FLZH 10-Q
Flash Sports & Media Holdings, Inc. (FLZH)
10-Q
2025-02-18
For: 2024-06-30
View Original
Added on
April 10, 2026
Fbacklog
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2024
or
For the transition period from _________ to _________.
Commission File Number: 001-39933
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
( | ||||||||||||||
| (Address of principal executive offices) | (Zip Code) | (Registrant’s telephone number, including area code) | ||||||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
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 o No x
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 | o | Accelerated filer | o | ||||||||
| x | 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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the registrant’s only class of common stock outstanding as of February 18, 2025 was 12,696,557 shares.
TABLE OF CONTENTS
| Item No. | Page No. | |||||||
2
CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements related to future events, challenges we may face, business strategy, future performance, future operations, backlog, financial position, estimated or projected revenues and losses, projected costs, prospects, plans and objectives of management. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as “seek,” “anticipate,” “plan,” “continue,” “estimate,” “expect,” “may,” “will,” “project,” “predict,” “potential,” “intend,” “could,” “should,” “believe,” and variations of such words or their negative and similar expressions. Forward-looking statements should not be read as a guarantee of future performance or results, and may not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on management’s belief, based on currently available information, as to the outcome and timing of future events. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those expressed in such forward-looking statements. When evaluating forward-looking statements, you should consider the risk factors and other cautionary statements described in this Quarterly Report on Form 10-Q and under the heading “Risk Factors” in our Annual Report on Amendment No. 2 on Form 10-K/A for the fiscal year ended December 31, 2023. We believe the expectations reflected in the forward-looking statements contained in this report are reasonable, but no assurance can be given that these expectations will prove to be correct. Forward-looking statements should not be unduly relied upon. Important factors that could cause actual results or events to differ materially from those expressed in forward-looking statements include, but are not limited to:
•risks related to our operating strategy;
•competition for projects in our markets;
•our ability to predict and respond to new laws and governmental regulatory actions affecting our business, including foreign laws and governmental regulation;
•risks related to delays in the grant of necessary licenses to clients and delays in passage of legislation expected to benefit our clients, which could delay the funding and start of projects
•our ability to successfully develop new and/or enhancements to our product offerings and develop a product mix to meet demand;
•our ability to meet or exceed market expectations from analysts;
•unfavorable economic conditions, increases in interest rates and restrictive financing markets that may cause customers to cancel contracts reflected in our backlog or cause sales to decrease;
•our ability to successfully identify, manage and integrate acquisitions;
•our ability to accurately estimate the overall risks, requirements or costs when we bid on or negotiate contracts that are ultimately awarded to us;
•climate change and related laws and regulations;
•our ability to manage our supply chain in a manner that ensures that we are able to obtain adequate raw materials, equipment and essential supplies in a timely manner and at favorable prices;
•our ability to attract and retain key personnel;
•risks associated with concentration of a large portion of our business from a relatively small number of key clients/customers and the effect a loss of a key client/customer could have on our business;
•risks associated with customers or suppliers not fulfilling contracts;
•risks associated with reliance on key suppliers and risks such suppliers could change incentive programs that negatively affect our returns;
•the impact of inflation on costs of labor, raw materials and other items that are critical to our business;
•property damage and other claims and insurance coverage issues;
•the outcome of litigation or disputes;
•risks related to our information technology systems and infrastructure, including cybersecurity incidents;
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•risks to our reputation from negative publicity, social media posts or negative interpretations of our Environmental, Social and Governance (ESG) efforts;
•our ability to maintain effective internal control over financial reporting; and
•other events outside of our control.
These factors are not necessarily all of the important factors that could cause actual results or events to differ materially from those expressed in the forward-looking statements. Other unknown or unpredictable factors could also cause actual results or events to differ materially from those expressed in the forward-looking statements. Our future results will depend upon various other risks and uncertainties, including those described in this Quarterly Report on Form 10-Q and in our Annual Report on Amendment No. 2 on Form 10-K/A for the fiscal year ended December 31, 2023. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements after the date on which any such statement is made, whether as a result of new information, future events or otherwise, except as required by law. You are advised, however, to consult any future disclosures we make on related subjects in future reports to the Securities and Exchange Commission (SEC).
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
URBAN-GRO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, 2024 | December 31, 2023 | ||||||||||
| ASSETS | (Unaudited) | (As Restated) | |||||||||
| Current assets: | |||||||||||
| Cash | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Contract receivables | |||||||||||
| Prepaid expenses and other assets | |||||||||||
| Total current assets | |||||||||||
| Non-current assets: | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right of use assets, net | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Total non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Contract liabilities | |||||||||||
| Accrued expenses | |||||||||||
| Customer deposits | |||||||||||
| Contingent consideration | |||||||||||
| Notes payable | |||||||||||
| Operating lease liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Non-current liabilities: | |||||||||||
| Operating lease liabilities | |||||||||||
| Deferred tax liability | ( | ||||||||||
| Total non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (note 11) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
Treasury shares, cost basis: | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements
5
URBAN-GRO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenues: | (Unaudited) | (As Restated) | (Unaudited) | (As Restated) | |||||||||||||||||||
| Equipment systems | $ | $ | $ | $ | |||||||||||||||||||
| Services | |||||||||||||||||||||||
| Construction design-build | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total revenues and other income | |||||||||||||||||||||||
| Cost of revenues: | |||||||||||||||||||||||
| Equipment systems | |||||||||||||||||||||||
| Services | |||||||||||||||||||||||
| Construction design-build | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total cost of revenues | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Depreciation and Amortization | |||||||||||||||||||||||
| Business development | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
| Non-operating income (expense): | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Contingent consideration - change in fair value | ( | ||||||||||||||||||||||
| Loss on settlement | ( | ( | |||||||||||||||||||||
| Other income (expense) | ( | ( | ( | ( | |||||||||||||||||||
| Total non-operating income (expense) | ( | ( | ( | ( | |||||||||||||||||||
| Loss before income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Income tax benefit | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share - basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted average shares - basic and diluted | |||||||||||||||||||||||
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements
6
URBAN-GRO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Treasury Stock | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock grant program vesting | ( | — | — | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock grant program vesting | ( | — | — | ||||||||||||||||||||||||||||||||
| Stock issued for contingent consideration | — | — | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance, June 30, 2024 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Treasury Stock | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock grant program vesting | ( | — | — | ||||||||||||||||||||||||||||||||
| Stock issued for contingent consideration | — | — | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock grant program vesting | ( | — | — | ||||||||||||||||||||||||||||||||
| Stock issued for contingent consideration | — | — | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements
7
URBAN-GRO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
| Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities: | (Unaudited) | (As Restated) | |||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of right-of-use assets | |||||||||||
| Stock-based compensation expense | |||||||||||
| Interest income on investments | ( | ||||||||||
| Changes in operating assets and liabilities (net of acquired amounts): | |||||||||||
| Accounts receivable and contract receivables | ( | ( | |||||||||
| Prepaid expenses and other assets and property and equipment | ( | ||||||||||
| Accounts payable, contract liabilities, customer deposits, and accrued expenses | |||||||||||
| Change in contingent consideration from indemnification | ( | ||||||||||
| Operating lease liability | ( | ( | |||||||||
| Deferred tax liability | ( | ||||||||||
| Net cash provided by (used in) operating activities | ( | ( | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Net cash provided by (used in) investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Additions to notes payable | |||||||||||
| Repayment of notes payable | ( | ( | |||||||||
| Repayment of finance lease liability | ( | ( | |||||||||
| Payments to settle contingent consideration | |||||||||||
| Net cash used in financing activities | ( | ||||||||||
| Net change in cash | ( | ( | |||||||||
| Cash at beginning of period | |||||||||||
| Cash at end of period | $ | $ | |||||||||
| Supplemental cash flow information: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Net cash paid for income taxes | $ | $ | |||||||||
| Supplemental disclosure of non-cash investing and financing activities: | |||||||||||
| Operating lease right of use assets and liabilities extension | $ | $ | |||||||||
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements
8
URBAN-GRO, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION, ACQUISITIONS, AND LIQUIDITY
Organization
urban-gro, Inc. (together with its wholly owned subsidiaries, collectively "urban-gro," "we," "us," or the “Company") was originally formed on March 20, 2014, as a Colorado limited liability company. On March 10, 2017, we converted to a Colorado corporation and exchanged shares of our common stock for every member's interest issued and outstanding on the date of conversion. On October 29, 2020, we reincorporated as a Delaware corporation. On February 12, 2021, we completed an uplisting to the Nasdaq Capital Market ("Nasdaq") under the ticker symbol "UGRO".
