Flash Sports & Media Holdings, Inc. 10-K

Item 1. Business Background urban-gro, Inc. (together with its wholly owned subsidiaries, collectively “urban-gro”, “we”, “us” or “the Company”) was originally formed on March 20, 2014, as a Colorado limited liability company. In March 2017, we converted to a Colorado corporation and exchanged shares of our common stock for every member interest issued and outstanding on the date of conversion. On October 29, 2020, we reincorporated as a Delaware corporation. On December 31, 2020, we effected a 1-for-6 reverse stock split with respect to our common stock. All information in this Report gives effect to this reverse stock split, including restating prior period reported amounts. On February 12, 2021, we completed an uplisting to the Nasdaq stock exchange under the ticker symbol UGRO. Overview urban-gro is a leading architectural design, engineering and cultivation design services company focused on the sustainable commercial indoor horticulture market. We design and engineer indoor controlled environment agriculture (“CEA”) facilities, then integrate complex environmental equipment systems into those facilities, and provide ongoing maintenance, training, and support services. CEA is a market segment that is defined by type of facility, and has no correlation to the industry, or more specifically the crop being grown in the facility. The CEA segment is represented by any horticultural facility that is fully self-contained, and has a fully-controlled environment. There are three facility types that meet these qualifications: i. Indoor Facilities - new building; or the retrofit of an existing building; ii. Vertical Farms – a building with a smaller footprint that is built up vertically and we view this category as including modular container farms; and iii. Greenhouses – traditional and made out of a variety of translucent materials as to provide natural sunlight for the crop being grown. While historically we have been focused on designing, engineering, and integrating equipment into indoor CEA facilities, of which some are ultimately used for the cultivation of plant-based medicines, we have expanded our reach within CEA across both facility type and crop type. The term “plant-based medicines” includes (i) a wide array of herbal supplements including but not limited to curcumin, saffron extract and ginger, (ii) cannabidiol (“CBD”) based therapeutics, (iii) cannabis based therapeutics and (iv) a host of medicines derived from plants such as caffeine, menthol, foxglove and others. We have also focused and expanded into the vertical farming CEA sub-segment, which is ultimately and predominantly used for the cultivation of a variety of crops including, but not limited to, leafy greens, herbs, cucumbers, peppers, and strawberries. 3 Through our work, we create high-performance indoor cultivation facilities for our clients to grow specialty crops, including leafy greens, vegetables, herbs, and cannabis. Our purpose-built, value-add approach to design, engineering, procurement, and equipment integration provides a single point of accountability across all aspects of indoor growing operations. We also help our clients achieve operational efficiency and economic advantages through a full spectrum of professional services and programs focused on facility optimization and environmental health which establish facilities that allow clients to manage, operate and perform at the highest level throughout their entire cultivation lifecycle once they are up and running. Since commencing business in March 2014, we have introduced new equipment solutions, products and services to the CEA market, expanded our ongoing operations across North America, added CEA-focused design and engineering to our services portfolio, diversified into food-focused CEA, and have entered into several engagements in Europe, where we have opened urban-gro European Holdings BV based in the Netherlands to help shepherd those engagements. The majority of our clients are commercial CEA cultivators. We believe one of the key points of our differentiation that clients value is the depth of experience of our employees and our Company. We currently employ 97 individuals. Approximately two-thirds of our employees are considered experts in their areas of focus, and our team includes Designers (Architects, Interior Designers, Cultivation Space Planners), Engineers (Mechanical, Electrical, Plumbing, Controls, and Agricultural), Professional Engineers, and individuals with Masters Degrees in Plant Science, Horticulture, and Business Administration. As a company, we have worked on nearly 500 indoor CEA facilities, and believe that the experience of our team and Company provides clients with the confidence that will proactively keep them from making common costly mistakes during the build out process that impact operational stages. Our expertise translates into clients saving time, money, and resources through expertise that they can leverage without having to add headcount to their own operations. We provide this experience in addition to offering a platform of the highest quality equipment systems that can be integrated holistically into our clients’ facilities. Our Services and Integrated Equipment Solutions We aim to work with our clients from inception of their project in a way that provides value throughout the life of their facility. We are a trusted partner and advisor to our clients and offer a complete set of design, engineering and managed services complemented by a vetted suite of select cultivation equipment systems. Outlined below is an example of a complete project that demonstrate how we provide value to our clients. 