UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For
the quarterly period ended
For the transition period from _________ to _________.
Commission
File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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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.
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
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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 ☐ | |
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Smaller
reporting company
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Emerging
growth company
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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
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The number of shares of the registrant’s only class of common stock outstanding as of August 15, 2022 was shares.
urban-gro, Inc.
FORM 10-Q
For the Quarterly Period Ended June 30, 2022
INDEX
| 2 |
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (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, 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, 2022 | December 31, 2021 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ |
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$ |
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||||
| Accounts receivable, net |
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| Contract receivables |
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| Inventories |
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| Prepaid expenses and other current assets |
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| Total current assets |
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| Non-current assets: | ||||||||
| Property and equipment, net |
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| Operating lease right of use assets, net |
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| Investments |
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| Goodwill |
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| Intangible assets, net |
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| Total non-current assets |
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| Total assets | $ |
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$ |
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| Liabilities | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ |
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$ |
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| Contract liabilities |
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| Accrued expenses |
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| Customer deposits |
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| Contingent consideration |
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| Operating lease liabilities |
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| Total current liabilities |
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| Non-current liabilities: | ||||||||
| Operating lease liabilities |
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| Deferred tax liability |
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| Total non-current liabilities |
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| Total liabilities |
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| 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, 2022, and issued and outstanding as of December 31, 2021 |
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| Additional paid in capital |
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||||||
| Treasury shares, cost basis: shares as of June 30, 2022 and shares as of December 31, 2021 |
(
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) |
(
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) | ||||
| Accumulated deficit |
(
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) |
(
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) | ||||
| Total shareholders’ equity |
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||||||
| Total liabilities and shareholders’ equity | $ |
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$ |
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||||
See accompanying notes to unaudited condensed consolidated financial statements
| 4 |
urban-gro, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | ||||||||||||||||
| Equipment systems | $ |
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$ |
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$ |
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$ |
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| Construction design-build |
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| Services |
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| Consumable products |
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| Total Revenue |
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| Cost of Revenue |
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| Gross profit |
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| Operating expenses: | ||||||||||||||||
| General and administrative |
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| Intangible asset amortization |
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| Stock-based compensation |
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| Total operating expenses |
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| Income (loss) from operations |
(
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) |
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(
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) |
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| Non-operating income (expenses): | ||||||||||||||||
| Interest expense |
(
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) |
(
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) |
(
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) |
(
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) | ||||||||
| Interest income |
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||||||||||||
| Interest expense – beneficial conversion of notes payable |
(
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) | ||||||||||||||
| Loss on extinguishment of debt |
(
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) | ||||||||||||||
| PPP Loan Forgiveness |
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| Other income (expense) |
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(
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) |
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(
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) | ||||||||||
| Total non-operating income (expenses) |
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(
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) | |||||||||||
| Income (loss) before income taxes |
(
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) |
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(
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) |
(
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) | |||||||||
| Income tax expense (benefit) |
(
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) |
(
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) |