urban-gro is an integrated professional services and Design-Build firm offering value-added architectural, engineering, and construction management solutions to the Controlled Environment Agriculture (“CEA”), industrial, healthcare, and other sectors. To serve our horticulture clients, we engineer, design and manage the construction of indoor CEA facilities and then integrate complex environmental equipment systems into those facilities. Through this work, we create high-performance indoor cultivation facilities for our clients to grow specialty crops, including leafy greens, vegetables, herbs, and plant-based medicines. Our custom-tailored approach to design, construction, procurement, and equipment integration provides a single point of accountability across all aspects of indoor growing operations. Further, we serve a broad range of commercial and governmental entities, providing them with planning, consulting, architectural, engineering and construction services for their facilities. As a full-service Design-Build provider, we serve as a trusted partner and advisor, affording clients the simplicity of a single point-of-contact and contract from project conception through completion.
Liquidity and Going Concern
The Company has produced multiple consecutive years of net losses and negative cash flows. The financial results described in these financial statements and our financial position as of June 30, 2024 raise substantial doubt about our ability to continue as a going concern. However, the Company has recently taken actions to strengthen its liquidity, including decreasing headcount and operating expenses to expedite the Company's path to cash flow positive results. If necessary, the Company will seek to raise capital by issuing additional equity shares either through a private placement or on the open market. The Company may also seek to obtain additional debt financing for which there can be no guarantee. Management has concluded that these recent positive steps alleviate any substantial doubt about the Company's ability to continue its operations, and meet its financial obligations, for twelve moths from the date these consolidated financial statements are issued.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Condensed Consolidated Financial Statements
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 Amendment No. 2 on Form 10-K/A for the year ended December 31, 2023. During the six months ended June 30, 2024, 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;
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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.
Contract Assets and Liabilities
Recently Issued Accounting Standards
From time to time, the Financial Accounting Standards Board (the "FASB") or other standards setting bodies issue new accounting pronouncements. The FASB issues updates to new accounting pronouncements through the issuance of an Accounting Standards Update ("ASU"). Unless otherwise discussed, the Company believes that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on the Company’s financial statements upon adoption.
Management has reviewed all other recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on the Company's financial condition or the results of our operations.
NOTE 3 – REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company recognizes revenue predominantly from the sale of equipment systems, services, construction design-build, and from other various immaterial contracts with customers from its CEA and Commercial sectors. The table below presents the revenue by source for the three and six months ended June 30, 2024 and 2023:
| Three Months Ended June 30, | |||||||||||||||||||||||||||||||||||
| CEA | Commercial | Total | |||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||||||
| Equipment systems | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Services | |||||||||||||||||||||||||||||||||||
| Construction design-build | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Total revenues and other income | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Relative percentage | % | % | % | % | % | % | |||||||||||||||||||||||||||||
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| Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||
| CEA | Commercial | Total | |||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||||||
| Equipment systems | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Services | |||||||||||||||||||||||||||||||||||
| Construction design-build | |||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Total revenues and other income | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Relative percentage | % | % | % | % | % | % | |||||||||||||||||||||||||||||
Under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, a performance obligation is a promise in a contract with a customer, to transfer a distinct good or service to the customer. Equipment systems contracts are lump sum contracts, which require the performance of some, or all, of the obligations under the contract for a specified amount. Service revenue contracts, which include both architectural and engineering designs, generally contain multiple performance obligations which can span across multiple phases of a project and are generally set forth in the contract as distinct milestones. The majority of construction design-build contracts have a single performance obligation, as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. Some contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the project life cycle (design and construction).
The transaction price for service contracts and construction design-build contracts is allocated to each distinct performance obligation and recognized as revenue when, or as, each performance obligation is satisfied. When there are multiple performance obligations under the same service contract, the Company allocates the transaction price to each performance obligation based on the standalone selling price. In general, payment terms are fixed at the time of the contract and are not subject to discounts, incentives, payment bonuses, credits, or penalties, unless negotiated in an amendment.
When establishing the selling price to the customer, the Company uses various observable inputs. For equipment systems, the stand-alone selling price is determined by forecasting the expected costs of the products, and then adding in the appropriate margins established by management. For service revenues and construction design-build revenues, the Company estimates the selling price by reference to certain physical characteristics of the project, which include the facility size, the complexity of the design, and the mechanical systems involved, which are indicative of the scope and complexity for those services. Significant judgments are typically not required with respect to the determination of the transaction price based on the nature of the selling prices of the products and services delivered and the collectability of those amounts. Accordingly, the Company does not consider estimates of variable consideration to be constrained.
The Company recognizes equipment systems, services, and construction design-build revenues when the performance obligation with the customer is satisfied. For satisfaction of equipment system revenues, the Company recognizes revenue when control of the promised good transfers to the customer, which predominately occurs at the time of shipment. For service revenues, satisfaction occurs as the services related to the distinct performance obligations are rendered or completed in exchange for consideration in an amount for which the Company is entitled. The time period between recognition and satisfaction of performance obligations is generally within the same reporting period; thus, there are no material unsatisfied or partially unsatisfied performance obligations for product or service revenues at the end of the reporting period.
