UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2021

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

For the transition period from _________ to _________.

Commission File Number: 001-39933

urban-gro, Inc.

(Exact name of registrant as specified in its charter)

Delaware

46-5158469

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1751 Panorama Point, Unit G

Lafayette, CO

80026

(Address of principal executive offices)

(Zip Code)

(720) 390-3880

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.001 par value		UGRO		NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s only class of common stock outstanding as of November 5, 2021 was 10,759,820 shares.

urban gro, Inc.

FORM 10-Q

For the Quarterly Period Ended September 30, 2021

INDEX

		Page
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	4
	Unaudited Condensed Consolidated Balance Sheets	4
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	5
	Unaudited Condensed Consolidated Statements of Shareholders’ Equity (Deficit)	6
	Unaudited Condensed Consolidated Statements of Cash Flows	8
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4.	Controls and Procedures	18

	PART II. OTHER INFORMATION

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

FORWARD LOOKING STATEMENTS

This Report on Form 10-Q (the “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. The statements regarding urban-gro, Inc. contained in this Report that are not historical in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “likely,” “expects,” “anticipates,” “estimates,” “believes” or “plans,” or comparable terminology, are forward-looking statements based on current expectations and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on our behalf. We caution readers regarding certain forward-looking statements in this Report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission (the “SEC”).

Important factors known to us that could cause such material differences are identified in this Report, including the factors described in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2020. Except as required by applicable law, we undertake no obligation to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any future disclosures we make on related subjects in future reports to the SEC.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

urban-gro, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

	September 30, 2021			December 31, 2020
Assets
Current assets:
Cash	$	40,515,927		$	184,469
Accounts receivable, net		5,764,361			915,052
Inventories		604,413			537,104
Related party receivable		10,975			61,678
Prepayments and other assets		7,790,637			3,547,068
Total current assets		54,686,313			5,245,371

Non-current assets:
Property and equipment, net		220,300			129,444
Operating lease right of use assets, net		721,614			88,889
Investments		1,710,358			1,710,358
Goodwill		8,893,047			902,067
Intangible assets, net		1,745,787			84,514
Total non-current assets		13,291,106			2,915,272

Total assets	$	67,977,419		$	8,160,643

Liabilities
Current liabilities:
Accounts payable	$	2,778,183		$	653,998
Accrued expenses		4,265,839			1,798,494
Deposits		9,396,595			4,878,863
Contingent consideration		1,563,000			-
Notes payable		-			1,854,500
Revolving Facility		-			3,403,143
Term Loan, net		-			1,868,320
Operating lease liabilities		152,459			88,889
Total current liabilities		18,156,076			14,546,207

Non-current liabilities:
Notes payable		-			1,020,600
Operating lease liabilities		570,345			-
Deferred tax liability		440,750
Total non-current liabilities		1,011,095			1,020,600

Total liabilities		19,167,171			15,566,807

Shareholders’ equity (deficit):
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; 11,530,844 issued and 10,759,820 outstanding as of September 30, 2021, and 4,718,714 shares issued and outstanding as of December 31, 2020		11,530			4,719
Additional paid in capital		77,936,332			14,553,438
Treasury shares, cost basis: 771,024 shares as of September 30, 2021		(6,901,811	)		-
Accumulated deficit		(22,235,803	)		(21,964,321	)
Total shareholders’ equity (deficit)		48,810,248			(7,406,164	)

Total liabilities and shareholders’ equity (deficit)	$	67,977,419		$	8,160,643

See accompanying notes to unaudited condensed consolidated financial statements

urban-gro, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Revenue
Equipment systems	$	16,454,321		$	7,431,693		$	39,978,388		$	13,723,868
Services		1,461,041			448,882			2,009,961			1,490,216
Consumable products		372,449			478,847			1,165,115			1,411,604
Total Revenue		18,287,811			8,359,422			43,153,464			16,625,688

Cost of Revenue		14,029,677			6,654,134			33,332,303			12,613,461
Gross profit		4,258,134			1,705,288			9,821,161			4,012,227

Operating expenses:
General and administrative		3,685,396			1,454,570			8,283,233			5,110,476
Stock-based compensation		506,034			399,258			1,096,441			1,391,807
Total operating expenses		4,191,430			1,853,828			9,379,674			6,502,283

Income (loss) from operations		66,704			(148,540	)		441,487			(2,490,056	)

Non-operating income (expenses):
Interest expense		(4,331	)		(393,158	)		(326,397	)		(1,057,501	)
Interest expense – beneficial conversion of notes payable		-			-			(636,075	)		-
Loss on extinguishment of debt		-			-			(790,723	)		-
Contingent consideration		-			(155,000	)		-			(155,000	)
Impairment of investment		-			-			-			(310,000	)
PPP Loan Forgiveness		-			-			1,032,316			-
Other income		(2,717	)		2,417			7,910			52,675
Total non-operating income (expenses)		(7,048	)		(545,741	)		(712,969	)		(1,469,826	)

Income (loss) before income taxes		59,656			(694,281	)		(271,482	)		(3,959,882	)

Income tax expense (benefit)		-			–			-			–
Net income (loss)	$	59,656		$	(694,281	)	$	(271,482	)	$	(3,959,882	)

Comprehensive income (loss)	$	59,656		$	(694,281	)	$	(271,482	)	$	(3,959,882	)

Earnings (loss) per share:
Earnings (loss) per share - basic	$	0.01		$	(0.14	)	$	(0.03	)	$	(0.83	)
Earnings (loss) per share - dilutive	$	0.00		$	(0.14	)	$	(0.03	)	$	(0.83	)

Weighted average share - basic		11,440,255			4,814,699			10,177,482			4,784,484
Weighted average shares - dilutive		12,204,530			4,814,699			10,177,482			4,784,484

See accompanying notes to unaudited condensed consolidated financial statements

urban-gro, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

(unaudited)