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|||||||||||
| Net income (loss) | $ |
(
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) | $ |
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$ |
(
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) | $ |
(
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) | |||||
| Comprehensive income (loss) | $ |
(
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) | $ |
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$ |
(
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) | $ |
(
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) | |||||
| Earnings (loss) per share: | ||||||||||||||||
| Earnings (loss) per share - basic |
$ |
(
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) | $ |
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$ |
(
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) | $ |
(
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) | |||||
| Earnings (loss) per share - dilutive | $ |
(
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) | $ |
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$ |
(
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) | $ |
(
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| Weighted average share - basic |
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| Weighted average shares - dilutive |
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See accompanying notes to unaudited condensed consolidated financial statements
| 5 |
urban-gro, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(unaudited)
| Common Stock |
Additional
Paid in |
Accumulated | Treasury |
Total
Shareholders’ Equity |
||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
| Balance, March 31, 2022 |
|
$ |
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$ |
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$ |
(
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) | $ |
(
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) | $ |
|
|||||||||||
| Stock-based compensation | - |
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| Treasury stock | - | |||||||||||||||||||||||
| Stock options exercised | ||||||||||||||||||||||||
| Stock issuance related to acquisition |
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| Net income (loss) for period ended June 30, 2022 | - |
(
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) |
(
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) | |||||||||||||||||||
| Balance, June 30, 2022 |
|
$ |
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$ |
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$ |
(
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) | $ |
(
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) | $ |
|
|||||||||||
| Common Stock |
Additional Paid in |
Accumulated | Treasury |
Total Shareholders’ Equity |
||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
| Balance, March 31, 2021 |
|
$ |
|
$ |
|
$ |
(
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) | $ |
(
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) | $ |
|
|||||||||||
| Stock-based compensation | - |
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|||||||||||||||||||||
|
Stock issuance related to offering, net of offering costs of $
|
(
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) |
(
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) | ||||||||||||||||||||
| Common stock repurchased | - |
(
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) |
(
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) | |||||||||||||||||||
| Stock Options Exercised |
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| Net income (loss) for period ended June 30, 2021 | - |
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| Balance, June 30, 2021 |
|
|
$ |
|
$ |
(
|
) | $ |
(
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) | $ |
|
||||||||||||
| Common Stock | Additional Paid in | Accumulated | Treasury |
Total
Shareholders’ Equity |
||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
| Balance, December 31, 2021 |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
|||||||||||
| Stock-based compensation | - |
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|||||||||||||||||||||
| Treasury stock | - |
(
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) |
(
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) | |||||||||||||||||||
| Stock option exercised | - | |||||||||||||||||||||||
| Stock exercised |
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| Stock Issuance related to acquisition |
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| Stock issued with exercise of warrants |
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(
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) | ||||||||||||||||||||
| Net income (loss) for period ended June 30, 2022 | - |
(
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) |
(
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) | |||||||||||||||||||
| Balance, June 30, 2022 |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
|||||||||||
| Common Stock |
Additional Paid in |
Accumulated | Treasury |
Total Shareholders’ Equity |
||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
| Balance, December 31, 2020 |
|
$ |
|
$ |
|
$ |
(
|
) | $ | $ |
(
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) | ||||||||||||
| Stock-based compensation | - |
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|
|||||||||||||||||||||
| Beneficial conversion feature | - |
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|||||||||||||||||||||
| Conversion of Bridge Financing |
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| Stock grant program vesting |
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(
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) | ||||||||||||||||||||
|
Stock issuance related to offering, net of offering costs of $
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|
||||||||||||||||||||
| Common stock repurchased | - |
(
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) |
(
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) | |||||||||||||||||||
| Stock issued with exercise of warrants |
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| Stock Options Exercised |
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| Net income (loss) for period ended June 30, 2021 | - |
(
|
) |
(
|
) | |||||||||||||||||||
| Balance, June 30, 2021 |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
|||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
| 6 |
urban-gro, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net income (loss) | $ |
(
|
) | $ |
(
|
) | ||
| Adjustments to reconcile net income (loss) from operations: | ||||||||
| Depreciation and amortization |
|
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| Deferred income tax benefit |
(
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) | ||||||
| Amortization of deferred financing costs |
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| Loss on extinguishment of debt |
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| Interest on convertible notes |
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| Stock-based compensation expense |
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| Beneficial conversion of Bridge notes |