4 Our indoor commercial cultivation solution offers an integrated suite of services and equipment systems that generally fall within the following categories: ● Service Solutions: ● Design and Engineering Services Engineering and Design Services – A comprehensive triad of services including: i. Pre-Construction Services ii. Cultivation Space Programming (“CSP”) iii. Architectural Design iv. Full-Facility Mechanical, Electrical, and Plumbing (“MEP”) v. Integrated Cultivation Design (“ICD”) ● An ongoing service offering including: i. Facility and Equipment Commissioning Services ii. Gro-Care Crop and Asset Protection Services including Training Services, Equipment Maintenance Services, Crop Protection Program, and an Interactive Online Portal Hub for Gro-Care ● Integrated Equipment Solutions: i Design, Source, and Integration of Complex Environmental Equipment Systems ii Value-Added Reselling (“VAR”) of Cultivation Equipment Systems iii Strategic Vendor Relationships with Premier Manufacturers Service Solutions Design and Engineering Services As a leader in indoor CEA facilities, we provide our clients with service offerings that include architectural, interior, and engineering design as well as the operational stages of the facility. Our in-house architectural design, engineering and cultivation design services offering includes Pre-Construction, CSP, Architectural Design, Interior Design, MEP, and ICD. ● Pre-Construction Services include providing a forecast summary of what it will take to get a high-performance facility built, giving initial indication and detailed analysis of budget, timeline/schedule, and potential large decision impacts including value analysis and engineering options. The integration of Pre-Construction Services can expedite project delivery. ● CSP is an early-stage engagement with stakeholders that provides an optimized basis of design including the interaction of people, plants, and processes. The output of CSP provides an optimized analysis of spatial needs based on stipulated criteria and can accelerate construction and regulatory approval paths, save stakeholders money and time, and enable a process-driven decision-making approach. ● Architectural Design is the implementation of a defined process from development of vision to built environment. Architecture includes the integration and coordination of all project required disciplines such as civil, landscape, structural, mechanical and electrical engineering, plumbing, security, interior design, and other specialty disciplines. Our services are built around an integrated design process focused on the collaborative development of client-driven solutions. Specific to the CEA industry, our team’s understanding of the relationship between people, plants, and process helps clients maximize profits and efficiencies while minimizing capital investments, and operational and maintenance costs. ● Interior Design involves branding and development of the interior aesthetic vision. Our collaborative and integrated approach from our award-winning team begins with inspiration boards focused on understanding the client’s aesthetic desires. Interior design is holistic and thereby includes all aspects of the building interiors from full branding to the selection and design of all finishes and interior systems. Common discussions beyond aesthetics include the cost, durability, and maintainability of systems presented. ● MEP engineering design focuses on the entire building, not just the cultivation space, which in turn eliminates the “gap” between cultivation systems and the building systems. We provide engineered construction contract documents for mechanical, heating, ventilation, and air conditioning (“HVAC”), plumbing and electrical systems required for the building permits necessary to obtain a Certificate of Occupancy. Our team evaluates client capabilities, needs, desires, and budget in development of recommended systems through a client-focused collaborative process culminating in the delivery of high-performance and low-maintenance systems. ● ICD creates cultivation space-focused design layouts that integrate climate control, fertigation, benching, air flow, and lighting. Our ICD team’s deep understanding of cultivation systems provides the foundation for ensuring optimal space utilization as they utilize an integrated and collaborative design process focused on understanding, vetting, and implementing the client’s vision. Products utilized in the ICD’s basis-of-design ensures the integration of high-quality systems and product performance. These detailed ICD plans are taken through the Construction Document stage and are leveraged by our clients to efficiently solicit contractor bids. Our Service Offerings gro-care is a highly differentiated service offering that provides a combination of facility commissioning and a crop and asset protection program through training, equipment maintenance, on-demand support, crop protection standard operating procedures (SOP)s, and a client-specific Operating Support System (OSS) that acts as an online hub for clients’ ongoing services. Combined, this solution focuses on the troubleshooting, tuning, and support of a myriad of cultivation systems and equipment while further providing guidance for client interactions with tradespeople working on HVAC, electrical, and plumbing in the facility on an ongoing basis. 