjustments and disclosures resulting from that evaluation.
On July 30,During 2021, the Company announced that it had completedpurchased lights from one of its international vendors to fulfill an order for a major customer. Subsequent to the acquisitions of 2WR of Colorado, Inc., a Colorado corporation, 2WR of Georgia, Inc., a Georgia corporation,sale, delivery and MJ12 Design Studio, Inc., a Colorado corporation (“ the 2WR Entities”), and had entered into an affiliate relationship with 2WR of Mississippi, P.C., a Mississippi professional corporation, agreements that were initially announced on June 28, 2021. The acquisitionsinstallation of the 2WR Entitieslights, the customer noted the lights were for a total purchase price of up to $9,100,000, consisting of $5,100,000 in cash and $2,000,000 not performing as the manufacturer had stipulated. The Company performed tests of the Company’s stock atlights and confirmed the closingperformance metrics did not meet the manufacturer’s specifications. The Company worked with the customer to determine a lighting solution of replacement lights, sourced from the transactions and up to $2,000,000 of additional earnout paymentsvendor, that would meet their needs. The customer has been a key customer to the sellersCompany and the Company expects to continue to do significant business with the customer in the future. In order to immediately satisfy the customer in this matter, during the third quarter of 2022, the 2WR Entities payable quarterly over a two-year period fromCompany agreed to supply the date of closing ofreplacement lighting solution to the transaction, based on the 2WR Entities achieving agreed upon gross profit targets. The earnout payments, if and when earned, can be paid in cash or stockcustomer at the Company’s discretion.expense while the Company continues to work with the vendor to resolve the original defective lighting issue. The Company’s initial accounting forcost of the 2WR Entities acquisitions has not been completed becausereplacement lighting solution is expected to be $3.2 million. The Company is still evaluating the valuations have not yet been received fromnet amount of the Company’s independent valuation firm. expense it expects to record in the third quarter related to this transaction.
14 |
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 page 3 of this Report.
Overview and History
urban-gro, Inc. (“we,” “us,” “our,” the “Company,” or “urban-gro”) is a leadingan integrated professional services and design-build firm. We offer value-added architectural, engineering, and design services company focused onconstruction management solutions to the sustainable commercial indoor horticulture market. We engineer and design indoor controlled environment agricultureControlled Environment Agriculture (“CEA”), industrial, healthcare, and other commercial sectors. Innovation, collaboration, and a commitment to sustainability drive our team to provide exceptional customer experiences.
On April 29, 2022, we acquired Emerald Construction Management, a general contracting and construction management firm. On July 30, 2021, we acquired three architecture design firms (2WR Colorado, Inc, 2WR Georgia, Inc. and MJ12 Design Studios, Inc., collectively the “2WR Entities”) from their shareholders. The 2WR Entities were under common ownership and management. We design and build high performance facilities andin several sectors. Within the CEA sector, we design these facilities and while building them, we then integrate complex environmental equipment systems into those facilities.them. 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, 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 which establish facilities that allow clients to manage, operate and perform at the highest level throughout their entire cultivation lifecycle once they are up and running.
We aim to work with our clients in all sectors from 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 design, engineering, construction management, and managed servicesservices. Within the CEA sector, this is complemented by a vetted suite of select cultivation equipment systems. We provide these services in a turnkey fashion, operating as a single point of responsibility for our clients, or they can pick and choose from the variety of services we offer. Outlined below is an example of a complete project with estimated time frames for each phase that demonstrate how we provide value to our clients for the life of their facility.
