The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein. See also "Forward Looking Statements" on page 3 of this Report.





Overview and History



urban-gro, Inc. ("we," "us," "our," the "Company," or "urban-gro") is a leading
architectural, engineering and cultivation design services company focused on
the sustainable commercial indoor horticulture market. On July 30, 2021, we
acquired three architecture design firms (2WR Colorado, Inc, 2WR Georgia, Inc.
and MJ12 Design Studios, Inc., collectively the "2WR Entities") from their
shareholders. The 2WR Entities were under common ownership and management.
Effective March 7, 2019, we acquired a mechanical, electrical and plumbing
engineering services firm (Impact Engineering, Inc. ("Impact")) from its sole
shareholder. We engineer and design indoor controlled environment agriculture
("CEA") facilities and then integrate complex environmental equipment systems
into those facilities. Through this work, we create high-performance indoor
cultivation facilities for our clients to grow specialty crops, including leafy
greens, vegetables, herbs, and plant-based medicines. Our custom-tailored
approach to design, procurement, and equipment integration provides a single
point of accountability across all aspects of indoor growing operations. We also
help our clients achieve operational efficiency and economic advantages through
a full spectrum of professional services and programs focused on facility
optimization and environmental health which establish facilities that allow
clients to manage, operate and perform at the highest level throughout their
entire cultivation lifecycle once they are up and running.



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

life
of their facility.



15






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





  ? Service Solutions:



? Architecture, Engineering Design Services - A comprehensive triad of services


    including:




  i.   Architecture

  ii.  Cultivation Space Programming ("CSP")

  iii. Integrated Cultivation Design ("ICD")

  iv.  Full-Facility Mechanical, Electrical, and Plumbing ("MEP")



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


    including:




  i.   Remote Monitoring, Reporting, Support, and Training Services

  ii.  Facility and Equipment Commissioning & Audit Services

iii. Environmental Sciences Groups' ("ESG") Compliance and Program Services






  ? Integrated Equipment Solutions:



? Design, Source, and Integration of Complex Environmental Equipment Systems

Including Purpose-Built Heating, Ventilation, and Air Conditioning ("HVAC")

solutions, Environmental Controls, Fertigation, and Irrigation Distribution.

? Value-Added Reselling ("VAR") of Cultivation Equipment including a Complete


    line of Lighting, Fans and Rolling Benching Systems

  ? Strategic Vendor Relationships with Premier Manufacturers




The majority of our clients are commercial CEA cultivators. We believe one of
the key points of our differentiation that our clients value is the depth of
experience of our employees and our Company. We currently employ 75 individuals.
Approximately two-thirds of our employees are considered experts in their areas
of focus, and our team includes Architects, Engineers (Mechanical, Electrical,
Plumbing, Controls, and Agricultural), Professional Engineers, horticulturalists
and individuals with Masters Degrees in Plant Science and Business
Administration. As a company, we have worked on more than 450 indoor CEA
facilities, and believe that the experience of our team and Company provides
clients with the confidence that we will proactively keep them from making
common costly mistakes during the build out and operational stages. Our
expertise translates into clients saving time, money, and resources, and
provides them ongoing access to expertise that they can leverage without having
to add headcount to their own operations. We provide this experience in addition
to offering a platform of the highest quality equipment systems that can be
integrated holistically into our clients' facilities.



Results Of Operations


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


During the three months ended September 30, 2021, we generated revenues of $18.3
million compared to revenues of $8.3 million during the three months ended
September 30, 2020, an increase of $10.0 million, or 119%. Equipment systems
revenue increased $9.1 million, primarily due to an increase in cultivation
equipment sales, services revenue increased $1.0 million, primarily from the
acquisition of the 2WR Entities, and consumable product sales decreased $0.1
million.



During the three months ended September 30, 2021, cost of revenues was $14.0
million compared to $6.7 million during the three months ended September 30,
2020, an increase of $7.3 million, or 111%. This increase is directly
attributable to the increase in revenues indicated above.



Gross profit was $4.2 million (23% of revenues) during the three months ended
September 30, 2021 compared to $1.7 million (20% of revenue) during the three
months ended September 30, 2020. Gross profit as a percentage of revenues
increased due to an increase in higher margin services revenues and higher
margin equipment systems revenues for the comparable periods.



