U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

~~Quarterly Report Under~~☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

~~the Securities Exchange Act of~~OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ~~Ended:~~ ~~September~~Ended June 30, ~~2019~~2020

☐ 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: 000-52898

urban-gro, Inc.

(Exact name of ~~small business issuer~~registrant as specified in its charter)

Colorado		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

(~~Issuer’s~~Registrant’s Telephone ~~Number)~~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	UGRO	OTCQX

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 ☒xNo ☐

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 x☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one)

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

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☐ Nox ☒

The number of shares of the registrant’s only class of common stock issued and outstanding as of ~~November 19, 2019,~~August 12, 2020, was ~~28,083,979~~28,830,978 shares.

urban gro, Inc.

FORM 10-Q

For the Quarterly Period Ended June 30, 2020

~~TABLE OF CONTENTS~~INDEX

		~~Page~~
	PART I. FINANCIAL INFORMATION	Page

Item 1.	Financial Statements		3
	~~Unaudited Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018~~		3
	~~Unaudited Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2019 and 2018~~ (Unaudited)		4
	Unaudited Condensed Consolidated Balance Sheets		4
	Unaudited Condensed Consolidated Statements of ~~Shareholders' Equity (Deficit~~)~~for the Three~~Operations and ~~Nine Months Ended September 30, 2019 and 2018~~Comprehensive Loss		5
	Unaudited Condensed Consolidated Statements of Shareholders' Deficit		6
	Unaudited Condensed Consolidated Statements of Cash Flows ~~for the Nine Months Ended September 30, 2019 and 2018~~		78
	Notes to Unaudited Condensed Consolidated Financial Statements		89
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		2218
Item 3.	Quantitative and Qualitative Disclosures About Market ~~Risk.~~Risk		2623
Item 4.	Controls and ~~Procedures.~~Procedures		2623

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		2724
Item 1A.	Risk Factors		2724
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		2724
Item 3.	Defaults Upon Senior Securities		2724
Item 4.	Mine Safety Disclosures		2724
Item 5.	Other Information		2724
Item 6.	Exhibits		27
~~Signatures~~			2824
Signatures			24

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, 2019. 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,			December 31,			June 30,			December 31,
	2019			2018			2020			2019
Assets
Current assets:
Cash	$	3,505,636		$	1,178,852		$	402,481		$	448,703
Accounts receivable, net		1,564,569			501,191			862,602			1,564,969
Inventories, net		1,014,127			1,214,224
Inventories								975,628			676,175
Related party receivable		96,233			122,356			64,348			49,658
Prepayments and advances		785,480			928,682
Prepayments and other assets								2,116,483			1,278,728
Total current assets		6,966,045			3,945,305			4,421,542			4,018,233

Non-current assets:
Property and equipment, net		603,416			441,141			176,021			165,035
Operating lease right of use assets, net		256,755			–			147,961			215,848
Investments		1,327,899			1,261,649			1,710,358			2,020,358
Goodwill		871,230			–			902,067			902,067
Other assets		116,494			96,669
Intangible assets, net								85,333			86,151
Total non-current assets		3,175,794			1,799,459			3,021,740			3,389,459

Total assets	$	10,141,839		$	5,744,764		$	7,443,282		$	7,407,692

Liabilities
Current liabilities:
Accounts payable	$	3,677,796		$	1,630,893		$	1,372,060		$	3,753,862
Accrued expenses		1,301,145			1,144,142			1,944,303			1,686,841
Related party payable		24,927			18,802			–			24,972
Customer deposits		4,224,531			3,298,609			3,356,924			2,915,406
Related party note payable								1,000,000			1,000,000
Notes payable		4,150,000			3,478,869			120,000			2,812,709
Revolving Facility								3,412,957			–
Term Loan, net								1,660,466			–
Operating lease liabilities		143,860			–			94,691			123,395
Total current liabilities		13,522,259			9,571,315			12,961,401			12,317,185

Non-current liabilities:
Convertible debentures, net		1,762,969			–
Notes payable								1,020,600			–
Operating lease liabilities		122,083			–			65,845			98,841
Total non-current liabilities		1,885,052			–			1,086,445			98,841

Total liabilities		15,407,311			9,571,315			14,047,846			12,416,026

Commitments and contingencies, note 11

Shareholders’ deficit:
Preferred stock, $0.1 par value; 10,000,000 shares authorized; 0 shares issued and outstanding		–			–
Common stock, $0.001 par value; 100,000,000 shares authorized; 26,981,466 and 25,229,833 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively		26,981			25,230
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; 28,830,978 and 28,209,312 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively								28,831			28,209
Additional paid in capital		8,967,004			4,688,272			13,522,832			11,854,083
Accumulated deficit		(14,259,457	)		(8,540,053	)		(20,156,227	)		(16,890,626	)
Total shareholders’ deficit		(5,265,472	)		(3,826,551	)		(6,604,564	)		(5,008,334	)

Total liabilities and shareholders’ deficit	$	10,141,839		$	5,744,764		$	7,443,282		$	7,407,692

See accompanying notes to condensed consolidated financial statements

urban-gro, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2020			2019			2020				2019
Revenue	$	5,583,064		$	5,336,631		$	17,056,737		$	14,680,295
Cost of sales		3,650,965			3,702,255			11,529,448			10,375,563
Product sales													$	3,378,596		$	4,562,671		$	7,224,933			$	10,015,643
Services														626,668			1,076,987			1,041,334				1,458,031
Total Revenue														4,005,264			5,639,658			8,266,267				11,473,674

Cost of Revenue														2,811,812			3,794,296			5,959,327				7,878,489
Gross profit		1,932,099			1,634,376			5,527,289			4,304,732			1,193,452			1,845,362			2,306,940				3,595,185

Operating expenses:
Marketing		263,948			231,046			914,563			679,898			77,388			252,812			193,344				538,642
General and administrative		2,383,920			1,810,981			6,892,623			5,062,092			1,483,111			2,363,371			3,462,563				4,620,675
General and administrative – amortization of broker issuing costs and broker warrants associated with convertible debentures		167,834			–			167,834			–
Stock compensation		509,219			432,347			1,606,355			646,302
Stock-based compensation														559,904			508,440			992,549				1,097,137
Total operating expenses		3,324,921			2,474,374			9,581,375			6,388,292			2,120,403			3,124,623			4,648,456				6,256,454

Loss from operations		(1,392,822	)		(839,998	)		(4,054,086	)		(2,083,560	)		(926,951	)		(1,279,261	)		(2,341,516	)			(2,661,269	)

Non-operating expenses:
Non-operating income (expenses):
Interest expense		(125,733	)		(23,430	)		(374,850	)		(65,573	)		(365,709	)		(149,146	)		(664,343	)			(249,117	)
Interest expense – amortization of warrants and conversion price associated with convertible debentures		(796,233	)		–			(796,233	)		–
Write-down of investment		(506,000	)		–			(506,000	)		–
Other income (expense)		11,258			16,620			11,765			20,627
Total non-operating expenses		(1,416,708	)		(6,810	)		(1,665,318	)		(44,946	)
Impairment of investment														(310,000	)		–			(310,000	)	��		–
Other income														32,690			4			50,258				512
Total other expenses, net														(643,019	)		(149,142	)		(924,085	)			(248,605	)

Loss before income taxes and equity-method investments		(2,809,530	)		(846,808	)		(5,719,404	)		(2,128,506	)
Loss before income taxes														(1,569,970	)		(1,428,403	)		(3,265,601	)			(2,909,874	)

Income tax benefit		–			–			–			–
Income tax expense (benefit)														–			–			–				–
Net loss	$	(2,809,530	)	$	(846,808	)	$	(5,719,404	)	$	(2,128,506	)	$	(1,569,970	)	$	(1,428,403	)	$	(3,265,601	)		$	(2,909,874	)

Comprehensive loss	$	(2,809,530	)	$	(846,808	)	$	(5,719,404	)	$	(2,218,506	)	$	(1,569,970	)	$	(1,428,403	)	$	(3,265,601	)		$	(2,909,874	)

Loss per share:
Earnings (loss) per share:
Net loss per share - basic and diluted	$	(0.11	)	$	(0.03	)	$	(0.22	)	$	(0.09	)	$	(0.05	)	$	(0.06	)	$	(0.11	)		$	(0.11	)

Weighted average shares used in computation		26,175,098			24,828,652			25,772,134			24,846,883			28,754,770			25,763,501			28,590,283				25,567,313

See accompanying notes to condensed consolidated financial statements

urban-gro, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

(unaudited)

Common Stock
Additional
Paid in
Accumulated Total
Shareholders'
Shares Amount Capital Deficit Deficit
Balance, March 31, 2020 28,709,312 $ 28,709 $ 12,963,050 $ (18,586,257 ) $ (5,594,498 )
Stock-based compensation – – 559,904 – 559,904
Stock grant program vesting 121,666 122 (122 ) – –
Net loss for period ended June 30, 2020 – – – (1,569,970 ) (1,569,970 )
Balance, June 30, 2020 28,830,978 $ 28,831 $ 13,522,832 $ (20,156,227 ) $ (6,604,564 )

Common Stock
Additional
Paid in
Accumulated Total Shareholders'
Shares Amount Capital Deficit Deficit
Balance, June 30, 2019 25,820,633 $ 25,821 $ 8,438,943 $ (11,449,927 ) $ (2,985,163 )
Stock based compensation – – 473,979 – 473,979
Stock grants issued for loan term revisions – – 35,239 – 35,239
Stock grant program vesting 1,160,833 1,160 (1,160 ) – –
Stock issuance related to acquisition – – 20,003 – 20,003
Net loss for period ended September 30, 2019 – – – (2,809,530 ) (2,809,530 )
Balance, September 30, 2019 26,981,466 $ 26,981 $ 8,967,004 $ (14,259,457 ) $ (5,265,472 )

Common Stock
Additional
Paid in
Accumulated Total Shareholders'
Shares Amount Capital Deficit Deficit
Balance, June 30, 2018 24,808,000 $ 24,808 $ 3,656,823 $ (5,925,877 ) $ (2,244,246 )
Stock based compensation – – 432,347 – 432,347
Stock grant program vesting 40,000 40 (40 ) – –
Net loss for period ended September 30, 2018 – – – (846,808 ) (846,808 )
Balance, September 30, 2018 24,848,000 $ 24,848 $ 4,089,130 $ (6,772,685 ) $ (2,658,707 )
Common Stock
Additional
Paid in
Accumulated Total Shareholders'
Shares Amount Capital Deficit Deficit
Balance, March 31, 2019 25,749,833 $ 25,750 $ 6,515,229 $ (10,021,524 ) $ (3,480,545 )
Stock based compensation – – 508,440 – 508,440
Stock grants issued for loan term revisions 10,000 10 24,090 – 24,100
Stock grant program vesting 60,800 61 (61 ) – –
Warrant issuance related to convertible debentures – – 512,300 – 512,300
Equity value of exercise price associated with convertible debentures – – 600,267 – 600,267
Broker warrants associated with issuance of convertible debentures – – 278,678 – 278,678
Net loss for period ended June 30, 2019 – – – (1,428,403 ) (1,428,403 )
Balance, June 30, 2019 25,820,633 $ 25,821 $ 8,438,943 $ (11,449,927 ) $ (2,985,163 )

See accompanying notes to condensed consolidated financial statements

5
~~urban-gro, Inc.~~
~~CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (Continued)~~
~~(unaudited)~~
Common Stock
Additional
Paid in
Accumulated Total Shareholders'
Shares Amount Capital Deficit Deficit
Balance, December 31, 2018 25,229,833 $ 25,230 $ 4,688,272 $ (8,540,053 ) $ (3,826,551 )
Stock based compensation – – 1,571,116 – 1,571,116
Stock options issued for loan term revisions 1,160,833 – 53,066 – 53,066
Stock grants issued for loan term revisions 10,000 10 24,090 – 24,090
Stock grant program vesting 80,800 1,241 (1,241 ) – –
Stock issuance related to acquisition 500,000 500 1,019,503 – 1,020,003
Warrant issuance related to convertible debentures – – 614,041 – 614,041
Equity value of exercise price associated with convertible debentures – – 719,479 – 719,479
Broker warrants associated with issuance of convertible debentures – – 278,678 – 278,678
Net loss for period ended September 30, 2019 – – – (5,719,404 ) (5,719,404 )
Balance, September 30, 2019 26,981,466 $ 26,981 $ 8,967,004 $ (14,259,457 ) $ (5,265,472 )
Common Stock
Additional
Paid in
Accumulated Total Shareholders'
Shares Amount Capital Deficit Deficit
Balance, December 31, 2017 25,046,000 $ 25,036 $ 3,258,116 $ (4,644,179 ) $ (1,361,027 )
Stock based compensation – – 746,301 – 746,301
Claw back of stock granted (375,000 ) (375 ) 375 – –
Payment of outstanding balance for PPM – – 80,000 – 80,000
Stock grant program vesting 177,000 187 (187 ) – –
Warrants related to debt revisions – – 4,525 – 4,525
Net loss for period ended September 30, 2018 – – – (2,128,506 ) (2,128,506 )
Balance, September 30, 2018 24,848,000 $ 24,848 $ 4,089,130 $ (6,772,685 ) $ (2,658,707 )
~~See accompanying notes to consolidated financial statements~~

