UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
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urban gro, Inc.
FORM 10-Q
For the Quarterly Period Ended June 30, 2021
INDEX
| 2 |
FORWARD LOOKING STATEMENTS
This Report on Form 10-Q (the “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. The statements regarding urban-gro, Inc. contained in this Report that are not historical in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “likely,” “expects,” “anticipates,” “estimates,” “believes” or “plans,” or comparable terminology, are forward-looking statements based on current expectations and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on our behalf. We caution readers regarding certain forward-looking statements in this Report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission (the “SEC”).
Important factors known to us that could cause such material differences are identified in this Report, including the factors described in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2020. Except as required by applicable law, we undertake no obligation to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any future disclosures we make on related subjects in future reports to the SEC.
| 3 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
urban-gro, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Related party receivable | ||||||||
| Prepayments and other assets | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right of use assets, net | ||||||||
| Investments | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Deposits | ||||||||
| Notes payable | - | |||||||
| Revolving Facility | - | |||||||
| Term Loan, net | - | |||||||
| Operating lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Notes payable | - | |||||||
| Total non-current liabilities | - | |||||||
| Total liabilities | ||||||||
| Shareholders’ equity (deficit): | ||||||||
| Preferred stock, $ par value; shares authorized; shares issued and outstanding | - | |||||||
| Common stock, $par value; shares authorized; issued and outstanding as of June 30, 2021, and shares issued and outstanding as of December 31, 2020 | ||||||||
| Additional paid in capital | ||||||||
| Treasury shares, cost basis: shares as of June 30, 2021 | ( | ) | - | |||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders’ equity (deficit) | ( | ) | ||||||
| Total liabilities and shareholders’ equity (deficit) | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements
| 4 |
urban-gro, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue | ||||||||||||||||
| Equipment systems | $ | $ | $ | $ | ||||||||||||
| Consumable products | ||||||||||||||||
| Services | ||||||||||||||||
| Total Revenue | ||||||||||||||||
| Cost of Revenue | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Stock-based compensation | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ||||||||||||
| Non-operating income (expenses): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense – beneficial conversion of notes payable | - | - | ( | ) | - | |||||||||||
| Loss on extinguishment of debt | - | - | ( | ) | - | |||||||||||
| Impairment of investment | - | ( | ) | - | ( | ) | ||||||||||
| PPP Loan Forgiveness | ||||||||||||||||
| Other income | ||||||||||||||||
| Total non-operating income (expenses) | ( | ) | ( | ) | ( | ) | ||||||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax expense (benefit) | - | - | ||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Comprehensive income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Earnings (loss) per share: | ||||||||||||||||
| Earnings (loss) per share - basic | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Earnings (loss) per share - dilutive | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Weighted average share - basic | ||||||||||||||||
| Weighted average shares - dilutive | ||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
| 5 |
urban-gro, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(unaudited)
| Common Stock | Additional Paid in | Accumulated | Treasury | Total Shareholders’ Equity | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||
| Stock issuance related to offering, net of offering costs of $ | - | ( | ) | - | - | ( | ) | |||||||||||||||||
| Common stock repurchased | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||
| Stock Options Exercised | - | - | ||||||||||||||||||||||
| Net income (loss) for period ended June 30, 2021 | - | - | - | - | ||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Common Stock | Additional Paid in | Accumulated | Total Shareholders’ Equity | |||||||||||||||||
| Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||
| Balance, March 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Stock-based compensation | – | |||||||||||||||||||
| Stock grant program vesting | ( | ) | ||||||||||||||||||
| Net income (loss) for period ended June 30, 2020 | – | ( | ) | ( | ) | |||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
| 6 |
urban-gro, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) (Continued)
(unaudited)
| Common Stock | Additional Paid in | Accumulated | Treasury | Total Shareholders’ Equity | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | (Deficit) | |||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||
| Beneficial conversion feature | - | - | - | - | ||||||||||||||||||||
| Conversion of Bridge Financing | - | - | ||||||||||||||||||||||
| Stock grant program vesting | ( | ) | - | - | - | |||||||||||||||||||
| Stock issuance related to offering, net of offering costs of $ | - | - | ||||||||||||||||||||||
| Common stock repurchased | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||
