Item 1A. Risk Factors
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 Cautionary Information
about Forward-Looking Statements in Part I of this Report.
Risks Related to Our Operations
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
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 and on February
12, 2021, we completed an uplisting to Nasdaq under the ticker symbol “UGRO.” The following is a summary of our recent historical
operating performance:
●
During
the year ended December 31, 2024, we generated revenue of $40.0 million and incurred a net loss of $36.5 million.
● During the year ended December 31, 2023, we generated
revenue of $69.9 million and incurred a net loss of $25.4 million.
● During the year ended December 31, 2022, we generated revenue
of $66.3 million and incurred a net loss of $15.3 million.
● During the year ended December 31, 2021, we generated revenue
of $62.1 million and incurred a net loss of $0.9 million.
● During the year ended December 31, 2020, we generated revenue
of $25.8 million and incurred a net loss of $5.1 million.
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, an investment in our securities necessarily involves uncertainty about the stability of our operating results, cash flows
and, ultimately, our prospects generally.
We had negative cash flow from operations
for the fiscal years ended December 31, 2024 and December 31, 2023.
We had negative cash flow
from operations of $2.8 million for the fiscal year ended December 31, 2024 and $10.5 million for the fiscal year ended December 31,
2023. To the extent that we have negative cash flow from operations 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.
We may not be able to generate positive cash flow from our operations and additional capital or other types of financing may not be available
when needed or on terms favorable to us.
Our architecture, engineering, design,
and construction management 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
architecture, engineering, design, and construction management 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.
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We may continue to incur losses in the near
future, which may impact our ability to implement our business strategy and adversely affect our financial condition.
While we are focused significantly
on controlling our operating expenses by managing variable expenses, employee count, and marketing activities in order to become cash
flow positive, these measures may adversely affect our future 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 may not become profitable
or generate sufficient profits from operations in the future. If our revenues do not continue to grow or our gross profits 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.
To the extent that future net losses are in excess
of additions to equity, we may fall below the Nasdaq’s listing requirement of having a net equity balance of at least $2,500,000. If we
fail to continue to satisfy this or any other continued listing requirements, Nasdaq will take steps to delist our common stock. Such
a delisting would likely have a negative effect on the price of our common stock and would impair shareholders’ ability to sell
or purchase our common stock when they wish to do so, as well as adversely affect our ability to issue additional securities and obtain
additional financing in the future.
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 the various sectors in which
we operate is intense.
There are many competitors
in the industries in which we operate, including many who offer somewhat categorically similar professional services and equipment solutions
as those offered by us. In the future other companies may enter this arena by developing solutions that directly compete 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 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 depend upon third-party suppliers for
the equipment solutions that we sell.
We depend on outside manufacturers
for the equipment solutions that we sell. While we believe that there are sufficient sources of supply available, if the third-party suppliers
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 equipment type products with alternative suppliers, our ability to sell these solutions 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.
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We have historically depended 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.
Although we have been able
to successfully generate substantial sales to different clients over time, we may not 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 client. Clients who
represent a substantial portion of our historical revenue may decide to purchase products and services from other providers 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.
A portion of our business depends on our
clients obtaining appropriate licenses from various licensing agencies.
A portion of our business
depends on our clients obtaining appropriate licenses from various licensing agencies. Any or all licenses necessary for our clients to
operate their businesses may not 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. Our existing clients may not be able to retain their licenses going forward and new licenses
may not 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 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.
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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 Legal Cannabis Industry
To date, the majority of our revenues have
come from providing architecture and engineering design services and selling equipment systems into facilities prior to the facility becoming
operational. 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 sector as well as the Commercial sector. However, on a historic basis, the majority of our clients to whom we provide
facility architecture and engineering design services and sell equipment systems prior to the facility becoming operational have primarily
been in the legal cannabis industry. In addition to selling directly to these clients, we also sell our equipment solutions to third parties,
such as general contractors and other intermediaries, like equipment leasing companies. The majority of these solutions have been resold
into the legal cannabis industry. A significant 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 in the U.S. is an
emerging industry and has only been legalized in some states while remaining illegal in others and under U.S. federal law. Federal Prohibition
makes it difficult to accurately forecast the demand for our solutions in this specific industry. Losing clients from this industry may
have a material adverse effect on our revenues and the success of our business.