15 |
Our indoor commercial cultivation solution offers an integrated suite of services and equipment systems that generally fall within the following categories:
● | Service Solutions: |
● |
i. | ||
ii. | Cultivation Space |
iii. | Architectural Design | |
iv. | Engineering | |
v. | Integrated Cultivation Design (“ICD”) |
vi. | Construction Management (“ |
● |
i. |
ii. |
● | Integrated Equipment Solutions: |
i. | Design, Source, and Integration of Complex Environmental Equipment Systems Including Purpose-Built Heating, Ventilation, and Air Conditioning (“HVAC”) solutions, Environmental Controls, Fertigation, and Irrigation Distribution. |
ii. | Value-Added Reselling (“VAR”) of Cultivation Equipment |
iii. | Strategic Vendor Relationships with Premier Manufacturers |
TheHistorically, the majority of our clients are commercial CEA cultivators. However, through our acquisitions we have seen our client base across the industrial, healthcare, and other commercial sectors grow as well. We believe one of the key points of our differentiation that our clients value is the depth of experience of our employees and our Company. We currently employ 75approximately 125 individuals. Approximately two-thirds of our employees are considered experts in their areas of focus, and our team includes Architects,Designers (Architects, Interior Designers, Cultivation Space Planners), Professional Engineers (Mechanical, Electrical, Plumbing, Controls,Plumbing), Engineers (Controls, and Agricultural), Professional Engineers, horticulturalistsConstruction Managers (superintendents, supervisors, project managers) and individuals with Masters Degrees in Plant Science, Horticulture, and Business Administration. As a company, we have worked on more than 4501000s of projects and well over 500 projects at indoor CEA facilities and believe that the experience of our team and Company provideprovides clients with the confidence that we will proactively keep them from making common costly mistakes during the build out andprocess that impact operational stages. Our expertise translates into clients saving time, money, and resources and provides them ongoing access tothrough expertise that they can leverage without having to add headcount to their own operations. We provide this experience in addition to offering a platform of the highest quality equipment systems that can be integrated holistically into our clients’ facilities.
Results Ofof Operations
Comparison of Results of Operations for the three months ended June 30, 20212022 and 20202021
During the three months ended June 30, 2021,2022, we generated revenues of $12.8$16.3 million compared to revenues of $4.0$12.8 million during the three months ended June 30, 2020,2021, an increase of $8.8$3.5 million, or 220%27%. Equipment systems revenue increased $9.1 million primarily due to anThis increase in cultivation equipment sales, servicesrevenues is a result of the following changes in individual revenue decreased $0.3 million and consumable product sales increased $0.1 million.components:
● | Construction design-build revenue increased $2.9 million, exclusively from the acquisition of Emerald; | |
● | Services revenue increased $2.7 million, primarily from the acquisition of the 2WR Entities: | |
● | Equipment systems revenue decreased $2.1 million due to a reduction in capital equipment spending by customers: and | |
● | Consumable product sales decreased $0.1 million. |
During the three months ended June 30, 2021,2022, cost of revenues was $9.9$12.8 million compared to $2.8$9.9 million during the three months ended June 30, 2020,2021, an increase of $7.1$2.9 million, or 252%29%. This increase is directly attributable to the overall increase in revenues indicated above.
Gross profit was $2.9$3.5 million (23%(22% of revenues) during the three months ended June 30, 20212022, compared to $1.2$2.9 million (30%(23% of revenue) during the three months ended June 30, 2020.2021. Gross profit as a percentage of revenues decreased primarily due to a significantan increase in lower margin equipment systems revenues for the comparable periods.construction design/build revenue offset by an increase in higher margin services revenue.
Operating expenses increased $0.6by $2.7 million, or 101%, to $5.4 million for the three months ended June 30, 2022 compared to $2.7 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.2021. This was due to the offsetting effects of a $0.8$1.8 million increase in general operating expenses, mainly due to an increase in salary, marketing, and travel expenses, in part related to the acquisitions of the 2WR Entities and Emerald, a $0.6 million increase in stock-based compensation expense, primarily due to an increase in the total number of employees and the number of employees included under the plan, and a $0.3 million reductionincrease in stock-based compensation expense.intangible asset amortization primarily due to the acquisitions of the 2WR Entities and Emerald.
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Non-operating income was $0.1 million for the three months ended June 30, 2022, compared to non-operating income of $1.0 million for the three months ended June 30, 2021, compareda decrease of $0.9 million. Other income increased by $0.1 million due to non-operating expenses of $0.6 million for the three months ended June 30, 2020.interest earned on the XS Financial investment. The Company recorded a $1.0 million gain from the PPP loan forgiveness in the three months ended June 30, 2021. For
Deferred income tax benefit increased by $0.1 million due to the three months ended June 30, 2020,acquisitions of the company incurred interest expense of $0.4 million2WR Entities and recorded an impairment loss of $0.3 million.Emerald.