Operating expenses increased $2.3 million to $4.2 million for the three months
ended September 30, 2021 compared to the three months ended September 30, 2020.
This was due to a $2.2 million increase in general operating expenses, mainly
due to an increase in salary and travel expenses, in part related to the
acquisition of the 2WR Entities, and a $0.1 million increase in stock-based
compensation expense.



Non-operating expense was $0.01 million for the three months ended September 30,
2021, compared to non-operating expenses of $0.5 million for the three months
ended September 30, 2020. For the three months ended September 30, 2020, the
Company incurred interest expense of $0.4 million and a purchase price
contingent consideration expense of $0.1 million.



As a result of the above, we generated net income of $0.06 million for the three
months ended September 30, 2021, or fully diluted net income per share of $0.00,
compared to a net loss of $0.7 million for the three months ended September 30,
2020 or a fully diluted net loss per share of $0.14.



Comparison of Results of Operations for the nine months ended September 30, 2021 and 2020





During the nine months ended September 30, 2021, we generated revenues of $43.2
million compared to revenues of $16.6 million during the nine months ended
September 30, 2020, an increase of $26.6 million, or 160%. Equipment systems
revenue increased $26.3 million primarily due to an increase in cultivation
equipment sales, services revenue increased $0.5 million, primarily from the
acquisition of the 2WR Entities, and consumable product sales decreased $0.2
million.


During the nine months ended September 30, 2021, cost of revenues was $33.3 million compared to $12.6 million during the nine months ended September 30, 2020, an increase of $20.7 million, or 164%. This increase is directly attributable to the increase in revenues indicated above.





Gross profit was $9.8 million (23% of revenues) during the nine months ended
September 30, 2021 compared to $4.0 million (24% of revenue) during the nine
months ended September 30, 2020. Gross profit as a percentage of revenues
decreased due primarily to an increase in lower margin equipment systems
revenues for the comparable periods.



Operating expenses increased $2.9 million to $9.4 million for the nine months
ended September 30, 2021 compared to the nine months ended September 30, 2020.
This was due to a $3.2 million increase in general operating expenses, mainly
due to an increase in salary and travel expenses, in part related to the
acquisition of the 2WR Entities, offset by a $0.3 million reduction in
stock-based compensation expense.



Non-operating expense was $0.7 million for the nine months ended September 30,
2021, compared to $1.5 million for the nine months ended September 30, 2020. The
Company incurred a $1.0 million gain from the forgiveness of the PPP loan, an
$0.8 million loss on the extinguishment of debt and interest expense of $0.9
million for the nine months ended September 30, 2021. For the nine months ended
September 30, 2020, the company incurred interest expense of $1.0 million,
recorded an impairment loss of $0.3 million related to an investment, and
recorded $0.2 million in purchase price contingent consideration expense.



As a result of the above, we incurred net loss of $0.3 million for the nine months ended September 30, 2021, or a fully diluted net loss per share of ($0.03), compared to a net loss of $4.0 million for the nine months ended September 30, 2020 or a fully diluted net loss per share of ($0.83).





16







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, income taxes/benefit, depreciation of tangible
assets, amortization of intangible assets, impairment of investments, unrealized
exchange losses, debt forgiveness and extinguishment, stock-based compensation
expense, and acquisition costs, that we do not believe reflect our core
operating performance.



Our board of directors and management team focus on Adjusted EBITDA as a key
performance and compensation measure. We believe that Adjusted EBITDA assists us
in comparing our operating performance over various reporting periods because it
removes from our operating results the impact of items that our management
believes do not reflect our core operating performance.



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





                                  Three months Ended September 30,          

Nine months Ended September 30,


                                    2021                   2020                  2021                 2020
Net Income (Loss)              $        56,656       $        (694,281 )   $       (271,482 )     $  (3,959,882 )
Interest expense                         4,331                 393,158              326,397           1,057,501