	Common Stock				Additional Paid in			Accumulated			Treasury			Total Shareholders’ Equity
	Shares		Amount		Capital			Deficit			Stock			(Deficit)
Balance, June 30, 2021		11,222,914	$	11,223		75,227,775		$	(22,295,459	)	$	(3,474,270	)	$	49,469,269
Stock-based compensation		-		-		506,034			-			-			506,034
Stock grant to satisfy accounts payable
Stock grant to satisfy accounts payable, shares		-
beneficial conversion feature
Conversion of Bridge Financing
Conversion of Bridge Financing, shares		-
Stock grant to satisfy accounts payable
Stock grant to satisfy accounts payable,shares		-
Stock issuance related to acquisition		202,066		202		1,999,798			-			-			2,000,000
Clawback of stock granted
Clawback of stock granted,shares		-
Stock issuance related to debt
Stock issuance related to debt, shares		-
Common stock repurchased		-		-		-			-			(3,427,541	)		(3,427,541	)
Stock issued with exercise of warrants
Stock issued with exercise of warrants, shares
Stock issued in conversion of warrants		4,078		4		(4	)		-			-			-
Stock issuance related to loan term revisions
Stock issuance related to loan term revisions, shares		-
Stock grant program vesting		68,681		68		(68	)		-			-			-
Stock issuance related to offering,net of offering costs
Stock issuance related to offering, net of offering costs, shares		-
Stock Options Exercised		33,105		33		202,797			-			-			202,830
Warrant issuance related to debt
Stock issued for lease revision
Stock issued for lease revision, shares		-
Net income (loss) for period ended September 30, 2021		-		-		-			59,656			-			59,656
Balance, September 30, 2021		11,530,844	$	11,530	$	77,936,332		$	(22,235,803	)	$	(6,901,811	)	$	48,810,248

	Shares			Amount			Capital			Deficit				(Deficit)
	Common Stock						Additional Paid in			Accumulated				Total Shareholders’ Equity
	Shares			Amount			Capital			Deficit				(Deficit)
Balance, June 30, 2020		4,805,163		$	4,805		$	13,546,858		$	(20,156,227	)	-	$	(6,604,564	)
Stock-based compensation		–			–			399,258			–		-		399,258
Stock grant to satisfy accounts payable		1,607			2			9,638			–				9,640
Stock grant program vesting		21,945			22			(22	)		–				–
Stock issuance related to acquisition		41,667			42			154,958			–				155,000
Clawback of stock granted		(166,667	)		(167	)		167			–				-
Stock issued for lease revision		8,333			8			30,992			–				31,000
Net income (loss) for period ended September 30, 2020		–			–			–			(694,281	)			(694,281	)
Balance, September 30, 2020		4,712,048		$	4,712		$	14,141,849		$	(20,850,508	)	-	$	(6,703,947	)

See accompanying notes to unaudited condensed consolidated financial statements

urban-gro, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) (Continued)

(unaudited)


	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		-		-		1,096,441			-			-			1,096,441
Beneficial conversion feature		-		-		636,075			-			-			636,075
Conversion of Bridge Financing		254,425		254		1,907,971			-			-			1,908,225
Stock grant program vesting		85,267		85		(85	)		-			-			-
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 acquisition		202,066		202		1,999,798			-			-			2,000,000
Common stock repurchased		-		-		-			-			(6,901,811	)		(6,901,811	)
Stock issued with exercise of warrants		22,490		22		9,974			-			-			9,996
Stock Options Exercised		37,882		38		235,187			-			-			235,225
Net income (loss) for period ended September 30, 2021		-		-		-			(271,482	)		-			(271,482	)
Balance, September 30, 2021		11,530,844	$	11,530	$	77,936,332		$	(22,235,803	)	$	(6,901,811	)	$	48,810,248

	Shares			Amount			Capital			Deficit				(Deficit)
	Common Stock						Additional Paid in			Accumulated				Total Shareholders’
	Shares			Amount			Capital			Deficit				Deficit
Balance, December 31, 2019		4,701,552		$	4,702		$	11,877,590		$	(16,890,626	)	-	$	(5,008,334	)
Stock-based compensation		–			–			1,391,807			–		-		1,391,807
Stock grant to satisfy accounts payable		1,607			2			9,638							9,640
Stock issuance related to loan term revisions		16,667			16			99,984			–				100,000
Stock grant program vesting		42,222			42			(42	)		–				–
Clawback of stock granted		(183,333	)		(183	)		183			–				–
Stock issuance related to debt		83,333			83			499,917			–				500,000
Stock issuance related to acquisition		41,667			42			154,958							155,000
Warrant issuance related to debt		–			–			76,822			–				76,822
Stock issued for lease revision		8,333			8			30,992							31,000
Net income (loss) for period ended September 30, 2020		–			–			–			(3,959,882	)			(3,959,882	)
Balance, September 30, 2020		4,712,048		$	4,712		$	14,141,849		$	(20,850,508	)	-	$	(6,703,947	)

See accompanying notes to unaudited condensed consolidated financial statements

urban-gro, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Nine Months Ended September 30,
	2021			2020
Cash Flows from Operating Activities
Net income (loss)	$	(271,482	)	$	(3,959,882	)
Adjustments to reconcile net income (loss) from operations:
Depreciation and amortization		263,932			181,750
Amortization of deferred financing costs		103,632			368,661
Loss on extinguishment of debt		790,723			–
Interest on convertible notes		53,725			–
Stock-based compensation expense		1,096,441			1,391,807
Contingent consideration expense		-			155,000
Beneficial conversion of Bridge notes		636,075			-
Impairment of investment		-			310,000
Gain on disposal of assets		-			3,468
Inventory write-offs		26,792			72,258
Bad debt expense		28,248			43,849
PPP loan forgiveness		(1,032,316	)		–
Changes in operating assets and liabilities (net of acquired amounts):
Accounts receivable		(3,229,513	)		658,706
Inventories		(94,101	)		(171,147	)
Prepayments and other assets		(5,237,138	)		(784,210	)
Accounts payable and accrued expenses		2,672,135			(2,470,559	)
Deposits		4,517,732			1,172,186
Net Cash Provided By (Used In) Operating Activities		324,885			(3,028,113	)

