What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-15 compared with 2022-05-10 · 184 added, 105 removed, 70 unchanged (81% of the section changed)

2 unchanged sentences

See also “Forward Looking Statements” on page 3 of this Report.

urban-gro, Inc.

“us,” “our,” the “Company,” or “urban-gro”) is a fully integrated architectural

design, engineering, procurement, and construction management (“E.P.C.”) design-build firm specializing in

indoor Controlled Environment Agriculture (“CEA”).

On July 30, 2021, we acquired three architecture design firms (2WR

Colorado, Inc, 2WR Georgia, Inc.

and MJ12 Design Studios, Inc., collectively the “2WR Entities”) from their shareholders.

(“we,” “us,” “our,” the “Company,” or “urban-gro”) is an integrated

professional services and design-build firm.

We offer value-added architectural, engineering, and construction management solutions to

the Controlled Environment Agriculture (“CEA”), industrial, healthcare, and other commercial sectors.

Innovation, collaboration,

and a commitment to sustainability drive our team to provide exceptional customer experiences.

April 29, 2022, we acquired Emerald Construction Management, a general contracting and construction management firm.

On July 30, 2021,

we acquired three architecture design firms (2WR Colorado, Inc, 2WR Georgia, Inc.

and MJ12 Design Studios, Inc., collectively the “2WR

Entities”) from their shareholders.

The 2WR Entities were under common ownership and management.

We engineer and design indoor CEA facilities and then integrate complex

environmental equipment systems into those facilities.

Through this work, we create high-performance indoor cultivation facilities for

our clients to grow specialty crops, including leafy greens, vegetables, herbs, and plant-based medicines.

Our custom-tailored approach

to design, procurement, and equipment integration provides a single point of accountability across all aspects of indoor growing operations.

We also help our clients achieve operational efficiency and economic advantages through a full spectrum of professional services and

programs focused on facility optimization and environmental health which establish facilities that allow clients to manage, operate and

perform at the highest level throughout their entire cultivation lifecycle once they are up and running.

We aim to work

with our clients from inception of their project in a way that provides value throughout the life of their facility.

We are a trusted

partner and advisor to our clients and offer a complete set of design, engineering, construction management, and managed services

complemented by a vetted suite of select cultivation equipment systems.

We can provide these services in a turnkey fashion, operating

as a single point of responsibility for our clients, or they can pick and choose from the variety of services we offer.

below is an example of a complete project that demonstrate how we provide value to our clients.

We design and build high performance

facilities in several sectors.

Within the CEA sector, we design these facilities and while building them, we then integrate complex environmental

equipment systems into them.

Through this work, we create high-performance indoor cultivation facilities for our clients to grow specialty

crops, including leafy greens, vegetables, herbs, and plant-based medicines.

Our custom-tailored approach to design, procurement, and

equipment integration provides a single point of accountability across all aspects of indoor growing operations.

We also help our clients

achieve operational efficiency and economic advantages through a full spectrum of professional services and programs focused on facility

optimization and environmental health which establish facilities that allow clients to manage, operate and perform at the highest level

throughout their entire cultivation lifecycle once they are up and running.

aim to work with our clients in all sectors from inception of their project in a way that provides value throughout the life of their

We are a trusted partner and advisor to our clients and offer a complete set of design, engineering, construction management,

and managed services.

Within the CEA sector, this is complemented by a vetted suite of select cultivation equipment systems.

these services in a turnkey fashion, operating as a single point of responsibility for our clients, or they can pick and choose from

the variety of services we offer.

Outlined below is an example of a complete project that demonstrate how we provide value to our clients

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

Design, Engineering, and Construction Management Services

– A comprehensive collection of services including:

Engineering, and Construction Design-Build Services – A comprehensive collection of services including:

Pre-Construction

Space Programming Planning (“CSP”)

Space Planning (“CSP”)

Architectural

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Management (“CM”)

An ongoing service offering including:

Facility and Equipment Commissioning Services

ongoing service offering including:

and Equipment Commissioning Services

Crop and Asset Protection Services including Training Services, Equipment Maintenance Services, Crop Protection Program, and an Interactive

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Vendor Relationships with Premier Manufacturers

majority of our clients are commercial CEA cultivators.

We believe one of the key points of our differentiation that clients value

is the depth of experience of our employees and our Company.

Historically,

the majority of our clients are commercial CEA cultivators.

However, through our acquisitions we have seen our client base across the

industrial, healthcare, and other commercial sectors grow as well.

We believe one of the key points of our differentiation that clients

value is the depth of experience of our employees and our Company.

We currently employ approximately 125 individuals.