The legal cannabis industry
is not mature in the United States and has been legalized in only some states and remains illegal in others and under U.S. federal law,
making it difficult to accurately forecast demand for our solutions. Revenues could materially decline if the U.S. Department of Justice
(“DOJ”) enforces federal law against the industry and some of our clients are negatively impacted.
The legal cannabis industry
in the U.S. remains in state of flux, and many aspects of this industry’s development and evolution cannot be accurately predicted.
Therefore, losing any clients could have a material adverse effect on our business. While we have attempted to identify our business risks
in the legal cannabis industry, investors 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.
As cannabis remains illegal under United
States federal law, we may have to stop providing equipment systems and services to companies who are engaged in cannabis cultivation
and other cannabis-related activities.
Cannabis, which is referred
to as “Marijuana” in the Controlled Substances Act, 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 cannabis 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 cannabis has been authorized under state law, its use remains
a violation of federal law. Since federal law criminalizing the use of cannabis is not preempted by state laws that legalize its use,
strict enforcement of federal law regarding cannabis may 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.
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Our solutions are used by legal and licensed
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 cultivation, law enforcement authorities, in their attempt to regulate the illegal use of cannabis,
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 cannabis.
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 legal and licensed 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
and the sales of our products and services.
As a company with clients operating in the
legal 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.
The “FinCEN Memo”
dated February 14, 2014, de-prioritizes enforcement of the Bank Secrecy Act against financial institutions and cannabis 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 cannabis laws, although it did not codify federal protections for medical cannabis patients and
producers. Moreover, despite the Appropriations Rider, the Justice Department maintains that it can still prosecute violations of the
federal cannabis ban and continue cases already in the courts. Additionally, the Appropriations Rider must be re-enacted every year. While
it has been continued every year since 2015, including most recently in 2022, 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 cannabis laws
would increase.
Further legislative development beneficial
to our operations is not guaranteed.
Among other things, the business
of our clients in the legal cannabis industry involves the cultivation, distribution, manufacture, storage, transportation and/or sale
of 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 legal 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 legal 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 cannabis as an alternative
to alcohol, and medical cannabis as an alternative to various commercial pharmaceuticals. Many industries that could view the emerging
legal cannabis industry as an economic threat are well established, with vast economic and United States federal and state lobbying resources.
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 legal cannabis industry could have
a detrimental impact on our clients and, in turn on our operations.
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The legality of cannabis could be reversed
in one or more states.
The voters or legislatures
of states in which cannabis has already been legalized could potentially repeal applicable laws which permit the operation of both legal
medical and retail cannabis 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 legal medical and adult-use cannabis industry are constantly changing, which could detrimentally affect our clients involved in that
industry and, in turn, our operations. Local, state and federal cannabis 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, 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 we determine what effect additional
governmental regulations or administrative policies and procedures, when and if promulgated, could have on our operations.
Regulatory scrutiny of the legal 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 legal cannabis industry may come under the scrutiny or further scrutiny by the United States Food and
Drug Administration (the “FDA”), 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. The FDA currently is authorized to promulgate regulations for and oversight of
CBD products. 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 cannabis
is illegal under federal law, federally chartered banks will not accept deposit funds from businesses involved with cannabis. Consequently,
businesses involved in the legal 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 legal 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
legal cannabis-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 legal 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 legal 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
Our failure to meet the continued listing requirements of Nasdaq
could result in the delisting of our Common Stock.
If we fail to satisfy the continued listing requirements
of Nasdaq, Nasdaq will take steps to delist our common stock. Such a delisting would likely have a negative effect on the price of our
common stock and would impair stockholders’ ability to sell or purchase our common stock when they wish to do so, as well as adversely
affect our ability to issue additional securities and obtain additional financing in the future.
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On August 20, 2024, we received
a notice from The Nasdaq Stock Market LLC (“Nasdaq”) stating that because we had not yet filed our Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 2024, we were no longer in compliance with Nasdaq Listing Rule 5250(c)(1) (the “Timely
Filing Requirement”). On November 21, 2024, we received a notice from Nasdaq stating that because we had not yet filed our Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 2024. We continued to not be in compliance with the Timely Filing Requirement.
On February 18, 2025, we filed each of our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2024 and September 30, 2024
and an amendment to our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, and on February 19, 2025 we filed an
amendment to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, which amendments included restated financial statements
for the periods covered therein. As a result of these filings, on February 24, 2025, the Listing Qualifications Department of Nasdaq
notified us that we had regained compliance with the Timely Filing Requirement.