Cash Flows from Investing Activities
Business combinations, net of cash acquired		(5,551,642	)		-
Purchases of property and equipment		(189,528	)		(122,817	)
Net Cash Used In Investing Activities		(5,741,170	)		(122,817	)

Cash Flows from Financing Activities
Proceeds from issuance of Revolving Facility		-			2,207,432
Proceeds from issuance of Term Loan		-			2,000,000
Proceeds from Revolving Facility advances		-			1,069,061
Proceeds from issuance of Common Stock, net of offering costs		58,405,686			–
Repurchase of Common Stock		(6,901,811	)		–
Long-term note payable		-			1,020,600
Debt financing costs		-			(638,046	)
Repayment of debt		(5,755,845	)		(2,743,428	)
Net Cash Provided by Financing Activities		45,748,030			2,915,619

Net Increase (Decrease) in Cash		40,331,458			(253,311	)
Cash at Beginning of Period		184,469			448,703
Cash at End of Period	$	40,515,927		$	213,392

Supplemental Cash Flow Information:
Interest Paid	$	222,765		$	670,165

Supplemental disclosure of non-cash investing and financing activities:
Debt financing costs booked in equity	$	-		$	676,822
Stock issued for acquisitions	$	2,000,000		$	155,000
PPP Loan Forgiveness	$	1,032,316		$	-
Operating lease right of use assets and liabilities extension	$	632,725		$

See accompanying notes to unaudited condensed consolidated financial statements

urban-gro, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND ACQUISITIONS, BUSINESS PLAN, AND LIQUIDITY

Organization

urban-gro, Inc. and its direct and indirect wholly owned subsidiaries (collectively, the “Companies”) (“we,” “us,” “our,” the “Company,” or “urban-gro”) is a leading architectural, engineering, consulting and design services company focused on the sustainable commercial indoor horticulture market. To serve our horticulture clients, we engineer and design indoor controlled environment agriculture (“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.

Acquisitions

On June 28, 2021, urban-gro, Inc., (the “Company” or “Parent”), urban-gro Architect Holdings, LLC, (the “Buyer”), a wholly-owned subsidiary of the Company, the 2WRCO Shareholders, the 2WRGA Shareholders, the MJ12 Shareholders, the 2WRMS Shareholders (collectively, the “Sellers” and each a “Seller”), and Sam Andras, an individual (the “Seller Representative”) entered into a Stock Purchase Agreement (the “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 “Purchased Shares”) from the Sellers. In connection with the acquisition of the Purchased Shares, Buyer would enter into an affiliate relationship with 2WR of Mississippi, P.C., a Mississippi professional corporation (“2WRMS” and together with 2WRCO, 2WRGA and MJ12, the “Target Companies”).

Pursuant to the Purchase Agreement, the Purchased Shares had an initial purchase price of up to $7.1 million, which purchase price is subject to customary working capital adjustments (the “Purchase Price”). At closing, the Purchase Price was paid in the form of wire transfer of immediately available funds and the issuance of unregistered shares (the “Closing Payment Shares”) of Parent’s common stock, par value $0.001 (“Parent Common Stock”), which Closing Payment Shares had an aggregate stated value of $2.0 million. Additionally, the Purchase Agreement provides for additional earnout payments (“Earnout Payments”) to the Sellers of up to an aggregate amount of $2.0 million, payable in cash or unregistered shares of Parent Common Stock in the Buyer’s sole discretion. The Earnout Payments are payable quarterly for a two-year period and will be equal to twenty percent of the Target Companies’ Quarterly Gross Profit (as defined in the Purchase Agreement). The value of the shares of Parent Common Stock issued in the transaction was determined based upon the daily volume weighted average closing price of the Parent Common Stock in the ten trading days prior to the issuance of such shares. The Company accounted for the initial acquisition of the Target Companies as follows:


Purchase Price	$	10,058,536

Allocation of Purchase Price:
Cash	$	943,894
Accounts receivable, net	$	1,597,341
Prepayments and other assets	$	71,936
PPE, net	$	63,246
Goodwill	$	7,990,980
Intangible assets	$	1,763,000
Accrued expenses	$	1,931,111
Deferred tax liability	$	440,750

The following table summarizes the supplemental information on an unaudited pro forma basis, as if the acquisition had been consummated as of January 1, 2020:

	2021		2020			2021		2020
	Three Months Ended September 30,					Nine Months Ended September 30,
	2021		2020			2021		2020
Revenues		19,225,173		9,600,989			47,842,906		21,036,536
Net income (loss)		389,217		(655,831	)		1,022,095		(3,490,989	)

These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of the acquisitions to reflect the additional amortization of intangibles and the purchase price adjustments as if they had been applied on January 1, 2020.

Basis of Presentation

These consolidated financial statements are presented in United States dollars and have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). On December 31, 2020, we effected a 1-for-6 reverse stock split with respect to our common stock. All share and per share information in these consolidated financial statements gives effect to this reverse stock split, including restating prior period reported amounts. On July 30, 2021, we acquired 2WR of Colorado, Inc., 2WR of Georgia, Inc. and MJ12 Design Studio, Inc., entities that had common ownership and management. We have accounted for the business combination by applying the acquisition method of accounting (ASC 805-10-25).

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, 2020.

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 2020 Form 10-K. During the nine months ended September 30, 2021, 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 design 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.

Business Combinations

Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition date fair values of the assets transferred, liabilities incurred to the former owners of the acquired entities and the equity interests issued in exchange for control of the acquired entities. Acquisition related costs are recognized in net income (loss) as incurred.

Recently Issued Accounting Pronouncements

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.