As a result of the above, we incurred a net incomeloss of $1.7 million for the three months ended June 30, 2022, or a net loss per share of ($0.17), compared to a net gain of $1.3 million for the three months ended June 30, 2021, or a net gain per share of $0.11, compared to a net loss of $1.6 million for the three months ended June 30, 2020 or a loss per share of ($0.33).
$0.11.
Comparison of Results of Operations for the six months ended June 30, 20212022 and 20202021
During the six months ended June 30, 2021,2022, we generated revenues of $24.9$37.3 million compared to revenues of $8.2$24.9 million during the six months ended June 30, 2020,2021, an increase of $16.7$12.4 million, or 201%50%. Equipment systems revenue increased $16.9 million primarily due to anThis increase in cultivation equipment sales, servicesrevenues is a result of the following changes in individual revenue decreased $0.5 million and consumable product sales increased $0.2 million.components:
● | Services revenue increased $6.2 million due primarily to the acquisition of the 2WR Entities; | |
● | Equipment systems revenue increased $3.6 million primarily due to an increase in cultivation equipment capital expenditure purchases by our customers; | |
● | Construction design-build revenue increased $2.9 million exclusively due to the acquisition of Emerald; and | |
● | Consumable product sales decreased $0.2 million. |
During the six months ended June 30, 2021,2022, cost of revenues was $19.3$28.9 million compared to $6.0$19.3 million during the six months ended June 30, 2020,2021, an increase of $13.3$9.6 million, or 224%50%. This increase is directly attributable to the increase in revenues indicated above.
Gross profit was $5.6$8.4 million (22%(23% of revenues) during the six months ended June 30, 20212022 compared to $2.3$5.6 million (28%(22% of revenue) during the six months ended June 30, 2020.2021. Gross profit as a percentage of revenues decreasedincreased primarily due to a significantan increase in higher margin services revenues offset by an increase in lower margin equipment systems revenues for the comparable periods.construction design/build revenue.
Operating expenses increased $0.6by $6.0 million, or 116%, to $11.2 million for the six months ended June 30, 2022 compared to $5.2 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.2021. This was due to the offsetting effects of a $0.9$4.4 million increase in general operatingand administrative expenses, mainly due to an increase in salary, marketing, and travel expenses, offset byin part related to the acquisitions of the 2WR Entities and Emerald, a $0.4$1.2 million reductionincrease in stock-based compensation expense.expense, primarily due to an increase in the number of total employees and an increase in employees included under the plan, and a $0.5 million increase in intangible asset amortization from the acquisitions of Emerald and 2WR.
Non-operating income was $0.2 million for the six months ended June 30, 2022, compared to non-operating expense wasof $0.7 million for the six months ended June 30, 2021, a change of $0.9 million. Interest expense decreased by $0.3 million to $0.0 million compared to $0.9$0.3 million forin the six months ended June 30, 2020. The2021, due to the elimination of debt. Interest income increased by $0.1 million due to the interest earned on the XS Financial investment. For the six months ended June 30, 2021, the Company incurred a $1.0 million gain from the forgiveness of the PPP loan, ana $0.8 million loss on the extinguishment of debt, and a $0.6 million interest expense related to the conversion of debt to equity at a discount to the offering price,price.
Deferred income tax benefit increased by $0.2 million due to the acquisitions of the 2WR Entities and interest expenseEmerald.
As a result of $0.3the above, we incurred a net loss of $2.4 million for the six months ended June 30, 2021. For the six months ended June 30, 2020, the company incurred interest expense2022, or a net loss per share of $0.7 million and recorded an impairment loss of $0.3 million.
As($0.23), compared to a result of the above, we incurred net loss of $0.3 million for the six months ended June 30, 2021, or a net loss per share of ($0.03), compared to a net loss of $3.3 million for the six months ended June 30, 2020 or a loss per share of ($0.69).
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 taxes/benefit, depreciation of tangible assets, amortization of intangible assets, impairment of investments, unrealized exchange losses, debt forgiveness and extinguishment, stock-based compensation expense, and acquisition costs, that we do not believe reflect our core operating performance.