6
urban-gro, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (Continued)
(unaudited)
Common Stock Additional
Paid in Accumulated Total
Shareholders'
Shares Amount Capital Deficit Deficit
Balance, December 31, 2019 28,209,312 $ 28,209 $ 11,854,083 $ (16,890,626 ) $ (5,008,334 )
Stock-based compensation – – 992,549 – 992,549
Clawback of stock granted (100,000 ) (100 ) 100 – –
Stock grant program vesting 121,666 122 (122 ) – –
Stock issuance related to loan term revisions 100,000 100 99,900 – 100,000
Stock issuance related to debt 500,000 500 499,500 – 500,000
Warrant issuance related to debt – – 76,822 – 76,822
Net loss for period ended June 30, 2020 – – – (3,265,601 ) (3,265,601 )
Balance, June 30, 2020 28,830,978 $ 28,831 $ 13,522,832 $ (20,156,227 ) $ (6,604,564 )
Common Stock Additional
Paid in Accumulated Total
Shareholders'
Shares Amount Capital Deficit Deficit
Balance, December 31, 2018 25,229,833 $ 25,230 $ 4,688,272 $ (8,540,053 ) $ (3,826,551 )
Stock based compensation – – 1,097,137 – 1,097,137
Stock options issued for loan term revisions – – 17,827 – 17,827
Stock grants issued for loan term revisions 10,000 10 24,090 – 24,100
Stock grant program vesting 80,800 81 (81 ) – –
Stock issuance related to acquisition 500,000 500 999,500 – 1,000,000
Warrant issuance related to convertible debentures – – 614,041 – 614,041
Equity value of exercise price associated with convertible debentures – – 719,479 – 719,479
Broker warrants associated with issuance of convertible debentures – – 278,678 – 278,678
Net loss for period ended June 30, 2019 – – – (2,909,874 ) (2,909,874 )
Balance, June 30, 2019 25,820,633 $ 25,821 $ 8,438,943 $ (11,449,927 ) $ (2,985,163 )
See accompanying notes to condensed consolidated financial statements
7
urban-gro, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

Nine Months Ended
September 30,

Six Months Ended
June 30,

2019 2018 2020 2019
Cash Flows from Operating Activities
Net loss $ (5,719,404 ) $ (2,128,506 ) $ (3,265,601 ) $ (2,909,874 )
Adjustments to reconcile net loss from operations:
Depreciation and amortization 193,956 117,116 120,410 120,028
Amortization of convertible debenture components 810,166 –
Stock compensation expense 1,606,355 646,301
Amortization of deferred financing costs 203,721 –
Interest expense – related to loan revisions – 43,059
Stock-based compensation expense 992,549 1,097,137
Impairment of investment 506,000 – 310,000 –
Interest expense – related to loan term revisions – 2,262
Gain on disposal of assets 3,468 –
Inventory write-offs 57,352 58,310 25,528 14,462
Bad debt expense 12,252 73,138 25,239 11,615
Gain on disposal of assets (9,572 ) –
Changes in operating assets and liabilities (excluding effects of acquisitions):
Accounts receivable (899,859 ) (378,335 ) 613,723 (491,566 )
Inventory 142,745 114,377
Inventories (324,981 ) (62,615 )
Prepayments and other assets 123,376 (216,289 ) (158,687 ) (203,052 )
Accounts payable and accrued expenses 2,164,412 122,026 (2,149,312 ) 2,146,861
Customer deposits 925,922 1,785,281 441,518 (1,409,085 )
Net Cash Provided By (Used In) Operating Activities (86,299 ) 195,681
Net Cash Used In Operating Activities (3,162,425 ) (1,643,030 )

Cash Flows from Investing Activities
Purchase of investment (572,250 ) (703,649 ) – (477,000 )
Purchase of intangible assets – (25,000 )
Purchases of property and equipment (387,160 ) (337,425 ) (85,331 ) (75,924 )
Proceeds from sale of assets 40,500 –
Cash acquired in acquisition 49,742 – – 49,742
Purchases of intangible assets (25,000 ) (32,226 )
Net Cash Used In Investing Activities (894,168 ) (1,073,300 ) (85,331 ) (528,182 )

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 1,205,525 –
Issuance of convertible debentures 2,565,000 – – 2,565,000
Issuance of capital stock – 80,000
Proceeds from sale of future receivables 970,000 –
Long-term note payable 1,020,600
Debt financing costs (545,501 ) –
Repayment of notes payable (227,749 ) (8,000 ) (2,686,522 ) (340,934 )
Net Cash Provided by Financing Activities 3,307,251 72,000 3,201,534 2,224,066

Net Increase (Decrease) in Cash 2,326,784 (805,619 ) (46,222 ) 52,854
Cash at Beginning of Period 1,178,852 1,656,791 448,703 1,178,852
Cash at End of Period $ 3,505,636 $ 851,172 $ 402,481 $ 1,231,706

Supplemental Cash Flow Information:
Interest paid $ 291,441 $ –
Income taxes paid $ – $ –
Interest Paid $ 664,343 $ 249,117
Income Taxes Paid $ – $ –

Supplemental disclosure of non-cash investing and financing activities:
Operating lease right of use asset $ 326,095 $ –
Operating lease liability $ 326,095 $ –
Operating lease right of use asset set-up effective January 1, 2019 $ – $ 139,266
Debt financing costs booked in equity $ 676,822 $ –

~~See~~See Note 1 regarding the acquisition of Impact Engineering, Inc.

See accompanying notes to condensed consolidated financial statements

78

urban-gro, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1 – ORGANIZATION AND ACQUISITIONS, ~~BUSINESS PLAN,~~LIQUIDITY AND ~~LIQUIDITY~~GOING CONCERN

Organization and Acquisitions

urban-gro, Inc. ~~and its subsidiaries (the~~(“we,” “us,” our” or the “Company”) isan ~~end-to-end~~ a leading engineering design services company that integrates complex environmental equipment systems to create high performance indoor cultivation facilities for the global commercial horticulture market. Our custom tailored, plant-centric approach to design, procurement, and integration provides a single point of accountability across all aspects of indoor cultivation operations. Our solution offers functionality that helps customers manage the entire cultivation lifecycle, from facility engineering and design to operation and day-to-day management. We offer a full range of custom services that are integrated with select cultivation equipment and product solutions, which we primarily source from third party technology and manufacturing partners but also develop in-house.
Our service offerings include full facility engineering design services, start-up commissioning services, facility optimization company that works with, and provides solutions to, leading commercial cannabis operators around the world. By combining its four business platforms -- 1) pre start-up: (i) cultivation space programming, (ii) facility engineering, (iii) interior cultivation design, (iii) equipment integration, and (iv) commissioning services ~~and post start-up: 2) cultivation optimization & technical support services, 3) Environmental Sciences, which includes the consultative selling of odor & microbial reduction equipment,~~ and Integrated Pest Management (“IPM”) ~~solutions,~~planning and ~~4) Soleil® Sense~~strategy services. Complementing these services, we work with customers to source an integrated suite of select cultivation equipment systems and crop ~~monitoring technology -- urban-gro provides global integrated solutions for today’s commercial cannabis operators.~~
~~The Company provides solutions that benefit single and multi-state operator’s needs to effectively manage investment in capital expenditures (CapEx) and operating expenses (OpEx). CapEx~~management products, ~~and services include the design, engineering, and sale of integrated cultivation systems. Integrated cultivation systems offered include~~which include: (1) environmental controls, fertigation, and irrigation distribution systems; (2) freshwater, wastewater, and condensation treatment systems; (3) light emitting diode (“LED”), high-pressure sodium (“HPS”) and ceramic metal halide (“CMH”) lighting systems; (4) rolltop, multi-tier, and automated fertigation/irrigation systems, commercial-grade light systems including light-emitting diode (LED) and high-pressure sodium (HPS) light fixtures, a complete line of water treatment solutions, rolling and automatedcontainer benching ~~systems,~~systems; (5) odor mitigation & microbial reduction systems; (6) air flow ~~systems,~~systems; (7) industrial spray applicators; (8) pesticides and ~~odor~~bio-controls; (9) plant nutrition products; (10) substrate and ~~microbial mitigation systems. OpEx related products~~coco bag solutions; and ~~services include recurring revenues realized in the Company’s Environmental Sciences, Professional Services,~~(11) our Soleil® technology data analytics platform that includes wireless environmental & substrate sensing and ~~Technology divisions. In its Environmental Sciences division, the Company markets a line of integrated pest management products~~remote monitoring and provides proactive guidance to operators on segment best practices. It its Professional Services division, the Company provides segment specific expertise, and recommends system solutions to mitigate any opportunities for improvement. In its Technology division, the Company markets an end-to-end hardware and software wireless IoT solution that provides real time feedback to operators, in turn allowing them to run their facilities at the highest levels of consistency and optimization. The Company primarily markets its products and services throughout the United States and Canada.support.

In June 2018, the Company formed urban-gro Canada Technologies, Inc. as a wholly owned Canadian subsidiary, which it ~~currently~~ utilizes for its Canadian sales operations.

Effective March 7, 2019, the Company acquired 100% of the stock of Impact Engineering, Inc. (d/b/a Grow2Guys) (“Impact”), a provider of mechanical electrical and plumbing ~~(MEP)~~(“MEP”) engineering services predominantly focused on the cannabis industry. ~~Management~~The Company believes the acquisition of Impact will improve the Company’s ability to better serve its current and future customer base by expanding on the fully integrated products and services offered by the Company. The Company issued 500,000 shares of Common Stock (“Common Stock”) valued at $2.00 per share to effect the acquisition of Impact. The Company has initially accounted for the acquisition of Impact as follows:

Purchase Price $ 1,025,000 $ 1,000,000

Allocation of Purchase Price:
Cash $ 49,742 $ 49,742
Accounts receivable, net $ 149,648 $ 93,811
Goodwill $ 871,230 $ 902,067
Accrued expenses $ 45,620 $ 45,620

~~Business Plan~~
~~The Company’s diversification plans have led to the strategic decision to focus on higher margin products~~Liquidity and services, especially recurring or managed services, delivering value-added product solutions to cannabis cultivators. Management has implemented the following actions to increase profit margins and generate positive operating cash flow: 1) establish strategic partnerships with the Company’s vendors to pool purchasing power in order to decrease costs; 2) implement a range of design fees associated with providing a range of services that includes (i) cultivation space programming, MEP engineering, and cultivation interior; 3) create a commissioning team compiled of engineers and subject matter experts, and charge commissioning fees for training staff and starting up new environmental controls and fertigation systems; 4) create a professional services team and charge for facility optimization services which includes an audit focused on locating areas of opportunities where system retrofits/upgrades will result in increased performance; 5) design and implement integrated pest management plans, biological controls procedures and pesticide prescriptions to these customers, and; 6) provide wireless IoT technology solutions that allow growers to gain deep insight into real-time conditions at the micro-climate level in their facilities. While no assurances can be provided, management believes these objectives will increase the Company’s gross profit and increase cash provided by operations.
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~~Liquidity~~Going Concern

Since inception, the Company has incurred significant operating losses and has funded its operations primarily through the issuance of equity securities, debt, and operating revenue. As of ~~September~~June 30, ~~2019,~~2020, the Company had an accumulated deficit of ~~$14,259,457,~~$20,156,227, a working capital deficit of ~~$6,556,214,~~$8,539,859, and negative stockholders’ equity of ~~$5,265,472.~~$6,604,564. These facts and conditions raise substantial doubt about the Company’s ability to continue as a going concern, within one year after the date that these financial statements are issued. The Company continually evaluates opportunities to raise equity and debt financing and has also sought to implement cost reduction and revenue enhancing measures to help achieve profitability and continue operations. There can, however, be no assurances that the Company will be able to raise equity or debt financing in sufficient amounts, when and if needed, on acceptable terms or at all, nor can there be any assurances that the Company will be able to implement cost reduction and revenue enhancing measures that will enable the Company to achieve profitable operations going forward. The accompanying financial statements have been prepared on a going concern basis.
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Pursuant to Accounting Standards Codification (“ASC”) 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, we assess going concern uncertainty for our condensed consolidated financial statements to determine if we have sufficient cash and cash equivalents on hand and working capital to operate for a period of at least one year from the date the condensed consolidated financial statements are issued or are available to be issued. As part of this assessment, based on conditions that are known and reasonably knowable to us, we will consider various scenarios, forecasts, projections, and estimates, and make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and our ability to delay or curtail those expenditures or programs, among other factors, if necessary. We believe it is probable that management’s plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the Company’s ~~independent registered public accounting firm included an explanatory paragraph regarding~~ability to continue as a going concern ~~in its audit report on~~within one year after the ~~Company for~~date that the ~~year ended December 31, 2018.~~financial statements are issued.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited ~~Interim~~Condensed Consolidated Financial ~~Information~~Statements

The Company has prepared the accompanying ~~interim~~condensed consolidated financial statements pursuant to the rules and regulations of the ~~Securities and Exchange Commission (the “SEC”)~~SEC for ~~interim~~condensed financial reporting. The ~~interim~~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 ~~loss,~~income (loss), condensed consolidated statements of shareholders’ deficit and condensed consolidated statements of cash flows for the periods presented. The results reported in these ~~interim~~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 accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with regulations of the SEC. These ~~interim~~condensed consolidated financial statements should be read in conjunction with the ~~consolidated~~ 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, ~~2018.~~2019.

~~Prior Period Reclassifications~~Significant Accounting Policies

~~Certain prior period amounts have been reclassified~~For a detailed discussion about the Company’s significant accounting policies, refer to ~~conform~~Note 2 — “Summary of Significant Accounting Policies,” in the Company’s consolidated financial statements included in the Company’s 2019 Form 10-K. During the six months ended June 30, 2020, there were no material changes made to the ~~current period presentation. These reclassifications had no effect on previously reported comprehensive loss amounts.~~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 useful lives and potential impairment of long-lived assets and goodwill, inventory write offs, allowance for deferred tax assets, and allowance for bad debt.