Construction design-build revenues are recognized as the Company's obligations are satisfied over time, using the ratio of project costs incurred to estimated total costs for each contract because of the continuous transfer of control to the customer as all of the work is performed at the customer’s site and, therefore, the customer controls the asset as it is being constructed. This continuous transfer of control to the customer is further supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay the Company for costs incurred plus a reasonable profit and take control of any work in process. This cost-to-cost measure is used for our construction design-build contracts because management considers it to be the best available measure of progress on these contracts.
Contract modifications through change orders, claims and incentives are routine in the performance of the Company’s construction design-build contracts to account for changes in the contract specifications or requirements. In most instances, contract modifications are not distinct from the existing contract due to the significant integration of services provided in the contract and are accounted for as a modification of the existing contract and performance obligation. Either the Company or its customers may initiate change orders, which may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of completion of the work. Change orders that are unapproved as to both price and scope are evaluated as claims. The Company considers claims to be amounts in excess of approved contract prices that the Company seeks to collect from its customers
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or others for customer-caused delays, errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes of unanticipated additional contract costs.
The timing of when the Company bills customers on long-term construction design-build contracts is generally dependent upon agreed-upon contractual terms, which may include milestone billings based on the completion of certain phases of the work, or when services are provided. When as a result of contingencies, billings cannot occur until after the related revenue has been recognized, the result is unbilled revenue, which is included in contract assets. Additionally, when the Company receives advances or deposits from customers before revenue is recognized; the result is deferred revenue, which is included in contract liabilities. Retainage subject to conditions other than the passage of time are included in contract assets and contract liabilities.
Contract assets represent revenues recognized in excess of amounts paid or payable (contract receivables) to the Company on uncompleted contracts. Contract liabilities represent the Company’s obligation to perform on uncompleted contracts with customers for which the Company has received payment or for which contract receivables are outstanding.
The following table provides information about contract assets and contract liabilities from contracts with customers:
| June 30, 2024 | December 31, 2023 | ||||||||||
| Contract assets: | (As Restated) | ||||||||||
| 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 | $ | $ | |||||||||
| June 30, 2024 | December 31, 2023 | ||||||||||
| Contract liabilities: | (As Restated) | ||||||||||
| Payments received or receivable (contract receivables) in excess of revenue recognized on uncompleted contracts (contract liability) | $ | $ | |||||||||
| Retainage included in contract liabilities due to being conditional on something other than solely passage of time | |||||||||||
| Total contract liabilities | $ | $ | |||||||||
For equipment systems contracts, the Company’s predominant policy is to collect deposits from customers at the beginning of the contract and the balance of the contract payment prior to shipping. The Company does, in some cases, collect deposits or retainers as down payments on service contracts. Consumable products orders may be paid for in advance of shipment or for recurring customers with credit, payment terms of 30 days or less may be extended by the Company. Customer payments that have been collected prior to the performance obligation being recognized are recorded as customer deposit liabilities on the balance sheet. When the performance obligation is satisfied and all the criteria for revenue recognition are met, revenue is recognized. In certain situations when the customer has paid the deposit and services have been performed but the customer chooses not to proceed with the contract, the Company is entitled to keep the deposit and recognize revenue.
NOTE 4 – RELATED PARTY TRANSACTIONS
A director of the Company is an owner of Cloud 9 Support, LLC (“Cloud 9”) and Potco LLC (“Potco”). Cloud 9 purchases materials from the Company for use with its customers and Potco purchases equipment from the Company for use in its cultivation facility. Another director of the Company is working on a vertical farming innovation model with a group of CEA experts (the “CEA Consortium”). The CEA Consortium contracts services from the Company related to their business model. The table below presents the revenues for these related party entities for the three and six months ended June 30, 2024, and 2023:
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| Three Months Ended June 30, 2024 | Six Months Ended June 30, 2024 | |||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||
| Revenue - Cloud 9 | $ | $ | $ | $ | ||||||||||||||||||||||
| Revenue - Potco | ||||||||||||||||||||||||||
| Revenue - CEA Consortium | $ | $ | $ | $ | ||||||||||||||||||||||
| Total revenues from related party transactions | $ | $ | $ | $ | ||||||||||||||||||||||
The table below presents the accounts receivable from these related party entities as of June 30, 2024, and December 31, 2023:
| June 30, 2024 | December 31, 2023 | ||||||||||
| Accounts receivable - Cloud 9 | $ | $ | |||||||||
| Accounts receivable - Potco | |||||||||||
| Accounts receivable - CEA Consortium | $ | $ | |||||||||
| Total accounts receivable due from related party transactions | $ | $ | |||||||||
NOTE 5 – PREPAID EXPENSES AND OTHER ASSETS
Prepayments and other assets are comprised of prepayments paid to vendors to initiate orders, prepaid services and fees, inventories, and other assets. These amounts are summarized as follows:
| June 30, 2024 | December 31, 2023 | ||||||||||
| Vendor prepayments | $ | $ | |||||||||
| Prepaid services and fees | |||||||||||
| Inventories | |||||||||||
| Other assets | |||||||||||
| Total Prepaid expenses and other assets | $ | $ | |||||||||
NOTE 6 – PROPERTY AND EQUIPMENT, NET
Property and equipment balances are summarized as follows:
| June 30, 2024 | December 31, 2023 | ||||||||||
| Computers and technology equipment | $ | $ | |||||||||
| Furniture and fixtures | |||||||||||
| Leasehold improvements | |||||||||||
| Vehicles | |||||||||||
| Software | |||||||||||
| Other equipment | |||||||||||
| Total property and equipment | |||||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Total property and equipment, net | $ | $ | |||||||||
Depreciation expense for the three months ended June 30, 2024, and 2023 totaled $200,708 and $159,997 , respectively and totaled $395,972 and $254,047 for the six months June 30, 2024 and 2023 ended respectively.
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NOTE 7 – INVESTMENTS
As of June 30, 2024 and December 31, 2023 the Company did not have any investments.
XS Financial
On October 30, 2021, the Company participated in a convertible note offering of Xtraction Services, Inc., a/k/a XS Financial Inc. (CSE: XSF) (OTCQB: XSHLF) ("XSF"), a specialty finance company providing CAPEX financing solutions, including equipment leasing, to CEA companies in the United States. The Company invested $2,500,000 of a total $43,500,000 raised by XSF. Prior to any Nasdaq listing, the investment incurs 9.5 % interest payable, of which, 7.5 % is cash interest and 2.0 % is interest paid in kind. Subsequent to any Nasdaq listing by XSF, the investment incurs 8.0 % cash interest. The debt matures on October 28, 2023, with a one-year option at the sole discretion of XSF to extend the maturity date. In addition, the Company received 1,250,000 warrants denominated in Canadian dollars ("C$") with a C$0.45 exercise price as subject to the warrant instrument. No value was attributed to the warrants at the time of the investment. In August 2023, the Company entered into an agreement to sell back its investment to XSF for $2.3 million and cancel the warrants. The Company received the $2.3 million in proceeds on August 30, 2023. In connection with the agreement to sell the investment, the Company recorded an impairment loss of $0.3 million for the three months ended September 30, 2023.
