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. OnJuly 30, 2021 , we acquired three architecture design firms (2WRColorado, Inc , 2WRGeorgia, Inc. andMJ12 Design Studios, Inc. , collectively the "2WR Entities") from their shareholders. The 2WR Entities were under common ownership and management. EffectiveMarch 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 inPlant 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
During the three months endedSeptember 30, 2021 , we generated revenues of$18.3 million compared to revenues of$8.3 million during the three months endedSeptember 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 endedSeptember 30, 2021 , cost of revenues was$14.0 million compared to$6.7 million during the three months endedSeptember 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 endedSeptember 30, 2021 compared to$1.7 million (20% of revenue) during the three months endedSeptember 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 endedSeptember 30, 2021 compared to the three months endedSeptember 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 endedSeptember 30, 2021 , compared to non-operating expenses of$0.5 million for the three months endedSeptember 30, 2020 . For the three months endedSeptember 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 endedSeptember 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 endedSeptember 30, 2020 or a fully diluted net loss per share of$0.14 .
Comparison of Results of Operations for the nine months ended
During the nine months endedSeptember 30, 2021 , we generated revenues of$43.2 million compared to revenues of$16.6 million during the nine months endedSeptember 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
Gross profit was$9.8 million (23% of revenues) during the nine months endedSeptember 30, 2021 compared to$4.0 million (24% of revenue) during the nine months endedSeptember 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 endedSeptember 30, 2021 compared to the nine months endedSeptember 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 endedSeptember 30, 2021 , compared to$1.5 million for the nine months endedSeptember 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 endedSeptember 30, 2021 . For the nine months endedSeptember 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$0.2 million in purchase price contingent consideration expense.
As a result of the above, we incurred net loss of
16 NON-GAAP FINANCIAL MEASURES The Company uses the supplemental financial measure of Adjusted Earnings before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") as a measure of our operating performance. Adjusted EBITDA is not calculated in accordance with accounting principles generally accepted inthe United States of America ("GAAP") and it is not a substitute for other measures prescribed by GAAP such as net income (loss), income (loss) from operations, and cash flows from operating activities. We define Adjusted EBITDA as net income (loss) attributable to urban-gro, Inc., determined in accordance with GAAP, excluding the effects of certain operating and non-operating expenses including, but not limited to, interest expense, income taxes/benefit, depreciation of tangible assets, amortization of intangible assets, impairment of investments, unrealized exchange losses, debt forgiveness and extinguishment, stock-based compensation expense, and acquisition costs, that we do not believe reflect our core operating performance. Our board of directors and management team focus on Adjusted EBITDA as a key performance and compensation measure. We believe that Adjusted EBITDA assists us in comparing our operating performance over various reporting periods because it removes from our operating results the impact of items that our management believes do not reflect our core operating performance.
The following table reconciles net loss attributable to the Company to Adjusted EBITDA for the periods presented:
Three months EndedSeptember 30 ,
Nine months Ended
2021 2020 2021 2020 Net Income (Loss)$ 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 ofDecember 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 ofSeptember 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 ofSeptember 30, 2021 , we had cash of$40.5 million , which represented an increase of$40.3 million fromDecember 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 endedSeptember 30, 2021 . Net cash provided by operating activities was$0.3 million during the nine months endedSeptember 30, 2021 , compared to net cash used in operating activities of$3.0 million during the nine months endedSeptember 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 ofSeptember 30, 2021 , we had$9.4 million in client deposits related to client orders, compared to client deposits of$4.9 million as ofDecember 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 ofSeptember 30, 2021 , we had$7.8 million of vendor prepayments compared to$3.5 million as ofDecember 31, 2020 . As ofSeptember 30, 2021 , we had$2.8 million in accounts payable, compared to$0.7 million as ofDecember 31, 2020 . Net cash used in investing activities was$5.7 million for the nine months endedSeptember 30, 2021 , compared to$0.1 million during the nine months endedSeptember 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 ofSeptember 30, 2021 Net cash provided by financing activities was$45.7 million for the nine months endedSeptember 30, 2021 , compared to$2.9 million during the nine months endedSeptember 30, 2020 . Cash provided from financing activities during the nine months endedSeptember 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 endedSeptember 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 inthe 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 endedSeptember 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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