UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2020~~2021

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________.

Commission File Number: 000-52898

urban-gro, Inc.

(Exact name of registrant as specified in its charter)

Delaware

46-5158469

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1751 Panorama Point, Unit G

Lafayette, CO

80026

(Address of principal executive offices)

(Zip Code)

(720)390-3880

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

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

The number of shares of the registrant’s only class of common stock ~~issued and~~ outstanding as of ~~October 28, 2020~~August 6, 2021 was ~~28,272,285~~ 10,512,515 shares.

urban gro, Inc.

FORM 10-Q

For the Quarterly Period Ended ~~September~~June 30, ~~2020~~2021

INDEX

		Page
	PART I. FINANCIAL INFORMATION		~~Page~~

Item 1.		Financial Statements (Unaudited)			4
		Unaudited Condensed Consolidated Balance Sheets			4
		Unaudited Condensed Consolidated Statements of Operations and Comprehensive ~~Loss~~Income (Loss)			5
		Unaudited Condensed Consolidated Statements of ~~Shareholders' Deficit~~Shareholders’ Equity (Deficit)			6
		Unaudited Condensed Consolidated Statements of Cash Flows			8
		Notes to Unaudited Condensed Consolidated Financial Statements			9
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			20	15
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			26	18
Item 4.		Controls and Procedures			27	18

		PART II. OTHER INFORMATION

Item 1.		Legal Proceedings			28	19
Item 1A.		Risk Factors			28	19
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			28	19
Item 3.		Defaults Upon Senior Securities			28	19
Item 4.		Mine Safety Disclosures			28	19
Item 5.		Other Information			28	19
Item 6.		Exhibits			28	19
Signatures				29	20

FORWARD LOOKING STATEMENTS

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

Important factors known to us that could cause such material differences are identified in this Report, including the factors described in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020. Except as required by applicable law, we undertake no obligation to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any future disclosures we make on related subjects in future reports to the SEC.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

urban-gro, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

	September 30,			December 31,			June 30,			December 31,
	2020			2019			2021			2020
Assets
Current assets:
Cash	$	213,392		$	448,703		$	50,444,738		$	184,469
Accounts receivable, net		853,585			1,564,969			2,977,167			915,052
Inventories		775,064			676,175			627,276			537,104
Related party receivable		9,772			49,658			5,626			61,678
Prepayments and other assets		2,734,382			1,278,728			6,212,891			3,547,068
Total current assets		4,586,195			4,018,233			60,267,698			5,245,371

Non-current assets:
Property and equipment, net		152,577			165,035			96,734			129,444
Operating lease right of use assets, net		114,017			215,848			22,222			88,889
Investments		1,710,358			2,020,358			1,710,358			1,710,358
Goodwill		902,067			902,067			902,067			902,067
Intangible assets, net		84,924			86,151
Other assets								83,936			84,514
Total non-current assets		2,963,943			3,389,459			2,815,317			2,915,272

Total assets	$	7,550,138		$	7,407,692		$	63,083,015		$	8,160,643

Liabilities
Current liabilities:
Accounts payable	$	1,132,020		$	3,753,862		$	2,265,840		$	653,998
Accrued expenses		1,863,096			1,686,841			1,971,405			1,798,494
Related party payable		–			24,972
Deposits		4,087,592			2,915,406			9,354,279			4,878,863
Related party note payable		–			1,000,000
Notes payable		60,000			2,812,709			-			1,854,500
Revolving Facility		600,000			–			-			3,403,143
Term Loan, net		1,596,280			–			-			1,868,320
Operating lease liabilities		80,339			123,395			22,222			88,889
Total current liabilities		9,419,327			12,317,185			13,613,746			14,546,207

Non-current liabilities:
Revolving Facility		2,676,493			–
Term Loan, net		88,318			–
Related Party note payable		1,000,000			–
Notes payable		1,020,600			–			-			1,020,600
Operating lease liabilities		49,347			98,841
Total non-current liabilities		4,834,758			98,841			-			1,020,600

Total liabilities		14,254,085			12,416,026			13,613,746			15,566,807

Shareholders’ deficit:
Preferred stock, $0.10 par value; 10,000,000 shares authorized; 0 shares issued and outstanding		–			–
Common stock, $0.001 par value; 100,000,000 shares authorized; 28,272,285 and 28,209,312 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively		28,272			28,209
Shareholders’ equity (deficit):
Preferred stock, $0.10 par value; 10,000,000 shares authorized; 0 shares issued and outstanding								-			–
Common stock, $0.001 par value; 100,000,000 shares authorized; 11,222,914 issued and 10,820,019 outstanding as of June 30, 2021, and 4,718,714 shares issued and outstanding as of December 31, 2020								11,223			4,719
Additional paid in capital		14,118,289			11,854,083			75,227,775			14,553,438
Treasury shares, cost basis: 402,895 shares as of June 30, 2021								(3,474,270	)		-
Accumulated deficit		(20,850,508	)		(16,890,626	)		(22,295,459	)		(21,964,321	)
Total shareholders’ deficit		(6,703,947	)		(5,008,334	)
Total shareholders’ equity (deficit)								49,469,269			(7,406,164	)

Total liabilities and shareholders’ deficit	$	7,550,138		$	7,407,692
Total liabilities and shareholders’ equity (deficit)							$	63,083,015		$	8,160,643

See accompanying notes to unaudited condensed consolidated financial statements

urban-gro, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2020 2019 2020 2019
Revenue
Product sales $ 7,910,540 $ 4,633,974 $ 15,135,472 $ 14,469,616
Services 448,882 949,090 1,490,216 2,587,121
Total Revenue 8,359,422 5,583,064 16,625,688 17,056,737

Cost of Revenue 6,654,134 3,650,965 12,613,461 11,529,448
Gross profit 1,705,288 1,932,099 4,012,227 5,527,289

Operating expenses:
Marketing 42,749 263,948 236,093 914,563
General and administrative 1,411,821 2,383,920 4,874,383 6,892,623
General and administrative - amortization of broker issuing costs and broker warrants associated with convertible debentures – 167,834 – 167,834
Stock-based compensation 399,258 509,219 1,391,807 1,606,355
Total operating expenses 1,853,828 3,324,921 6,502,283 9,581,375

Loss from operations (148,540 ) (1,392,822 ) (2,490,056 ) (4,054,086 )

Non-operating income (expenses):
Interest expense (393,158 ) (125,733 ) (1,057,501 ) (374,850 )
Interest expense – amortization of convertible debentures – (796,233 ) – (796,233 )
Contingent consideration (155,000 ) – (155,000 ) –
Impairment of investment – (506,000 ) (310,000 ) (506,000 )
Other income 2,417 11,258 52,675 11,765
Total non-operating income (expenses), net (545,741 ) (1,416,708 ) (1,469,826 ) (1,665,318 )

Income (loss) before income taxes (694,281 ) (2,809,530 ) (3,959,882 ) (5,719,404 )

Income tax expense (benefit) – – – –
Net income (loss) $ (649,281 ) $ (2,809,530 ) $ (3,959,882 ) $ (5,719,404 )

Comprehensive income (loss) $ (694,281 ) $ (2,809,530 ) $ (3,959,882 ) $ (5,719,404 )

Earnings (loss) per share:
Net loss per share - basic and diluted $ (0.02 ) $ (0.11 ) $ (0.14 ) $ (0.22 )

Weighted average shares used in computation 28,888,194 26,175,098 28,706,905 25,772,134

	2021			2020			2021			2020
	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
Revenue
Equipment systems	$	12,179,316		$	3,108,162		$	23,524,066		$	6,589,747
Consumable products		363,574			270,434			792,667			635,186
Services		288,407			626,668			548,920			1,041,334
Total Revenue		12,831,297			4,005,264			24,865,653			8,266,267

Cost of Revenue		9,908,913			2,811,812			19,302,626			5,959,327
Gross profit		2,922,384			1,193,452			5,563,027			2,306,940

Operating expenses:
General and administrative		2,400,828			1,560,499			4,597,835			3,655,907
Stock-based compensation		299,602			559,904			590,407			992,549
Total operating expenses		2,700,430			2,120,403			5,188,242			4,648,456

