See accompanying notes to condensed consolidated financial statements

urban-gro, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (Continued)

(unaudited)

See accompanying notes to condensed consolidated financial statements

urban-gro, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements

urban-gro, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

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

See accompanying notes to unaudited condensed consolidated financial statements

urban-gro, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 – ORGANIZATION AND ACQUISITIONS, LIQUIDITYBUSINESS PLAN, AND GOING CONCERNLIQUIDITY

Organization and Acquisitions

urban-gro, Inc. (“we,” “us,” our”“our,” the “Company,” or the “Company”“urban-gro”) is a leading engineering and design services company that integratesfocused on the sustainable commercial indoor horticulture market. We engineer and design indoor controlled environment agriculture (“CEA”) facilities and then integrate complex environmental equipment systems tointo those facilities. Through this work, we create high performancehigh-performance indoor cultivation facilities for the global commercial horticulture market.our clients to grow specialty crops, including leafy greens, vegetables, herbs, and plant-based medicines. Our custom tailored, plant-centriccustom-tailored approach to design, procurement, and equipment integration provides a single point of accountability across all aspects of indoor cultivationgrowing operations. Our solution offers functionalityWe also help our clients achieve operational efficiency and economic advantages through a full spectrum of professional services and programs focused on facility optimization and environmental health which establish facilities that helps customersallow clients to manage, operate and perform at the highest level throughout their entire cultivation lifecycle once they are up and running.

We aim to work with our clients from facilityinception of their project in a way that provides value throughout the life of their facility. We are a trusted partner and advisor to our clients and offer a complete set of engineering and design to operation and day-to-day management. We offermanaged services complemented by 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 services and Integrated Pest Management (“IPM”) planning and strategy services. Complementing these services, we work with customers to source an integratedvetted 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) light emitting diode (“LED”), high-pressure sodium (“HPS”) and ceramic metal halide (“CMH”) lighting systems; (4) rolltop, multi-tier, and automated container benching systems; (5) odor mitigation & microbial reduction systems; (6) air flow systems; (7) industrial spray applicators; (8) pesticides and bio-controls; (9) plant nutrition products; (10) substrate and coco bag solutions; and (11) our Soleil® technology data analytics platform that includes wireless environmental & substrate sensing and remote monitoring and support.systems.

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

Effective March 7, 2019, the Company acquired 100% of theThese consolidated financial statements are presented in United States dollars and have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). On December 31, 2020, we effected a 1-for-6 reverse stock of Impact Engineering, Inc. (d/b/a Grow2Guys) (“Impact”), a provider of mechanical electricalsplit with respect to our common stock. All share and plumbing (“MEP”) engineering services predominantly focused on the cannabis industry. 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 information in these consolidated financial statements gives effect to effect the acquisition of Impact. The Company has initially accounted for the acquisition of Impact as follows:this reverse stock split, including restating prior period reported amounts.

Liquidity and Going Concern

Since inception,The accompanying consolidated financial statements have been prepared assuming that 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 June 30, 2020, the Company had an accumulated deficit of $20,156,227, a working capital deficit of $8,539,859, and negative stockholders’ equity of $6,604,564. These facts and conditions raise substantial doubt about the Company’s ability towill continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date 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.

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 ability to continue as a going concern within one year after the date that the financial statements are issued.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Condensed Consolidated Financial Statements

The Company has prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the SEC for condensed financial reporting. The condensed consolidated financial statements are unaudited and, in the Company’s opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of the Company’s condensed consolidated balance sheets, condensed consolidated statements of operations and comprehensive income (loss), condensed consolidated statements of shareholders’ deficit and condensed consolidated statements of cash flows for the periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”)GAAP have been omitted in accordance with regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2020.

Significant Accounting Policies

For a detailed discussion about the Company’s significant accounting policies, refer to Note 2 — “Summary of Significant Accounting Policies,” in the Company’s consolidated financial statements included in the Company’s 20192020 Form 10-K. During the sixthree months ended June 30, 2020,March 31, 2021, there were no material changes made to the Company’s significant accounting policies.