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| Inventory write-offs |
(
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) |
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| Bad debt expense |
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| PPP loan forgiveness |
(
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) | ||||||
| Changes in operating assets and liabilities (net of acquired amounts): | ||||||||
| Accounts receivable |
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(
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) | |||||
| Inventories |
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(
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) | |||||
| Prepayments and other assets |
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(
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) | |||||
| Accounts payable and accrued expenses |
(
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) |
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| Operating leases |
(
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) | ||||||
| Customer deposits |
(
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) |
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| Net Cash Provided By (Used In) Operating Activities |
(
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) |
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| Cash Flows from Investing Activities | ||||||||
| Business combinations, net of cash acquired |
(
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) | ||||||
| Purchases of property and equipment |
(
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) |
(
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) | ||||
| Net Cash Used In Investing Activities |
(
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) |
(
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) | ||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from issuance of Common Stock, net of offering costs |
|
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| Repurchase of Common Stock |
(
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) |
(
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) | ||||
| Repayment of notes payable |
(
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) | ||||||
| Proceeds from stock issuance |
|
|||||||
| Payment of finance lease ROU liability |
(
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) | ||||||
| Net Cash Provided By (Used In) Financing Activities |
(
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) |
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|||||
| Net Increase (Decrease) in Cash |
(
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) |
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|||||
| Cash at Beginning of Period |
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| Cash at End of Period | $ |
|
$ |
|
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| Supplemental Cash Flow Information: | ||||||||
| Interest paid | $ |
|
$ |
|
||||
| Operating lease right of use asset | $ |
|
$ | |||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Stock issued related to acquisitions | $ |
|
$ | |||||
| PPP Loan Forgiveness | $ | $ |
|
|||||
See accompanying notes to unaudited condensed consolidated financial statements
| 7 |
urban-gro, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION, ACQUISITIONS, AND LIQUIDITY
Organization
urban-gro, Inc. (“our,” the “Company,” or “urban-gro”) is an integrated professional services and design-build firm. We offer value-added architectural, engineering, and construction management solutions to the Controlled Environment Agriculture (“CEA”), industrial, healthcare, and other commercial sectors. Innovation, collaboration, and a commitment to sustainability drive our team to provide exceptional customer experiences. To serve our horticulture clients, we engineer and design indoor CEA facilities and then integrate complex environmental equipment systems into those facilities. Through this work, we create high-performance indoor cultivation facilities for our clients to grow specialty crops, including leafy greens, vegetables, herbs, and plant-based medicines. Our custom-tailored approach to design, 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.
Acquisitions
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 $
The
Emerald Purchase Price was payable as follows: $
| Purchase Price | $ |
|
||
| Allocation of Purchase Price: | ||||
| Cash | $ |
|
||
| Accounts receivable, net | $ |
|
||
| Contract receivable | $ |
|
||
| Prepayments and other assets | $ |
|
||
| Property and equipment | $ |
|
||
| ROU asset | $ |
|
||
| Goodwill | $ |
|
||
| Intangible assets | $ |
|
||
| Accrued expenses | $ |
|
||
| Contract liabilities | $ |
|
||
| ROU liability | $ |
|
||
| Deferred tax liability | $ |
|
The following pro forma amounts reflect the Company’s results as if the acquisition of Emerald had occurred on January 1, 2021. These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results of the acquisition to reflect the additional amortization of intangibles.
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue |
|
|
|
|
||||||||||||
| Net Income (loss) |
(
|
) |
|
(
|
) |
(
|
) | |||||||||
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 $
| Purchase Price | $ |
|
||
| Allocation of Purchase Price: | ||||
| Cash | $ |
|
||
| Accounts receivable, net | $ |
|
||
| Prepayments and other assets | $ |
|
||
| Property and equipment | $ |
|
||
| Goodwill | $ |
|
||
| Intangible assets | $ |
|
||
| Accrued expenses | $ |
|
||
| Deferred tax liability | $ |
|
| 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 policies and adjusting the results of the acquisition to reflect the additional amortization of intangibles.
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue |
|
|
|
|
||||||||||||
| Net Income (loss) |
(
|
) |
|
(
|
) |
|
||||||||||
Acquired goodwill from the 2WR Entities represents the value expected to arise from organic growth and an opportunity to expand into a 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’ equity (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, 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 Annual Report on Form 10-K for the year ended December 31, 2021. During the six months ended June 30, 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 include: estimated revenues earned under construction design-build contracts; estimated useful lives and potential impairment of long-lived assets, intangibles and goodwill; inventory write offs; allowance for deferred tax assets; and allowance for bad debt.
Reclassification
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
Balance Sheet Classifications
The Company includes in current assets and liabilities the following amounts that are in connection with construction contracts that may extend beyond one year: contract assets and contract liabilities (including retainage invoiced to customers contingent upon anything other than the passage of time), capitalized costs to fulfill contracts, retainage payable to sub-contractors and accrued losses on uncompleted contracts. A one-year time period is used to classify all other current assets and liabilities when not otherwise prescribed by the applicable accounting principles.