Approximately

two-thirds of our employees are considered experts in their areas of focus, and our team includes Designers (Architects, Interior

Designers, Cultivation Space Planners), Professional Engineers (Mechanical, Electrical, Plumbing), Engineers (Controls, and

Agricultural), Construction Managers (superintendents, supervisors, project managers) and individuals with Masters Degrees in

Plant Science, Horticulture, and Business Administration.

As a company, we have worked on over 500 projects at indoor CEA

facilities and believe that the experience of our team and Company provides clients with the confidence that will proactively keep them

from making common costly mistakes during the build out process that impact operational stages.

Our expertise translates into

clients saving time, money, and resources through expertise that they can leverage without having to add headcount to their own

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.

Approximately two-thirds

of our employees are considered experts in their areas of focus, and our team includes Designers (Architects, Interior Designers, Cultivation

Space Planners), Professional Engineers (Mechanical, Electrical, Plumbing), Engineers (Controls, and Agricultural), Construction Managers

(superintendents, supervisors, project managers) and individuals with Masters Degrees in Plant Science, Horticulture, and Business Administration.

As a company, we have worked on 1000s of projects and well over 500 projects at indoor CEA facilities and believe that the experience

of our team and Company provides clients with the confidence that will proactively keep them from making common costly mistakes during

the build out process that impact operational stages.

Our expertise translates into clients saving time, money, and resources through

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.

of Operations

of Results of Operations for the three months ended March 31, 2022 and 2021

the three months ended March 31, 2022, we generated revenues of $21.1 million compared to revenues of $12.0 million during the three

months ended March 31, 2021, an increase of $9.1 million, or 76%.

Equipment systems revenue increased $5.7 million, primarily

due to an increase in cultivation equipment sales, services revenue increased $3.4 million, primarily from the acquisition of the 2WR

Entities, and consumable product sales decreased $0.1 million.

the three months ended March 31, 2022, cost of revenues was $16.2 million compared to $9.4 million during the three months ended March

of Results of Operations for the three months ended June 30, 2022 and 2021

the three months ended June 30, 2022, we generated revenues of $16.3 million compared to revenues of $12.8 million during the three months

ended June 30, 2021, an increase of $3.5 million, or 27%.

This increase in revenues is a result of the following changes in individual revenue components:

Construction design-build revenue increased $2.9 million, exclusively from the acquisition of Emerald;

Services revenue increased

$2.7 million, primarily from the acquisition of the 2WR Entities:

Equipment systems revenue

decreased $2.1 million due to a reduction in capital equipment spending by customers:

Consumable product sales

decreased $0.1 million.

the three months ended June 30, 2022, cost of revenues was $12.8 million compared to $9.9 million during the three months ended June

30, 2021, an increase of $2.9 million, or 29%.

This increase is directly attributable to the overall increase in revenues indicated

profit was $3.5 million (22% of revenues) during the three months ended June 30, 2022, compared to $2.9 million (23% of revenue) during

the three months ended June 30, 2021.

Gross profit as a percentage of revenues decreased primarily due to an increase in lower margin

construction design/build revenue offset by an increase in higher margin services revenue.

expenses increased by $2.7 million, or 101%, to $5.4 million for the three months ended June 30, 2022 compared to $2.7 million for

the three months ended June 30, 2021.

This was due to a $1.8 million increase in general operating expenses, mainly due to an

increase in salary, marketing, and travel expenses, in part related to the acquisitions of the 2WR Entities and Emerald, a $0.6

million increase in stock-based compensation expense, primarily due to an increase in the total number of employees and the number

of employees included under the plan, and a $0.3 million increase in intangible asset amortization primarily due to the acquisitions

of the 2WR Entities and Emerald.

Non-operating

income was $0.1 million for the three months ended June 30, 2022, compared to non-operating income of $1.0 million for the three months

ended June 30, 2021, a decrease of $0.9 million.

Other income increased by $0.1 million due to the interest earned on the XS Financial

The Company recorded a $1.0 million gain from the PPP loan forgiveness in the three months ended June 30, 2021.

income tax benefit increased by $0.1 million due to the acquisitions of the 2WR Entities and Emerald.

a result of the above, we incurred a net loss of $1.7 million for the three months ended June 30, 2022, or a net loss per share of ($0.17),

compared to a net gain of $1.3 million for the three months ended June 30, 2021, or a net gain per share of $0.11.

of Results of Operations for the six months ended June 30, 2022 and 2021

the six months ended June 30, 2022, we generated revenues of $37.3 million compared to revenues of $24.9 million during the six months

ended June 30, 2021, an increase of $12.4 million, or 50%.