| Stock issued with exercise of warrants | - | - | ||||||||||||||||||||||
| Stock Options Exercised | - | - | ||||||||||||||||||||||
| Net income (loss) for period ended June 30, 2021 | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Common Stock | Additional Paid in | Accumulated | Total Shareholders’ Equity | |||||||||||||||||
| Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Stock-based compensation | – | |||||||||||||||||||
| Clawback of stock granted | ( | ) | ( | ) | ||||||||||||||||
| Stock grant program vesting | ( | ) | ||||||||||||||||||
| Stock issued loan revisions | ||||||||||||||||||||
| Stock issuance related to debt | ||||||||||||||||||||
| Warrant issuance related to debt | – | |||||||||||||||||||
| Net income (loss) for period ended June 30, 2020 | – | ( | ) | ( | ) | |||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
| 7 |
urban-gro, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss from operations: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of deferred financing costs | ||||||||
| Loss on extinguishment of debt | ||||||||
| Interest on convertible notes | ||||||||
| Stock-based compensation expense | ||||||||
| Beneficial conversion of Bridge notes | - | |||||||
| Impairment of investment | - | |||||||
| Gain on disposal of assets | - | |||||||
| Inventory write-offs | ||||||||
| Bad debt expense | ||||||||
| PPP loan forgiveness | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepayments and other assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Deposits | ||||||||
| Net Cash Provided By (Used In) Operating Activities | ( | ) | ||||||
| Cash Flows from Investing Activities | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net Cash Used In Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from issuance of Revolving Facility | - | |||||||
| Proceeds from issuance of Term Loan | - | |||||||
| Proceeds from Revolving Facility advances | - | |||||||
| Repurchase of Common Stock | ( | ) | ||||||
| Proceeds from issuance of Common Stock, net of offering costs | ||||||||
| Long-term note payable | - | |||||||
| Debt financing costs | - | ( | ) | |||||
| Repayment of debt | ( | ) | ( | ) | ||||
| Net Cash Provided by Financing Activities | ||||||||
| Net Increase in Cash | ( | ) | ||||||
| Cash at Beginning of Period | ||||||||
| Cash at End of Period | $ | $ | ||||||
| Supplemental Cash Flow Information: | ||||||||
| Interest Paid | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Debt financing costs booked in equity | $ | $ | ||||||
| PPP Loan Forgiveness | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements
| 8 |
urban-gro, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – GENERAL
Organization
urban-gro, Inc. (“we,” “us,” “our,” the “Company,” or “urban-gro”) is a leading architectural, engineering and design services company focused on the sustainable commercial indoor horticulture market. We engineer and design indoor controlled environment agriculture (“CEA”) facilities and then integrate complex environmental equipment systems into those facilities. Through this work, we create high-performance indoor cultivation facilities for our clients to grow specialty crops, including leafy greens, vegetables, herbs, and plant-based medicines. Our custom-tailored approach to design, procurement, and equipment integration provides a single point of accountability across all aspects of indoor growing operations. We also help our clients achieve operational efficiency and economic advantages through a full spectrum of professional services and programs focused on facility optimization and environmental health which establish facilities that allow clients to manage, operate and perform at the highest level throughout their entire cultivation lifecycle once they are up and running.
We aim to work with our clients from inception of their project in a way that provides value throughout the life of their facility. We are a trusted partner and advisor to our clients and offer a complete set of engineering and managed services complemented by a vetted suite of select cultivation equipment systems.
Basis of Presentation
These
consolidated financial statements are presented in United States dollars and have been prepared in accordance with United States generally
accepted accounting principles (“GAAP”). On December 31, 2020, we effected a
Liquidity and Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements are available to be issued.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Condensed Consolidated Financial Statements
The Company has prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the SEC for condensed financial reporting. The condensed consolidated financial statements are unaudited and, in the Company’s opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of the Company’s condensed consolidated balance sheets, condensed consolidated statements of operations and comprehensive income (loss), condensed consolidated statements of shareholders’ deficit and condensed consolidated statements of cash flows for the periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Significant Accounting Policies
For a detailed discussion about the Company’s significant accounting policies, refer to Note 2 — “Summary of Significant Accounting Policies,” in the Company’s consolidated financial statements included in the Company’s 2020 Form 10-K. During the six months ended June 30, 2021, there were no material changes made to the Company’s significant accounting policies.
| 9 |
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”). Unless otherwise discussed, the Company believes that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on the Company’s financial statements upon adoption.