5 Many of the current service options available to clients are isolated to vendors providing post-sale service for a single piece of equipment. Our service provides a cultivation-level view of the complex system made up by each piece of equipment, allowing for rapid installation, continuous process improvement, and greater revenue recognition for our clients Facility and Equipment Commissioning Services . Today’s cultivation systems are custom designed and extremely complex. Our team of project managers and engineers supports the installation process by coordinating with a client’s engineers and stakeholders to avoid project bottlenecks while supporting construction trades. Our commissioning team ensures that the equipment is installed according to the design and operates per the defined manufacturer specifications. gro-care Training Services . Complex cultivation systems encompass a multitude of variables and environment readings such as temperature, relative humidity, vapor pressure differential (VPD), electrical conductivity (EC), pH, network status, light status, photosynthetically active radiation, sunrise/sunset modules, CO 2 , HVAC status, fan status, vents (including windward and leeward), shades, network status and flow rates. In CEA there is a scarcity of skilled labor which impedes our clients’ ability to drive operating proficiency across their teams. Our engineering team uses a series of tools and processes to ensure clients are proactive in preventing equipment downtime, can operate all equipment and processes fluently, and have expert support in resolving potential issues. These services range from equipment standard operating procedure (“SOP”) libraries to staff training sessions. With a unique knowledgebase acquired from both our commissioning and training for a wide breadth of cultivation equipment, we provide our clients’ teams with the skills to minimize equipment downtime and optimize processes in their facilities. gro-care Maintenance Services . Complex cultivation systems require specific and ongoing maintenance. Our team enables clients to perform this maintenance appropriately or even can perform the maintenance for them so that assets operate at their highest efficiency and any issues are encountered early. gro-care Support Services When problems arise in a facility, our team is on-call to provide analysis, support, and even in-person visits to help make sure the issue is addressed prior to impacting any facility operations. Program Overview and Pricing . We estimate that, on average and depending on the crop, CEA facilities can lose up to $10,000 per 1,000 square feet of canopy per day when offline – our gro-care Crop and Asset Protection services are centered around proactively minimizing this potential loss for a fraction of the cost. Our clients are best described as automation- and margin-focused and have an understanding of the importance of preventing downtime in their facilities. Integrated Equipment Solutions While our engineers play an integral part in the design of most of the complex equipment systems that are then integrated into a CEA facility, we also provide consultative reselling of more common solutions that we integrate into the overall design. For CEA, the environmental goal is to maintain a stable and consistent VPD according to the client’s priorities through environmental control of relative humidity and temperature during all stages of growth. There are four main variables in CEA that affect plant growth (and can impact VPD): (i) water and nutrients; (ii) environmental control; (iii) CO 2 ; and (iv) lighting. Design, Source, and Integration of Complex Environmental Equipment Systems Complex Environment Systems for CEA include the integration of environmental controls, fertigation and irrigation distribution, a complete line of water treatment and wastewater reclamation systems, and purpose-built HVAC equipment systems. The most significant variable of interest in a CEA facility is the control of the environment, which is accomplished through the integration of both environmental controls and the purpose-built HVAC system. Without proper design, the environmental control system is the most influential variable in terms of temperature and relative humidity control within an indoor agriculture space. With properly designed equipment, the environmental controls variable is less volatile, enabling efficient growing conditions. 6 Purpose-built HVAC equipment systems will provide a more stable environment, maximize plant health and yields, minimize crop loss, minimize utility costs, save on capital equipment, and maximize sustainability. Additionally, private studies of a partner comparing purpose-built HVAC environmental controls equipment to standard commercial HVAC and dehumidification, found increased crop yields with purpose-built equipment, which can include chilled water and DX systems. VAR of Cultivation Equipment Systems We act as an experienced VAR to our clients when selling vetted best-in-class commercial horticulture lighting solutions, rolling and automated container benching systems, specialty fans, and microbial mitigation and odor reduction systems. The acquired knowledge of how each of these systems work in combination with and in tangent to the overall ecosystem is a significant benefit that our engineers and product experts offer to our clients. Not only are many competing products reviewed in each category with the intention of vetting the best solution, we continually search out and review competing technologies to ensure that only the best-in-class equipment systems are integrated into