Income (loss) from operations		221,954			(926,951	)		374,784			(2,341,516	)

Non-operating income (expenses):
Interest expense		(4,624	)		(365,709	)		(322,067	)		(664,343	)
Interest expense – beneficial conversion of notes payable		-			-			(636,075	)		-
Loss on extinguishment of debt		-			-			(790,723	)		-
Impairment of investment		-			(310,000	)		-			(310,000	)
PPP Loan Forgiveness		1,032,316						1,032,316
Other income		7,798			32,690			10,626			50,258
Total non-operating income (expenses)		1,035,490			(643,019	)		(705,923	)		(924,085	)

Income (loss) before income taxes		1,257,444			(1,569,970	)		(331,138	)		(3,265,601	)

Income tax expense (benefit)		-			–			-			–
Net income (loss)	$	1,257,444		$	(1,569,970	)	$	(331,138	)	$	(3,265,601	)

Comprehensive income (loss)	$	1,257,444		$	(1,569,970	)	$	(331,138	)	$	(3,265,601	)

Earnings (loss) per share:
Earnings (loss) per share - basic	$	0.11		$	(0.33	)	$	(0.03	)	$	(0.69	)
Earnings (loss) per share - dilutive	$	0.11		$	(0.33	)	$	(0.03	)	$	(0.69	)

Weighted average share - basic		11,220,580			4,792,462			9,535,630			4,765,047
Weighted average shares - dilutive		11,725,282			4,792,462			9,535,630			4,765,047

See accompanying notes to unaudited condensed consolidated financial statements

urban-gro, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

(unaudited)

	Shares		Amount		Capital			Deficit			Stock			(Deficit)
	Common Stock				Additional Paid in			Accumulated			Treasury			Total Shareholders’ Equity
	Shares		Amount		Capital			Deficit			Stock			(Deficit)
Balance, March 31, 2021		11,218,137	$	11,218	$	75,091,357		$	(23,552,903	)	$	(2,975,000	)	$	48,574,672
Stock-based compensation		-		-		299,602			-			-			299,602
Stock grant program vesting
Stock grant program vesting, shares
Beneficial conversion feature
Conversion of Bridge Financing
Conversion of Bridge Financing, shares
Stock issued with exercise of warrants
Stock issued with exercise of warrants, shares
Clawback of stock granted
Clawback of stock granted, shares
Stock issued loan revisions
Stock issued loan revisions, shares
Stock issuance related to debt
Stock issuance related to debt, shares
Warrant issuance related to debt
Stock issuance related to offering, net of offering costs of $195,574		-		-		(195,574	)		-			-			(195,574	)
Common stock repurchased		-		-		-			-			(499,270	)		(499,270	)
Stock Options Exercised		4,777		5		32,390			-			-			32,395
Net income (loss) for period ended June 30, 2021		-		-		-			1,257,444			-			1,257,444
Balance, June 30, 2021		11,222,914	$	11,223	$	75,227,775		$	(22,295,459	)	$	(3,474,270	)	$	49,469,269

	Shares		Amount		Capital			Deficit			(Deficit)
	Common Stock				Additional Paid in			Accumulated			Total Shareholders’ Equity
	Shares		Amount		Capital			Deficit			(Deficit)
Balance, March 31, 2020		4,784,885	$	4,785	$	12,986,974		$	(18,586,257	)	$	(5,594,498	)
Stock-based compensation		–		–		559,904			–			559,904
Stock grant program vesting		20,278		20		(20	)		–			–
Net income (loss) for period ended June 30, 2020		–		–		–			(1,569,970	)		(1,569,970	)
Balance, June 30, 2020		4,805,163	$	4,805	$	13,546,858		$	(20,156,227	)	$	(6,604,564	)

See accompanying notes to unaudited condensed consolidated financial statements

urban-gro, Inc.

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

(unaudited)

Common Stock
Additional
Paid in
Accumulated Total
Shareholders'
Shares Amount Capital Deficit Deficit
Balance, June 30, 2020 28,830,978 $ 28,830 $ 13,522,833 $ (20,156,227 ) $ (6,604,564 )
Stock-based compensation – – 399,258 – 399,258
Stock grant to satisfy accounts payable 9,640 10 9,630 – 9,640
Stock grant program vesting 131,667 132 (132 ) – –
Stock issuance related to acquisition 250,000 250 154,750 – 155,000
Clawback of stock granted (1,000,000 ) (1,000 ) 1,000 – –
Stock issued for lease revision 50,000 50 30,950 – 31,000
Net income (loss) for period ended September 30, 2020 – – – (694,281 ) (694,281 )
Balance, September 30, 2020 28,272,285 $ 28,272 $ 14,118,289 $ (20,850,508 ) $ (6,703,947 )

	Shares		Amount		Capital			Deficit			Stock			(Deficit)
	Common Stock				Additional Paid in			Accumulated			Treasury			Total Shareholders’ Equity
	Shares		Amount		Capital			Deficit			Stock			(Deficit)
Balance, December 31, 2020		4,718,714	$	4,719	$	14,553,438		$	(21,964,321	)	$	–		$	(7,406,164	)
Stock-based compensation		-		-		590,407			-			-			590,407
Beneficial conversion feature		-		-		636,075			-			-			636,075
Conversion of Bridge Financing		254,425		254		1,907,971			-			-			1,908,225
Stock grant program vesting		16,586		17		(17	)		-			-			-
Stock issuance related to offering, net of offering costs of $4,596,257		6,210,000		6,210		57,497,533			-			-			57,503,743
Common stock repurchased		-		-		-			-			(3,474,270	)		(3,474,270	)
Stock issued with exercise of warrants		18,412		18		9,978			-			-			9,996
Stock Options Exercised		4,777		5		32,390			-			-			32,395
Net income (loss) for period ended June 30, 2021		-		-		-			(331,138	)		-			(331,138	)
Balance, June 30, 2021		11,222,914	$	11,223	$	75,227,775		$	(22,295,459	)	$	(3,474,270	)	$	49,469,269

	Shares			Amount			Capital			Deficit			(Deficit)
	Common Stock						Additional Paid in			Accumulated			Total Shareholders’ Equity
	Shares			Amount			Capital			Deficit			(Deficit)
Balance, December 31, 2019		4,701,552		$	4,702		$	11,877,590		$	(16,890,626	)	$	(5,008,334	)
Stock-based compensation		–			–			992,549			–			992,549
Clawback of stock granted		(16,667	)		(17	)		17			–			–
Stock grant program vesting		20,278			20			(20	)		–			–
Stock issued loan revisions		16,667			16			99,984			–			100,000
Stock issuance related to debt		83,333			83			499,917			–			500,000
Warrant issuance related to debt		–			–			76,822			–			76,822
Net income (loss) for period ended June 30, 2020		–			–			–			(3,265,601	)		(3,265,601	)
Net income (loss)		–			–			–			(3,265,601	)		(3,265,601	)
Balance, June 30, 2020		4,805,163		$	4,805		$	13,546,858		$	(20,156,227	)	$	(6,604,564	)

Common Stock
Additional
Paid in
Accumulated Total Shareholders'
Shares Amount Capital Deficit Deficit
Balance, June 30, 2019 25,820,633 $ 25,821 $ 8,438,943 $ (11,449,927 ) $ (2,985,163 )
Stock-based compensation – – 509,219 – 509,219
Stock options issued for loan term revisions – – 20,002 – 20,002
Stock grant program vesting 1,160,833 1,160 (1,160 ) – –
Net income (loss) for period ended September 30, 2019 – – – (2,809,530 ) (2,809,530 )
Balance, September 30, 2019 26,981,466 $ 26,981 $ 8,967,004 $ (14,259,457 ) $ (5,265,472 )

See accompanying notes to unaudited condensed consolidated financial statements

urban-gro, Inc.