NOTE 3 – RELATED PARTY TRANSACTIONS
Cloud
9 Support, LLC (“Cloud 9”), a company owned by James Lowe, a director and shareholder, purchases materials from the Company.
Total sales to Cloud 9 from the Company were $
In
October 2018, we issued a $
On February 21, 2020, we entered into an agreement to amend the James Lowe Note to extend the maturity date therein from December 31, 2019 to the date which is the earlier of 60 days following the date: (a) on which demand for repayment is made by the lenders under the Credit Agreement, as described in Note 9, (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 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. In consideration for Cloud9 Support’s agreement to extend the maturity date of the promissory note and to enter into the Subordination Agreement, we issued shares of common stock to Mr. Lowe (as designee of Cloud 9 Support).
On
December 15, 2020, James Lowe agreed to convert the $
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:
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Vendor prepayments | $ | $ | ||||||
| Prepaid services and fees | ||||||||
| Deferred financing asset (See Note 9 - Debt) | - | |||||||
| Prepayments and other assets | $ | $ | ||||||
| 10 |
NOTE 5 – INVESTMENTS
The
Company has a strategic investment in Edyza, Inc. (“Edyza”), a hardware and software technology company that enables dense
sensor networks in agriculture, healthcare, and other environments that require precise micro-climate monitoring. The Company measures
this investment at cost, less any impairment changes resulting from observable price changes in orderly transactions for an identical
or similar investment of the same issuer. The balance as of June 30, 2021 and December 31, 2020 was $
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, 2021
and December 31, 2020 is $
NOTE 7 – ACCRUED EXPENSES
Accrued expenses are summarized as follows:
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Accrued operating expenses | $ | $ | ||||||
| Accrued wages and related expenses | ||||||||
| Accrued interest expense | - | |||||||
| Accrued sales tax payable | ||||||||
| $ | $ | |||||||
Accrued sales tax payable is comprised of amounts due to various states and Canadian provinces for 2015 through 2020.
NOTE 8 – NOTES PAYABLE
The following is a summary of notes payable excluding related party notes payable:
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Paycheck Protection Program (“PPP”) loan entered into on April 16, 2020. The Company applied for and has been notified that the full amount of the loan, which was used for eligible expenditures for payroll and other expenses described in the CARES Act was forgiven on June 11, 2021. | $ | |||||||
| Convertible notes related to bridge financing. See Bridge Financing Notes below. | ||||||||
| Total | ||||||||
| Less current maturities | ( | ) | ||||||
| Long Term | $ | $ | ||||||
During
the fourth quarter of 2020 the Company entered into bridge financing notes (the “Bridge Financing Notes”) totaling $
| 11 |
NOTE 9 – DEBT
The Company’s borrowings as of June 30, 2021 and December 31, 2020 consisted of the following:
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Revolving Facility | $ | $ | ||||||
| Term Loan, net of unamortized debt issuance costs | ||||||||
| Total | ||||||||
| Less current debt due within one year | ( | ) | ||||||
| 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”).
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
As
a result of the First Amendment, the Company was required to prepay, on or before January 31, 2021, $
The
Company incurred $
NOTE 10 – RISKS AND UNCERTAINTIES
Concentration Risk
During the six months ended June 30, 2021 one client
represented
| 12 |
During the six months ended June 30, 2021,
Coronavirus Pandemic
The outbreak of COVID-19, a novel strain of coronavirus first identified in China, which has spread across the globe including the U.S., has had an adverse impact on our operations and financial condition. The response to this coronavirus by federal, state and local governments in the U.S. has resulted in significant market and business disruptions across many industries and affecting businesses of all sizes. This pandemic has also caused significant stock market volatility and further tightened capital access for most businesses. Given that the COVID-19 pandemic and its disruptions are of an unknown duration, they could have an adverse effect on our liquidity and profitability.