our projects. As such, we believe it will be imperative to maintain and to continue to develop close relationships with both existing and new leading technology and manufacturing providers. Today, we typically do not sell any cultivation equipment systems individually as a one-time sale. The majority of equipment sales are sold as part of a larger all-encompassing project solution that spans over a 12 to 18 month period and includes engineering design and the sale of both custom complex and more standard equipment systems. Strategic Vendor Relationships with Premier Manufacturers We work closely with leading technology and manufacturing providers to deliver an integrated solution designed to achieve the stated objectives of our clients. While we previously manufactured certain lighting products, we discontinued all manufacturing in 2019, although we continued to sell existing inventory through 2020. Today we are equipment agnostic – meaning we do not have any allegiance to any manufacturer – we offer the solution that will best fit the design and budget constraints of our clients and are happy to design, engineer, and integrate in whatever equipment fits the needs of our clients. Revenues and Gross Profit Margins by Category . Service Revenues for engineering design services contracts can be hundreds of thousands of dollars, depending on the spectrum of services desired by the client and the size of the facility. Product Revenues for customized equipment systems can be millions of dollars, depending on the size of the cultivation facilities, the complexity and types of systems purchased by the client, and the number of systems purchased by the client. Sales of consumable products are typically of a recurring nature each month to a client and can be in the tens of thousands of dollars. Targeted gross profit margins for each of the Company’s revenue categories are as follows: ● Architectural and Engineering design services – thirty to sixty percent; ● gro-care Crop and Asset Protection services – forty to sixty percent; ● Customized equipment systems - mid-teens to mid-thirty percent; and ● Consumable products revenues - high-teens to high-twenty percent. Gross profit margins on engineering design services and customized equipment systems are highly dependent on the complexity and size of the project. Our Clients We primarily market and sell our products and services to CEA operators and facilitators in the United States and Canada. Our historical client base has been comprised of indoor commercial cultivators seeking to grow high-quality cannabis crops. Since launching the engineering and design division in 2018, we have designed and assisted in the build-out of 500+ projects for some of the largest independent and multi-state operators in both the United States and Canada. Although the cannabis market has been our historical target market and an unknown but substantial portion of all of our revenues to date have been generated from clients in the cannabis industry, we have been diversifying our client base by expanding our reach within food-focused vertical farming indoor CEA and maintaining non-CEA business lines from our architectural and engineering teams. The term “plant-based medicines” includes (i) a wide array of herbal supplements including but not limited to curcumin, saffron extract and ginger, (ii) CBD based therapeutics, (iii) cannabis-based therapeutics and (iv) a host of medicines derived from plans such as caffeine, menthol, foxglove and others. We are focusing on expanding to the vertical farming CEA sub-segment, which is ultimately and predominantly used for the cultivation of a variety of crops including, but not limited to, leafy greens, herbs, cucumbers, peppers, and strawberries, as well as continue our expansion into Europe to meet the demand for our solutions within the indoor CEA market. Environment , Social, and Governance We are continuously striving to develop, maintain, and build upon our environmental, social, and governance (“ESG”) practices. ● Environment: As a leader in the CEA space, urban-gro has a continuing commitment to Environmental Sustainability in order to help form a better, healthier world for future generations. Utilizing the expertise of our employees, we create less waste, water consumption, and carbon emissions for over 500 facilities worldwide and counting. We believe we present a strong opportunity for the growing market of investors looking for profitable growth companies dedicated to providing a more sustainable world for generations to come. As technological advancement continues, we plan to work with our partners to create even more earth-friendly cultivation sites in our hopes of carbon neutrality. ● Social : We leverage our leadership position in the market as an opportunity to promote our corporate values of inclusion, innovation, and connection. ● Inclusion : Internally, we hire and promote underrepresented communities in STEM (science, technology, education, mathematics). Our project design and engineering teams reflect our commitment as demonstrated by leadership positions held by women across our project design, project management, and client engagement departments. ● Innovation : CEA is an industry that is rapidly advancing, testing, and adopting new technologies. Our corporate development team works closely with our project design and engineering teams to vet new products and ensure they align with our corporate responsibility needs. ● Connection: Through our outreach efforts across the world, we represent a company committed to