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 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 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 Company 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 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 bills their customers on long-term construction contracts is generally dependent upon agreed-upon contractual terms, which may include milestone billings based on the completion of certain phases of the work, or when services are provided. When as a result of contingencies, billings cannot occur until after the related revenue has been recognized, the result is 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 obligation to perform on uncompleted contracts with customers for which the Company has received payment or for which contract receivables are outstanding.
| Contract assets | ||||
| Revenue recognized in excess of amounts paid or payable (contract receivables) to the Company on uncompleted contracts (contract asset), excluding retainage |
$ |
|
||
| Retainage included in contract assets due to being conditional on something other than solely passage of time |
|
|||
| Total contract assets | $ |
|
||
| Contract liabilities | ||||
| Payments received or receivable (contract receivables) in excess of revenue recognized on uncompleted contracts (contract liability), excluding retainage | $ |
(
|
) | |
| Retainage included in contract liabilities due to being conditional on something other than solely passage of time |
|
|||
| Total contract liabilities | $ |
(
|
) | |
NOTE 3 – RELATED PARTY TRANSACTIONS
Cloud
9 Support, LLC (“Cloud 9”) is an entity owned by James Lowe, a director of the Company. Cloud 9 purchases materials from
the Company for use with its customers. Total sales to Cloud 9 from the Company were $
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:
| June 30, 2022 | December 31, 2021 | |||||||
| Vendor prepayments | $ |
|
$ |
|
||||
| Prepaid services and fees |
|
|
||||||
| Other assets |
|
|
||||||
| Prepayments and other assets | $ |
|
$ |
|
||||
NOTE 5 – INVESTMENTS
The components of investments are summarized as follows:
| June 30, 2022 | December 31, 2021 | |||||||
| Investment in Edyza | $ |
|
$ |
|
||||
| Investment in XSF |
|
|
||||||
| $ |
|
$ |
|
|||||
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.
| 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 $
NOTE 6 – GOODWILL & INTANGIBLE ASSETS
Goodwill
The
Company has recorded goodwill in conjunction with the acquisitions it has completed. The goodwill balances as of June 30, 2022 and
December 31, 2021 were $
Intangible Assets Other Than Goodwill
Intangible assets as of June 30, 2022 and December 31, 2021 consisted of the following:
| June 30, 2022 | ||||||||||||
| Cost | Accumulated Amortization | Net Book Value | ||||||||||
| Finite-lived intangible assets: | ||||||||||||
| Customer relationships | $ |
|
$ |
|
$ |
|
||||||
| Trademarks and trade names |
|
|
|
|||||||||
| Backlog and Other |
|
|
|
|||||||||
| Total finite-lived intangible assets: |
|
|
|
|||||||||
| Indefinite-lived intangible assets: | ||||||||||||
| Patents |
|
|
||||||||||
| Trade name |
|
|
||||||||||
| Total Intangible assets, net | $ |
|
$ |
|
$ |
|
||||||
| December 31, 2021 | ||||||||||||
| Cost | Accumulated Amortization | Net Book Value | ||||||||||
| Customer relationships | $ |
|
$ |
|
$ |
|
||||||
| Trademarks and trade names |
|
|
|
|||||||||
| Backlog and Other |
|
|
|
|||||||||
| $ |
|
$ |
|
$ |
|
|||||||
The estimated future amortization expense for intangible assets subject to amortization as of June 30, 2022, is summarized below:
|
Estimated Future |
||||
| Amortization Expense | ||||
| Remainder of 2022 | $ |
|
||
| 2023 |
|
|||
| 2024 |
|
|||
| 2025 |
|
|||
| Thereafter |
|
|||
| Total | $ |
|
||
Amortization
expense for intangible assets for the six months ended June 30, 2022 and 2021 was $
NOTE 7 – ACCRUED EXPENSES