~~Basis of Presentation and Principles of Consolidation~~Reclassification

Certain prior year amounts have been reclassified for consistency with the current year presentation. These ~~consolidated financial statements are presented in United States dollars and they include~~reclassifications had no effect on the ~~accounts of urban-gro, Inc. and its wholly-owned subsidiaries. The financial~~reported results of ~~Impact have been included in the Company’s consolidated financial statements from the date of acquisition on March 7, 2019.~~operations.

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.

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~~Going Concern Assessment~~
Pursuant to ASC 205-40, we assess going concern uncertainty for our consolidated financial statements to determine if we have sufficient cash and cash equivalents on hand and working capital to operate for a period of at least one year from the date the consolidated financial statements are issued or are available to be issued. As part of this assessment, based on conditions that are known and reasonably knowable to us, we will consider various scenarios, forecasts, projections, and estimates, and make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and our ability to delay or curtail those expenditures or programs, among other factors, if necessary.
~~Fair Value of Financial Instruments~~
The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, notes payable and other current assets and liabilities. We value our financial assets and liabilities using fair value measurements. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels defined as follows:
~~Level 1: Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.~~
Level 2: Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
The carrying amount of our cash and cash equivalents, accounts receivable, accounts payable, and other current assets and liabilities in our consolidated financial statements approximates fair value because of the short-term nature of the instruments. Investments in non-marketable equity securities are carried at cost less other-than-temporary impairments. The carrying amount of our notes payable and convertible debt at September 30, 2019 and December 31, 2018 approximates their fair values based on our incremental borrowing rates.
~~There have been no changes in Level 1, Level 2, and Level 3 categorizations and no changes in valuation techniques for these assets or liabilities for the nine months ended September 30, 2019.~~
~~Cash and Cash Equivalents~~
The Company considers all highly liquid short-term cash investments with an original maturity of three months or less to be cash equivalents. As of September 30, 2019 and December 31, 2018, the Company did not maintain any cash equivalents. The Company maintains cash with financial institutions that may from time to time exceed federally insured limits. The Company has not experienced any losses related to these balances and believes the risk to be minimal.
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~~Accounts Receivable, Net~~
Trade accounts receivables are carried at the original invoiced amounts less an allowance for doubtful accounts. As of September 30, 2019 and December 31, 2018, the balance of allowance for doubtful accounts was $18,920 and $18,920, respectively. The allowances for doubtful accounts are calculated based on a detailed review of certain individual customer accounts and an estimation of the overall economic conditions affecting the Company's customer base. The Company reviews a customer's credit history before extending credit to the customer. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additions to the allowance would be required. A provision is made against accounts receivable to the extent they are considered unlikely to be collected. Occasionally the Company will write off bad debt directly to the bad debt expense account when the balance is determined to be uncollectable. Bad debt expense for the nine months ended September 30, 2019 and 2018 was $12,252 and $73,138, respectively and for the three months ended September 30, 2019 and 2018 was $637 and $33,175, respectively.
~~Inventories~~
Inventories, consisting entirely of finished goods inventories, are stated at the lower of cost or net realizable value, with cost determined using the average cost method. The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions. Write-downs and write-offs are charged to cost of goods sold at the realization of change in value. Once written down, inventories are carried at this lower basis until sold or scrapped.
~~Property and Equipment~~
Property and equipment are stated at cost less accumulated depreciation, amortization and impairment. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses other depreciation methods (generally accelerated) for tax purposes where appropriate. No impairment charges were recorded for the nine months ended September 30, 2019 and 2018.
~~The estimated useful lives for significant property and equipment asset categories are as follows:~~
~~Computer and Technology Equipment~~ ~~3 years~~
~~Furniture and Equipment~~ ~~5 years~~
~~Leasehold Improvements~~ ~~Lease term~~
~~Vehicles~~ ~~3 years~~
~~Software~~ ~~3 years~~
~~Other Equipment~~ ~~3 or 5 years~~
~~Operating Lease Right of Use Assets~~
Operating lease right of use assets are stated at cost less accumulated depreciation, amortization and impairment. The Company has two operating leases with an imputed annual interest rate of 8%. The terms of the first lease are 24 months commencing on September 1, 2018 and ending on August 31, 2020. The terms of the second lease are 28 months commencing on September 1, 2019 and ending December 31, 2021.
~~Equity Investments~~
Equity investments without readily determinable fair values and for which the Company does not have the ability to exercise significant influence are accounted for at cost with adjustments for observable changes in prices or impairments.
Equity investments for which the Company has the ability to exercise significant influence, but not control, are accounted for using the equity method of accounting. The Company’s share of the earnings or losses as reported by equity-method investees are classified as “Income (Loss) from equity investees, net of tax” on the Company’s consolidated statements of operations and comprehensive income (loss).
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~~Intangible Assets~~
The Company’s intangible assets, consisting of legal fees for application of patents and trademarks and license fees paid for inspection services, are recorded at cost. Patents and trademarks, once approved, will be amortized using the straight-line method over an estimated life, generally 5 years for patents and 10 to 20 years for trademarks. License fees are amortized over 10 years. Intangible assets are included in “other assets” on the balance sheets.
~~Customer Deposits~~
The Company’s policy is to collect deposits from customers at the beginning of the project prior to the design phase. The customer payments received are recorded as a customer deposit liability on the balance sheet. When the project is complete and meets all the criteria for revenue recognition, the deposit is recorded against the customer’s receivable balance. In certain situations when the customer has paid the deposit and design work has been completed but the customer chooses not to proceed with the project, the Company may keep the deposit and recognize revenue.
~~Revenue Recognition~~
~~The Company recognizes revenue in accordance with ASC 606,~~~~Revenue from Contracts with Customers,~~ which requires that five basic steps be followed to recognize revenue: (1) a legally enforceable contract that meets criterial standards as to composition and substance is identified; (2) performance obligations relating to provision of goods or services to the customer are identified; (3) the transaction price, with consideration given to any variable, noncash, or other relevant consideration, is determined; (4) the transaction price is allocated to the performance obligations; and (5) revenue is recognized when control of goods or services is transferred to the customer with consideration given to whether that control happens over time or not. Determination of criteria (3) and (4) are based on our management's judgments regarding the fixed nature of the selling prices of the products and services delivered and the collectability of those amounts.
~~Cost of Sales~~
The Company’s policy is to recognize cost of sales in the same manner as, and in conjunction with, revenue recognition. The Company’s cost of sales includes the costs directly attributable to revenue recognized and includes expenses related to the purchasing of our products, fees for third-party commissions and shipping costs. Total shipping costs included in cost of sales was $491,950 and $244,754 for the nine months ended September 30, 2019 and 2018, respectively and $149,266 and $86,986 for the three months ended September 30, 2019 and 2018, respectively.
~~Advertising Costs~~
The Company expenses advertisings costs in the periods the costs are incurred. Prepayments made under contracts are included in prepaid expenses and expensed when the advertisement is run. Total advertising expense incurred was $130,894 and $127,316 for the nine months ended September 30, 2019 and 2018, respectively and $44,282 and $31,960 for the three months ended September 30, 2019 and 2018, respectively.
~~Derivative Financial Instruments~~
The Company accounts for its warrants by estimating the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option pricing based on the estimated market value of the underlying common stock at the valuation measurement date, the remaining contractual term, risk-free interest rate, and expected volatility of the price of the underlying common stock. There is a moderate degree of subjectivity involved when using option pricing models to estimate the warrants and the assumptions used in the Black-Scholes option-pricing model is moderately judgmental.
~~Share Based Compensation~~
~~The Company periodically issues both options and shares of its Common Stock to employees and consultants in non-capital raising transactions for fees and services.~~
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The Company accounts for stock issued to non-employees with the value of the stock compensation based upon the measurement date as determined at the grant date of the award. Accounting for stock-based compensation to non-employees requires the measurement and recognition of compensation expense for all share-based payment awards made to non-employees based on estimated fair values.
The Company accounts for stock grants issued and vesting to employees with the award being measured at its fair value at the date of grant and amortized ratably over the vesting period. Accounting for stock-based compensation to employees requires the measurement and recognition of compensation expense for all share-based payment awards made to employees based on estimated fair values. The Company also estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from its estimates.
~~Income Taxes~~
The Company files a federal income tax return in the United States and state and local tax returns in applicable jurisdictions. Provisions for current income tax liabilities, if any, would be calculated and accrued on income and expense amounts expected to be included in the income tax returns for the current year. Income taxes reported in earnings, if any, would also include deferred income tax provisions.
Deferred income tax assets and liabilities, if any, would be computed on differences between the financial statement bases of assets and liabilities at the enacted tax rates. Changes in deferred income tax assets and liabilities would be included as a component of income tax expense. The effect on deferred income tax assets and liabilities attributable to changes in enacted tax rates would be charged or credited to income tax expense in the period of enactment. Valuation allowances would be established for certain deferred tax assets when realization is not likely.
Assets and liabilities would be established for uncertain tax positions taken or positions expected to be taken in income tax returns when such positions, in the judgement of the Company, do not meet a more-likely-than-not threshold based on the technical merits of the positions. Valuation allowances would be established for certain deferred tax assets when realization is not likely.
~~Loss Per Share~~
The Company computes net loss per share by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share would be computed by dividing net loss by the weighted-average of all potentially dilutive shares of common stock that were outstanding during the periods presented. The diluted earnings per share calculation is not presented as it results in an anti-dilutive calculation of net loss per share.
The treasury stock method would be used to calculate diluted earnings per share for potentially dilutive stock options and share purchase warrants. This method assumes that any proceeds received from the exercise of in-the-money stock options and share purchase warrants would be used to purchase common shares at the average market price for the period.
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~~Recently Adopted Accounting Pronouncements~~
In February 2016, the FASB issued an ASU amending the accounting for leases. The new guidance requires the recognition of lease assets and liabilities for operating leases with terms of more than 12 months, in addition to those currently recorded, on the Company’s consolidated balance sheets. Presentation of leases within the consolidated statements of operations and comprehensive loss and consolidated cash flows will be generally consistent with the prior lease accounting guidance. The ASU was effective for reporting periods beginning after December 13, 2018, with early adoption permitted. The Company adopted the ASU effective January 1, 2019 under the modified retrospective method with respect to lease contracts in effect as of the adoption date. The adoption of the ASU increased our assets and liabilities by $139,266 as of January 1, 2019 due to the recognition of right of use assets and lease liabilities with respect to operating leases.

NOTE 3 – RELATED PARTY TRANSACTIONS

The Company purchases some cultivation products from Bravo Lighting, LLC (d/b/a Bravo Enterprises) (“Bravo”) and Enviro-Glo, LLC (“Enviro-Glo”), manufacturers and distributors of commercial building lighting and other product solutions with common control by the Company’s two major shareholders, Bradley Nattrass and Octavio Gutierrez. Purchases from Bravo and Enviro-Glo totaled ~~$43,912~~$0 and ~~$246,372~~$4,728 for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~totaled $7,442~~$0 and ~~$85,962~~$2,296 for the three months ended ~~September~~June 30, 2020 and 2019, ~~and 2018,~~ respectively. ~~Outstanding~~There were no outstanding receivables from Bravo and Enviro-Glo as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018, totaled $48,875 and $43,120, respectively.~~2019. Net outstanding payables incurred for purchases of inventory and other services to Bravo and Enviro-Glo as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018, totaled~~2019 were $0 and $8,570, ~~and $5,562,~~ respectively.

The Company has purchased goods from Cloud 9 Support, LLC (“Cloud 9”), a company owned by James Lowe, a director, shareholder, and debt holder. Purchases from Cloud 9 were ~~$75,617~~$0 and ~~$12,791~~$15,322 during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$24,368~~$0 and ~~$11,111~~$469 during the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. Cloud 9 also purchases materials from the Company for use with their customers. Total sales to Cloud 9 from the Company were ~~$229,688~~$247,157 and ~~$273,760~~$196,600 during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and were ~~$103,088~~$114,285 and ~~$74,956~~$96,615 during the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. Outstanding receivables from Cloud 9 as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 totaled ~~$47,359~~$64,348 and ~~$79,235,~~$49,659, respectively. Net outstanding payables for purchases of inventory and other services tofrom Cloud 9 as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018, totaled $16,357~~2019 were $0 and ~~$13,240,~~$16,402, respectively.

In October 2018, the Company received a $1,000,000, unsecured, ~~loan~~interest only, promissory note (the “Promissory Note”) from ~~James Lowe, a director and shareholder, which became~~Cloud 9. The Promissory Note was originally due April 30, 2019. The ~~loan had~~Promissory Note is personally guaranteed by the Company’s largest shareholders, Bradley Nattrass, who is the Company’s Chairman and Chief Executive Officer, and Octavio Gutierrez, a ~~one-time origination fee~~former officer and director of ~~$12,500. Interest accrued at~~ the ~~rate of 12% per annum and was paid monthly. As~~Company. The Promissory Note includes additional consideration ~~for the loan the Company granted Mr. Lowe an option to purchase~~of 30,000 ~~shares of its Common Stock~~options at an exercise price of $1.20 per ~~share, which option is exercisable for a period of five (5) years. The loan is guaranteed by Mr. Nattrass,~~share. Under the ~~Company’s CEO, a director and one of its principal shareholders, and by Mr. Gutierrez, one~~initial terms of the ~~Company’s principal shareholders, a director, and a former officer. The~~Promissory Note, the interest rate was 12.0% per year with interest payable monthly. In May 2019, the due date ~~for~~of the ~~note payable~~Promissory Note was extended ~~in May 2019~~ to December 31, 2019 and the interest rate was ~~reduced~~decreased to 9.0% per ~~year.~~year payable monthly. In ~~consideration for~~connection with the execution of the Credit Agreement (see Note ~~Holder extending~~9 – Debt) on February 21, 2020, the Company entered into an agreement to amend the Promissory Note (the “Amending Agreement”). Pursuant to the Amending Agreement, Cloud 9 agreed to extend the maturity date of the Promissory Note ~~and reducing~~from December 31, 2019 to the ~~interest rate,~~date which is the earlier of 60 days following the date: (a) on which demand for repayment is made by the Lender under the Credit Agreement; or (b) which is the Maturity Date of the Credit Agreement. As part of the Amending Agreement, the Company ~~agreed to issue 10,000~~issued 100,000 shares of ~~its~~ Common Stock to ~~Mr. Lowe.~~James Lowe as designee of Cloud 9.