the development and nurturing of a deeper understanding across all disciplines of CEA, food production, and being on the leading edge of emerging industry-related innovations. ○ Through our Client Appreciation Events at major tradeshows across North America, we raise awareness and funds for local charities. These events serve as opportunities for non-profits to bolster career opportunities, economic development, veteran health and housing, and other causes. ○ We have been a long-time supporter of HeroGrown, an organization that provides Veterans, First Responders, and their families with free access to benefit-rich CBD. Through “Operation CBD Drop,” HeroGrown provides an alternative to those struggling with addiction to deadly drugs prescribed for service-related injuries and psychological disorders. ○ We have been a supporter of Teens for Food Justice which is catalyzing a youth-led movement to end food insecurity in one generation through high-capacity, school-based hydroponic farming. We have even helped build out and commission their first in-classroom vertical farm in the Denver area located near our headquarters and have committed our team’s time to mentoring students and helping further TFFJ’s goals. · Governance: We have three main approaches we utilize to guide us for a successful governance program to ensure that our stakeholders’ best interests are acted upon: ○ Board Composition: We have a strong and diverse board made up of leaders from a variety of fields that help guide our overall efforts. ○ National Cannabis Roundtable: We sit on the board of the National Cannabis Roundtable, an organization dedicated to sensible regulation, criminal justice reform, social equity and community reinvestment. ○ Audit Committee. Our Audit Committee is focused on internal controls and multi-discipline oversight enabled by its charter and structure. 7 Growth Strategy Our employees and the application of their acquired knowledge is our most valuable asset as an organization. Our growth strategy involves leveraging this considerable strength as a basis for growth across three pillars of focus and exploration. These three pillars allow us to continue to provide value to our current and future clients: 1. Diversifying our Service Capabilities 2. Expansion of Geographical Reach 3. Expansion within the Commercial Horticulture Segment 1. Diversifying our Service Capabilities We intend to be the global leading provider for purpose-built turnkey indoor CEA facilities. To that end, we will seek to diversify our service capabilities to enable that offering of providing value to clients through acting as a single point of responsibility in our turnkey approach. While we will continue to expand our services organically, we began this journey through the acquisition of Impact Engineering, Inc in 2019, the acquisition of 2WR+ Partners in 2021, and will continue to look for inorganic opportunities that propel us forward towards our vision. Examples of these opportunities include services that we do not currently have in-house that provide meaningful value to clients and also represent meaningful revenue gaps for us – amongst these are services like construction management, additional design-build engineering disciplines, and further niche-specific indoor CEA operational support. We believe that acting as a single point of responsibility as a provider for turnkey solutions, especially one with the depth and breadth of experience within indoor CEA facilities, we can get our clients to market more quickly and more efficiently than others. We have always aimed to provide the highest level of service and expertise to our clients from initial cultivation ideation to helping prior to go-live to proactively solve for issues that may arise once operations begin and continue at their facilities. We will continue to provide these elite service levels as we expand our service capabilities. In addition, where this diversification of service capabilities adds existing clients from non-CEA industry sectors, we will look to continue to compete and expand in those sectors, including medical, K12, industrial, commercial, hospitality, and CPG, while remaining focused on being the leader for indoor CEA. 2. Expansion of Geographical Reach While we will continue to establish our end-to-end solution as the industry standard for CEA indoor cultivation, we intend to continue to focus on integrating our expertise and service offerings with the best available technologies to allow our clients to achieve operational superiority and profitability. While we believe that the U.S. market will experience continued strength, and this will represent significant growth opportunities for us, we also intend to continue our expansion and reach within Europe. European Expansion - Historically, our business has found success with clients in the United States and Canada. While North America currently presents the dominant opportunity for indoor new build and retrofit CEA facilities, the European CEA market, especially in the vertical farming sub-segment, is rapidly expanding. 8 We first entered the European market in early 2020, through key partners who have brought us into opportunities as a value-added component to their own sales cycle. We have demonstrated the transferability of our expertise to the EU and have closed several deals to provide value-added solution services to European clients in several countries, including Switzerland, Northern Macedonia, Greece, Spain, England, and the Netherlands. Based on our due diligence, we believe that the most common facilities in demand in this market will mirror that of our niche – indoor, CEA, GMP-certified operations. We will look to capitalize on our current approach and expand our reach into Europe with our services and products through a staged and cost-efficient approach by first entering the market through our strong partnerships and leveraging our existing U.S.