~~CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (Continued)~~

~~(unaudited)~~

Common Stock Additional
Paid in Accumulated Total
Shareholders'
Shares Amount Capital Deficit Deficit
Balance, December 31, 2019 28,209,312 $ 28,209 $ 11,854,083 $ (16,890,626 ) $ (5,008,334 )
Stock-based compensation – – 1,391,807 – 1,391,807
Stock grant to satisfy accounts payable 9,640 10 9,630 9,640
Stock issuance related to loan term revisions 100,000 100 99,900 – 100,000
Stock grant program vesting 253,333 253 (253 ) – –
Clawback of stock granted (1,100,000 ) (1,100 ) 1,100 – –
Stock issuance related to debt 500,000 500 499,500 – 500,000
Stock issuance related to acquisition 250,000 250 154,750 155,000
Warrant issuance related to debt – – 76,822 – 76,822
Stock issued for lease revision 50,000 50 30,950 31,000
Net income (loss) for period ended September 30, 2020 – – – (3,959,882 ) (3,959,882 )
Balance, September 30, 2020 28,272,285 $ 28,272 $ 14,118,289 $ (20,850,508 ) $ (6,703,947 )

Common Stock Additional
Paid in Accumulated Total
Shareholders'
Shares Amount Capital Deficit Deficit
Balance, December 31, 2018 25,229,833 $ 25,230 $ 4,688,272 $ (8,540,053 ) $ (3,826,551 )
Stock-based compensation – – 1,606,355 – 1,606,355
Stock options issued for loan term revisions – – 37,830 – 37,830
Stock grants issued for loan term revisions 10,000 10 24,090 – 24,100
Stock grant program vesting 1,241,633 1,241 (1,241 ) – –
Stock issuance related to acquisition 500,000 500 999,500 – 1,000,000
Warrant issuance related to convertible debentures – – 614,041 – 614,041
Equity value of exercise price associated with convertible debentures – – 719,479 – 719,479
Broker warrants associated with issuance of convertible debentures – – 278,678 – 278,678
Net income (loss) for period ended September 30, 2019 – – – (5,719,404 ) (5,719,404 )
Balance, September 30, 2019 26,981,466 $ 26,981 $ 8,967,004 $ (14,259,547 ) $ (5,265,472 )

~~See accompanying notes to condensed consolidated financial statements~~

~~urban-gro, Inc.~~

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

							2021			2020
	Nine Months Ended September 30,						Six Months Ended June 30,
	2020			2019			2021			2020
Cash Flows from Operating Activities
Net income (loss)	$	(3,959,882	)	$	(5,719,404	)
Adjustments to reconcile net income (loss) from operations:
Net loss							$	(331,138	)	$	(3,265,601	)
Adjustments to reconcile net loss from operations:
Depreciation and amortization		181,750			193,956			109,625			120,410
Amortization of deferred financing costs		368,661			–			103,632			203,721
Amortization of convertible debenture components		–			810,166
Loss on extinguishment of debt								790,723			–
Interest on convertible notes								53,725			–
Stock-based compensation expense		1,391,807			1,606,355			590,407			992,549
Contingent consideration expense		155,000			–
Beneficial conversion of Bridge notes								636,075			-
Impairment of investment		310,000			506,000			-			310,000
Gain on disposal of assets		3,468			(9,572	)		-			3,468
Inventory write-offs		72,258			57,352			26,792			25,528
Bad debt expense		43,849			12,252			28,248			25,239
Changes in operating assets and liabilities (excluding effects of acquisitions):
PPP loan forgiveness								(1,032,316	)		–
Changes in operating assets and liabilities:
Accounts receivable		658,706			(899,859	)		(2,034,311	)		613,723
Inventories		(171,147	)		142,745			(116,964	)		(324,981	)
Prepayments and other assets		(784,210	)		123,376			(3,732,753	)		(158,687	)
Accounts payable and accrued expenses		(2,470,559	)		2,164,412			1,729,802			(2,149,312	)
Deposits		1,172,186			925,922			4,475,416			441,518
Net Cash Used In Operating Activities		(3,028,113	)		(86,299	)
Net Cash Provided By (Used In) Operating Activities								1,296,963			(3,162,425	)

Cash Flows from Investing Activities
Purchase of investment		–			(572,250	)
Purchase of intangible assets		–			(25,000	)
Purchases of property and equipment		(122,817	)		(387,160	)		(9,670	)		(85,331	)
Proceeds from sale of assets		–			40,500
Cash acquired in acquisition		–			49,742
Net Cash Used In Investing Activities		(122,817	)		(894,168	)		(9,670	)		(85,331	)

Cash Flows from Financing Activities
Proceeds from issuance of Revolving Facility		2,207,432			–			-			2,207,432
Proceeds from issuance of Term Loan		2,000,000			–			-			2,000,000
Proceeds from Revolving Facility advances		1,069,061			–			-			1,205,525
Issuance of convertible debentures		–			2,565,000
Proceeds from notes payable		1,020,600			970,000
Repurchase of Common Stock								(3,474,270	)		–
Proceeds from issuance of Common Stock, net of offering costs								58,203,091			–
Long-term note payable								-			1,020,600
Debt financing costs		(638,046	)		–			-			(545,501	)
Repayment of notes payable		(2,743,428	)		(227,749	)
Repayment of debt								(5,755,845	)		(2,686,522	)
Net Cash Provided by Financing Activities		2,915,619			3,307,251			48,972,976			3,201,534

Net Increase (Decrease) in Cash		(235,311	)		2,326,784
Net Increase in Cash								50,260,269			(46,222	)
Cash at Beginning of Period		448,703			1,178,852			184,469			448,703
Cash at End of Period	$	213,392		$	3,505,636		$	50,444,738		$	402,481

Supplemental Cash Flow Information:
Interest Paid	$	670,165		$	291,441		$	218,435		$	664,343
Income Taxes Paid	$	–		$	–

Supplemental disclosure of non-cash investing and financing activities:
Operating lease right of use asset set-up effective January 1, 2019	$	–		$	326,095
Debt financing costs booked in equity	$	676,822		$	–		$	-		$	676,822
Stock issued for acquisitions	$	155,000		$	1,020,003
PPP Loan Forgiveness							$	1,032,316		$	-

~~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, LIQUIDITY AND GOING CONCERN~~GENERAL

Organization ~~and Acquisitions~~

urban-gro, Inc. (“we,” “us,” “our,” the “Company,” or “urban-gro”) is a leading architectural, engineering and design ~~and~~ services company focused on the sustainable commercial indoor horticulture market. We engineer and design indoor controlled environment agriculture (“CEA”) facilities andand 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 like cannabis and hemp.~~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 ~~allows~~ establish facilities that allow clients to manage, ~~their entire cultivation lifecycle, establishing facilities that~~ operate and perform at the highest ~~level.~~level throughout their entire cultivation lifecycle once they are up and running.

~~Our indoor commercial cultivation solution offers an integrated~~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 ~~services~~select cultivation equipment systems.

Basis of Presentation

These consolidated financial statements are presented in United States dollars and ~~equipment systems that~~have been prepared in accordance with United States generally ~~fall within the following categories:~~

~~Service Solutions:~~

~~Engineering Design Services – A comprehensive triad of services including:~~

~~Cultivation Space Programming (“CSP”)~~

~~ii.~~

~~Integrated Cultivation Design (“ICD”)~~

~~iii.~~

~~Full-Facility Mechanical, Electrical,~~accepted accounting principles (“GAAP”). On December 31, 2020, we effected a 1-for-6 reverse stock split with respect to our common stock. All share and ~~Plumbing (“MEP”)~~

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

~~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 and Rolling Benching Systems~~

~~Strategic Vendor Relationships with Premier Manufacturers~~

Since commencing business in March 2014, we have introduced new equipment solutions, products and services to the CEA market, expanded our ongoing operations across North America, and most recently, we have entered into several engagements in Europe. ~~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.~~

Effective March 7, 2019, the Company acquired 100% of the stock of Impact Engineering, Inc. (d/b/a Grow2Guys) (“Impact”), a provider of mechanical electrical and plumbing (“MEP”) engineering services predominantly focused on the indoor commercial horticulture industry. The Company believes the acquisition of Impact will improve the Company’s ability to better serve its current and future client base by expanding on the fully integrated products and services offered by the Company. The Company initially issued 500,000 shares of Common Stock valued at $2.00 per share information in these consolidated financial statements gives effect to ~~effect the acquisition of Impact. The Company accounted for the initial acquisition of Impact as follows:~~this reverse stock split, including restating prior period reported amounts.