Our board of directors 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:
Three months Ended June 30, | Six months Ended June 30, | Three months Ended June 30, | Six months Ended June 30, | |||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
Net Income (Loss) | $ | 1,257,444 | $ | (1,569,970 | ) | $ | (331,138 | ) | $ | (3,265,601 | ) | $ | (1,739,304 | ) | $ | 1,257,444 | $ | (2,435,521 | ) | $ | (331,138 | ) | ||||||||||
Interest expense | 4,624 | 365,709 | 322,067 | 664,343 | 7,658 | 4,624 | 15,317 | 322,067 | ||||||||||||||||||||||||
Interest expense – BCF | – | – | 636,075 | – | – | – | – | 636,075 | ||||||||||||||||||||||||
Interest income | (47,275 | ) | – | (127,126 | ) | – | ||||||||||||||||||||||||||
Income tax benefit | (76,453 | ) | – | (184,512 | ) | – | ||||||||||||||||||||||||||
Loss on extinguishment of debt | – | – | 790,723 | – | – | – | – | 790,723 | ||||||||||||||||||||||||
Stock-based compensation | 299,602 | 559,904 | 590,407 | 992,549 | 882,000 | 299,602 | 1,764,000 | 590,407 | ||||||||||||||||||||||||
Impairment of investment | – | 310,000 | – | 310,000 | ||||||||||||||||||||||||||||
Depreciation and amortization | 53,941 | 59,396 | 109,626 | 120,411 | 371,557 | 53,941 | 589,835 | 109,626 | ||||||||||||||||||||||||
Transaction & new entity costs | 15,535 | - | 70,760 | – | ||||||||||||||||||||||||||||
Non-recurring legal fees | 57,382 | - | 218,929 | – | ||||||||||||||||||||||||||||
PPP Loan forgiveness | (1,032,316 | ) | - | (1,032,316 | ) | - | – | (1,032,316 | ) | – | (1,032,316 | ) | ||||||||||||||||||||
Adjusted EBITDA | $ | 583,295 | $ | (274,961 | ) | $ | 1,085,444 | $ | (1,178,298 | ) | $ | (528,900 | ) | $ | 583,295 | $ | (88,318 | ) | $ | 1,085,444 |
BACKLOG
As of December 31, 2020, the Company began reporting the dollar amount of contractually committed orders for equipment systems for which revenue has not been recognized (“Backlog”).
Backlog is a non-GAAP 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 boardindustries. 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 for which customer deposits have been received. Construction Design-Build backlog is comprised of directorsconstruction projects once the contract is awarded and management team focus on as a key performance measure. Although there can be no assurances that Backlog will be recognized as equipment systems revenue in future periods,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 tracking Backlog assists us in estimating the timing of future equipment systems revenue. Backlogwe 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.
Our backlog as of June 30, 2021 was $27.9 million. This compares to Backlog of $15.2 million and $14.6 million as of2022, March 31, 20212022, and December 31, 2020, respectively.2021 for each of our revenue categories is reflected in the following table (in millions of $):
Revenue Category | June 30, 2022 | March 31, 2022 | December 31, 2021 | |||||||||
Equipment Systems | $ | 7 | $ | 16 | $ | 25 | ||||||
Construction Design-Build (1) | 10 | NA | NA | |||||||||
Services | 5 | 6 | 5 | |||||||||
Total | $ | 22 | $ | 22 | $ | 30 |
(1) - Construction Design-Build revenue and backlog relate to the operations of Emerald C.M. which was acquired by the Company on April 30, 2022.
Historically, the majority of our Equipment Systems and Services backlog has been retired and converted into revenue within two quarters. At June 30, 2022, we expected approximately 85% of our Construction Design-Build backlog to be completed in the next 12 months.
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.
Although the majority of the contracts in our Construction Design-Build backlog may be canceled or modified at the election of the customer, we have not experienced material amounts of contract cancellations or modifications. 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 year-end Construction Design/Build backlog amounts.