Accrued expenses are summarized as follows:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accrued operating expenses | $ |
|
$ |
|
||||
| Accrued wages and related expenses |
|
|
||||||
| Accrued 401(k) |
|
|
||||||
| Accrued sales tax payable |
|
|
||||||
| $ |
|
$ |
|
|||||
| 11 |
NOTE 8 – RISKS AND UNCERTAINTIES
Concentration Risk
The table below shows customers who account for 10% or more of the Company’s total revenues and 10% or more of the Company’s accounts receivable for the periods presented:
Customers exceeding 10% of revenue:
|
Three Months Ended
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 | * |
|
% |
|
% |
|
% | |||||||||
| C000001140 |
|
% | * |
|
% | * | ||||||||||
| C000001660 | * | * | * |
|
% | |||||||||||
| C000001661 | * |
|
% | * | * | |||||||||||
| C000000819 |
|
% | * | * | * | |||||||||||
Customers exceeding 10% of accounts receivable:
| June 30, | December 31, | |||||||
| Company Customer Number | 2022 | 2021 | ||||||
| C000001462 | * |
|
% | |||||
| C000001140 |
|
% |
|
% | ||||
| C000002151 |
|
% | * | |||||
The table below shows vendors who account for 10% or more of the Company’s total purchases and 10% or more of the Company’s accounts payable for the periods presented:
Vendors exceeding 10% of purchases:
|
Three Months Ended
June 30, |
Three Months Ended
June 30, |
Six
|
Six Months Ended
June 30, |
|||||||||||||
| Company Vendor Number | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| V000001029 |
|
% | * |
|
% |
|
% | |||||||||
| V000001350 | * |
|
% | * |
|
% | ||||||||||
| V000000453 | * | * |
|
% | * | |||||||||||
| V000001372 | * |
|
% | * |
|
% | ||||||||||
| V000001326 | * | * | * |
|
% | |||||||||||
| V000001280 |
|
% | * | * | * | |||||||||||
Vendors exceeding 10% of accounts payable:
| June 30, | December 31, | |||||||
| Company Vendor Number | 2022 | 2021 | ||||||
| V000001029 |
|
% | * | |||||
| V000000453 | * |
|
% | |||||
| V000001372 | * |
|
% | |||||
| V000001326 | * |
|
% | |||||
*Amounts less than 10%
Foreign Exchange Risk
Although the Company’s revenues and expenses are expected to be predominantly denominated in United States dollars, the Company may be exposed to currency exchange fluctuations. Recent events in the global financial markets have been coupled with increased volatility in the currency markets. Fluctuations in the exchange rate between the U.S. dollar, the Canadian dollar, the Euro, and the currency of other regions in which the Company may operate may have a material adverse effect on the Company’s business, financial condition and operating results. The Company may, in the future, establish a program to hedge a portion of 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, 2022, and 2021 was $ and $ , respectively, based on the vesting schedule of the stock grants and options. Stock-based compensation expense for the three months ended June 30, 2022 and 2021 was $ and $ , respectively, based on the vesting schedule of the stock grants and options. No cash flow effects are anticipated for stock grants.
| Grants unissued as of December 31, 2021 |
|
|||
| Grants awarded |
|
|||
| Forfeiture/Cancelled |
(
|
) | ||
| Grants Vested |
(
|
) | ||
| Grants unissued as of June 30, 2022 |
|
| 12 |
As of June 30, 2022, the Company has $ million in unrecognized share-based compensation expense related to these stock grants.
| Number of Shares |
Weighted Average Remaining Life (Years) |
Weighted Average Exercise Price |
||||||||||||
| Stock options outstanding as of December 31, 2021 |
|
$ |
|
|||||||||||
| Issued |
|
$ |
|
|||||||||||
| Expired | - | $ | ||||||||||||
| Exercised |
(
|
) | - | $ |
(
|
) | ||||||||
| Stock options outstanding as of June 30, 2022 |
|
$ |
|
|||||||||||
| Stock options exercisable as of June 30, 2022 |
|
$ |
|
|||||||||||
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, 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, 2022 is $ .