Purchase Price $ 1,000,000

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

Under the terms of the agreement to acquire Impact, the Company was required to issue additional shares of Common Stock to the former Impact owner if the average closing price per share of the Company’s Common Stock was less than or equal to $2.00 per share for the 30-day period beginning on the date that was 150 days after the initial date of the listing of the Company’s Common Stock on a national securities exchange or quotation on the OTCQB or OTCQX (the “Valuation Period”). The Company’s Common Stock price was lower than $2.00 per share during the Valuation Period and the Company was required to issue additional shares of the Company’s Common Stock to the former Impact owner. In September 2020, however, the Company and the former Impact owner agreed to satisfy this provision of the agreement by the Company issuing 250,000 additional shares of Common Stock to the former Impact owner. The Company valued the issuance of these additional 250,000 shares at $0.62 per share of Common Stock based on the market price of our shares on the date of the agreement and recorded the additional issuance of shares as contingent consideration in the statements of operations and comprehensive income (loss).

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 September 30, 2020, the Company had an accumulated deficit of $20,850,508, a working capital deficit of $4,833,132, and negative stockholders’ equity of $6,703,947. 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 ~~2019~~2020 Form 10-K. During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~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 previously purchased certain 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 $43,912 for the nine months ended September 30, 2020 and 2019, respectively, and $0 and $7,442 for the three months ended September 30, 2020 and 2019, respectively. There were no outstanding receivables from Bravo and Enviro-Glo as of September 30, 2020 and December 31, 2019. Net outstanding payables incurred for purchases of inventory and other services to Bravo and Enviro-Glo as of September 30, 2020 and December 31, 2019 were $0 and $8,570, respectively.

~~The Company has made payments to~~ Cloud 9 Support, LLC (“Cloud 9”), a company owned by James Lowe, a director ~~shareholder,~~ and debt holder. Payments to Cloud 9 were $0 and $75,617 during the nine months ended September 30, 2020 and 2019, respectively, and $0 and $24,368 during the three months ended September 30, 2020 and 2019, respectively. Cloud 9 alsoshareholder, purchases materials from the Company. Total sales to Cloud 9 from the Company were ~~$359,562~~ $93,205 and ~~$229,688 during~~$247,157 for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021, and ~~2019,~~2020, respectively, and ~~$112,405~~ $79,199 and ~~$103,088~~ $114,285 during the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. Outstanding receivables from Cloud 9 as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 totaled ~~$9,772~~ $5,626 and ~~$49,659,~~$61,678, respectively. ~~Net outstanding payables~~

In October 2018, we issued a $1,000,000 unsecured note payable to Cloud 9, asan entity owned by James Lowe, a director of ~~September 30, 2020 and December 31, 2019 were $0 and $16,402, respectively.~~

~~In October 2018,~~ the Company, ~~received a $1,000,000, unsecured, interest only, promissory note (the “Promissory Note”) from Cloud 9. The Promissory Note was~~which originally became due April 30, ~~2019.~~2019 (the “James Lowe Note”). The ~~Promissory~~James Lowe Note iswas personally guaranteed by ~~the Company’s largest shareholders,~~ Bradley Nattrass, ~~who is the Company’s Chairman and~~our Chief Executive Officer, and Octavio ~~Gutierrez,~~Gutierrez. The loan had a ~~former officer~~one-time origination fee of $12,500. Interest accrued at the rate of 12% per annum and ~~director of the Company. The Promissory Note includes~~was paid monthly. As additional consideration for the James Lowe Note, we granted Mr. Lowe (as designee of ~~30,000 options~~Cloud9 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 terms~~share, 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, the~~five years. The due date offor the ~~Promissory~~James 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 with~~consideration for Cloud9 Support extending the ~~execution~~maturity date of the ~~Credit Agreement (see Note 9 – Debt) on~~note 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 Company~~we entered into an agreement to amend the ~~Promissory~~James Lowe Note ~~(the “Amending Agreement”). Pursuant to the Amending Agreement, Cloud 9 agreed~~ to extend the maturity date ~~of the Promissory Note~~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 ~~Lender~~lenders 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 ofunder the Credit Agreement. ~~As part~~

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 ~~Amending~~promissory note and to enter into the Subordination Agreement, ~~the Company~~we issued ~~100,000~~16,667 shares of ~~Common Stock~~common stock to ~~James~~Mr. 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:

SCHEDULE OF PREPAID BALANCES

	September 30,		December 31,		June 30,		December 31,
	2020		2019		2021		2020
Vendor prepayments	$	1,828,531	$	1,070,788	$	5,699,972	$	2,676,493
Prepaid services and fees		268,655		187,912		512,919		365,931
Deferred financing asset (See Note 9 - Debt)		630,805		–		-		504,644
Other assets		6,391		20,028
Prepayments and other assets	$	2,734,382	$	1,278,728	$	6,212,891	$	3,547,068

NOTE 5 – INVESTMENTS

The ~~components of investments are summarized as follows:~~

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

~~On January 24, 2020, the~~ Company ~~entered into~~has a Membership Interest Redemption Agreement (the “Redemption Agreement”) with Total Grow Holdings LLC (d/b/a Total Grow Control, LLC) (“TGH”), whereby the Company agreed to sell the Company’s 24.4% membership interests in TGH back to TGH for total consideration of $370,000. As a result of TGH’s failure to perform its obligations under the Redemption Agreement, the Company initiated a lawsuit against TGH seeking damages (the “Lawsuit”), and subsequently fully impaired the remainingstrategic investment in ~~TGH during~~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 ~~three months ended~~same issuer. The balance as of June 30, ~~2020.~~2021 and December 31, 2020 was $1,710,358.

On September 24, 2020, the Company and TGH entered into a Settlement Agreement (the “Settlement Agreement”), pursuant to which the parties agreed to settle all claims brought in the Lawsuit. Pursuant to the Settlement Agreement, TGH agreed to pay the Company a total of $61,919 in six equal installments. TGH’s first payment was due by October 4, 2020. TGH also agreed to reimburse the Company for up to $25,000 of its attorney’s fees related to the Lawsuit and the Settlement Agreement. In consideration of the foregoing and subject to TGH satisfying its payment obligations, the Company agreed to release any and all claims related to the Lawsuit. The Settlement Agreement also provides for a mutual release between the parties.

On September 24, 2020, in connection with the Settlement Agreement, the Company also entered into an agreement (the “Pullar Agreement”) by and between the Company and George R. Pullar, a former director of the Company and the Company’s former chief financial officer and the current chief financial officer of TGH. Pursuant to the Pullar Agreement, in exchange for Mr. Pullar relinquishing all right, title and interest in and to 1,000,000 shares of the Company’s common stock, the Company agreed to (i) execute the Settlement Agreement, (ii) transfer, sell and assign to Mr. Pullar the Company’s 24.4% membership interest in TGH pursuant to the Settlement Agreement and (iii) issue Mr. Pullar a fully vested warrant, to purchase 400,000 shares of Common Stock at an exercise price of $1.00 per share which expires five years from the date of issuance. The Pullar Agreement also provides for a mutual release between the Company and Mr. Pullar.