This increase in revenues is a result of the following changes in individual revenue components:

Services revenue

increased $6.2 million due primarily to the acquisition of the 2WR Entities;

Equipment systems revenue

increased $3.6 million primarily due to an increase in cultivation equipment capital expenditure purchases by our customers;

design-build revenue increased $2.9 million exclusively due to the acquisition of Emerald;

Consumable product sales

decreased $0.2 million.

the six months ended June 30, 2022, cost of revenues was $28.9 million compared to $19.3 million during the six months ended June 30,

2021, an increase of $9.6 million, or 50%.

This increase is directly attributable to the increase in revenues indicated above.

profit was $4.9 million (23% of revenues) during the three months ended March 31, 2022, compared to $2.6 million (22% of revenue) during

the three months ended March 31, 2021.

Gross profit as a percentage of revenues increased primarily due to an increase in higher

margin services revenues.

expenses increased by $3.3 million, or 132%, to $5.8 million for the three months ended March 31, 2022 compared to $2.5 million for the

three months ended March 31, 2021.

This was due to a $2.7 million increase in general operating expenses, mainly due to an increase in

salary, marketing, and travel expenses, in part related to the acquisition of the 2WR Entities, and a $0.6 million increase in stock-based

compensation expense, primarily due to an increase in the number of employees included under the plan.

Non-operating income was $0.1 million for the three

months ended March 31, 2022, compared to non-operating expense of $1.7 million for the three months ended March 31, 2021, a change

of $1.8 million (104%).

Interest expense, decreased by $0.3 million to $0.0 million compared to $0.3 million in the three

months ended March 31, 2021, due to the elimination of debt.

Other income increased by $0.1 million due to the interest earned on the

XS Financial investment.

The Company incurred a $0.8 million loss on the extinguishment of debt and a $0.6 million interest expense

related to the conversion of debt to equity at a discount to the offering price for the three months ended March 31, 2021.

Deferred income tax benefit increased by $0.1

a result of the above, we incurred a net loss of $0.7 million for the three months ended March 31, 2022, or a net loss per share of $0.07,

compared to a net loss of $1.6 million for the three months ended March 31, 2021, or a net loss per share of $0.20.

profit was $8.4 million (23% of revenues) during the six months ended June 30, 2022 compared to $5.6 million (22% of revenue) during

the six months ended June 30, 2021.

Gross profit as a percentage of revenues increased primarily due to an increase in higher margin

services revenues offset by an increase in lower margin construction design/build revenue.

expenses increased by $6.0 million, or 116%, to $11.2 million for the six months ended June 30, 2022 compared to $5.2 million for

the six months ended June 30, 2021.

This was due to a $4.4 million increase in general and administrative expenses, mainly due to an

increase in salary, marketing, and travel expenses, in part related to the acquisitions of the 2WR Entities and Emerald, a $1.2

million increase in stock-based compensation expense, primarily due to an increase in the number of total employees and an increase

in employees included under the plan, and a $0.5 million increase in intangible asset amortization from the acquisitions of Emerald

Non-operating

income was $0.2 million for the six months ended June 30, 2022, compared to non-operating expense of $0.7 million for the six months

ended June 30, 2021, a change of $0.9 million.

Interest expense decreased by $0.3 million to $0.0 million compared to $0.3 million

in the six months ended June 30, 2021, due to the elimination of debt.

Interest income increased by $0.1 million due to the interest

earned on the XS Financial investment.

For the six months ended June 30, 2021, the Company incurred a $1.0 million gain from the forgiveness

of the PPP loan, a $0.8 million loss on the extinguishment of debt, and a $0.6 million interest expense related to the conversion of

debt to equity at a discount to the offering price.

income tax benefit increased by $0.2 million due to the acquisitions of the 2WR Entities and Emerald.

a result of the above, we incurred a net loss of $2.4 million for the six months ended June 30, 2022, or a net loss per share of ($0.23),

compared to a net loss of $0.3 million for the six months ended June 30, 2021, or a net loss per share of ($0.03).

FINANCIAL MEASURES

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

Three months Ended

Three months Ended June 30,

Six months Ended June 30,

Net Income (Loss)

$ (1,739,304 )

$ (2,435,521 )

Interest expense

2 unchanged sentences

Income tax benefit

Depreciation and amortization

Loss on extinguishment of debt

Stock-based compensation

Transaction costs

Depreciation and amortization

Transaction & new entity costs

Non-recurring legal fees

PPP Loan forgiveness

Adjusted EBITDA

Our backlog as of March

31, 2022 was approximately $22 million.

Our backlog as of December 31, 2021 was approximately $30 million.

The current backlog

consists of $16 million of equipment systems and $6 million of services to be performed.

We define backlog as signed contracts for which deposits have been received.

Historically, the majority of our backlog has been retired and

converted into revenue within two quarters.

is a financial measure that generally reflects the dollar value of revenue that the Company expects to realize in the future.