-based engineering expertise and overhead. Approach to Market Expansion - Due to the rapid development of the European market and the lack of established companies experienced in the design, construction, and operations of indoor cultivation facilities, we will make a strategic and staged entry into the European market to ensure a sustainable use of resources and capital. The market entry will be designed around a three-phased approach: ● Phase One – Focus on establishing a client base and pipeline surrounding early license applicants and current license holders by providing facility and systems design for indoor projects with a focus on CSP. ● Phase Two – Building on established vendor relationships, integrate purpose-built custom environmental equipment systems from U.S. manufacturers into our European offering. ● Phase Three – Incorporate the development of the initial two phases combined with partnerships, joint ventures, expansion of service capabilities, and domestic manufacturing of equipment to provide a turn-key project solution offering in Europe. We believe this three-phased approach, paired with the evolution of partnerships and domestic equipment manufacturing, will establish us as an experienced leader and solution provider in the design, engineering, and turn-key systems for the European indoor CEA market. 3. Expansion within the Commercial Horticulture Segment Utilizing our in-house engineering capabilities and synergies, we confidently believe that we can efficiently expand our diversification to include working on projects in the CEA indoor vertical farming market segment in both the North American and European markets. Global CEA Vertical Farming Segment - CEA vertical farm facilities for cultivation are typically indoor warehouse farms and plant factories that are in purpose-built or retrofitted facilities. According to Bank of America Thematic Research, the global vertical farming market is estimated to reach $17 billion by 2025, with a compounded annual growth rate of 27.7% from 2020 to 2025. The market for non-container facilities—on which we already focus and have had success—is forecasted to grow even faster. This rate of growth forecast is buttressed by the fact that more and more food will be needed closer to where population resides, and CEA eliminates many of the risks of traditional agriculture, minimizing risk and allowing localities to be closer and control their food supply more readily. Market Entry - Our end-to-end approach, solutions, and expertise are applicable for and valuable to clients creating high performance indoor vertical farms to cultivate high value crops such as leafy greens, micro-greens, herbs, peppers, or even floriculture. And our experience and expertise is highly transferable – while our experts’ backgrounds are predominantly built on a commercial horticulture foundation, our architects’ and engineers’ design expertise in indoor CEA also seamlessly flows through to indoor vertical farming facilities. The acquired expertise our team has in over 500 indoor CEA projects with the highest valued crop in the world allows us to understand how to successfully design high performance CEA facilities. 9 Our approach to entering this market has followed what we have done as we entered Europe – we continue to reinforce our core strengths as we expand into new markets through our partnerships. The first phase of entering this CEA market is through our leading design and engineering teams. Our teams have helped in the initial phases of Cultivation Space Planning (CSP) for indoor CEA vertical farm producers as well as helped existing producers identify and solve issues in their current facilities. As we find success here, we will look to continue to partner to accelerate our reach and begin to supply much of the equipment needed to build out a facility, and finally, after identifying and solving for any potential gaps, we will look to offer turn-key, end-to-end design, engineer, and build services for indoor CEA facilities. Acquisition Strategy - While entering any new market can be challenging, we believe that our existing brand combined with the strength of our partnerships and expertise will allow us to capture a meaningful amount of this market through targeting the most sophisticated, well-funded producers who are in need of a partner that has a demonstrated history of success growing crops in this way. To speed up our expansion plan, and with the intention of forming strategic relationships to assist in lead generation, we plan to place investments in or acquire horticulture-related positive cash flow entities at discounted prices based upon the synergistic upside available for both organizations. Our Competition While we feel that our complex end-to-end solution places us as a leader in the CEA segment, we do face competition from companies that offer some, but not all, portions of an all-encompassing facility package. Further, these companies often outsource to third parties for the integration and sale of equipment systems and products, particularly within the cannabis industry. We also compete with other smaller and mid-sized companies that focus primarily on either engineering