Flash Sports & Media Holdings, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS urban-gro, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) June 30, 2022 December 31, 2021 Assets Current assets: Cash $ 22,767,595 $ 34,592,190 Accounts receivable, net 14,903,543 13,125,685 Contract receivables 543,687 — Inventories 398,098 514,756 Prepaid expenses and other current assets 6,142,613 11,248,266 Total current assets 44,755,536 59,480,897 Non-current assets: Property and equipment, net 864,022 207,496 Operating lease right of use assets, net 708,876 689,704 Investments 4,210,358 4,210,358 Goodwill 10,636,284 7,992,121 Intangible assets, net 4,886,740 1,575,466 Total non-current assets 21,306,280 14,675,145 Total assets $ 66,061,816 $ 74,156,042 Liabilities Current liabilities: Accounts payable $ 7,946,023 $ 6,066,896 Contract liabilities 671,685 — Accrued expenses 3,381,263 3,878,278 Customer deposits 3,286,073 13,345,451 Contingent consideration 2,612,678 1,563,000 Operating lease liabilities 283,727 152,459 Total current liabilities 18,181,449 25,006,084 Non-current liabilities: Operating lease liabilities 427,826 542,003 Deferred tax liability 1,201,112 440,625 Total non-current liabilities 1,628,938 982,628 Total liabilities 19,810,387 25,988,712 Shareholders’ Equity Preferred stock, $ 0.10 par value; 10,000,000 shares authorized; 0 shares issued and outstanding — — Common stock, $ 0.001 par value; 100,000,000 shares authorized; 11,911,043 issued and 10,637,040 outstanding as of June 30, 2022, and 11,588,110 issued and 10,733,195 outstanding as of December 31, 2021 11,911 11,588 Additional paid in capital 82,971,694 78,679,220 Treasury shares, cost basis: 1,274,003 shares as of June 30, 2022 and 854,915 shares as of December 31, 2021 ( 11,456,667 ) ( 7,683,490 ) Accumulated deficit ( 25,275,509 ) ( 22,839,988 ) Total shareholders’ equity 46,251,429 48,167,330 Total liabilities and shareholders’ equity $ 66,061,816 $ 74,156,042 See accompanying notes to unaudited condensed consolidated financial statements 4 urban-gro, Inc. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (unaudited) 1 2 3 4 Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Revenue Equipment systems $ 10,077,572 $ 12,179,316 $ 27,144,916 $ 23,524,066 Construction design-build 2,917,321 - 2,917,321 - Services 3,027,556 288,407 6,666,062 548,920 Consumable products 259,054 363,574 606,072 792,667 Total Revenue 16,281,503 12,831,297 37,334,371 24,865,653 Cost of Revenue 12,779,557 9,908,913 28,930,405 19,302,626 Gross profit 3,501,946 2,922,384 8,403,966 5,563,027 Operating expenses: General and administrative 4,240,658 2,400,417 8,965,957 4,597,257 Intangible asset amortization 306,225 411 468,725 578 Stock-based compensation 882,000 299,602 1,764,000 590,407 Total operating expenses 5,428,883 2,700,430 11,198,682 5,188,242 Income (loss) from operations ( 1,926,937 ) 221,954 ( 2,794,716 ) 374,784 Non-operating income (expenses): Interest expense ( 7,658 ) ( 4,624 ) ( 15,317 ) ( 322,067 ) Interest income 47,275 11,531 127,126 14,390 Interest expense – beneficial conversion of notes payable - - - ( 636,075 ) Loss on extinguishment of debt - - - ( 790,723 ) PPP Loan Forgiveness - 1,032,316 - 1,032,316 Other income (expense) 71,563 ( 3,733 ) 62,874 ( 3,764 ) Total non-operating income (expenses) 111,180 1,035,490 174,683 ( 705,923 ) Income (loss) before income taxes ( 1,815,757 ) 1,257,444 ( 2,620,033 ) ( 331,138 ) Income tax expense (benefit) ( 76,453 ) - ( 184,512 ) - Net income (loss) $ ( 1,739,304 ) $ 1,257,444 $ ( 2,435,521 ) $ ( 331,138 ) Comprehensive income (loss) $ ( 1,739,304 ) $ 1,257,444 $ ( 2,435,521 ) $ ( 331,138 ) Earnings (loss) per share: Earnings (loss) per share - basic $ ( 0.17 ) $ 0.11 $ ( 0.23 ) $ ( 0.03 ) Earnings (loss) per share - dilutive $ ( 0.17 ) $ 0.11 $ ( 0.23 ) $ ( 0.03 ) Weighted average share - basic 10,508,972 11,220,580 10,527,975 9,535,630 Weighted average shares - dilutive 10,508,972 11,725,282 10,527,975 9,535,630 See accompanying notes to unaudited condensed consolidated financial statements 5 urban-gro, Inc. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) (unaudited) Shares Amount Capital Deficit Stock (Deficit) Common Stock Additional Paid in Accumulated Treasury Total Shareholders’ Equity Shares Amount Capital Deficit Stock (Deficit) Balance, March 31, 2022 11,627,528 $ 11,628 $ 79,589,977 $ ( 23,536,205 ) $ ( 11,456,667 ) $ 44,608,733 Stock-based compensation - - 882,000 - - 882,000 Treasury stock - - - - - - Stock options exercised - - - - - - Stock issuance related to acquisition 283,515 283 2,499,717 - - 2,500,000 Net income (loss) for period ended June 30, 2022 - - - ( 1,739,304 ) - ( 1,739,304 ) Balance, June 30, 2022 11,911,043 $ 11,911 $ 82,971,694 $ ( 25,275,509 ) $ ( 11,456,667 ) $ 46,251,429 Common Stock Additional Paid in Accumulated Treasury Total Shareholders’ Equity Shares Amount Capital Deficit Stock (Deficit) Balance, March 31, 2021 11,218,137 $ 11,218 $ 75,091,357 $ ( 23,552,903 ) $ ( 2,975,000 ) $ 48,574,672 Stock-based compensation - - 299,602 - - 299,602 Stock issuance related to offering, net of offering costs of $ 195,574 - - ( 195,574 ) - - ( 195,574 ) Common stock repurchased - - - - ( 499,270 ) ( 499,270 ) Stock Options Exercised 4,777 5 32,390 - - 32,395 Net income (loss) for period ended June 30, 2021 - - - 1,257,444 - 1,257,444 Balance, June 30, 2021 11,222,914 11,223 $ 75,227,775 $ ( 22,295,459 ) $ ( 3,474,270 ) $ 49,469,269 Common Stock Additional Paid in Accumulated Treasury Total Shareholders’ Equity Shares Amount Capital Deficit Stock (Deficit) Balance, December 31, 2021 11,588,110 $ 11,588 $ 78,679,220 $ ( 22,839,988 ) $ ( 7,683,490 ) $ 48,167,330 Stock-based compensation - - 1,764,000 - - 1,764,000 Treasury stock - - - - ( 3,773,177 ) ( 3,773,177 ) Stock option exercised - - - - - - Stock exercised 4,555 5 28,792 - - 28,797 Stock Issuance related to acquisition 283,515 283 2,499,717 - - 2,500,000 Stock issued with exercise of warrants 34,863 35 ( 35 ) - - - Net income (loss) for period ended June 30, 2022 - - - ( 2,435,521 ) - ( 2,435,521 ) Balance, June 30, 2022 11,911,043 $ 11,911 $ 82,971,694 $ ( 25,275,509 ) $ ( 11,456,667 ) $ 46,251,429 Common Stock Additional Paid in Accumulated Treasury Total Shareholders’ Equity Shares Amount Capital Deficit Stock (Deficit) Balance, December 31, 2020 4,718,714 $ 4,719 $ 14,553,438 $ ( 21,964,321 ) $ – $ ( 7,406,164 ) Stock-based compensation - - 590,407 - - 590,407 Beneficial conversion feature - - 636,075 - - 636,075 Conversion of Bridge Financing 254,425 254 1,907,971 - - 1,908,225 Stock grant program vesting 16,586 17 ( 17 ) - - - Stock issuance related to offering, net of offering costs of $ 4,596,257 6,210,000 6,210 57,497,533 - - 57,503,743 Stock issuance related to offering, net of offering costs 6,210,000 6,210 57,497,533 - - 57,503,743 Common stock repurchased - - - - ( 3,474,270 ) ( 3,474,270 ) Stock issued with exercise of warrants 18,412 18 9,978 - - 9,996 Stock Options Exercised 4,777 5 32,390 - - 32,395 Net income (loss) for period ended June 30, 2021 - - - ( 331,138 ) - ( 331,138 ) Net income (loss) - - - ( 331,138 ) - ( 331,138 ) Balance, June 30, 2021 11,222,914 $ 11,223 $ 75,227,775 $ ( 22,295,459 ) $ ( 3,474,270 ) $ 49,469,269 See accompanying notes to unaudited condensed consolidated financial statements 6 urban-gro, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) 1 2 Six Months Ended June 30, 2022 2021 Cash Flows from Operating Activities Net income (loss) $ ( 2,435,521 ) $ ( 331,138 ) Adjustments to reconcile net income (loss) from operations: Depreciation and amortization 589,835 109,625 Deferred income tax benefit ( 184,512 ) Amortization of deferred financing costs - 103,632 Loss on extinguishment of debt - 790,723 Interest on convertible notes - 53,725 Stock-based compensation expense 1,764,000 590,407 Beneficial conversion of Bridge notes - 636,075 Inventory write-offs ( 84,942 ) 26,792 Bad debt expense 30,000 28,248 PPP loan forgiveness - ( 1,032,316 ) Changes in operating assets and liabilities (net of acquired amounts): Accounts receivable 663,955 ( 2,034,311 ) Inventories 201,600 ( 116,964 ) Prepayments and other assets 6,073,732 ( 3,732,753 ) Accounts payable and accrued expenses ( 1,320,152 ) 1,729,802 Operating leases ( 163,054 ) - Customer deposits ( 10,059,378 ) 4,475,416 Net Cash Provided By (Used In) Operating Activities ( 4,924,437 ) 1,296,963 Cash Flows from Investing Activities Business combinations, net of cash acquired ( 2,709,148 ) - Purchases of property and equipment ( 374,630 ) ( 9,670 ) Net Cash Used In Investing Activities ( 3,083,778 ) ( 9,670 ) Cash Flows from Financing Activities Proceeds from issuance of Common Stock, net of offering costs - 58,203,091 Repurchase of Common Stock ( 3,773,177 ) ( 3,474,270 ) Repayment of notes payable - ( 5,755,845 ) Proceeds from stock issuance 28,797 - Payment of finance lease ROU liability ( 72,000 ) - Net Cash Provided By (Used In) Financing Activities ( 3,816,380 ) 48,972,976 Net Increase (Decrease) in Cash ( 11,824,595 ) 50,260,269 Cash at Beginning of Period 34,592,190 184,469 Cash at End of Period $ 22,767,595 $ 50,444,738 Supplemental Cash Flow Information: Interest paid $ 15,317 $ 218,453 Operating lease right of use asset $ 52,733 $ - Supplemental disclosure of non-cash investing and financing activities: Stock issued related to acquisitions $ 2,500,000 $ - PPP Loan Forgiveness $ - $ 1,032,316 See accompanying notes to unaudited condensed consolidated financial statements 7 urban-gro, Inc. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – ORGANIZATION, ACQUISITIONS, AND LIQUIDITY Organization urban-gro, Inc. (“our,” the “Company,” or “urban-gro”) is an integrated professional services and design-build firm. We offer value-added architectural, engineering, and construction management solutions to the Controlled Environment Agriculture (“CEA”), industrial, healthcare, and other commercial sectors. Innovation, collaboration, and a commitment to sustainability drive our team to provide exceptional customer experiences. To serve our horticulture clients, we engineer and design indoor CEA facilities and then integrate complex environmental equipment systems into those facilities. Through this work, we create high-performance indoor cultivation facilities for our clients to grow specialty crops, including leafy greens, vegetables, herbs, and plant-based medicines. Our custom-tailored approach to design, procurement, and equipment integration provides a single point of accountability across all aspects of indoor growing operations. We also help our clients achieve operational efficiency and economic advantages through a full spectrum of professional services and programs focused on facility optimization and environmental health which establish facilities that allow clients to manage, operate and perform at the highest level throughout their entire cultivation lifecycle once they are up and running. We also serve a broad range of commercial and governmental entities, providing them with planning, consulting, architectural and engineering design services for their facilities. We aim to work with our clients from inception of their project in a way that provides value throughout the life of their facility. We are a trusted partner and advisor to our clients and offer a complete set of engineering and managed services complemented by a vetted suite of select cultivation equipment systems. Acquisitions Emerald On April 29, 2022 (the “Emerald Closing Date”), the Company acquired all of the issued and outstanding capital stock (the “Emerald Acquisition”) of Emerald Construction Management, Inc. (“Emerald”) from their shareholders (collectively, the “Emerald Sellers”). The aggregate purchase price for the Emerald Acquisition was $ 7.8 million (the “Emerald Purchase Price”), which represented $ 7.0 million in initial purchase price and an estimated $ 0.8 million in working capital adjustments. The Emerald Purchase Price was payable as follows: $ 3.3 million in cash to the Emerald Sellers, net of satisfaction of Emerald’s entire outstanding debt of approximately $ 0.4 million; 283,515 shares of the Company’s common stock valued at $ 2.5 million transferred to the Emerald Sellers; and up to $ 2.0 million of contingent consideration (the “Emerald Contingent Consideration”) which can be earned by and payable to the Emerald Sellers based on the performance of Emerald during the 2-year period following the Emerald Closing Date. The Emerald Contingent Consideration is payable quarterly for a two-year period and will be equal to 35% of the Quarterly Gross Profit (as defined in the Emerald Acquisition Agreement). The value of the shares of the Company’s common stock to be issued for the Closing Payment Shares (as defined in the Emerald Acquisition Agreement) was determined based upon the daily volume weighted average closing price of the Company’s common stock in the ten trading days prior the signing date of the Emerald Acquisition Agreement. Any Emerald Contingent Consideration amounts earned by and payable to the Emerald Sellers is payable in shares of the Company’s common stock. The value of the shares of the Company’s common stock to be issued for the Emerald Contingent Consideration will be determined based upon the daily volume weighted average closing price of the Company’s common stock in the ten trading days prior to the end of the applicable annual quarter the Quarterly Gross Profit is calculated. SCHEDULE OF INITIAL ACQUISITION OF TARGET COMPANIES 1 Purchase Price $ 7,667,328 Allocation of Purchase Price: Cash $ 622,641 Accounts receivable, net $ 3,015,500 Contract receivable $ 697,019 Prepayments and other assets $ 38,086 Property and equipment $ 403,008 ROU asset $ 82,408 