Item 3. Legal Proceedings
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company
is involved in routine litigation that arises in the ordinary course of business. Other than below, there are no other 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.
Gemini Loan Agreement Amendment and Default
On December 13, 2023, our
wholly-owned subsidiary UG Construction, Inc. d/b/a Emerald Construction Management, Inc. (“UG Construction”) entered into
(i) an interest only asset based revolving loan agreement (the “Loan Agreement”) with Gemini Finance Corp. (“Gemini”)
pursuant to which Gemini 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 us with cash management, and (ii) a Secured Promissory Note - Revolving issued by UG Construction to Gemini (the “Promissory
Note”). Pursuant to the Promissory Note, each draw was due and payable on or before 180 days after such draw is funded to UG Construction,
subject to a mandatory pre-payment upon UG Construction’s receipt of payment for any invoice previously submitted and approved for
financing by Gemini.
On March 18, 2025, UG Construction
entered into an amendment to the Loan Agreement and Promissory Note and waiver with Gemini (the “Amendment”). Pursuant to
the Amendment, Gemini waived any potential or perceived events of default arising under certain circumstances, which events did not constitute
specified events of default under the Promissory Note or the Loan Agreement.
Pursuant to the Amendment,
the Promissory Note was amended to provide that (i) the term during which Gemini may consider advances under the Loan Agreement has been
extended to January 1, 2026, and (ii) the interest applied on the outstanding principal amount of the Promissory Note will accrue interest
at an annual rate of 12%, and all accrued and unpaid interest shall be paid to Gemini on the first business day of each month for the
prior month. The Amendment also amended the Loan Agreement to require monthly reporting of certain accounts receivable and to include
a covenant that such accounts receivable equal or exceed 125% of the sum of the total amount drawn down under the Promissory Note, plus
outstanding interest, as of the applicable measurement date. In connection with the execution of the Amendment, we issued to Gemini, as
an amendment fee, 150,000 shares of our common stock, or 6,000 shares after giving effect to a 1-for-25 reverse stock split.
On July 31, 2025, Gemini issued
a notice of default to UG Construction claiming that UG Construction was in default under the line of credit due to a failure to
submit receivables calculations and failing to maintain sufficient eligible accounts and to forward accounts receivable. The notice indicated
that the remaining outstanding amount due under the line of credit of approximately $1.76 million was immediately due and payable with
default of 1% per week accruing from the June 16, 2025 date of default claimed by Gemini, and that Gemini intended to pursue legal
action if full payment was not received by August 8, 2025.
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On August 21, 2025, we received
a notification from Gemini stating that Gemini would proceed with a foreclosure and private sale of substantially all of the assets of
UG Construction in an Article 9 sale process, pursuant to Section 9601 et seq. of the California Commercial Code (the “Asset Sale”).
The Asset Sale occurred on September 4, 2025, at which Gemini acquired the assets constituting the collateral under the line of credit
for $450,000.
On August 29, 2025, Gemini
commenced a lawsuit captioned Gemini Finance Corp. v. UG Construction, Inc. et al. , case number 25CV2259 W SBC, in the U.S.
District Court for the Southern District of California, which lawsuit (the “Lawsuit”) included us and certain of our officers
as defendants and pursuant to which Gemini claimed it was owed $1,486,189 (the “Claim Amount”).
On September 26, 2025, we
entered into a Settlement and Mutual General Release (the “Gemini Settlement Agreement”) with Gemini. Pursuant to the terms
of the Gemini Settlement Agreement, among other things, we agreed to file a joint motion requesting an expedited fairness hearing under
Section 3(a)(10) of the Securities Act of 1933, as amended (the “Securities Act”), which motion was filed on September 30,
2025. Following such fairness hearing, and subject to the satisfaction of all applicable conditions and requirements of Section 3(a)(10)
of the Securities Act, we agreed to issue to Gemini shares of our common stock that, upon sale by Gemini, would result in net proceeds
to Gemini equal to the Claim Amount, provided that Gemini shall at no time be issued shares if it would beneficially own more than 4.99%
of our common stock, and the aggregate number of shares issued to Gemini may not exceed 19.99% of our outstanding common stock as of immediately
prior to the signing of the Gemini Settlement Agreement to the extent required by Nasdaq Listing Rule 5635. Additionally, Gemini agreed
to use its best efforts to not sell common stock exceeding 10% of our daily volume on any given trading day. Upon the issuance of the
last tranche of shares under the Gemini Settlement Agreement, Gemini will dismiss the Lawsuit with prejudice. The Gemini Settlement Agreement
also included a customary mutual release of claims by the parties. The fairness hearing occurred on October 14, 2025.