Use of Estimates

In preparing condensed consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of assets and liabilities at the date of the condensed consolidated financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates. Significant estimates include estimated useful lives and potential impairment of long-lived assets and goodwill, inventory write offs, allowance for deferred tax assets, and allowance for bad debt.

Reclassification

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

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"(“ASU”). Unless otherwise discussed, the Company believes that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on the Company’s financial statements upon adoption.

NOTE 3 – RELATED PARTY TRANSACTIONS

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 $0 and $4,728 for the six months ended June 30, 2020 and 2019, respectively, and $0 and $2,296 for the three months ended June 30, 2020 and 2019, respectively. There were no outstanding receivables from Bravo and Enviro-Glo as of June 30, 2020 and December 31, 2019. Net outstanding payables incurred for purchases of inventory and other services to Bravo and Enviro-Glo as of June 30, 2020 and December 31, 2019 were $0 and $8,570, 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 $0 and $15,322 during the six months ended June 30, 2020 and 2019, respectively, and $0 and $469 during the three months ended June 30, 2020 and 2019, respectively. Cloud 9 alsoshareholder, purchases materials from the Company for use with their customers.Company. Total sales to Cloud 9 from the Company were $247,157$14,006 and $196,600 during the six months ended June 30, 2020 and 2019, respectively, and were $114,285 and $96,615$132,872 during the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively. Outstanding receivables from Cloud 9 as of June 30, 2020March 31, 2021 and December 31, 20192020 totaled $64,348$4,263 and $49,659, respectively. Net outstanding payables for purchases of inventory and other services from Cloud 9 as of June 30, 2020 and December 31, 2019 were $0 and $16,402,$61,678, respectively.

In October 2018, the Company receivedwe issued a $1,000,000 unsecured interest only, promissory note (the “Promissory Note”) frompayable to Cloud 9. The Promissory Note was9, an entity owned by James Lowe, a director of the Company, which originally became due April 30, 2019.2019 (the “James Lowe Note”). The PromissoryJames Lowe Note iswas personally guaranteed by the Company’s largest shareholders, Bradley Nattrass, who is the Company’s Chairman andour Chief Executive Officer, and Octavio Gutierrez,Gutierrez. The loan had a former officerone-time origination fee of $12,500. Interest accrued at the rate of 12% per annum and director of the Company. The Promissory Note includeswas paid monthly. As additional consideration for the James Lowe Note, we granted Mr. Lowe (as designee of 30,000 optionsCloud9 Support) an option to purchase 5,000 shares of our common stock at an exercise price of $1.20$7.20 per share. Under the initial termsshare, which option is exercisable for a period of the Promissory Note, the interest rate was 12.0% per year with interest payable monthly. In May 2019, thefive years. The due date offor the PromissoryJames Lowe Note was extended in May 2019 to December 31, 2019 and the interest rate was decreased to 9.0%9% per year payable monthly.year. In connection withconsideration for Cloud9 Support extending the executionmaturity date of the Credit Agreement (see Note 9 – Debt) onnote and reducing the interest rate, we issued 1,667 shares of our common stock to Mr. Lowe (as designee of Cloud9 Support).

On February 21, 2020, the Companywe entered into an agreement to amend the PromissoryJames Lowe Note (the “Amending Agreement”). Pursuant to the Amending Agreement, Cloud 9 agreed to extend the maturity date of the Promissory Notetherein from December 31, 2019 to the date which is the earlier of 60 days following the date: (a) on which demand for repayment is made by the Lenderlenders under the Credit Agreement;Agreement, as described in Note 9, (which is now only applicable in the case of an event of default under the Credit Agreement because of the removal of the demand feature pursuant to the First Amendment to the Credit Agreement); or (b) which is the Maturity Date ofmaturity date under the Credit Agreement.