Goodwill $ 2,644,162 Intangible assets $ 3,780,000 Accrued expenses $ 2,111,302 Contract liabilities $ 476,786 ROU liability $ 82,408 Deferred tax liability $ 945,000 The following pro forma amounts reflect the Company’s results as if the acquisition of Emerald had occurred on January 1, 2021. These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results of the acquisition to reflect the additional amortization of intangibles. SCHEDULE OF SUPPLEMENTAL INFORMATION ON UNAUDITED PRO-FORMA BASIC OF ACQUISITION 1 2 3 4 Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Revenue 18,718,087 16,775,744 49,015,819 33,062,834 Net Income (loss) ( 1,556,748 ) 1,040,701 ( 1,456,161 ) ( 263,650 ) Acquired goodwill from Emerald represents the value expected to arise from organic growth and an opportunity to expand into a well-established market for the Company. 2WR On June 28, 2021, the Company’s wholly-owned subsidiary, urban-gro Architect Holdings, LLC (the “Buyer”), and the 2WRCO Shareholders, the 2WRGA Shareholders, the MJ12 Shareholders, and the 2WRMS Shareholders (collectively, the “2WR Sellers”), and Sam Andras, an individual (the “Sellers Representative”) entered into a Stock Purchase Agreement (the “2WR Purchase Agreement”), pursuant to which the Buyer would purchase all of the issued and outstanding capital stock of 2WR of Colorado, Inc., a Colorado corporation (“2WRCO”), 2WR of Georgia, Inc., a Georgia corporation (“2WRGA”), MJ12 Design Studio, Inc., a Colorado corporation (“MJ12”) (collectively, the “2WR Purchased Shares”) from the 2WR Sellers. In connection with the acquisition of the 2WR Purchased Shares, the Buyer entered into an affiliate relationship with 2WR of Mississippi, P.C., a Mississippi professional corporation (“2WRMS” and together with 2WRCO, 2WRGA and MJ12, the “2WR Entities”). The transaction closed on July 30, 2021. The 2WR Purchased Shares had an initial purchase price of up to $ 7.1 million, which purchase price was subject to customary working capital adjustments (the “2WR Purchase Price”). At closing, the 2WR Purchase Price was paid in the form of wire transfer of immediately available funds and the issuance of unregistered shares (the “2WR Closing Payment Shares”) of the Company’s common stock, par value $ 0.001 , which 2WR Closing Payment Shares had an aggregate stated value of $ 2.0 million. Additionally, the 2WR Purchase Agreement provides for additional earnout payments (“2WR Earnout Payments”) to the 2WR Sellers of up to an aggregate amount of $ 2.0 million, payable in cash or unregistered shares of the Company’s common stock in the Buyer’s sole discretion. The 2WR Earnout Payments are payable quarterly for a two-year period and will be equal to 20% of the 2WR Entities’ Quarterly Gross Profit (as defined in the 2WR Purchase Agreement) . The value of the shares of the Company’s common stock issued in the transaction was determined based upon the daily volume weighted average closing price of the Company’s common stock in the ten trading days prior to the issuance of such shares. The Company accounted for the acquisition of the 2WR Entities as follows: SCHEDULE OF INITIAL ACQUISITION OF TARGET COMPANIES Purchase Price $ 10,058,536 Allocation of Purchase Price: Cash $ 950,690 Accounts receivable, net $ 1,676,208 Prepayments and other assets $ 42,752 Property and equipment $ 9,351 Goodwill $ 7,090,054 Intangible assets $ 1,762,500 Accrued expenses $ 1,032,394 Deferred tax liability $ 440,625 8 The following pro forma amounts reflect the Company’s results as if the acquisition of the 2WR Entities had occurred on January 1, 2020. These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results of the acquisition to reflect the additional amortization of intangibles. SCHEDULE OF SUPPLEMENTAL INFORMATION ON UNAUDITED PRO-FORMA BASIC OF ACQUISITION 1 2 3 4 Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Revenue 16,281,503 14,868,933 37,334,371 28,617,733 Net Income (loss) ( 1,739,304 ) 1,358,395 ( 2,435,521 ) 732,592 Acquired goodwill from the 2WR Entities represents the value expected to arise from organic growth and an opportunity to expand into a well-established market for the Company. Liquidity and Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements are available to be issued. NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Unaudited Condensed Consolidated Financial Statements The Company has prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the SEC for condensed financial reporting. The condensed consolidated financial statements are unaudited and, in the Company’s opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of the Company’s condensed consolidated balance sheets, condensed consolidated statements of operations and comprehensive income (loss), condensed consolidated statements of shareholders’ equity (deficit) and condensed consolidated statements of cash flows for the periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Significant Accounting Policies For a detailed discussion about the Company’s significant accounting policies, refer to Note 2 — “Summary of Significant Accounting Policies,” in the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. During the six months ended June 30, 2022, there were no material changes made to the Company’s significant accounting policies. Use of Estimates In preparing condensed consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of assets and liabilities at the date of the condensed consolidated financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates. Significant estimates include: estimated revenues earned under construction design-build contracts; estimated useful lives and potential impairment of long-lived assets, intangibles and goodwill; inventory write offs; allowance for deferred tax assets; and allowance for bad debt. Reclassification Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. Balance Sheet Classifications The Company includes in current assets and liabilities the following amounts that are in connection with construction contracts that may extend beyond one year: contract assets and contract liabilities (including retainage invoiced to customers contingent upon anything other than the passage of time), capitalized costs to fulfill contracts, retainage payable to sub-contractors and accrued losses on uncompleted contracts. A one-year time period is used to classify all other current assets and liabilities when not otherwise prescribed by the applicable accounting principles. Contracts Receivable Contracts receivable includes billed and unbilled amounts for services provided to customers for which the Company has an unconditional right to payment. Billed and unbilled amounts for which payment is contingent on anything other than the passage of time are included in contract assets and contract liabilities on a contract-by-contract basis. When payment of the retainage is contingent upon the Company fulfilling its obligations under the contract it does not meet the criteria to be included in contracts receivable and remains in the contract’s respective contract asset or contract liability, determined on a contract-by-contract basis. Retainage for which the Company has an unconditional right to payment that is only subject to the passage of time are included in contracts receivable. The Company provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Contracts receivable is ordinarily due 30 days after the issuance of the invoice. Accounts past due more than 60 days are considered delinquent. Interest continues to accrue on delinquent accounts until the account is past due more than one year, at which time interest accrual ceases and does not resume until the account is no longer classified as delinquent, Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer. 9 Contract Assets and Liabilities The timing of when the Company bills their customers on long-term construction contracts is generally dependent upon agreed-upon contractual terms, which may include milestone billings based on the completion of certain phases of the work, or when services are provided. When as a result of contingencies, billings cannot occur until after the related revenue has been recognized, the result is in unbilled revenue, which is included in contract assets. Additionally, the Company may receive advances or deposits from customers before revenue is recognized, resulting in deferred revenue, which is included in contract liabilities. Retainage for which the Company has an unconditional right to payment that is only subject to the passage of time are classified as contracts receivable. Retainage subject to conditions other than the passage of time do not meet the definition of a receivable and are therefore included in contract assets and contract liabilities, as determined on a contract-by-contract basis. Contract assets represent revenues recognized in excess of amounts paid or payable (contract receivables) to the Company on uncompleted contracts. Contract liabilities represent the Company’s obligation to perform on uncompleted contracts with customers for which the Company has received payment or for which contract receivables are