NOTE 3 – RELATED PARTY TRANSACTIONS

Cloud 9 Support, LLC (“Cloud 9”), a company owned by James Lowe, a director and shareholder, purchases materials from the Company. Total sales to Cloud 9 from the Company were $99,556 and $359,562 for the nine months ended September 30, 2021, and 2020, respectively, and $5,349 and $112,405 during the three months ended September 30, 2021 and 2020, respectively. Outstanding receivables from Cloud 9 as of September 30, 2021 and December 31, 2020 totaled $10,975 and $61,678, respectively.

In October 2018, we issued a $1,000,000 unsecured note payable to Cloud 9, which originally became due April 30, 2019 (the “Cloud 9 Note”). The Cloud 9 Note was personally guaranteed by Bradley Nattrass, our Chief Executive Officer, and Octavio Gutierrez, a co-founder of the Company. The Cloud 9 Note had a one-time origination fee of $12,500. Interest accrued at the rate of 12% per annum and was paid monthly. As additional consideration for the Cloud 9 Note, we granted Mr. Lowe (as designee of Cloud 9) an option to purchase 5,000 shares of our common stock at an exercise price of $7.20 per share, which option is exercisable for a period of five years. The due date for the Cloud 9 Note was extended in May 2019 to December 31, 2019 and the interest rate was decreased to 9% per year. In consideration for Cloud 9 extending the maturity date of the note and reducing the interest rate, we issued 1,667 shares of our common stock to Mr. Lowe (as designee of Cloud 9).

On February 21, 2020, we entered into an agreement to amend the Cloud 9 Note to extend the maturity date therein from December 31, 2019 to the date which is the earlier of 60 days following the date: (a) on which demand for repayment is made by the lenders under the Credit Agreement, as described in Note 9; or (b) the maturity date under the Credit Agreement.

In addition, on February 25, 2020, the Company entered into a subordination, postponement and standstill agreement with Cloud 9 (the “Subordination Agreement”) pursuant to which Cloud 9 agreed to postpone and subordinate all payments due under the promissory note until the facilities under the Credit Agreement have been fully and finally repaid. The term for the Subordination Agreement continued in force as long as the Company was indebted to the agent or lenders under the Credit Agreement. In consideration for Cloud 9’s agreement to extend the maturity date of the promissory note and to enter into the Subordination Agreement, we issued 16,667 shares of common stock to Mr. Lowe (as designee of Cloud 9).

On December 15, 2020, Mr. Lowe agreed to convert the $1,000,000 Cloud 9 Note plus $4,500 of accrued interest into a convertible note bridge financing (the “James Lowe Note”) (see “Bridge Financing” in Note 8 – Notes Payable). The James Lowe Note carried interest at the rate of 12% and a maturity date of December 31, 2021. The James Lowe Note plus accrued interest was mandatorily converted into 137,940 shares of our common stock on February 17, 2021 in connection with the other Bridge Financing notes.

The Company follows ASC 850, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions.

In accordance with ASC 850, the Company’s combined financial statements include disclosures of material related party transactions, other than compensation arrangements, expense reimbursements, and other similar items in the ordinary course of business, as well as transactions that are eliminated in the preparation of the combined financial statements.

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:

	September 30, 2021		December 31, 2020
Vendor prepayments	$	6,750,228	$	2,676,493
Prepaid services and fees		1,036,640		365,931
Deferred financing asset (See Note 9 - Debt)		-		504,644
Other assets		3,769		-
Prepayments and other assets	$	7,790,637	$	3,547,068

NOTE 5 – INVESTMENTS

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. The balance as of September 30, 2021 and December 31, 2020 was $1,710,358.

NOTE 6 – GOODWILL & INTANGIBLE ASSETS

Goodwill

The Company recorded goodwill in conjunction with the initial acquisition of Impact Engineering, Inc. (“Impact”) on March 7, 2019 and 2WR Colorado, Inc, 2WR Georgia, Inc. and MJ12 Design Studio, Inc. on July 30, 2021. The goodwill balance as of September 30, 2021 and December 31, 2020 is $8,893,047 and 902,067, 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 September 30, 2021 and 2020.

Intangible Assets Other Than Goodwill

Finite-lived intangible assets as of September 30, 2021 and December 31, 2020 consisted of the following:

	September 30, 2021
	Cost		Accumulated Amortization		Net Book Value
Customer relationships		834,000		18,905		815,095
Trademarks and trade names		499,000		14,333		484,667
Backlog and Other		519,004		72,979		446,025
		1,852,004		106,217		1,745,787

	December 31, 2020
	Cost		Accumulated Amortization		Net Book Value
Other		89,004		4,490		84,514
		89,004		4,490		84,514

Amortization expense for intangible assets for the nine months ended September 30, 2021 and 2020 was $101,727 and $1,228, respectively. Amortization expense for intangible assets for the three months ended September 30, 2021 and 2020 was $101,149 and $409, respectively.

NOTE 7 – ACCRUED EXPENSES

Accrued expenses are summarized as follows:

	September 30,		December 31,
	2021		2020
Accrued operating expenses	$	2,181,208	$	717,503
Accrued wages and related expenses		1,422,633		408,907
Accrued interest expense		-		99,258
Accrued sales tax payable		661,998		572,826
Accrued expenses	$	4,265,839	$	1,798,494

Accrued sales tax payable is comprised of amounts due to various states and Canadian provinces for 2015 through 2020.