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 ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019 was $902,067.~~2020 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 ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

NOTE 7 – ACCRUED EXPENSES

Accrued expenses are summarized as follows:

SCHEDULE OF ACCRUED EXPENSES

	September 30,		December 31,		June 30,		December 31,
	2020		2019		2021		2020
Accrued operating expenses	$	798,752	$	854,056	$	588,276	$	717,503
Accrued wages and related expenses		402,710		487,327		661,696		408,907
Accrued interest expense		44,635		–		-		99,258
Accrued sales tax payable		616,999		345,458		721,433		572,826
	$	1,863,096	$	1,686,841
Accrued expenses					$	1,971,405	$	1,798,494

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

NOTE 8 – NOTES PAYABLE

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

SCHEDULE OF NOTES PAYABLE

September 30, December 31,
2020 2019

Unsecured, interest only, note payable with Chris Parkes originally due December 31, 2018. Initial interest payments due monthly at an annual rate of 20.4%. Note payable revised in December 2018 extending the maturity date to March 31, 2019. During August 2019, the maturity date was extended to March 31, 2020 and the interest rate was decreased to an annual rate of 9%. In consideration for extending the due date of the note and reducing the interest rate, the Company issued the holder 3,000 shares of Common Stock. Beginning in April 2020, the Company is making monthly principal payments in the amount of $10,000. $ 20,000 $ 80,000

Unsecured, interest only, note payable with David Parkes originally due December 31, 2018. Initial interest payments due monthly at an annual rate of 18.0%. Note payable revised in December 2018 extending the maturity date to March 31, 2019. During August 2019, the maturity date was extended to March 31, 2020 and the interest rate was decreased to an annual rate of 9%. In consideration for extending the due date of the note and reducing the interest rate, the Company issued the holder 3,000 shares of Common Stock. Beginning in April 2020, the Company is making monthly principal payments in the amount of $10,000. 40,000 100,000

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

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

Paycheck Protection Program (“PPP”) loan entered into on April 16, 2020. Interest rate of 1.0% per annum. Payments of principal and interest are deferred until August 1, 2021 (the “Deferral Period”). The PPP loan may be forgiven in part or fully depending on the Company meeting certain PPP loan forgiveness guidelines. The Company has not yet determined if any of the PPP loan is subject to forgiveness and has therefore continued to present the entire PPP loan as an obligation on its financial statements. Any unforgiven portion of the PPP loan is payable over a two-year term, with payments deferred during the Deferral Period. The Company may prepay the unforgiven loan balance at any time without payment of any premium. 1,020,600 –

Total 1,080,600 2,812,709
Less current maturities (60,000 ) (2,812,709 )
Long Term $ 1,020,600 $ –

	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.	$	-		1,020,600

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

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

During the fourth quarter of 2020 the Company entered into bridge financing notes (the “Bridge Financing Notes”) totaling $1,854,500. The Bridge Financing Notes are a combination of $1,004,500 in the 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~~Company’s borrowings as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 consisted of the following:

SCHEDULE OF DEBT

	September 30,			December 31,		June 30,		December 31,
	2020			2019		2021		2020
Revolving Facility	$	3,276,493		$	–	$	-	$	3,403,143
Term Loan, net of $315,402 unamortized debt issuance costs		1,684,598			–
Term Loan, net of unamortized debt issuance costs							-		1,868,320
Total		4,961,091			–		-		5,271,463
Less current debt due within one year		(2,196,280	)		–		-		(5,271,463	)
Total long-term debt	$	2,764,811		$	–	$	-	$	-

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)~~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)~~million), which ~~may~~could be drawn from time to time, subject to the terms and conditions set forth in the Credit Agreement and described further below (the “Revolving Facility,” and together with the Term Loan, the “Facilities”). The Credit Agreement iswas personally guaranteed by the Company’s CEO and Chairman, Brad Nattrass, and was to be in place for the original term of the Credit Agreement (1 year) plus a 1-year extension period at the discretion of the Lender as provided in the Credit Agreement.

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

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

On September 4, 2020, the Company executed an amendment to the Credit Agreement (the “First Amendment”) whereas the Facilities described above ~~are now~~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%~~12% per ~~annum (14.5% as of September 30, 2020).~~annum.

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

The Company incurred ~~$1,314,868~~$1,314,868 of debt issuance costs in connection with these Facilities, of which ~~$676,822~~$676,822 was non-cash in the form of Common Stock and warrant issuances. The Company estimated the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option pricing based on the market value of the underlying Common Stock at the valuation measurement date of ~~$1.00,~~$6.00, the remaining contractual terms of the warrants of 5 years, risk free interest rate of ~~1.14%~~1.14% an expected volatility of the price of the underlying Common Stock of ~~100%~~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 ~~are~~were being amortized as interest expense over the life of the Facilities, until the Revised Maturity Date. On February 17, 2021, the Company repaid all amounts outstanding under the Credit Agreement and expensed the remaining unamortized debt issuance costs as loss on extinguishment of debt. As of ~~September 30,~~December 31, 2020, there were ~~$630,805~~$504,644 and ~~$315,402~~$252,322 of unamortized debt issuance costs remaining related to the Revolving Facility and Term Loan, respectively.

The Company recorded interest expense of $1,057,501 in the nine months ended September 30, 2020, of which $368,661 related to the amortization of debt issuance costs on the Credit Agreement. Excluding interest expense related to the amortization of convertible debentures of $796,233, the Company recorded interest expense of $374,850 in the nine months ended September 30, 2019. The Company recorded interest expense of $393,158 in the three months ended September 30, 2020, of which $164,941 related to the amortization of debt issuance costs on the Credit Agreement. Excluding interest expense related to the amortization of convertible debentures of $796,233, the Company recorded interest expense of $125,733 in the three months ended September 30, 2019.

~~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 bore 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 was defined as: (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 September 30, 2020, no Warrants had been exercised.

NOTE 1110 – RISKS AND UNCERTAINTIES

Concentration Risk

During the ~~nine~~six months ended ~~September~~June 30, ~~2020 and 2019,~~2021 one client represented ~~26%~~46% and ~~15%~~another client represented 15% of total revenue, ~~respectively.~~compared to the six months ended June 30, 2020 where two other clients represented 17% each of total revenue. During the three months ended ~~September~~June 30, ~~2020 and 2019,~~2021, one client represented ~~51%~~60% and ~~17%~~another client represented 11% of total revenue, ~~respectively.~~compared to the three months ended June 30, 2020, when two other clients represented 25% and 11% of total revenue. At ~~September~~June 30, 2021 one client represented 75% and another client represented 15% of total outstanding accounts receivable. At December 31, 2020, one client represented ~~26% of total outstanding receivables. At December 31, 2019, one~~23% and another client represented ~~15% and another represented 11%~~17% of total outstanding accounts ~~receivables.~~receivable.

During the ~~nine~~six months ended ~~September~~June 30, ~~2020, 27%~~2021, 16% of the Company’s total purchases were from one ~~vendor.~~vendor compared to 15% from another vendor for the six months ended June 30, 2020. During the ~~nine~~three months ended ~~September~~June 30, ~~2019, 15%~~2021, one vendor represented 25% of the Company’s total purchases, ~~were from one vendor. During~~compared to the three months ended ~~September~~June 30, 2020, ~~48%~~where a separate vendor consisted of 15% of the Company’s total ~~purchases were from~~purchases. At June 30, 2021, one ~~vendor. During the three months ended September 30, 2019, 20%~~vendor represented 35% of ~~the Company’s~~ total ~~purchases were from one vendor.~~accounts payable. At December 31, 2020, a separate vendor represented 25% of total accounts payable.

Coronavirus Pandemic

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

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 client-centric sales and project management activities. The duration and likelihood of success of this workforce reduction are uncertain; however, we have since rehired several employees who were impacted by the downsizing effort. If this downsizing effort does not meet our expectations, or additional capital is not available, we may not be able to continue our operations. The pandemic and its effects resulted in temporary delays in our projects, however, work on all such projects has resumed. 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 clients 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 clients. If our clients 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-BASED COMPENSATION

Stock-based compensation expense for the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020 was $590,407 and ~~2019 was $1,391,807 and $1,606,355,~~$992,549, respectively, based on the vesting schedule of the stock grants and options. Stock based compensation expense for the three months ended ~~September~~June 30, 2021 and 2020 was $299,602and ~~2019 was $399,258 and $509,219,~~$559,904, 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 six months ended June 30, 2021:

SCHEDULE OF STOCK GRANT ACTIVITY


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

As of June 30, 2021, the Company ~~began granting Common~~ has $642,717 in unrecognized share-based compensation expense related to these stock grants.