NOTE 4 – PREPAYMENTS AND ~~ADVANCES~~OTHER ASSETS

Prepayments and ~~advances~~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, December 31,
2019 2018
Vendor Prepayments $ 596,472 $ 776,478
Prepaid Services and Fees 189,008 152,204
Prepayments and Advances $ 785,480 $ 928,682
June 30, December 31,
2020 2019
Vendor prepayments $ 1,238,763 $ 1,070,788
Prepaid services and fees 192,260 187,912
Deferred financing asset (See Note 9 - Debt) 679,069 –
Other assets 6,391 20,028
Prepayments and other assets $ 2,116,483 $ 1,278,728

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NOTE 5 – ~~PROPERTY AND EQUIPMENT~~
~~Property and equipment balances are summarized as follows:~~
September 30, December 31,
2019 2018
Computer and Technology Equipment $ 80,307 $ 61,910
Furniture and Equipment 42,518 30,162
Leasehold Improvements 164,072 143,215
Vehicles 57,414 132,875
Software 268,345 233,783
R&D Assets 84,031 84,031
Other Equipment 289,232 65,140
Accumulated depreciation and amortization (382,503 ) (309,975 )
Property and equipment, net $ 603,416 $ 441,141
Depreciation expense totaled $192,645 and $116,468 for the nine months ended September 30, 2019 and 2018, respectively, and $73,518 and $39,692 for the three months ended September 30, 2019 and 2018, respectively.
~~NOTE 6 –~~ INVESTMENTS

Investments are comprised of the Company’s investments in Edyza Sensors, Inc. (“Edyza”) and Total Grow Holdings, LLC, d/b/a Total Grow Control, LLC (“TGH”). As of December 31, 2018, the Company’s investments in Edyza and TGH were accounted for under the cost method. In January 2019, the Company agreed to acquire an additional ownership interest in TGH under a payment plan, which would increase the Company’s ownership interest in TGH to 24.4%. When the payment plan was completed in May 2019, the Company was issued the additional ownership interest in TGH. In September 2019, the Company entered into preliminary negotiations with TGH to sell its ownership interest in TGH back to TGH. In connection with those negotiations, the Company has recorded a $506,000 write-down of its investment in TGH to an amount the Company anticipates receiving in proceeds from the sale of the TGH investment back to TGH. The components of investments are summarized as follows:
September 30, December 31,
2019 2018
Investment in Edyza, cost method $ 1,018,133 $ 812,883
Investment in TGH, cost method net of impairment 309,766 448,766
$ 1,327,899 $ 1,261,649

June 30,
2020
December 31,
2019
Investment in Edyza $ 1,710,358 $ 1,710,358
Investment in TGH – 310,000
$ 1,710,358 $ 2,020,358

In January 2020, the Company and Total Grow Holdings, LLC (d/b/a/ Total Grow Control, LLC) (“TGH”), entered into an agreement whereby TGH agreed to purchase the Company’s remaining investment in TGH in consideration for a short-term note due April 24, 2020 in the amount of $200,000 and a long-term note due in a lump sum on January 27, 2025 in the amount of $110,000 with interest of 4.0% payable annually in arrears. Per the terms of the agreement, the Company retains its ownership interest in TGH until the $200,000 short-term note is repaid. As of the date of this report, TGH has not made any payments on the short-term note and the Company has retained its ownership interest in TGH. TGH is now in default of both the short-term and the long-term notes payable and the Company is aggressively pursuing collection of the total of both notes. As of June 30, 2020, the Company has fully impaired its investment in TGH, recording an impairment loss of $310,000 for the three and six month periods ended June 30, 2020.
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NOTE 76 – ~~OTHER ASSETS~~GOODWILL
~~Included in other assets are the following intangible assets:~~
· Patents, consisting of legal costs paid to third parties to establish a patent, which are capitalized until such time that the patents are approved and issued or rejected. If approved, capitalized costs are amortized using the straight-line method over the estimated lives of the patents, generally five years. The Company has one issued patent as of September 30, 2019 and had no issued patents at December 31, 2018.
· ~~License fees, which consist of fees paid to have the Company’s products certified by a nationally recognized organization. License fees are amortized over ten years.~~

The ~~net~~Company recorded goodwill in conjunction with the acquisition of Impact on March 7, 2019. The goodwill balance ~~of intangible assets~~ as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 was ~~$96,463 and $63,755, respectively. Amortization expense totaled $1,312 and $648~~$902,067. 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 ~~nine months~~periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018, respectively, and $409 and $312 for the three months ended September 30, 2019 and 2018, respectively.~~2019.

NOTE 87 – ACCRUED EXPENSES

Accrued expenses are summarized as follows:

September 30, December 31, June 30, December 31,
2019 2018 2020 2019
Accrued operating expenses $ 303,331 $ 240,941 $ 967,398 $ 854,056
Accrued wages and related expenses 569,798 490,961 409,300 487,327
Accrued interest expense 123,409 10,958 58,889 –
Accrued sales tax payable 304,607 401,282 508,716 345,458
$ 1,301,145 $ 1,144,142 $ 1,944,303 $ 1,686,841

Accrued sales tax payable is comprised of prior period sales tax payable to various states for 2015 through ~~2019.~~2020. The Company has set up payment plans with the various taxing agencies to relieve the obligation. The payment plans require monthly payments in various amounts over a period of 12 months.

1612

NOTE 98 – NOTES PAYABLE ~~AND OPERATING LEASE LIABILITIES~~

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

September 30, December 31,
2019 2018

Unsecured, interest only, note payable with Chris Parkes originally due December 31, 2018. Interest payments due monthly at an annual rate of 20.4%. Note payable revised in December 2018 extending the maturity date to March 31, 2020. During August 2019, the maturity date was extended to March 31, 2020 and the interest rate was decreased to an annual rate of 9%. In consideration for extending the due date of the Note and reducing the interest rate, the Company issued the Holder 3,000 shares of Common Stock. $ 80,000 $ 80,000

Unsecured, interest only, note payable with David Parkes originally due December 31, 2018. Interest payments due monthly at an annual rate of 18.0%. Note payable revised in December 2018 extending the maturity date to March 31, 2020. During August 2019, the maturity date was extended to March 31, 2020 and the interest rate was decreased to an annual rate of 9%. In consideration for extending the due date of the Note and reducing the interest rate, the Company issued the Holder 3,000 shares of Common Stock. 100,000 100,000

Unsecured, interest only, note payable with Michael S. Bank originally due April 30, 2019. Interest at 19.8% per year is paid twice per month. The note contains a demand re-payment provision that can be executed by Mr. Bank at any time by providing a one-time notice. The Company may re-pay any part or the entire principal sum at any time with penalty and abatement of interest expense from date of early payment. The note includes six thousand warrants, each exercisable to purchase one share of the Company's Common Stock at a price of $1.00 per share. In March 2019, the Company repaid $35,000 of the principal and extended the maturity date to April 30, 2019. The note was repaid in full on April 30, 2019. – 298,869

Unsecured, interest only, note payable with Cloud9 Support Inc. originally due April 30, 2019. The note is personally guaranteed by the Company’s two majority shareholders, Mr. Nattrass, who is the Company’s Chairman, and Chief Executive Officer, and Mr, Gutierrez, a Director, and former officer of the Company. The note includes additional consideration of 30,000 options at an exercise price of $1.20. Under the initial terms of the note, the interest rate was 12.0% per year with interest payable monthly. In May 2019, the due date of the note was extended to December 31, 2019 and the interest rate was decreased to 9.0% per year payable monthly. In consideration for extending the due date of the Note and reducing the interest rate, the Company issued the Holder 10,000 shares of Common Stock.
1,000,000 1,000,000

Note payable with Hydrofarm Holdings Group, Inc. (“Hydrofarm”), secured by all currently existing and future assets. Interest accrues at 8.0% per year and is paid quarterly. The note matures on the earlier of: (a) 90 days’ notice from Hydrofarm; (b) acceleration of the note payable due to the Company being in default; or (c) December 2023. 2,000,000 2,000,000

Secured agreement to sell future receivables to GCF Resources, LLC, net of $30,000 in closing fees. The agreement requires 32 weekly payments of $42,190 totaling $1,350,000. The agreement matures on May 7, 2020 but is repayable prior to maturity for less than the $1,350,000 in total payments. 970,000 –

Total 4,150,000 3,478,869
Less current maturities (4,150,000 ) (3,478,869 )
Long term $ – $ –
June 30, December 31,
2020 2019

Unsecured, interest only, note payable with Chris Parkes originally due December 31, 2018. Initial interest payments due monthly at an annual rate of 20.4%. Note payable revised in December 2018 extending the maturity date to March 31, 2019. During August 2019, the maturity date was extended to March 31, 2020 and the interest rate was decreased to an annual rate of 9%. In consideration for extending the due date of the note and reducing the interest rate, the Company issued the holder 3,000 shares of Common Stock. Beginning in April 2020, the Company is making monthly payments in the amount of $10,000.
$ 50,000 $ 80,000

Unsecured, interest only, note payable with David Parkes originally due December 31, 2018. Initial interest payments due monthly at an annual rate of 18.0%. Note payable revised in December 2018 extending the maturity date to March 31, 2019. During August 2019, the maturity date was extended to March 31, 2020 and the interest rate was decreased to an annual rate of 9%. In consideration for extending the due date of the note and reducing the interest rate, the Company issued the holder 3,000 shares of Common Stock. Beginning in April 2020, the Company is making monthly payments in the amount of $10,000.
70,000 100,000

Note payable with Hydrofarm Holdings Group, Inc. (“Hydrofarm”), secured by all currently existing and future assets. Interest accrues at 8.0% per year and is paid quarterly. The note matures on the earlier of: (a) 90 days notice from Hydrofarm; (b) acceleration of the note payable due to the Company being in default; or (c) December 2023. The note was repaid in full on February 27, 2020. – 2,000,000

Secured agreement to sell future receivables to GCF Resources, LLC, net of $30,000 in closing fees. The agreement requires 32 weekly payments of $42,190 totaling $1,350,000. The agreement matures on May 7, 2020 but is repayable prior to maturity for less than the $1,350,000 in total payments. The note was repaid in full on February 27, 2020. – 632,709

Paycheck Protection Program (“PPP”) loan entered into on April 16, 2020. Interest rate of 1.0% per annum. Payments of principal and interest are deferred until August 1, 2021 (the “Deferral Period”). The PPP loan may be forgiven in part or fully depending on the Company meeting certain PPP loan forgiveness guidelines. Any unforgiven portion of the PPP loan is payable over a two-year term, with payments deferred during the Deferral Period. The Company may prepay the loan at any time without payment of any premium. 1,020,600 –

Total 1,140,600 2,812,709
Less current maturities (120,000 ) (2,812,709 )
Long Term $ 1,020,600 $ –

1713

~~The following is a summary of operating lease liabilities:~~NOTE 9 – DEBT

September 30,
2019 December 31,
2018
Operating lease liabilities related to right of use assets.
$ 265,943 $ –
Less current portion (143,860 ) –
Long term $ 122,083 $ –
The Company's total borrowings as of June 30, 2020 and December 31, 2019 consisted of the following:
June 30, December 31,
2020 2019
Revolving Facility $ 3,412,957 $ –
Term Loan, net of $339,534 unamortized debt issuance costs 1,660,466 –
Total 5,073,423 –
Less current debt due within one year (5,073,423 ) –
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 is denominated in Canadian dollars (C$), is 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 may 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 will 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 will be 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 “Maturity Date”). The Facilities will bear interest at the annual rate established and designated by the Bank of Nova Scotia as the prime rate, plus 11% per annum (13.5% as of June 30, 2020). Accrued interest on the outstanding principal amount of the Facilities will be due and payable monthly in arrears, on the last business day of each month, and on the Maturity Date.
The Revolving Facility may 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 will be 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 may be prepaid in part or in full without a penalty at any time during the term of the Facilities, and the Term Loan may be prepaid in full or in part without penalty subject to 60 days prior notice in each case subject to certain customary conditions.
The Company incurred $1,222,323 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 estimated market value of the underlying common stock. 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 are amortized as interest expense over a period of 24 months based on management’s assessment that it is more likely than not that the Credit Agreement will be in place for a total period of 24 months. As of June 30, 2020, there were $679,069 and $339,534 of unamortized debt issuance costs remaining related to the Revolving Facility and Term Loan, respectively.
The Company recorded interest expense of $664,343 and $249,117 in the accompanying condensed consolidated statements of operations for the six months ended June 30, 2020 and 2019, respectively, of which $203,720 and $0 respectively, was amortization of debt issuance costs. The Company recorded interest expense of $365,709 and $149,146 in the accompanying condensed consolidated statements of operations for the three months ended June 30, 2020 and 2019, respectively, of which $152,790 and $0 respectively, was amortization of debt issuance costs.
14