NOTE 8 – NOTES PAYABLE

The following is a summary of notes payable excluding related party notes payable:

	September 30,		December 31,
	2021		2020

Paycheck Protection Program (“PPP”) loan entered into on April 16, 2020. The Company applied for and has been notified that the full amount of the loan, which was used for eligible expenditures for payroll and other expenses described in the CARES Act was forgiven on June 11, 2021.	$	-		1,020,600

Convertible notes related to bridge financing. See Bridge Financing Notes below.		-		1,854,500

Total		-		2,875,100
Less current maturities		-		(1,854,500	)
Long Term	$	-	$	1,020,600

During the fourth quarter of 2020 the Company entered into bridge financing notes (the “Bridge Financing Notes”) totaling $1,854,500. The Bridge Financing Notes are a combination of $1,004,500 in the James Lowe Note (See Note 3 – Related Party Transactions), $350,000 received in November 2020, and an additional $500,000 received in December 2020. The Bridge Financing Notes carried interest at the rate of 12% and had a maturity date of December 31, 2021. The Bridge Financing Notes were mandatorily convertible upon the closing of a sale of the securities of the Company, whether in a private placement or pursuant to an effective registration statement under the Securities Act, resulting in at least $2,500,000 of gross proceeds to the Company (a “Qualified Offering”). In the event of a Qualified Offering, the outstanding principal and interest of the Bridge Financing Notes were to be converted into the identical security issued at such Qualified Offering at 75% of the per security price paid by investors in connection with the Qualified Offering. The Offering described in Note 12 – Shareholders Equity, was a Qualified Offering and the Bridge Financing Notes were converted into equity in connection with the Offering on February 17, 2021.

NOTE 9 – DEBT

The Company’s borrowings as of September 30, 2021 and December 31, 2020 consisted of the following:

	September 30,		December 31,
	2021		2020
Revolving Facility	$	-	$	3,403,143
Term Loan, net of unamortized debt issuance costs		-		1,868,320
Total		-		5,271,463
Less current debt due within one year		-		(5,271,463	)
Total long-term debt	$	-	$	-

On February 21, 2020, we entered into a letter agreement (the “Credit Agreement”) by and among the Company, as borrower, urban-gro Canada Technologies Inc. and Impact., as guarantors, the lenders party thereto (the “Lenders”), and Bridging Finance Inc., as administrative agent for the Lenders (the “Agent”). The Credit Agreement, which was denominated in Canadian dollars (C$), was comprised of (i) a 12-month senior secured demand term loan facility in the amount of C$2.7 million ($2.0 million), which was funded in its entirety on the closing date (the “Term Loan”); and (ii) a 12-month demand revolving credit facility of up to C$5.4 million ($4.0 million), which could be drawn from time to time, subject to the terms and conditions set forth in the Credit Agreement and described further below (the “Revolving Facility,” and together with the Term Loan, the “Facilities”). The Credit Agreement was personally guaranteed by the Company’s CEO and Chairman, Brad Nattrass, and was to be in place for the original term of the Credit Agreement (1 year) plus a 1-year extension period at the discretion of the Lender as provided in the Credit Agreement.

The final maturity date of the Facilities was initially stipulated in the Credit Agreement as the earlier of (i) demand, and (ii) the date that is 12 months after the closing date, with a potential extension to the date that is 24 months after the closing date (the “Initial Maturity Date”). The Facilities bore interest at the annual rate established and designated by the Bank of Nova Scotia as the prime rate, plus 11% per annum. Accrued interest on the outstanding principal amount of the Facilities was due and payable monthly in arrears, on the last business day of each month, and on the Initial Maturity Date.

The Revolving Facility could initially be borrowed and re-borrowed on a revolving basis by the Company during the term of the Facilities, provided that borrowings under the Revolving Facility were limited by a loan availability formula equal to the sum of (i) 90% of insured accounts receivable, (ii) 85% of investment grade receivables, (iii) 75% of other accounts receivable, (iv) 50% of eligible inventory, and (v) the lesser of C$4.05 million ($3.0 million) and (A) 75% of uncollected amounts on eligible signed equipment orders for equipment systems contracts and (B) 85% of uncollected amounts on eligible signed professional services order forms for design contracts. The Revolving Facility could be prepaid in part or in full without a penalty at any time during the term of the Facilities, and the Term Loan could be prepaid in full or in part without penalty subject to 60 days prior notice in each case subject to certain customary conditions.

On September 4, 2020, the Company executed an amendment to the Credit Agreement (the “First Amendment”) whereas the Facilities described above were due on December 31, 2021 (the “Revised Maturity Date”). The First Amendment also increased the rate at which the Facilities would bear interest to the annual rate established and designated by the Bank of Nova Scotia as the prime rate, plus 12% per annum.

As a result of the First Amendment, the Company was required to prepay, on or before January 31, 2021, $1,000,000 of the balance of the Term Loan and begin making monthly payments of $100,000 on the balance on the Term Loan starting on March 1, 2021. Additionally, the Company was required to make monthly payments of $50,000 on the balance under the Revolving Facility beginning October 1, 2020 and could make no more draws under the Revolving Facility.

The Company incurred $1,314,868 of debt issuance costs in connection with these Facilities, of which $676,822 was non-cash in the form of Common Stock and warrant issuances. The Company estimated the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option pricing based on the market value of the underlying Common Stock at the valuation measurement date of $6.00, the remaining contractual terms of the warrants of 5 years, risk free interest rate of 1.14% an expected volatility of the price of the underlying Common Stock of 100%. The Company recorded the debt issuance costs as either a deferred financing asset or a direct reduction of the loan obligation based on the pro-rata value of the Revolving Facility and Term Loan, respectively, on the closing date. The debt issuance costs were being amortized as interest expense over the life of the Facilities, until the Revised Maturity Date. On February 17, 2021, the Company repaid all amounts outstanding under the Credit Agreement and expensed the remaining unamortized debt issuance costs as loss on extinguishment of debt. As of December 31, 2020, there were $504,644 and $252,322 of unamortized debt issuance costs remaining related to the Revolving Facility and Term Loan, respectively.

NOTE 10 – RISKS AND UNCERTAINTIES

Concentration Risk

During the nine months ended September 30, 2021 one client represented 51% of total revenue, compared to the nine months ended September 30, 2020 where a separate client represented 26% of total revenue. During the three months ended September 30, 2021, one client represented 58% of total revenue, compared to the three months ended September 30, 2020, where a separate client represented 51% of total revenue. At September 30, 2021 one client represented 64% of total outstanding accounts receivable. At December 31, 2020, that same client represented 23% and a separate client represented 17% of total outstanding accounts receivable.