In addition, on February 25, 2020, the Company entered into a subordination, postponement and standstill agreement with Cloud9 Support (the “Subordination Agreement”) pursuant to which Cloud 9 Support agreed to postpone and subordinate all payments due under the promissory note until the facilities under the Credit Agreement have been fully and finally repaid. The term for the Subordination Agreement will continue in force as long as the Company is indebted to the agent or lenders under the Credit Agreement. As partIn consideration for Cloud9 Support’s agreement to extend the maturity date of the Amendingpromissory note and to enter into the Subordination Agreement, the Companywe issued 100,00016,667 shares of Common Stockcommon stock to JamesMr. Lowe as(as designee of Cloud 9.9 Support).

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

NOTE 4 – PREPAYMENTS AND OTHER ASSETS

Prepayments and other assets are comprised of prepayments paid to vendors to initiate orders and prepaid services and fees. The prepaid balances are summarized as follows:

NOTE 5 – INVESTMENTS

The components of investments are summarized as follows: 

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 remaininghas a strategic investment in TGHEdyza, Inc. (“Edyza”), a hardware and software technology company that enables dense sensor networks in considerationagriculture, healthcare, and other environments that require precise micro-climate monitoring. The Company measures this investment at cost, less any impairment changes resulting from observable price changes in orderly transactions for 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 termsan identical or similar investment of the agreement, the Company retains its ownership interest in TGH until the $200,000 short-term note is repaid. Assame issuer. The balance as of the date of this report, TGH has not made any payments on the short-term noteMarch 31, 2021 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,December 31, 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.was $1,710,358.

NOTE 6 – GOODWILL

The Company recorded goodwill in conjunction with the initial acquisition of Impact Engineering, Inc. (“Impact”) on March 7, 2019. The goodwill balance as of June 30, 2020March 31, 2021 and December 31, 2019 was2020 is $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 periods ended June 30, 2020March 31, 2021 and 2019.2020.

NOTE 7 – ACCRUED EXPENSES

Accrued expenses are summarized as follows:

Accrued sales tax payable is comprised of prior period sales tax payableamounts due to various states and Canadian provinces for 2015 through 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.

NOTE 8 – NOTES PAYABLE

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

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

NOTE 9 – DEBT

The Company's totalCompany’s borrowings as of June 30, 2020March 31, 2021 and December 31, 20192020 consisted of the following:

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 iswas denominated in Canadian dollars (C$), iswas 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 maycould 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 “Facilities”). The Credit Agreement willwas personally guaranteed by the Company’s CEO and Chairman, Brad Nattrass, and was to be in place for the original term of the Credit Agreement (1 year) plus a 1-year extension period at the discretion of the Lender as provided in the Credit Agreement.

The final maturity date of the Facilities will bewas initially stipulated in the Credit Agreement as the earlier of (i) demand, and (ii) the date that is 12 months after the closing date, with a potential extension to the date that is 24 months after the closing date (the “Maturity“Initial Maturity Date”). The Facilities will bearbore 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).annum. Accrued interest on the outstanding principal amount of the Facilities will bewas due and payable monthly in arrears, on the last business day of each month, and on the Initial Maturity Date.

The Revolving Facility maycould initially be borrowed and re-borrowed on a revolving basis by the Company during the term of the Facilities, provided that borrowings under the Revolving Facility will bewere 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 maycould be prepaid in part or in full without a penalty at any time during the term of the Facilities, and the Term Loan maycould be prepaid in full or in part without penalty subject to 60 days prior notice in each case subject to certain customary conditions.

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

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

The Company incurred $1,222,323$1,314,868 of debt issuance costs in connection with these Facilities, of which $676,822 was non-cash in the form of common stockCommon 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.Common Stock at the valuation measurement date of $6.00, the remaining contractual terms of the warrants of 5 years, risk free interest rate of 1.14% an expected volatility of the price of the underlying Common Stock of 100%. The Company recorded the debt issuance costs as either a deferred financing asset or a direct reduction of the loan obligation based on the pro-rata value of the Revolving Facility and Term Loan, respectively, on the closing date. The debt issuance costs arewere being amortized as interest expense over a periodthe life of 24 months based on management’s assessment that it is more likely than not thatthe Facilities, until the Revised Maturity Date. On February 17, 2021, the Company repaid all amounts outstanding under the Credit Agreement will be in place for a total periodand expensed the remaining unamortized debt issuance costs as loss on extinguishment of 24 months.debt. As of June 30,December 31, 2020, there were $679,069$504,644 and $339,534$252,322 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.