NOTE 10 – UNIT OFFERING

Effective January 9, 2019, the Company executed a letter agreement with ~~4Front Capital Partners, Inc., Toronto, Canada (“4Front”), whereby 4Front agreed to act as the Company’s~~an exclusive placement agent in connection with a private placement offering. Beginning in March 2019, ~~4Front~~the placement agent initiated an offering (the “Offering”) of up to $6,000,000 from the sale of Units, with each Unit consisting of a $1,000 Convertible Debenture (the “Debentures” or a “Debenture”) and Common Stock Purchase Warrants (the “Warrants”) exercisable to purchase 207.46 shares of Common Stock at $3.00 per share for a period of two years from the purchase date. The Debentures ~~are~~were due May 31, 2021 and bear interest at 8%, compounded annually, with interest due at maturity. The Debentures, plus any accrued but unpaid interest, ~~will~~were to automatically convert for no additional consideration into Common Shares at a conversion price of $2.41 per share upon the occurrence of a liquidity event. A liquidity event means: (a) the date on which the Company’s Common Stock is listed for trading on a recognized stock exchange in either Canada or the United States; and (b) securities issued pursuant to the Offering, including the Common Stock underlying both the conversion right included in the Debentures and underlying the Warrants, have been duly qualified by a registration statement in the United States, allowing the securities to be freely tradeable pursuant to the U.S. securities laws, or a prospectus in Canada. The Company filed a registration statement with the SEC on September 17, 2019, to register the securities in connection with the Offering. That registration statement was declared effective October 16, 2019, triggering the liquidity event indicated above and the $2,565,000 in Debentures plus $92,037 in accrued interest were converted into 1,102,513 Common Shares at $2.41 per share. The Warrants contain a mandatory exercise provision if the weighted average share price of the Company’s Common Stock exceeds $5.00 per share for a period of five consecutive days.
~~The following is a summary of convertible debentures associated with the Offering:~~
September 30, December 31,
2019 2018

Convertible debentures maturing on May 31, 2021. Interest accrues at 8.0% per year, compounded annually, and is due at maturity. 2,565 and 0 debenture units issued as of September 30, 2019 and December 31, 2018, respectively $ 2,565,000 $ –
Unamortized warrants associated with the debentures (initial value of $239.39 per Unit which are being amortized as interest expense over twenty-four months beginning July 1, 2019). 532,135 and 0 warrants issued as of September 30, 2019 and December 31, 2018, respectively. (537,287 ) –
Unamortized conversion price associated with the debentures (initial equity of $280.50 per Unit which are being amortized as interest expense over three months beginning July 1, 2019) – –
Unamortized broker issuing costs (initial issuing costs of $60.00 per Unit which are being amortized as general and administrative expenses over three months beginning July 1, 2019) – –
Unamortized broker warrants associated with the debentures (initial issuing costs of $108.65 per Unit which are being amortized as general and administrative expenses over sixty months beginning July 1, 2019). 153,900 and 0 warrants issued as of September 30, 2019 and December 31, 2018, respectively. (264,744 ) –
Total 1,762,969 –
Less current maturities – –
Long Term $ 1,762,969 $ –
18
~~The Company elected to close the offering in June 2019. The Company accepted an aggregate of $2,565,000 in subscriptions.~~
As of ~~September~~June 30, ~~2019, the Company has accrued interest of $83,409 associated with the Convertible Debentures. See Note 16, Subsequent Events, below.~~
~~NOTE 11 – COMMITMENTS AND CONTINGENCIES~~
~~From time to time, the Company is involved in routine litigation that arises in the ordinary course of business. There are~~2020, no ~~outstanding legal proceedings for which management believes the ultimate outcome would have a material adverse effect on the Company’s results of operations and cash flows.~~warrants had been exercised.

NOTE 1211 – RISKS AND UNCERTAINTIES

Concentration Risk

During the ~~nine~~six months ended ~~September~~June 30, 2020, 18% of the Company’s total purchases were from one vendor. During the six months ended June 30, 2019, 12% of the Company’s total purchases were from one ~~vendor composed 15% of total purchases.~~vendor. During the three months ended ~~September~~June 30, ~~2019, this same vendor composed 20%~~2020, 22% of the Company’s total purchases ~~and two unrelated vendors composed of 8% and 6%, respectively. During the nine months ended September 30, 2018, no vendor composed 15% of total purchases.~~were from one vendor. During the three months ended ~~September~~June 30, ~~2018, one vendor composed~~2019, 10% of the Company’s total ~~purchases.~~
~~The Company’s primary suppliers of automated fertigation controls represented 12% and 46% of total accounts payable outstanding as of September 30, 2019 and December 31, 2018, respectively.~~purchases were from one vendor.

During the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, one customer represented 17% and 22% of total revenue, respectively. During the three months ended June 30, 2020 and 2019, one customer represented 25% and 16% of total revenue, respectively. At June 30, 2020 one customer represented 8% of total outstanding receivables. At December 31, 2019, one customer represented 15% and another represented 11% of total revenue. During the three months ended September 30, 2019, this same customer represented 1% of total revenue while an unrelated customer represented 17%. During the nine months ended September 30, 2018, one customer represented 17% of total revenue. During the three months ended September 30, 2018, this same customer represented 12% of total revenue.outstanding accounts receivables.

Coronavirus Pandemic

The recent 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. Most recently, 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 has caused a significant economic slowdown it appears increasingly likely that it could cause a global recession, which could be of an unknown duration and could have had an adverse effect on our liquidity and profitability.

As a result of these events, we assessed our near-term operations, working capital, finances and capital formation opportunities, and implemented, in late March 2020, a downsizing of our operations and workforce to preserve cash resources and focus our operations on customer-centric sales and project management activities. The duration and likelihood of success of this workforce reduction are uncertain. If this downsizing effort does not meet our expectations, or additional capital is not available, we may not be able to continue our operations. Other factors that will affect our ability to continue operations include the market demand for our products and services, our ability to service the needs of our customers and prospects with a reduced workforce, potential contract cancellations, project scope reductions and project delays, our ability to fulfill our current backlog, management of our working capital, the availability of cash to fund our operations, and the continuation of normal payment terms and conditions for purchase of our products. In light of these extenuating circumstances, there is no assurance that we will be successful in growing and maintaining our business with our customers. If our customers or prospects are unable to obtain project financing and we are unable to increase revenues, or otherwise generate cash flows from operations, we will not be able to successfully execute on the various strategies and initiatives we have set forth in this Report to grow our business.

1915
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 1312 – STOCK BASED COMPENSATION

Stock based compensation expense for the six months ended June 30, 2020 and 2019 was $992,549 and 1,097,137, respectively, based on the vesting schedule of the stock grants and options. Stock based compensation expense for the three months ended June 30, 2020 and 2019 was $559,504 and $508,440, respectively, based on the vesting schedule of the stock grants and options. No cash flow effects are anticipated for stock grants.
In January 2017, the Company began granting stock to attract, retain, and reward employees with Common Stock. Stock grants are offered as part of the employment offer package, to ensure continuity of employment or as a reward for performance. Each of these grants requires a specific tenure of employment before the grant vests with typical vesting periods of 1 to 3 years of employment.

~~The following schedule shows stock grant activity for the nine months ended September 30, 2019.~~
~~Grants outstanding as of December 31, 2018~~ ~~1,802,667~~
~~Grants awarded~~ ~~50,800~~
~~Forfeiture/Cancelled~~ ~~(70,000~~ )
~~Grants vested~~ ~~(1,251,633~~ )
~~Grants outstanding as of September 30, 2019~~ ~~531,834~~
~~The following table summarizes stock grant vesting periods.~~
Number of Shares Period Ending
December 31,
119,333 2019
264,167 2020
148,334 2021
531,834
In January 2018, the Company implemented an equity incentive plan (the “Plan”) to reward and attract employees and compensate vendors for services when applicable. Stock options are offered as part of an employment offer package, to ensure continuity of service or as a reward for performance. The fair value of the options is calculated using the Black-Scholes pricing model based on the estimated market value of the underlying common stock at the valuation measurement date $0.90, the remaining contractual term of the options of 10 years, risk-free interest rate of 2.75% and expected volatility of the price of the underlying common stock of 100%.
In May 2019, the Company ~~terminated the original plan and~~ adopted a new equity incentive plan, authorizing an aggregate of 3,500,000 shares of Common Stock for issuance thereunder. Stock grants under the equity incentive programs are valued at the price of the stock on the date of grant. There is a moderate degree of subjectivity involved when estimating the value of the options with the Black Scholes option pricing model as the assumptions used are moderately judgmental. Stock options and stock grants are sometimes offered as part of an employment offer package, to ensure continuity of service or as a reward for performance.
Stock Grants:
The following ~~schedule~~table shows stock grant activity for the six months ended June 30, 2020:
Grants outstanding as of December 31, 2019 412,501
Grants awarded 786,666
Forfeiture/Cancelled (268,334 )
Grants vested (129,166 )
Grants outstanding as of June 30, 2020 801,667
The following table summarizes stock grant vesting periods:
Number of Unrecognized
stock
compensation Year Ending
Shares expense December 31,
188,333 $ 292,728 2020
513,334 215,451 2021
100,000 33,333 2022
801,667 $ 541,512
16
Stock Options:
The following table shows stock option activity for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020:
Number of
Shares Weighted Average Remaining
Life (Years) Weighted Average
Exercise
Price Number of
Shares Weighted
Average
Remaining
Life (Years) Weighted
Average
Exercise
Price
Stock options outstanding as of December 31, 2018 1,184,000 9.68 $ 1.15
Stock options outstanding as of December 31, 2019 1,702,167 9.21 $ 1.21
Issued 736,499 9.46 $ 1.38 2,395,000 9.58 $ 1.00
Exercised – – – – – –
Expired (109,332 ) 8.23 $ 1.19 97,500 9.13 $ 1.30
Stock options outstanding at September 30, 2019 1,811,167 9.24 $ 1.23
Stock options exercisable at September 30, 2019 463,248 8.99 $ 1.14
Stock options outstanding at June 30, 2020 3,999,667 9.40 $ 1.06
Stock options exercisable at June 30, 2020 1,151,621 8.89 $ 1.13

The following table summarizes stock option vesting periods under the ~~two~~ stock options ~~plans.~~plans:

Number of Shares Period Ending December 31,
299,957 2019
557,331 2020
441,964 2021
48,667 2022
1,347,919
Number of Unrecognized
stock
compensation Year Ending
Shares expense December 31,
1,052,081 $ 848,945 2020
1,065,631 882,833 2021
730,334 573,603 2022
2,848,046 $ 2,305,381

NOTE 13 – SHAREHOLDERS’ EQUITY

In March 2020, an executive left the Company and returned 100,000 common shares as part of the related separation agreement. The Company retired the shares and reduced its issued and outstanding stock by 100,000 shares.
20
NOTE 14 – ~~INCOME TAXES~~
The Company has experienced substantial losses for both book and tax purposes since inception and to date has not provided for any income tax expense. The potential future recovery of any tax assets that the Company may be entitled to due to these accumulated losses is uncertain and these tax assets are fully reserved based on management’s current estimates.
~~The Company’s estimated operating loss carryforwards and expiration dates for tax purposes are as follows:~~
~~2016 - $1,618,386 expiring in 2036~~
~~2017 - $2,182,354 expiring in 2037~~
~~2018 - $3,060,443 no expiration~~
~~2019 - $3,372,951 no expiration~~
Realization of operating loss carryforwards to offset future operating income for tax purposes are subject to various limitations including change of ownership and current year taxable income percentage limitations.
~~NOTE 15 – DERIVATIVE FINANCIAL INSTRUMENTS~~WARRANTS

Warrants are immediately exercisable upon issuance. The following table shows warrant activity for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020.

Number of Shares Weighted Average Exercise Price
Warrants outstanding as of December 31, 2018 6,000 $ 1.00
Warrants issued in connection with convertible debenture offering (see Note 10):
Issued to convertible debenture holders 532,134 $ 3.00
Issued to 4Front as part of compensation 153,900 $ 2.41
Warrants exercised – –
Warrants expired – –
Warrants outstanding as of September 30, 2019 692,034 $ 2.88
Number of shares Weighted
Average
Exercise Price
Warrants outstanding as of December 31, 2019 692,034 $ 2.88
Issued in conjunction with debt 124,481 $ 2.41
Warrants outstanding as of June 30, 2020 816,515 $ 2.81
Warrants exercisable as of June 30, 2020 816,515 $ 2.81
The weighted-average life of the warrants is 1.6 years. The aggregate intrinsic value of the warrants outstanding and exercisable at June 30, 2020 is $0.

NOTE 1615 – SUBSEQUENT EVENTS

On October 7, 2019, the Company’s application to list its Common Stock for trading on the OTCQX was approved. On October 16, 2019, the Company’s registration statement filed with the SEC was declared effective. These two events triggered a liquidity event that resulted in the conversion of $2,565,000 of the Debentures discussed in Note 10, above, plus $92,037 in accrued interest being converted into 1,102,513 Common Shares at a conversion price of $2.41 per share.
Management has assessed and determined that no ~~other~~ significant subsequent ~~event~~events are to be disclosed according to ASC 855.

2117

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. ~~In connection with, and because we desire to take advantage~~See also “Forward Looking Statements” on page 3 of ~~the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere 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. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates 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 disclaim any obligation to update forward looking statements.Report.