NOTE 8 – GOODWILL & INTANGIBLE ASSETS
Goodwill
The Company has recorded goodwill in conjunction with the acquisitions it has completed. The goodwill balances as of June 30, 2024 and December 31, 2023 were $9,688,975 and $9,688,975 , respectively. Goodwill is not amortized. The Company did no
Intangible Assets Other Than Goodwill
Intangible assets as of June 30, 2024 and December 31, 2023 consisted of the following:
| As of June 30, 2024 | |||||||||||||||||
| Cost | Accumulated Amortization | Net Book Value | |||||||||||||||
| Finite-lived intangible assets: | |||||||||||||||||
| Customer relationships | $ | $ | ( | $ | |||||||||||||
| Trademarks and trade names | ( | ||||||||||||||||
| Backlog | ( | ||||||||||||||||
| Licenses | ( | ||||||||||||||||
| Total finite-lived intangible assets: | ( | ||||||||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||||
| Trade name | — | ||||||||||||||||
| Patents | — | ||||||||||||||||
| Total indefinite-lived intangible assets | — | ||||||||||||||||
| Total intangible assets, net | $ | $ | ( | $ | |||||||||||||
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| December 31, 2023 | |||||||||||||||||
| (As Restated) | |||||||||||||||||
| Cost | Accumulated Amortization | Net Book Value | |||||||||||||||
| Finite-lived intangible assets: | |||||||||||||||||
| Customer relationships | $ | $ | ( | $ | |||||||||||||
| Trademarks and trade names | ( | ||||||||||||||||
| Backlog | ( | ||||||||||||||||
| Licenses | ( | ||||||||||||||||
| Total finite-lived intangible assets: | ( | ||||||||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||||
| Trade name | — | ||||||||||||||||
| Patents | — | ||||||||||||||||
| Total indefinite-lived intangible assets | — | ||||||||||||||||
| Total intangible assets, net | $ | $ | ( | $ | |||||||||||||
Amortization expense for intangible assets subject to amortization for the three months ended June 30, 2024 and 2023 was $194,988 and $264,166 , respectively and totaled $389,975 and $574,185 for the six months ended June 30, 2024 and 2023, respectively. The estimated future amortization expense for intangible assets subject to amortization as of June 30, 2024 is summarized below:
| For the years ending December 31, | Estimated Future Amortization Expense | |||||||
| Remainder of 2024 | $ | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| 2029 | ||||||||
| Total estimated future amortization expense | $ | |||||||
NOTE 9 – ACCRUED EXPENSES
Accrued expenses are summarized as follows:
| June 30, 2024 | December 31, 2023 | ||||||||||
| Accrued operating expenses | $ | $ | |||||||||
| Accrued wages and related expenses | |||||||||||
| Business development accrual | |||||||||||
| Accrued 401(k) | |||||||||||
| Accrued interest expense | |||||||||||
| Accrued sales tax payable | |||||||||||
| Total accrued expenses | $ | $ | |||||||||
Accrued sales tax payable is comprised of amounts due to various states and Canadian provinces for 2017 through 2023.
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NOTE 10 – NOTES PAYABLE
The table below shows outstanding notes payable amounts as of June 30, 2024 and December 31, 2023.
As of | |||||||||||
| June 30, 2024 | December 31, 2023 | ||||||||||
| Line of credit | $ | $ | |||||||||
| DVO note | |||||||||||
| Other financing agreements | |||||||||||
| Total | $ | $ | |||||||||
| Less current maturities | ( | ( | |||||||||
| Long Term | |||||||||||
On December 13, 2023, UG Construction, a wholly owned subsidiary of the Company, entered into an interest only asset based revolving Loan Agreement (the “Line of Credit”) with Gemini Finance Corp. (“Lender”) pursuant to which Lender extended to UG Construction a secured line of credit in an amount not to exceed $10,000,000 , to be used to assist UG Construction and the Company with cash management. Lender will consider requests for advances under the Line of Credit, which Lender may accept or reject in its discretion, until September 12, 2024 (the “Initial Term”), subject to an automatic extension for an additional nine-month term until May 12, 2025, provided that UG Construction is in compliance with all the terms of the applicable loan documents and Lender has not sent a written notice of non-renewal at least 60 days prior to expiration of the Initial Term. The Line of Credit contains standard events of default and representations and warranties by UG Construction and the Lender and the Company have entered into a Continuing Guaranty pursuant to which the Company will guarantee repayment of the loans associated with the Line of Credit (the “Guaranty Agreement”).
Loans made under the Line of Credit shall be evidenced by a Secured Promissory Note - Revolving issued by UG Construction to the Lender (the “Promissory Note”), and each draw on the Promissory Note shall be due and payable on or before 180 days after such draw is funded to UG Construction; provided that, such draw is also subject to a mandatory prepayment upon UG Construction’s receipt of payment for any invoice previously submitted and approved for financing by Lender. Lender will receive a security interest in UG Construction’s Collateral (as defined in the “Security Agreement” entered into as part of the Line of Credit). The Promissory Note earns interest at a monthly rate of one and seventy-five hundredths percent (1.75 %).
In connection with entering in the Line of Credit, the Company has agreed to issue to Bancroft Capital, LLC (the “Placement Agent”) cash and warrant compensation in two separate tranches, the first being earned upon closing of the Line of Credit and the remainder of which will be due if and when UG Construction draws more than $4,500,000 from the Line of Credit. Both instances are detailed as follows:
1.At closing of the Line of Credit, the Placement Agent earned a cash fee of $200,000 . In addition to the cash fee, the Company will issue to the Placement Agent or its designees, $200,000 worth of warrants (the “Placement Agent’s Warrants”) to purchase the Company’s common stock at a price per share equal to 110 % of the daily volume weighted average closing price of the Company’s common stock on the Nasdaq exchange for a period consisting of ten (10 ) consecutive trading days ending on and inclusive of the trading day of the Closing. The Placement Agent’s Warrants will be exercisable at any time and from time to time, in whole or in part, during the four and a half-year period commencing six (6 ) months from the date of issuance. The Placement Agent’s Warrants will provide for registration rights (including a one-time demand registration right and unlimited piggyback rights), cashless exercise and customary anti-dilution provisions (for stock dividends and splits) and anti-dilution protection (adjustment in the number and price of such warrants and the shares underlying such warrants) resulting from corporate events (which would include dividends, reorganizations, mergers, etc.).