Stock ~~to attract, retain, and reward employees. In January 2018,~~Options:

The following table shows stock option activity for the Company implemented an equity incentive plan to reward and attract employees and directors and compensate vendors for services when applicable. In May 2019, the Company adopted a new equity incentive plan, authorizing an aggregate of 3,500,000 shares of Common Stock for issuance thereunder. This equity incentive plan was approved by the Company’s shareholders on May 23, 2019.six months ended June 30, 2021:

SCHEDULE OF STOCK OPTION ACTIVITY

	Number of Shares		Weighted Average Remaining Life (Years)		Weighted Average Exercise Price
Stock options outstanding as of December 31, 2020		638,278		7.72	$	6.48
Issued		55,833		4.51	$	6.00
Expired		(18,444)		4.82	$	7.89
Exercised		(4,777)		-	$	6.78
Stock options outstanding at June 30, 2021		670,890		7.55	$	6.39
Stock options exercisable at June 30, 2021		365,362		7.69	$	6.46

~~Stock grants under the equity incentive plans are valued at the price of the stock on the date of grant.~~ The fair value of ~~stock~~the options ~~granted under the equity incentive plans~~ is calculated using the Black-Scholes pricing model based on the ~~estimated~~ market value of the underlying common stock at the valuation measurement date of $9.39the remaining contractual term of the ~~stock~~ options of 5 years, risk-free interest rate of 1.61% and expected volatility of the price of the underlying ~~Common Stock. There is a moderate degree~~common stock of subjectivity involved when estimating the value of stock options with the Black-Scholes option pricing model as the assumptions used are moderately judgmental. Stock grants and stock options are sometimes offered as part of an employment offer package, to ensure continuity of service or as a reward for performance. Stock grants and stock options typically require a 1 to 3 year period of continued employment or service performance before the stock grant or stock option vests. 100%.

~~Stock Grants:~~

~~The following table shows stock grant activity for the nine months ended September 30, 2020:~~

~~Grants outstanding as of December 31, 2019~~	~~412,501~~
~~Grants awarded~~	~~794,166~~
~~Forfeiture/Cancelled~~	~~(200,000~~	)
~~Grants vested~~	~~(253,333~~	)
~~Grants outstanding as of September 30, 2020~~	~~753,334~~

As of ~~September~~June 30, ~~2020,~~2021, the Company has ~~$393,215 in unrecognized share-based compensation expense related to these stock grants.~~

~~Stock Options:~~

~~The following table shows stock option activity for the nine months ended September 30, 2020:~~

Number of
Shares Weighted
Average
Remaining
Life (Years) Weighted
Average
Exercise
Price
Stock options outstanding as of December 31, 2019 1,702,167 9.21 $ 1.21
Issued 2,425,000 9.49 $ 1.00
Exercised – – –
Expired (297,501 ) 9.19 $ 1.21
Stock options outstanding at September 30, 2020 3,829,666 9.35 $ 1.05
Stock options exercisable at September 30, 2020 1,437,578 8.88 $ 1.12

~~As of September 30, 2020, the Company has $1,919,523~~$515,320 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 $0.

NOTE 1312 – SHAREHOLDERS’ EQUITY

In March 2020, an executive left the Company and returned ~~100,000~~16,667 common shares as part of the related separation agreement. The Company retired the shares and reduced its issued and outstanding stock by ~~100,000~~16,667 shares.

~~In September 2020, a former executive who had the right to receive 1,000,000~~ On February 17, 2021, we completed an offering of 6,210,000 shares of ~~Common Stock~~ our common stock, inclusive of the underwriters full overallotment, at $10.00per 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 ~~terms~~Nasdaq Capital Market under the symbol “UGRO”.

On May 24, 2021, we announced that the Board of his separation agreement that was reached in September 2019, entered into an agreement with the Company to exchange the right to receive those 1,000,000 shares of Common Stock for the Company’s ownership interest in TGH (see Note 5 – Investments) andDirectors authorized a ~~warrant~~stock repurchase program to purchase ~~400,000~~up to $5.0 million of the currently outstanding shares of the Company’s ~~Common Stock at $1.00 per share. The~~common stock, over a period of 12 months through open market purchases, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. Under this program, the Company ~~retired the~~has repurchased 52,895 shares ~~and reduced its issued and outstanding~~of common stock ~~by 1,000,000 shares.~~as of June 30, 2021.

NOTE 13 – WARRANTS

~~NOTE 14 – WARRANTS~~

~~Warrants are immediately exercisable upon issuance.~~ The following table shows warrant activity for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

SCHEDULE OF WARRANT ACTIVITY

Number of shares Weighted
Average
Exercise Price
Warrants outstanding as of December 31, 2019 692,034 $ 2.88
Issued in conjunction with debt 124,481 $ 2.41
Issued in conjunction with agreement with former executive (see Note 13 – Shareholders’ Equity) 400,000 $ 1.00
Warrants outstanding as of September 30, 2020 1,216,515 $ 2.21
Warrants exercisable as of September 30, 2020 1,216,515 $ 2.21

	Number of shares			Weighted Average Exercise Price
Warrants outstanding as of December 31, 2020		202,752		$	13.64
Exercised		(18,412	)	$	24.00
Issued in connection with equity offering		310,500		$	12.50
Expired		(116,674	)	$	18.00
Warrants outstanding as of June 30, 2021		377,166		$	11.16
Warrants exercisable as of June 30, 2021		377,166		$	11.16

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

The weighted-average life of the warrants is ~~2.5~~2.20 years. The aggregate intrinsic value of the warrants outstanding and exercisable at ~~September~~June 30, ~~2020~~2021 is ~~$0.~~$0.

NOTE 1514 – SUBSEQUENT EVENTS

~~Management~~The Company has ~~assessed~~evaluated events and ~~determined~~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 ~~no significant subsequent events are to be disclosed according to ASC 855.~~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 $9,100,000, consisting of $5,100,000 in cash and $2,000,000 of the Company’s stock at the closing of the transactions and up to $2,000,000 of additional earnout payments to the sellers of the 2WR Entities payable quarterly over a two-year period from the date of closing of the transaction, based on the 2WR Entities achieving agreed upon gross profit targets. The earnout payments, if and when earned, can be paid in cash or stock at the Company’s discretion. The Company’s initial accounting for the 2WR Entities acquisitions has not been completed because the valuations have not yet been received from the Company’s independent valuation firm.

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 ~~and~~ 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 like cannabis and hemp.~~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 ~~allows~~ establish facilities that allow clients to manage, ~~their entire cultivation lifecycle, establishing facilities that~~ operate and perform at the highest ~~level.~~level throughout their entire cultivation lifecycle once they are up and running.

We aim to work with our clients ~~for~~ from inception of their project in a way that provides value throughout the life of their ~~facility~~ ~~– providing value to them from inception through ongoing facility operation.~~facility. We are a trusted partner and advisor to our clients and offer a complete set of engineering and managed services complemented by a vetted suite of select cultivation equipment systems. Outlined below is an example of a complete project with estimated time frames for each phase that demonstrate how we provide value to our clients for the life of their facility.

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

·●

Service Solutions:

·●

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

	i.	Architecture

	ii.	Cultivation Space Programming (“CSP”)

~~ii.~~iii.

Integrated Cultivation Design (“ICD”)

~~iii.~~iv.

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

·●

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

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:

·●

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 3975 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 ~~Horticulture,~~ and Business Administration. As a company, we have worked on more than ~~300~~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.

~~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 that may be issued by many states and cities. However, as discussed below, we have seen a decrease in revenues for the nine months ended September 30, 2020, a portion of which was the result of clients 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 client 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:~~

~~In March 2020, we began executing a substantial reduction in discretionary marketing and general & administrative expenses;~~

~~On March 30, 2020, we reduced our headcount by 13 people (27%), from 48 to 35, by terminating ten employees and furloughing three other employees, including one member of our leadership team;~~

~~Effective April 6, 2020, we reduced compensation for almost every remaining employee, including a 20% reduction for the senior members of our leadership team.~~

Effective July 27, 2020, the reduced compensation for everyone other than the leadership team was reinstated. Effective September 7, 2020, the reduced compensation for the leadership team was reinstated.