During the nine months ended September 30, 2021, 15% of the Company’s total purchases were from one vendor compared to 27% from another vendor for the nine months ended September 30, 2020. During the three months ended September 30, 2021, one vendor represented 18% of the Company’s total purchases, compared to the three months ended September 30, 2020, where a separate vendor represented 48% of the Company’s total purchases. At September 30, 2021, one vendor represented 41% of total accounts payable. At December 31, 2020, a separate vendor represented 25% of total accounts payable.

Coronavirus Pandemic

The outbreak of COVID-19, a novel strain of coronavirus first identified in China, which has spread across the globe including the U.S., has had an adverse impact on our operations and financial condition. The response to this coronavirus by federal, state and local governments in the U.S. has resulted in significant market and business disruptions across many industries and affecting businesses of all sizes. This pandemic has also caused significant stock market volatility and further tightened capital access for most businesses. Given that the COVID-19 pandemic and its disruptions are of an unknown duration, they could have an adverse effect on our liquidity and profitability.

The ultimate magnitude of COVID-19, including the extent of its impact on our financial and operational results, which could be material, will depend on the length of time that the pandemic continues, its effect on the demand for our products and our supply chain, the effect of governmental regulations imposed in response to the pandemic, as well as uncertainty regarding all of the foregoing. We cannot at this time predict the full impact of the COVID-19 pandemic, but it could have a larger material adverse effect on our business, financial condition, results of operations and cash flows beyond what is discussed within this Report.

NOTE 11 – STOCK-BASED COMPENSATION

Stock-based compensation expense for the nine months ended September 30, 2021 and 2020 was $1,096,441 and $1,391,807, respectively, based on the vesting schedule of the stock grants and options. Stock based compensation expense for the three months ended September 30, 2021 and 2020 was $506,034 and $399,258, respectively, based on the vesting schedule of the stock grants and options. No cash flow effects are anticipated for stock grants.

Stock Grants:

The following table shows stock grant activity for the nine months ended September 30, 2021:

G			2021
Grants outstanding as of December 31, 2020			118,889
Grants awarded			101,102
Grants Vested			16,667
Grants outstanding as of September 30, 2021			203,324

As of September 30, 2021, the Company has $620,811 in unrecognized share-based compensation expense related to these stock grants.

Stock Options:

The following table shows stock option activity for the nine months ended September 30, 2021:

	Number of Shares			Weighted Average Remaining Life (Years)		Weighted Average Exercise Price
Stock options outstanding as of December 31, 2020		638,278			7.72	$	6.48
Issued		55,833			4.51	$	6.00
Expired		(18,444	)		-	$	7.89
Exercised		(4,777	)		-	$	6.78
Stock options outstanding as of September 30, 2021		670,890			7.55	$	6.40
Stock options exercisable as of September 30, 2021		404,140			7.69	$	6.46

The fair value of the stock 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 $9.39, the remaining contractual term of the options of 5 years, risk-free interest rate of 1.61% and expected volatility of the price of the underlying common stock of 100%.

As of September 30, 2021, the Company has $368,061 in unrecognized share-based compensation expense related to these stock options. The aggregate intrinsic value of the options outstanding and exercisable as of September 30, 2021 is $0.

NOTE 12 – SHAREHOLDERS’ EQUITY

In March 2020, an executive left the Company and returned 16,667 common shares as part of the related separation agreement. The Company retired the shares and reduced its issued and outstanding stock by 16,667 shares.

On February 17, 2021, we completed an offering of 6,210,000 shares of our common stock, inclusive of the underwriters full overallotment, at $10.00 per share for total gross offering proceeds of $62,100,000. In connection with this offering, we received approval to list our common stock on the Nasdaq Capital Market under the symbol “UGRO”.

On May 24, 2021, we announced that 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. Under this program, the Company has repurchased 421,024 shares of common stock at an average price per share of $9.33, for a total price of $3,926,811 during the nine months ended September 30, 2021. In total, the Company has repurchased 771,024 shares of common stock at an average price per share of $8.95 for a total of $6,901,811 during the nine months ended of September 30, 2021.

NOTE 13 – WARRANTS

The following table shows warrant activity for the nine months ended September 30, 2021.

	Number of shares			Weighted Average Exercise Price
Warrants outstanding as of December 31, 2020		202,752		$	13.64
Exercised		(22,490	)	$	14.94
Issued in connection with equity offering		310,500		$	12.50
Expired		(116,674	)	$	18.00
Warrants outstanding as of September 30, 2021		374,088		$	11.26
Warrants exercisable as of September 30, 2021		374,088		$	11.26

The fair value of the warrants issued in connection with the equity offering were calculated using the Black-Scholes pricing model based on the market value of the underlying common stock at the valuation measurement date of $10.00, the remaining contractual term of the options of 5 years, risk-free interest rate of .57% and expected volatility of the price of the underlying common stock of 100%.

The weighted-average life of the warrants is 1.95 years. The aggregate intrinsic value of the warrants outstanding and exercisable as of September 30, 2021 is $0.

NOTE 14 – SUBSEQUENT EVENTS

The Company has evaluated events and transaction occurring subsequent to September 30, 2021 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.

On October 13, 2021, the Company learned that an unauthorized third party initiated fraudulent wire transfers of approximately $5,100,000 from the Company’s accounts. Approximately $0.8 million is in the process of being recovered from the recipient banks. The Company has reported the incident to its insurer and expects the Company’s bank, the bank’s insurers or the Company’s insurer to reimburse the Company for the remaining balance, as the Company believes the bank failed to follow proper and industry standard procedures designed to prevent such a theft and is therefore liable for the unrecovered balance.

