U.S.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
one)
[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2020
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[ ]
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TRANSITION
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ________________ to________________________.
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Commission
File Number: 000-52898
URBAN-GRO,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
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46-5158469
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(State or other jurisdiction
of incorporation or organization)
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(IRS Employer
Identification No.)
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1751
Panorama Point
Unit
G
Lafayette,
CO
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80026
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(720)
390-3880
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(Address
of principal executive office)
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(Zip
Code)
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(Registrant’s
telephone number, Including area code)
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Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock.
Title
of each class
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Trading
Symbol(s)
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Name
of each exchange on which registered
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Common
Stock, $0.001 par value
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UGRO
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NASDAQ
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ]
Yes [X] No
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes
[X] No
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. [X] 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). [X] Yes [ ] No
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,
“smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
Large
accelerated filer [ ]
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Accelerated
filer [ ]
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Non-accelerated
filer [X]
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Smaller
Reporting Company [X]
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Emerging
growth company [X]
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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 has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] Yes [X] No
The
aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of
the registrant’s most recently completed second fiscal quarter on June 30, 2020 was $8,359,761.
As
of March 26, 2021, the registrant had 10,866,471 shares of Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The
information required by Part III of this Annual Report on Form 10-K is incorporated by reference from the Registrant’s
definitive proxy statement relating to the 2021 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates.
TABLE
OF CONTENTS
CAUTIONARY
NOTE REGARDING FORWARD LOOKING STATEMENTS
This
Annual Report on Form 10-K (this “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”). 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, and entail various risks and uncertainties
that could cause actual results to differ materially from those expressed in such forward-looking statements.
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”. 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 Securities and Exchange Commission (“SEC”).
PART
I
Item
1. Business
Background
urban-gro,
Inc. (together with its wholly owned subsidiaries, collectively “urban-gro”, “we”, “us” or
“the Company”) was originally formed on March 20, 2014, as a Colorado limited liability company. In March 2017, we
converted to a Colorado corporation and exchanged shares of our common stock for every member interest issued and outstanding
on the date of conversion. On October 29, 2020, we reincorporated as a Delaware corporation. On December 31, 2020, we effected
a 1-for-6 reverse stock split with respect to our common stock. All information in this Report gives effect to this reverse stock
split, including restating prior period reported amounts.
Overview
urban-gro
is a leading engineering and design services company focused on the sustainable commercial indoor horticulture market. We engineer
and design indoor controlled environment agriculture (“CEA”) facilities and then integrate complex environmental equipment
systems into those facilities. CEA is a market segment that is defined by type of facility, and has no correlation to the industry,
or more specifically the crop being grown in the facility. The CEA segment is represented by any horticultural facility that
is fully self-contained, and has a fully-controlled environment. There are three facility types that meet these qualifications:
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i.
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Indoor
Facilities - new building; or the retrofit of an existing building;
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ii.
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Vertical
Farms – a building with a smaller footprint that is built up vertically and we view this category as including modular
container farms; and
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iii.
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Greenhouses
– traditional and made out of a variety of translucent materials as to provide natural sunlight for the crop being grown.
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While
historically we have been focused on engineering, design, and equipment integration into indoor facilities, of which some are
ultimately used for the cultivation of plant-based medicines, we are planning to expand our reach within CEA across both facility
type and crop type. The term “plant-based medicines” includes (i) a wide array of herbal supplements including but
not limited to curcumin, saffron extract and ginger, (ii) cannabidiol (“CBD”) based therapeutics, (iii) cannabis
based therapeutics and (iv) a host of medicines derived from plants such as caffeine, menthol, foxglove and others. We are focusing
on expanding to the vertical farming CEA sub-segment, which is ultimately and predominantly used for the cultivation of a variety
of crops including, but not limited to, leafy greens, herbs, cucumbers, peppers, and strawberries. As the global horticulture
market has become more focused on the safety of the food supply chain, reducing emissions with current transportation methods
associated with these crops, and, growing local, we are confident that the vertical farming CEA sub-segment will represent a significant
and increasing share of our revenue and be a significant factor in our organic growth moving forward.
Through
this work, we create high-performance indoor cultivation facilities for our clients to grow specialty crops, including leafy greens,
vegetables, herbs, and cannabis. Historically, a large number of our clients were cannabis producers, and we still do substantial
work for those clients, but we have shifted our priorities to non-cannabis crops as we seek to address a broader market. 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.
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, and we plan
on opening a European Headquarters office.
The
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. We currently employ 47 individuals. Approximately two-thirds
of our employees are considered experts in their areas of focus, and our team includes Engineers (Mechanical, Electrical, Plumbing,
Controls, and Agricultural), Professional Engineers, and individuals with Masters Degrees in Plant Science, Horticulture, and
Business Administration. As a company, we have worked on more than 300 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 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.
Our
Services and Integrated Equipment Solutions
We
aim to work with our clients from inception of their project in a way that provides value throughout for the life
of their facility. We are a trusted partner and advisor to our clients and offer a complete set of engineering and managed services
complemented by a vetted suite of select cultivation equipment systems. Outlined below is an example of a complete project with
estimated time frames for each phase that demonstrate how we provide value to our clients.
Our
indoor commercial cultivation solution offers an integrated suite of services and equipment systems that generally fall within
the following categories:
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Engineering
and Design Services – A comprehensive triad of services including:
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Cultivation
Space Programming (“CSP”)
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ii.
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Integrated
Cultivation Design (“ICD”)
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iii.
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Full-Facility
Mechanical, Electrical, and Plumbing (“MEP”)
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A
service offering including:
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Training
Services
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ii.
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Facility
and Equipment Commissioning Services
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Integrated
Equipment Solutions:
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Design,
Source, and Integration of Complex Environmental Equipment Systems
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ii
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Value-Added
Reselling (“VAR”) of Cultivation Equipment Systems
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iii
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Strategic
Vendor Relationships with Premier Manufacturers
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Service
Solutions
Engineering
and Design Services
As
a leader in indoor CEA facilities, we provide our clients with service offerings that span from engineering design to the operational
stages of the facility. Our engineering and design services offering includes three engagements: CSP, ICD, and MEP.
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CSP
revolves around early-stage engagement with stakeholders and provides for a basis of design that optimizes for interactions
between people, plants and processes, saving stakeholders money and time, immediately and in the future, through smart, informed
decision-making.
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ICD
revolves around professionally designed layouts for climate control, fertigation, benching, air flow and lighting, together
ensuring optimal space utilization and product performance. These detailed plans are taken through the Construction Document
stage and are leveraged by our clients to efficiently solicit contractor bids.
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MEP
engineering design focuses on the gross square footage of the building, not just the cultivation space, which in turn eliminates
the “gap” between cultivation systems and the building systems. We provide engineered construction contract documents
for mechanical, heating, ventilation, and air conditioning (“HVAC”), plumbing and electrical systems required
for the building permits necessary to obtain a Certificate of Occupancy.
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Our
Service Offering
We
provide value for clients in the form of facility commissioning and staff training. Combined, this solution focuses on the troubleshooting,
tuning, and support of a myriad of cultivation systems and equipment while further providing guidance for client interactions
with tradespeople working on HVAC, electrical, and plumbing in the facility.
Many
of the current service options available to clients are isolated to vendors providing post-sale service for a single piece of
equipment – whereas our service has a cultivation-level view of the complex system made up by each piece of equipment.
Training
Services. Complex cultivation systems encompass a multitude of variables and environment readings such as temperature, relative
humidity, vapor pressure differential (VPD), electrical conductivity (EC), pH, network status, light status, photosynthetically
active radiation, sunrise/sunset modules, CO2, HVAC status, fan status, vents (including windward and leeward), shades,
network status and flow rates. In our CEA world there is a scarcity of skilled labor which impedes our clients’ ability
to drive operating proficiency across their teams. Our engineering team uses a series of tools and processes to ensure clients
are proactive in preventing equipment downtime, can operate all equipment and processes fluently, and have expert support in resolving
potential issues. These services range from equipment standard operating procedure (“SOP”) libraries to staff training
sessions. With a unique knowledgebase acquired from both our commissioning and training for a wide breadth of cultivation equipment,
we provide our clients’ teams with the skills to minimize equipment downtime and optimize processes in their facilities.
Facility
and Equipment Commissioning Services. Today’s cultivation systems are custom designed and extremely complex. Our team
of project managers and engineers supports the installation process by coordinating with a client’s engineers and stakeholders
to avoid project bottlenecks while supporting construction trades. Our commissioning team ensures that the equipment is installed
according to the design and operates per the defined manufacturer specifications.
Program
Overview and Pricing. We estimate that, on average and depending on the crop, CEA facilities can lose up to $10,000 per 1,000
square feet of canopy per day when offline – our training services are centered around proactively minimizing this potential
loss for a fraction of the cost. Our clients are best described as automation- and margin-focused and have an understanding of
the importance of preventing downtime in their facilities.
Related-Party
Hardware and Software Platforms. Since initially collaborating with California-based Edyza Corporation (“Edyza”)
in 2018, our multiple investments have culminated into a 19.5% equity position in Edyza. Edyza’s IoT platform employs a
robust, high performance, proprietary, tree-mesh wireless network topology and utilizes wireless hardware sensors to acquire data
within the cultivation environment. Our training services can help clients utilize the data garnered from these sensors to provide
a high-resolution understanding of what’s happening within a client’s facility through detailed multi-point information
on temperature, humidity, barometric pressure, soil moisture, and electrical conductivity.
Integrated
Equipment Solutions
While our engineers play
an integral part in the design of most of the complex equipment systems that are then integrated into a CEA facility,
we also provide consultative reselling of more common solutions that we integrate into the overall design. For
CEA, the environmental goal is to maintain a stable and consistent VPD according to the client’s priorities through environmental
control of relative humidity and temperature during all stages of growth. There are four main variables in CEA that affect plant
growth (and can impact VPD): (i) water and nutrients; (ii) environmental control; (iii) CO2; and (iv) lighting.
Design,
Source, and Integration of Complex Environmental Equipment Systems
Complex
Environment Systems for CEA include the integration of environmental controls, fertigation and irrigation distribution, a complete
line of water treatment and wastewater reclamation systems, and purpose-built HVAC equipment systems.
The
most significant variable of interest in a CEA facility is the control of the environment, which is accomplished through the integration
of both environmental controls and the purpose-built HVAC system. Without proper design, the environmental control system is the
most influential variable in terms of temperature and relative humidity control within an indoor agriculture space. With properly
designed equipment, the environmental controls variable is less volatile, enabling efficient growing conditions.
Purpose-built
HVAC equipment systems will provide a more stable environment, maximize plant health and yields, minimize crop loss, minimize
utility costs, save on capital equipment, and maximize sustainability. Additionally, private studies of a partner comparing purpose-built
HVAC environmental controls equipment to standard commercial HVAC and dehumidification, found increased crop yields with purpose-built
equipment.
VAR
of Cultivation Equipment Systems
We
act as an experienced VAR to our clients when selling vetted best-in-class commercial horticulture lighting solutions, rolling
and automated container benching systems, specialty fans, and microbial mitigation and odor reduction systems. The acquired knowledge
of how each of these systems work in combination with and in tangent to the overall ecosystem is a significant benefit that our
engineers and product experts offer to our clients. Not only are many competing products reviewed in each category with the intention
of vetting the best solution, we continually search out and review competing technologies to ensure that only the best-in-class
equipment systems are integrated into our projects. As such, we believe it will be imperative to maintain and to continue to develop
close relationships with both existing and new leading technology and manufacturing providers.
Today, we typically do
not sell any cultivation equipment systems individually as a one-time sale. The majority of equipment sales are sold as
part of a larger all-encompassing project solution that spans over a 12 to 18 month period and includes engineering design and
the sale of both custom complex and more standard equipment systems.
Strategic
Vendor Relationships with Premier Manufacturers
We
work closely with leading technology and manufacturing providers to deliver an integrated solution designed to achieve the stated
objectives of our clients. While we previously manufactured certain lighting products, we discontinued all manufacturing
in 2019, although we continued to sell existing inventory through 2020. Although we have numerous provider relationships, three
vendors are particularly important to our solution: Fluence, Argus, and Desert Aire.
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Fluence’s
LED-based lighting systems are designed to provide high levels of photosynthetically active radiation ideal for commercial
cultivation and research applications. From sole-source indoor grow lighting to supplemental greenhouse lighting, Fluence
custom tailors the light spectrum and form-factors to optimize plant growth and increase yields while consuming less energy
and reducing operating costs as compared to legacy technologies.
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After
working closely together since early 2019, we have demonstrated our value to Fluence by engaging with clients, and introducing
their product line, up to 18 months prior to facility start-up.
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Building
on this success, in the second quarter of 2020, we signed an exclusive two-year global System Integrator Agreement with Fluence.
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Argus
provides automated control systems for the horticulture and aquaculture industries. Argus systems provide three essential
functions: (i) fully integrated equipment control; (ii) advanced monitoring and alarms; and (iii) comprehensive crop and environmental
data acquisition and management information. Argus capabilities include facilities automation and specialty monitoring and
control applications to support the needs of cultivators. Argus’ systems are used in horticulture and biotechnology
research facilities, universities, aquaculture and aquaponics, and many other custom control applications at sites throughout
the world.
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In
the fourth quarter of 2019, we renewed our multi-year strategic agreement with Argus to provide cultivators in North America
with industry-leading, plant-centric solutions for environmental control, automation, and nutrient management.
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We
have worked with Argus on over 50 projects and the extended agreement demonstrates both companies’ commitment to client
success through early and ongoing collaboration with cultivators throughout their project lifecycles.
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Desert
Aire manufactures commercial and industrial humidity and climate control systems, including their purpose-built GrowAire™
solution which has been designed specifically to meet the sensible and latent needs of indoor growing climates in the CEA
space.
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In
the first quarter of 2020, we signed an agreement with Desert Aire to be a Systems Integration National Account within the
agriculture market.
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We
have not experienced any material changes in the availability of equipment systems and products from Fluence, Argus, or Desert
Aire.
Sales
and Marketing Strategy
Sales
Overview
Our
sales team is comprised of one Executive Vice President, three Directors of Sales, one Sales Operations Manager, and one Sales
Associate. The Directors of Sales, serving as “relationship ambassadors,” are located across the United States and
are tasked with cultivating leads, generating and supporting sales, and managing client relationships.
With
the experience garnered from providing engineering and design services to over 300 CEA projects, and our continued research on
finding best-in-class complex equipment solutions, our clients choose to work with us because our team custom tailors a solution
to address the client’s unique combination of process flow, complex environmental systems, cultivation equipment solutions,
and any potential sensitivities of the crop.
When
potential clients express an interest in our solution, we provide them with a technical expert, referred to as a sales engineer,
who can quickly and effectively explain a proposed solution to resolve the client’s specific challenges. We believe this
technical sales process requires true segment expertise, which we also believe has not been readily available to indoor cultivators.
Our team includes talented and experienced individuals including licensed Professional Engineers, as well as individuals with
Masters Degrees in Business Administration, Plant Science, Horticulture, and post-secondary degrees in Environmental Science,
Horticulture, Agricultural Engineering, and Electrical/Mechanical/Controls Engineering. We leverage these technical experts in
their areas of expertise to continually find and vet what we believe are the best-in-class solutions, and then educate and inform
our clients on best solution use and techniques.
In
addition to leads generated from the execution of our marketing strategy, for additional new business opportunities, we focus
on referrals generated from our relationships with industry partners and from contract referral agents. By offering a referral
program to consultants whose primary business model is to help their clients set up cultivation facilities from the design stage
through cultivation, we ensure access to a strong network of cultivators.
Sales
Cycle and Average Revenues and Gross Margins
We
generate revenue and profits based on selling engineering design and managed services, customized environmental and cultivation
equipment systems, and consumable products once facilities are operational.
Sales
Cycle. At the outset of a client design project, we utilize a proprietary project estimation tool that accounts for multiple
variables relating to the size and complexity of the new or retrofitted facility. This tool optimizes the facility layout, taking
into consideration the initial costs of all custom cultivation equipment systems as well as the ongoing operational costs associated
with labor and utilities required to move the crop, in order to establish a facility that meets the objectives of the client.
After the project estimate is determined, a design fee and project deposit are determined. The design fee is dependent on the
desired design services and on the complexity of the overall project, including facility and canopy size, type and complexity
of controls and irrigation distribution system, which is dependent on number of irrigation zones, types of nutrients, and the
number of individual plants that require irrigation. We provide our solution pursuant to a contract that typically requires a
project design deposit equal to 50% of the project estimate, with the remaining balance due prior to delivery of the construction
documents, which collectively takes, approximately twelve months.
Following
the design stage, we contract with clients to procure and sell customized equipment systems. To begin the procurement process,
we charge a deposit ranging from 20% to 50% of total cost, which varies based on lead time, complexity, and the type of systems.
After the procurement window, which ranges from one week to five months to allow for the manufacturing and assembly of systems,
we charge a final shipment payment for the balance owed, which is due within two weeks of system readiness and prior to shipment.
Following installation of the systems, we dispatch an engineering team for commissioning they systems.
Once
the client’s facility is operational, we are able to support the client’s ongoing operations by selling consumable
products to ensure the facilities function at optimal performance.
Revenues
and Gross Profit Margins by Category. Service Revenues for engineering design services contracts can be hundreds of thousands
of dollars, depending on the spectrum of services desired by the client and the size of the facility. Product Revenues for customized
equipment systems can be millions of dollars, depending on the size of the cultivation facilities, the complexity and types of
systems purchased by the client, and the number of systems purchased by the client. Sales of consumable products are typically
of a recurring nature each month to a client and can be in the tens of thousands of dollars.
Targeted
gross profit margins for each of the Company’s revenue categories are as follows:
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Engineering
design services – thirty to sixty percent;
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Customized
equipment systems - mid-teens to mid-thirty percent; and
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Consumable
products revenues - high-teens to high-twenty percent.
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Gross
profit margins on engineering design services and customized equipment systems are highly dependent on the complexity and size
of the project.
Our
Clients
We
primarily market and sell our products and services to CEA operators and facilitators in the United States and Canada. Our historical
client base has been comprised of indoor commercial cultivators seeking to grow high-quality cannabis crops. Since launching the
engineering and design division in 2018, we have designed and assisted in the build-out of 300+ projects for some of the largest
independent and multi-state operators in both the United States and Canada. Although the cannabis market has been our historical
target market and an unknown but substantial portion of all of our revenues to date have been generated from clients in the cannabis
industry, we are seeking to diversify our client base by expanding our reach within CEA. The term “plant-based medicines”
includes (i) a wide array of herbal supplements including but not limited to curcumin, saffron extract and ginger, (ii) CBD based
therapeutics, (iii) cannabis based therapeutics and (iv) a host of medicines derived from plans such as caffeine, menthol, foxglove
and others. We are focusing on expanding to the vertical farming CEA sub-segment, which is ultimately and predominantly used for
the cultivation of a variety of crops including, but not limited to, leafy greens, herbs, cucumbers, peppers, and strawberries.
During 2020, we also continued exploring the potential demand for our solutions in select countries, including those within Latin
America and Europe.
Marketing
Strategy
We
provide our clients with equipment and service solutions for their facility that empowers their success for the life of their
grow — from early stage facility programming, engineering design, and the integration of complex equipment systems, through
commissioning / facility start-up services. Our team of engineers and experts understand the highly regulated market, challenges,
and opportunities unique to cultivators.
Marketing
serves two general purposes at urban-gro – brand image and lead generation.
Brand
Image
Our
marketing strategy is to position urban-gro as a leading engineering and design services company that integrates complex environmental
equipment systems into high-performance indoor CEA cultivation facilities for the global commercial horticulture market. Managing
the clarity of our brand is a key component of supporting our organization’s growth initiatives and lead generation. We
support our brand through (i) interviews, (ii) website, (iii) e-commerce, (iv) events, and (v) corporate responsibility.
Interviews.
We retain a public relations firm to amplify our business objectives through earned media to support of our corporate activities
and marketing functions. The focus of our publicity efforts is to engage and inform key audiences, build relationships, and provide
vital feedback for analysis and action. Our spokespeople have received media training and are briefed prior to each interview.
Website.
Our online experience supports our brand by being both educational and transactional. By applying an established set of key metrics,
user activity on the website is used to generate Marketing Qualified Leads (“MQL”) to be passed to the sales team
for engagement. With the technology advancements and market expansion into CEA, our website offers educational content for investors,
managers, and cultivators to ensure they are considering key facility programming, design, and engineering aspects critical to
high-performance buildings. Given our team’s early involvement with indoor cultivation, our experts are uniquely positioned
to share knowledge, thereby qualifying us for future projects. As a lead-generation tool, the urban-gro website produces qualified,
trackable sales leads. The leads move through the qualification and nurture process before being passed to sales and engaged by
the appropriate contact for advancement through the sales funnel.
Events. In the
era of COVID-19, events and tradeshows have changed dramatically. Now virtual experiences, we participate in select events promoting
thought leadership through speaking and participation on panels. Event sponsorship is carefully evaluated with clear goals and
objectives established ahead of time. Participation in events must meet the following four-part qualification criteria: 1) engaging
with potential clients during and after the event, 2) building a network of collaborative design and construction firms across
North America, 3) repurposing event content and delivering across our digital media platforms as curated content, and 4) continue
to protect our brand, image and reputation as the thought and delivery leader in the CEA marketplace. According to Freeman,
a top leader in event logistics, in-person events are anticipated to resume in the second quarter 2021 at the earliest.
This is subject to change based upon the developments of COVID-19 in the spring of 2021.
Corporate
Responsibility. We leverage our leadership position in the market as an opportunity to promote our corporate values of inclusion,
innovation, and connection.
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Inclusion:
Internally, we hire and promote underrepresented communities in STEM (science, technology, education, mathematics). Our project
design and engineering teams reflect our commitment as demonstrated by leadership positions held by women across our project
design, project management, and client engagement departments.
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Innovation:
CEA is an industry that is rapidly advancing, testing, and adopting new technologies. Our corporate development team works
closely with our project design and engineering teams to vet new products and ensure they align with our corporate responsibility
needs.
