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, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________.

Commission File Number: 001-39933

urban-gro, Inc.

(Exact name of registrant as specified in its charter)

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:

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 15, 2022 was 10,637,040 shares.

urban-gro, Inc.

FORM 10-Q

For the Quarterly Period Ended June 30, 2022

INDEX

		Page
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	4
	Unaudited Condensed Consolidated Balance Sheets	4
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	5
	Unaudited Condensed Consolidated Statements of Shareholders’ Equity (Deficit)	6
	Unaudited Condensed Consolidated Statements of Cash Flows	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4.	Controls and Procedures	18

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	19
Item 4.	Mine Safety Disclosures	19
Item 5.	Other Information	19
Item 6.	Exhibits	19
Signatures		20

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.

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	$	22,767,595		$	34,592,190
Accounts receivable, net		14,903,543			13,125,685
Contract receivables		543,687			—
Inventories		398,098			514,756
Prepaid expenses and other current assets		6,142,613			11,248,266
Total current assets		44,755,536			59,480,897

Non-current assets:
Property and equipment, net		864,022			207,496
Operating lease right of use assets, net		708,876			689,704
Investments		4,210,358			4,210,358
Goodwill		10,636,284			7,992,121
Intangible assets, net		4,886,740			1,575,466
Total non-current assets		21,306,280			14,675,145

Total assets	$	66,061,816		$	74,156,042

Liabilities
Current liabilities:
Accounts payable	$	7,946,023		$	6,066,896
Contract liabilities		671,685			—
Accrued expenses		3,381,263			3,878,278
Customer deposits		3,286,073			13,345,451
Contingent consideration		2,612,678			1,563,000
Operating lease liabilities		283,727			152,459
Total current liabilities		18,181,449			25,006,084

Non-current liabilities:
Operating lease liabilities		427,826			542,003
Deferred tax liability		1,201,112			440,625
Total non-current liabilities		1,628,938			982,628

Total liabilities		19,810,387			25,988,712

Shareholders’ Equity
Preferred stock, $0.10 par value; 10,000,000 shares authorized; 0 shares issued and outstanding		—			—

Common stock, $0.001 par value; 100,000,000 shares authorized; 11,911,043 issued and 10,637,040 outstanding as of June 30, 2022, and 11,588,110 issued and 10,733,195 outstanding as of December 31, 2021		11,911			11,588
Additional paid in capital		82,971,694			78,679,220
Treasury shares, cost basis: 1,274,003 shares as of June 30, 2022 and 854,915 shares as of December 31, 2021		(11,456,667	)		(7,683,490	)
Accumulated deficit		(25,275,509	)		(22,839,988	)
Total shareholders’ equity		46,251,429			48,167,330

Total liabilities and shareholders’ equity	$	66,061,816		$	74,156,042

See accompanying notes to unaudited condensed consolidated financial statements

urban-gro, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(unaudited)

		1			2			3			4
	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Revenue
Equipment systems	$	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		259,054			363,574			606,072			792,667
Total Revenue		16,281,503			12,831,297			37,334,371			24,865,653

Cost of Revenue		12,779,557			9,908,913			28,930,405			19,302,626
Gross profit		3,501,946			2,922,384			8,403,966			5,563,027

Operating expenses:
General and administrative		4,240,658			2,400,417			8,965,957			4,597,257
Intangible asset amortization		306,225			411			468,725			578
Stock-based compensation		882,000			299,602			1,764,000			590,407
Total operating expenses		5,428,883			2,700,430			11,198,682			5,188,242

Income (loss) from operations		(1,926,937	)		221,954			(2,794,716	)		374,784

Non-operating income (expenses):
Interest expense		(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	)
Loss on extinguishment of debt		-			-			-			(790,723	)
PPP Loan Forgiveness		-			1,032,316			-			1,032,316
Other income (expense)		71,563			(3,733	)		62,874			(3,764	)
Total non-operating income (expenses)		111,180			1,035,490			174,683			(705,923	)

Income (loss) before income taxes		(1,815,757	)		1,257,444			(2,620,033	)		(331,138	)

Income tax expense (benefit)		(76,453	)		-			(184,512	)		-
Net income (loss)	$	(1,739,304	)	$	1,257,444		$	(2,435,521	)	$	(331,138	)

Comprehensive income (loss)	$	(1,739,304	)	$	1,257,444		$	(2,435,521	)	$	(331,138	)
Earnings (loss) per share:
Earnings (loss) per share - basic	$	(0.17	)	$	0.11		$	(0.23	)	$	(0.03	)
Earnings (loss) per share - dilutive	$	(0.17	)	$	0.11		$	(0.23	)	$	(0.03	)

Weighted average share - basic		10,508,972			11,220,580			10,527,975			9,535,630
Weighted average shares - dilutive		10,508,972			11,725,282			10,527,975			9,535,630

See accompanying notes to unaudited condensed consolidated financial statements

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, 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

	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

urban-gro, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

		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

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 $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; 283,515 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.