Overview and History

urban-gro ~~Inc. (“we,” “us,” our” or~~is a leading engineering design services company that integrates complex environmental equipment systems to create high-performance indoor cultivation facilities for the ~~“Company”) was originally formed on March 20, 2014 as~~global commercial horticulture market. Our custom tailored, plant-centric approach to design, procurement, and integration provides a ~~Colorado limited liability company. In March 2017,~~single point of accountability across all aspects of indoor growing operations. Our solution offers functionality that helps customers manage the entire cultivation lifecycle, from facility engineering and design to operation and day-to-day management. We offer a full range of custom services that are integrated with select cultivation equipment and product solutions, which we ~~converted to a corporation~~primarily source from third party technology and issued 193.3936722 shares of our Common Stock for every Member Interest issued and outstanding on the date of conversion. Effective March 7, 2019, we acquired 100% of the stock of Impact Engineering, Inc., d/b/a Grow2Guys (“Impact”), a provider of mechanical, electrical, and plumbing (MEP) engineering services. Management believes the acquisition of Impact has improved our ability to better serve our current and future customer base by expanding on the fully integrated products and services offered by us.manufacturing partners but also develop in-house.

~~We are an end-to-end~~Our service offerings include full facility programming, engineering and design services, start-up facility and equipment ~~integration, and~~commissioning services, facility optimization ~~company that works with, and provides solutions to, leading commercial cannabis operators around the world. We engage directly in the business of selling a full line of~~ services and Integrated Pest Management (“IPM”) planning and strategy services. Complementing these services, we work with customers to source an integrated ~~product solutions to~~suite of select cultivation equipment systems and crop management products, which include: (1) environmental controls, fertigation, and irrigation distribution systems; (2) freshwater, wastewater, and condensation treatment systems; (3) purpose-built HVAC solutions; (4) light emitting diode (“LED”), high-pressure sodium (“HPS”) and ceramic metal halide (“CMH”) lighting systems; (5) rolltop, multi-tier, and automated container benching systems; (6) odor mitigation & microbial reduction systems; (7) air flow systems; (8) industrial spray applicators; (9) pesticides and bio-controls; (10) plant nutrition products; (11) substrate and coco bag solutions; and (12) our Soleil® technology data analytics platform that includes wireless environmental & substrate sensing and remote monitoring and support.
Although the ~~medical and recreational~~rapidly expanding cannabis ~~industry in states and countries where operation of a cannabis production facility~~market has been legalized. We have and will continue to work with grow operations and production facilities to pursue strategies to provide services, products, and other potential revenue-producing opportunities with respect to the cannabis industry in those states where the same is lawful. We engage directly with the ownership groups and operators of large commercial indoor and greenhouse cultivation facilities and strategically work with them to provide solutions that assist them in lowering production costs and increasing crop yields. While earmarking the emerging cannabis market as our ~~principal~~ target market and ~~while, to date, most~~substantially all of our revenues to date have been generated from customers in the cannabis industry, we ~~also plan to market our solutions to customers outside of the cannabis industry~~are seeking to diversify our ~~operations at a future point in time. These prospective customers include~~customer base by expanding into other segments of the indoor horticultural market, including targeting cultivators of ~~the world’s highest~~high value crops ~~including~~such as tomatoes, strawberries, chilies, peppers, and leaf lettuce. During 2019, we also began exploring the potential demand for our solutions in select countries, including those within Latin America and Europe.

By combining our four business platforms -- 1) pre start-up: (i) cultivation space programming, (ii) facility engineering, (iii) interior cultivation design, (iii) equipment integration, and (iv) commissioning services, and post start-up: 2) cultivation optimization & technical support services, 3) Environmental Sciences, which includes the consultative selling of odor & microbial reduction equipment, and Integrated Pest Management (“IPM”) solutions, and 4) Soleil® Sense crop monitoring technology -- we provide global integrated solutions for today’s commercial cannabis operators.RECENT DEVELOPMENTS

~~We provide solutions that benefit single and multi-state operator’s needs~~COVID-19 Pandemic
In December 2019, a novel strain of coronavirus, COVID-19, was reported to ~~effectively manage investment~~have surfaced in capital expenditures (CapEx) and operating expenses (OpEx). CapEx products and services include the design, engineering, and sale of integrated cultivation systems. Integrated cultivation systems offered include environmental controls and automated fertigation/irrigation systems, commercial-grade light systemsWuhan, China. In January 2020, this coronavirus spread to other countries, including light-emitting diode (LED) and high-pressure sodium (HPS) light fixtures, a complete line of water treatment solutions, rolling and automated benching systems, air flow systems, and odor and microbial mitigation systems. OpEx related products and services include recurring revenues realized in our Environmental Sciences, Professional Services, and Technology divisions. In our Environmental Sciences division, we market a line of integrated pest management products and provides proactive guidance to operators on segment best practices. In our Professional Services division, we provide segment specific expertise and recommends system solutions to mitigate any opportunities for improvement. In our Technology division we market an end-to-end hardware and software wireless IoT solution that provides real time feedback to operators, in turn allowing them to run their facilities at the highest levels of consistency and optimization. We primarily market our products and services throughout the United States, and ~~Canada. During 2018 and 2019, we also made preliminary~~ efforts to ~~sign contracts~~contain the spread of this coronavirus intensified. In March 2020, the World Health Organization declared the outbreak of the coronavirus a pandemic. We are a business that supplies other essential businesses with support and supplies necessary to operate and we therefore believe we are an essential business allowed to continue operating under the Stay-At-Home Orders issued by many states and cities. However, as discussed below, we have seen a decrease in revenues for the six months ended June 30, 2020, a portion of which was the result of customers deferring spending due to the impacts of COVID-19. The extent to which the COVID-19 pandemic impacts our results will depend on ~~projects~~future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact. The outbreak and any preventative or protective actions that governments or we may take in ~~other countries, including countries~~respect of COVID-19 may result in ~~Latin America~~a period of business disruption, reduced customer business and ~~countries associated with, and included in the European Union.~~reduced operations.

~~Our executive office is located at 1751 Panorama Point, Unit G, Lafayette, CO 80026,~~Due to the uncertainty and ~~our phone number is (720) 390-3880. Our Company website is~~~~www.urban-gro.com~~~~, which contain a description of our Company and products, but such websites and the information contained~~adverse impact on our ~~websites are not part~~operations and financial condition resulting from the outbreak of ~~this report. In addition,~~COVID-19, we ~~also maintain a branded product website supporting our technology initiatives at www.soleiltech.ag.~~took the following actions:

· In March 2020, we began executing a substantial reduction in discretionary marketing and general & administrative expenses;
~~We have not been subject to any bankruptcy, receivership or similar proceeding.~~
· On March 30, 2020, we reduced our headcount by 13 people (27%), from 48 to 35, by terminating ten employees and furloughing three other employees, including one member of our leadership team;
· Effective April 6, 2020, we reduced compensation for almost every remaining employee, including a 20% reduction for the senior members of our leadership team.

2218
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.
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
On March 27, 2020, the CARES Act was enacted. The CARES Act is an approximate $2 trillion emergency economic stimulus package passed in response to the coronavirus outbreak. The CARES Act, among other things, includes broad sweeping provisions such as direct financial assistance to Americans in the form of one-time payments to individuals; aid to businesses in the form of loans and grants; and efforts to stabilize the U.S. economy and keep Americans employed in general. On April 16, 2020, we received a loan in the amount of $1,020,600 under the Paycheck Protection Program (“PPP”) of the CARES Act. The PPP provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “PPPFA”) was enacted. The PPPFA extended the covered period of the loans under the PPP from eight weeks to 24 weeks from the origination date of the loan, or December 31, 2020, whichever is earlier. Therefore, the PPP now provides a mechanism for forgiveness of up to the full amount borrowed after 24 weeks as long as the borrower uses the loan proceeds during the 24-week period after the loan origination for eligible purposes, including payroll costs, certain benefits costs, rent and utilities costs or other permitted purposes, and maintains its payroll levels, subject to certain other requirements and limitations. The amount of loan forgiveness is subject to reduction, among other reasons, if the borrower terminates employees or reduces salaries during the 24-week period. The interest rate on the loan is 1.0% per annum. The PPPFA also extended the deferment period for principal and interest payments on PPP loans from six months to ten months. Therefore, the payments of principal and interest under our PPP loan are deferred for ten months from the final day of the loan forgiveness period (the “Deferral Period”). Any unforgiven portion of the PPP Loan is payable over the two-year term, with payments deferred during the Deferral Period. The Company is permitted to prepay the loan at any time without payment of any premium.

Results Of Operations

During the six months ended June 30, 2020, we generated revenues of $8.3 million compared to revenues of $11.5 million during the six months ended June 30, 2019, a decrease of $3.2 million, or 28%. This decrease was comprised of a $1.9 million decrease in cultivation equipment sales, a $1.2 million decrease in complex equipment systems sales, and a $0.5 million decrease in professional services. This was partially offset by a $0.4 million increase in environmental sciences revenues, recurring revenue and other revenues. A portion of the decrease in revenues was the result of customers deferring spending due to the impacts of COVID-19. As a result of the deferred spending, many of the completion dates in our customer contracts were extended, but no contracts were lost. We signed 42 new engineering design project contracts in the six-month period ended June 30, 2020, including six new projects in Europe, and secured our first horticulture commissioning project, an East Coast based lettuce facility.
~~We generate~~
During the six months ended June 30, 2020, cost of revenues was $6.0 million compared to $7.9 million during the six months ended June 30, 2019, a decrease of $1.9 million, or 24%. This decrease was directly related to the decrease in revenue.
Gross profit was $2.3 million (28% of revenue) during the six months ended June 30, 2020 compared to $3.6 million (31% of revenue) during the six months ended June 30, 2019. Gross profit as a percentage of revenue ~~both from (i) working with facility owners~~decreased due to ~~design, integrate systems which~~a reduction in higher margin equipment sales in the current period when compared to the same period of the prior year.
Operating expenses decreased by $1.6 million, or 26%, to $4.6 million for the six months ended June 30, 2020 compared to $6.3 million for the six months ended June 30, 2019. The decrease in operating expenses was comprised of a $1.2 million reduction in general operating expenses, mainly due to reduced salary and travel expenses, a $0.3 million reduction of marketing related expenses, and a $0.1 million reduction in stock-based compensation expense.
Non-operating expenses increased $0.7 million to $0.9 million for the six months ended June 30, 2020, compared to $0.2 million for the six months ended June 30, 2019. This increase was due to a $0.4 million increase in interest expense due to an increase in debt and a $0.3 million impairment loss recorded in the period, not present in the comparable period in the prior year.
19
As a result of the above, we ~~sell, and commission/start up new facilities and (ii) selling consumable product lines once existing facilities are operational.~~incurred a net loss of $3.3 million for the six months ended June 30, 2020, ($0.11) per share compared to a net loss of $2.9 million for the six months ended June 30, 2019, ($0.11) per share.

Comparison of Results of Operations for the ~~nine~~three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

During the ~~nine~~three months ended ~~September~~June 30, ~~2019,~~2020, we generated revenues of ~~$17,056,737,~~$4.0 million compared to revenues of ~~$14,680,295~~$5.6 million during the ~~comparable period~~three months ended June 30, 2019, a decrease of $1.6 million, or 29%. This decrease was comprised of a $0.5 million decrease in ~~2018, an increase~~complex equipment systems sales, a $0.5 million decrease in environmental sciences revenues, a $0.3 million decrease in cultivation equipment sales and a $0.3 million decrease in professional services. A portion of ~~$2,376,442 (16%). While this increase is partially attributable~~the decrease in revenues was the result of customers deferring spending due to the ~~general growth~~impacts of ~~the cannabis industry in North America, we believe that this increase primarily occurred as~~COVID-19. As a result of the deferred spending, many of the completion dates in our ~~increased marketing efforts~~customer contracts were extended, but no contracts were lost. We signed 24 new engineering design project contracts in the three-month period ended June 30, 2020, including 2 new projects in Europe, and ~~industry demand for large, environmentally controlled, grow facilities. This increase in revenue primarily occurred in lighting ($1,528,678 increase) and environmental sciences ($461,359 increase).~~secured our first horticulture commissioning project, an East Coast based lettuce facility.

In 2019, we implemented a strategic initiative to more closely align with our customers and sell an all-encompassing enterprise platform solution. This solution is a full service consultative integrated facility package for interior cultivation design. Supporting this directive, forDuring the ~~nine~~three months ended ~~September~~June 30, 2020, cost of revenues was $2.8 million compared to $3.8 million during the three months ended June 30, 2019, ~~we have signed 43 new environmental controls/fertigation design contracts for~~ a ~~total~~decrease of ~~1,009,901 canopy sq. ft., 10 MEP engineering contracts for a total of 347,845 sq. ft, and 7 cultivation space programming design contracts for a total of 874,788 sq. ft.~~
~~Cost of sales increased to $11,529,448 during the nine months ended September 30, 2019, compared to $10,375,563 during the comparable period in 2018, an increase of $1,153,885 (11%)~~$1.0 million, or 26%. ~~These increases are~~This change was directly related to ~~increased revenues.~~the decrease in revenue.

Gross profit ~~increased to $5,527,289 (32%~~was $1.2 million (30% of revenue) during the ~~nine~~three months ended ~~September~~June 30, ~~2019,~~2020 compared to ~~$4,304,732 (29%~~$1.8 million (33% of revenue) during the ~~comparable period in 2018.~~three months ended June 30, 2019. Gross profit as a percentage of revenue ~~increased~~decreased due to ~~our increased focus on~~a reduction in higher margin ~~services business.~~equipment sales in the current period when compared to the same period of the prior year.