~~As of the date of this Report, we have hired back 3 employees and brought back 2 employees off of furlough.~~

~~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”). Although the Company believes the PPP loan proceeds were used in accordance with the CARES Act guidance, the Company has not yet determined if any of the PPP loan is subject to forgiveness and has therefore continued to show the entire PPP loan as an obligation on its financial statements. Any unforgiven portion of the PPP loan is payable over the two-year term, with payments deferred during the Deferral Period. The Company may elect to prepay the unforgiven loan at any time without payment of any premium.

Results Of Operations

During the nine months ended September 30, 2020, we generated revenues of $16.6 million compared to revenues of $17.1 million during the nine months ended September 30, 2019, a decrease of $0.5 million, or 3%. Product sales revenue increased $0.6 million primarily due to an increase in cultivation equipment sales while services revenue decreased $1.1 million primarily due to a decrease in the average size of the facilities being designed. A portion of the decrease in revenues was the result of clients deferring spending due to the impacts of COVID-19. As a result of the deferred spending, many of the completion dates in our client contracts were extended, but no contracts were lost. We signed 57 new engineering design project contracts in the nine-month period ended September 30, 2020, including six new projects in Europe, and secured our first horticulture commissioning project, an East Coast based lettuce facility.

During the nine months ended September 30, 2020, cost of revenues was $12.6 million compared to $11.5 million during the nine months ended September 30, 2019, an increase of $1.1 million, or 9%. This increase is attributable to an increase in revenue from our lower margin product equipment sales and a reduction in our higher margin services revenue.

Gross profit was $4.0 million (24% of revenue) during the nine months ended September 30, 2020 compared to $5.5 million (32% of revenue) during the nine months ended September 30, 2019. Gross profit as a percentage of revenue decreased due to a revenue mix shift in the current period favoring product versus services revenue as noted above.

Operating expenses decreased by $3.1 million, or 32%, to $6.5 million for the nine months ended September 30, 2020 compared to $9.6 million for the nine months ended September 30, 2019. The decrease in operating expenses was comprised of a $2.0 million reduction in general operating expenses, mainly due to reduced salary and travel expenses, a $0.7 million reduction of marketing related expenses, and a $0.2 million reduction in stock-based compensation expense.

Non-operating expenses decreased $0.2 million to $1.5 million for the nine months ended September 30, 2020, compared to $1.7 million for the nine months ended September 30, 2019. Interest expense, excluding $0.8 million related to the amortization of convertible debentures in the nine months ended September 30, 2019, increased $0.7 million due to the increase in debt over the comparable periods. For the nine months ended September 30, 2020 and 2019, the Company recognized an impairment loss of $0.3 million and $0.5 million, respectively, related to the investment in TGH. The Company also incurred a $0.2 million expense for contingent consideration from the acquisition of Impact during the nine months ended September 30, 2020.

As a result of the above, we incurred a net loss of $4.0 million for the nine months ended September 30, 2020, or a loss per share of $0.14, compared to a net loss of $5.7 million for the nine months ended September 30, or a loss per share of $0.22.

Comparison of Results of Operations for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020

During the three months ended ~~September~~June 30, ~~2020,~~2021, we generated revenues of ~~$8.4~~$12.8 million compared to revenues of ~~$5.6~~$4.0 million during the three months ended ~~September~~June 30, ~~2019,~~2020, an increase of ~~$2.8~~$8.8 million, or ~~50%~~220%. ~~Product sales~~Equipment systems revenue increased ~~$3.3~~$9.1 million primarily due to an increase in cultivation equipment sales, ~~while~~ services revenue decreased ~~$0.5~~$0.3 million ~~primarily due to a decrease in the average size of facilities being designed. We signed 15 new engineering design project contracts in the three-month period ended September 30, 2020.~~and consumable product sales increased $0.1 million.

During the three months ended ~~September~~June 30, ~~2020,~~2021, cost of revenues was ~~$6.7~~$9.9 million compared to ~~$3.7~~$2.8 million during the three months ended ~~September~~June 30, ~~2019,~~2020, an increase of ~~$3.0~~$7.1 million, or ~~82%~~252%. This increase is directly attributable to anthe increase in ~~revenue from our lower margin product equipment sales and a reduction in our higher margin services revenue.~~revenues indicated above.

Gross profit was ~~$1.7~~$2.9 million ~~(20%~~(23% of revenues) during the three months ended June 30, 2021 compared to $1.2 million (30% of revenue) during the three months ended ~~September~~June 30, ~~2020 compared to $1.9 million (35% of revenue) during the three months ended September 30, 2019.~~2020. Gross profit as a percentage of ~~revenue~~revenues decreased due to a ~~revenue mix shift~~significant increase in lower margin equipment systems revenues for the ~~current period favoring product versus services revenue as noted above.~~comparable periods.

Operating expenses ~~decreased by $1.4~~increased $0.6 million ~~or 42%,~~ to ~~$1.9~~$2.7 million for the three months ended ~~September~~June 30, ~~2020~~2021 compared to ~~$3.3 million for~~ the three months ended ~~September~~June 30, ~~2019. The decrease in operating expenses~~2020. This was ~~comprised~~due to the offsetting effects of a ~~$1.0~~$0.8 million ~~reduction~~increase in general operating expenses, mainly due to ~~reduced~~an increase in salary and travel expenses ~~a $0.3 million reduction of marketing related expenses,~~ and a ~~$0.1~~$0.3 million reduction in stock-based compensation expense.

Non-operating ~~expenses decreased $0.9 million to $0.5~~income was $1.0 million for the three months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$1.4~~non-operating expenses of $0.6 million for the three months ended ~~September~~June 30, ~~2019. Interest expense, excluding $0.8~~2020. The Company recorded a $1.0 million ~~related to~~gain from the ~~amortization of convertible debentures~~PPP loan forgiveness in ~~the nine months ended September 30, 2019, increased $0.3 million due to the increase in debt over the comparable period. In~~ the three months ended ~~September~~June 30, ~~2019 the Company recorded a $0.5 million impairment loss related to TGH. The Company incurred a $0.2 million expense for contingent consideration from the acquisition of Impact during~~2021. For the three months ended ~~September~~June 30, ~~2020.~~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 a net ~~loss~~income of ~~$0.7~~$1.3 million for the three months ended ~~September~~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 ~~$0.02,~~($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 ~~$2.8~~$3.3 million for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020 or a loss per share of ~~$0.11.~~($0.69).

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	)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2020 2019 2020 2019
Net Loss $ (694,281 ) $ (2,809,530 ) $ (3,959,882 ) $ (5,719,404 )
Interest expense 393,158 125,733 1,057,501 374,850
Interest expense – amortization of convertible debentures – 796,233 – 796,233
G&A – amortization of convertible debentures – 167,834 – 167,834
Impairment loss – 506,000 310,000 506,000
Stock-based compensation 399,258 509,219 1,391,807 1,606,355
Contingent consideration – purchase price 155,000 – 155,000 –
Depreciation and amortization 61,339 73,928 181,750 193,956
Adjusted EBITDA $ 314,474 $ (630,583 ) $ (863,824 ) $ (2,074,176 )

Adjusted EBITDA for the nine months ended September 30, 2020 was a negative $0.9 million, compared to a negative $2.1 million for the nine months ended September 30, 2019, due to the offsetting effects of reduced operating expenses and reduced gross profit. Adjusted EBITDA for the three months ended September 30, 2020 was $0.3 million compared to a negative $0.7 million for the three months ended September 30, 2019, due primarily to reduced operating expenses.

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.

~~Liquidity and Capital Resources~~

As of ~~September 30, 2020, we had cash of $213,392, which represented a decrease of $235,311 from~~ December 31, ~~2019.~~

~~Since inception, we have incurred significant operating losses~~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 have funded our operations primarily through issuances of equity securities, debt, and operating revenue. As of September 30, 2020, we had an accumulated deficit of $20,850,508, a working capital deficit of $4,833,132, and negative stockholders’ equity of $6,703,947. Our ability to generate sufficient revenues to pay our debt obligations and accounts payable when due remains subject to risks and uncertainties. These risks and uncertainties raise substantial doubt about our ability to continuemanagement team focus on as a going concern within one year after the date that the condensed consolidated financial statements in connection with this Report are issued. The condensed consolidated financial statements included in this Report have been prepared on a going concern basis and do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might result from the outcome of this uncertainty. Our ability to continue as a going concern is dependent upon, among other things, our ability to generate revenue, control costs and raise capital. Such capital, however, may not be available, if at all, on terms that are acceptable to us.