Interest expense - BCF                       -                       -              636,075                   -
Impairment loss                              -                       -                    -             310,000
Loss on extinguishment of
debt                                         -                       -              790,723                   -
Stock-based compensation               506,034                 399,258            1,096,441           1,391,807
Contingent consideration -
purchase price                               -                 155,000                    -             155,000
Impairment of investment                     -                       -                    -                   -
Depreciation and
amortization                           154,306                  61,339              263,932             181,750
Acquisition costs                      141,052                       -              198,609                   -
One-time employee expenses             125,000                       -              125,000                   -
PPP loan forgiveness                         -                       -           (1,032,316 )                 -
Adjusted EBITDA                $       990,379       $         314,474     $      2,133,379       $    (863,824 )




As of December 31, 2020, the Company began reporting the dollar amount of
contractually committed orders for equipment systems for which revenue has not
been recognized ("Equipment Backlog"). As of September 30, 2021, the Company has
also begun reporting the dollar amount of contractually committed orders for
services revenue for which revenue has not been recognized ("Services Backlog"
and collectively with Equipment Backlog, "Backlog"). Backlog is a non-GAAP
financial measure that our board of directors and management team focus on as a
key performance measure. Although there can be no assurances that Backlog will
be recognized as equipment systems revenue in future periods, we believe that
tracking Backlog assists us in estimating the timing of future equipment systems
revenue. Backlog amounts, reported in millions of dollars, are reflected in the
table below as of the dates indicated:



                                December 31, 2020       March 31, 2021       June 30, 2021       September 30, 2021
Equipment Backlog              $              14.6     $           15.2     $          27.9     $               18.6
Services Backlog                                NR                   NR                  NR     $                3.9
Backlog                        $              14.6     $           15.2     $          27.9     $               22.5




NR - Not reported


Liquidity and Capital Resources





As of September 30, 2021, we had cash of $40.5 million, which represented an
increase of $40.3 million from December 31, 2020. This increase in cash and cash
equivalents is primarily due to the net proceeds received from our equity
offering in February of 2021 of $58.2 million offset by $5.8 million of debt
repayment, $6.9 million of treasury stock purchases, and a $5.2 million decrease
due to timing of deposits and prepayments to vendors during the nine months
ended September 30, 2021.



Net cash provided by operating activities was $0.3 million during the nine
months ended September 30, 2021, compared to net cash used in operating
activities of $3.0 million during the nine months ended September 30, 2020, an
improvement of $3.3 million. This increase in cash provided by operating
activities is primarily the result of an improvement in income from operations
for the comparable periods with the remaining fluctuation being primarily
comprised of fluctuations in operating assets and liabilities. As of September
30, 2021, we had $9.4 million in client deposits related to client orders,
compared to client deposits of $4.9 million as of December 31, 2020. We require
prepayments from clients before any design work is commenced and before any
material is ordered from the vendor. These prepayments are booked to the client
deposits liability account when received. We expect client deposits to be
relieved from the deposits account no longer than 12 months for each project. As
of September 30, 2021, we had $7.8 million of vendor prepayments compared to
$3.5 million as of December 31, 2020. As of September 30, 2021, we had $2.8
million in accounts payable, compared to $0.7 million as of December 31, 2020.



Net cash used in investing activities was $5.7 million for the nine months ended
September 30, 2021, compared to $0.1 million during the nine months ended
September 30, 2020. The Company used $5.6 million for the purchase of the 2WR
Entities during the period. We have no material commitments for capital
expenditures as of September 30, 2021



Net cash provided by financing activities was $45.7 million for the nine months
ended September 30, 2021, compared to $2.9 million during the nine months ended
September 30, 2020. Cash provided from financing activities during the nine
months ended September 30, 2021 primarily relates to $58.4 million in net
proceeds received from the issuance of stock, offset by $5.8 million used in the
repayment of notes payable and $6.9 million in treasury shares acquired.



Inflation



Although our operations are influenced by general economic conditions, we do not
believe that inflation had a material effect on our results of operations during
the nine months ended September 30, 2021.



17






Critical Accounting Policies and Estimates

Critical Accounting Policies and Estimates





The discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On an on-going
basis, we evaluate our estimates based on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions For a detailed discussion about the Company's
significant accounting policies, refer to Note 2 - "Summary of Significant
Accounting Policies," in the Company's consolidated financial statements
included in the Company's 2020 Form 10-K. During the nine months ended September
30, 2021, there were no material changes made to the Company's significant
accounting policies.



Off-Balance Sheet Arrangements





We have not entered into any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources and would be considered
material to investors.

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