The ultimate magnitude of COVID-19, including the extent of its impact on our financial and operational results, which could be material, will depend on the length of time that the pandemic continues, its effect on the demand for our products and our supply chain, the effect of governmental regulations imposed in response to the pandemic, as well as uncertainty regarding all of the foregoing. We cannot at this time predict the full impact of the COVID-19 pandemic, but it could have a larger material adverse effect on our business, financial condition, results of operations and cash flows beyond what is discussed within this Report.
Stock-based compensation expense for the six months ended June 30, 2021 and 2020 was $and $, respectively, based on the vesting schedule of the stock grants and options. Stock based compensation expense for the three months ended June 30, 2021 and 2020 was $ and $, respectively, based on the vesting schedule of the stock grants and options. No cash flow effects are anticipated for stock grants.
Stock Grants:
| Grants outstanding as of December 31, 2020 | ||||
| Grants awarded | ||||
| Grants Vested | ( |
|||
| Grants outstanding as of June 30, 2021 |
As of June 30, 2021, the Company has $ in unrecognized share-based compensation expense related to these stock grants.
Stock Options:
| Number of Shares |
Weighted Average Remaining Life (Years) |
Weighted Average Exercise Price |
||||||||||
| Stock options outstanding as of December 31, 2020 | $ | |||||||||||
| Issued | $ | |||||||||||
| Expired | ( |
$ | ||||||||||
| Exercised | ( |
- | $ | |||||||||
| Stock options outstanding at June 30, 2021 | $ | |||||||||||
| Stock options exercisable at June 30, 2021 | $ | |||||||||||
The fair value of the options is calculated using the Black-Scholes pricing model based on the market value of the underlying common stock at the valuation measurement date of $ the remaining contractual term of the options of years, risk-free interest rate of and expected volatility of the price of the underlying common stock of .
As of June 30, 2021, the Company has $ in unrecognized share-based compensation expense related to these stock options. The aggregate intrinsic value of the options outstanding and exercisable at June 30, 2021 is $.
NOTE 12 – SHAREHOLDERS’ EQUITY
In March 2020, an executive left the Company and returned common shares as part of the related separation agreement. The Company retired the shares and reduced its issued and outstanding stock by shares.
| 13 |
On
February 17, 2021, we completed an offering of shares of our common stock, inclusive of the
underwriters full overallotment, at $
per share for total gross offering proceeds of $
On May 24, 2021, we announced that the Board of
Directors authorized a stock repurchase program to purchase up to $
NOTE 13 – WARRANTS
The following table shows warrant activity for the six months ended June 30, 2021.
| Number of shares | Weighted Average Exercise Price | |||||||
| Warrants outstanding as of December 31, 2020 | $ | |||||||
| Exercised | ( | ) | $ | |||||
| Issued in connection with equity offering | $ | |||||||
| Expired | ( | ) | $ | |||||
| Warrants outstanding as of June 30, 2021 | $ | |||||||
| Warrants exercisable as of June 30, 2021 | $ | |||||||
The fair value of the warrants issued
in connection with the equity offering were calculated using the Black-Scholes pricing model based on the market value of the underlying
common stock at the valuation measurement date of $,
the remaining contractual term of the options of
The weighted-average life of the warrants
is
NOTE 14 – SUBSEQUENT EVENTS
The Company has evaluated events and transaction occurring subsequent to June 30, 2021 up to the date of this filing of these condensed consolidated financial statements. These statements contain all necessary adjustments and disclosures resulting from that evaluation.
On July 30, 2021, the Company announced
that it had completed the acquisitions of 2WR of Colorado, Inc., a Colorado corporation, 2WR of Georgia, Inc., a Georgia corporation,
and MJ12 Design Studio, Inc., a Colorado corporation (“ the 2WR Entities”), and had entered into an affiliate relationship
with 2WR of Mississippi, P.C., a Mississippi professional corporation, agreements that were initially announced on June 28,
2021. The acquisitions of the 2WR Entities were for a total purchase price of up to $
| 14 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein. See also “Forward Looking Statements” on page 3 of this Report.