outstanding. SCHEDULE OF CONTRACT ASSETS AND LIABILITIES Contract assets Revenue recognized in excess of amounts paid or payable (contract receivables) to the Company on uncompleted contracts (contract asset), excluding retainage $ 261,920 Retainage included in contract assets due to being conditional on something other than solely passage of time 281,767 Total contract assets $ 543,687 Contract liabilities Payments received or receivable (contract receivables) in excess of revenue recognized on uncompleted contracts (contract liability), excluding retainage $ ( 672,699 ) Retainage included in contract liabilities due to being conditional on something other than solely passage of time 1,014 Total contract liabilities $ ( 671,685 ) NOTE 3 – RELATED PARTY TRANSACTIONS Cloud 9 Support, LLC (“Cloud 9”) is an entity owned by James Lowe, a director of the Company. Cloud 9 purchases materials from the Company for use with its customers. Total sales to Cloud 9 from the Company were $ 11,813 and $ 93,205 during the six months ended June 30, 2022, and 2021, respectively, and $ 5,606 and $ 79,199 during the three months ended June 30, 2022 and 2021, respectively. Outstanding receivables from Cloud 9 as of June 30, 2022 and December 31, 2021 totaled $ 4,052 and $ 6,797 , respectively. NOTE 4 – PREPAYMENTS AND OTHER ASSETS Prepayments and other assets are comprised of prepayments paid to vendors to initiate orders and prepaid services and fees. The prepaid balances are summarized as follows: SCHEDULE OF PREPAID BALANCES June 30, 2022 December 31, 2021 Vendor prepayments $ 5,348,733 $ 10,652,962 Prepaid services and fees 761,697 587,505 Other assets 32,183 7,799 Prepayments and other assets $ 6,142,613 $ 11,248,266 NOTE 5 – INVESTMENTS The components of investments are summarized as follows: SCHEDULE OF COST METHOD INVESTMENTS June 30, 2022 December 31, 2021 Investment in Edyza $ 1,710,358 $ 1,710,358 Investment in XSF 2,500,000 2,500,000 Investment $ 4,210,358 $ 4,210,358 Edyza The Company has a strategic investment in Edyza, Inc. (“Edyza”), a hardware and software technology company that enables dense sensor networks in agriculture, healthcare, and other environments that require precise micro-climate monitoring. The Company measures this investment at cost, less any impairment changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. 10 XS Financial On October 30, 2021, the Company’s wholly-owned subsidiary UGFS, LLC, a Colorado limited liability company (“UGFS”), participated in a convertible note offering of Xtraction Services, Inc., a/k/a XS Financial Inc. (CSE: XSF) (OTCQB: XSHLF) (“XSF”), a specialty finance company providing CAPEX financing solutions, including equipment leasing, to Controlled Environment Agriculture (CEA) companies in the United States. UGFS invested $ 2,500,000 of a total $ 43,500,000 raised by XSF. The investment is convertible into equity and incurs 9.50 % interest payable in cash ( 8.0 %) and payment-in-kind Notes ( 1.5 %) prior to any Nasdaq listing and 8.0 % interest after any listing, pursuant to the Note Purchase Agreement. The debt matures on October 28, 2023 , with a one-year option to extend the maturity date at the option of XSF. In addition, UGFS received 1,250,000 warrants with a CAD$ 0.45 exercise price pursuant to the Warrant instrument. No value was attributed to the warrants at the time of the investment in XFS. NOTE 6 – GOODWILL & INTANGIBLE ASSETS Goodwill The Company has recorded goodwill in conjunction with the acquisitions it has completed. The goodwill balances as of June 30, 2022 and December 31, 2021 were $ 10,636,284 and $ 7,992,121 , respectively. Goodwill is not amortized. There is no goodwill for income tax purposes. The Company did not record any impairment charges related to goodwill for the periods ended June 30, 2022 and 2021. Intangible Assets Other Than Goodwill Intangible assets as of June 30, 2022 and December 31, 2021 consisted of the following: SCHEDULE OF FINITE-LIVED INTANGIBLE ASSETS June 30, 2022 Cost Accumulated Amortization Net Book Value Finite-lived intangible assets: Customer relationships $ 2,665,100 $ 152,584 $ 2,502,516 Trademarks and trade names 2,195,000 148,018 2,046,982 Backlog and Other 708,837 444,162 264,675 Total finite-lived intangible assets: 5,558,937 744,764 4,814,173 Indefinite-lived intangible assets: Patents 44,276 - 44,276 Trade name 28,291 - 28,291 Total Intangible assets, net $ 5,631,504 $ 744,764 $ 4,886,740 December 31, 2021 Cost Accumulated Amortization Net Book Value Customer relationships $ 834,100 $ 49,649 $ 784,451 Trademarks and trade names 