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 Controlled Environment Agriculture (CEA) companies in the United States. The Company invested $2,500,000 and the total raise by XSF was $43,500,000.

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

The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein. See also “Forward Looking Statements” on page 3 of this Report.

Overview and History

urban-gro, Inc. (“we,” “us,” “our,” the “Company,” or “urban-gro”) is a leading architectural, engineering and cultivation design services company focused on the sustainable commercial indoor horticulture market. On July 30, 2021, we acquired three architecture design firms (2WR Colorado, Inc, 2WR Georgia, Inc. and MJ12 Design Studios, Inc., collectively the “2WR Entities”) from their shareholders. The 2WR Entities were under common ownership and management. Effective March 7, 2019, we acquired a mechanical, electrical and plumbing engineering services firm (Impact Engineering, Inc. (“Impact”)) from its sole shareholder. We engineer and design indoor controlled environment agriculture (“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 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. Outlined below is an example of a complete project with estimated time frames for each phase that demonstrate how we provide value to our clients for the life of their facility.

Our indoor commercial cultivation solution offers an integrated suite of services and equipment systems that generally fall within the following categories:

●

Service Solutions:

●

Architecture, Engineering Design Services – A comprehensive triad of services including:

	i.	Architecture

	ii.	Cultivation Space Programming (“CSP”)

	iii.	Integrated Cultivation Design (“ICD”)

	iv.	Full-Facility Mechanical, Electrical, and Plumbing (“MEP”)

●

gro-care® - A recurring revenue subscription-based managed service offering including:

	i.	Remote Monitoring, Reporting, Support, and Training Services

	ii.	Facility and Equipment Commissioning & Audit Services

	iii.	Environmental Sciences Groups’ (“ESG”) Compliance and Program Services

●

Integrated Equipment Solutions:

	●	Design, Source, and Integration of Complex Environmental Equipment Systems Including Purpose-Built Heating, Ventilation, and Air Conditioning (“HVAC”) solutions, Environmental Controls, Fertigation, and Irrigation Distribution.

	●	Value-Added Reselling (“VAR”) of Cultivation Equipment including a Complete line of Lighting, Fans and Rolling Benching Systems

	●	Strategic Vendor Relationships with Premier Manufacturers

The majority of our clients are commercial CEA cultivators. We believe one of the key points of our differentiation that our clients value is the depth of experience of our employees and our Company. We currently employ 75 individuals. Approximately two-thirds of our employees are considered experts in their areas of focus, and our team includes Architects, Engineers (Mechanical, Electrical, Plumbing, Controls, and Agricultural), Professional Engineers, horticulturalists and individuals with Masters Degrees in Plant Science and Business Administration. As a company, we have worked on more than 450 indoor CEA facilities, and believe that the experience of our team and Company provides clients with the confidence that we will proactively keep them from making common costly mistakes during the build out and operational stages. Our expertise translates into clients saving time, money, and resources, and provides them ongoing access to expertise that they can leverage without having to add headcount to their own operations. We provide this experience in addition to offering a platform of the highest quality equipment systems that can be integrated holistically into our clients’ facilities.

Results Of Operations

Comparison of Results of Operations for the three months ended September 30, 2021 and 2020

During the three months ended September 30, 2021, we generated revenues of $18.3 million compared to revenues of $8.3 million during the three months ended September 30, 2020, an increase of $10.0 million, or 119%. Equipment systems revenue increased $9.1 million, primarily due to an increase in cultivation equipment sales, services revenue increased $1.0 million, primarily from the acquisition of the 2WR Entities, and consumable product sales decreased $0.1 million.

During the three months ended September 30, 2021, cost of revenues was $14.0 million compared to $6.7 million during the three months ended September 30, 2020, an increase of $7.3 million, or 111%. This increase is directly attributable to the increase in revenues indicated above.

Gross profit was $4.2 million (23% of revenues) during the three months ended September 30, 2021 compared to $1.7 million (20% of revenue) during the three months ended September 30, 2020. Gross profit as a percentage of revenues increased due to an increase in higher margin services revenues and higher margin equipment systems revenues for the comparable periods.

Operating expenses increased $2.3 million to $4.2 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. This was due to a $2.2 million increase in general operating expenses, mainly due to an increase in salary and travel expenses, in part related to the acquisition of the 2WR Entities, and a $0.1 million increase in stock-based compensation expense.

Non-operating expense was $0.01 million for the three months ended September 30, 2021, compared to non-operating expenses of $0.5 million for the three months ended September 30, 2020. For the three months ended September 30, 2020, the Company incurred interest expense of $0.4 million and a purchase price contingent consideration expense of $0.1 million.

As a result of the above, we generated net income of $0.06 million for the three months ended September 30, 2021, or fully diluted net income per share of $0.00, compared to a net loss of $0.7 million for the three months ended September 30, 2020 or a fully diluted net loss per share of $0.14.

Comparison of Results of Operations for the nine months ended September 30, 2021 and 2020

During the nine months ended September 30, 2021, we generated revenues of $43.2 million compared to revenues of $16.6 million during the nine months ended September 30, 2020, an increase of $26.6 million, or 160%. Equipment systems revenue increased $26.3 million primarily due to an increase in cultivation equipment sales, services revenue increased $0.5 million, primarily from the acquisition of the 2WR Entities, and consumable product sales decreased $0.2 million.

During the nine months ended September 30, 2021, cost of revenues was $33.3 million compared to $12.6 million during the nine months ended September 30, 2020, an increase of $20.7 million, or 164%. This increase is directly attributable to the increase in revenues indicated above.

Gross profit was $9.8 million (23% of revenues) during the nine months ended September 30, 2021 compared to $4.0 million (24% of revenue) during the nine months ended September 30, 2020. Gross profit as a percentage of revenues decreased due primarily to an increase in lower margin equipment systems revenues for the comparable periods.