On February 24, 2025, we
received a deficiency letter from Nasdaq notifying us that (i) for the last 30 consecutive business days, the bid price for our common
stock had closed at a price of below $1.00 per share, which is the minimum closing price required to maintain continued listing on the
Nasdaq Capital Market under Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”), and (ii) because our stockholder’s
equity was below $2.5 million as reported on our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2024, we no
longer met the minimum stockholders’ equity requirement for continued listing on The Nasdaq Capital Market under Nasdaq Rule 5550(b)(1),
requiring a minimum stockholders’ equity of $2.5 million (the “Stockholders’ Equity Requirement”).
On April 16, 2025, we received
a notice from Nasdaq stating that because we had not yet filed our Annual Report on Form 10-K for the fiscal year ended December 31,
2024 (the “Form 10-K”), we were no longer in compliance with the Timely Filing Requirement. On May 21, 2025, we received
a notice from Nasdaq stating that because we had not yet filed our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2025 or our Annual Report on Form 10-K for the fiscal year ended December 31, 2024, we continued to be out of compliance with the Timely
Filing Requirement.
On August 18, 2025, we received
a determination letter from Nasdaq stating that Nasdaq had determined that we did not file the Form 10-K and the
Form 10-Q by August 15, 2025, the date required for the delinquent filings by an exception previously received from Nasdaq staff. The
letter stated that, as a result, unless we timely requested an appeal, the trading of our common stock would be suspended at the opening
of business on August 27, 2025 and a Form 25-NSE will be filed with the SEC, which would remove our common stock securities from listing
and registration on Nasdaq. The letter also stated that we were not in compliance the Bid Price Rule and the Stockholders’
Equity Requirement. We timely requested an appeal to a Nasdaq Hearings Panel (the “Panel”).
On October 14, 2025, we attended
a hearing before the Panel in connection with the determination letter. On October 30, 2025, we received a notice from Nasdaq notifying
us that the Panel had determined to grant our request to continue our listing on The Nasdaq Capital Market, conditioned on us regaining
compliance with the Timely Filing Requirement and the Stockholders’ Equity Requirement on or before December 31, 2025 and regaining
compliance with the Bid Price Rule on or before January 28, 2026. During the exception period, we are required to provide prompt notification
to the Panel of any significant event that may affect our compliance with Nasdaq requirements. Any documentation evidencing our compliance
will be subject to review by the Panel, which may, in its discretion, request additional information before determining whether we have
regained compliance.
On November 18, 2025, we received a determination letter from Nasdaq stating
that because we did not timely file our Quarterly Report on Form 10-Q for the period ended September 30, 2025, the resulting filing
delinquency would be an additional basis for delisting our securities pursuant to the Timely Filing Requirement. The letter notified us
that the Panel would consider the matter in their decision regarding our continued listing on the Nasdaq Capital Market and requested
that we present our views with respect to the additional deficiency in writing by November 25, 2025. We made a submission to the Panel
by the requested date.
There can be no assurance
that we will be able to regain compliance with the Bid Price Rule, the Timely Filing Requirement, or the Stockholders’ Equity Requirement,
or will otherwise be in compliance with other applicable Nasdaq Listing Rules. If we fail to meet the conditions set forth
in our compliance plan or if Nasdaq delists our securities from trading for any other reason, we could face significant material adverse
consequences, including:
● a limited availability
of market quotations for our securities;
● reduced liquidity
with respect to our securities;
● a determination
that our common stock is a “penny stock” which will require brokers trading in
our ordinary shares to adhere to more stringent rules, possibly resulting in a reduced level
of trading activity in the secondary trading market for our ordinary shares;
● a limited amount
of news and analyst coverage for our company; and
● a decreased ability
to issue additional securities or obtain additional financing in the future.
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Our stock price could be extremely volatile.
As a result, shareholders may not be able to re-sell their shares at or above the price they paid for them.