2.If and when Emerald draws more than $4,500,000 from the Line of Credit, the Placement Agent will earn an additional cash fee of $200,000 , and an additional $200,000 worth of Placement Agent’s Warrants to purchase the Company’s common stock at a price per share equal to 110 % of the daily volume weighted average closing price of the Company’s common stock on the Nasdaq exchange for a period consisting of ten (10 ) consecutive trading days ending on and inclusive of the trading day of the date that the draws exceeding $4,500,000 were to take place.
As part of the Asset Purchase Agreement of DVO, a non-negotiable promissory note in the aggregate principal amount of $3,806,250 , payable to DVO was issued effective November 1, 2022 (the "DVO Promissory Note"). The principal amount, together with the simple interest accrued on the unpaid principal amount outstanding was to be paid by the Company on a quarterly basis for the first four consecutive quarters, with the first payment paid in January 2023, and the remaining three payments due ten days following the end of each subsequent fiscal quarter thereafter until the earlier of the end of the fourth full fiscal quarter following the closing date December 31, 2023 or the payment in full of all amounts due. In the third quarter ended September 30, 2023, a portion of
16
that quarter’s note payment was extended to the first quarter ended March 31, 2024. The DVO Promissory Note may be prepaid in whole or in part at any time without premium or penalty; provided, that each payment shall be accompanied by payment of all unpaid costs, fees and expenses, if any, which are due plus all accrued and unpaid interest due as of the date of such prepayment.
The outstanding principal balance under the DVO Promissory Note shall bear simple interest at a variable rate per annum equal to the rate of interest most recently published by JP Morgan Chase & Co. as the "prime rate" (the "Prime Rate"). Initially, interest will accrue at the Prime Rate as of the date of the DVO Promissory Note. The interest rate will be adjusted on a quarterly basis as of the first day of each full fiscal quarter following the first full fiscal quarter after the closing date to the then current Prime Rate. In connection with the extension of the DVO Promissory Note payment to the first quarter ended March 31, 2024, the interest rate was revised to a fixed rate of 10 %, with principal and interest to be paid on a weekly basis.
The other financing agreements relate to short-term financing of the Company's insurance policies and are at an average interest rate of 13.6 %.
NOTE 11 – OPERATING LEASE LIABILITIES AND COMMITMENTS AND CONTINGENCIES
The Company has seven operating office lease liabilities and one finance office lease liability with an imputed annual interest rate of 8.0 Five of the leases were assigned to the Company in connection with its various acquisitions. The remaining lease terms range from less than a year to 6 The following is a summary of operating lease liabilities:
| June 30, 2024 | December 31, 2023 | ||||||||||
| Operating lease liabilities related to right of use assets | $ | $ | |||||||||
| Less current portion | ( | ( | |||||||||
| Long term | $ | $ | |||||||||
The following is a schedule showing total future minimum lease payments:
| For the years ending December 31, | Minimum Lease Payments | |||||||
| Remainder of 2024 | $ | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Total minimum lease payments | ||||||||
| Less: Amount representing interest | ( | |||||||
| Net lease obligations | $ | |||||||
From time to time, the Company is involved in routine litigation that arises in the ordinary course of business. There are no ongoing legal proceedings for which management believes the ultimate outcome would have a material adverse effect on the Company’s results of operations and cash flows.
On August 11, 2023, the Company entered into a settlement agreement (the “Settlement Agreement”) with Crest Ventures, LLC (“Crest”) and Andrew Telsey to settle all claims in the litigation filed in the District Court for Arapahoe County, Colorado, Case No. 2021CV31301. Pursuant to the Settlement Agreement, the Company paid $1,500,000 to Crest on September 7, 2023. In connection with this settlement, the Company recorded a loss in the second quarter ended June 30, 2023 of $1,500,000 in accordance with GAAP related to loss contingencies.
17
NOTE 12 – 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, | Six Months Ended June 30, | |||||||||||||||||||||||||
| Company Customer Number | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||
| C000002393 | * | % | * | * | ||||||||||||||||||||||
| C000002187 | * | % | % | % | ||||||||||||||||||||||
| C000002463 | * | * | * | % | ||||||||||||||||||||||
| C000002552 | % | * | % | * | ||||||||||||||||||||||
| *Amounts less than 10% | ||||||||||||||||||||||||||
Customers exceeding 10% of accounts receivable
| As of June 30, | As of December 31, | |||||||||||||
| Company Customer Number | 2024 | 2023 | ||||||||||||
| C000002187 | % | % | ||||||||||||
| C000002552 | % | * | ||||||||||||
| *Amounts less than 10% | ||||||||||||||
The table below shows vendors who account for 10% or more of the Company’s total purchases and 10% or more of the Company’s accounts payable for the periods presented:
Vendors exceeding 10% of purchases
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| Company Vendor Number | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||
| V000002275 | * | * | * | % | ||||||||||||||||||||||
| V000002198 | % | * | % | * | ||||||||||||||||||||||
| V000002503 | % | * | % | * | ||||||||||||||||||||||
| *Amounts less than 10% | ||||||||||||||||||||||||||
Vendors exceeding 10% of accounts payable
| As of June 30, | As of December 31, | |||||||||||||
| Company Vendor Number | 2024 | 2023 | ||||||||||||
| V000002275 | % | % | ||||||||||||
| V000002503 | % | * | ||||||||||||
| V000002198 | % | * | ||||||||||||
| *Amounts less than 10% | ||||||||||||||
Foreign Exchange Risk
Although our revenues and expenses are expected to be predominantly denominated in United States dollars, we may be exposed to currency exchange fluctuations. Recent events in the global financial markets have been coupled with increased volatility in the currency markets. Fluctuations in the exchange rate between the U.S. dollar, the Canadian dollar, the Euro, and the currency of
18
other regions in which we may operate may have a material adverse effect on our business, financial condition and operating results. We may, in the future, establish a program to hedge a portion of our foreign currency exposure with the objective of minimizing the impact of adverse foreign currency exchange movements. However, even if we develop a hedging program, it may not mitigate currency risks.
NOTE 13 – STOCK-BASED COMPENSATION
Based on the vesting schedule of the grants of restricted stock units (“RSU” or “RSUs”) and options, stock-based compensation expense for the three months ended June 30, 2024 and 2023 totaled $460,785 and $622,547 , respectively, and totaled $1,117,361 and $1,102,188 for the six months ended June 30, 2024, and 2023, respectively.