Overview and History
urban-gro, Inc. (“we,” “us,” “our,” the “Company,” or “urban-gro”) is a leading architectural, engineering and design services company focused on the sustainable commercial indoor horticulture market. We engineer and design indoor controlled environment agriculture (“CEA”) facilities and then integrate complex environmental equipment systems into those facilities. Through this work, we create high-performance indoor cultivation facilities for our clients to grow specialty crops, including leafy greens, vegetables, herbs, and plant-based medicines. Our custom-tailored approach to design, procurement, and equipment integration provides a single point of accountability across all aspects of indoor growing operations. We also help our clients achieve operational efficiency and economic advantages through a full spectrum of professional services and programs focused on facility optimization and environmental health which establish facilities that allow clients to manage, operate and perform at the highest level throughout their entire cultivation lifecycle once they are up and running.
We aim to work with our clients from inception of their project in a way that provides value throughout the life of their facility. We are a trusted partner and advisor to our clients and offer a complete set of engineering and managed services complemented by a vetted suite of select cultivation equipment systems. Outlined below is an example of a complete project with estimated time frames for each phase that demonstrate how we provide value to our clients for the life of their facility.
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Our indoor commercial cultivation solution offers an integrated suite of services and equipment systems that generally fall within the following categories:
| ● | Service Solutions: |
| ● | Architecture, Engineering Design Services – A comprehensive triad of services including: |
| i. | Architecture | |
| ii. | Cultivation Space Programming (“CSP”) |
| iii. | Integrated Cultivation Design (“ICD”) |
| iv. | Full-Facility Mechanical, Electrical, and Plumbing (“MEP”) |
| ● | gro-care® - A recurring revenue subscription-based managed service offering including: |
| i. | Remote Monitoring, Reporting, Support, and Training Services |
| ii. | Facility and Equipment Commissioning & Audit Services |
| iii. | Environmental Sciences Groups’ (“ESG”) Compliance and Program Services |
| ● | Integrated Equipment Solutions: |
| ● | Design, Source, and Integration of Complex Environmental Equipment Systems Including Purpose-Built Heating, Ventilation, and Air Conditioning (“HVAC”) solutions, Environmental Controls, Fertigation, and Irrigation Distribution. |
| ● | Value-Added Reselling (“VAR”) of Cultivation Equipment including a Complete line of Lighting, Fans and Rolling Benching Systems |
| ● | Strategic Vendor Relationships with Premier Manufacturers |
The majority of our clients are commercial CEA cultivators. We believe one of the key points of our differentiation that our clients value is the depth of experience of our employees and our Company. We currently employ 75 individuals. Approximately two-thirds of our employees are considered experts in their areas of focus, and our team includes Architects, Engineers (Mechanical, Electrical, Plumbing, Controls, and Agricultural), Professional Engineers, horticulturalists and individuals with Masters Degrees in Plant Science and Business Administration. As a company, we have worked on more than 450 indoor CEA facilities, and believe that the experience of our team and Company provide clients with the confidence that we will proactively keep them from making common costly mistakes during the build out and operational stages. Our expertise translates into clients saving time, money, and resources, and provides them ongoing access to expertise that they can leverage without having to add headcount to their own operations. We provide this experience in addition to offering a platform of the highest quality equipment systems that can be integrated holistically into our clients’ facilities.
Results Of Operations
Comparison of Results of Operations for the three months ended June 30, 2021 and 2020
During the three months ended June 30, 2021, we generated revenues of $12.8 million compared to revenues of $4.0 million during the three months ended June 30, 2020, an increase of $8.8 million, or 220%. Equipment systems revenue increased $9.1 million primarily due to an increase in cultivation equipment sales, services revenue decreased $0.3 million and consumable product sales increased $0.1 million.
During the three months ended June 30, 2021, cost of revenues was $9.9 million compared to $2.8 million during the three months ended June 30, 2020, an increase of $7.1 million, or 252%. This increase is directly attributable to the increase in revenues indicated above.
Gross profit was $2.9 million (23% of revenues) during the three months ended June 30, 2021 compared to $1.2 million (30% of revenue) during the three months ended June 30, 2020. Gross profit as a percentage of revenues decreased due to a significant increase in lower margin equipment systems revenues for the comparable periods.
Operating expenses increased $0.6 million to $2.7 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. This was due to the offsetting effects of a $0.8 million increase in general operating expenses, mainly due to an increase in salary and travel expenses and a $0.3 million reduction in stock-based compensation expense.