As described above in Note 9 to the Condensed Consolidated Financial Statements, on February 21, 2020, we entered into the Credit Agreement, providing for a senior secured demand term loan facility in the amount of C$2.7 million ($2.0 million) and a demand revolving credit facility of up to C$5.4 million ($4.0 million). Our failure to obtain additional debt or equity financing in the future could have a negative impact on our ability to continue as a going concern or to grow and expand our operations, which will have a negative impact on our anticipated results of operations. As of September 30, 2020, we had no availability under the revolving credit facility.

Effective January 9, 2019, we 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 $6.0 million from the sale of Units, with each Unit consisting of a $1,000 Convertible Debenture (the “Debentures”) and Common Stock Purchase Warrants (the “Warrants”) to purchase 207.46 shares of our Common Stock at $3.00 per share for a period of two years from the purchase date. The Debentures were due May 31, 2021 and bore interest at 8%, compounded annually, with interest due at maturity. On October 16, 2019, the $2.6 million in Debentures plus $92,037 in accrued interest were converted into 1,102,513 Common Shares at $2.41 per share pursuant to their terms as a result of our registration of the securities on a registration statement that was declared effective on such date. The Warrants contain a mandatory exercise provision if the weighted average share price of our Common Stock exceeds $5.00 per share for a period of five consecutive days.

If we do not raise enough funds from a financing, or generate sufficient operating cash flow, or if additional expenditures and acquisitions are identified and we cannot use our securities as compensation, we will need additional funding to continue to implement our business plan and to execute our strategic initiatives. Other than the availability pursuant to the Revolving Facility, we do not currently have an agreement with any third party to provide us with such financing andkey performance measure. Although there can be no assurances that weBacklog will be ~~able~~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 ~~raise any capital on commercially reasonable terms, or at all. If~~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 ~~require additional capital~~had cash of $50.4 million, which represented an increase of $50.2 million from December 31, 2020. This increase in cash and ~~are unable~~cash equivalents is primarily due to ~~raise~~ the ~~same, it could have a material negative impact on~~net proceeds received from our ~~results~~equity offering in February of ~~operations.~~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 ~~was $3.0~~of $3.2 million during the ~~nine~~six months ended ~~September~~June 30, 2020, ~~compared to $0.1 million used~~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 ~~nine months ended September~~comparable periods with the remaining fluctuation being primarily comprised of fluctuations in operating assets and liabilities. At June 30, 2019. Operating cash has been positively impacted from an increase in client deposits as demand for our services and equipment solutions increased in the nine months ended September 30, 2020. At September 30, 2020,2021, we had ~~$4.1~~$4.5 million in client deposits related to client orders, ~~which~~ compared ~~favorably~~ to client deposits of ~~$2.9~~$4.9 million as of December 31, ~~2019.~~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. ~~Our standard policy is to collect the following before action is taken on a client order: 50% deposit; and the remaining 50% payment made prior to shipping.~~ We expect client deposits to be relieved from the deposits account no longer than 12 months for each project. ~~We do not have trade payable terms with most of our vendors and as a result, we are required to prepay a portion or all of the total order.~~ At ~~September~~June 30, ~~2020,~~2021, we had ~~$1.1~~$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 ~~$3.8~~$0.7 million at December 31, ~~2019.~~2020.

Net cash used in investing activities was ~~$0.1~~$0.0 million for the ~~nine~~six months ~~September~~ended June 30, ~~2020,~~2021, compared to ~~$0.9~~$0.1 million during the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. Historically, cash has been used to increase our investments in strategic partnerships and to acquire property and equipment. ~~We do not anticipate using significant cash in the future to invest in strategic partnerships.~~ We will continue to have ongoing needs to purchase property and equipment to maintain our operations. We have no material commitments for capital expenditures as of ~~September~~June 30, ~~2020.~~2021.

Net cash provided by financing activities was ~~$2.9~~$49.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$3.3~~$3.2 million during the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. Cash provided from financing activities during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 primarily relates to ~~$5.3~~$58.3 million in net proceeds received from the issuance of ~~debt and a $1.0 million long-term loan,~~stock, offset by ~~$2.8~~$5.8 million used in the repayment of notes payable and ~~$0.6~~$3.5 million in ~~financing fees related to the issuance of debt.~~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 ~~nine~~three months ended ~~September~~June 30, ~~2020.~~2021.

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 ~~2019~~2020 Form 10-K. During the ~~nine~~six months ended ~~September~~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 ~~September~~June 30, ~~2020,~~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 ~~nine~~six months ended ~~September~~June 30, ~~2020,~~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.

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

~~3.1~~31.1		~~Certificate of Incorporation~~ ~~((incorporated by reference to Current Report on Form 8-K filed on October 30, 2020).~~

~~3.2~~		~~Bylaws of Registrant(incorporated by reference to Current Report on Form 8-K filed on October 30, 2020).~~

~~10.1~~		~~First Amendment to Loan Agreement, dated as of September 4, 2020, by and among the Registrant, urban-gro Canada Technologies Inc., Impact Engineering, Inc. and Bridging Finance Inc.~~

~~10.2~~		~~Agreement, dated as of September 18, 2020, by and between the Registrant and George (Bob) Pullar.~~

~~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

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 ~~November 3, 2020.~~August 11, 2021.

	URBAN-GRO, INC.

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

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Revenue
Product sales	$	7,910,540		$	4,633,974		$	15,135,472		$	14,469,616
Services		448,882			949,090			1,490,216			2,587,121
Total Revenue		8,359,422			5,583,064			16,625,688			17,056,737

Cost of Revenue		6,654,134			3,650,965			12,613,461			11,529,448
Gross profit		1,705,288			1,932,099			4,012,227			5,527,289

Operating expenses:
Marketing		42,749			263,948			236,093			914,563
General and administrative		1,411,821			2,383,920			4,874,383			6,892,623
General and administrative - amortization of broker issuing costs and broker warrants associated with convertible debentures		–			167,834			–			167,834
Stock-based compensation		399,258			509,219			1,391,807			1,606,355
Total operating expenses		1,853,828			3,324,921			6,502,283			9,581,375

Loss from operations		(148,540	)		(1,392,822	)		(2,490,056	)		(4,054,086	)

Non-operating income (expenses):
Interest expense		(393,158	)		(125,733	)		(1,057,501	)		(374,850	)
Interest expense – amortization of convertible debentures		–			(796,233	)		–			(796,233	)
Contingent consideration		(155,000	)		–			(155,000	)		–
Impairment of investment		–			(506,000	)		(310,000	)		(506,000	)
Other income		2,417			11,258			52,675			11,765
Total non-operating income (expenses), net		(545,741	)		(1,416,708	)		(1,469,826	)		(1,665,318	)

Income (loss) before income taxes		(694,281	)		(2,809,530	)		(3,959,882	)		(5,719,404	)

Income tax expense (benefit)		–			–			–			–
Net income (loss)	$	(649,281	)	$	(2,809,530	)	$	(3,959,882	)	$	(5,719,404	)

Comprehensive income (loss)	$	(694,281	)	$	(2,809,530	)	$	(3,959,882	)	$	(5,719,404	)

Earnings (loss) per share:
Net loss per share - basic and diluted	$	(0.02	)	$	(0.11	)	$	(0.14	)	$	(0.22	)

Weighted average shares used in computation		28,888,194			26,175,098			28,706,905			25,772,134

Purchase Price	$	1,000,000

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

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

	Number of shares		Weighted Average Exercise Price
Warrants outstanding as of December 31, 2019		692,034	$	2.88
Issued in conjunction with debt		124,481	$	2.41
Issued in conjunction with agreement with former executive (see Note 13 – Shareholders’ Equity)		400,000	$	1.00
Warrants outstanding as of September 30, 2020		1,216,515	$	2.21
Warrants exercisable as of September 30, 2020		1,216,515	$	2.21