Liquidity and Capital Resources
As of June 30, 2021,2022, we had cash of $50.4$22.8 million, which represented an increasea decrease of $50.2$11.8 million from December 31, 2020. This increase in cash and cash equivalents is primarily2021 due to the net proceeds received from our equity offering in February of 2021 of $58.2 million offset by $5.8 million of debt repayment and $3.5 million of treasury stock purchases during the six months ended June 30, 2021.following changes:
Net cash provided by operating activities was $1.3 million during the six months ended June 30, 2021, compared to net cash used in operating activities of $3.2 million during the six months ended June 30, 2020, an improvement of $4.5 million. This increase in cash provided by operating activities is primarily the result of an improvement in income from operations for the comparable periods with the remaining fluctuation being primarily comprised of fluctuations in operating assets and liabilities. At June 30, 2021, we had $4.5 million in client deposits related to client orders, compared to client deposits of $4.9 million as of December 31, 2020. We require prepayments from clients before any design work is commenced and before any material is ordered from the vendor. These prepayments are booked to the client deposits liability account when received. We expect client deposits to be relieved from the deposits account no longer than 12 months for each project. At June 30, 2021, we had $6.2 million of vendor prepayments compared to $3.5 million at December 31, 2020. At June 30, 2021, we had $2.3 million in accounts payable, compared to $0.7 million at December 31, 2020.
Net cash used in investing activities was $0.0 million for the six months ended June 30, 2021, compared to $0.1 million during the six months ended June 30, 2020. Historically, cash has been used to increase our investments in strategic partnerships and to acquire property and equipment. We will continue to have ongoing needs to purchase property and equipment to maintain our operations. We have no material commitments for capital expenditures as of June 30, 2021.
Net cash provided by financing activities was $49.0 million for the six months ended June 30, 2021, compared to $3.2 million during the six months ended June 30, 2020. Cash provided from financing activities during the six months ended June 30, 2021 primarily relates to $58.3 million in net proceeds received from the issuance of stock, offset by $5.8 million used in the repayment of notes payable and $3.5 million in treasury shares acquired.
● | Net cash used by operating activities was $4.9 million. This use of cash is primarily the net effects of a $10.1 million decrease in customer deposits, a $1.3 million decrease in accounts payable and accrued expenses, and a $6.1 million decrease in prepayments and other assets. As of June 30, 2022, we had $3.3 million in customer deposits compared to $13.3 million as of December 31, 2021. We require prepayments from customers before any design work is commenced and before any material is ordered from the vendor. These prepayments are booked to the customer deposits liability account when received. We expect customer deposits to be relieved from the deposits account no longer than 12 months for each project. As of June 30, 2022, we had $6.1 million of vendor prepayments compared to $11.2 million as of December 31, 2021. As of June 30, 2022, we had $11.3 million in accounts payable and accrued expenses compared to $9.9 million as of December 31, 2021. | |
● | Net cash used in investing activities was $3.1 million, primarily from the acquisition of Emerald. We have no material commitments for capital expenditures as of June 30, 2022. | |
● | Net cash used by financing activities was $3.8 million, primarily due to the repurchase of treasury shares. |
Inflation
Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the threesix months ended June 30, 2021.2022.
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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 accounting principles generally accepted in the 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 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 2020Annual Report on Form 10-K.10-K for the year ended December 31, 2021. During the six months ended June 30, 2020,2022, there were no material changes made to the Company’s significant accounting policies.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company and are not required to provide the information under this Item pursuant to Regulation S-K.
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Disclosure Controls and Procedures– Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report.
These controls are designed to ensure that information required to be disclosed in the reports we file or submit pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO to allow timely decisions regarding required disclosure.
Based on this evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of June 30, 2021,2022, at reasonable assurance levels.
We believe that our financial statements presented in this Form 10-Q fairly present, in all material respects, our financial position, results of operations, and cash flows for all periods presented herein.
Inherent Limitations – Our management team, including our CEO and CFO, does not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. In particular, many of our current processes rely upon manual reviews and processes to ensure that neither human error nor system weakness has resulted in erroneous reporting of financial data.