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Connection:
Through our outreach efforts across the United States and Canada, we represent a company committed to the development
and nurturing of a deeper understanding across all disciplines of CEA, food production, and being on the leading edge of emerging
industry-related innovations.
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We
have been a long-time supporter of HeroGrown, an organization that provides Veterans, First Responders, and their families
with free access to benefit-rich CBD. Through “Operation CBD Drop,” HeroGrown provides an alternative to those
struggling with addiction to deadly drugs prescribed for service-related injuries and psychological disorders.
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○
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Through
our Client Appreciation Events at major tradeshows across North America, we raise awareness and funds for local charities.
These events serve as opportunities for non-profits to bolster career opportunities, economic development, veteran health
and housing, and other causes.
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Lead
Generation
We
generate interest in our services and equipment solutions through a strategic approach to lead generation combining owned, earned,
and paid marketing activities. These lead generation campaigns include advertising, contributed articles and news stories, newsletters,
referral agreements, social media, and tradeshows / webinars.
Advertising
(Traditional and Digital): We advertise with traditional print media outlets, as well as digitally through targeted pay-per-click
campaigns. Ad components include educational offerings as well as a clear call-to-action. Social media promotion is also leveraged
as a part of the overall advertising strategy but on a very targeted basis.
Contributed
Articles and News Stories: Contributed articles and news stories support and further our reputation and showcase our expertise
in key areas of facility programming, engineering design, and facility operations.
Newsletters:
We provide a free newsletter which provides insight into cultivation practices, product promotions, and client spotlights. These
newsletters are a great opportunity to educate the audience on our full extent of services and products, as well as demonstrate
how we add value through expert experience and oversight.
Referral
Agreements: Third-party endorsements are powerful referral systems for lead generation. We have developed agreements with
key influencers and affiliated industry companies.
Social
Media: As a part of our digital marketing efforts, we produce original and curated content across our social channels including
Instagram, Facebook, LinkedIn, and TikTok.
Trade
Shows, Webinars and Panel Discussions: Tradeshows in the age of COVID-19 have been transformed into virtual events. We participate
in select events as speakers and panel participants.
Growth
Strategy
Our
employees and the application of their acquired knowledge is our most valuable asset as an organization. Our growth strategy involves
leveraging this considerable strength as a basis for growth across three pillars of focus and exploration. These three pillars
allow us to continue to provide value to our current and future clients:
|
1.
|
Expertise
as a Service
|
|
2.
|
Expansion
of Geographical Reach
|
|
3.
|
Expansion
within the Commercial Horticulture Segment
|
1.
Expertise as a Service
We
have always aimed to provide the highest level of service and expertise to our clients from initial cultivation ideation to helping
prior to go-live to proactively solve for issues that may arise once operations begin and continue at their facilities. Our commissioning
and training services allow our clients to manage, operate and perform at the highest level throughout their entire cultivation
lifecycle once they are up and running.
2.
Expansion of Geographical Reach
While
we will continue to establish our end-to-end solution as the industry standard for CEA indoor cultivation, we intend to continue
to focus on integrating our expertise and service offerings with the best available technologies to allow our clients to achieve
operational superiority and profitability. While we believe that the U.S. market will experience continued strength, and this
will represent significant growth opportunities for us, we also intend to expand our reach within Europe.
European
Expansion - Historically, our business has found success with clients in the United States and Canada. While North
America currently presents the dominant opportunity for indoor new build and retrofit CEA facilities, the European CEA market,
especially in the vertical farming sub-segment, is rapidly expanding.
We
first entered the European market in early 2020, through key partners who have brought us into opportunities as a value-added
component to their own sales cycle. We have demonstrated the transferability of our expertise to the EU and have closed several
deals to provide value-added solution services to European clients. Further, in Switzerland, where the majority of our
engineering and design contracts were signed, the plant-based medicines market (hemp-derived CBD) has shown a strong, positive
response for our solutions. Based on our due diligence, we believe that the most common facilities in demand in this market will
mirror that of our niche – indoor, CEA, GMP-certified operations. We will look to capitalize on our current approach and
expand our reach into Europe with our services and products through a staged and cost-efficient approach by first entering the
market through our strong partnerships and leveraging our existing U.S.-based engineering expertise and overhead.
The
term “plant-based medicines” includes (i) a wide array of herbal supplements including but not limited to curcumin,
saffron extract and ginger, (ii) CBD based therapeutics, (iii) cannabis based therapeutics and (iv) a host of medicines derived
from plans such as caffeine, menthol, foxglove and others.
Approach
to Market Expansion - Due to the rapid development of the European market and the lack of established companies experienced
in the design, construction, and operations of indoor cultivation facilities, we will make a strategic and staged entry into the
European market to ensure a sustainable use of resources and capital. The market entry will be designed around a three-phased
approach:
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●
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Phase
One – Focus on establishing a client base and pipeline surrounding early license applicants and current license holders
by providing facility and systems design for indoor projects.
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Phase
Two – Building on established vendor relationships, integrate purpose-built custom environmental equipment systems from
U.S. manufacturers into our European offering.
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Phase
Three – Incorporate the development of the initial two phases combined with the partnerships, joint ventures, and domestic
manufacturing of equipment to provide a turn-key project solution offering in Europe.
|
We
believe this three-phased approach, paired with the evolution of partnerships and domestic equipment manufacturing, will
establish us as an experienced leader and solution provider in the design, engineering, and turn-key systems for the European
indoor CEA market.
3.
Expansion within the Commercial Horticulture Segment
Utilizing
our in-house engineering capabilities and synergies, we confidently believe that we can efficiently expand our diversification
to include working on projects in the CEA indoor vertical farming market segment in both the North American and European markets.
Global
CEA Vertical Farming Segment - CEA vertical farm facilities for cultivation are typically indoor warehouse farms and plant
factories that are in purpose-built or retrofitted facilities.
According
to Allied Market Research, the global vertical farming market is estimated to reach $12.8 billion by 2026, with a compounded annual
growth rate of 24.6% from 2019 to 2026. The market for non-container facilities—on which we already focus and have had success—is
forecasted to grow even faster. This rate of growth forecast is buttressed by the fact that more and more food will be needed
closer to where population resides, and CEA eliminates many of the risks of traditional agriculture, minimizing risk and allowing
localities to be closer and control their food supply more readily.
Market
Entry - Our end-to-end approach, solutions, and expertise are applicable for and valuable to clients creating high performance
indoor vertical farms to cultivate high value crops such as leafy greens, micro-greens, herbs, peppers, or even floriculture.
After studying the opportunity over the last two quarters, we see relatively few barriers to entry as:
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●
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our
engineers’ design expertise in indoor CEA seamlessly flows through to indoor vertical farming facilities;
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●
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our
experts’ backgrounds are predominantly built on a commercial horticulture foundation; and
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our
acquired expertise in engineering over 300 indoor CEA projects with the highest valued crop in the world will allow us to
design high performance vertical farms.
|
Our
approach to entering this market will follow what we have done as we entered Europe – we will continue to reinforce our
core strengths as we expand into new markets through our partnerships. The first phase of entering this CEA market will be as
a value-add to our partners who already successfully sell to this market in North America. As we find success here, we will look
to continue to partner to accelerate our reach and begin to supply much of the equipment needed to build out a facility, and finally,
after identifying and solving for any potential gaps, we will look to offer turn-key, end-to-end design, engineer, and build services
for indoor CEA facilities.
Acquisition
Strategy - While entering any new market can be challenging, we believe that our existing brand combined with the strength
of our partnerships and expertise will allow us to capture a meaningful amount of this market through targeting the most sophisticated,
well-funded producers who are in need of a partner that has a demonstrated history of success growing crops in this way.
To
speed up our expansion plan, and with the intention of forming strategic relationships to assist in lead generation, we plan to
place investments in or acquire horticulture-related positive cash flow entities at discounted prices based upon the synergistic
upside available for both organizations.
Our
Competition
While
we feel that our complex end-to-end solution places us as a leader in the CEA segment, we do face competition from companies that
offer some, but not all, portions of an all-encompassing facility package. Further, these companies often outsource to third parties
for the integration and sale of equipment systems and products, particularly within the cannabis industry. We also compete with
other smaller and mid-sized companies that focus primarily on either engineering design services or product sales. Within the
services space, there are several product or services specific competitors that offer similar services, such as MEP services or
basic fertigation design. Currently, we view our competition to be focused on equipment sales that are predominantly commodity
“off-the-shelf” items like lighting and other cultivation staple products, both pre- and post-startup. This competition
comes from traditional wholesale horticulture dealers, online retailers, and some manufacturers who sell direct.
Greenhouse
manufacturers and European systems integrators may increasingly seek to offer comprehensive product and service solutions to compete
with our integrated solution, but they are primarily focused on the greenhouse industry, and not on indoor CEA facilities. European
systems integrators in particular are experienced and have a strong operating history in traditional horticulture and provide
specialized, intensive, and large-scale solutions that revolve around greenhouse projects. Instead of competing with these integrators,
we find ourselves working with them and combining synergies to work on projects together.
Further,
although we frequently partner with direct manufacturers to deliver our customized solution, these manufacturers may seek to engage
with clients directly to deliver their products. In addition, we sometimes compete with electrical contractors with respect to
specific components of facility engineering and design.
As
the cannabis market continues to mature and develop and legalization becomes more prevalent, we expect to see more competition
from cannabis-focused agricultural product and service providers. Going forward, our focus is on non-cannabis crops. These
companies may have longer operating histories, greater name recognition, larger client bases and significantly greater financial,
technical, sales and marketing resources. These competitors may adopt more aggressive pricing policies and make more attractive
offers to existing and potential clients, employees, strategic partners, distribution channels and advertisers. Increased competition
is likely to result in price reductions, reduced gross margins and a potential loss of market share.
Regulation
U.S.
Regulations
While
we do not generate any revenue from the direct sale of cannabis products, we have historically, and may continue to, offer our
solutions to indoor cultivators that are engaged in various aspects of the cannabis industry. Marijuana is a Schedule I controlled
substance and is illegal under federal law. Even in those states in which the use of marijuana has been legalized, its use remains
a violation of federal laws.
A
Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack
of safety for use under medical supervision and a high potential for abuse. The Department of Justice defines Schedule I controlled
substances as “the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence.”
If the federal government decides to enforce the Controlled Substances Act with respect to marijuana, persons that are charged
with distributing, possessing with intent to distribute, or growing marijuana could be subject to fines and terms of imprisonment,
the maximum being life imprisonment and a $50 million fine. Any such change in the federal government’s enforcement of current
federal laws could cause significant financial damage to us. While we do not intend to harvest, distribute or sell cannabis, we
may be irreparably harmed by a change in enforcement by the federal or state governments.
Previously,
the Obama administration took the position that it was not an efficient use of resources to direct federal law enforcement agencies
to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical marijuana. The Trump
administration revised this policy but made no major changes in enforcement. Specifically, Attorney General Sessions vacated the
Cole Memorandum in favor of deferral of any enforcement of federal regulation to the individual states’ Department of Justice
or U.S. Attorney. However, certain other protections remain in place via budgetary element embedment (the Rohrabacher-Farr amendment,
now referred to as the Rohrabacher-Blumenauer Amendment), which limits funding of any enforcement of anti-cannabis legislation.
The Department of Justice has stated that it will continue to enforce the Controlled Substances Act with respect to marijuana
to prevent:
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the
distribution of marijuana to minors;
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criminal
enterprises, gangs and cartels receiving revenue from the sale of marijuana;
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the
diversion of marijuana from states where it is legal under state law to other states;
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state-authorized
marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
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violence
and the use of firearms in the cultivation and distribution of marijuana;
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●
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driving
while impaired and the exacerbation of other adverse public health consequences associated with marijuana use;
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●
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the
growing of marijuana on public lands; and
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●
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marijuana
possession or use on federal property.
|
Since
the use of marijuana is illegal under federal law, most federally chartered banks will not accept deposit funds from businesses
involved with marijuana. Consequently, businesses involved in the marijuana industry generally bank with state-chartered banks
and credit unions to provide banking to the industry.
Although
cultivation and distribution of marijuana for medical use is permitted in many states, provided compliance with applicable state
and local laws, rules, and regulations, marijuana is illegal under federal law. Strict enforcement of federal law regarding marijuana
would likely result in a material adverse effects on our business and revenues. Though the cultivation and distribution of marijuana
remains illegal under federal law, H.R. 83, enacted by Congress on December 16, 2014, provides that none of the funds made available
to the DOJ pursuant to the 2015 Consolidated and Further Continuing Appropriations Act may be used to prevent states from implementing
their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana. While this appropriations
measure continued from 2016 through 2020, and remains in effect, continued re-authorization cannot be guaranteed.
If this appropriations rider is no longer in effect, the risk of federal enforcement and override of state marijuana laws would
increase. However, state laws do not supersede the prohibitions set forth in the federal drug laws.
In
order to participate in either the medical or adult use sides of the marijuana industry, all businesses
and employees must obtain licenses from the state and, for businesses, local jurisdictions. In addition, all owners and employees must obtain an occupational
license to be permitted to own or work in a facility. All applicants for licenses undergo a background investigation, including
a criminal record check for all owners and employees.
Laws
and regulations affecting the medical marijuana industry are constantly changing, which could detrimentally affect our proposed
operations. Local, state and federal medical marijuana laws and regulations are broad in scope and subject to evolving interpretations,
which could require us to incur substantial costs associated with compliance or alter our business plan. In addition, violations
of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our operations.
It is also possible that regulations may be enacted in the future that will be directly applicable to our business. We cannot
predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional
governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.
Canadian
Regulations
Summary
of the Cannabis Act
On
October 17, 2018, the Cannabis Act came into force as law with the effect of legalizing adult recreational use of cannabis across
Canada. The Cannabis Act replaced the Access to Cannabis for Medicinal Purposes Regulations (“ACMPR”) and the Industrial
Hemp Regulations, both of which came into force under the Controlled Drugs and Substances Act (Canada) (the “CDSA”),
which previously permitted access to cannabis for medical purposes for only those Canadians who had been authorized to use cannabis
by their health care practitioner. The ACMPR replaced the Marihuana for Medical Purposes Regulations (Canada) (the “MMPR”),
which was implemented in June 2013. The MMPR replaced the Marihuana Medical Access Regulations (Canada) (the “MMAR”)
which was implemented in 2001. The MMPR and MMAR were initial steps in the Government of Canada’s legislative path towards
the eventual legalization and regulating recreational and medical cannabis.
The
Cannabis Act permits the recreational adult use of cannabis and regulates the production, distribution and sale of cannabis and
related oil extracts in Canada, for both recreational and medical purposes. Under the Cannabis Act, Canadians who are authorized
by their health care practitioner to use medical cannabis have the option of purchasing cannabis from one of the producers licensed
by Health Canada and are also able to register with Health Canada to produce a limited amount of cannabis for their own medical
purposes or to designate an individual who is registered with Health Canada to produce cannabis on their behalf for personal medical
purposes.
Pursuant
to the Cannabis Act, subject to provincial regulations, individuals over the age of 18 are able to purchase fresh cannabis,
dried cannabis, cannabis oil, and cannabis plants or seeds and are able to legally possess up to 30 grams of dried cannabis, or
the equivalent amount in fresh cannabis or cannabis oil. The Cannabis Act also permits households to grow a maximum of four cannabis
plants. This limit applies regardless of the number of adults that reside in the household. In addition, the Cannabis Act provides
provincial and municipal governments the authority to prescribe regulations regarding retail and distribution, as well as the
ability to alter some of the existing baseline requirements of the Cannabis Act, such as increasing the minimum age for purchase
and consumption.
Provincial
and territorial governments in Canada have made varying announcements on the proposed regulatory regimes for the distribution
and sale of cannabis for adult-use purposes. For example, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Yukon
and the Northwest Territories have chosen the government-regulated model for distribution, whereas Saskatchewan and Newfoundland
& Labrador have opted for a private sector approach. Alberta, Ontario, Manitoba, Nunavut and British Columbia have announced
plans to pursue a hybrid approach of public and private sale and distribution.
In
connection with the new framework for regulating cannabis in Canada, the federal government has introduced new penalties under
the Criminal Code (Canada), including penalties for the illegal sale of cannabis, possession of cannabis over the prescribed limit,
production of cannabis beyond personal cultivation limits, taking cannabis across the Canadian border, giving or selling cannabis
to a youth and involving a youth to commit a cannabis-related offence.
On
July 11, 2018, the Canadian federal government published regulations in the Canada Gazette to support the Cannabis Act, including
the Cannabis Regulations, the new Industrial Hemp Regulations, along with proposed amendments to the Narcotic Control Regulations
and certain regulations under the Food and Drugs Act (Canada). The Industrial Hemp Regulations and the Cannabis Regulations, among
other things, outline the rules for the legal cultivation, processing, research, analytical testing, distribution, sale, importation
and exportation of cannabis and hemp in Canada, including the various classes of licenses that can be granted, and set standards
for cannabis and hemp products. The Industrial Hemp Regulations and the Cannabis Regulations include strict specifications for
the plain packaging and labelling and analytical testing of all cannabis products as well as stringent physical and personnel
security requirements for all federally licensed production sites. The Industrial Hemp Regulations and the Cannabis Regulations
also maintain a distinct system for access to cannabis. With the Cannabis Act now in force, cannabis has ceased to be regulated
under the CDSA and is instead regulated under the Cannabis Act, and both the ACMPR and the Industrial Hemp Regulations have been
repealed effective October 17, 2018.
On
June 7, 2018, Bill-C45 passed the third reading in the Senate with a number of amendments to the language of the Cannabis Act.
More specifically, the Senate proposed:
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establishing
a committee of the Senate and a committee of the House of Commons to undertake a comprehensive review of the administration
and operation of the Cannabis Act;
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assisting
provinces and territories to facilitate the development of workplace impairment policies;
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allowing
provinces to place restrictions on the ability of individuals to engage in home cultivation;
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that
law enforcement be provided with the appropriate tools and resources to address concerns about continued illicit production,
diversion, and sale of cannabis to youth, including preventing the sharing of marihuana among young adults by rendering it
a ticketable offense;
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that
the prices set for cannabis products and the applicable taxes reflect the dual objective of minimizing the health dangers
of cannabis consumption and undercutting the illicit market of cannabis;
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mandatory
health warnings for cannabis products, including warnings about the danger of smoking cannabis, the danger of exposure to
second-hand cannabis smoke, and the risks of combining cannabis and tobacco;
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testing
procedures for THC content be standardized to ensure accurate measurement to better protect consumer health and safety;
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that
forthcoming regulations for edible products and other forms of cannabis ensure that product packaging is child-resistant and
does not appeal to young people, and that the type of available products should be strictly limited;
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adequate
and ongoing funding for sustained, evidence-based cannabis education and prevention programs to provide Canadians, especially
young Canadians, with knowledge about the health risks of cannabis use, including on-going research initiatives on the impact
of cannabis use on the developing brain; and that the federal government commit to on-going educational initiatives to ensure
youth are informed on the effects of cannabis use;
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to
prohibit licensees under the Cannabis Act to distribute branded merchandise, such as t-shirts and baseball caps and imposing
a moratorium on loosening the regulations on the branding, marketing, and promotion of cannabis for 10 years;
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to
set aggressive targets, comparable to the successful Federal Tobacco Control Strategy, to reduce the number of youth and adult
cannabis users; and
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to
ensure that the Cannabis Tracking System be operational upon the coming-into-force of the Cannabis Act.
|
Security
Clearances - The Cannabis Regulations require that certain people associated with cannabis licensees, including individuals
occupying a “key position” directors, officers, large stockholders and individuals identified by the Minister
of Health, must hold a valid security clearance issued by the Minister of Health. Officers and directors of a parent corporation
must be security cleared.
Under
the Cannabis Regulations, the Minister of Health may refuse to grant security clearances to individuals with associations to organized
crime or with past convictions for, or an association with, drug trafficking, corruption or violent offences. Individuals who
have histories of nonviolent, lower-risk criminal activity (for example, simple possession of cannabis, or small-scale cultivation
of cannabis plants) are not precluded from participating in the legal cannabis industry, and the grant of security clearance to
such individuals is at the discretion of the Minister of Health and such applications will be reviewed on a case-by-case basis.
Cannabis
Tracking System - Under the Cannabis Act, the Minister of Health is authorized to establish and maintain a national cannabis
tracking system. The Cannabis Regulations set out a national cannabis tracking system to track cannabis throughout the supply
chain to help prevent diversion of cannabis into, and out of, the illicit market. The Cannabis Regulations also provides the Minister
of Health with the authority to make a ministerial order that would require certain persons named in such order to report specific
information about their authorized activities with cannabis, in the form and manner specified by the Minister of Health.
Cannabis
Products - The Cannabis Regulations set out the requirements for the sale of cannabis products at the retail level permit
the sale of dried cannabis, cannabis oil, fresh cannabis, cannabis plants, and cannabis seeds, including in such forms as “pre-rolled”
and in capsules. The THC content and serving size of cannabis products is limited by the Cannabis Regulations. The sale of edibles
containing cannabis and cannabis concentrates was not initially permitted, however the federal government anticipates that such
products will be legalized within one year following the coming into force of the Cannabis Act.
Intellectual
Property
The
success of our business depends, in part, on our ability to maintain and protect our proprietary technologies, information, processes
and know-how. We rely primarily on patent, trademark, copyright and trade secret laws in the U.S. and similar laws in other countries,
confidentiality agreements and procedures and other contractual arrangements to protect our technology. Our patents are limited
to certain sensors that we obtain from third party manufacturers that do not contribute materially to our sales or profitability.
Our trademarks are solely for branding purposes, although we no longer sell any goods or services under the Soleil brand. As of
the date of this prospectus, the following summarizes the status of our registrations, pending applications, issued U.S. patents
and one published U.S. patent application:
Trademarks
We
have received the following trademark registrations:
Trademark
|
|
Jurisdiction
|
|
Registration
Number
|
|
Registration
Date
|
|
Status
|
URBAN-GRO
|
|
United
States
|
|
4618322
|
|
October
7, 2014
|
|
Registered
|
URBAN-GRO
|
|
United
Kingdom
|
|
3266415
|
|
January
19, 2018
|
|
Registered
|
URBAN-GRO
|
|
European
Union
|
|
017391806
|
|
October
31, 2018
|
|
Registered
|
URBAN-GRO
|
|
WIPO
|
|
1548013
|
|
July
08, 2020
|
|
Registered
|
SOLEIL
|
|
United
States
|
|
5209707
|
|
May
23, 2017
|
|
Registered
|
SOLEIL
|
|
United
Kingdom
|
|
3266410
|
|
March
09, 2018
|
|
Registered
|
SOLEIL
|
|
Canada
|
|
1083969
|
|
October
07, 2020
|
|
Registered
|
SOLEIL
|
|
European
Union
|
|
017391781
|
|
September
11, 2018
|
|
Registered
|
OPTI-DURA
|
|
United
States
|
|
5770091
|
|
June
4, 2019
|
|
Registered
|
OPTI-DURA
|
|
Canada
|
|
TMA1070145
|
|
January
20, 2020
|
|
Registered
|
We
have applied for and are awaiting receipt of the following trademark registrations:
Trademark
|
|
Jurisdiction
|
|
Application
Number
|
|
Filing
Date
|
|
Status
|
URBAN-GRO
|
|
Canada
|
|
1930075
|
|
November
13, 2018
|
|
Pending.
|
URBAN-GRO
|
|
Canada
(Madrid)
|
|
A0098111
|
|
July
08, 2020
|
|
Pending.
|
URBAN-GRO
|
|
European
Union (Madrid)
|
|
A0098111
|
|
July
08, 2020
|
|
Pending.
Examination Completed.
|
URBAN-GRO
|
|
United
Kingdom (Madrid)
|
|
A0098111
|
|
July
08, 2020
|
|
Pending.
|
gro-care
|
|
United
States
|
|
88898692
|
|
May
03, 2020
|
|
Pending.
|
gro-care
|
|
WIPO
|
|
A0099548
|
|
August
24, 2020
|
|
Pending.
|
gro-care
|
|
Canada
(Madrid)
|
|
A0099548
|
|
August
24, 2020
|
|
Pending.
|
gro-care
|
|
European
Union (Madrid)
|
|
A0099548
|
|
August
24, 2020
|
|
Pending.
|
gro-care
|
|
United
Kingdom (Madrid)
|
|
A0099548
|
|
August
24, 2020
|
|
Pending.
|
SOLEIL
GIVES YOUR CROP A VOICE
|
|
United
States
|
|
87671876
|
|
November
3, 2017
|
|
Allowed
– Intent to Use
|
SOLEIL
GIVES YOUR PLANTS A VOICE
|
|
United
States
|
|
87671878
|
|
November
3, 2017
|
|
Allowed
– Intent to Use
|
Patents
Title
|
|
Jurisdiction
|
|
Application
Number
|
|
Filing
Date
|
|
Patent
Number and Issue Date
|
|
Status
|
Sensor
bus architecture for modular sensor systems
|
|
United
States
|
|
15/626,085
|
|
June
17, 2017
|
|
10,499,123
(December
3, 2019)
|
|
Issued
Expire
in 2037
|
Modular
sensor architecture for soil and water analysis at various depths from the surface
|
|
United
States
|
|
15/626,079
|
|
June
17, 2017
|
|
10,405,069
(September
3, 2019)
|
|
Issued
Expire
in 2037
|
Modular
sensor architecture for soil and water analysis at various depths from the surface
|
|
United
States
|
|
16/519,800
|
|
July
23, 2019
|
|
n/a
|
|
Published
|
We
rely on trade secret protection and confidentiality agreements to safeguard our interests with respect to proprietary know-how
that is not patentable and processes for which patents are difficult to enforce. We believe that many elements of our design and
engineering processes involve proprietary know-how, technology or data that are not covered by patents or patent applications,
including technical processes, test equipment designs, algorithms and procedures.
Our
policy is for our employees to enter into confidentiality and proprietary information agreements with
us to address intellectual property protection issues and require our employees to assign to us all of the inventions, designs
and technologies they develop during the course of employment with us. However, we might not have entered into such agreements
with all applicable personnel, and such agreements might not be self-executing. Moreover, such individuals could breach the terms
of such agreements.
We
attempt to protect our intellectual property via the deployment of non-disclosure agreements with both prospective clients and
business partners as well as licensees. There are no assurances that these non-disclosure agreements will prevent a third party
from infringing upon our rights.
Available
Information
Our
internet address is www.urban-gro.com and our investor relations website is located at ir.urban-gro.com . Our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports can be found
on our investor relations website, free of charge, as soon as reasonably practical after we electronically file such material
with, or furnish it to, the SEC. Information contained on our website is not incorporated by reference into this Form 10-K. The
SEC maintains a public website, www.sec.gov, which includes information about and the filings of issuers that file electronically
with the SEC.
Item
1A. Risk Factors
An investment in our common stock involves
a high degree of risk. You should carefully consider the following risks and all of the other information contained in this Report
before deciding whether to invest in our common stock. If any of the following risks are realized, our business, financial condition
and results of operations could be materially and adversely affected. In that event, the trading price of our common stock could
decline and you could lose all or part of your investment in our common stock. Additional risks of which we are not presently
aware or that we currently believe are immaterial may also harm our business and results of operations. Some statements in this
Report, including such statements in the following risk factors, constitute forward-looking statements. See the section entitled
“Forward-Looking Statements.”
Risks
Related to Our Operations
The
COVID-19 pandemic could continue to materially adversely affect our business, financial condition, results of operations, cash
flows and day-to-day operations.
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. We have since rehired several employees who were impacted by the downsizing effort.
The pandemic and its effects resulted in temporary delays in our projects, however, work on all such projects has resumed. Other
factors related to this coronavirus that could negatively impact 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, potential contract cancellations,
project scope reductions and project delays, our ability to fulfill our current backlog, and the ability of our vendors to
continue to provide us with product to fulfill our customers’ orders. 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.
We
have a relatively limited history of operations, a history of losses, and our future earnings, if any, and cash flows may be volatile,
resulting in uncertainty about our ability to service and repay our debt when it comes due and uncertainty about our prospects
generally.
We
were initially organized as a limited liability company in the State of Colorado on March 20, 2014. In March 2017, we converted
into a corporation with the expectation of becoming a public reporting company.
Following
is a summary of our recent historical operating performance:
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During
the year ended December 31, 2020, we generated revenue of $25.8 million and incurred a net loss of $5.1 million.
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During
the year ended December 31, 2019, we generated revenue of $24.2 million and incurred a net loss of $8.3 million.
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During
the year ended December 31, 2018, we generated revenue of $20.1 million and incurred a net loss of $3.9 million.
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During
the year ended December 31, 2017, we generated revenue of $12.3 million, and incurred a net loss of $2.6 million.
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Our
lack of a significant history and the evolving nature of the market in which we operate make it likely that there are risks inherent
to our business that are yet to be recognized by us or others, or not fully appreciated, and that could result in us suffering
further losses. As a result of the foregoing, and concerns regarding the economic impact from COVID-19, an investment in our securities
necessarily involves uncertainty about the stability of our operating results, cash flows and, ultimately, our ability to service
and repay our debt and our prospects generally.
We
had negative cash flow for the fiscal years ended December 31, 2020 and 2019.
We
had negative operating cash flow of ($3.6) million and ($2.5) million for the fiscal years ended December 31, 2020 and 2019, respectfully.
To the extent that we have negative operating cash flow in future periods, we may need to allocate a portion of our cash reserves
to fund such negative cash flow. We may also be required to raise additional funds through the issuance of equity or debt securities.
There can be no assurance that we will be able to generate positive cash flow from our operations, that additional capital or
other types of financing will be available when needed or that these financings will be on terms favorable to us.
Our
engineering and design services have been used and may continue to be contracted for use in emerging industries that may be subject
to quickly changing and inconsistent laws, regulations, practices and perceptions.
Although
the demand for our engineering and design services may be negatively impacted depending on how laws, regulations, administrative
practices, judicial interpretations, and consumer perceptions develop, we cannot reasonably predict the nature of such developments
or the effect, if any, that such developments could have on our business. We will continue to encounter risks and uncertainty
relating to our operations that may be difficult to overcome. To do so, we believe it will be important to:
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Execute
our business and marketing strategy successfully;
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Increase
and diversify our client base;
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Extend
our reach to include the global CEA marketplace;
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Meet
client demand with quality, timely services;
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When
appropriate, partner with affiliate marketing companies to explore demand;
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Leverage
initial relationships with existing clients;
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Enhance
the solutions that we offer and focus on continually improving customer service levels; and
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Attract,
hire, motivate and retain qualified personnel.
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We
may incur losses in the near future, which may impact our ability to implement our business strategy and adversely affect our
financial condition.
While
we have focused significantly on decreasing our operating expenses by reducing variable expenses, employee count, and marketing
activities in order to become cash flow positive, such decreases may adversely affect our operating results if we are unable to
support the business effectively. In turn, this would have a negative impact on our financial condition and potentially our share
price.
We also cannot make
any assurances that we will be profitable or generate sufficient profits from operations in the future. If our revenues do
not grow or our gross margins deteriorate substantially, we are likely to continue to experience losses in future periods. Collectively,
this may impact our ability to implement our business strategy and adversely affect our financial condition. This potentially
would have a negative impact on our share price.
We
may become subject to additional regulation of CEA facilities.
Our
engineering and design services are focused on facilities that grow a wide variety of crops that are subject to regulation by
the United States Food and Drug Administration and other federal, state or foreign agencies. Changes to any regulations and laws
that could complicate the engineering of these CEA facilities, such as waste water treatment and electricity-related mandates,
make it possible that potential related enforcement could decrease the demand for our services, and in turn negatively impact
our revenues and business opportunities.
Competition
in our industry is intense.
There
are many competitors in the horticulture industry, and in particular the cannabis industry, including many who offer somewhat
categorically similar products and services as those offered by us. There can be no guarantees that in the future other companies
will not enter this arena by developing products that are in direct competition with us. We anticipate the presence as well as
entry of other companies in this market space and acknowledge that we may not be able to establish, or if established to maintain,
a competitive advantage. Some of these companies may have longer operating histories, greater name recognition, larger client
bases and significantly greater financial, technical, sales and marketing resources. This may allow them to respond more quickly
than us to market opportunities. It may also allow them to devote greater resources to the marketing, promotion and sale of their
products and/or services. These competitors may also adopt more aggressive pricing policies and make more attractive offers to
existing and potential clients, employees, strategic partners, distribution channels and advertisers. Increased competition is
likely to result in price reductions, reduced gross margins and a potential loss of market share.
We
are dependent upon third-party suppliers of products we sell.
We
are dependent on outside vendors for the products we sell. For the year ended December 31, 2020, two vendors, Argus Control Systems
Limited (“Argus”), a provider of automated control systems, and Fluence Bioengineering, Inc. (“Fluence”),
a provider of lighting systems, were particularly important to our integrated sales solutions. Sales of Fluence’s LED lighting
systems accounted for 33% of our consolidated revenue for the year ended December 31, 2020. We use Fluence LED systems in our
designs and then sell them to our clients as part of our overall package. While we believe that there are sufficient sources of
supply available, if the third-party suppliers, such as Argus or Fluence, were to cease production or otherwise fail to supply
us with products in sufficient quantities on a timely basis and we were unable to contract on acceptable terms for these products
with alternative suppliers, our ability to sell these products would be materially adversely affected. If a sole source supplier
was to go out of business, we may be unable to find a replacement for such source in a timely manner or at all. If a sole source
supplier were to be acquired by a competitor, that competitor may elect not to sell to us in the future. Any inability to secure
required products or to do so on appropriate terms could have a materially adverse impact on the business, financial condition,
results of operations or prospects of urban-gro.
As
indicated above, we continue to monitor the outbreak of the COVID-19 coronavirus. Should the outbreak continue to become more
widespread, it could disrupt the businesses of our industry partners and third-party suppliers, which, in turn, could impact our
ability to procure equipment and raw materials from them and thereby negatively impact the business, financial condition, results
of operations or our prospects.
We
have historically been dependent on a small number of clients for a substantial portion of our revenue. If we fail to retain or
expand our client relationships, or if a significant client were to terminate its relationship with us or reduce its purchases,
our revenue could decline significantly.
During the year ended
December 31, 2020, one client represented 25% of total revenue and another client represented 13% of total revenue.
During the year ended December 31, 2019, one client represented 21% of total revenue. Substantially all of the revenue
derived from each of these separate clients were equipment sales. Although we have been able to successfully generate substantial
sales to different clients over time, there can be no assurances that we will be able to continue to do this in the future.
Our operating results for the foreseeable future could continue to depend on substantial sales to a small number of clients. Our
clients have no purchase commitments and may cancel, change or delay purchases with little or no notice or penalty. As a result
of this, our revenue could fluctuate materially and could be materially and disproportionately impacted by purchasing decisions
of any significant client. There can be no assurances that clients who represented a substantial portion of our historical revenue
will continue to purchase products from us in the future, which could cause our revenue to decline materially and negatively
impact our financial condition and results of operations. If we are unable to diversify our client base, we will continue
to be susceptible to risks associated with client concentration.
Our
business is dependent on our clients obtaining appropriate licenses from various licensing agencies.
Our
business is dependent on our clients obtaining appropriate licenses from various licensing agencies. There can be no assurance
that any or all licenses necessary for our clients to operate their businesses will be obtained, retained or renewed. If a licensing
body were to determine that one of our clients had violated applicable rules and regulations, there is a risk the license granted
to that client could be revoked, which could adversely affect future sales to that client and our operations. There can be no
assurance that our existing clients will be able to retain their licenses going forward, or that new licenses will be granted
to existing and new market entrants.
System
security risks, data protection breaches, cyber-attacks and systems integration issues could disrupt our internal operations or
services provided to clients.
Experienced
computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential
information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may
be able to develop and deploy viruses, worms, and other malicious software programs that attack or otherwise exploit any security
vulnerabilities of the products that we may sell in the future. Such disruptions could adversely impact our ability to fulfill
orders and interrupt other processes. Delayed sales, lower profits, or lost clients resulting from these disruptions could adversely
affect our financial results, stock price and reputation.
We
may be forced to litigate to defend our intellectual property rights, or to defend against claims by third parties against urban-gro
relating to intellectual property rights.
We
may be forced to litigate to enforce or defend our intellectual property rights, to protect our trade secrets or to determine
the validity and scope of other parties’ proprietary rights. Any such litigation could be very costly and could distract
our management from focusing on operating our business. The existence and/or outcome of any such litigation could harm our business.
We
may not be able to successfully identify, consummate or integrate acquisitions or to successfully manage the impacts of such transactions
on our operations.
Part
of our business strategy includes pursuing synergistic acquisitions. We have expanded, and plan to continue to expand, our business
by making strategic acquisitions and regularly seeking suitable acquisition targets to enhance our growth. Material acquisitions,
dispositions and other strategic transactions involve a number of risks, including: (i) the potential disruption of our ongoing
business; (ii) the distraction of management away from the ongoing oversight of our existing business activities; (iii) incurring
additional indebtedness; (iv) the anticipated benefits and cost savings of those transactions not being realized fully, or at
all, or taking longer to realize than anticipated; (v) an increase in the scope and complexity of our operations; and (vi) the
loss or reduction of control over certain of our assets.
The
pursuit of acquisitions may pose certain risks to us. We may not be able to identify acquisition candidates that fit our criteria
for growth and profitability. Even if we are able to identify such candidates, we may not be able to acquire them on terms or
financing satisfactory to us. We will incur expenses and dedicate attention and resources associated with the review of acquisition
opportunities, whether or not we consummate such acquisitions.
Additionally,
even if we are able to acquire suitable targets on agreeable terms, we may not be able to successfully integrate their operations
with ours. Achieving the anticipated benefits of any acquisition will depend in significant part upon whether we integrate such
acquired businesses in an efficient and effective manner. We may not be able to achieve the anticipated operating and cost synergies
or long-term strategic benefits of our acquisitions within the anticipated timing or at all. The benefits from any acquisition
will be offset by the costs incurred in integrating the businesses and operations. We may also assume liabilities in connection
with acquisitions to which we would not otherwise be exposed. An inability to realize any or all of the anticipated synergies
or other benefits of an acquisition as well as any delays that may be encountered in the integration process, which may delay
the timing of such synergies or other benefits, could have an adverse effect on our business, results of operations and financial
condition.
Risks
Related to the Cannabis Industry
Our
business is focused on providing engineering design, and equipment integration into facilities prior to the facility becoming
operational. We do not know for certain how much of our revenues to date have been generated from clients in the legal cannabis
industry; however, we believe the majority of our revenues to date have been generated from clients that operate in the legal
cannabis industry.
We
are broadening our market reach beyond the legal cannabis industry and are placing a substantial sales effort on expansion into
the rapidly growing non-cannabis CEA vertical farming segment. However, on a historic basis, we believe our clients to whom we
provide facility engineering design and equipment integration prior to the facility becoming operational have primarily been in
the legal cannabis industry. In addition to selling to these clients, we also sell our equipment solutions to third parties, such
as general contractors, and other intermediaries, like equipment leasing companies. While we do not know for certain how much
of these solutions are resold into the legal cannabis industry, we believe that to date the majority of these solutions have been
resold into the legal cannabis industry.
Now
that the non-cannabis CEA segment is gaining strong momentum, and since most all of the equipment systems that we sell originate
in the general horticulture industry and are agnostic to the crop grown in the facility, we believe that the proportion of non-cannabis
revenues will increase. However, we do not control to who such third parties resell our solutions, and notwithstanding our expansion
plans, a decrease in demand in the legal cannabis industry could have a material adverse effect on our revenues and the success
of our business.
The
cannabis industry is an emerging industry and has only been legalized in some states and remains illegal in others and under U.S.
federal law, making it difficult to accurately forecast the demand for our solutions in this specific industry, and losing clients
from this industry may have a material adverse effect on our revenues and the success of our business.
The
cannabis industry is immature in the United States and has only been legalized in some states and remains illegal in others and
under U.S. federal law, making it difficult to accurately predict and forecast the demand for our solutions. If the U.S. Department
of Justice (“DOJ”) did take action against the cannabis industry, those of our clients operating in the legal cannabis
industry would be lost to us.
To
analyze this risk, we are relying heavily upon the various U.S. federal governmental memos issued in the past (including the memorandum
issued by the DOJ on October 19, 2009, known as the “Ogden Memorandum”, the memorandum issued by the DOJ on August
29, 2013, known as the “Cole Memorandum” and other guidance), to remain acceptable to those state and federal entities
that regulate, enforce, or choose to defer enforcement of certain current regulations regarding cannabis and that the U.S. federal
government will not change its attitude to those practitioners in the cannabis industry as long as they comply with their state
and local jurisdictional rules and authorities.
The
legal cannabis industry is not yet well-developed, and many aspects of this industry’s development and evolution cannot
be accurately predicted, and therefore losing any clients may have a material adverse effect on our business. While we have attempted
to identify our business risks in the legal cannabis industry, you should carefully consider that there are other risks that cannot
be foreseen or are not described in this Report, which could materially and adversely affect our business and financial performance.
There
is heightened scrutiny by Canadian regulatory authorities related to the cannabis industry.
Our
existing operations in the United States, and any future operations or investments, may become the subject of heightened scrutiny
by regulators and other authorities in Canada. As a result, we may be subject to significant direct and indirect interaction with
public officials. No assurance can be provided that this heightened scrutiny will not in turn lead to the imposition of certain
restrictions on our ability to operate or invest in the United States, in addition to those described herein.
It
had been reported in Canada that the Canadian Depository for Securities Limited considered a policy shift that would see its subsidiary,
CDS, refuse to settle trades for cannabis issuers or issuers with cannabis related activities that have investments in the United
States. CDS is Canada’s central securities depository, clearing and settling trades in the Canadian equity, fixed income
and money markets. The TMX Group, the owner and operator of CDS, subsequently issued a statement on August 17, 2017 reaffirming
that there is no CDS ban on the clearing of securities of issuers with cannabis-related activities in the United States, despite
media reports to the contrary and that the TMX Group was working with regulators to arrive at a solution that will clarify this
matter, which would be communicated at a later time. On February 8, 2018, following discussions with the Canadian Securities Administrators
and recognized Canadian securities exchanges, the TMX Group announced the signing of the TMX Memorandum of Understanding (“MOU”)
with Aequitas NEO Exchange Inc., the Canadian Securities Exchange (“CSE”), the Toronto Stock Exchange, and the TSXV.
The TMX MOU outlines the parties’ understanding of Canada’s regulatory framework applicable to the rules, procedures,
and regulatory oversight of the exchanges and CDS as it relates to issuers with cannabis-related activities in the United States.
The MOU confirms, with respect to the clearing of listed securities, that CDS relies on the exchanges to review the conduct of
listed issuers. As a result, there is no CDS ban on the clearing of securities of issuers with cannabis-related activities in
the United States. However, there can be no guarantee that this approach to regulation will continue in the future. If such a
ban were to be implemented at a time when our securities are listed on a stock exchange, it would have a material adverse effect
on the ability of holders of our securities to make and settle trades. In particular, our securities would become highly illiquid
until an alternative was implemented, and investors would have no ability to effect a trade of our securities through the facilities
of the CSE.
As
marijuana remains illegal under United States federal law, it is possible that we may have to stop providing products and services
to companies who are engaged in marijuana cultivation and other marijuana-related activities.
Marijuana
is currently classified as a Schedule I controlled substance under the Controlled Substances Act and is illegal under United States
federal law. It is illegal under United States federal law to grow, cultivate, sell or possess marijuana for any purpose or to
assist or conspire with those who do so. Additionally, 21 U.S.C. 856 makes it illegal to “knowingly open, lease, rent, use,
or maintain any place, whether permanently or temporarily, for the purpose of manufacturing, distributing, or using any controlled
substance.” Even in those states in which the use of marijuana has been authorized under state law, its use remains a violation
of federal law. Since federal law criminalizing the use of marijuana is not preempted by state laws that legalize its use, strict
enforcement of federal law regarding marijuana would likely result in the inability of our clients that are involved in the cannabis
industry to proceed with their operations, which would adversely affect our operations.
Our
solutions are used by cannabis growers. While we are not aware of any threatened or current federal or state law enforcement actions
against any supplier of equipment that might be used for cannabis growing, law enforcement authorities, in their attempt to regulate
the illegal use of marijuana, may seek to bring an action or actions against us under the Controlled Substances Act for assisting
or conspiring with persons engaged in the cultivation of marijuana.
There
is also a risk that our activities could be deemed to be facilitating the selling or distribution of cannabis in violation of
the Controlled Substances Act. Although federal authorities have not focused their resources on such tangential or secondary violations
of the Controlled Substances Act, nor have they threatened to do so, with respect to the sale of equipment that might be used
by cannabis cultivators, or with respect to any supplies marketed to participants in the medical and recreational cannabis industry,
if the federal government were to change its practices, or were to expend its resources investigating and prosecuting providers
of equipment that could be usable by participants in the medical or recreational cannabis industry, such actions could have a
materially adverse effect on our operations, our clients that operate in the cannabis industry, or the sales of our products and
services.
As
a company with clients operating in the cannabis industry, we face many particular and evolving risks associated with that industry,
including uncertainty of United States federal enforcement and the need to renew temporary safeguards.
On
January 4, 2018, former Attorney General Sessions rescinded the previously issued memoranda (known as the Cole Memorandum) from
the DOJ that had de-prioritized the enforcement of federal law against marijuana users and businesses that comply with state marijuana
laws, adding uncertainty to the question of how the U.S. federal government will choose to enforce federal laws regarding marijuana.
Former Attorney General Sessions issued a memorandum to all United States Attorneys in which the DOJ affirmatively rescinded the
previous guidance as to marijuana enforcement, calling such guidance “unnecessary.” This one-page memorandum was vague
in nature, stating that federal prosecutors should use established principles in setting their law enforcement priorities. Under
previous administrations, the DOJ indicated that those users and suppliers of medical marijuana who complied with state laws,
which required compliance with certain criteria, would not be prosecuted. As a result, it is now unclear if the DOJ will seek
to enforce the Controlled Substances Act against those users and suppliers who comply with state marijuana laws.
Despite
Attorney General Sessions’ rescission of the Cole Memorandum, the Department of the Treasury, Financial Crimes Enforcement
Network, has not rescinded the “FinCEN Memo” dated February 14, 2014, which de-prioritizes enforcement of the Bank
Secrecy Act against financial institutions and marijuana related businesses which utilize them. This memorandum appears
to be a standalone document and is presumptively still in effect. At any time, however, the Department of the Treasury, Financial
Crimes Enforcement Network, could elect to rescind the FinCEN Memo. This would make it more difficult for our clients and potential
clients to access the U.S. banking systems and conduct financial transactions, which would adversely affect our operations.
In
2014, Congress passed a spending bill (“2015 Appropriations Bill”) containing a provision (“Appropriations Rider”)
blocking federal funds and resources allocated under the 2015 Appropriations Bill from being used to “prevent such States
from implementing their own State medical marijuana law.” The Appropriations Rider seemed to have prohibited the federal
government from interfering with the ability of states to administer their medical marijuana laws, although it did not codify
federal protections for medical marijuana patients and producers. Moreover, despite the Appropriations Rider, the Justice Department
maintains that it can still prosecute violations of the federal marijuana ban and continue cases already in the courts. Additionally,
the Appropriations Rider must be re-enacted every year. While it was continued in 2016, 2017, 2018, 2019 and 2020, and remains
in effect, continued re-authorization of the Appropriations Rider cannot be guaranteed. If the Appropriation Rider is no longer
in effect, the risk of federal enforcement and override of state marijuana laws would increase.
Further
legislative development beneficial to our operations is not guaranteed.
Among
other things, the business of our clients in the cannabis industry involves the cultivation, distribution, manufacture, storage,
transportation and/or sale of medical and adult use cannabis products in compliance with applicable state law. The success of
our business with respect to these clients depends on the continued development of the cannabis industry and the activity of commercial
business and government regulatory agencies within the industry. The continued development of the cannabis industry is dependent
upon continued legislative and regulatory authorization of cannabis at the state level and a continued laissez-faire approach
by federal enforcement agencies. Any number of factors could slow or halt progress in this area. Further regulatory progress beneficial
to the industry cannot be assured. While there may be ample public support for legislative action, numerous factors impact the
legislative and regulatory process, including election results, scientific findings or general public events. Any one of these
factors could slow or halt progressive legislation relating to cannabis and the current tolerance for the use of cannabis by consumers,
which could adversely affect our operations.
The
cannabis industry could face strong opposition from other industries.
We
believe that established businesses in other industries may have a strong economic interest in opposing the development of the
cannabis industry. Cannabis may be seen by companies in other industries as an attractive alternative to their products, including
recreational marijuana as an alternative to alcohol, and medical marijuana as an alternative to various commercial pharmaceuticals.
Many industries that could view the emerging cannabis industry as an economic threat are well established, with vast economic
and United States federal and state lobbying resources. It is possible that companies within these industries could use their
resources to attempt to slow or reverse legislation legalizing cannabis. Any inroads these companies make in halting or impeding
legislative initiatives that would be beneficial to the cannabis industry could have a detrimental impact on our clients and,
in turn on our operations.
The
legality of marijuana could be reversed in one or more states.
The
voters or legislatures of states in which marijuana has already been legalized could potentially repeal applicable laws which
permit the operation of both medical and retail marijuana businesses. These actions might force us to cease operations in one
or more states entirely.
Changing
legislation and evolving interpretations of law, which could negatively impact our clients and, in turn, our operations.
Laws
and regulations affecting the medical and adult-use marijuana industry are constantly changing, which could detrimentally affect
our clients involved in that industry and, in turn, our operations. Local, state and federal marijuana laws and regulations are
often broad in scope and subject to constant evolution and inconsistent interpretations, which could require our clients and ourselves
to incur substantial costs associated with modification of operations to ensure compliance. In addition, violations of these laws,
or allegations of such violations, could disrupt our clients’ business and result in a material adverse effect on our operations.
In addition, it is possible that regulations may be enacted in the future that will limit the amount of cannabis growth or related
products that our commercial clients are authorized to produce. We cannot predict the nature of any future laws, regulations,
interpretations or applications, nor can it determine what effect additional governmental regulations or administrative policies
and procedures, when and if promulgated, could have on our operations.
Regulatory
scrutiny of the cannabis industry may negatively impact our ability to raise additional capital.
The
business activities of certain of our clients rely on newly established and/or developing laws and regulations in multiple jurisdictions.
These laws and regulations are rapidly evolving and subject to change with minimal notice. Regulatory changes may adversely affect
our profitability or cause us to cease operations entirely. The cannabis industry may come under the scrutiny or further scrutiny
by the United States Food and Drug Administration, the SEC, the DOJ, the Financial Industry Regulatory Authority or other federal,
state or nongovernmental regulatory authorities or self-regulatory organizations that supervise or regulate the production, distribution,
sale or use of cannabis for medical or nonmedical purposes in the United States. It is impossible to determine the extent of the
impact of any new laws, regulations or initiatives that may be proposed, or whether any proposals will become law. The regulatory
uncertainty surrounding the industry that we service may adversely affect our business and operations, including without limitation,
the costs to remain compliant with applicable laws and the impairment of our ability to raise additional capital.
Banking
regulations could limit access to banking services.
Since
the use of marijuana is illegal under federal law, federally chartered banks will not accept deposit funds from businesses involved
with marijuana. Consequently, businesses involved in the cannabis industry often have trouble finding a bank willing to accept
their business. The inability to open bank accounts may make it difficult for our clients in the cannabis industry to operate
and their reliance on cash can result in a heightened risk of theft, which could harm their businesses and, in turn, harm our
business. Additionally, some courts have denied marijuana-related businesses bankruptcy protection, thus, making it very difficult
for lenders to recoup their investments, which may limit the willingness of banks to lend to our clients and to us.
A drop in the retail price
of cannabis products may negatively impact our business.
The
fluctuations in economic and market conditions that impact the prices of commercially grown cannabis, such as increases in the
supply of cannabis and decreases in demand for cannabis, could have a negative impact on our clients that are cannabis producers,
and therefore could negatively impact our business.
Our
contracts may not be legally enforceable in the United States.
Many
of our historic contracts, and those we may enter into in the future, relate to services that are ancillary to the cannabis industry
and other activities that are not legal under U.S. federal law and under some state laws. As a result, we may face difficulties
in enforcing our contracts in U.S. federal and certain state courts.
Risks
Related to Ownership of Our Common Stock
An
active, liquid trading market for our common stock may not develop in the future, and as a result, you may not be able to sell
your common stock at an attractive price, or at all.
Prior
to the completion of the initial public offering of our common stock in February 2021, shares of our common stock were quoted
on the OTC Markets Group, Inc. OTCQX Marketplace under the symbol “UGRO.” Trading on the OTCQX marketplace was infrequent
and in limited volume. Although our shares are now listed on the Nasdaq Capital Market, an active trading market for shares of
our common stock may never develop or be sustained. If an active trading market does not develop, you may have difficulty selling
your shares of common stock at an attractive price, or at all. An inactive market may also impair our ability to raise capital
by selling our common stock and may impair our ability to expand our business by using our common stock as consideration in an
acquisition.
Our stock price could be extremely volatile. As a result,
you may not be able to resell your shares at or above the price you paid for them.
Even if an active
trading market for our common stock develops, the market price of our common stock may be highly volatile and could be subject
to wide fluctuations. Volatility in the market price of our common stock, as well as general economic, market or political conditions,
may prevent you from being able to sell your shares at or above the price you paid for your shares and may otherwise negatively
affect the liquidity of our common stock. You may experience a decrease, which could be substantial, in the value of your stock,
including decreases unrelated to our operating performance or prospects, and you could lose part or all of your investment. The
price of our common stock has been, and could continue to be, subject to wide fluctuations in response to a number of factors,
including those described elsewhere in this Report and others such as:
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the
effect of the COVID-19 pandemic on our business and operations;
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our
ability to generate revenues sufficient to achieve profitability and positive cash flow;
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competition
in our industry and our ability to compete effectively;
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our
ability to attract, recruit, retain and develop key personnel and qualified employees;
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reliance
on significant clients and third-party suppliers;
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the ability of our principal stockholders to
significantly influence or control matters requiring a stockholder
vote;
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our
ability to successfully identify and complete acquisitions and effectively integrate those acquisitions into our operations;
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our
indebtedness and potential increases in our indebtedness;
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our
actual or anticipated operating and financial results, including how those results vary from the expectations of management,
securities analysts and investors;
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changes
in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating
agencies with respect to us or other industry participants;
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developments
in our business or operations or our industry sectors generally;
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any
future offerings by us of our common stock;
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any
coordinated trading activities or large derivative positions in our common stock, for example, a “short squeeze”
(a short squeeze occurs when a number of investors take a short position in a stock and have to buy the borrowed securities
to close out the position at a time that other short sellers of the same security also want to close out their positions,
resulting in a surge in stock prices, i.e., demand is greater than supply for the stock sold short);
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legislative
or regulatory changes affecting our industry generally or our business and operations specifically;
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the
operating and stock price performance of companies that investors consider to be comparable to us;
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announcements
of strategic developments, acquisitions, restructurings, dispositions, financings and other material events by us or our competitors;
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actions
by our current stockholders, including future sales of common shares by existing stockholders, including our
directors and executive officers;
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proposed
or final regulatory changes or developments;
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anticipated
or pending regulatory investigations, proceedings, or litigation that may involve or affect us; and
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the
other factors described under Part I, Item 1A “Risk Factors.”
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In
response to any one or more of these events, the market price of shares of our common stock could decrease significantly. In the
past, securities class action litigation has often been initiated against companies following periods of volatility in their stock
price. This type of litigation could result in substantial costs and divert our management’s attention and resources and
could also require us to make substantial payments to satisfy judgments or to settle litigation.
You
may be diluted by future issuances of preferred stock or additional common stock in connection with our incentive plans, acquisitions
or otherwise; future sales of such shares in the public market, or the expectations that such sales may occur, could lower our
stock price.
Our
certificate of incorporation authorizes us to issue shares of our common stock and options, rights, warrants and appreciation
rights relating to our common stock for the consideration and on the terms and conditions established by our Board of Directors
(the “Board”) in its sole discretion. We could issue a significant number of shares of common stock in the future
in connection with investments or acquisitions. Any of these issuances could dilute our existing stockholders, and such dilution
could be significant. Moreover, such dilution could have a material adverse effect on the market price for the shares of our common
stock.
The
future issuance of shares of preferred stock with voting rights may adversely affect the voting power of the holders of shares
of our common stock, either by diluting the voting power of our common stock if the preferred stock votes together with the common
stock as a single class, or by giving the holders of any such preferred stock the right to block an action on which they have
a separate class vote, even if the action were approved by the holders of our shares of our common stock.
The
future issuance of shares of preferred stock with dividend or conversion rights, liquidation preferences or other economic terms
favorable to the holders of preferred stock could adversely affect the market price for our common stock by making an investment
in the common stock less attractive. For example, investors in the common stock may not wish to purchase common stock at a price
above the conversion price of a series of convertible preferred stock because the holders of the preferred stock would effectively
be entitled to purchase common stock at the lower conversion price, causing economic dilution to the holders of common stock.
A
significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the
near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.
Subject
to certain exceptions, without the prior written consent of ThinkEquity, a division of Fordham Financial Management, Inc., as
representative of the underwriters of our initial public offering, we, during the period ending May 12, 2021 (90 days after the
date of the of the final prospectus for our initial public offering), and our officers and directors and our 5% or greater stockholders,
during the period ending August 10, 2021 (180 days after the date of the final prospectus for our initial public offering), have
agreed not to or are otherwise restricted in their ability to: (1) offer, sell, contract to sell, pledge, grant any option to
purchase, make any short sale or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities
convertible into, exchangeable for or that represent the right to receive shares of common stock; (2) file any registration statement
with the SEC relating to the offering of any shares of common stock or any securities convertible into or exercisable or exchangeable
for common stock; or (3) enter into any swap or other arrangement that transfers, in whole or in part, any of the economic consequences
of ownership of common stock, subject to certain exceptions. ThinkEquity, in its sole discretion, may release the common stock
and other securities subject to the lock-up provisions described above in whole or in part at any time with or without notice.
The
market price of our common stock may decline significantly when the restrictions on resale by our existing stockholders lapse.
A decline in the market price of our common stock might impede our ability to raise capital through the issuance of additional
shares of common stock or other equity securities.
We
do not anticipate paying any cash dividends on our common stock in the foreseeable future.
We
currently intend to retain our future earnings, if any, for the foreseeable future, to repay indebtedness and to fund the development
and growth of our business. We do not intend to pay any dividends to holders of our common stock in the foreseeable future. Any
decision to declare and pay dividends in the future will be made at the discretion of our Board taking into account various factors,
including our business, operating results and financial condition, current and anticipated cash needs, plans for expansion, any
legal or contractual limitations on our ability to pay dividends under our loan agreements or otherwise. As a result, if our Board
does not declare and pay dividends, the capital appreciation in the price of our common stock, if any, will be your only source
of gain on an investment in our common stock, and you may have to sell some or all of your common stock to generate cash flow
from your investment.
If
securities or industry analysts do not publish research or reports about our business, or if they downgrade their recommendations
regarding our common stock, its trading price and volume could decline.
We
expect the trading market for our common stock to be influenced by the research and reports that industry or securities analysts
publish about us, our business or our industry. As a new public company, we do not currently have and may never obtain research
coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading
price for our stock may be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of these
analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets,
which in turn could cause our stock price or trading volume to decline and our common stock to be less liquid. Moreover, if one
or more of the analysts who cover us downgrades our stock or publishes inaccurate or unfavorable research about our business,
or if our results of operations do not meet their expectations, our stock price could decline.
Taking
advantage of the reduced disclosure requirements applicable to “emerging growth companies” may make our common stock
less attractive to investors.
We
qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS
Act. An emerging growth company may take advantage of certain reduced reporting and other requirements that are otherwise generally
applicable to public companies, as described above. We currently intend to take advantage of each of these exemptions. We have
elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different
application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at
the time private companies adopt the new or revised standard. This may make a comparison of our financial statements with the
financial statements of a public company that is not an emerging growth company, or the financial statements of an emerging growth
company that has opted out of using the extended transition period, difficult or impossible because of the potential differences
in accounting standards used. We could be an emerging growth company until December 31, 2023. We cannot predict if investors will
find our common stock less attractive if we elect to rely on these exemptions, or if taking advantage of these exemptions would
result in less active trading or more volatility in the price of our common stock.
Provisions
of our certificate of incorporation and bylaws may delay or prevent a take-over that may not be in the best interests of our stockholders.
Provisions
of our certificate of incorporation and bylaws may be deemed to have anti-takeover effects, which include when and by whom special
meetings of our stockholders may be called, and may delay, defer or prevent a takeover attempt.
In
addition, our certificate of incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock with such rights
and preferences determined from time to time by our Board. None of our preferred shares are currently issued or
outstanding. Our Board may, without stockholder approval, issue additional preferred shares with dividends, liquidation, conversion,
voting or other rights that could adversely affect the voting power or other rights of the holders of our common stock.
The
requirements of being a public company may strain our resources, divert management’s attention and affect our ability to
attract and retain executive management and qualified board members.
As
a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank
Act, and other applicable securities rules and regulations. Compliance with these rules and regulations involves significant legal
and financial compliance costs, may make some activities more difficult, time-consuming or costly and may increase demand on our
systems and resources, particularly after we are no longer an “emerging growth company,” as defined in the JOBS Act.
The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business
and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and
procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls
and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight
may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely
affect our business and operating results. We may need to hire more employees in the future or engage outside consultants, which
will increase our costs and expenses.
In
addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty
for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws,
regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result,
their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could
result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure
and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment
may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating
activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities
intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities
may initiate legal proceedings against us, and our business may be adversely affected.
However,
for as long as we remain an “emerging growth company,” we may take advantage of certain exemptions from various reporting
requirements that are applicable to public companies that are not “emerging growth companies” including, but not limited
to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes Oxley Act, reduced disclosure
obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements
of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not
previously approved. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.”
We would cease to be an “emerging growth company” upon the earliest of: (i) the last day of the fiscal year following
the fifth anniversary of the first sale of our common stock under an effective Securities Act registration statement, which will
occur on December 31, 2023; (ii) the first fiscal year after our annual gross revenues are $1.07 billion or more; (iii) the date
on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or
(iv) as of the end of any fiscal year in which the market value of the common stock held by non-affiliates exceeded $700 million
as of the end of the second quarter of that fiscal year.
As
a result of disclosure of information in this Report and in filings required of a public company, our business and financial condition
are highly visible, which may result in threatened or actual litigation, including by competitors and other third parties. If
such claims are successful, our business and operating results could be adversely affected, and even if the claims do not result
in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the
resources of our management and adversely affect our business and operating results.
We
may be subject to additional regulatory burdens resulting from our public listing.
We
are working with our legal, accounting and financial advisors to identify those areas in which changes should be made to our financial
management control systems to manage our obligations as a public company listed on Nasdaq. These areas include corporate governance,
corporate controls, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will
continue to make, changes in these and other areas, including our internal controls over financial reporting. However, we cannot
assure holders of our common stock that these and other measures that we might take will be sufficient to allow us to satisfy
our obligations as a public company listed on Nasdaq on a timely basis. In addition, compliance with reporting and other requirements
applicable to public companies listed on Nasdaq will create additional costs for us and will require the time and attention of
management. We cannot predict the amount of the additional costs that we might incur, the timing of such costs or the impact that
management’s attention to these matters will have on our business.
General
Risks
We
are highly dependent on our management team, and the loss of our senior executive officers or other key employees could harm our
ability to implement our strategies, impair our relationships with clients and adversely affect our business, results of operations
and growth prospects.
Our
success depends, in large degree, on the skills of our management team and our ability to retain, recruit and motivate key officers
and employees. Our active senior executive leadership team, including Jonathan Nassar, Mark Doherty, Dan Droller, Brian Zimmerman,
and particularly Bradley Nattrass, James Dennedy and Richard Akright, have significant experience, and their knowledge and relationships
would be difficult to replace. Leadership changes will occur from time to time, and we cannot predict whether significant resignations
will occur or whether we will be able to recruit additional qualified personnel. Competition for senior executives and skilled
personnel in the horticulture industry is intense, which means the cost of hiring, paying incentives and retaining skilled personnel
may continue to increase.
We
need to continue to attract and retain key personnel and to recruit qualified individuals to succeed existing key personnel to
ensure the continued growth and successful operation of our business. In addition, as a provider of custom-tailored horticulture
solutions, we must attract and retain qualified personnel to continue to grow our business, and competition for such personnel
can be intense. Our ability to effectively compete for senior executives and other qualified personnel by offering competitive
compensation and benefit arrangements may be restricted by cash flow and other operational restraints. The loss of the services
of any senior executive or other key personnel, or the inability to recruit and retain qualified personnel in the future, could
have a material adverse effect on our business, financial condition or results of operations. In addition, to attract and retain
personnel with appropriate skills and knowledge to support our business, we may offer a variety of benefits, which could reduce
our earnings or have a material adverse effect on our business, financial condition or results of operations.
Our
insurance may not adequately cover our operating risk.
We
have insurance to protect our assets, operations and employees. While we believe our insurance coverage addresses all material
risks to which we are exposed and is adequate and customary in our current state of operations, such insurance is subject to coverage
limits and exclusions and may not be available for the risks and hazards to which we are exposed. In addition, no assurance can
be given that such insurance will be adequate to cover our liabilities or will be generally available in the future or, if available,
that premiums will be commercially justifiable. If we were to incur substantial liability and such damages were not covered by
insurance or were in excess of policy limits, or if we were to incur such liability at a time when we are not able to obtain liability
insurance, our business, results of operations and financial condition could be materially adversely affected.
We
may be exposed to currency fluctuations.
Although
our revenues and expenses are expected to be predominantly denominated in United States dollars, we may be exposed to currency
exchange fluctuations. Recent events in the global financial markets have been coupled with increased volatility in the currency
markets. Fluctuations in the exchange rate between the U.S. dollar, the Canadian dollar, the Euro, the Swiss franc, and the currency
of other regions in which we may operate may have a material adverse effect on our business, financial condition and operating
results. We may, in the future, establish a program to hedge a portion of our foreign currency exposure with the objective of
minimizing the impact of adverse foreign currency exchange movements. However, even if we develop a hedging program, there can
be no assurance that it will effectively mitigate currency risks.
Changes
in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters
could significantly affect our financial results.
U.S.
generally accepted accounting principles (“GAAP”) and related pronouncements, implementation guidelines and interpretations
with regard to a wide variety of matters that are relevant to our business, such as, but not limited to, revenue recognition,
stock-based compensation, trade promotions, and income taxes are highly complex and involve many subjective assumptions, estimates
and judgments by our management. Changes to these rules or their interpretation or changes in underlying assumptions, estimates
or judgments by our management could significantly change our reported results.
Our
ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially adversely
affect our business and the value of our common stock.
Our
reputation is a valuable component of our business. Threats to our reputation can come from many sources, including adverse sentiment
about our industry generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality,
compliance deficiencies, and questionable or fraudulent activities of our clients. Negative publicity regarding our business,
employees, or clients, with or without merit, may result in the loss of clients, investors and employees, costly litigation, a
decline in revenues and increased governmental regulation. If our reputation is negatively affected, by the actions of our employees
or otherwise, our business and, therefore, our operating results and the value of our common stock may be materially adversely
affected.
Our
indebtedness could adversely affect our financial condition and prevent us from fulfilling our debt service and other obligations.
Our
indebtedness could have significant effects on our business. For example, it could:
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make
it more difficult for us to satisfy our financial obligations, including with respect to our indebtedness, and any failure
to comply with the obligations of any of our debt agreements, including financial and other restrictive covenants, could result
in an event of default under the agreements governing our indebtedness;
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increase
our vulnerability to general adverse economic, industry and competitive conditions;
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limit
our ability to borrow additional funds; and
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limit
our financial flexibility.
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Each
of these factors may have a material and adverse effect on our financial condition and viability. Our ability to make payments
with respect to our indebtedness and to satisfy any other debt obligations will depend on our future operating performance, which
will be affected by prevailing economic conditions and financial, business and other factors affecting us and our industry, many
of which are beyond our control.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
Item
2. Properties
Our
principal place of business is located at 1751 Panorama Point, Unit G, Lafayette, Colorado, 80026. This location consists of approximately
10,000 square feet, including approximately 3,500 of office space and 6,500 square feet of warehouse space. This lease will expire
on August 31, 2021, unless the Company elects to exercise the one-year extension, which is exercisable at the Company’s
discretion. We currently pay monthly rent of $12,000, through August 2021.
Item
3. Legal Proceedings
From
time to time we become involved in or are threatened with what we consider to be immaterial disputes. There are no current, past,
pending or threatened legal proceedings or administrative actions either by or against the Company that in our opinion could have
a material effect on our business, financial condition, or operations.
ITEM
4. MINE SAFETY DISCLOSURES
Not
Applicable.
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
On February 17,
2021, we completed a public offering of 6,210,000 shares of our common stock, inclusive of the underwriters’
full overallotment, at $10.00 per share for total gross offering proceeds of $62,100,000. In connection with the offering,
we received approval to list our common stock on the Nasdaq Capital Market under the symbol “UGRO”. Prior to the
offering, shares of our common stock were quoted on the OTC Markets Group, Inc. OTCQX Marketplace under the symbol “UGRO”.
Although our shares were quoted on the OTCQX Marketplace from October 7, 2019 through February 11, 2021, because
trading on the OTCQX Marketplace was infrequent and limited in volume, the prices at which such transactions occurred did not
necessarily reflect the price that would have been paid for our common stock in a more liquid market.
The trading price
of our common stock has been, and may continue to be, subject to wide price fluctuations in response to various factors, many
of which are beyond our control, including those described in Part I, Item 1A, “Risk Factors.”
The
following table sets forth the high and low closing bid price information for our common stock on the OTCQX Marketplace for the
periods indicated. The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission
and may not necessarily represent actual transactions. Trading activity for our common stock prior to listing on the Nasdaq Capital
Market on February 12, 2021 can be found at www.otcmarkets.com.
Quarter Ended
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Low
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High
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December 31, 2020
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$
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0.37
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$
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8.39
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September 30, 2020
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$
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3.05
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$
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5.99
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June 30, 2020
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$
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3.05
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$
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5.99
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March 31, 2020
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$
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3.05
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$
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8.99
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October 7, 2019 thru December 31, 2019
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$
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7.19
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$
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15.29
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Holders
As
of March 26, 2021, we had 6,846 holders of record for our Common Stock.
Dividend
Policy
Since
our inception, we have not paid any dividends on our common stock, and we currently expect that, for the foreseeable future, all
earnings, if any, will be retained for use in the development and operation of our business. In the future, our Board may decide,
at its discretion, whether dividends may be declared and paid to holders of our common stock.
Reports
We
are subject to certain reporting requirements and furnish annual financial reports to our stockholders, certified by our independent
accountants, and furnish unaudited quarterly financial reports in our quarterly reports filed electronically with the SEC. All
reports and information filed by us can be found at the SEC website, www.sec.gov.
ReCENT
SALES OF UNREGISTERED SECURTIES
During
the year ended December 31, 2020, we issued the following
securities that were not registered under the Securities Act:
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On
February 21, 2020, we entered into a letter agreement (the “Credit Agreement”) by and among us, as borrower,
urban-gro Canada Technologies Inc. and Impact Engineering, Inc., as guarantors, the lenders party thereto, and Bridging
Finance Inc., as administrative agent for the lenders (the “Agent”). As additional consideration for the entering
into the Credit Agreement, we issued 83,333 shares of our common stock and warrants to purchase 20,746 shares of common stock
with an exercise price of $14.46 per share to the Agent. We relied upon the exemption from registration provided by Section
4(a)(2) of the Securities Act to issue the securities.
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On
December 15, 2020, we signed a $1,854,500 convertible note (the “Notes”) bridge financing (the “Bridge
Financing”). The Bridge Financing is a combination of $1,354,500 received on November 20, 2020, and an additional
$500,000 received on December 15, 2020. The Bridge Financing was raised by a combination of our Board of Directors, our
current investors and two new institutional funds. In connection with the Bridge Financing, an outstanding $1,000,000
promissory note and $4,500 interest accrued thereon was converted into a Note. The Notes were issued in reliance upon the
exemption from registration under Section 4(a)(2) of the Securities Act. The Notes carried interest at the rate of 12% and
were scheduled to mature on December 31, 2021. Pursuant to the mandatory conversion provisions therein, the Notes plus
accrued interest of $53,725 were converted into 254,430 shares of common stock upon completion of the public offering
described in more detail below.
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Completion
of Registered Public Offering
On
February 11, 2021, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with ThinkEquity,
a division of Fordham Financial Management, Inc. (the “Underwriter”), relating to the Company’s underwritten
public offering of its common stock. Pursuant to the Underwriting Agreement, the Company agreed to sell 5,400,000 shares of Common
Stock to the Underwriter at a public offering price of $10.00 per share, and granted the Underwriter
a 45-day over-allotment option to purchase up to 810,000 additional shares of Common Stock, equivalent to 15% of the shares of
Common Stock sold in the Offering (the “Option”), pursuant to the Company’s registration statement on Form S-1
(File Nos. 333-250120 and 333-253011) (the “Registration Statement”), under the Securities Act of 1933. The offering
closed on February 17, 2021, and the Company sold 6,210,000 shares of Common Stock to the Underwriter for total gross proceeds
of $62.1 million, which includes 810,000 shares sold upon the full exercise of the Option. After deducting the underwriting commissions,
discounts, and offering expenses, the Company received net proceeds of approximately $57.8 million. On February 17, 2021, pursuant
to the Underwriting Agreement, the Company issued the Warrants to purchase up to an aggregate of 310,500 shares of Common Stock.
The Warrants may be exercised beginning on August 11, 2021 until February 11, 2026. The initial exercise price of each Warrant
is $12.50 per share, which represents 125% of the Offering Price. On February 19, 2021 we used $5.8 million of the net proceeds
to repay outstanding under and terminated the Credit Agreement. We intend to use the remaining net proceeds to support our organic
growth, to expand in the European CEA market and for other general corporate purposes, including to fund potential future investments
and acquisitions of companies that we believe are complementary to our business and consistent with our growth strategy. Although
we may, from time to time, evaluate potential strategic investments and acquisitions, we do not have any definitive agreements
in place to make any such acquisitions at this current time. The expected use of net proceeds from the offering represents our
intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions
evolve and change. As a result, our management will have broad discretion over how these proceeds are used. The remaining net
proceeds will be invested in short-term investments until needed for the uses described above.
Item
6. Selected Financial Data
As
a smaller reporting company, we are not required to provide this information.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion and analysis of our results of operations and financial condition should be read together with the financial
statements and related notes and the other financial information included elsewhere in this Report. Such discussion and analysis
reflects our historical results of operations and financial position. This discussion contains forward-looking statements based
upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors”
and “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this Report. All share and per share amounts
presented herein have been restated to reflect the implementation of the 1-for-6 reverse stock split as if it had occurred at
the beginning of the earliest period presented.
Overview
AND HISTORY – See “Item 1. Business” for a further description of our History and Background
We
are a leading engineering and design services company focused on the sustainable commercial indoor horticulture market. We engineer
and design indoor CEA facilities and then integrate complex environmental equipment systems into those 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. 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.
|
The
ultimate magnitude of COVID-19, including the extent of its impact on our financial and operational results, which could be material,
will depend on the length of time that the pandemic continues, its effect on the demand for our products and our supply chain,
the effect of governmental regulations imposed in response to the pandemic, as well as uncertainty regarding all of the foregoing.
We cannot at this time predict the full impact of the COVID-19 pandemic, but it could have a larger material adverse effect on
our business, financial condition, results of operations and cash flows beyond what is discussed within this Report.
Coronavirus
Aid, Relief, and Economic Security Act (“CARES Act”)
On
March 27, 2020, the CARES Act was enacted. The CARES Act is an approximate $2 trillion emergency economic stimulus package passed
in response to the coronavirus outbreak. The CARES Act, among other things, includes broad sweeping provisions such as direct
financial assistance to Americans in the form of one-time payments to individuals; aid to businesses in the form of loans and
grants; and efforts to stabilize the U.S. economy and keep Americans employed in general. On April 16, 2020, we received a loan
in the amount of $1,020,600 under the Paycheck Protection Program (“PPP”) of the CARES Act. The PPP provides for loans
to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. On June
5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “PPPFA”) was enacted. The PPPFA extended the
covered period of the loans under the PPP from eight weeks to 24 weeks from the origination date of the loan, or December 31,
2020, whichever is earlier. Therefore, the PPP now provides a mechanism for forgiveness of up to the full amount borrowed after
24 weeks as long as the borrower uses the loan proceeds during the 24-week period after the loan origination for eligible purposes,
including payroll costs, certain benefits costs, rent and utilities costs or other permitted purposes, and maintains its payroll
levels, subject to certain other requirements and limitations. The amount of loan forgiveness is subject to reduction, among other
reasons, if the borrower terminates employees or reduces salaries during the 24-week period. The interest rate on the loan is
1.0% per annum. The PPPFA also extended the deferment period for principal and interest payments on PPP loans from six months
to ten months. Therefore, the payments of principal and interest under our PPP loan are deferred for ten months from the final
day of the loan forgiveness period (the “Deferral Period”). 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.
Bridge
Financing
During
the fourth quarter of 2020 the Company entered into bridge financing notes (the “Bridge Financing Notes”) totalling
$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 provided for a mandatory
conversion into common stock 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 above under Item 5 “Market
for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities—Completion
of Registered Public Offering” was a Qualified Offering and the Bridge Financing Notes plus accrued interest of $53,725
were converted into 254,430 shares of common stock in connection with the offering on February 17, 2021.
RESULTS
OF OPERATIONS
We
generate revenues from (i) engineering design and managed services, (ii) the sale, integration, and commissioning of customized
environmental and cultivation equipment systems, and (iii) selling consumable products once facilities are operational.
Comparison
of Results of Operations for the years ended December 31, 2020 compared to 2019
During the year
ended December 31, 2020, we generated revenues of $25.8 million compared to revenues of $24.2 million during the year ended December
31, 2019, an increase of $1.6 million, or 7%. Equipment systems sales revenue increased $3.7 million primarily due to an increase
in cultivation equipment sales, services revenue decreased $1.3 million primarily due to a decrease in the average size of the
facilities being designed and consumable product sales decreased $0.8 million due to fewer products sold. We signed 77
new engineering design project contracts in the year ended December 31, 2020, including six new projects in Europe, and secured
our first horticulture commissioning project, an East Coast based lettuce facility. During the year ended December 31, 2020 one
client represented 25% and another client represented 13% of our total revenue. During the year ended December 31, 2019
one client represented 21% of our total revenue. Substantially all of the revenue derived from each of these separate clients
were equipment systems sales.
During the year ended December 31, 2020, cost
of revenues was $20.1 million compared to $17.6 million during the year ended December 31, 2019, an increase of $2.5 million,
or 14%. This increase is attributable to an increase in revenue from our lower margin product equipment systems sales and
a reduction in our higher margin services revenue.
Gross profit was $5.7 million (22% of revenue)
during the year ended December 31, 2020 compared to $6.6 million (27% of revenue) during the year ended December 31, 2019. Gross
profit as a percentage of revenue decreased due to a revenue mix shift in the current period favoring equipment systems
versus services revenue as noted above.
Operating
expenses decreased by $4.0 million, or 32%, to $8.5 million for the year ended December 31, 2020 compared to $12.5 million for
the year ended December 31, 2019. The decrease in operating expenses was comprised of a $2.9 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 $0.5
million decrease in amortization of broker issuing costs and broker warrants associated with our offering of convertible debentures
in 2019.
Non-operating expenses were $2.3 million for
the year ended December 31, 2020, compared to $2.5 million for the year ended December 31, 2019, a decrease of $0.2 million (8%).
Interest expense, excluding amortization related to the convertible debentures of $1.3 million in 2019, increased by $0.8 million
to $1.5 million compared to $0.7 million in the year ended December 31, 2019, due to an increase in debt. For the years ended
December 31, 2020 and 2019, the Company recognized an impairment loss of $0.3 million and $0.5 million, respectively, related
to the investment in Total Grow Control Holdings Inc. (“TGH”). The Company incurred a $0.2 million expense for contingent
consideration from the acquisition of Impact Engineering, Inc. during the year ended December 31, 2020. The Company also
recorded a foreign exchange loss of $0.4 million in the year ended December 31, 2020 due to the revaluation of our Canadian denominated
debt.
As
a result of the above, we incurred a net loss of $5.1 million for the year ended December 31, 2020, or a net loss per share
of $1.06, compared to a net loss of $8.4 million for the year ended December 31, 2019, or a net loss per share of $1.90.
NON-GAAP
FINANCIAL MEASURES
The
Company uses the supplemental financial measure of Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted
EBITDA”) as a measure of our operating performance. Adjusted EBITDA is not calculated in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) and it is not a substitute for other measures prescribed
by GAAP such as net income (loss), income (loss) from operations, and cash flows from operating activities. We define Adjusted
EBITDA as net income (loss) attributable to urban-gro, Inc., determined in accordance with GAAP, excluding the effects of certain
operating and non-operating expenses including, but not limited to, interest expense, depreciation of tangible assets, amortization
of intangible assets, impairment of investments, and stock-based compensation that we do not believe reflect our core operating
performance.
Our
board of directors and management team focus on Adjusted EBITDA as a key performance and compensation measure. We believe that
Adjusted EBITDA assists us in comparing our operating performance over various reporting periods because it removes from our operating
results the impact of items that our management believes do not reflect our core operating performance.
The
following table reconciles net loss attributable to the Company to Adjusted EBITDA for the periods presented:
|
|
Years
Ended
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Net Loss
|
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$
|
(5,073,695
|
)
|
|
$
|
(8,350,573
|
)
|
Interest expense
|
|
|
1,497,469
|
|
|
|
704,230
|
|
Interest expense – amortization of convertible debentures
|
|
|
–
|
|
|
|
1,333,520
|
|
G&A – amortization of convertible debentures
|
|
|
–
|
|
|
|
432,578
|
|
Impairment loss
|
|
|
310,000
|
|
|
|
505,766
|
|
Stock-based compensation
|
|
|
1,803,403
|
|
|
|
1,830,426
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|
Contingent consideration – purchase price
|
|
|
155,000
|
|
|
|
–
|
|
Depreciation and amortization
|
|
|
258,440
|
|
|
|
266,476
|
|
Unrealized exchange loss
|
|
|
397,292
|
|
|
|
-
|
|
Adjusted EBITDA
|
|
$
|
(652,091
|
)
|
|
$
|
(3,277,577
|
)
|
Liquidity
and Capital Resources
As
of December 31, 2020, we had cash of $184,469, which represented a decrease of $264,234 from December 31, 2019.
Since
inception, we have incurred significant operating losses and have funded our operations primarily through issuances of equity
securities, debt, and operating revenue. As of December 31, 2020, we had an accumulated deficit of $21,964,321, a working capital
deficit of $9,300,836, and negative stockholders’ equity of $7,406,164. Prior to the $62.1 million common stock offering
on February 17, 2021, our ability to generate sufficient revenues to pay our debt obligations and accounts payable when
due was subject to risks and uncertainties. Historical consolidated financial statements included in this Report were 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
was dependent upon, among other things, our ability to generate revenue, control costs and raise capital. With the completion
of the $62.1 million common stock offering on February 17, 2021 management believes these doubts have been
alleviated.
As
described in the notes to the consolidated financial statements included in this Report, on February 21, 2020, we entered into
the letter agreement by and among us, as borrower, urban-gro Canada Technologies Inc. and Impact Engineering, Inc., as guarantors,
the lenders party thereto, and Bridging Finance Inc., as administrative agent for the lenders, 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). All amounts outstanding under the Credit Agreement were repaid in February of 2021 with a portion of the
net proceeds from the $62.1 million common stock offering and the Credit Agreement was terminated.
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 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 to purchase 34.58
shares of our Common Stock at $18.00 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 183,752 shares of common stock at $14.46 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 $30.00 per
share for a period of five consecutive days.
Net
cash used in operating activities was $3.6 million during the year ended December 31, 2020, compared to $2.5 million used for
the year ended December 31, 2019. Operating cash has been positively impacted from an increase in client deposits as demand for
our services and equipment solutions increased in the year ended December 31, 2020. At December 31, 2020, we had $4.9 million
in client deposits related to client orders, which compared favorably to client deposits of $2.9 million as of December 31, 2019.
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 December 31, 2020,
we had $0.7 million in accounts payable, compared to $3.8 million at December 31, 2019.
Net
cash used in investing activities was $0.2 million for the year ended December 31, 2020, compared to $2.9 million during the year
ended December 31, 2019. Historically, cash has been used to increase our investments in strategic partnerships and to acquire
property and equipment. We will
continue to have ongoing needs to purchase property and equipment to maintain our operations. We had no material commitments for
capital expenditures as of December 31, 2020.
Net
cash provided by financing activities was $3.5 million for the year ended December 31, 2020, compared to $2.9 million during the
year ended December 31, 2019. Cash provided from financing activities during the year ended December 31, 2020 primarily related
to $5.3 million in proceeds received from the issuance of debt, $1.0 million related to a long-term loan, and $0.9 million of
convertible notes related to the Bridge Financing, offset by $3.0 million used in the repayment of
notes payable and $0.7 million in financing fees related to the issuance of debt.
Gross
debt, excluding operating leases, was $8.4 million and $3.8 million as of December 31, 2020 and December 31, 2019, respectively.
This represents an increase in gross debt of $4.6 million primarily due to $5.3 million in proceeds received from the issuance
of debt offset by principal paydowns.
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 year ended December 31, 2020.
Critical
Accounting Policies and Estimates
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical
experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions. See Note 2, Summary of Significant Accounting
Policies, to the Notes to Consolidated Financial Statements contained in this Report for a discussion of our significant accounting
policies.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
From
time to time, the Financial Accounting Standards Board (“FASB”) or other standards setting bodies issue new accounting
pronouncements. Updates to the FASB’s Accounting Standard Codifications (“ASCs”) are communicated through issuance
of an Accounting Standards Update (“ASU”). Unless otherwise discussed, we believe 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 our financial statements
upon adoption.
In
June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments” (ASU 2016-13), creating
ASC Topic 326 – Financial Instruments – Credit Losses. ASU 2016-13 is intended to improve financial reporting by requiring
timelier recording of credit losses on financial assets measured at amortized cost basis (including, but not limited to loans),
net investments in leases recognized as lessor and off-balance sheet credit exposures. ASU 2016-13 eliminates the probable initial
recognition threshold under the current incurred loss methodology for recognizing credit losses. Instead, ASU 2016-13 requires
the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience,
current conditions, and reasonable and supportable forecasts. The Company will continue to evaluate the extent of the impact of
ASU 2016-13 on the Company’s financial position, results of operations and cash flows. With the release of ASU 2019-10,
the Company will monitor this impact through the effective date for fiscal years beginning after December 15, 2022.
In August 2020, the Financial Accounting Standards
Board FASB issued ASU 2020-06—Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts
in Entity’s Own Equity (Subtopic 815-40)—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.
ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models required under
current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate
accounting for embedded conversion features. ASU 2020-06 removes certain settlement conditions that are required for equity
contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. ASU 2020-06
also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for annual and
interim periods beginning after December 15, 2021, and early adoption is permitted for fiscal years beginning after December 15,
2020, and interim periods within those fiscal years. The Company is currently evaluating the impact that this new guidance will
have on its consolidated financial statements.
There
are other various updates recently issued by the FASB, most of which represented technical corrections to the accounting literature
or application to specific industries and are not expected to have a material impact on the Company’s financial position,
results of operations or cash flows.
Management
has reviewed all other recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption
of any such pronouncements may be expected to cause a material impact on our financial condition or the results of our operations.
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
7a. Quantitative And Qualitative Disclosures About Market Risk
As
a smaller reporting company, we are not required to provide this information.
Item
8. Financial Statements And Supplementary Data
The
financial statements and supplementary financial information required by this Item are set forth immediately following the signature
page and are incorporated herein by reference.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item
9A. Controls and Procedures
Disclosure
Controls and Procedures
Our management, with the participation of
our CEO and 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 December 31,
2020, at reasonable assurance levels.
We
believe that our financial statements presented in this Report fairly present, in all material respects, our financial position,
results of operations, and cash flows for all periods presented herein.
Our management, 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 fiscal year ended December 31, 2020, which were identified
in conjunction with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act,
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule
13a-15(f) or 15d-15(f) promulgated under the Exchange Act. Those rules define internal control over financial reporting as a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
|
●
|
Pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of
the assets of the Company;
|
|
●
|
Provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and the receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the Company; and
|
|
●
|
Provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the company’s
assets that could have a material effect on the financial statements.
|
Because
of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management
assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment,
our management used the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
This
Report does not include an attestation report of our registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary
rules of the SEC that permit us to provide only management’s report in this Report.
Item
9b. Other Information
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information
concerning our directors and officers is incorporated by reference to our Definitive Proxy Statement on Schedule 14A to be filed
with the SEC within 120 days after the end of our fiscal year.
ITEM
11. EXECUTIVE COMPENSATION
Information
concerning our directors and officers is incorporated by reference to our Definitive Proxy Statement on Schedule 14A to be filed
with the SEC within 120 days after the end of our fiscal year.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information
concerning our directors and officers is incorporated by reference to our Definitive Proxy Statement on Schedule 14A to be filed
with the SEC within 120 days after the end of our fiscal year.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information
concerning our directors and officers is incorporated by reference to our Definitive Proxy Statement on Schedule 14A to be filed
with the SEC within 120 days after the end of our fiscal year.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information
concerning our directors and officers is incorporated by reference to our Definitive Proxy Statement on Schedule 14A to be filed
with the SEC within 120 days after the end of our fiscal year.
PART
IV
Item
15. Exhibits, Financial Statements Schedules.
A
list of financial statements filed herewith is contained is set forth on page F-1 of the financial statements that immediately
follow the signature page of this Report and is incorporated by reference herein. The financial statement schedules have been
omitted because they are not required, not applicable or the information has been included in our financial statements. The exhibits
required by this Item are contained in the Exhibit Index beginning on the following page of this Annual Report on Form 10-K and
are incorporated herein by reference.
EXHIBIT INDEX
Exhibit
No.
|
|
Description
|
|
|
|
3.1
|
|
Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to Form 8-K filed October 30, 2020).
|
|
|
|
3.2
|
|
Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Form 8-K filed January 5, 2021)
|
|
|
|
3.3
|
|
Bylaws (incorporated by reference to Exhibit 3.4 to Form 8-K filed October 30, 2020).
|
|
|
|
3.4
|
|
Amendment No. 1 to Bylaws (incorporated by reference to Exhibit 3.1 to Form 8-K filed January 12, 2021).
|
|
|
|
4.1
|
|
Description
of urban-gro, Inc.’s Common Stock.
|
|
|
|
10.1
|
|
Letter Agreement between Edyza, Inc. and Registrant (incorporated by reference to Form S-1 Registration Statement filed on May 18, 2018)
|
|
|
|
10.2
|
|
Intellectual Property Purchase and Assignment Agreement between Edyza, Inc. and Registrant (incorporated by reference to Form S-1 Registration Statement filed on May 18, 2018)
|
|
|
|
10.3
|
|
Business Lease between JW Properties, LLC and Registrant dated July 22, 2015 (incorporated by reference to Form S-1Registration Statement filed on May 18, 2018)
|
|
|
|
10.4
|
|
Commercial Lease Agreement between Bravo Lighting, LLC and Registration (incorporated by reference to Form S-1 Registration Statement filed on May 18, 2018)
|
|
|
|
10.5
|
|
Form of Common Stock Purchase Warrant issued to Michael Sandy Bank dated April 19, 2018 (incorporated by reference to Form S-1/A Registration Statement filed on July 11, 2018)
|
|
|
|
10.6
|
|
Redemption Agreement with Total Grow Holdings LLC dated January 24, 2020 (incorporated by referenced to Form 8-K filed on January 30, 2020)
|
Exhibit
No.
|
|
Description
|
|
|
|
10.7*
|
|
Separation Agreement, dated as of March 20, 2020, by and between urban-gro, Inc. and Larry Dodson (incorporated by reference to Form 8-K filed on March 23, 2020)
|
|
|
|
10.8*
|
|
Form of Stock Option Agreement to be entered into on the Effective Date by and between urban-gro, Inc. and Larry Dodson (incorporated by reference to Form 8-K filed on March 23, 2020)
|
|
|
|
10.9*
|
|
urban-gro, Inc. 2019 Equity Incentive Plan (incorporated by reference to Form S-8 filed on August 27, 2019)
|
|
|
|
10.10*
|
|
Form of Deferred Shares Award Agreement (incorporated by reference to Exhibit 10.10 to Form 10-K filed on May 18, 2020).
|
|
|
|
10.11
|
|
Letter Agreement, dated February 21, 2020, by and among urban-gro, Inc., urban-gro Canada Technologies Inc., Impact Engineering, Inc., the lenders party thereto, and Bridging Finance Inc., as administrative agent for the lenders. (incorporated by reference to Exhibit 10.11 to Form 10-K filed on May 18, 2020).
|
|
|
|
10.12
|
|
Promissory Note, dated October 18, 2018, between urban-gro, Inc. and Cloud9 Support Inc. (incorporated by reference to Exhibit 10.12 to Form 10-K filed on May 18, 2020).
|
|
|
|
10.13
|
|
Amendment to Promissory Note, dated May 20, 2019, between urban-gro, Inc. and Cloud9 Support Inc. (incorporated by reference to Exhibit 10.13 to Form 10-K filed on May 18, 2020).
|
|
|
|
10.14
|
|
Subordination Agreement, dated February 25, 2020, between urban-gro, Inc. and Cloud9 Support Inc. (incorporated by reference to Exhibit 10.14 to Form 10-K filed on May 18, 2020).
|
|
|
|
10.15
|
|
Promissory Note, dated February 21, 2020, between urban-gro, Inc. and Cloud9 Support Inc. (incorporated by reference to Exhibit 10.15 to Form 10-K filed on May 18, 2020).
|
|
|
|
10.16
|
|
First Amendment to Loan Agreement, dated as of September 4, 2020, by and among urban-gro, Inc., urban-gro Canada Technologies Inc., Impact Engineering, Inc. and Bridging Finance Inc. (incorporated by reference to Exhibit 10.1 to Form 10-Q filed on November 3, 2020).
|
|
|
|
10.17
|
|
Agreement, dated as of September 18, 2020, by and between urban-gro, Inc. and George (Bob) Pullar (incorporated by reference to Exhibit 10.2 to Form 10-Q filed on November 3, 2020).
|
|
|
|
10.18*
|
|
Employment Agreement, dated as of July 1, 2020, by and between urban-gro, Inc. and Bradley Nattrass (incorporated by reference to Exhibit 10.18 to Form S-1 filed on November 16, 2020)
|
|
|
|
10.19*
|
|
Employment Agreement, dated as of July 1, 2020, by and between urban-gro, Inc. and Richard Akright (incorporated by reference to Exhibit 10.19 to Form S-1 filed on November 16, 2020)
|
|
|
|
10.20
|
|
Form of Amended and Restated Promissory Note (incorporated by reference to Exhibit 10.1 to Form 8-K filed on November 25, 2020).
|
|
|
|
10.21
|
|
Form of Amended and Restated Promissory Note (incorporated by reference to Exhibit 10.2 to Form 8-K filed on November 25, 2020).
|
|
|
|
10.22
|
|
Form of Convertible Promissory Note (incorporated by reference to Exhibit 10.3 to Form 8-K filed on November 25, 2020).
|
*
|
Denotes a management contract or compensatory plan
or arrangement.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual
Report to be signed on its behalf by the undersigned thereunder duly authorized.
|
URBAN-GRO,
INC.
|
|
|
|
Dated:
March 31, 2021
|
By:
|
/s/
Bradley Nattrass
|
|
|
Bradley
Nattrass
Chairperson of the Board of Directors and Chief
Executive Officer
|
POWER
OF ATTORNEY
KNOW
ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Bradley Nattrass, his or
her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his
or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and
to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission,
granting unto such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite
or necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that such attorney-in-fact and agent, or his or her substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Bradley Nattrass
|
|
Chairperson
of the Board, Chief Executive Officer, and
|
|
March
31, 2021
|
Bradley
Nattrass
|
|
Director
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/
Richard A. Akright
|
|
Chief
Financial Officer and Director
|
|
March
31, 2021
|
Richard
A. Akright
|
|
(Principal
Financial Officer)
|
|
|
|
|
(Principal
Accounting Officer)
|
|
|
|
|
|
|
|
/s/
Lewis O. Wilks
|
|
Director
|
|
March
31, 2021
|
Lewis
O. Wilks
|
|
|
|
|
|
|
|
|
|
/s/
Lance Galey
|
|
Director
|
|
March
31, 2021
|
Lance
Galey
|
|
|
|
|
|
|
|
|
|
/s/ James H. Dennedy
|
|
Director
|
|
March 31, 2021
|
James H. Dennedy, Director
|
|
|
|
|
|
|
|
|
|
/s/
James Lowe
|
|
Director
|
|
March
31, 2021
|
James
Lowe
|
|
|
|
|
INDEX
TO FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
To
the stockholders and the board of directors of urban-gro, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of urban-gro, Inc. (the “Company”) as of December 31, 2020
and 2019, the related consolidated statements of operations and comprehensive income, stockholders’ deficit and cash
flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the
“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows each of the two
years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/
BF Borgers CPA PC
We
have served as the Company’s auditor since 2017.
Lakewood,
CO
March
31, 2021
urban-gro,
Inc.
CONSOLIDATED
BALANCE SHEETS
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
184,469
|
|
|
$
|
448,703
|
|
Accounts receivable, net
|
|
|
915,052
|
|
|
|
1,564,969
|
|
Inventories
|
|
|
537,104
|
|
|
|
676,175
|
|
Related party receivable
|
|
|
61,678
|
|
|
|
49,658
|
|
Prepayments and other assets
|
|
|
3,547,068
|
|
|
|
1,258,700
|
|
Total current assets
|
|
|
5,245,371
|
|
|
|
3,998,205
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
|
129,444
|
|
|
|
165,035
|
|
Operating lease right of use assets, net
|
|
|
88,889
|
|
|
|
215,848
|
|
Investments
|
|
|
1,710,358
|
|
|
|
2,020,358
|
|
Goodwill
|
|
|
902,067
|
|
|
|
902,067
|
|
Other assets
|
|
|
84,514
|
|
|
|
106,179
|
|
Total non-current assets
|
|
|
2,915,272
|
|
|
|
3,409,487
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,160,643
|
|
|
$
|
7,407,692
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
653,998
|
|
|
$
|
3,753,862
|
|
Accrued expenses
|
|
|
1,798,494
|
|
|
|
1,686,841
|
|
Related party payable
|
|
|
-
|
|
|
|
24,972
|
|
Customer deposits
|
|
|
4,878,863
|
|
|
|
2,915,406
|
|
Related party note payable
|
|
|
-
|
|
|
|
1,000,000
|
|
Notes payable, current portion
|
|
|
1,854,500
|
|
|
|
2,812,709
|
|
Short-term debt, Term Loan, net
|
|
|
1,868,320
|
|
|
|
-
|
|
Short-term debt, Revolving Facility
|
|
|
3,403,143
|
|
|
|
-
|
|
Operating lease liabilities
|
|
|
88,889
|
|
|
|
123,395
|
|
Total current liabilities
|
|
|
14,546,207
|
|
|
|
12,317,185
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
Notes payable, long-term
|
|
|
1,020,600
|
|
|
|
-
|
|
Operating lease liabilities
|
|
|
-
|
|
|
|
98,841
|
|
Total non-current liabilities
|
|
|
1,020,600
|
|
|
|
98,841
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
15,566,807
|
|
|
|
12,416,026
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies, Note 12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 100,000,000 shares authorized; 4,718,714 and 4,701,552 shares issued and outstanding as of December 31, 2020 and 2019, respectively
|
|
|
4,719
|
|
|
|
4,702
|
|
Additional Paid in Capital
|
|
|
14,553,438
|
|
|
|
11,877,590
|
|
Accumulated deficit
|
|
|
(21,964,321
|
)
|
|
|
(16,890,626
|
)
|
Total stockholders’ deficit
|
|
|
(7,406,164
|
)
|
|
|
(5,008,334
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficit
|
|
$
|
8,160,643
|
|
|
$
|
7,407,692
|
|
See
accompanying notes to consolidated financial statements
urban-gro,
Inc.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Equipment systems
|
|
$
|
22,058,696
|
|
|
$
|
18,383,440
|
|
Services
|
|
|
1,902,969
|
|
|
|
3,167,237
|
|
Consumable products
|
|
|
1,876,252
|
|
|
|
2,639,126
|
|
Total Revenue
|
|
|
25,837,917
|
|
|
|
24,189,803
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
20,122,281
|
|
|
|
17,563,594
|
|
Gross profit
|
|
|
5,715,636
|
|
|
|
6,626,209
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Marketing
|
|
|
313,784
|
|
|
|
1,016,073
|
|
General and administrative
|
|
|
6,344,119
|
|
|
|
9,207,737
|
|
General and administrative – amortization of broker issuing costs and broker warrants associated with convertible debentures
|
|
|
-
|
|
|
|
432,578
|
|
Stock-based compensation
|
|
|
1,803,403
|
|
|
|
1,830,426
|
|
Total operating expenses
|
|
|
8,461,306
|
|
|
|
12,486,814
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,745,670
|
)
|
|
|
(5,860,605
|
)
|
|
|
|
|
|
|
|
|
|
Non-operating income (expenses):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,497,469
|
)
|
|
|
(704,230
|
)
|
Interest expense – amortization of warrants and conversion price associated with convertible debentures
|
|
|
-
|
|
|
|
(1,333,520
|
)
|
Contingent consideration
|
|
|
(155,000
|
)
|
|
|
-
|
|
Impairment loss on investment
|
|
|
(310,000
|
)
|
|
|
(505,766
|
)
|
Unrealized exchange loss
|
|
|
(397,292
|
)
|
|
|
-
|
|
Other income, net
|
|
|
31,736
|
|
|
|
53,548
|
|
Total non-operating expenses
|
|
|
(2,328,025
|
)
|
|
|
(2,489,968
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(5,073,695
|
)
|
|
|
(8,350,573
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
-
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,073,695
|
)
|
|
$
|
(8,350,573
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(5,073,695
|
)
|
|
$
|
(8,350,573
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(1.06
|
)
|
|
$
|
(1.90
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding shares - basic and diluted
|
|
|
4,766,294
|
|
|
|
4,386,343
|
|
See
accompanying notes to consolidated financial statements
urban-gro,
Inc.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
Additional
|
|
|
Retained
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Earnings
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Deficit
|
|
Balance, December 31, 2018
|
|
|
4,204,972
|
|
|
$
|
4,205
|
|
|
$
|
4,709,297
|
|
|
$
|
(8,540,053
|
)
|
|
$
|
(3,826,551
|
)
|
Stock based compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
1,830,426
|
|
|
|
–
|
|
|
|
1,830,426
|
|
Stock options issued for loan term revisions
|
|
|
–
|
|
|
|
–
|
|
|
|
37,829
|
|
|
|
–
|
|
|
|
37,829
|
|
Stock grants issued for loan term revisions
|
|
|
2,667
|
|
|
|
3
|
|
|
|
31,297
|
|
|
|
–
|
|
|
|
31,300
|
|
Stock grant program vesting
|
|
|
226,828
|
|
|
|
227
|
|
|
|
(227
|
)
|
|
|
–
|
|
|
|
–
|
|
Stock issuance related to conversion of convertible debentures
|
|
|
183,752
|
|
|
|
184
|
|
|
|
2,656,853
|
|
|
|
–
|
|
|
|
2,657,037
|
|
Stock issuance related to acquisition
|
|
|
83,333
|
|
|
|
83
|
|
|
|
999,917
|
|
|
|
–
|
|
|
|
1,000,000
|
|
Warrants issued related to convertible debentures
|
|
|
–
|
|
|
|
|
|
|
|
614,041
|
|
|
|
–
|
|
|
|
614,041
|
|
Equity value of exercise price associated with convertible debentures
|
|
|
–
|
|
|
|
|
|
|
|
719,479
|
|
|
|
–
|
|
|
|
719,479
|
|
Broker warrants associated with issuance of convertible debentures
|
|
|
–
|
|
|
|
|
|
|
|
278,678
|
|
|
|
–
|
|
|
|
278,678
|
|
Net loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(8,350,573
|
)
|
|
|
(8,350,573
|
)
|
Balance, December 31, 2019
|
|
|
4,701,552
|
|
|
$
|
4,702
|
|
|
$
|
11,877,590
|
|
|
$
|
(16,890,626
|
)
|
|
$
|
(5,008,334
|
)
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Retained
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Earnings
|
|
|
Stockholders’
|
|
|
|
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
|
|
|
-
|
|
|
|
-
|
|
|
|
1,803,403
|
|
|
|
–
|
|
|
|
1,803,403
|
|
Stock grant to satisfy accounts payable
|
|
|
1,606
|
|
|
|
2
|
|
|
|
9,638
|
|
|
|
–
|
|
|
|
9,640
|
|
Stock issuance related to loan term revisions
|
|
|
16,667
|
|
|
|
16
|
|
|
|
99,984
|
|
|
|
–
|
|
|
|
100,000
|
|
Stock grant program vesting
|
|
|
48,889
|
|
|
|
49
|
|
|
|
(49
|
)
|
|
|
–
|
|
|
|
-
|
|
Claw back of stock granted
|
|
|
(183,333
|
)
|
|
|
(183
|
)
|
|
|
183
|
|
|
|
–
|
|
|
|
-
|
|
Stock issuance related to debt
|
|
|
83,333
|
|
|
|
83
|
|
|
|
499,917
|
|
|
|
–
|
|
|
|
500,000
|
|
Stock issuance related to acquisition
|
|
|
41,667
|
|
|
|
42
|
|
|
|
154,958
|
|
|
|
–
|
|
|
|
155,000
|
|
Warrant issuance related to debt
|
|
|
-
|
|
|
|
-
|
|
|
|
76,822
|
|
|
|
–
|
|
|
|
76,822
|
|
Stock issued for lease revisions
|
|
|
8,333
|
|
|
|
8
|
|
|
|
30,992
|
|
|
|
–
|
|
|
|
31,000
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,073,695
|
)
|
|
|
(5,073,695
|
)
|
Balance, December 31, 2020
|
|
|
4,718,714
|
|
|
$
|
4,719
|
|
|
$
|
14,553,483
|
|
|
$
|
(21,964,321
|
)
|
|
$
|
(7,406,164
|
)
|
See
accompanying notes to consolidated financial statements
urban-gro,
Inc.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For the years ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(5,073,695
|
)
|
|
$
|
(8,350,573
|
)
|
Adjustment to reconcile net loss from operations:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
258,440
|
|
|
|
266,476
|
|
Amortization of deferred financing costs
|
|
|
557,903
|
|
|
|
-
|
|
Amortization of convertible debenture components
|
|
|
-
|
|
|
|
1,612,197
|
|
Stock-based compensation expense
|
|
|
1,803,403
|
|
|
|
1,830,426
|
|
Contingent consideration
|
|
|
155,000
|
|
|
|
-
|
|
Impairment of investment
|
|
|
310,000
|
|
|
|
505,766
|
|
Loss (gain) on disposal of assets
|
|
|
3,468
|
|
|
|
(72,416
|
)
|
Inventory write-offs
|
|
|
91,730
|
|
|
|
94,727
|
|
Unrealized exchange losses
|
|
|
397,292
|
|
|
|
-
|
|
Bad debt expense
|
|
|
58,849
|
|
|
|
67,633
|
|
Changes in Operating Assets and
Liabilities (net of acquired amounts):
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
530,333
|
|
|
|
(849,355
|
)
|
Inventory
|
|
|
47,341
|
|
|
|
443,322
|
)
|
Prepayments and other assets
|
|
|
(1,723,056
|
)
|
|
|
(324,273
|
)
|
Accounts payable and accrued expenses
|
|
|
(3,013,183
|
)
|
|
|
2,671,838
|
|
Customer deposits
|
|
|
1,963,457
|
|
|
|
(383,203
|
)
|
Net Cash Provided by (Used in) Operating Activities
|
|
|
(3,632,718
|
)
|
|
|
(2,487,435
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
-
|
|
|
|
(1,085,975
|
)
|
Purchases of property and equipment
|
|
|
(175,965
|
)
|
|
|
(192,954
|
)
|
Proceeds from sale of assets
|
|
|
-
|
|
|
|
121,500
|
|
Cash acquired in acquisition
|
|
|
-
|
|
|
|
49,742
|
|
Purchases of intangible assets
|
|
|
-
|
|
|
|
(40,255
|
)
|
Net Cash Provided By (Used In) Investing Activities
|
|
|
(175,965
|
)
|
|
|
(1,147,942
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Revolving Facility
|
|
|
2,207,432
|
|
|
|
-
|
|
Proceeds from issuance of Term Loan
|
|
|
2,000,000
|
|
|
|
–
|
|
Proceeds from Revolving Facility advances
|
|
|
1,069,061
|
|
|
|
-
|
|
Issuance of convertible debentures
|
|
|
-
|
|
|
|
2,565,000
|
|
Proceeds from notes payables
|
|
|
1,870,600
|
|
|
|
970,000
|
|
Debt financing costs
|
|
|
(638,046
|
)
|
|
|
-
|
|
Repayments of notes payable
|
|
|
(2,964,598
|
)
|
|
|
(629,772
|
)
|
Net Cash Provided by (Used In) Financing Activities
|
|
|
3,544,449
|
|
|
|
2,905,228
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash
|
|
|
(264,234
|
)
|
|
|
(730,149
|
)
|
Cash at Beginning of Period
|
|
|
448,703
|
|
|
|
1,178,852
|
|
Cash at End of Period
|
|
$
|
184,469
|
|
|
$
|
448,703
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
Interest Paid
|
|
$
|
920,891
|
|
|
$
|
612,138
|
|
Income Tax Paid
|
|
$
|
-
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Convertible debentures and accrued interest converted into common stock
|
|
$
|
-
|
|
|
$
|
2,657,037
|
|
Stock issuance related to acquisition
|
|
$
|
-
|
|
|
$
|
1,000,000
|
|
Debt financing costs booked in equity
|
|
$
|
676,822
|
|
|
$
|
–
|
|
See
accompanying notes to consolidated financial statements
urban-gro,
Inc.
Notes
to Consolidated Financial Statements
For
the years ended December 31, 2020 and 2019
NOTE
1 – ORGANIZATION AND ACQUISITIONS, BUSINESS PLAN, AND LIQUIDITY
Organization
and Acquisitions
urban-gro,
Inc. (“we,” “us,” “our,” the “Company,” or “urban-gro”) is a leading
engineering and design services company focused on the sustainable commercial indoor horticulture market. We engineer and design
indoor controlled environment agriculture (“CEA”) facilities and then integrate complex environmental equipment systems
into those facilities. Through this work, we create high-performance indoor cultivation facilities for our clients to grow specialty
crops, including leafy greens, vegetables, herbs, and plant-based medicines. To date, a large number of our clients have been
cannabis producers, and we will continue to do substantial work for those clients, but we have added a focus on non-cannabis crops
as we seek to address a broader market. In particular, our focus going forward is on the vertical farming CEA sub-segment. Our
custom-tailored approach to design, procurement, and equipment integration provides a single point of accountability across all
aspects of indoor growing operations. We also help our clients achieve operational efficiency and economic advantages through
a full spectrum of professional services and programs focused on facility optimization and environmental health which establish
facilities that allow clients to manage, operate and perform at the highest level throughout their entire cultivation lifecycle
once they are up and running.
We
aim to work with our clients from inception of their project in a way that provides value throughout the life of
their facility. We are a trusted partner and advisor to our clients and offer a complete set of engineering and managed services
complemented by a vetted suite of select cultivation equipment systems.
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 83,333 shares of Common Stock valued at $12.00 per share to effect the acquisition of Impact. The Company
accounted for the acquisition of Impact as follows:
Purchase Price
|
|
$
|
1,000,000
|
|
|
|
|
|
|
Allocation of Purchase Price:
|
|
|
|
|
Cash
|
|
$
|
49,742
|
|
Accounts receivable, net
|
|
$
|
93,811
|
|
Goodwill
|
|
$
|
902,067
|
|
Accrued expenses
|
|
$
|
45,620
|
|
The
following table summarizes the supplemental information on an unaudited pro forma basis, as if the acquisition had been consummated
as of January 1, 2019:
|
|
2019
|
|
Revenue
|
|
$
|
24,477,011
|
|
Net loss
|
|
|
(8,268,920
|
)
|
The
unaudited pro form results of operations do not purport to represent what the Company’s results of operations would actually
have been had the acquisition occurred on January 1, 2019. Actual future results may vary considerably based on a variety of factors
beyond the Company’s control.
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 $12.00 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 $12.00 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 41,667 additional shares of Common Stock
to the former Impact owner. The Company valued the issuance of these additional 41,667 shares at $3.72 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).
Basis
of Presentation
These
consolidated financial statements are presented in United States dollars and have been prepared in accordance with United States
generally accepted accounting principles (“GAAP”). On December 31, 2020, we effected a 1-for-6 reverse stock split
with respect to our common stock. All share and per share information in these consolidated financial statements gives
effect to this reverse stock split, including restating prior period reported amounts.
Liquidity
and Going Concern
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern,
which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year
after the date the consolidated financial statements are available to be issued. Since inception, the Company has incurred significant
operating losses and has funded its operations primarily through the issuance of equity securities, debt, and operating revenue.
As of December 31, 2020, the Company had an accumulated deficit of $21,964,321, a working capital deficit of $9,300,836, and negative
stockholders’ equity of $7,406,164. Prior consolidated financial statements contained an explanatory paragraph indicating
that there could be no assurances that the Company would be able to raise equity or debt financing in sufficient amounts, when
and if needed, on acceptable terms or at all, in order to provide assurances that the Company would be able to continue as a going
concern. As indicated in Note 18 – Subsequent Events, on February 17, 2021 the Company received $62,100,000 in gross proceeds
from completion of an equity offering and listing of the Company’s common shares on the Nasdaq Capital Market (“NASDAQ”)
(the “Offering”). Based on management’s evaluation, the proceeds from the Offering will be more than sufficient
for the Company to meet its obligations as they come due and to fund its operations for at least 12 months after the date the
consolidated financial statements are available to be issued. Accordingly, the conditions that previously raised substantial doubt
about the Company’s ability to continue as a going concern as of the date of issuance of the Company’s December 31,
2020 consolidated financial statements have been alleviated.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
In
preparing 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 consolidated
financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates. Significant
estimates include estimated useful lives and potential impairment of long-lived assets and goodwill, inventory write offs, allowance
for deferred tax assets, and allowance for bad debt.
Basis
of Presentation and Principles of Consolidation
These
consolidated financial statements are presented in United States dollars and they include the accounts of urban-gro, Inc. and
its wholly owned subsidiaries. The financial results of Impact have been included in the Company’s consolidated financial
statements from the date of acquisition on March 7, 2019 and all intercompany transactions have been eliminated.
Functional
and reporting currency and foreign currency translation
The
functional and reporting currency of the Company and its subsidiaries is US dollars. All transactions in currencies other than
US dollars are translated into US dollars on the date of the transaction. Any exchange gains and losses related to these transactions
are recognized in the current period earnings as other income (expense).
Fair
Value of Financial Instruments
The
Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable,
notes payable and other current assets and liabilities. We value our financial assets and liabilities using fair value measurements.
Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Assets and liabilities measured at fair value are categorized based on whether
the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments
within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The hierarchy
is prioritized into three levels (with Level 3 being the lowest) defined as follows:
Level
1: Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level
2: Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active
markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are
observable or can be corroborated with observable market data.
Level
3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets
and liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant
unobservable inputs.
The
carrying amount of our cash and cash equivalents, accounts receivable, accounts payable, and other current assets and liabilities
in our consolidated financial statements approximates fair value because of the short-term nature of the instruments. Investments
in non-marketable equity securities are carried at cost less other-than-temporary impairments. The carrying amount of our notes
payable and convertible debt at December 31, 2020 and 2019 approximates their fair values based on our incremental borrowing rates.
There
have been no changes in Level 1, Level 2, and Level 3 categorizations and no changes in valuation techniques for these assets
or liabilities for the years ended December 31, 2020 and 2019.
Cash
and Cash Equivalents
The
Company considers all highly liquid short-term cash investments with an original maturity of three months or less to be cash equivalents.
As of December 31, 2020 and 2019, the Company did not maintain any cash equivalents. The Company maintains cash with financial
institutions that may from time to time exceed federally-insured limits. The Company has not experienced any losses related to
these balances and believes the risk to be minimal. There are no restricted or compensating cash balances as of December 31, 2020.
Accounts
Receivable, Net
Trade
accounts receivables are carried at the original invoiced amounts less an allowance for doubtful accounts. As of December 31,
2020 and 2019, the balance of allowance for doubtful accounts was $15,955 and $18,920, respectively. The allowances for doubtful
accounts are calculated based on a detailed review of certain individual customer accounts and an estimation of the overall economic
conditions affecting the Company’s customer base. The Company reviews a customer’s credit history before extending
credit to the customer. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability
to make payments, additions to the allowance would be required. A provision is made against accounts receivable to the extent
they are considered unlikely to be collected. Occasionally the Company will write off bad debt directly to the bad debt expense
account when the balance is determined to be uncollectable. Bad debt expense for the years ended December 31, 2020 and 2019 was
$58,849 and $67,633, respectively.
Inventories
Inventories,
consisting entirely of finished goods, are stated at the lower of cost or net realizable value, with cost determined using the
weighted average cost method. The Company periodically reviews the value of items in inventory and provides write-downs or write-offs
of inventory based on its assessment of market conditions. Write-downs and write-offs are charged to cost of goods sold at the
realization of change in value. Once written down, inventories are carried at this lower basis until sold or scrapped.
Property,
Plant, and Equipment, net
Property
and equipment is stated at cost less accumulated depreciation and impairment. Expenditures for major additions and improvements
are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment
is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain
or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful
lives of the related assets using the straight-line method for financial statement purposes. The Company uses other depreciation
methods (generally accelerated) for tax purposes where appropriate. No impairment charges were recorded for the years ended December
31, 2020 and 2019.
The
estimated useful lives for significant property and equipment categories are as follows:
Computer
and Technology Equipment
|
|
3
years
|
Furniture
and Equipment
|
|
5
years
|
Leasehold
Improvements
|
|
Lease
term
|
Vehicles
|
|
3
years
|
Other
Equipment
|
|
3
or 5 years
|
Software
|
|
3
years
|
Operating
Lease Right of Use Assets
Operating
lease right of use assets are stated at cost less accumulated depreciation, amortization and impairment. The Company has one operating
lease with an imputed annual interest rate of 8%. The terms of the lease are 12 months commencing on September 1, 2020 and ending
on August 31, 2021. The Company is currently evaluating whether to renew this lease.
Intangible
Assets
The
Company’s intangible assets, consisting of legal fees for application of patents and trademarks and license fees paid for
inspection services, are recorded at cost. Patents and trademarks, once approved, are amortized using the straight-line method
over an estimated life, generally 5 years for patents and 10 to 20 years for trademarks. License fees are amortized over 10 years.
Intangible assets are included in “other assets” on the balance sheets. The net balance of intangible assets for December
31, 2020 and 2019 was $84,514 and $86,151, respectively. Amortization expense totaled $1,637 and $1,879 for the years ended December
31, 2020 and 2019, respectively.
Goodwill
Goodwill
represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is
not amortized, but is tested for impairment annually as of December 31 and at any time when events or circumstances suggest impairment
may have occurred.
The
testing for impairment consists of a comparison of the fair value of the reporting unit with its carrying amount. If the carrying
amount of the reporting unit, including goodwill, exceeds the fair value, an impairment will be recognized equal to the difference
between the carrying value of the reporting unit’s goodwill and the implied fair value of the goodwill. In testing goodwill
for impairment, we determine the estimated fair value of our reporting units based upon a discounted future cash flow analysis.
Goodwill is our only indefinite-lived intangible asset. Definite-lived intangible assets are amortized using the straight line
method over the shorter of their contractual term or estimated useful lives.
Impairment
of Long-lived Assets
The
Company evaluates potential impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum
of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment will be recognized
as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
Investments
Investments
without readily determinable fair values and for which the Company does not have the ability to exercise significant influence
are accounted for at cost with adjustments for observable changes in prices or impairments.
Convertible
Notes
The
Company accounts for its convertible notes at issuance by allocating the proceeds received from a convertible note among freestanding
instruments according to ASC 470, Debt, based upon their relative fair values. The fair value of debt and common stock was determined
based on the closing price of the common stock on the date of the transaction, and the fair value of warrants was determined using
the Black-Scholes option-pricing model. Convertible notes were subsequently carried at amortized cost. The fair value of the warrants
is recorded as additional paid-in capital, with a corresponding amount recorded as a debt discount from the face amount of the
convertible note. Each convertible note was analyzed for the existence of a beneficial conversion feature (“BCF”),
defined as the fair value of the common stock at the commitment date for the convertible note, less the effective conversion price.
BCFs were recognized at their intrinsic value, and recorded as an increase to additional paid-in capital, with a corresponding
reduction in the carrying amount of the convertible note (as a debt discount from the face amount of the convertible note). The
discounts on the convertible notes, consisting of amounts ascribed to warrants and beneficial conversion features, is amortized
to interest expense, using the effective interest method, over the terms of the related convertible notes. BCFs that are contingent
upon the occurrence of a future event are recorded when the contingency is resolved.
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, which requires that five
basic steps be followed to recognize revenue: (1) a legally enforceable contract that meets criterial standards as to composition
and substance is identified; (2) performance obligations relating to provision of goods or services to the customer are identified;
(3) the transaction price, with consideration given to any variable, noncash, or other relevant consideration, is determined;
(4) the transaction price is allocated to the performance obligations; and (5) revenue is recognized when control of goods or
services is transferred to the customer with consideration given to whether that control happens over time or not. Determination
of criteria (3) and (4) are based on our management’s judgments regarding the fixed nature of the selling prices of the
services and products delivered and the collectability of those amounts.
Our equipment systems, services and
consumable product revenues arise from contracts with customers. Service revenues include full facility programming, engineering
and design services, start-up commissioning services, facility optimization services and IPM planning and strategy services. Product
revenues include an integrated suite of select cultivation equipment systems and consumable crop management products. We
enter into separate contracts for the service and product revenues we provide to our customers in order to clarify our obligations
under the terms of the contracts. New contracts are entered into if the services to be performed or products to be delivered need
to be modified. Service revenues are satisfied when services are rendered or completed in accordance with the terms of the contract.
Product revenues are satisfied when control of the products is transferred to the customer.
Customer
Deposits
The Company’s policy is to collect deposits
from customers at the beginning of the contract. The customer payments received are recorded as a customer deposit liability on
the balance sheet. When the contract is complete and meets all the criteria for revenue recognition, the customer is billed for
the entire contract amount and the deposit is recorded against the customer’s receivable balance. In certain situations
when the customer has paid the deposit and services have been performed but the customer chooses not to proceed with the contract,
the Company may keep the deposit and recognize revenue. Of the outstanding customer deposit balance of $2,915,406
at December 31, 2019, $1,955,902 was recognized as revenue in the year ended December 31, 2020. The entire customer deposit
balance of $3,298,609 at December 31, 2018 was recognized as revenue in the year ended December 31, 2019.
Cost
of Revenue
The
Company’s policy is to recognize cost of revenues in the same manner as, and in conjunction with, revenue recognition. The
Company’s cost of revenues includes the costs directly attributable to revenue recognized and includes expenses related
to the purchasing of products and providing services, fees for third-party commissions and shipping costs. Total shipping costs
included in the cost of goods sold for the years ended December 31, 2020 and 2019 were $790,996 and $679,911, respectively.
Advertising
Costs
The
Company expenses advertising costs in the periods the costs are incurred. Prepayments made under contracts are included in prepaid
expenses and expensed when the advertisement is run. Total advertising expense incurred for the years ended December 31, 2020
and 2019 was $174,131 and $159,728, respectively.
Warrants
The
Company estimates the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option pricing
based on the estimated market value of the underlying common stock at the valuation measurement date, the remaining contractual
term, risk-free interest rate, and expected volatility of the price of the underlying common stock. There is a moderate degree
of subjectivity involved when using option pricing models to estimate the warrants and the assumptions used in the Black-Scholes
option-pricing model are moderately judgmental.
Stock-Based
Compensation
The
Company periodically issues shares of its common stock and stock options to employees and consultants in non-capital raising transactions
for fees and services. The Company accounts for stock issued to non-employees with the value of the stock compensation based upon
the measurement date as determined at the grant date of the award.
The
Company accounts for stock grants issued and vesting to employees with the award being measured at its fair value at the date
of grant and amortized ratably over the vesting period.
Income
Taxes
The
Company files income federal tax returns in the United States and Canada and state and local tax return in applicable jurisdictions.
Provisions for current income tax liabilities, if any, would be calculated and accrued on income and expense amounts expected
to be included in the income tax returns for the current year. Income taxes reported in earnings, if any, would also include deferred
income tax provisions.
Deferred
income tax assets and liabilities, if any, would be computed on differences between the financial statement bases of assets and
liabilities at the enacted tax rates. Changes in deferred income tax assets and liabilities would be included as a component of
income tax expense. The effect on deferred income tax assets and liabilities attributable to changes in enacted tax rates would
be charged or credited to income tax expense in the period of enactment. Valuation allowances would be established for certain
deferred tax assets when realization is not likely.
Assets
and liabilities would be established for uncertain tax positions taken or positions expected to be taken in income tax returns
when such positions, in the judgment of the Company, do not meet a more-likely-than-not threshold based on the technical merits
of the positions. Valuation allowances would be established for certain deferred tax assets when realization is not likely.
Loss
Per Share
The
Company computes net loss per share by dividing net loss available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share would be computed by dividing net loss by the weighted-average of
all potentially dilutive shares of common stock that were outstanding during the periods presented. The diluted earnings per share
calculation is not presented as it results in an anti-dilutive calculation of net loss per share.
The
treasury stock method would be used to calculate diluted earnings per share for potentially dilutive stock options and share purchase
warrants. This method assumes that any proceeds received from the exercise of in-the-money stock options and share purchase warrants
would be used to purchase common shares at the average market price for the period.
Recently
Adopted Accounting Pronouncements
From
time to time, the Financial Accounting Standards Board (the “FASB”) or other standards setting bodies issue new accounting
pronouncements. The FASB issues updates to new accounting pronouncements through the issuance of an Accounting Standards Update
(“ASU”). Unless otherwise discussed, the Company believes that the impact of recently issued guidance, whether adopted
or to be adopted in the future, is not expected to have a material impact on the Company’s financial statements upon adoption.
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments (“ASU 2016-13”). This update replaces the incurred loss impairment methodology with a methodology
that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to
inform credit loss estimates. This update is effective for interim and annual periods beginning after December 15, 2022, with
a modified-retrospective approach. The Company is currently evaluating the impact that this new guidance will have on its consolidated
financial statements.
In August 2020, the FASB issued ASU 2020-06—Debt—Debt
with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic
815-40)—Accounting For Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 simplifies accounting
for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt
instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. ASU
2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope
exception, which will permit more equity contracts to qualify for it. ASU 2020-06 also simplifies the diluted net income
per share calculation in certain areas. The new guidance is effective for annual and interim periods beginning after December
15, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those
fiscal years. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements.
NOTE
3 – RELATED PARTY TRANSACTIONS
In
October 2018, we issued a $1,000,000 unsecured note payable to Cloud9 Support Inc. (“Cloud9 Support”),
an entity owned by James Lowe, a director of the Company, which originally became due April 30, 2019 (the “James Lowe Note”).
The James Lowe Note was personally guaranteed by Bradley Nattrass, our Chief Executive Officer, and Octavio Gutierrez. The loan
had a one-time origination fee of $12,500. Interest accrued at the rate of 12% per annum and was paid monthly. As additional consideration
for the James Lowe Note, we granted Mr. Lowe (as designee of Cloud9 Support) an option to purchase 5,000 shares of our common
stock at an exercise price of $7.20 per share, which option is exercisable for a period of five years. The due date for the James
Lowe Note was extended in May 2019 to December 31, 2019 and the interest rate was decreased to 9% per year. In consideration for
Cloud9 Support extending the maturity date of the 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, we entered into an agreement to amend the James Lowe Note to extend the maturity date of therein from December
31, 2019 to the date which is the earlier of 60 days following the date: (a) on which demand for repayment is made by the lenders
under the Credit Agreement, as described in Note 10, (which is now only applicable in the case of an event of default under the
Credit Agreement because of the removal of the demand feature pursuant to the First Amendment to the Credit Agreement); or (b)
which is the maturity date under the Credit Agreement.
In
addition, on February 25, 2020, the Company entered into a subordination, postponement and standstill agreement with Cloud9 Support
(the “Subordination Agreement”) pursuant to which Cloud9 Support agreed to postpone and subordinate all payments due
under the promissory note until the facilities under the Credit Agreement have been fully and finally repaid. The term for the
Subordination Agreement will continue in force as long as the Company is indebted to the agent or lenders under the Credit Agreement.
In consideration for Cloud9 Support’s agreement to extend the maturity date of the promissory note and to enter into the
Subordination Agreement, we issued 16,667 shares of common stock to Mr. Lowe (as designee of Cloud9 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 9 – 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 will be
mandatorily converted into shares of our common stock upon the closing of a qualified offering, at 75% of the per share price
paid by investors in a qualified offering.
The
Company has purchased goods from Cloud 9 Support. Purchases from Cloud 9 Support were $0 and $97,329 during the years ended 2020
and 2019, respectively. Cloud 9 Support also purchases materials from the Company for use with their customers. Total sales to
Cloud 9 Support from the Company were $414,108 and $392,963 during the years ended 2020 and 2019, respectively. Outstanding receivables
from Cloud 9 Support as of December 31, 2020 and 2019 totaled $61,678 and $49,659, respectively. Net outstanding payables for
purchases of inventory and other services to Cloud 9 Support as of December 31, 2020 and 2019, totaled $0 and $16,402, respectively.