Operating expenses ~~increased~~decreased by $1.0 million, or 32%, to ~~$9,581,375~~$2.1 million for the ~~nine~~three months ended ~~September~~June 30, ~~2019,~~2020 compared to ~~$6,388,292~~$3.1 million for the ~~nine~~three months ended ~~September~~June 30, ~~2018,~~2019. The decrease in operating expenses was comprised of a $0.9 million reduction in general operating expenses, mainly due to reduced salary and travel expenses and a $0.2 million reduction of marketing related expenses, partially offset by an increase of ~~$3,193,083 (50%). Marketing expense increased by $234,665 (35%) due to increases~~$0.1 million in advertising expenses, business development and costs of attendance at trade shows as we prepared for becoming a publicly held company. General and administrative expense, excluding amortization of broker issuing costs and broker warrants associated with our offering of convertible debentures of $167,834, increased by $1,830,531 (36%), due primarily to our expanding work force. Many of our new employees are members of management, hold advanced degrees, and are experts in their area of focus, which increased compensation expense. Stockstock-based compensation expense ~~increased by $960,053 primarily as a result of~~due to the timing of vesting of stock ~~grants and stock options previously issued under our stock grant and stock option programs.~~options.

~~Beginning~~Non-operating expenses increased $0.5 million to $0.6 million for the three months ended June 30, 2020, compared to $0.1 million for the three months ended June 30, 2019. This increase was due to a $0.4 million increase in ~~August 2019, we implemented certain cost reduction initiatives that we anticipate will have the following impact on our ongoing operating expenses, including general~~interest expense due to an increase in debt and ~~administrative costs:~~
· ~~Reduced employees by 15, which we expect to result in savings up to $1,828,000, including a 25% burden for benefits and travel;~~
· ~~Reduced marketing expenditures by $500,000 by limiting participation in tradeshows and outsourced marketing functions;~~
· ~~Eliminated outsourced product development. During the nine months ended September 30, 2019 we incurred approximately $240,000 under that outsourcing program;~~
· ~~Reduced corporate function activities, which is expected to result in savings of up to $50,000.~~
~~Interest expense, excluding amortization related to the convertible debentures of $796,233,~~a $0.3 million impairment loss recorded in the ~~nine months ended September 30, 2019, was $374,850 compared to $65,573 incurred during~~period, not present in the ~~nine months ended September 30, 2018, as a result of increased debt.~~comparable period in the prior year.

As a result of the above, we incurred a net loss of ~~$5,719,404 during~~$1.6 million for the ~~nine~~three months ended ~~September~~June 30, ~~2019~~2020, ($~~0.22~~0.05) per ~~share),~~share compared to a net loss of $2,128,506 during the nine months ended September 30, 2018 ($0.09 per share). In the nine months ended September 30, 2019, $3,076,422 of this loss relates to non-cash expenses compared to $646,302 of non-cash expenses incurred in the nine months ended September 30, 2018.
~~Comparison of Results of Operations~~$1.4 million for the three months ended ~~September~~June 30, 2019, ~~and 2018~~($0.06) per share.

~~During~~NON-GAAP FINANCIAL MEASURES
We define Adjusted EBITDA as net income (loss) attributable to urban-gro, Inc., determined in accordance with GAAP, excluding the ~~three months ended September 30, 2019, we generated revenues~~effects of ~~$5,583,064 compared to revenues~~interest expense, depreciation and amortization of ~~$5,336,631 during the comparable period in 2018, an increase~~acquired intangible assets, impairment of ~~$246,433 (5%). There were not material changes in revenue in any~~investments, and stock-based compensation. We use Adjusted EBITDA as a measure of our ~~divisions during these comparable periods.~~operating performance. Adjusted EBITDA is a supplemental non-GAAP financial measure. Adjusted EBITDA is not a substitute for net income (loss), income (loss) from operations, cash flows from operating activities or any other measure prescribed by accounting principles generally accepted in the United States of America ("GAAP").

Our board of directors and management team focus on Adjusted EBITDA as a key performance and compensation measure. Adjusted EBITDA assists us in comparing our 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.
~~During~~
There are limitations to using non-GAAP measures such as Adjusted EBITDA. Although we believe that Adjusted EBITDA can make an evaluation of our operating performance more consistent because it removes items that do not reflect our core operations, other companies in our industry may define Adjusted EBITDA differently than we do. As a result, it may be difficult to use Adjusted EBITDA to compare the ~~three months ended September 30, 2019, we signed 12 new environmental controls/fertigation design contracts for~~performance of those companies to our performance. Adjusted EBITDA should not be considered as a ~~total~~measure of ~~357,752 canopy sq. ft., 5 MEP engineering contracts for a total~~the income generated by our business or discretionary cash available to us to invest in the growth of ~~276,845 sq. ft., and 5 cultivation space programming design contracts for a total of 61,500 sq. ft.~~our business.

2320

~~Cost of sales increased~~The following table reconciles net loss attributable to ~~$3,650,965 during~~ the ~~three~~Company to Adjusted EBITDA for the periods presented:

Three Months Ended
June 30,

Six Months Ended
June 30,

2020 2019 2020 2019
Net Loss $ (1,569,970 ) $ (1,428,403 ) $ (3,265,601 ) $ (2,909,874 )
Interest expense 365,709 149,146 664,343 249,117
Depreciation and amortization 59,396 61,386 120,410 120,028
Impairment of investment 310,000 – 310,000 –
Stock-based compensation 559,904 508,440 992,549 1,097,137
Adjusted EBITDA $ (274,961 ) $ (709,431 ) $ (1,178,299 ) $ (1,443,592 )
Adjusted EBITDA for the six months ended ~~September~~June 30, 2020 was a negative $1.2 million, compared to a negative $1.4 million for the six months ended June 30, 2019 ~~compared~~due primarily to ~~$3,702,255 during the comparable period in 2018, a decrease of $51,290 (1%).~~
Gross profit increased to $1,932,099 (35% of revenue) during the nine months ended September 30, 2019, compared to $1,634,376 (31% of revenue) during the comparable period in 2018. Gross profit as a percentage of revenue increased due to our increased focus on higher margin services business.
~~Operating expenses increased to $3,324,921~~reduced operating expenses. Adjusted EBITDA for the three months ended ~~September~~June 30, ~~2019,~~2020 was a negative $0.3 million compared to ~~$2,474,374~~a negative $0.7 million for the three months ended ~~September~~June 30, 2018, an increase of $850,547 (34%). Marketing expense increased by $32,902 (14%) due to increases in advertising expenses, business development and costs of attendance at trade shows as we prepared for our becoming a publicly held company. General and administrative expense, excluding amortization of broker issuing costs and broker warrants associated with our private offering of convertible debentures of $167,834, increased by $572,939 (32%),2019, due primarily to our expanding work force. Many of our new employees are members of management, hold advanced degrees, and are experts in their area of focus, which increased compensation expense. However, as discussed above, in August 2019 we implemented various cost reduction initiatives that we anticipate will reduce ourreduced operating costs, including general and administrative costs in the future. Stock compensation expense increased by $76,872 primarily as a result of the timing of vesting of stock grants and stock options previously issued under our stock grant and stock option plans.
Interest expense, excluding amortization related to the convertible debentures of $796,233, in the three months ended September 30, 2019, was $125,733, compared to $23,430 incurred during the three months ended September 30, 2018, which corresponds to an increase in the average outstanding debt balances during those periods.
As a result of the above we incurred a net loss of $2,809,530 during the three months ended September 30, 2019 ($0.11 per share), compared to a net loss of $846,808 during the three months ended September 30, 2018 ($0.03 per share). In the three months ended September 30, 2019, $1,979,286 of this loss relates to non-cash expenses compared to $432,347 of non-cash expenses incurred in the three months ended September 30, 2018.expenses.

Liquidity and Capital Resources

As of ~~September~~June 30, ~~2019,~~2020, we had cash of ~~$3,505,636~~$402,481, which ~~represents an increase~~represented a decrease of ~~$2,326,784~~$46,222 from ~~our cash balance as of~~ December 31, ~~2018 of $1,178,852.~~2019.

AsSince inception, we have ~~previously disclosed,~~incurred significant operating losses and have funded our operations primarily through issuances of equity securities, debt, and operating revenue. As of June 30, 2020, we ~~believe we require~~had an ~~aggregate~~accumulated deficit of ~~$6,000,000~~$20,156,227, a working capital deficit of $8,539,859, and negative stockholders’ equity of $6,604,564. Our ability to generate sufficient revenues to pay our debt obligations and accounts payable when due remains subject to risks and uncertainties. These risks and uncertainties raise substantial doubt about our ability to continue as a going concern within one year after the date that the condensed consolidated financial statements in ~~total funding~~connection with this Report are issued. The condensed consolidated financial statements included in this Report have been prepared on a going concern basis and do not include any adjustments relating to ~~fully implement~~the recoverability and classification of recorded asset amounts or amounts of liabilities that might result from the outcome of this uncertainty. Our ability to continue as a going concern is dependent upon, among other things, our ~~business plan. To date, we have raised approximately $2,500,000~~ability to generate revenue, control costs and ~~we will continue~~raise capital. Such capital, however, may not be available, if at all, on terms that are acceptable to look for a viable strategic partner(s) to finance the remaining $3,500,000. We will utilize this additional funding to expand our existing operations, including retaining additional qualified experts in engineering design, facility optimization consulting, and expanded commissioning services, as well as working capital. While no assurances can be provided, we anticipate that a portion of these funds will be provided from future operating cash flows.us.

~~Because~~Although we are ~~involved~~not actively engaged in the production of cannabis, federal law prohibitions on the cannabis industry ~~and cannabis is still a Schedule 1 controlled substance under federal law, we are unable~~in the United States inhibit our ability to establish ~~a relationship with~~traditional banking support and opportunities. Specifically, conventional banks ~~to provide any kind of financing, whether secured or otherwise. As of the date of this Report the US Congress is considering various legislation to allow banking in the cannabis industry. While there~~ are ~~no assurances that this legislation will pass Congress or otherwise become law, if it is adopted we believe we will be able to establish an ongoing relationship with an established bank~~currently unwilling to provide us with ~~lines~~any financing normally available to growth stage companies similar to ourselves, including purchase order financing. As a result, we have been forced to finance our expansion primarily by raising capital privately, as well as through private debt and operating capital. This has placed a significant impediment on our cash flows. However, as described above in Note 9 to the Condensed Consolidated Financial Statements, on February 21, 2020, we entered into the Credit Agreement, providing for a 12-month senior secured demand term loan facility in the amount of C$2.7 million ($2.0 million) and a 12-month demand revolving credit ~~secured by~~facility of up to C$5.4 million ($4.0 million). Our failure to obtain additional debt or equity financing in the future could have a negative impact on our ~~existing purchase orders and other assets. This will limit~~ability to continue as a going concern or ~~perhaps eliminate the need for us to issue any additional equity and subsequently dilute our existing shareholders. Until this does happen and we are given the opportunity~~ to grow and expand our ~~business in~~operations, which will have a ~~more traditional manner,~~negative impact on our anticipated results of operations. As of June 30, 2020, we ~~will need to access capital, both debt and equity, in~~had C$0.7 million ($0.5 million) of availability under the ~~same manner that we have done so in the past.~~Revolving Facility.

Effective January 9, 2019, we executed a letter agreement with ~~4Front Capital Partners, Inc., Toronto, Canada (“4Front”), whereby 4Front agreed to act as our~~an exclusive placement agent in connection with a private placement offering. Beginning in March 2019, ~~4Front~~the placement agent initiated an offering (the “Offering”) of up to ~~$6,000,000~~$6.0 million from the sale of Units, with each Unit consisting of a $1,000 Convertible Debenture (the “Debentures”) and Common Stock Purchase Warrants (the “Warrants”) to purchase 207.46 shares of our Common Stock at $3.00 per share for a period of two years from the purchase date. The Debentures ~~are~~were due May 31, 2021 and ~~bear~~bore interest at 8%, compounded annually, with interest due at maturity. The Debentures, plus any accrued but unpaid interest will automatically convert for no additional consideration, into shares of our Common Stock at a conversion price of $2.41 per share upon the occurrence of a liquidity event. A liquidity event means: (a) the date on which our Common Stock is listed for trading on a recognized stock exchange in either Canada or the United States; and (b) securities issued pursuant to the Offering, including the Common Stock underlying both the conversion right included in the Debentures and underlying the Warrants, have been duly qualified by a registration statement in the United States, allowing the securities to be freely tradeable pursuant to the U.S. securities laws, or a prospectus in Canada. We filed a registration statement with the SEC on September 17, 2019 to register the securities in connection with the Offering. That registration statement was declared effectiveOn October 16, 2019, ~~triggering~~ the ~~liquidity event indicated above and the $2,565,000~~$2.6 million in Debentures plus $92,037 in accrued interest were converted into 1,102,513 Common Shares at $2.41 per ~~share.~~share pursuant to their terms as a result of our registration of the securities on a registration statement that was declared effective on such date. The Warrants contain a mandatory exercise provision if the weighted average share price of our Common Stock exceeds $5.00 per share for a period of five consecutive days.

2421

~~We accepted the final funding on June 24, 2019.~~

If we do not raise enough funds from a financing, or generate sufficient operating cash flow, or if additional expenditures and acquisitions are identified and we cannot use our securities as compensation, we will need additional funding to continue to implement our business ~~plan. While~~plan and to execute our strategic initiatives. Other than the amount availability pursuant to the Revolving Facility, we ~~believe we will be able to raise these funds in either debt or equity, we~~do not currently have noan agreement with any third party to provide us ~~the same~~with such financing and there can be no assurances that we will be able to raise any capital on commercially reasonable terms, or at all. If we require additional capital and are unable to raise the same, it could have a material negative impact on our results of operations.