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 shareholders from being able to sell their shares at or above the price
they paid for their shares and may otherwise negatively affect the liquidity of our common stock. Shareholders may experience a decrease,
which could be substantial, in the value of their stock, including decreases unrelated to our operating performance or prospects, and
shareholders could lose part or all of their 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:
● our ability to generate sufficient revenues to achieve profitability
and positive cash flow;
● competition in our industry and our
ability to compete effectively;
● our ability to attract, recruit,
retain and develop key personnel and qualified employees;
● reliance on significant clients and
third-party suppliers;
● our ability to successfully identify
and complete acquisitions and effectively integrate those acquisitions into our operations;
● our actual or anticipated operating
and financial results, including how those results vary from the expectations of management,
securities analysts and investors;
● 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;
● developments in our business or operations
or our industry sectors generally;
● any future offerings by us of our
common stock;
● 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);
● legislative or regulatory changes
affecting our industry generally or our business and operations specifically;
● the operating and stock price performance
of companies that investors consider to be comparable to us;
● announcements of strategic developments,
acquisitions, restructurings, dispositions, financings and other material events by us or
our competitors;
● actions by our current shareholders,
including future sales of common shares by existing shareholders, including our directors
and executive officers;
● proposed or final regulatory changes
or developments;
● anticipated or pending regulatory
investigations, proceedings, or litigation that may involve or affect us; and
● the other factors described under
Risk Factors in Part I, Item 1A of this Report.
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.
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Shareholders 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 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
shareholders, 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.
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 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 our shareholders only source of gain on an investment in our common stock, and shareholders may have
to sell some or all of their common stock to generate cash flow from their 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. If no additional securities or industry analysts commence coverage of our company, the trading price for our stock may
be negatively impacted. If one or more of our covering 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 (“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 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.
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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 shareholders.
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 shareholders
may be called, and may delay, defer or prevent a takeover attempt.
In addition, our certificate
of incorporation authorizes the issuance of up to 3,000,000 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 shareholder approval,
issue 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.
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 are subject to ongoing regulatory burdens
resulting from our public listing.
We continually work 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, these and other measures that we might take
may not 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 creates additional costs for us and requires the
time and attention of management. The additional costs that we incur, the timing of such costs and the impact that management’s
attention to these matters may adversely affect our business and operating results.
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We have identified material weaknesses
in our internal control over financial reporting. If we fail to develop or maintain an effective system of internal controls, we may
not be able to accurately report our financial results and prevent fraud. As a result, current and potential shareholders could lose
confidence in our financial statements, which would harm the trading price of our common shares.
Companies that file reports
with the SEC, including us, are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404. SOX 404 requires
management to establish and maintain a system of internal control over financial reporting and annual reports on Form 10-K filed under
the Exchange Act to contain a report from management assessing the effectiveness of a company’s internal control over financial
reporting. Separately, under SOX 404, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, public companies
that are large accelerated filers or accelerated filers must include in their annual reports on Form 10-K an attestation report of their
regular auditors attesting to and reporting on management’s assessment of internal control over financial reporting. Non-accelerated
filers and smaller reporting companies, like us, are not required to include an attestation report of their auditors in annual reports.
A report of our management
is included under Item 9A. “Controls and Procedures.” We are a smaller reporting company and, consequently, are not required
to include an attestation report of our auditor in our annual report. However, if and when we become subject to the auditor attestation
requirements under SOX 404, we can provide no assurance that we will receive a positive attestation from our independent auditors.
During its evaluation of the effectiveness of internal control over
financial reporting as of December 31, 2024, management identified material weaknesses as described under Item 9A. “Controls and
Procedures.” We are undertaking remedial measures, which measures will take time to implement and test, to address these material
weaknesses. There can be no assurance that such measures will be sufficient to remedy the material weaknesses identified or that additional
material weaknesses or other control or significant deficiencies will not be identified in the future. If we continue to experience material
weaknesses in our internal controls or fail to maintain or implement required new or improved controls, such circumstances could cause
us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements, or adversely affect
the results of periodic management evaluations and, if required, annual auditor attestation reports. Each of the foregoing results could
cause investors to lose confidence in our reported financial information and lead to a decline in our share price.
General Risk Factors
We are highly dependent on our management
team, and the loss of our 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 senior executive
leadership team has 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.
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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, such insurance may not be adequate to cover our liabilities
or may not be generally available in the future or, if available, premiums may not 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, 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 (“U.S. 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.
Failure to retain our existing workforce
and to attract qualified new personnel in the current labor market could adversely affect our business and results of operations.
The current U.S. labor shortage
has and may continue to impact our ability to hire and retain qualified personnel and may impact our ability to operate our business
effectively. We may experience a labor shortage preventing us from filling targeted staffing levels. A labor shortage may also impact
our ability to attract qualified new personnel. Additionally, the COVID pandemic has changed the way businesses operate with companies
allowing employees to work remotely from home or in hybrid work models. We may not be able to attract, hire or retain qualified personnel
if competing companies offer a more desirable work model.
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