Changes in Internal Control over Financial Reporting – There were no changes in our internal control over financial reporting during ourthe six months ended June 30, 2021,2022, which were identified in conjunction with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The company has been suedFrom time to time, we become involved in or are threatened with legal disputes. While most of these disputes are not likely to have a putative breach of contract case inmaterial effect on our business, financial condition, or operations, the District Court for Arapahoe County, CO. Crest Ventures, LLC v. urban-gro, Inc. (Case No. 2021CV31301 filed on July 30, 2021). The allegations infollowing matters are deemed by the action are based on a claim that Crest Ventures, LLC is entitledCompany to commission compensation on the recent urban-gro, Inc. public stock offering. We believe we have substantial defensesbe material either due to the claims assertedcosts of litigation or the potential negative impacts to the Company should these matters not be resolved in this lawsuit and intend to vigorously defend this action.our favor:
● | Great Green Theory – Emerald filed a lien and brought a suit in the Superior Court of Berkshire, Massachusetts to foreclose on the lien against Great Green Theory Land, LLC and Great Green Theory Cultivation, LLC who are the owners of the land and a construction project in Lee, Massachusetts. Emerald is claiming breach of contract and quantum merit against Great Green Theory for failure to pay approximately $1,326,286.28 in payment applications, of which approximately half of that amount is due and owning to subcontractors on the project. Great Green Theory has filed counterclaims against Emerald claiming liquidated damages of approximately $1,010,000 for alleged unjustifiable delays on the project and alleging construction defects in the project. |
To the best of our management’s knowledge and belief, there are no additional material claims that have been brought against us nor have there been any claims threatened.
o | Account Receivable of $500,000 acquired in Emerald transaction – The selling Emerald shareholders have agreed to indemnify and defend the Company for any litigation or judgement stemming from this lawsuit. The Company has recorded the full $500,000 as a receivable on the opening balance sheet as of the date of the acquisition. |
o | Legal Costs to collect the Account Receivable of $500,000 – The Company has agreed to split the legal costs of this claim until the funds are recovered or until the claim of liquidated damages is relieved. Total estimated legal costs associated with this claim are approximately $250,000. The Company recorded 50% of this amount as a liability on the opening balance sheet as of the date of the acquisition. |
● | Pullar – urban-gro’s former Chief Financial Officer, George Pullar filed a suit in the District Court of Boulder County, Colorado against urban-gro and Bradley Nattrass, in his capacity as urban-gro’s CEO, claiming breach of fiduciary duty. urban-gro has since been dismissed without prejudice from the suit. The remaining claim stems from a settlement agreement with Mr. Pullar and allegations that Mr. Natrrass failed to share enough non-public material information about urban-gro’s plans for fundraising that would have impacted Mr. Pullar’s decision to enter into the settlement agreement. urban-gro’s director and officer liability insurance carrier has indicated coverage is available to Mr. Nattrass for this suit. We believe we have substantial defenses to the claim asserted in this lawsuit and intend to vigorously defend this action. |
● | Crest Ventures, LLC – We have been sued in a putative breach of contract case in the District Court for Arapahoe County, Colorado. The allegations in the action are based on a claim that Crest Ventures, LLC is entitled to commission compensation on the February 2021 uplisting of our common stock to the Nasdaq Capital Market. We believe we have substantial defenses to the claim asserted in this lawsuit and intend to vigorously defend this action. |
● | Sunflower Bank – We have filed a lawsuit against Sunflower Bank related to fraudulent wire transfers of approximately $5.1 million that were made from our accounts at Sunflower Bank in October 2021. As of the date of this Report, $1.8 million of these funds have been returned to us. We are suing Sunflower Bank for the remaining $3.3 million as we believe that Sunflower Bank failed to follow industry standard procedures designed to prevent such a theft and is therefore liable for the unrecovered balance. We expect Sunflower Bank, Sunflower Bank’s insurers, and/or our insurer to reimburse us for the remaining balance. |
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 11, 2021.15, 2022.
URBAN-GRO, INC. | ||
By: | /s/ Bradley Nattrass | |
Bradley Nattrass, | ||
Principal Executive Officer, a duly authorized officer | ||
By: | /s/ Richard Akright | |
Richard A. Akright, Principal Financial Officer and Principal Accounting Officer |
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