499,000 41,583 457,417 Backlog and Other 518,404 184,806 333,598 $ 1,851,504 $ 276,039 $ 1,575,466 The estimated future amortization expense for intangible assets subject to amortization as of June 30, 2022, is summarized below: SCHEDULE OF FUTURE AMORTIZATION EXPENSES OF INTANGIBLE ASSETS Estimated Future Amortization Expense Remainder of 2022 $ 577,253 2023 907,610 2024 819,944 2025 819,944 Thereafter 1,689,422 Total $ 4,814,173 Amortization expense for intangible assets for the six months ended June 30, 2022 and 2021 was $ 468,725 and $ 578 , respectively. Amortization expense for intangible assets for the three months ended June 30, 2022 and 2021 was $ 306,225 and $ 411 , respectively. NOTE 7 – ACCRUED EXPENSES Accrued expenses are summarized as follows: SCHEDULE OF ACCRUED EXPENSES June 30, December 31, 2022 2021 Accrued operating expenses $ 673,034 $ 628,871 Accrued wages and related expenses 800,322 1,887,124 Accrued 401(k) 163,941 23,520 Accrued sales tax payable 1,743,966 1,338,763 Accrued expenses $ 3,381,263 $ 3,878,278 11 NOTE 8 – RISKS AND UNCERTAINTIES Concentration Risk The table below shows customers who account for 10% or more of the Company’s total revenues and 10% or more of the Company’s accounts receivable for the periods presented: Customers exceeding 10% of revenue: SCHEDULES OF CONCENTRATION OF RISK Three Months Ended June 30, Three Months Ended June 30, Six Months Ended June 30, Six Months Ended June 30, Company Customer Number 2022 2021 2022 2021 C000001462 * 59 % 16 % 46 % C000001140 25 % * 20 % * C000001660 * * * 15 % C000001661 * 11 % * * C000000819 14 % * * * Customers exceeding 10% of accounts receivable: June 30, December 31, Company Customer Number 2022 2021 C000001462 * 41 % C000001140 23 % 23 % C000002151 12 % * The table below shows vendors who account for 10% or more of the Company’s total purchases and 10% or more of the Company’s accounts payable for the periods presented: Vendors exceeding 10% of purchases: Three Months Ended June 30, Three Months Ended June 30, Six Months Ended June 30, Six Months Ended June 30, Company Vendor Number 2022 2021 2022 2021 V000001029 23 % * 25 % 10 % V000001350 * 17 % * 16 % V000000453 * * 12 % * V000001372 * 25 % * 15 % V000001326 * * * 10 % V000001280 19 % * * * Vendors exceeding 10% of accounts payable: June 30, December 31, Company Vendor Number 2022 2021 V000001029 33 % * V000000453 * 20 % V000001372 * 33 % V000001326 * 12 % *Amounts less than 10% Foreign Exchange Risk Although the Company’s revenues and expenses are expected to be predominantly denominated in United States dollars, the Company may be exposed to currency exchange fluctuations. Recent events in the global financial markets have been coupled with increased volatility in the currency markets. Fluctuations in the exchange rate between the U.S. dollar, the Canadian dollar, the Euro, and the currency of other regions in which the Company may operate may have a material adverse effect on the Company’s business, financial condition and operating results. The Company may, in the future, establish a program to hedge a portion of the Company’s foreign currency exposure with the objective of minimizing the impact of adverse foreign currency exchange movements. However, even if the Company develops a hedging program, there can be no assurance that it will effectively mitigate currency risks. NOTE 9 – STOCK-BASED COMPENSATION Stock-based compensation expense for the six months ended June 30, 2022, and 2021 was $ 1,764,000 and $ 590,407 , respectively, based on the vesting schedule of the stock grants and options. Stock-based compensation expense for the three months ended June 30, 2022 and 2021 was $ 882,000 and $ 299,602 , respectively, based on the vesting schedule of the stock grants and options. No cash flow effects are anticipated for stock grants. The following schedule shows stock grant activity for the six months ended June 30, 2022. SCHEDULE OF STOCK GRANT ACTIVITY Grants unissued as of December 31, 2021 153,673 Grants outstanding, beginning 153,673 Grants awarded 628,760 Forfeiture/Cancelled ( 7,200 ) Grants Vested ( 16,667 ) Grants unissued as of June 30, 2022 758,566 Grants outstanding, ending 758,566 12 As of June 30, 2022, the Company has $ 1.8 million in unrecognized share-based compensation expense related to these stock grants. The following schedule shows stock option activity for the six months ended June 30, 2022. SCHEDULE OF STOCK GRANT VESTING PERIODS Number of Shares Weighted Average Remaining Life (Years) Weighted Average Exercise Price Stock options outstanding as of December 31, 2021 641,337 7.20 $ 6.27 Issued 44,410 9.50 $ 10.48 Expired - - $ - Exercised ( 4,555 ) - $ ( 6.00 ) Stock options outstanding as of June 30, 2022 681,192 7.40 $ 6.55 Stock options exercisable as of June 30, 2022 579,169 7.20 $ 6.41 The fair value of the options is calculated using the Black-Scholes pricing model based on the market value of the underlying common stock at the valuation measurement date of $ 10.48 , the remaining contractual term of the options of 10 years, risk-free interest rate of 0.66 % and expected volatility of the price of the underlying common stock of 100 %. As of June 30, 2022, the Company has $ 0.6 million in unrecognized share-based compensation expense related to these stock options. The aggregate intrinsic value of the options outstanding and exercisable at June 30, 2022 is $ 0 . NOTE 10 – SHAREHOLDERS’ EQUITY On May 24, 2021, the Board of Directors authorized a stock repurchase program to purchase up to $ 5.0 million of the currently outstanding shares of the Company’s common stock, over a period of 12 months through open market purchases, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. On January 18, 2022, the Board of Directors authorized a $ 2.0 million increase to the stock repurchase program, to a total of $ 7.0 million. On February 2, 2022, the Board of Directors authorized an additional $ 1.5 million increase to the stock repurchase, to a total of $ 8.5 million. During the six months ended June 30, 2022, the Company repurchased 419,088 shares of common stock at an average price per share of $ 9.02 , for a total price of $ 3.8 million under this program. The Company did not repurchase any shares during the three-months ended June 30, 2022. In total, the Company has repurchased 924,003 shares of common stock at an average of $ 9.20 per share, for a total price of $ 8.5 million, under this program. For the three and six months ended June 30, 2021, the Company repurchased 52,895 under this program, and repurchased 350,000 shares of common stock at an average price of $ 8.50 per share, for a total price of $ 3.0 million outside of the stock repurchase program. NOTE 11 – WARRANTS The following table shows warrant activity for the six months ended June 30, 2022. SCHEDULE OF WARRANT ACTIVITY Number of shares Weighted Average Exercise Price Warrants outstanding as of December 31, 2021 374,088 $ 11.26 Exercised ( 18,196 ) $ 6.00 Terminated – cashless exercise ( 44,393 ) $ 6.00 Warrants outstanding as of June 30, 2022 311,499 $ 12.32 Warrants exercisable as of June 30, 2022 311,499 $ 12.32 13 The weighted-average life of the warrants is 2.3 years. The aggregate intrinsic value of the warrants outstanding and exercisable as of June 30, 2022 is $ 0 . NOTE 12 – INCOME TAXES The Company has experienced losses for both book and tax purposes since inception. The deferred income tax benefit for the three and six month periods ended June 30, 2022 relates to the reduction in the deferred tax liability associated with the amortization of the intangible assets from the acquisitions of the Emerald and 2WR Entities. NOTE 13 – SUBSEQUENT EVENTS The Company has evaluated events and transaction occurring subsequent to June 30, 2022 up to the date of this filing of these condensed consolidated financial statements. These statements contain all necessary adjustments and disclosures resulting from that evaluation. During 2021, the Company purchased lights from one of its international vendors to fulfill an order for a major customer. Subsequent to the sale, delivery and installation of the lights, the customer noted the lights were not performing as the manufacturer had stipulated. The Company performed tests of the lights and confirmed the performance metrics did not meet the manufacturer’s specifications. The Company worked with the customer to determine a lighting solution of replacement lights, sourced from the vendor, that would meet their needs. The customer has been a key customer to the Company and the Company expects to continue to do significant business with the customer in the future. In order to immediately satisfy the customer in this matter, during the third quarter of 2022, the Company agreed to supply the replacement lighting solution to the customer at the Company’s expense while the Company continues to work with the vendor to resolve the original defective lighting issue. The cost of the replacement lighting solution is expected to be $ 3.2 million. The Company is still evaluating the net amount of the expense it expects to record in the third quarter related to this transaction. 14