The Company has adopted the 2021 Omnibus Stock Incentive Plan, as amended (the “Omnibus Incentive Plan”), which provides for the issuance of incentive stock options, grants of RSUs, and stock-based awards to employees, directors, and consultants of the Company to reward and attract employees and compensate the Company’s Board of Directors (the “Board”) and vendors when applicable. The Omnibus Incentive Plan is administered by the Company's Board. Grants of RSUs under the Omnibus Incentive Plan are valued at no less than the market price of the stock on the date of grant. The fair value of the options is calculated using the Black-Scholes pricing model based on the estimated market value of the underlying common stock at the valuation measurement date, the remaining contractual term of the options, risk-free interest rate and expected volatility of the price of the underlying common stock of 100 %. There is a moderate degree of subjectivity involved when estimating the value of stock options with the Black-Scholes option pricing model as the assumptions used are moderately judgmental. Grant of RSUs and stock options are sometimes offered as part of an employment offer package, to ensure continuity of service or as a reward for performance. Grants of RSUs and stock options typically require a 1 3
The following schedule shows grants of RSU activity for the six months ended June 30, 2024:
| Number of Shares | |||||
| Grants of RSUs unvested as of December 31, 2023 | |||||
| Grants of RSUs | |||||
| Forfeiture/cancelled | ( | ||||
| Grants of RSUs vested and issued | ( | ||||
| Grants of RSUs unvested as of June 30, 2024 | |||||
The following table summarizes the vesting time periods of these unvested RSUs:
| Number of Shares | Vesting Time Period | |||||||
| Remainder of 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
The following schedule shows stock option activity for the six months ended June 30, 2024.
19
| Number of Shares | Weighted Average Remaining Life (Years) | Weighted Average Exercise Price | |||||||||||||||
| Stock options outstanding as of December 31, 2023 | $ | ||||||||||||||||
| Issued | $ | ||||||||||||||||
| Forfeited | ( | $ | |||||||||||||||
| Exercised | $ | ||||||||||||||||
| Stock options outstanding as of June 30, 2024 | $ | ||||||||||||||||
| Stock options exercisable as of June 30, 2024 | $ | ||||||||||||||||
As of June 30, 2024, the Company has $0 in unrecognized stock-based compensation expense related to these stock options. The aggregate intrinsic value of the options outstanding and exercisable at June 30, 2024 is $0
NOTE 14 – STOCKHOLDERS’ EQUITY
On May 24, 2021, the Board authorized a stock repurchase program to purchase up to $5.0 million of the currently outstanding shares of the Company’s common stock, over a period of 12 months through open market purchases, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. On January 18, 2022, the Board authorized a $2.0 million increase to the stock repurchase program, to a total of $7.0 million. On February 2, 2022, the Board authorized an additional $1.5 million increase to the stock repurchase, to a total of $8.5 million. On September 12, 2022, the Board authorized an additional $2 million increase to the stock repurchase, to a total of $10.5 million. In total, the Company has repurchased 1,099,833 shares of common stock at an average price per share of $8.25 for a total of $9.1 million, under this program.
The Company did no 1.4 million remaining under the repurchase program.
In February 2021, the Company repurchased 350,000 shares of common stock with an average price per share of $8.50 , for a total of $3.0 million, outside of any stock repurchase or publicly announced program.
NOTE 15 – WARRANTS
The following table shows warrant activity for the six months ended June 30, 2024.
| Number of Shares | Weighted Average Exercise Price | ||||||||||
| Warrants outstanding as of December 31, 2023 | $ | ||||||||||
| Issued | $ | ||||||||||
| Exercised | $ | ||||||||||
| Expired | ( | $ | |||||||||
| Warrants outstanding as of June 30, 2024 | $ | ||||||||||
| Warrants exercisable as of June 30, 2024 | $ | ||||||||||
The aggregate intrinsic value of the warrants outstanding and exercisable as of June 30, 2024 is $13,456
NOTE 16 – INCOME TAXES
The Company has experienced cumulative losses for both book and tax purposes since inception. The potential future recovery of any tax assets that the Company may be entitled to due to these accumulated losses is uncertain and any tax assets that that the Company may be entitled to have been fully reserved based on management’s current estimates. Management intends to continue maintaining a full valuation allowance on the Company’s deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.The deferred income tax benefit for the six months ended June 30, 2024 and 2023 relates to the reduction in the deferred tax liability associated with the amortization of the intangible assets from the acquisitions of the 2WR Entities and Emerald. The Company records state income taxes paid during the year within the Other income (expense) financial statement line item.
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NOTE 17 – SUBSEQUENT EVENTS
Term Loan
On October 1, 2024, urban-gro, Inc. (the “Company”) entered into an asset based term Loan Agreement (the “Loan”) with Grow Hill, LLC, a Washington limited liability company (the “Lender”) pursuant to which the Lender extended to the Company a secured loan of $2,100,000 , to be used to assist the Company with cash management, including to support the Company’s growth in the cannabis industry. The Loan is for a term of 24 months and has an origination fee of $100,000 , which was added to the amount of the Loan. There is no penalty to prepayment, except the Lender will receive at least $150,000 in minimum interest if Company chooses to prepay the Loan. The Loan contains standard events of default and representations and warranties by the Company and the Lender.
The Loan is evidenced by a Secured Promissory Note issued by the Company to the Lender (the “Grow Hill Promissory Note”). The Lender received a security interest in certain of the Company’s assets pursuant to a security agreement between the Company and the Lender (the “Security Agreement”), which does not include any assets of the Company’s subsidiaries, including those securing the Company’s existing line of credit. The Grow Hill Promissory Note accrues simple interest at an annual rate of fifteen percent (15 %).
In connection with entering in the Loan, the Company issued to Lender a warrant (the “Warrant”) to purchase up to an aggregate of 160,000 shares of the Company’s common stock at an exercise price of $2.50 per share. The Warrant is exercisable immediately, will expire on the five (5 ) year anniversary of issuance, and is exercisable on a cashless basis at the election of the holder.
Modification of Agreement with Bancroft Related to Line of Credit
On October 2, 2024, the Company amended its agreement with the Placement Agent to modify the terms of the cash and warrant compensation associated with the Line of Credit. Under this amendment, the threshold at which the second tranche of cash and warrant compensation was increased such that under the new agreement the Company has to draw more than $6,000,000 from the Line of Credit in order for the Placement Agent to earn an additional cash fee of $200,000 and an additional $200,000 worth of Placement Agent's Warrants to purchase the Company's common stock at a price per share equal to 110 % of the daily volume weighted average closing price of the Company’s common stock on the Nasdaq exchange for a period consisting of ten (10 ) consecutive trading days ending on and inclusive of the trading day of the date that the draws exceeding $6,000,000 were to take place.
Equity Issuances After June 30, 2024
Subsequent to June 30, 2024, 216,500 RSUs were granted to employees, directors, and consultants with various vesting periods.
Settlement of Pullar Lawsuit
On May 5, 2022, Robert Pullar (“Pullar”) filed a lawsuit against urban-gro and Bradley Nattrass, in his capacity as the Company’s CEO, relating to a prior settlement agreement the Company had entered into with Pullar. On Friday, January 31, 2025, the parties entered a settlement agreement, without any admission of liability or wrongdoing, to settle all claims associated with the litigation in exchange for a cash payment by the Company to Pullar of $250,000 and an issuance of a warrant to purchase up to 75,000 shares of common stock with an exercise price per share of $1.00 .