Non-operating income was $1.0 million for the three months ended June 30, 2021, compared to non-operating expenses of $0.6 million for the three months ended June 30, 2020. The Company recorded a $1.0 million gain from the PPP loan forgiveness in the three months ended June 30, 2021. For the three months ended June 30, 2020, the company incurred interest expense of $0.4 million and recorded an impairment loss of $0.3 million.
As a result of the above, we incurred net income of $1.3 million for the three months ended June 30, 2021, or a gain per share of $0.11, compared to a net loss of $1.6 million for the three months ended June 30, 2020 or a loss per share of ($0.33).
Comparison of Results of Operations for the six months ended June 30, 2021 and 2020
During the six months ended June 30, 2021, we generated revenues of $24.9 million compared to revenues of $8.2 million during the six months ended June 30, 2020, an increase of $16.7 million, or 201%. Equipment systems revenue increased $16.9 million primarily due to an increase in cultivation equipment sales, services revenue decreased $0.5 million and consumable product sales increased $0.2 million.
During the six months ended June 30, 2021, cost of revenues was $19.3 million compared to $6.0 million during the six months ended June 30, 2020, an increase of $13.3 million, or 224%. This increase is directly attributable to the increase in revenues indicated above.
Gross profit was $5.6 million (22% of revenues) during the six months ended June 30, 2021 compared to $2.3 million (28% of revenue) during the six months ended June 30, 2020. Gross profit as a percentage of revenues decreased due to a significant increase in lower margin equipment systems revenues for the comparable periods.
Operating expenses increased $0.6 million to $5.2 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. This was due to the offsetting effects of a $0.9 million increase in general operating expenses, mainly due to an increase in salary and travel expenses, offset by a $0.4 million reduction in stock-based compensation expense.
Non-operating expense was $0.7 million for the six months ended June 30, 2021, compared to $0.9 million for the six months ended June 30, 2020. The Company incurred a $1.0 million gain from the forgiveness of the PPP loan, an $0.8 million loss on the extinguishment of debt, a $0.6 million expense related to the conversion of debt to equity at a discount to the offering price, and interest expense of $0.3 million for the six months ended June 30, 2021. For the six months ended June 30, 2020, the company incurred interest expense of $0.7 million and recorded an impairment loss of $0.3 million.
As a result of the above, we incurred net loss of $0.3 million for the six months ended June 30, 2021, or a loss per share of ($0.03), compared to a net loss of $3.3 million for the six months ended June 30, 2020 or a loss per share of ($0.69).
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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 of tangible assets, amortization of intangible assets, impairment of investments, unrealized exchange losses, debt forgiveness, and stock-based compensation expense that we do not believe reflect our core operating performance.
Our board of directors and management team focus on Adjusted EBITDA as a key performance and compensation measure. We believe that Adjusted EBITDA assists us in comparing our operating performance over various reporting periods because it removes from our operating results the impact of items that our management believes do not reflect our core operating performance.
The following table reconciles net loss attributable to the Company to Adjusted EBITDA for the periods presented:
| Three months Ended June 30, | Six months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net Income (Loss) | $ | 1,257,444 | $ | (1,569,970 | ) | $ | (331,138 | ) | $ | (3,265,601 | ) | |||||
| Interest expense | 4,624 | 365,709 | 322,067 | 664,343 | ||||||||||||
| Interest expense – BCF | – | – | 636,075 | – | ||||||||||||
| Loss on extinguishment of debt | – | – | 790,723 | – | ||||||||||||
| Stock-based compensation | 299,602 | 559,904 | 590,407 | 992,549 | ||||||||||||
| Impairment of investment | – | 310,000 | – | 310,000 | ||||||||||||
| Depreciation and amortization | 53,941 | 59,396 | 109,626 | 120,411 | ||||||||||||
| PPP Loan forgiveness | (1,032,316 | ) | - | (1,032,316 | ) | - | ||||||||||
| Adjusted EBITDA | $ | 583,295 | $ | (274,961 | ) | $ | 1,085,444 | $ | (1,178,298 | ) | ||||||
As of December 31, 2020, the Company began reporting the dollar amount of contractually committed orders for equipment systems for which revenue has not been recognized (“Backlog”). Backlog is a non-GAAP financial measure that our board of directors and management team focus on as a key performance measure. Although there can be no assurances that Backlog will be recognized as equipment systems revenue in future periods, we believe that tracking Backlog assists us in estimating the timing of future equipment systems revenue. Backlog as of June 30, 2021 was $27.9 million. This compares to Backlog of $15.2 million and $14.6 million as of March 31, 2021 and December 31, 2020, respectively.