Grow Hill Default
On October 1, 2024, we entered
into an asset-based term Loan Agreement with Grow Hill, LLC (“Grow Hill”) pursuant to which Grow Hill extended to us a secured
loan of $2,100,000 with an origination fee of $100,000, which was added to the amount of the loan. The loan is evidenced by a Secured
Promissory Note issued by us to Grow Hill. Grow Hill received a security interest in certain of our assets pursuant to a security agreement
between us and Grow Hill (the “Security Agreement”), which does not include any assets of our subsidiaries.
On October 14, 2025, we received service of process for a lawsuit filed
by Grow Hill against us in the District Court for the City and County of Denver, Colorado (Case No. 2025CV33546) alleging breach of contract
and fraud. Pursuant to the complaint, Grow Hill stated that we were in default under the Secured Promissory Note due to a failure to timely
make payments, and elected to accelerate all amounts due under the Secured Promissory Note, including a default fee equal to 1% of the
outstanding principal amount. We are currently investigating available options to resolve the complaint and intend to vigorously defend
the allegation of fraud.
J Brrothers Settlement
On August 8, 2025, we entered
into a Settlement and Release Agreement (the “Settlement Agreement”) with J Brrothers LLC (“J Brrothers”) and
Herb-a-More LLC relating to a dispute arising from amounts due for certain heating, ventilation and air conditioning equipment. Pursuant
to the terms of the Settlement Agreement, among other things, we issued a promissory note to J Brrothers with an original principal amount
of $395,556 and agreed to issue 150,000 unregistered shares of our common stock, or 6,000 shares after giving effect to a 1-for-25 reverse
stock split, to J Brrothers. The note accrues simple interest at an annual rate of 12% and has a maturity date of March 18, 2026. The
note must be repaid in monthly installments over a period of eight months, with the first seven payments being $50,000 per month and the
final monthly payment being $64,047. Any remaining principal and accrued but unpaid interest will become due and payable on the maturity
date, and the note may be prepaid without penalty. The note includes customary representations and warranties, customary events of default
and a 17% default interest rate.
As of December 31, 2025, the Company had made only the initial partial
payment of $25,000 on August 27, 2025. The required $50,000 monthly payments for September through December 2025 were not made. The outstanding
balance was approximately $374,512 at December 31, 2025, inclusive of accrued interest. The note matured on March 18, 2026.
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MJ’s Market, Inc
MJ’s Market, Inc. v.
Urban-Gro, Inc. et al, pending in the Suffolk County Superior Court in Massachusetts as Civil Action No. 2384-cv-02794. The original complaint,
filed by MJ’s Market, Inc, alleged that the Corporation prepared deign drawings for the plaintiff and subsequently sold those drawings
to a competitor. The original complaint asserted claims for Breach of Contract; violation of M.G.L. c. 93A; Breach of the Covenant of
Good Faith and Fair Dealing; Trademark Infringement; and Interference with Contractual Relations against the Corporation. An amended complaint
has been filed which names 2WR of Colorado, Inc., which is characterized as a subsidiary or affiliate of the Corporation, in place of
the Corporation. The lawsuit is ongoing.
RK Mechanical- complaint filed
On June 27, 2025, RK Mechanical LLC (“RK”) filed a complaint
against UG Construction and certain other defendants, with SVC Manufacturing Inc. as cross-claimant and UG Construction as cross-defendant,
in the Superior Court of Arizona for Maricopa County (Case No. CV2025-022680). The complaint alleged that UG Construction served as general
contractor for the construction of a PepsiCo plant in Tolleson, Arizona, and that as a result of work completed by RK, UG Construction
owed $1,522,716 to RK as a result of alleged breach of contract, breach of implied covenant of good faith and fair dealing, violation
of the Arizona Prompt Payment Act, and lien foreclosure. On or about October 2025, a default judgment was entered against UG Construction
for $1,511,716, plus prejudgment interest of $288,346 and post-judgment interest at 8.25% plus $10,057 in attorney fees.