21
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein. See also “Forward Looking Statements” on pages 3-4 of this Report.
OVERVIEW AND HISTORY
urban-gro, Inc. is an integrated professional services and Design-Build firm offering solutions to the Controlled Environment Agriculture (“CEA”) and other industrial sectors. Our business specializes in fee-based, knowledge-driven services and value-added equipment procurement and integration. We generate income income from our ability to drive revenue through the provision of architectural, engineering, systems procurement and integration, and construction services to clients across CEA and commercial markets. In CEA, our clients include cannabis and produce operators and facilitators throughout the United States, Canada, and Europe. In commercial sectors, we work with leading food and beverage Commercial Packaged Goods (“CPG”) companies, higher education institutions, municipalities and government agencies, hospitality brands, and more.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the three months ended June 30, 2024 and 2023
During the three months ended June 30, 2024, we generated revenues of $17.9 million compared to revenues of $18.5 million during the three months ended June 30, 2023, a decrease of $0.5 million, or approximately 3%. This decrease in revenues is the net result of the following changes in individual revenue components:
•Equipment systems revenue decreased $1.3 million due to continued weak market conditions in the CEA sector and a subsequent reduction in the number of projects available to bid on as our clients’ access to incremental capital continues to remain tight;
•Services revenue decreased $0.7 million due to headwinds that continue to be faced in the CEA sector that limited the kickoff of new design contracts as well as a decrease in revenue from commercial customers correlated with a reduction in the number of contracts signed; and
•Construction design-build revenue increased $1.5 million due to the execution of a limited notice to proceed with a construction design-build contract in the CEA sector.
During the three months ended June 30, 2024, cost of revenues was $15.5 million compared to $15.9 million during the three months ended June 30, 2023, a decrease of $0.4 million, or approximately 3%. Gross profit was $2.4 million (13% of revenues) during the three months ended June 30, 2024, compared to $2.5 million (14% of revenue) during the three months ended June 30, 2023. The decrease in gross profit dollars was the result of the decrease in revenues. The decrease in gross profit as a percentage of revenues was the net result of reduced margins in Construction design-build projects and increased margins in Equipment systems as compared to the prior year. Construction design-build gross profit was reduced primarily due to a legacy project that incurred costs that could not be billed back to the customer.
Operating expenses decreased by $1.6 million, or approximately 24%, to $5.1 million for the three months ended June 30, 2024 compared to $6.7 million for the three months ended June 30, 2023. The $1.6 million decrease in general and administrative expenses was a result of the previously disclosed initiative in the first quarter to reduce operating expenses by reducing salary and personnel related costs through a reduction in force and elimination of the incentive retention plan in 2024.
Non-operating expense was $0.3 million for the three months ended June 30, 2024, compared to non-operating expense of $1.6 million for the three months ended June 30, 2023. Non-operating expense for the three months ended June 30, 2023 included a settlement of $1.5 million.
As a result of the above, for the three months ended June 30, 2024, we incurred a net loss of $3.0 million, or a net loss per share of $0.24, compared to a net loss of $5.8 million, or a net loss per share of $0.53 for the three months ended June 30, 2023.
Comparison of Results of Operations for the six months ended June 30, 2024 and 2023
During the six months ended June 30, 2024, we generated revenues of $33.3 million compared to revenues of $35.2 million during the six months ended June 30, 2023, a decrease of $1.9 million, or approximately 5%. This decrease in revenues is the result of the following changes in individual revenue components:
•Equipment systems revenue decreased $1.7 million due to weak market conditions in the CEA sector and a subsequent reduction in the number of projects available to bid on as our clients’ access to incremental capital continues to remain tight;
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•Services revenue decreased $1.0 million due to headwinds that continue to be faced in the CEA sector that limited the kickoff of new design contracts as well as a decrease in revenue from commercial customers correlated with a reduction in the number of contracts signed;
•Construction design-build revenue increased $1.0 million due to the execution of a limited notice to proceed with a construction design-build contract in the CEA sector; and
•Other revenues decreased $0.1 million.
During the six months ended June 30, 2024, cost of revenues was $27.9 million compared to $29.7 million during the six months ended June 30, 2023, a decrease of $1.7 million, or approximately 6%. Gross profit was $5.4 million (16% of revenues) during the six months ended June 30, 2024, compared to $5.5 million (16% of revenue) during the six months ended June 30, 2023. This decrease in gross profit dollars was due to lower revenue. Gross profit margins remained consistent between periods.
Operating expenses decreased by $4.2 million, or approximately 28%, to $10.6 million for the six months ended June 30, 2024 compared to $14.7 million for the six months ended June 30, 2023. This overall decrease in operating expenses was the result of decreases in salary and personnel related costs, including elimination of the incentive retention plan in 2024.
Non-operating expense was $0.5 million for the six months ended June 30, 2024, compared to non-operating expense of $1.8 million for the six months ended June 30, 2023. Non-operating expense for the six months ended June 30, 2023 included a settlement of $1.5 million.
As a result of the above, for the six months ended June 30, 2024, we incurred a net loss of $5.5 million, or a net loss per share of $0.45, compared to a net loss of $11.0 million, or a net loss per share of $1.01 for the six months ended June 30, 2023.
NON-GAAP FINANCIAL MEASURES
The Company uses the supplemental financial measure of Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) as a measure of our operating performance. Adjusted EBITDA is not calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and it is not a substitute for other measures prescribed by GAAP such as net income (loss), income (loss) from operations, and cash flows from operating activities. We define Adjusted EBITDA as net income (loss) attributable to urban-gro, Inc., determined in accordance with GAAP, excluding the effects of certain operating and non-operating expenses including, but not limited to, interest expense/income, income taxes/benefit, depreciation of tangible assets, amortization of intangible assets, impairment of investments, foreign exchange gains and losses, debt forgiveness and extinguishment, stock-based compensation expense, and non-recurring legal and acquisition costs, that we do not believe reflect our core operating performance.
Our Board and management team focus on Adjusted EBITDA as a key performance and compensation measure. We believe that Adjusted EBITDA assists us in comparing our operating performance over various reporting periods because it removes from our operating results the impact of items that our management believes do not reflect our core operating performance.