Net cash used in operating activities was ~~$86,299~~$3.2 million during the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$195,681~~$1.6 million used for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. Operating cash has been positively impacted from an increase in customer deposits as demand for our ~~business continues to grow.~~solutions increased in the six months ended June 30, 2020. At ~~September~~June 30, ~~2019,~~2020, we had ~~$4,224,531~~$3.4 million in customer deposits related to customer ~~orders.~~orders, which compared favorably to customer deposits of $2.9 million as of December 31, 2019. We require prepayments from customers before any design work is commenced and before any material is ordered from the vendor. These prepayments are booked to the customer deposits liability account when received. Our standard policy is to collect the following before action is taken on a customer order: 50% deposit; and the remaining 50% payment made prior to shipping. We expect customer deposits to be relieved from the deposits account no longer than 12 months for each project. ~~At September 30, 2019, we had $785,480 in prepayments and advances. This is primarily comprised of prepayments to vendors to initiate orders.~~ We do not have trade payable terms with most of our vendors and as a result, we are required to prepay a portion or all of the total order. ~~Due to the increase in customer projects~~At June 30, 2020, we had ~~increased prepayments~~$1.4 million in accounts payable, compared to ~~order materials from vendors.~~$3.8 million at December 31, 2019.

Net cash used in investing activities was ~~$894,168~~$0.1 million for the ~~nine~~six months June 30, 2020, compared to $0.5 million during the six months ended ~~September~~June 30, ~~2019, compared to $1,073,300 used during the nine months ended September 30, 2018.~~2019. Historically, cash has been used to increase our investments in strategic partnerships and to acquire property and equipment. We do not anticipate using significant cash in the future to invest in strategic partnerships. We will continue to have ongoing needs to purchase property and equipment to maintain our operations. We have no material commitments for capital expenditures as of June 30, 2020.

Net cash provided by financing activities was ~~$3,307,251 in~~$3.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$72,000~~$2.2 million during the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. Cash provided from financing activities during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 primarily relates to ~~$2,565,000~~$5.4 million in proceeds we received from ~~our ongoing Offering~~the issuance of ~~Units in addition to~~debt and a ~~short term note payable for $970,000, both described above. Unless we revise the terms of our existing outstanding debt, we will need to make significant payments~~$1.0 million long-term loan, offset by $2.7 million used in the ~~future to pay off these outstanding obligations.~~
~~In October 2018, we received a $1,000,000 unsecured loan from James Lowe, a director, which became due April 30, 2019. The loan had a one-time origination fee~~repayment of ~~$12,500. Interest accrued at the rate of 12% per annum~~notes payable and was paid monthly. As additional consideration for the loan we granted Mr. Lowe an option to purchase 30,000 shares of our Common Stock at an exercise price of $1.20 per share, which option is exercisable for a period of five (5) years. The loan is guaranteed by Mr. Nattrass, our CEO, a director and one of our principal shareholders, and by Mr. Gutierrez, one of our principal shareholders, a director, and a former officer. The due date for the note payable was extended$0.5 million in May 2019 to December 31, 2019 and the interest rate was decreased to 9% per year. In consideration for Mr. Lowe extending the maturity date of the Note and reducing the interest rate, we agreed to issue 10,000 shares of our Common Stock to him.
Gross debt, excluding operating leases, was $6,715,000 and $3,478,869 as of September 30, 2019 and December 31, 2018, respectively. This represents an increase in gross debt of $3,236,131, of which $2,565,000 relatesfinancing fees related to the issuance of ~~the Convertible Debentures and $970,000 relates to the sale of future receivables. These increases were offset by payments on other debts during the nine months ended September 30, 2019.~~debt.
~~Subsequent Event~~
On October 16, 2019, our registration statement filed with the SEC was declared effective which the conversion of $2,565,000 of Debentures plus $92,037 in accrued interest into 1,102,513 Common Shares at $2.41 per share.
25

Inflation

Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the ~~nine-month period~~three months ended ~~September~~June 30, ~~2019.~~2020.

Critical Accounting Policies and Estimates
Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or ~~conditions.~~conditions For a detailed discussion about the Company’s significant accounting policies, refer to Note 2 — “Summary of Significant Accounting Policies,” in the Company’s consolidated financial statements included in the Company’s 2019 Form 10-K. During the six months ended June 30, 2020, there were no material changes made to the Company’s significant accounting policies.

~~Off Balance~~Off-Balance Sheet Arrangements

~~None~~We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors.
22

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are a smaller reporting company and are not required to provide the information under this Item pursuant to Regulation S-K.

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures
Disclosure Controls and Procedures - – Our management, with the participation of our Chief Executive Officer (“CEO”) and ~~Interim~~ Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the ~~Securities~~ Exchange ~~Act of 1934, as amended (the “Exchange Act”)~~Act) as of the end of the period covered by this ~~report.~~Report.

These controls are designed to ensure that information required to be disclosed in the reports we file or submit pursuant to the ~~Securities~~ Exchange Act ~~of 1934~~ is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the ~~Securities and Exchange Commission,~~SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO ~~as appropriate,~~ to allow timely decisions regarding required disclosure.

Based on this evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of ~~September~~June 30, ~~2019~~2020, at ~~the~~ reasonable assurance ~~level.~~ levels.
We believe that our financial statements presented in this Form 10-Q fairly present, in all material respects, our financial position, results of operations, and cash flows for all periods presented herein.

Inherent Limitations - – Our management, including our CEO and CFO, dodoes not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. In particular, many of our current processes rely upon manual reviews and processes to ensure that neither human error nor system weakness has resulted in erroneous reporting of financial data.

Changes in Internal Control over Financial Reporting - – There were no changes in our internal control over financial reporting during ~~the period~~our six months ended ~~September~~June 30, ~~2019,~~2020, which were identified in conjunction with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

2623

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

To the best of our management’s knowledge and belief, there are no material claims that have been brought against us nor have there been any claims threatened.

ITEM 1A. RISK FACTORS

~~We are a smaller reporting company and are not required~~There were no material changes to ~~provide~~ the ~~information under this item pursuant to Regulation S-K.~~risk factors previously disclosed in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2019.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.
We issued 1,160,833 and 1,751,633 shares of Common Stock in the three and nine months ended September 30, 2019, respectively as part of grants issued to our employees at the inception of their employment with us. We relied upon the exemption from registration provided by Section 4(a)(2) of the Securities Act to issue these shares. We did not receive any cash proceeds from the issuance of these shares.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURE

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit No. Description
3.1 Articles of Incorporation filed with the Colorado Secretary of State on March 10, 2017 (incorporated by reference to Form S-1 Registration Statement filed on May 15, 2018).
3.2 Bylaws of Registrant (incorporated by reference to Form S-1 Registration Statement filed on May 15, 2018).
3.3 Specimen Stock Certificate (incorporated by reference to Form S-1 Registration Statement filed on May 15, 2018).

31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of ~~Interim~~ Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32 Certification of Chief Executive Officer and ~~Interim~~ Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document*Document
101.SCH XBRL Schema Document*Document
101.CAL XBRL Calculation Linkbase Document*Document
101.DEF XBRL Definition Linkbase Document*Document
101.LAB XBRL Label Linkbase Document*Document
101.PRE XBRL Presentation Linkbase Document*Document
~~______________________~~
* Pursuant to Rule 406T of Regulation S-T, these interactive data files are not deemed filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act or Section 18 of the Securities Exchange Act and otherwise not subject to liability.

2724

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on ~~November 19, 2019.~~August 13, 2020.

URBAN-GRO, INC.

By: /s/ Bradley Nattrass
Bradley Nattrass,
Principal Executive Officer, a duly authorized officer

By: /s/ Richard Akright
Richard A. Akright, ~~Interim~~ Principal Financial Officer and ~~Interim~~ Principal Accounting Officer

2825

	Common Stock				Additional Paid in			Accumulated			Total Shareholders'
	Shares		Amount		Capital			Deficit			Deficit
Balance, March 31, 2020		28,709,312	$	28,709	$	12,963,050		$	(18,586,257	)	$	(5,594,498	)
Stock-based compensation		–		–		559,904			–			559,904
Stock grant program vesting		121,666		122		(122	)		–			–
Net loss for period ended June 30, 2020		–		–		–			(1,569,970	)		(1,569,970	)
Balance, June 30, 2020		28,830,978	$	28,831	$	13,522,832		$	(20,156,227	)	$	(6,604,564	)

	Common Stock						Additional Paid in			Accumulated			Total Shareholders'
	Shares			Amount			Capital			Deficit			Deficit
Balance, December 31, 2017		25,046,000		$	25,036		$	3,258,116		$	(4,644,179	)	$	(1,361,027	)
Stock based compensation		–			–			746,301			–			746,301
Claw back of stock granted		(375,000	)		(375	)		375			–			–
Payment of outstanding balance for PPM		–			–			80,000			–			80,000
Stock grant program vesting		177,000			187			(187	)		–			–
Warrants related to debt revisions		–			–			4,525			–			4,525
Net loss for period ended September 30, 2018		–			–			–			(2,128,506	)		(2,128,506	)
Balance, September 30, 2018		24,848,000		$	24,848		$	4,089,130		$	(6,772,685	)	$	(2,658,707	)

Purchase Price	$	1,025,000	$	1,000,000

Allocation of Purchase Price:
Cash	$	49,742	$	49,742
Accounts receivable, net	$	149,648	$	93,811
Goodwill	$	871,230	$	902,067
Accrued expenses	$	45,620	$	45,620

~~Computer and Technology Equipment~~		~~3 years~~
~~Furniture and Equipment~~		~~5 years~~
~~Leasehold Improvements~~		~~Lease term~~
~~Vehicles~~		~~3 years~~
~~Software~~		~~3 years~~
~~Other Equipment~~		~~3 or 5 years~~

	June 30, 2020		December 31, 2019
Investment in Edyza	$	1,710,358	$	1,710,358
Investment in TGH		–		310,000
	$	1,710,358	$	2,020,358

	September 30, 2019			December 31, 2018
Operating lease liabilities related to right of use assets.	$	265,943		$	–
Less current portion		(143,860	)		–
Long term	$	122,083		$	–

~~Grants outstanding as of December 31, 2018~~	~~1,802,667~~
~~Grants awarded~~	~~50,800~~
~~Forfeiture/Cancelled~~	~~(70,000~~	)
~~Grants vested~~	~~(1,251,633~~	)
~~Grants outstanding as of September 30, 2019~~	~~531,834~~

Grants outstanding as of December 31, 2019	412,501
Grants awarded	786,666
Forfeiture/Cancelled	(268,334	)
Grants vested	(129,166	)
Grants outstanding as of June 30, 2020	801,667

Number of	Unrecognized stock compensation		Year Ending
Shares	expense		December 31,
188,333	$	292,728	2020
513,334		215,451	2021
100,000		33,333	2022
801,667	$	541,512

	Number of Shares			Weighted Average Remaining Life (Years)		Weighted Average Exercise Price		Number of Shares		Weighted Average Remaining Life (Years)		Weighted Average Exercise Price
Stock options outstanding as of December 31, 2018		1,184,000			9.68	$	1.15
Stock options outstanding as of December 31, 2019									1,702,167		9.21	$	1.21
Issued		736,499			9.46	$	1.38		2,395,000		9.58	$	1.00
Exercised		–			–		–		–		–		–
Expired		(109,332	)		8.23	$	1.19		97,500		9.13	$	1.30
Stock options outstanding at September 30, 2019		1,811,167			9.24	$	1.23
Stock options exercisable at September 30, 2019		463,248			8.99	$	1.14
Stock options outstanding at June 30, 2020									3,999,667		9.40	$	1.06
Stock options exercisable at June 30, 2020									1,151,621		8.89	$	1.13

	Number of Shares		Weighted Average Exercise Price
Warrants outstanding as of December 31, 2018		6,000	$	1.00
Warrants issued in connection with convertible debenture offering (see Note 10):
Issued to convertible debenture holders		532,134	$	3.00
Issued to 4Front as part of compensation		153,900	$	2.41
Warrants exercised		–		–
Warrants expired		–		–
Warrants outstanding as of September 30, 2019		692,034	$	2.88

	Number of shares		Weighted Average Exercise Price
Warrants outstanding as of December 31, 2019		692,034	$	2.88
Issued in conjunction with debt		124,481	$	2.41
Warrants outstanding as of June 30, 2020		816,515	$	2.81
Warrants exercisable as of June 30, 2020		816,515	$	2.81

Exhibit No.		Description

3.1		Articles of Incorporation filed with the Colorado Secretary of State on March 10, 2017 (incorporated by reference to Form S-1 Registration Statement filed on May 15, 2018).

3.2		Bylaws of Registrant (incorporated by reference to Form S-1 Registration Statement filed on May 15, 2018).

3.3		Specimen Stock Certificate (incorporated by reference to Form S-1 Registration Statement filed on May 15, 2018).

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of ~~Interim~~ Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certification of Chief Executive Officer and ~~Interim~~ Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


101.INS		XBRL Instance Document*Document

101.SCH		XBRL Schema Document*Document

101.CAL		XBRL Calculation Linkbase Document*Document

101.DEF		XBRL Definition Linkbase Document*Document

101.LAB		XBRL Label Linkbase Document*Document

101.PRE		XBRL Presentation Linkbase Document*Document

	URBAN-GRO, INC.


	By:	/s/ Bradley Nattrass
		Bradley Nattrass,
		Principal Executive Officer, a duly authorized officer


	By:	/s/ Richard Akright
		Richard A. Akright, ~~Interim~~ Principal Financial Officer and ~~Interim~~ Principal Accounting Officer

Number of Shares

Period Ending
December 31,