NOTE 10 – SHAREHOLDERS’ EQUITY
On
May 24, 2021, the Board of Directors authorized a stock repurchase program to purchase up to $
For
the three and six months ended June 30, 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 $
NOTE 11 – WARRANTS
The following table shows warrant activity for the six months ended June 30, 2022.
|
Number of shares |
Weighted Average Exercise Price |
||||||||
| Warrants outstanding as of December 31, 2021 |
|
$ |
|
||||||
| Exercised |
(
|
) | $ |
|
|||||
| Terminated – cashless exercise |
(
|
) | $ |
|
|||||
| Warrants outstanding as of June 30, 2022 |
|
$ |
|
||||||
| Warrants exercisable as of June 30, 2022 |
|
$ |
|
||||||
| 13 |
The
weighted-average life of the warrants is
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 13 – SUBSEQUENT EVENTS
The Company has evaluated events and transaction occurring subsequent to June 30, 2022 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.
During 2021, the Company purchased lights from
one of its international vendors to fulfill an order for a major customer. Subsequent to the sale, delivery and installation of the
lights, the customer noted the lights were not performing as the manufacturer had stipulated. The Company performed tests of the
lights and confirmed the performance 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 vendor, that would meet their needs. The customer
has been a key customer to the Company 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 Company agreed to supply
the replacement lighting solution to the customer at the Company’s expense while the Company continues to work with the vendor to resolve the original defective lighting issue. The cost of the replacement lighting solution is
expected to be $
| 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 an integrated professional services and design-build firm. We offer value-added architectural, engineering, and construction management solutions to the Controlled Environment Agriculture (“CEA”), industrial, healthcare, and other commercial sectors. Innovation, collaboration, and a commitment to sustainability drive our team to provide exceptional customer experiences.
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 in several sectors. Within the CEA sector, we design these facilities and while building them, we then integrate complex environmental equipment systems into 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 services. 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 that demonstrate how we provide value to our clients
| 15 |
Our indoor commercial cultivation solution offers an integrated suite of services and equipment systems that generally fall within the following categories:
| ● | Service Solutions: |
| ● | Design, Engineering, and Construction Design-Build Services – A comprehensive collection of services including: |
| i. | Pre-Construction Services | |
| ii. | Cultivation Space Planning (“CSP”) | |
| iii. | Architectural Design | |
| iv. | Engineering | |
| v. | Integrated Cultivation Design (“ICD”) | |
| vi. | Construction Management (“CM”) |
| ● | An ongoing service offering including: |
| i. | Facility and Equipment Commissioning Services | |
| ii. | Gro-Care Crop and Asset Protection Services including Training Services, Equipment Maintenance Services, Crop Protection Program, and an Interactive Online Operating Support System (“OSS”) for Gro-Care |
| ● | 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 Systems | |||
| iii. | Strategic Vendor Relationships with Premier Manufacturers |
Historically, 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 clients value is the depth of experience of our employees and our Company. We currently employ approximately 125 individuals. Approximately two-thirds of our employees are considered experts in their areas of focus, and our team includes Designers (Architects, Interior Designers, Cultivation Space Planners), Professional Engineers (Mechanical, Electrical, Plumbing), Engineers (Controls, and Agricultural), Construction Managers (superintendents, supervisors, project managers) and individuals with Masters Degrees in Plant Science, Horticulture, and Business Administration. As a company, we have worked on 1000s of projects and well over 500 projects at indoor CEA facilities and believe that the experience of our team and Company provides clients with the confidence that will proactively keep them from making common costly mistakes during the build out process that impact operational stages. Our expertise translates into clients saving time, money, and resources through 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 of Operations
Comparison of Results of Operations for the three months ended June 30, 2022 and 2021
During the three months ended June 30, 2022, we generated revenues of $16.3 million compared to revenues of $12.8 million during the three months ended June 30, 2021, an increase of $3.5 million, or 27%. This increase in revenues is a result of the following changes in individual revenue 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, 2022, cost of revenues was $12.8 million compared to $9.9 million during the three months ended June 30, 2021, an increase of $2.9 million, or 29%. This increase is directly attributable to the overall increase in revenues indicated above.
Gross profit was $3.5 million (22% of revenues) during the three months ended June 30, 2022, compared to $2.9 million (23% of revenue) during the three months ended June 30, 2021. Gross profit as a percentage of revenues decreased primarily due to an increase in lower margin construction design/build revenue offset by an increase in higher margin services revenue.