		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 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.

		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 the 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 $0.001, 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:


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

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.

		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 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.

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	$	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”) 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 $11,813 and $93,205 during the six months ended June 30, 2022, and 2021, respectively, and $5,606 and $79,199 during the three months ended June 30, 2022 and 2021, respectively. Outstanding receivables from Cloud 9 as of June 30, 2022 and December 31, 2021 totaled $4,052 and $6,797, respectively.

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, 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.

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 incurs 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$0.45 exercise price pursuant to the Warrant instrument. No value was 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 acquisitions it has completed. The goodwill balances as of June 30, 2022 and December 31, 2021 were $10,636,284 and $7,992,121, 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:

	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:

	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 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,
	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

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:

SCHEDULES OF CONCENTRATION OF RISK

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		*			41	%
C000001140		23	%		23	%
C000002151		12	%		*

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 Months Ended June 30,			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 accounts payable:

	June 30,			December 31,
Company Vendor Number	2022			2021
V000001029		33	%		*
V000000453		*			20	%
V000001372		*			33	%
V000001326		*			12	%

*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.

NOTE 9 – STOCK-BASED COMPENSATION

Stock-based compensation expense for the six months ended June 30, 2022, and 2021 was $1,764,000 and $590,407, 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 $882,000 and $299,602, respectively, based on the vesting schedule of the stock grants and options. No cash flow effects are anticipated for stock grants.

The following schedule shows stock grant activity for the six months ended June 30, 2022.

SCHEDULE OF STOCK GRANT ACTIVITY


Grants unissued as of December 31, 2021	153,673
Grants outstanding, beginning	153,673
Grants awarded	628,760
Forfeiture/Cancelled	(7,200	)
Grants Vested	(16,667	)
Grants unissued as of June 30, 2022	758,566
Grants outstanding, ending	758,566

As of June 30, 2022, the Company has $1.8 million in unrecognized share-based compensation expense related to these stock grants.

The following schedule shows stock option activity for the six months ended June 30, 2022.

SCHEDULE OF STOCK GRANT VESTING PERIODS

	Number of Shares		Weighted Average Remaining Life (Years)	Weighted Average Exercise Price
Stock options outstanding as of December 31, 2021	641,337		7.20	$	6.27
Issued	44,410		9.50	$	10.48
Expired	-		-	$	-
Exercised	(4,555	)	-	$	(6.00	)
Stock options outstanding as of June 30, 2022	681,192		7.40	$	6.55
Stock options exercisable as of June 30, 2022	579,169		7.20	$	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 $10.48, the remaining contractual term of the options of 10 years, risk-free interest rate of 0.66% and expected volatility of the price of the underlying common stock of 100%.

As of June 30, 2022, the Company has $0.6 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 $0.

NOTE 10 – SHAREHOLDERS’ EQUITY

On May 24, 2021, 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. On 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 419,088 shares of common stock at an average price per share of $9.02, for a total price of $3.8 million under this program. The Company did not repurchase any shares during the three-months ended June 30, 2022. In total, the Company has repurchased 924,003 shares of common stock at an average of $9.20 per share, for a total price of $8.5 million, under this program.

For the three and six months ended June 30, 2021, the Company repurchased 52,895 under this program, and repurchased 350,000 shares of common stock at an average price of $8.50 per share, for a total price of $3.0 million outside of the stock repurchase program.

NOTE 11 – WARRANTS

The following table shows warrant activity for the six months ended June 30, 2022.

SCHEDULE OF WARRANT ACTIVITY

	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

The weighted-average life of the warrants is 2.3 years. The aggregate intrinsic value of the warrants outstanding and exercisable as of June 30, 2022 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 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 $3.2 million. The Company is still evaluating the net amount of the expense it expects to record in the third quarter related to this transaction.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEC Form 10-Q filed by urban-gro Inc.