Although backlog is not a term recognized under generally accepted accounting principles in the United States (“GAAP”),

it is a common measure used by companies operating in our industries.

We report backlog for the following revenue categories:

Equipment Systems;

(ii) Construction Design-Build;

and (iii) Services.

We define backlog for Equipment Systems and Services as

signed contracts for which customer deposits have been received.

Construction Design-Build backlog is comprised of construction

projects once the contract is awarded and to the extent we believe funding is probable.

Our Construction Design/Build backlog

consists of uncompleted work on contracts in progress and contracts for which we have executed a contract but have not commenced the

For uncompleted work on contracts in progress, we include (i) executed change orders, (ii) pending change orders for which we

expect to receive confirmation in the ordinary course of business, and (iii) claims that we have made against our customers for

which we have determined we have a legal basis under existing contractual arrangements and as to which we consider collection to be

backlog as of June 30, 2022, March 31, 2022, and December 31, 2021 for each of our revenue categories is reflected in the following table

(in millions of $):

Revenue Category

June 30, 2022

March 31, 2022

December 31, 2021

Equipment Systems

Construction Design-Build (1)

- Construction Design-Build revenue and backlog relate to the operations of Emerald C.M.

which was acquired by the Company on April

Historically,

the majority of our Equipment Systems and Services backlog has been retired and converted into revenue within two quarters.

2022, we expected approximately 85% of our Construction Design-Build backlog to be completed in the next 12 months.

Construction Design-Build contracts contain options that are exercisable at the discretion of our customer to award additional work

to us, without requiring us to go through an additional competitive bidding process.

In addition, some customer contracts also

contain task orders that are signed under master contracts pursuant to which we perform work only when the customer awards specific

task orders to us.

the majority of the contracts in our Construction Design-Build backlog may be canceled or modified at the election of the customer,

we have not experienced material amounts of contract cancellations or modifications.

Many Construction Design/Build projects are

added to our contract backlog and completed within the same fiscal year and therefore may not be reflected in our beginning or

year-end Construction Design/Build backlog amounts.

and Capital Resources

As of March 31, 2022, we had cash of $27.1 million,

which represented a decrease of $7.5 million from December 31, 2021 due to the changes outlined below.

of June 30, 2022, we had cash of $22.8 million, which represented a decrease of $11.8 million from December 31, 2021 due to the following

Net cash used by operating activities was $4.9 million.

during the three months ended March 31, 2022 This use of cash is primarily the net effects of a $6.1 million reduction

in customer deposits offset by a $1.1 million increase in accounts payable and accrued expenses, and a $1.2 million increase in prepayments and other assets.

As of March 31, 2022, we had $7.2 million in customer deposits compared to $13.3

million as of December 31, 2021.

We require prepayments from customers before any design work is commenced and before any

material is ordered from the vendor.

use of cash is primarily the net effects of a $10.1 million decrease in customer deposits, a $1.3 million decrease in accounts payable

and accrued expenses, and a $6.1 million decrease in prepayments and other assets.

As of June 30, 2022, we had $3.3 million in customer

deposits compared to $13.3 million as of December 31, 2021.

We require prepayments from customers before any design work is commenced

and before any material is ordered from the vendor.

These prepayments are booked to the customer deposits liability account when received.

We expect customer deposits to be relieved from the deposits account no longer than 12 months for each project.

As of June 30, 2022,

we had $6.1 million of vendor prepayments compared to $11.2 million as of December 31, 2021.

As of March 31, 2022, we had

$11.0 million in accounts payable and accrued expenses compared to $9.9 million as of December 31, 2021.

Net cash used in investing activities was $0.0

million for the three months ended March 31, 2022.

We have no material commitments for capital expenditures as of March 31, 2022.

Net cash used by financing activities was $3.8

million for the three months ended March 31, 2022.

Cash used in financing activities during the three months ended March 31, 2022 primarily

relates to $3.7 million used in treasury shares acquired.

Although our operations are influenced by general

economic conditions, we do not believe that inflation had a material effect on our results of operations during the three months ended

March 31, 2022.

As of June 30, 2022, we had $11.3 million

in accounts payable and accrued expenses compared to $9.9 million as of December 31, 2021.

Net cash used in investing activities was $3.1 million, primarily

from the acquisition of Emerald.

We have no material commitments for capital expenditures as of June 30, 2022.

Net cash used by financing activities was $3.8 million, primarily

due to the repurchase of treasury shares.

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 six months ended June 30, 2022.

Accounting Policies and Estimates

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included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

During the three months

ended March 31, 2022, there were no material changes made to the Company’s significant accounting policies.

During the six months ended June 30,

2022, there were no material changes made to the Company’s significant accounting policies.

Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis