NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. Our custom-tailored approach to design, procurement,
and equipment integration provides a single point of accountability across all aspects of indoor growing operations. We also help our
clients achieve operational efficiency and economic advantages through a full spectrum of professional services and programs focused
on facility optimization and environmental health which establish facilities that allow clients to manage, operate and perform at the
highest level throughout their entire cultivation lifecycle once they are up and running.
We
aim to work with our clients from inception of their project in a way that provides value throughout the life of their facility. We are
a trusted partner and advisor to our clients and offer a complete set of engineering and managed services complemented by a vetted suite
of select cultivation equipment systems.
Basis
of Presentation
These
consolidated financial statements are presented in United States dollars and have been prepared in accordance with United States generally
accepted accounting principles (“GAAP”). On December 31, 2020, we effected a 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.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited
Condensed Consolidated Financial Statements
The
Company has prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the SEC for
condensed financial reporting. The condensed consolidated financial statements are unaudited and, in the Company’s opinion, include
all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of the Company’s condensed
consolidated balance sheets, condensed consolidated statements of operations and comprehensive income (loss), condensed consolidated
statements of shareholders’ deficit and condensed consolidated statements of cash flows for the periods presented. The results
reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be
expected for the entire year. Certain information and footnote disclosures normally included in financial statements prepared in accordance
with GAAP have been omitted in accordance with regulations of the SEC. These condensed consolidated financial statements should be read
in conjunction with the financial statements and notes thereto included in the Company’s consolidated financial statements in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Significant
Accounting Policies
For
a detailed discussion about the Company’s significant accounting policies, refer to Note 2 — “Summary of Significant
Accounting Policies,” in the Company’s consolidated financial statements included in the Company’s 2020 Form 10-K.
During the three months ended March 31, 2021, there were no material changes made to the Company’s significant accounting policies.
Use
of Estimates
In
preparing condensed consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of assets and liabilities at the date of the condensed
consolidated financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates.
Significant estimates include estimated useful lives and potential impairment of long-lived assets and goodwill, inventory write offs,
allowance for deferred tax assets, and allowance for bad debt.
Reclassification
Certain
prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on
the reported results of operations.
Recently
Issued Accounting Pronouncements
From
time to time, the Financial Accounting Standards Board (the “FASB”) or other standards setting bodies issue new accounting
pronouncements. The FASB issues updates to new accounting pronouncements through the issuance of an Accounting Standards Update (“ASU”).
Unless otherwise discussed, the Company believes that the impact of recently issued guidance, whether adopted or to be adopted in the
future, is not expected to have a material impact on the Company’s financial statements upon adoption.
NOTE
3 – RELATED PARTY TRANSACTIONS
Cloud
9 Support, LLC (“Cloud 9”), a company owned by James Lowe, a director and shareholder, purchases materials from the Company.
Total sales to Cloud 9 from the Company were $14,006 and $132,872 during the three months ended March 31, 2021 and 2020, respectively.
Outstanding receivables from Cloud 9 as of March 31, 2021 and December 31, 2020 totaled $4,263 and $61,678, respectively.
In
October 2018, we issued a $1,000,000 unsecured note payable to Cloud 9, 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 therein from December 31,
2019 to the date which is the earlier of 60 days following the date: (a) on which demand for repayment is made by the lenders under the
Credit Agreement, as described in Note 9, (which is now only applicable in the case of an event of default under the Credit Agreement
because of the removal of the demand feature pursuant to the First Amendment to the Credit Agreement); or (b) which is the maturity date
under the Credit Agreement.
In
addition, on February 25, 2020, the Company entered into a subordination, postponement and standstill agreement with Cloud9
Support (the “Subordination Agreement”) pursuant to which Cloud 9 Support agreed to postpone and
subordinate all payments due under the promissory note until the facilities under the Credit Agreement have been fully and
finally repaid. The term for the Subordination Agreement will continue in force as long as the Company is indebted to the
agent or lenders under the Credit Agreement. In consideration for Cloud9 Support’s agreement to extend the maturity
date of the promissory note and to enter into the Subordination Agreement, we issued 16,667 shares of common stock to Mr.
Lowe (as designee of Cloud 9 Support).
On
December 15, 2020, James Lowe agreed to convert the $1,000,000 James Lowe Note plus $4,500 of accrued interest (the “New James
Lowe Note”) into a convertible note bridge financing (see “Bridge Financing” in Note 8 – Notes Payable).
The New James Lowe Note carries interest at the rate of 12% and matures on December 31, 2021. The New James Lowe Note plus accrued interest
was mandatorily converted into 137,940 shares of our common stock on February 17, 2021 in connection with the other Bridge Financing
notes.
NOTE
4 – PREPAYMENTS AND OTHER ASSETS
Prepayments
and other assets are comprised of prepayments paid to vendors to initiate orders and prepaid services and fees. The prepaid balances
are summarized as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Vendor prepayments
|
|
$
|
3,428,331
|
|
|
$
|
2,676,493
|
|
Prepaid services and fees
|
|
|
425,619
|
|
|
|
365,931
|
|
Deferred financing asset (See Note 9 - Debt)
|
|
|
-
|
|
|
|
504,644
|
|
Prepayments and other assets
|
|
$
|
3,853,950
|
|
|
$
|
3,547,068
|
|
NOTE 5 –
INVESTMENTS
The Company has
a strategic investment in Edyza, Inc. (“Edyza”), a hardware and software technology company that enables dense sensor networks
in agriculture, healthcare, and other environments that require precise micro-climate monitoring. The Company measures this investment
at cost, less any impairment changes resulting from observable price changes in orderly transactions for an identical or similar investment
of the same issuer. The balance as of March 31, 2021 and December 31, 2020 was $1,710,358.
NOTE 6 –
GOODWILL
The Company
recorded goodwill in conjunction with the initial acquisition of Impact Engineering, Inc. (“Impact”) on March
7, 2019. The goodwill balance as of March 31, 2021 and December 31, 2020 is $902,067. Goodwill is not amortized. There is no goodwill
for income tax purposes. The Company did not record any impairment charges related to goodwill for the periods ended March 31,
2021 and 2020.
NOTE 7 –
ACCRUED EXPENSES
Accrued expenses
are summarized as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Accrued operating expenses
|
|
$
|
538,835
|
|
|
$
|
717,503
|
|
Accrued wages and related expenses
|
|
|
335,225
|
|
|
|
408,907
|
|
Accrued interest expense
|
|
|
9,759
|
|
|
|
99,258
|
|
Accrued sales tax payable
|
|
|
533,300
|
|
|
|
572,826
|
|
|
|
$
|
1,417,119
|
|
|
$
|
1,798,494
|
|
Accrued sales tax
payable is comprised of amounts due to various states and Canadian provinces for 2015 through 2020.
NOTE 8 –
NOTES PAYABLE
The following is
a summary of notes payable excluding related party notes payable:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
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
|
|
|
|
1,020,600
|
|
|
|
|
|
|
|
|
|
|
Convertible notes related to bridge financing. See Bridge Financing Notes below.
|
|
|
–
|
|
|
|
1,854,500
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,020,600
|
|
|
|
2,875,100
|
|
Less current maturities
|
|
|
(1,020,600
|
)
|
|
|
(1,854,500
|
)
|
Long Term
|
|
$
|
–
|
|
|
$
|
1,020,600
|
|
During the fourth quarter of 2020 the Company
entered into bridge financing notes (the “Bridge Financing Notes”) totaling $1,854,500. The Bridge Financing Notes are a
combination of $1,004,500 in the New James Lowe Note (See Note 3 – Related Party Transactions), $350,000 received in November 2020,
and an additional $500,000 received in December 2020. The Bridge Financing Notes carry interest at the rate of 12% and mature on December
31, 2021. The Bridge Financing Notes will be mandatorily converted upon the closing of a sale of the securities of the Company, whether
in a private placement or pursuant to an effective registration statement under the Securities Act, resulting in at least $2,500,000
of gross proceeds to the Company (a “Qualified Offering”). In the event of a Qualified Offering, the outstanding principal
and interest of the Bridge Financing Notes will be converted into the identical security issued at such Qualified Offering at 75% of
the per security price paid by investors in connection with the Qualified Offering. The Offering described in Note 12 – Shareholders
Equity, was a Qualified Offering and the Bridge Financing Notes were converted into equity in connection with the Offering on February
17, 2021.
NOTE 9 –
DEBT
The Company’s
borrowings as of March 31, 2021 and December 31, 2020 consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Revolving Facility
|
|
$
|
–
|
|
|
$
|
3,403,143
|
|
Term Loan, net of $0 and $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 was denominated in Canadian dollars (C$), was
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 could be drawn from time to time, subject to the terms and conditions set forth in the Credit Agreement
and described further below (the “Revolving Facility,” and together with the Term Loan, the “Facilities”). The
Credit Agreement was 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 was 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
could be prepaid in part or in full without a penalty at any time during the term of the Facilities, and the Term Loan could
be prepaid in full or in part without penalty subject to 60 days prior notice in each case subject to certain customary conditions.
On September
4, 2020, the Company executed an amendment to the Credit Agreement (the “First Amendment”) whereas the Facilities
described above were due on December 31, 2021 (the “Revised Maturity Date”). The First Amendment also increased
the rate at which the Facilities will bear interest to the annual rate established and designated by the Bank of Nova Scotia as
the prime rate, plus 12% per annum.
As a result
of the First Amendment, the Company was required to prepay, on or before January 31, 2021, $1,000,000 of the balance of the Term
Loan and begin making monthly payments of $100,000 on the balance on the Term Loan starting on March 1, 2021. Additionally, the
Company was required to make monthly payments of $50,000 on the balance under the Revolving Facility beginning October 1, 2020
and could make no more draws under the Revolving Facility.
The Company incurred
$1,314,868 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 were
being amortized as interest expense over the life of the Facilities, until the Revised Maturity Date. On February 17, 2021, the Company
repaid all amounts outstanding under the Credit Agreement and expensed the remaining unamortized debt issuance costs as loss on extinguishment
of debt. As of 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.
NOTE 10
– RISKS AND UNCERTAINTIES
Concentration
Risk
During the three
months ended March 31, 2021 and 2020, one client represented 31% and another client represented 26% of total revenue, respectively. At
March 31, 2021 one client represented 18% and another represented 16% of total outstanding accounts receivable. At December 31,
2020, one client represented 23% and another represented 17% of total outstanding accounts receivable.
During the three
months ended March 31, 2021, 18% of the Company’s total purchases were from one vendor. During the three months ended March 31,
2020, one vendor composed 21% and another vendor composed 15% of the Company’s total purchases.
Coronavirus
Pandemic
The outbreak of
COVID-19, a novel strain of coronavirus first identified in China, which has spread across the globe including the U.S., has had an adverse
impact on our operations and financial condition. The response to this coronavirus by federal, state and local governments in the U.S.
has resulted in significant market and business disruptions across many industries and affecting businesses of all sizes. This pandemic
has also caused significant stock market volatility and further tightened capital access for most businesses. Given that the COVID-19
pandemic and its disruptions are of an unknown duration, they could have an adverse effect on our liquidity and profitability.
The ultimate magnitude
of COVID-19, including the extent of its impact on our financial and operational results, which could be material, will depend on the
length of time that the pandemic continues, its effect on the demand for our products and our supply chain, the effect of governmental
regulations imposed in response to the pandemic, as well as uncertainty regarding all of the foregoing. We cannot at this time predict
the full impact of the COVID-19 pandemic, but it could have a larger material adverse effect on our business, financial condition, results
of operations and cash flows beyond what is discussed within this Report.
NOTE 11 –
STOCK-BASED COMPENSATION
Stock-based compensation
expense for the three months ended March 31, 2021 and 2020 was $290,805 and $432,645, respectively, based on the vesting schedule of
the stock grants and options. No cash flow effects are anticipated for stock grants.
Stock Grants:
The following table
shows stock grant activity for the three months ended March 31, 2021:
Grants outstanding as of December 31, 2020
|
|
|
118,889
|
|
Grants awarded
|
|
|
40,000
|
|
Grants outstanding as of March 31, 2021
|
|
|
158,889
|
|
As of March 31,
2021, the Company has $329,448 in unrecognized share-based compensation expense related to these stock grants.
Stock Options:
The following
table shows stock option activity for the three months ended March 31, 2021:
|
|
Number of
Shares
|
|
|
Weighted
Average
Remaining
Life (Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
Stock options outstanding as of December 31, 2020
|
|
|
638,278
|
|
|
|
7.72
|
|
|
$
|
6.48
|
|
Issued
|
|
|
55,833
|
|
|
|
4.76
|
|
|
$
|
6.00
|
|
Expired
|
|
|
18,444
|
|
|
|
5.07
|
|
|
$
|
7.89
|
|
Stock options outstanding at March 31, 2021
|
|
|
675,667
|
|
|
|
7.55
|
|
|
$
|
6.40
|
|
Stock options exercisable at March 31, 2021
|
|
|
369,305
|
|
|
|
7.69
|
|
|
$
|
6.46
|
|
The
fair value of the options is calculated using the Black-Scholes pricing model based on the market value of the underlying common stock
at the valuation measurement date $6.00, the remaining contractual term of the options of 5 years, risk-free interest rate of 0.36% and
expected volatility of the price of the underlying common stock of 100%.
As of March 31,
2021, the Company has $673,086 in unrecognized share-based compensation expense related to these stock options. The aggregate intrinsic
value of the options outstanding and exercisable at March 31, 2021 is $0.
NOTE 12 –
SHAREHOLDERS’ EQUITY
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.
On February 17, 2021, we completed an offering
of 6,210,000 shares of our common stock, inclusive of the underwrites full overallotment, at $10.00 per share for total gross offering
proceeds of $62,100,000. In connection with this offering, we received approval to list our common stock on the Nasdaq Capital Market
under the symbol “UGRO”.
NOTE
13 – WARRANTS
Warrants
are immediately exercisable upon issuance. The following table shows warrant activity for the three months ended March 31, 2021.
|
|
Number of shares
|
|
|
Weighted
Average
Exercise Price
|
|
Warrants outstanding as of December 31, 2020
|
|
|
202,752
|
|
|
$
|
13.64
|
|
Exercised
|
|
|
(21,747
|
)
|
|
|
24.00
|
|
Issued in connection with equity offering
|
|
|
310,500
|
|
|
$
|
12.50
|
|
Warrants outstanding as of March 31, 2021
|
|
|
491,505
|
|
|
$
|
12.75
|
|
Warrants exercisable as of March 31, 2021
|
|
|
491,505
|
|
|
$
|
12.75
|
|
The
fair value of the warrants is calculated using the Black-Scholes pricing model based on the market value of the underlying common
stock at the valuation measurement date $10.00, the remaining contractual term of the options of 5 years, risk-free interest
rate of 0.57% and expected volatility of the price of the underlying common stock of 100%.
The
weighted-average life of the warrants is 2.4 years. The aggregate intrinsic value of the warrants outstanding and exercisable at March
31, 2021 is $0.
NOTE
14 – SUBSEQUENT EVENTS
Management has
assessed and determined that no significant subsequent events are to be disclosed according to ASC 855.