Operating expenses increased $2.9 million to $9.4 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. This was due to a $3.2 million increase in general operating expenses, mainly due to an increase in salary and travel expenses, in part related to the acquisition of the 2WR Entities, offset by a $0.3 million reduction in stock-based compensation expense.

Non-operating expense was $0.7 million for the nine months ended September 30, 2021, compared to $1.5 million for the nine months ended September 30, 2020. The Company incurred a $1.0 million gain from the forgiveness of the PPP loan, an $0.8 million loss on the extinguishment of debt and interest expense of $0.9 million for the nine months ended September 30, 2021. For the nine months ended September 30, 2020, the company incurred interest expense of $1.0 million, recorded an impairment loss of $0.3 million related to an investment, and recorded $0.2 million in purchase price contingent consideration expense.

As a result of the above, we incurred net loss of $0.3 million for the nine months ended September 30, 2021, or a fully diluted net loss per share of ($0.03), compared to a net loss of $4.0 million for the nine months ended September 30, 2020 or a fully diluted net loss per share of ($0.83).

NON-GAAP FINANCIAL MEASURES

The Company uses the supplemental financial measure of Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) as a measure of our operating performance. Adjusted EBITDA is not calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and it is not a substitute for other measures prescribed by GAAP such as net income (loss), income (loss) from operations, and cash flows from operating activities. We define Adjusted EBITDA as net income (loss) attributable to urban-gro, Inc., determined in accordance with GAAP, excluding the effects of certain operating and non-operating expenses including, but not limited to, interest expense, income taxes/benefit, depreciation of tangible assets, amortization of intangible assets, impairment of investments, unrealized exchange losses, debt forgiveness and extinguishment, stock-based compensation expense, and acquisition costs, that we do not believe reflect our core operating performance.

Our board of directors and management team focus on Adjusted EBITDA as a key performance and compensation measure. We believe that Adjusted EBITDA assists us in comparing our operating performance over various reporting periods because it removes from our operating results the impact of items that our management believes do not reflect our core operating performance.

The following table reconciles net loss attributable to the Company to Adjusted EBITDA for the periods presented:

	Three months Ended September 30,					Nine months Ended September 30,
	2021		2020			2021			2020
Net Income (Loss)	$	56,656	$	(694,281	)	$	(271,482	)	$	(3,959,882	)
Interest expense		4,331		393,158			326,397			1,057,501
Interest expense – BCF		–		–			636,075			–
Impairment loss		–		–			–			310,000
Loss on extinguishment of debt		–		–			790,723			–
Stock-based compensation		506,034		399,258			1,096,441			1,391,807
Contingent consideration - purchase price		–		155,000			–			155,000
Impairment of investment		–		–			–			–
Depreciation and amortization		154,306		61,339			263,932			181,750
Acquisition costs		141,052		–			198,609			–
One-time employee expenses		125,000		–			125,000			–
PPP loan forgiveness		–		–			(1,032,316	)		–
Adjusted EBITDA	$	990,379	$	314,474		$	2,133,379		$	(863,824	)

As of December 31, 2020, the Company began reporting the dollar amount of contractually committed orders for equipment systems for which revenue has not been recognized (“Equipment Backlog”). As of September 30, 2021, the Company has also begun reporting the dollar amount of contractually committed orders for services revenue for which revenue has not been recognized (“Services Backlog” and collectively with Equipment Backlog, “Backlog”). Backlog is a non-GAAP financial measure that our board of directors and management team focus on as a key performance measure. Although there can be no assurances that Backlog will be recognized as equipment systems revenue in future periods, we believe that tracking Backlog assists us in estimating the timing of future equipment systems revenue. Backlog amounts, reported in millions of dollars, are reflected in the table below as of the dates indicated:

	December 31, 2020		March 31, 2021		June 30, 2021		September 30, 2021
Equipment Backlog	$	14.6	$	15.2	$	27.9	$	18.6
Services Backlog		NR		NR		NR	$	3.9
Backlog	$	14.6	$	15.2	$	27.9	$	22.5

NR – Not reported

Liquidity and Capital Resources

As of September 30, 2021, we had cash of $40.5 million, which represented an increase of $40.3 million from December 31, 2020. This increase in cash and cash equivalents is primarily due to the net proceeds received from our equity offering in February of 2021 of $58.2 million offset by $5.8 million of debt repayment, $6.9 million of treasury stock purchases, and a $5.2 million decrease due to timing of deposits and prepayments to vendors during the nine months ended September 30, 2021.

Net cash provided by operating activities was $0.3 million during the nine months ended September 30, 2021, compared to net cash used in operating activities of $3.0 million during the nine months ended September 30, 2020, an improvement of $3.3 million. This increase in cash provided by operating activities is primarily the result of an improvement in income from operations for the comparable periods with the remaining fluctuation being primarily comprised of fluctuations in operating assets and liabilities. As of September 30, 2021, we had $9.4 million in client deposits related to client orders, compared to client deposits of $4.9 million as of December 31, 2020. We require prepayments from clients before any design work is commenced and before any material is ordered from the vendor. These prepayments are booked to the client deposits liability account when received. We expect client deposits to be relieved from the deposits account no longer than 12 months for each project. As of September 30, 2021, we had $7.8 million of vendor prepayments compared to $3.5 million as of December 31, 2020. As of September 30, 2021, we had $2.8 million in accounts payable, compared to $0.7 million as of December 31, 2020.

Net cash used in investing activities was $5.7 million for the nine months ended September 30, 2021, compared to $0.1 million during the nine months ended September 30, 2020. The Company used $5.6 million for the purchase of the 2WR Entities during the period. We have no material commitments for capital expenditures as of September 30, 2021

Net cash provided by financing activities was $45.7 million for the nine months ended September 30, 2021, compared to $2.9 million during the nine months ended September 30, 2020. Cash provided from financing activities during the nine months ended September 30, 2021 primarily relates to $58.4 million in net proceeds received from the issuance of stock, offset by $5.8 million used in the repayment of notes paya

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