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The following table reconciles net income (loss) attributable to the Company to Adjusted EBITDA for the periods presented:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net loss (GAAP) | $ | (2,964,728) | $ | (5,763,909) | $ | (5,525,291) | $ | (11,015,110) | |||||||||||||||
| Interest expense | 311,706 | 44,989 | 411,010 | 118,205 | |||||||||||||||||||
| Interest income | (155) | (75,060) | (236) | (148,191) | |||||||||||||||||||
| Federal and state income tax (provisions) | (48,383) | — | (96,765) | — | |||||||||||||||||||
| Federal and state income tax payments | 15,175 | 110,765 | 38,150 | 134,252 | |||||||||||||||||||
| Depreciation and amortization | 395,696 | 424,160 | 785,947 | 828,232 | |||||||||||||||||||
| EBITDA (non-GAAP) | (2,290,689) | (5,259,055) | (4,387,185) | (10,082,612) | |||||||||||||||||||
| Non-recurring professional fees | 152,275 | 267,873 | 377,653 | 484,611 | |||||||||||||||||||
| Contingent consideration - change in fair value | — | — | — | 160,232 | |||||||||||||||||||
| Contingent consideration - DVO acquisition | 72,556 | 80,431 | 147,361 | 126,698 | |||||||||||||||||||
| Reduction in force costs | 21,232 | 263,003 | 465,027 | 263,003 | |||||||||||||||||||
| One time business development expenses | 25,000 | — | 25,000 | — | |||||||||||||||||||
| Retention incentive | — | 192,000 | — | 642,000 | |||||||||||||||||||
| Loss on settlement | — | 1,500,000 | — | 1,500,000 | |||||||||||||||||||
| Stock-based compensation | 460,785 | 622,547 | 1,117,361 | 1,102,188 | |||||||||||||||||||
| Transaction costs | — | 26,857 | — | 61,938 | |||||||||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | (1,558,841) | $ | (2,306,344) | $ | (2,254,783) | $ | (5,741,942) | |||||||||||||||
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LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2024, we had negative working capital of $8.7 million, compared to negative working capital of $5.1 million as of December 31, 2023, a decrease of $3.6 million. This decrease in working capital was primarily due to the net effects of the following:
•an increase in accounts payable, accrued expenses, and contract liabilities of $8.7 million;
•an increase in the line of credit of $2.0 million;
•an increase in accounts receivable, net and contract receivables of $6.1 million.
These changes were primarily the result of the negative operating results experienced for the six months ended June 30, 2024.
On December 13, 2023, UG Construction, Inc. ("UG Construction"), a wholly owned subsidiary of the Company, entered into an interest only asset based revolving loan agreement (the “Line of Credit") with Gemini Finance Corp. ("Lender") pursuant to which Lender extended to UG Construction the Line of Credit in an amount not to exceed $10.0 million to be used to assist UG Construction and the Company with cash management. Lender will consider requests under the Line of Credit, which Lender may accept or reject in its discretion, until September 12, 2024 (the “Initial Term"), subject to an automatic extension for an additional nine-month term until May 12, 2025, provided that UG Construction is in compliance with all the terms of the applicable loan documents and Lender has not sent a written notice of non-renewal at least 60 days prior to expiration of the Initial Term. The Line of Credit contains standard events of default and representations and warranties by UG Construction and the Lender and the Company has entered into a Continuing Guaranty pursuant to which the Company will guarantee repayment of the loans associated with the Line of Credit (the “Guaranty Agreement”). Loans made under the Line of Credit earns interest at a monthly rate of one and seventy-five hundredths percent (1.75%). As of June 30, 2024, we had borrowed $4.5 million under the Line of Credit.
As of June 30, 2024, we had cash of $0.4 million, which represented a decrease of $0.7 million from December 31, 2023 due to the following changes during the three months ended June 30, 2024:
•Net cash used by operating activities was $1.8 million. This use of cash is the net effect of the net loss of $3.0 million, offset by non-cash expenses of $2.2 million, and a reduction in net operating assets and liabilities of $1.6 million. See the condensed consolidated statements of cash flows for further details on the non-cash expenses and net changes in operating assets and liabilities;
•Net cash used in investing activities was $0.0 million. We have no material commitments for capital expenditures as of June 30, 2024.
•Net cash provided by financing activities was $1.1 million. Cash used from financing activities primarily relates to cash provided by our Line of Credit and other financing agreements of $4.5 million offset by $3.3 million of payments made on the line of credit and other financing agreements.
INFLATION
Inflation on the costs of labor, raw materials and other items that are critical to our business has resulted in increased costs for our customers. In addition, the U.S. Government has responded to inflation by raising interest rates, which has increased the cost of capital for our customers. We believe this has resulted in some customers delaying projects, reducing the scope of projects or potentially canceling projects, as well as increased costs of our operations, which has negatively impacted the results of our operations during the quarter ended March 31, 2024. We maintain strategies to mitigate the impact of higher material, energy and commodity costs, including cost reduction, alternative sourcing strategies, and passing along cost increase to customers, which may offset only a portion of the adverse impact.
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 Amendment No. 2 on Form 10-K/A for the year ended
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December 31, 2023. During the six months ended June 30, 2024, 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.
As a smaller reporting company, we are not required to provide this information.
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 Quarterly Report on Form 10-Q.
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 by our management team, our CEO and CFO have concluded that our disclosure controls and procedures were not effective as of June 30, 2024 because of the material weaknesses in our internal control over financial reporting described in the Amendment No. 2 on Form 10-K/A for the fiscal year ended December 31, 2023.
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.
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, 2024, 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.
Management’s Plan to Remediate the Material Weaknesses
As it relates to the material weaknesses that existed as of June 30, 2024, we are currently in the process of designing and implementing remediation plans and taking steps to address the root cause of the material weaknesses described in the Amendment No. 2 on Form 10-K/A for the fiscal year ended December 31, 2023. There have been no changes to the remediation plan described in the Amendment No. 2 on Form 10-K/A for the fiscal year ended December 31, 2023.
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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. Most of these disputes are not likely to have a material effect on our business, financial condition, or operations. There are no new material legal proceedings that were initiated or terminated during the period covered by this report and there were no material developments in the material proceedings identified in Part 1, Item 3 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 during the period covered by this report.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Amendment No. 2 on Form 10-K/A for the fiscal year ended December 31, 2023, each of which is incorporated herein by reference and which could materially affect our business, financial condition or future results. The risks described herein and in those filings are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. We do not believe that there have been any material changes from the risk factors previously disclosed in our Annual Report on Amendment No. 2 on Form 10-K/A for the fiscal year ended December 31, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Sale of Unregistered Securities
None.
Repurchase of Equity Securities
We did not repurchase any of our registered equity securities during the period covered by this Quarterly Report on Form 10-Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
Not Applicable.
ITEM 5. OTHER INFORMATION
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ITEM 6. EXHIBITS
| Exhibit No. | Exhibit Description | |||||||
| 10.1 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 101.INS | Inline XBRL Instance Document | |||||||
| 101.SCH | Inline XBRL Schema Document | |||||||
| 101.CAL | Inline XBRL Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (Embedded within the Inline XBRL document) | |||||||
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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 February 18, 2025.
| URBAN-GRO, INC. | ||||||||
| By: | /s/ Bradley Nattrass | |||||||
| Bradley Nattrass | ||||||||
| Chairperson of the Board of Directors and Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
| By: | /s/ Richard Akright | |||||||
| Richard A. Akright | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
| (Principal Accounting Officer) | ||||||||
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