Liquidity and Capital Resources
As of June 30, 2021, we had cash of $50.4 million, which represented an increase of $50.2 million from December 31, 2020. This increase in cash and cash equivalents is primarily due to the net proceeds received from our equity offering in February of 2021 of $58.2 million offset by $5.8 million of debt repayment and $3.5 million of treasury stock purchases during the six months ended June 30, 2021.
Net cash provided by operating activities was $1.3 million during the six months ended June 30, 2021, compared to net cash used in operating activities of $3.2 million during the six months ended June 30, 2020, an improvement of $4.5 million. This increase in cash provided by operating activities is primarily the result of an improvement in income from operations for the comparable periods with the remaining fluctuation being primarily comprised of fluctuations in operating assets and liabilities. At June 30, 2021, we had $4.5 million in client deposits related to client orders, compared to client deposits of $4.9 million as of December 31, 2020. We require prepayments from clients before any design work is commenced and before any material is ordered from the vendor. These prepayments are booked to the client deposits liability account when received. We expect client deposits to be relieved from the deposits account no longer than 12 months for each project. At June 30, 2021, we had $6.2 million of vendor prepayments compared to $3.5 million at December 31, 2020. At June 30, 2021, we had $2.3 million in accounts payable, compared to $0.7 million at December 31, 2020.
Net cash used in investing activities was $0.0 million for the six months ended June 30, 2021, compared to $0.1 million during the six months ended June 30, 2020. Historically, cash has been used to increase our investments in strategic partnerships and to acquire property and equipment. 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, 2021.
Net cash provided by financing activities was $49.0 million for the six months ended June 30, 2021, compared to $3.2 million during the six months ended June 30, 2020. Cash provided from financing activities during the six months ended June 30, 2021 primarily relates to $58.3 million in net proceeds received from the issuance of stock, offset by $5.8 million used in the repayment of notes payable and $3.5 million in treasury shares acquired.
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 three months ended June 30, 2021.
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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 For a detailed discussion about the Company’s significant accounting policies, refer to Note 2 — “Summary of Significant Accounting Policies,” in the Company’s consolidated financial statements included in the Company’s 2020 Form 10-K. During the six months ended June 30, 2020, there were no material changes made to the Company’s significant accounting policies.
Off-Balance Sheet Arrangements
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.
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 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 Exchange Act) as of the end of the period covered by this Report.
These controls are designed to ensure that information required to be disclosed in the reports we file or submit pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO 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 June 30, 2021, at reasonable assurance 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 team, including our CEO and CFO, does 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 our six months ended June 30, 2021, 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The company has been sued in a putative breach of contract case in the District Court for Arapahoe County, CO. Crest Ventures, LLC v. urban-gro, Inc. (Case No. 2021CV31301 filed on July 30, 2021). The allegations in the action are based on a claim that Crest Ventures, LLC is entitled to commission compensation on the recent urban-gro, Inc. public stock offering. We believe we have substantial defenses to the claims asserted in this lawsuit and intend to vigorously defend this action.
To the best of our management’s knowledge and belief, there are no additional 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 as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
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 | |
| 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Schema Document | |
| 101.CAL | XBRL Calculation Linkbase Document | |
| 101.DEF | XBRL Definition Linkbase Document | |
| 101.LAB | XBRL Label Linkbase Document | |
| 101.PRE | XBRL Presentation Linkbase Document |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 11, 2021.
| URBAN-GRO, INC. | ||
| By: | /s/ Bradley Nattrass | |
| Bradley Nattrass, | ||
| Principal Executive Officer, a duly authorized officer | ||
| By: | /s/ Richard Akright | |
| Richard A. Akright, Principal Financial Officer and Principal Accounting Officer | ||
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