Operating expenses increased by $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. This was due to a $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 increase in intangible asset amortization primarily due to the acquisitions of the 2WR Entities and Emerald.
| 16 |
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, a decrease of $0.9 million. Other income increased by $0.1 million due to the 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.
Deferred income tax benefit increased by $0.1 million due to the acquisitions of the 2WR Entities and Emerald.
As a result of the above, we incurred a net loss 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.
Comparison of Results of Operations for the six months ended June 30, 2022 and 2021
During the six months ended June 30, 2022, we generated revenues of $37.3 million compared to revenues of $24.9 million during the six months ended June 30, 2021, an increase of $12.4 million, or 50%. This increase in revenues is a result of the following changes in individual revenue 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, 2022, cost of revenues was $28.9 million compared to $19.3 million during the six months ended June 30, 2021, an increase of $9.6 million, or 50%. This increase is directly attributable to the increase in revenues indicated above.
Gross profit was $8.4 million (23% of revenues) during the six months ended June 30, 2022 compared to $5.6 million (22% of revenue) during the six months ended June 30, 2021. Gross profit as a percentage of revenues increased primarily due to an increase in higher margin services revenues offset by an increase in lower margin construction design/build revenue.
Operating expenses increased by $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. This was due to a $4.4 million increase in general and administrative 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 $1.2 million increase in stock-based compensation 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 of $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 $0.3 million in the six months ended June 30, 2021, 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, a $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.
Deferred income tax benefit increased by $0.2 million due to the acquisitions of the 2WR Entities and Emerald.
As a result of the above, we incurred a net loss of $2.4 million for the six months ended June 30, 2022, or a net loss per share of ($0.23), compared to a net loss of $0.3 million for the six months ended June 30, 2021, or a net loss per share of ($0.03).
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, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net Income (Loss) | $ | (1,739,304 | ) | $ | 1,257,444 | $ | (2,435,521 | ) | $ | (331,138 | ) | |||||
| Interest expense | 7,658 | 4,624 | 15,317 | 322,067 | ||||||||||||
| Interest expense – BCF | – | – | – | 636,075 | ||||||||||||
| Interest income | (47,275 | ) | – | (127,126 | ) | – | ||||||||||
| Income tax benefit | (76,453 | ) | – | (184,512 | ) | – | ||||||||||
| Loss on extinguishment of debt | – | – | – | 790,723 | ||||||||||||
| Stock-based compensation | 882,000 | 299,602 | 1,764,000 | 590,407 | ||||||||||||
| Depreciation and amortization | 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 | ) | ||||||||||
| Adjusted EBITDA | $ | (528,900 | ) | $ | 583,295 | $ | (88,318 | ) | $ | 1,085,444 | ||||||
BACKLOG
Backlog is a financial measure that generally reflects the dollar value of revenue that the Company expects to realize in the future. Although backlog is not a term recognized under generally accepted accounting principles in the United States (“GAAP”), it is a common measure used by companies operating in our industries. We report backlog for the following revenue categories: (i) Equipment Systems; (ii) 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 construction projects once the contract is awarded and to the extent we believe funding is probable. Our Construction Design/Build backlog consists of uncompleted work on contracts in progress and contracts for which we have executed a contract but have not commenced the work. For uncompleted work on contracts in progress, we include (i) executed change orders, (ii) pending change orders for which we expect to receive confirmation in the ordinary course of business, and (iii) claims that we have made against our customers for which we have determined we have a legal basis under existing contractual arrangements and as to which we consider collection to be probable.
Our backlog as of June 30, 2022, March 31, 2022, and December 31, 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, 2022, we had cash of $22.8 million, which represented a decrease of $11.8 million from December 31, 2021 due to the following changes:
| ● | 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 six months ended June 30, 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 Annual Report on Form 10-K for the year ended December 31, 2021. During the six months ended June 30, 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, 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 the six months ended June 30, 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
From time to time, we become involved in or are threatened with legal disputes. While most of these disputes are not likely to have a material effect on our business, financial condition, or operations, the following matters are deemed by the Company to be material either due to the costs of litigation or the potential negative impacts to the Company should these matters not be resolved in 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. |
| 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 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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