The
Company purchases some cultivation products from Bravo Lighting, LLC (d/b/a Bravo Enterprises) (“Bravo”) and Enviro-Glo,
LLC (“Enviro-Glo”), manufacturers and distributors of commercial building lighting and other product solutions with
common control by the Company’s two major stockholders, Bradley Nattrass and Octavio Gutierrez. Purchases from Bravo
and Enviro-Glo totaled $0 and $45,129 for the years ended 2020 and 2019, respectively. Outstanding receivables from Bravo and
Enviro-Glo for the years ended 2020 and 2019 totaled $0 and $0, respectively. Net outstanding payables incurred for purchases
of inventory and other services to Bravo and Enviro-Glo as of December 31, 2020 and 2019, was $0 and $8,570, respectively.
NOTE 4 – PREPAYMENTS & 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:
|
|
2020
|
|
|
2019
|
|
Vendor prepayments
|
|
$
|
2,676,493
|
|
|
$
|
1,070,788
|
|
Prepaid services and fees
|
|
|
365,931
|
|
|
|
187,912
|
|
Deferred financing cost (See Note 10 - Debt)
|
|
|
504,644
|
|
|
|
–
|
|
Others
|
|
|
-
|
|
|
|
20,028
|
|
Prepayments and other assets
|
|
$
|
3,547,068
|
|
|
$
|
1,278,728
|
|
NOTE
5 - PROPERTY PLANT & EQUIPMENT, NET
Property
Plant and Equipment balances are summarized as follows:
|
|
2020
|
|
|
2019
|
|
Computers & Technology Equip
|
|
$
|
67,754
|
|
|
$
|
87,300
|
|
Furniture and Fixtures
|
|
|
85,662
|
|
|
|
42,518
|
|
Leasehold Improvements
|
|
|
164,072
|
|
|
|
164,072
|
|
Vehicles
|
|
|
20,000
|
|
|
|
57,414
|
|
Software
|
|
|
142,721
|
|
|
|
142,721
|
|
R&D Assets
|
|
|
3,031
|
|
|
|
3,031
|
|
Other Equipment
|
|
|
34,063
|
|
|
|
38,355
|
|
Accumulated depreciation
|
|
|
(387,859
|
)
|
|
|
(370,376
|
)
|
Property plant and equipment, net
|
|
$
|
129,444
|
|
|
$
|
165,035
|
|
Depreciation
expense for the years ended December 31, 2020 and 2019 totaled $256,803 and $264,597, respectively.
NOTE
6 – INVESTMENTS
The
components of investments are summarized as follows:
|
|
2020
|
|
|
2019
|
|
Investment in Edyza
|
|
$
|
1,710,358
|
|
|
$
|
1,710,358
|
|
Investment in TGH
|
|
|
–
|
|
|
|
310,000
|
|
|
|
$
|
1,710,358
|
|
|
$
|
2,020,358
|
|
Edyza
We have a strategic investment in
Edyza, Inc. (“Edyza”), a hardware and software technology company that enables dense sensor networks in agriculture,
healthcare, and other environments that require precise micro-climate monitoring. During 2019, the Company acquired an additional
827,018 shares for $897,475. The Company has capitalized an additional $12,883 in legal fees associated with the purchases of
the Edyza Common Stock. The Company measures this investment at cost, less any impairment changes resulting from observable price
changes in orderly transactions for an identical or similar investment of the same issuer.
TGH
On
January 24, 2020, the Company entered into 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 remaining investment in TGH in June 2020.
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 166,667 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 66,667 shares of Common
Stock at an exercise price of $6.00 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
7 – GOODWILL
The Company recorded goodwill in conjunction
with the initial acquisition of Impact on March 7, 2019. The goodwill balance as of December 31, 2020 and 2019 was $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 years ended December 31, 2020 and 2019.
NOTE
8 – ACCRUED EXPENSES
Accrued
expenses are summarized as follows:
|
|
2020
|
|
|
2019
|
|
Accrued operating expenses
|
|
$
|
717,503
|
|
|
$
|
854,056
|
|
Accrued wages and related expenses
|
|
|
408,907
|
|
|
|
487,327
|
|
Accrued interest expense
|
|
|
99,258
|
|
|
|
–
|
|
Accrued sales tax payable
|
|
|
572,826
|
|
|
|
345,458
|
|
|
|
$
|
1,798,494
|
|
|
$
|
1,686,841
|
|
Accrued sales tax payable is comprised of
amounts due to various states and Canadian provinces for 2015 through 2020.
NOTE
9 – NOTES PAYABLE
The
following is a summary of notes payable excluding related party notes payable:
|
|
December 31,
|
|
|
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 500 shares of Common Stock. This note was fully repaid on December 3, 2020.
|
|
$
|
-
|
|
|
$
|
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 500 shares of Common Stock. This note was fully repaid on December 3, 2020.
|
|
|
-
|
|
|
|
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
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Convertible notes related to bridge financing. See Bridge Financing Notes below.
|
|
|
1,854,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,875,100
|
|
|
|
2,812,709
|
|
Less current maturities
|
|
|
(1,854,500
|
)
|
|
|
(2,812,709
|
)
|
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 18 – Subsequent Events, was a Qualified Offering and the Bridge Financing
Notes were converted into equity in connection with the Offering in February 2021.
NOTE
10 – DEBT
The
Company’s borrowings as of December 31, 2020 and 2019 consisted of the following:
|
|
2020
|
|
|
2019
|
|
Revolving Facility
|
|
$
|
3,403,143
|
|
|
$
|
–
|
|
Term Loan, net of $252,322 unamortized debt issuance costs
|
|
|
1,868,320
|
|
|
|
–
|
|
Total
|
|
|
5,271,463
|
|
|
|
–
|
|
Less current debt due within one year
|
|
|
(5,271,463
|
)
|
|
|
–
|
|
Total long-term debt
|
|
$
|
-
|
|
|
$
|
–
|
|
On
February 21, 2020, we entered into a letter agreement (the “Credit Agreement”) by and among the Company, as borrower,
urban-gro Canada Technologies Inc. and Impact., as guarantors, the lenders party thereto (the “Lenders”), and Bridging
Finance Inc., as administrative agent for the Lenders (the “Agent”). The Credit Agreement, which is denominated in
Canadian dollars (C$), is comprised of (i) a 12-month senior secured demand term loan facility in the amount of C$2.7 million
($2.0 million), which was funded in its entirety on the closing date (the “Term Loan”); and (ii) a 12-month demand
revolving credit facility of up to C$5.4 million ($4.0 million), which may be drawn from time to time, subject to the terms and
conditions set forth in the Credit Agreement and described further below (the “Revolving Facility,” and together with
the Term Loan, the “Facilities”). The Credit Agreement is 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
is 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 be prepaid in part or in full without a penalty at any time during the
term of the Facilities, and the Term Loan may be prepaid in full or in part without penalty subject to 60 days prior notice in
each case subject to certain customary conditions.
On
September 4, 2020, the Company executed an amendment to the Credit Agreement (the “First Amendment”) whereas the Facilities
described above are now due on December 31, 2021 (the “Revised Maturity Date”). The First Amendment also increased
the rate at which the Facilities will bear interest to the annual rate established and designated by the Bank of Nova Scotia as
the prime rate, plus 12% per annum (14.5% as of September 30, 2020).
As
a result of the First Amendment, the Company is required to prepay, on or before January 31, 2021, $1,000,000 of the balance of
the Term Loan and begin making monthly payments of $100,000 on the balance on the Term Loan starting on March 1, 2021. Additionally,
the Company is required to make monthly payments of $50,000 on the balance under the Revolving Facility beginning October 1, 2020
and can make no more draws under the Revolving Facility.
The
Company incurred $1,314,868 of debt issuance costs in connection with these Facilities, of which $676,822 was non-cash in the
form of Common Stock and warrant issuances. The Company estimated the fair value of these warrants at the respective balance sheet
dates using the Black-Scholes option pricing based on the market value of the underlying Common Stock at the valuation measurement
date of $6.00, the remaining contractual terms of the warrants of 5 years, risk free interest rate of 1.14% an expected volatility
of the price of the underlying Common Stock of 100%. The Company recorded the debt issuance costs as either a deferred financing
asset or a direct reduction of the loan obligation based on the pro-rata value of the Revolving Facility and Term Loan, respectively,
on the closing date. The debt issuance costs are amortized as interest expense over the life of the Facilities, until the Revised
Maturity Date. As of December 31, 2020, there were $504,644 and $252,322 of unamortized debt issuance costs remaining related
to the Revolving Facility and Term Loan, respectively.
The Company recorded interest expense of $557,903
related to the amortization of debt issuance costs and a foreign exchange loss of $397,292 for the year ended December
31, 2020.
On
February 19, 2021, the Company repaid all amounts outstanding and terminated the Credit Agreement.
NOTE
11 – UNIT OFFERING
Effective
January 9, 2019, the Company executed a letter agreement with 4Front Capital Partners, Inc., Toronto, Canada (“4Front”),
whereby 4Front agreed to act as the Company’s exclusive placement agent in connection with a private placement offering.
Beginning in March 2019, 4Front 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 34.58 shares of Common Stock at $18.00 per share
for a period of two years from the purchase date. The Debentures are due May 31, 2021 and bear interest at 8%, compounded annually,
with interest due at maturity. The Debentures, plus any accrued but unpaid interest, will automatically convert for no additional
consideration into Common Shares at a conversion price of $14.46 per share upon the occurrence of a liquidity event. A liquidity
event means: (a) the date on which the Company’s Common Stock is listed for trading on a recognized stock exchange in either
Canada or the United States; and (b) securities issued pursuant to the Offering, including the Common Stock underlying both the
conversion right included in the Debentures and underlying the Warrants, have been duly qualified by a registration statement
in the United States, allowing the securities to be freely tradeable pursuant to the U.S. securities laws, or a prospectus in
Canada. The Company filed a registration statement with the SEC on September 17, 2019, to register the securities in connection
with the Offering. That registration statement was declared effective October 16, 2019, triggering the liquidity event indicated
above and the $2,565,000 in Debentures plus $92,037 in accrued interest were converted into 183,752 Common Shares at $14.46 per
share. The Warrants contain a mandatory exercise provision if the weighted average share price of the Company’s Common Stock
exceeds $30.00 per share for a period of five consecutive days.
NOTE
12 – OPERATING LEASE LIABILITIES & COMMITMENTS AND CONTINGENCIES
The
Company has one operating leases with an imputed annual interest rate of 8%. The terms of the lease are 12 months commencing on
September 1, 2020 and ending on August 31, 2021. The Company is currently evaluating whether to renew this lease.
The
following is a summary of operating lease liabilities:
|
|
2020
|
|
|
2019
|
|
Operating lease liabilities related to right of use assets.
|
|
$
|
88,888
|
|
|
$
|
222,236
|
|
Less current portion
|
|
|
(88,888
|
)
|
|
|
(123,395
|
)
|
Long term
|
|
$
|
-
|
|
|
$
|
98,841
|
|
The
following is a schedule showing future minimum lease payments:
Year ending
|
|
Total Minimum
|
|
December 31,
|
|
Lease Payments
|
|
2021
|
|
|
96,000
|
|
From
time to time, the Company is involved in routine litigation that arises in the ordinary course of business. There are no legal
proceedings for which management believes the ultimate outcome would have a material adverse effect on the Company’s results
of operations and cash flows.
NOTE
13 – RISKS AND UNCERTAINTIES
Concentration
Risk
During
the year ended December 31, 2020, one customer represented 25% of total revenue and another represented 13% of total revenue.
During the year ended December 31, 2019, one customer represented 21% of total revenue. At December 31, 2020, one customer represented
23% and another represented 17% of total outstanding accounts receivables. At December 31, 2019, one customer represented
15% and another represented 11% of total outstanding receivables.
During
the year ended December 31, 2020, one vendor composed 33% and another composed 13% of total purchases. During the year ended
December 31, 2019, one vendor composed 24% of total purchases.
Foreign
Exchange Risk
Although
our revenues and expenses are expected to be predominantly denominated in United States dollars, we may be exposed to currency
exchange fluctuations. Recent events in the global financial markets have been coupled with increased volatility in the currency
markets. Fluctuations in the exchange rate between the U.S. dollar, the Canadian dollar, the Euro, the Swiss franc, and the currency
of other regions in which we may operate may have a material adverse effect on our business, financial condition and operating
results. We may, in the future, establish a program to hedge a portion of our foreign currency exposure with the objective of
minimizing the impact of adverse foreign currency exchange movements. However, even if we develop a hedging program, there can
be no assurance that it will effectively mitigate currency risks.
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
14 – STOCK-BASED COMPENSATION
Stock-based
compensation expense for the years ended December 31, 2020 and 2019 was $1,803,403 and $1,830,426, respectively based on the vesting
schedule of the stock grants and options. During the year ended December 31, 2020, 48,889 shares vested and were issued to employees.
No cash flow affects are anticipated for stock grants.
In
January 2017, the Company began granting stock to attract, retain, and reward employees with Common Stock. Stock grants are offered
as part of the employment offer package, to ensure continuity of employment or as a reward for performance. Each of these grants
requires a specific tenure of employment before the grant vests with typical vesting periods of 1 to 3 years of employment.
In
January 2018, the Company implemented an equity incentive plan to reward and attract employees and compensate vendors for services
when applicable. Stock options are offered as part of an employment offer package, to ensure continuity of service or as a reward
for performance. The stock option plan authorizes 500,000 shares of common stock.
In May 2019, the Company adopted a new equity
incentive plan, authorizing an aggregate of 588,333 shares of Common Stock for issuance thereunder. Stock grants under the equity incentive
programs are valued at the price of the stock on the date of grant The fair value of the options is calculated using the Black-Scholes
pricing model based on the estimated market value of the underlying common stock at the valuation measurement date $6.00, the remaining
contractual term of the options of 5 years, risk-free interest rate of 1.92% and expected volatility of the price of the underlying common
stock of 100%. There is a moderate degree 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.
The
following schedule shows stock grant activity for the year ended December 31, 2020 and 2019:
Grants outstanding as of December 31, 2018
|
|
|
300,444
|
|
Grants awarded
|
|
|
6,967
|
|
Forfeiture/Cancelled
|
|
|
(11,667)
|
|
Grants vested
|
|
|
(226,994)
|
|
Grants outstanding as of December 31, 2019
|
|
|
68,750
|
|
Grants outstanding as of December 31, 2019
|
|
|
68,750
|
|
Grants awarded
|
|
|
132,361
|
|
Forfeiture/Cancelled
|
|
|
(33,333
|
)
|
Grants vested
|
|
|
(48,889
|
)
|
Grants outstanding as of December 31, 2020
|
|
|
118,889
|
|
The
following table summarizes stock grant vesting periods.
Number of
|
|
|
Unrecognized stock compensation
|
|
|
Year Ending
|
Shares
|
|
|
expense
|
|
|
December 31,
|
|
85,555
|
|
|
$
|
215,451
|
|
|
2021
|
|
16,667
|
|
|
|
33,333
|
|
|
2022
|
|
16,667
|
|
|
|
2,778
|
|
|
2023
|
|
118,889
|
|
|
$
|
251,562
|
|
|
|
The
following schedule shows stock option activity for the year ended December 31, 2020 and 2019.
|
|
Number of
Shares
|
|
Weighted Average Remaining
Life (Years)
|
|
Weighted Average
Exercise
Price
|
Stock options outstanding as of December 31, 2018
|
|
|
197,334
|
|
|
|
9.68
|
|
|
$
|
6.90
|
|
Issued
|
|
|
122,750
|
|
|
|
9.20
|
|
|
$
|
8.28
|
|
Expired
|
|
|
36,389
|
|
|
|
9.12
|
|
|
$
|
7.98
|
|
Stock options outstanding at December 31, 2019
|
|
|
283,695
|
|
|
|
9.21
|
|
|
$
|
7.26
|
|
Stock options exercisable at December 31, 2019
|
|
|
117,256
|
|
|
|
8.89
|
|
|
$
|
7.02
|
|
|
|
Number of
Shares
|
|
Weighted
Average Remaining
Life (Years)
|
|
Weighted
Average
Exercise
Price
|
Stock options outstanding as of December 31, 2019
|
|
|
283,695
|
|
|
|
9.21
|
|
|
$
|
7.26
|
|
Issued
|
|
|
404,167
|
|
|
|
4.00
|
|
|
$
|
6.00
|
|
Expired
|
|
|
49,584
|
|
|
|
8.02
|
|
|
$
|
6.90
|
|
Stock options outstanding at December 31, 2020
|
|
|
638,278
|
|
|
|
7.25
|
|
|
$
|
6.49
|
|
Stock options exercisable at December 31, 2020
|
|
|
363,951
|
|
|
|
7.72
|
|
|
$
|
6.48
|
|
The
following table summarizes stock option vesting periods under the two stock option plans.
Number of
|
|
|
Unrecognized stock compensation
|
|
|
Year Ending
|
Shares
|
|
|
expense
|
|
|
December 31,
|
|
163,716
|
|
|
$
|
815,518
|
|
|
2021
|
|
110,611
|
|
|
|
521,223
|
|
|
2022
|
|
274,327
|
|
|
$
|
1,336,741
|
|
|
|
The aggregate intrinsic value of the stock
options outstanding and exercisable at December 31, 2020 is $0.
NOTE
15 – STOCKHOLDERS’ EQUITY
Preferred
stock, $0.10 par value; 10,000,000 shares authorized; 0 and 0 shares issued and outstanding as of December 31, 2020 and 2019 respectively.
In
March 2020, an executive left the Company and returned 16,667 common shares as part of the related separation agreement. The Company
retired the shares and reduced its issued and outstanding stock by 16,667 shares.
In
September 2020, a former executive who had the right to receive 166,667 shares of Common Stock per the terms of his separation
agreement that was reached in September 2019, entered into an agreement with the Company to exchange the right to receive those
166,667 shares of Common Stock for the Company’s ownership interest in TGH (see Note 6 – Investments) and a warrant
to purchase 66,666 shares of the Company’s Common Stock at $6.00 per share. The Company retired the shares and reduced its
issued and outstanding stock by 166,667 shares.
NOTE
16 - INCOME TAXES
The
Company accounts for income taxes in accordance with the asset and liability method prescribed in ASC 740, “Accounting for
Income Taxes”. The Company has adopted the provisions of ASC 740-10-25, which provides recognition criteria and a related
measurement model for uncertain tax positions taken or expected to be taken in income tax returns. ASC 740-10-25 requires that
a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than
not that the position would be sustained upon examination by tax authorities. Tax positions that meet the more likely than not
threshold are then measured using a probability weighted approach recognizing the largest amount of tax benefit that is greater
than 50% likely of being realized upon ultimate settlement. The Company had no tax positions relating to open income tax returns
that were considered to be uncertain.
The
Company has experienced substantial losses for both book and tax purposes since inception and has recorded no tax provisions
for the years ended December 31, 2020 and 2019. The potential future recovery of any tax assets that the Company
may be entitled to due to these accumulated losses is uncertain and any tax assets that that the Company may be entitled
to have been fully reserved based on management’s current estimates. Management intends to continue maintaining a full
valuation allowance on the Company’s deferred tax assets until there is sufficient evidence to support the reversal
of all or some portion of these allowances.
As
of December 31, 2020, the Company had approximately $11,356,890 of operating loss carryforwards for United States
tax purposes, expiring as follows:
●
|
$2,182,354
expiring in 2037
|
|
|
●
|
$9,174,536
with no expiration
|
Realization
of operating loss carryforwards to offset future operating income for tax purposes are subject to various limitations including
change of ownership and current year taxable income percentage limitations.
The
Company has no credit carryforwards for tax purposes.
The
Company’s primary filing jurisdictions are the United States and Canada. Due to the Company’s net operating
loss carryforwards, the Company’s income tax returns remain subject to examination by federal, foreign and most state taxing
authorities for all tax years.
NOTE
17 – WARRANTS
The
following table shows warrant activity for the years ended December 31, 2020 and 2019.
|
|
Number of shares
|
|
|
Weighted Average Exercise Price
|
|
Warrants outstanding as of
December 31, 2018
|
|
|
1,000
|
|
|
$
|
6.00
|
|
Warrants issued in connection with convertible debenture offering (see Note 11):
Issued to convertible debenture holders
|
|
|
88,689
|
|
|
|
18.00
|
|
Issued to 4Front as part of compensation
|
|
|
25,650
|
|
|
$
|
14.46
|
|
Warrants outstanding as of December 31, 2019
|
|
|
115,339
|
|
|
$
|
17.28
|
|
Warrants exercisable as of December 31, 2019
|
|
|
115,339
|
|
|
$
|
17.28
|
|
|
|
Number of shares
|
|
|
Weighted Average Exercise Price
|
|
Warrants outstanding as of December 31, 2019
|
|
|
115,339
|
|
|
$
|
17.28
|
|
Issued in conjunction with debt
|
|
|
20,747
|
|
|
|
18.00
|
|
Issued in conjunction with agreement with former executive
(see Note 15 – Stockholders’ Equity)
|
|
|
66,666
|
|
|
$
|
6.00
|
|
Warrants outstanding as of December 31, 2020
|
|
|
202,752
|
|
|
$
|
13.64
|
|
Warrants exercisable as of December 31, 2020
|
|
|
202,752
|
|
|
$
|
13.64
|
|
The fair value of the options is calculated using
the Black-Scholes pricing model based on the estimated market value of the underlying common stock at the valuation measurement date
$6.00, the remaining contractual term of the options of 5 years, risk-free interest rate of 0.26% and expected volatility of the price
of the underlying common stock of 100%. There is a moderate degree of subjectivity involved when estimating the value of warrants with
the Black-Scholes option pricing model as the assumptions used are moderately judgmental.
The
weighted-average life of the warrants is 2.2 years. The aggregate intrinsic value of the warrants outstanding and exercisable
at December 31, 2020 is $0.
NOTE
18 – SUBSEQUENT EVENTS
On
February 17, 2021, we completed an offering of 6,210,000 shares of our common stock, inclusive of the underwrites full
overallotment, at $10.00 per share for total gross offering proceeds of $62,100,000. In connection with this offering, we received
approval to list our common stock on the Nasdaq Capital Market under the symbol “UGRO”.
On
February 19, 2021, we repaid all of the amounts outstanding under and terminated the Credit Agreement (See “NOTE
10 – DEBT”).
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