NOTE 10 – UNIT OFFERING

Effective January 9, 2019, the Company executed a letter agreement with an exclusive placement agent in connection with a private placement offering. Beginning in March 2019, 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 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, 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. As of June 30, 2020, no warrants had been exercised.

NOTE 1110 – RISKS AND UNCERTAINTIES

Concentration Risk

During the sixthree months ended June 30,March 31, 2021 and 2020, one client represented 31% and another client represented 26% of total revenue, respectively. At March 31, 2021 one client represented 18% and another represented 16% of the Company’s total purchases were fromoutstanding accounts receivable. At December 31, 2020, one vendor. client represented 23% and another represented 17% of total outstanding accounts receivable.

During the sixthree months ended June 30, 2019, 12%March 31, 2021, 18% of the Company’s total purchases were from one vendor. During the three months ended June 30,March 31, 2020, 22%one vendor composed 21% and another vendor composed 15% of the Company’s total purchases were from one vendor. During the three months ended June 30, 2019, 10% of the Company’s total purchases were from one vendor.purchases.

During the six months ended 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 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, theThe 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 beand its disruptions are of an unknown duration, andthey 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.

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 1211 – STOCK BASEDSTOCK-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 basedStock-based compensation expense for the three months ended June 30,March 31, 2021 and 2020 was $290,805 and 2019 was $559,504 and $508,440,$432,645, respectively, based on the vesting schedule of the stock grants and options. No cash flow effects are anticipated for stock grants.

In January 2017,Stock Grants:

The following table shows stock grant activity for the three months ended March 31, 2021:

As of March 31, 2021, the Company began grantinghas $329,448 in unrecognized share-based compensation expense related to these 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.grants.

In January 2018,Stock Options:

The following table shows stock option activity for 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.  three months ended March 31, 2021:

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,$6.00, the remaining contractual term of the options of 105 years, risk-free interest rate of 2.75%0.36% and expected volatility of the price of the underlying common stock of 100%.

In May 2019,As of March 31, 2021, the Company adopted a new equity incentive plan, authorizing anhas $673,086 in unrecognized share-based compensation expense related to these stock options. The 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 theintrinsic value of the options with the Black Scholes option pricing model as the assumptions used are moderately judgmental. Stock optionsoutstanding and stock grants are sometimes offered as part of an employment offer package, to ensure continuity of service or as a reward for performance.exercisable at March 31, 2021 is $0.

Stock Grants:

The following table shows stock grant activity for the six months ended June 30, 2020:

The following table summarizes stock grant vesting periods:

Stock Options:

The following table shows stock option activity for the six months ended June 30, 2020:

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

NOTE 1312 – SHAREHOLDERS’ EQUITY

In March 2020, an executive left the Company and returned 100,00016,667 common shares as part of the related separation agreement. The Company retired the shares and reduced its issued and outstanding stock by 100,00016,667 shares.

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

NOTE 1413 – WARRANTS

Warrants are immediately exercisable upon issuance. The following table shows warrant activity for the sixthree months ended June 30, 2020.March 31, 2021.

The fair value of the warrants is calculated using the Black-Scholes pricing model based on the market value of the underlying common stock at the valuation measurement date $10.00, the remaining contractual term of the options of 5 years, risk-free interest rate of 0.57% and expected volatility of the price of the underlying common stock of 100%.

The weighted-average life of the warrants is 1.62.4 years. The aggregate intrinsic value of the warrants outstanding and exercisable at June 30, 2020March 31, 2021 is $0.

NOTE 1514 – SUBSEQUENT EVENTS

Management has assessed and determined that no significant subsequent events are to be disclosed according to ASC 855.

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

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

Overview and History

urban-gro, Inc. (“we,” “us,” “our,” the “Company,” or “urban-gro”) is a leading engineering design and services company that integratesfocused on the commercial indoor horticulture market. We engineer and design indoor controlled environment agriculture (“CEA”) facilities and then integrate complex environmental equipment systems tointo those facilities. Through this work, we create high-performance indoor cultivation facilities for the global commercial horticulture market.our clients to grow specialty crops, including leafy greens, vegetables, herbs, and plant-based medicines like cannabis and hemp. Our custom tailored, plant-centriccustom-tailored approach to design, procurement, and equipment integration provides a single point of accountability across all aspects of indoor growing operations. Our solution offers functionality that helps customersWe also help our clients achieve operational efficiency and economic advantages through a full spectrum of professional services and programs focused on facility optimization and environmental health which allows clients to manage thetheir entire cultivation lifecycle, establishing facilities that operate and perform at the highest level.

We aim to work with our clients for the life of their facility – providing value to them from inception through ongoing facility operation. We are a trusted partner and advisor to our clients and offer a complete set of engineering and design to operation and day-to-day management. We offermanaged services complemented by 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 programming, engineering and design services, start-up facility and equipment commissioning services, facility optimization services and Integrated Pest Management (“IPM”) planning and strategy services. Complementing these services, we work with customers to source an integratedvetted 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)systems. Outlined below is an example of a complete project with estimated time frames for each phase that demonstrate how we provide value to our Soleil® technology data analytics platform that includes wireless environmental & substrate sensing and remote monitoring and support.clients for the life of their facility.

Although the rapidly expanding cannabis market has been our target market and substantially all of our revenues to date have been generated from customers in the cannabis industry, we are seeking to diversify our customer base by expanding into other segments of the indoor horticultural market, including targeting cultivators of high value crops 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.

RECENT DEVELOPMENTS

COVID-19 Pandemic

In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. In January 2020, this coronavirus spread to other countries, including the United States, and efforts to 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 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 respect of COVID-19 may result in a period of business disruption, reduced customer business and reduced operations.

Due to the uncertainty and adverse impact on our operations and financial condition resulting from the outbreak of COVID-19, we took the following actions:

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

The ultimate magnitudemajority of COVID-19, includingour clients are commercial CEA cultivators. We believe one of the extentkey points of its impactour differentiation that our clients value is the depth of experience of our employees and our Company. We currently employ 49 individuals. Approximately two-thirds of our employees are considered experts in their areas of focus, and our team includes Engineers (Mechanical, Electrical, Plumbing, Controls, and Agricultural), Professional Engineers, horticulturalists and individuals with Masters Degrees in Plant Science and Business Administration. As a company, we have worked on more than 300 indoor CEA facilities, and believe that the experience of our financialteam and Company provide clients with the confidence that we will proactively keep them from making common costly mistakes during the build out and operational results, which could be material, will depend on the length ofstages. Our expertise translates into clients saving time, money, and resources, and provides them ongoing access to expertise that the pandemic continues, its effect on the demand for our products and our supply chain, the effect of governmental regulations imposedthey can leverage without having to add headcount to their own operations. We provide this experience in responseaddition to the pandemic, as well as uncertainty regarding alloffering a platform 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 onhighest quality equipment systems that can be integrated holistically into 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.clients’ facilities.

Results Of Operations

During the sixthree months ended June 30, 2020,March 31, 2021, we generated revenues of $8.3$12.0 million compared to revenues of $11.5$4.2 million during the sixthree months ended June 30, 2019, a decreaseMarch 31, 2020, an increase of $3.2$7.8 million, or 28%182%. This decrease was comprised of a $1.9Equipment systems revenue increased $8.0 million decreaseprimarily due to an increase in cultivation equipment sales, a $1.2services revenue decreased $0.1 million decrease in complex equipment systemsand consumable product 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.decreased $0.1 million.

During the sixthree months ended June 30, 2020,March 31, 2021, cost of revenues was $6.0$9.4 million compared to $7.9$3.1 million during the sixthree months ended June 30, 2019, a decreaseMarch 31, 2020, an increase of $1.9$6.3 million, or 24%198%. This decrease wasincrease is directly relatedattributable to the decreaseincrease in revenue.revenues indicated above.

Gross profit was $2.3$2.6 million (28%(22% of revenue)revenues) during the sixthree months ended June 30, 2020March 31, 2021 compared to $3.6 million (31%$1.1million (26% of revenue)revenues) during the sixthree months ended June 30, 2019.March 31, 2020. Gross profit as a percentage of revenuerevenues decreased due to a reduction in higher margin equipment salesrevenue mix shift in the current period when compared to the same period of the prior year.favoring equipment systems revenues versus services and consumables revenues.

Operating expenses decreased by $1.6 million, or 26%, to $4.6remained constant at $2.5 million for the sixthree months ended June 30, 2020March 31, 2021 compared to $6.3 million for the sixthree months ended June 30, 2019. The decrease in operating expensesMarch 31, 2020. This was compriseddue to the offsetting effects of a $1.2$0.1 million reduction in stock-based compensation expense and a $0.1 million increase in general operating expenses, mainly due to reducedan increase in salary and travel expenses, a $0.3 million reduction of marketing related expenses, and a $0.1 million reduction in stock-based compensation expense.expenses.

Non-operating expenses increased $0.7$1.4 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.

As a result of the above, we 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 three months ended June 30, 2020 and 2019

During the three months ended June 30, 2020, we generated revenues of $4.0 million compared to revenues of $5.6 million during the 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 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 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 24 new engineering design project contracts in the three-month period ended June 30, 2020, including 2 new projects in Europe, and secured our first horticulture commissioning project, an East Coast based lettuce facility.

During the three months ended June 30, 2020, cost of revenues was $2.8 million compared to $3.8 million during the three months ended June 30, 2019, a decrease of $1.0 million, or 26%. This change was directly related to the decrease in revenue.

Gross profit was $1.2 million (30% of revenue) during the three months ended June 30, 2020 compared to $1.8 million (33% of revenue) during the three months ended June 30, 2019. Gross profit as a percentage of revenue decreased due to 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 $1.0 million, or 32%, to $2.1$1.7 million for the three months ended June 30, 2020March 31, 2021, compared to $3.1$0.3 million for the three months ended June 30, 2019.March 31, 2020. The decrease in operating expenses was comprisedCompany incurred a $0.8 million loss on the extinguishment of a $0.9 million reduction in general operating expenses, mainly due to reduced salary and travel expensesdebt and a $0.2$0.6 million reduction of marketingexpense related expenses, partially offset by an increase of $0.1 million in stock-based compensation expense due to the timingconversion of vesting of stock options.

Non-operating expenses increased $0.5 milliondebt to $0.6 millionequity at a discount to the offering price 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 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.March 31, 2021.

As a result of the above, we incurred a net loss of $1.6 million for the three months ended June 30, 2020, ($0.05)March 31, 2021, or a loss per share of $0.20, compared to a net loss of $1.4$1.7 million for the three months ended June 30, 2019, ($0.06)March 31, 2020 or a loss per share.share of $0.36.

NON-GAAP FINANCIAL MEASURES

The Company uses the supplemental financial measure of Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) as a measure of our operating performance. Adjusted EBITDA is not calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and it is not a substitute for other measures prescribed by GAAP such as net income (loss), income (loss) from operations, and cash flows from operating activities. We define Adjusted EBITDA as net income (loss) attributable to urban-gro, Inc., determined in accordance with GAAP, excluding the effects of certain operating and non-operating expenses including, but not limited to, interest expense, depreciation andof tangible assets, amortization of acquired intangible assets, impairment of investments, unrealized exchange losses, and stock-based compensation. We use Adjusted EBITDA as a measure ofcompensation expense that we do not believe reflect our core 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. We believe that Adjusted EBITDA assists us in comparing our operating performance over various reporting periods because it removes from our operating results the impact of items that our management believes do not reflect our core operating performance.

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 performance of those companies to our performance. Adjusted EBITDA should not be considered as a measure of the income generated by our business or discretionary cash available to us to invest in the growth of our business.

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