Action Equipment- complaint filed
On April 21, 2025, Action
Equip. & Scaffold Co. (“Action”) filed a complaint against UG Construction in the Superior Court of Arizona for Maricopa
County (Case No. CV2025-014165). The complaint alleged that UG Construction owed Action $380,932 plus interest and attorneys’ fees
in connection with a contract pursuant to which Action leased equipment to UG Construction, and alleged breach of contract, breach of
covenant of good faith and fair dealing, and unjust enrichment.
Cullens v. Urban-Gro, Inc. et al.
On December 24, 2025, Christopher W. Cullens (“Mr. Cullens”),
a former employee of urban-gro, Inc. (the “Company”), filed a complaint against the Company and Bradley Nattrass, the Company's
Chief Executive Officer, in the District Court, Boulder County, State of Colorado (Case No. 2025CV31164). Mr. Cullens served as Vice President
of Construction Operations pursuant to a written employment agreement and was terminated without cause on November 14, 2025, following
an unpaid furlough that began in August 2025.
The complaint asserts claims for: (i) violation of the Colorado Wage
Claim Act, C.R.S. § 8-4-101, et seq. (the "CWA"), against the Company and Mr. Nattrass; (ii) breach of contract against
the Company; and (iii) unjust enrichment against the Company, pleaded in the alternative. Mr. Cullens alleges that, at the time of his
termination, he had earned and was vested in commissions totaling $650,000, which he contends constitute earned, vested, and determinable
wages due and payable immediately upon discharge under the CWA. Mr. Cullens further alleges that he is entitled to a severance package
consisting of nine months of his base salary and nine months of COBRA premium payments pursuant to the terms of his employment agreement.
Mr. Cullens seeks, among other relief, payment of the unpaid commissions, statutory penalties of up to three times the unpaid wages under
the CWA, the full value of the severance package, reasonable attorney's fees and costs, and such other relief as the court deems just
and proper.
On March 30, 2026, the Company and Mr. Nattrass filed their answer
to the complaint, generally denying the material allegations or asserting that they lack sufficient information or knowledge to admit
or deny certain allegations. Among other defenses, the Company asserts that Mr. Cullens has been paid for his time worked, that all compensation
considered earned, vested, and determinable has been paid, that Mr. Nattrass is not an "employer" under the CWA, and that Mr.
Cullens may have failed to mitigate his damages.
Concurrently with the answer, the Company filed counterclaims against
Mr. Cullens asserting: (i) breach of contract; (ii) breach of the implied covenant of good faith and fair dealing; and (iii) unjust enrichment,
pleaded in the alternative. The counterclaims arise out of an Acquisition Agreement and Plan of Merger entered into on or about March
13, 2022, among the Company, Emerald Merger Sub, Inc., Emerald Construction Management, Inc., Christopher Cullens, Charles Cullens, and
Green Stone Property LLC (the "Acquisition Agreement"), and an Amended and Restated Indemnification Claim Agreement entered
into on or about August 10, 2023, between the Company and Mr. Cullens (the “Amended Indemnification Agreement”). The Company
alleges that, under Article VIII of the Acquisition Agreement and the Amended Indemnification Agreement, Mr. Cullens is obligated to indemnify
the Company for certain pre-closing losses and specified project-related losses, including losses related to a project in Olathe, Kansas,
and legal fees associated with at least six pending indemnification claims. The Company alleges that Mr. Cullens has failed to make the
required indemnification payments. The Company seeks an award of its losses and damages, costs, pre- and post-judgment interest, and attorneys'
fees and costs.
This litigation is in its preliminary stages. The Company believes
the claims asserted in Mr. Cullens' complaint are without merit and intends to vigorously defend against them while pursuing its counterclaims.
The outcome of this matter is inherently uncertain, and the Company is unable to predict the ultimate outcome or estimate the amount or
range of loss, if any, that may result from this matter.
Other – Trade
Vendors
Due to cash flow and working
capital issues, the Company has been delinquent in paying vendors, some of which have filed lawsuits seeking judgment for payment. The
amounts due to these vendors are included in accounts payable in the consolidated balance sheet as of December 31, 2025.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II