design services or product sales. Within the services space, there are several product or services specific competitors that offer similar services, such as architectural design services, MEP services or basic fertigation design. Currently, we view our competition to be focused on equipment sales that are predominantly commodity “off-the-shelf” items like lighting and other cultivation staple products, both pre- and post-startup. This competition comes from traditional wholesale horticulture dealers, online retailers, and some manufacturers who sell direct. Greenhouse manufacturers and European systems integrators may increasingly seek to offer comprehensive product and service solutions to compete with our integrated solution, but they are primarily focused on the greenhouse industry, and not on indoor CEA facilities. European systems integrators in particular are experienced and have a strong operating history in traditional horticulture and provide specialized, intensive, and large-scale solutions that revolve around greenhouse projects. Instead of competing with these integrators, we find ourselves working with them and combining synergies to work on projects together. Further, although we frequently partner with direct manufacturers to deliver our customized solution, these manufacturers may seek to engage with clients directly to deliver their products. In addition, we sometimes compete with electrical contractors with respect to specific components of facility engineering and design. As the cannabis market continues to mature and develop and legalization becomes more prevalent, we expect to see more competition from cannabis-focused agricultural product and service providers. Going forward, while we will continue to serve cannabis CEA producers, we will extend our focus to non-cannabis crops. These companies may have longer operating histories, greater name recognition, larger client bases and significantly greater financial, technical, sales and marketing resources. These competitors may adopt more aggressive pricing policies and make more attractive offers to existing and potential clients, employees, strategic partners, distribution channels and advertisers. Increased competition is likely to result in price reductions, reduced gross margins and a potential loss of market share. Regulation U.S. Regulations While we do not generate any revenue from the direct sale of cannabis products, we have historically, and may continue to, offer our solutions to indoor cultivators that are engaged in various aspects of the cannabis industry. Marijuana is a Schedule I controlled substance and is illegal under federal law. Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal laws. 10 A Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The Department of Justice defines Schedule I controlled substances as “the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence.” If the federal government decides to enforce the Controlled Substances Act with respect to marijuana, persons that are charged with distributing, possessing with intent to distribute, or growing marijuana could be subject to fines and terms of imprisonment, the maximum being life imprisonment and a $50 million fine. Any such change in the federal government’s enforcement of current federal laws could cause significant financial damage to us. While we do not intend to harvest, distribute or sell cannabis, we may be irreparably harmed by a change in enforcement by the federal or state governments. Previously, the Obama administration took the position that it was not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical marijuana. The Trump administration revised this policy but made no major changes in enforcement. Specifically, Attorney General Sessions vacated the Cole Memorandum in favor of deferral of any enforcement of federal regulation to the individual states’ Department of Justice or U.S. Attorney. However, certain other protections remain in place via budgetary element embedment (the Rohrabacher-Farr amendment, now referred to as the Rohrabacher-Blumenauer Amendment), which limits funding of any enforcement of anti-cannabis legislation. The Department of Justice has stated that it will continue to enforce the Controlled Substances Act with respect to marijuana to prevent: ● the distribution of marijuana to minors; ● criminal enterprises, gangs and cartels receiving revenue from the sale of marijuana; ● the diversion of marijuana from states where it is legal under state law to other states; ● state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity; ● violence and the use of firearms in the cultivation and distribution of marijuana; ● driving while impaired and the exacerbation of other adverse public health consequences associated with marijuana use; ● the growing of marijuana on public lands; and ● marijuana possession or use on federal property. Since the use of marijuana is illegal under federal law, most federally chartered banks will not accept deposit funds from businesses involved with marijuana. Consequently, businesses involved in the marijuana industry generally bank with state-chartered banks and credit unions to provide banking to the industry. Although cultivation and distribution of marijuana for medical use is permitted in many states, provided compliance with applicable state and local laws, rules, and regulations, marijuana is illegal under federal law. Strict enforcement of federal law regarding marijuana would likely result in a material adverse effects on our business and revenues. Though the cultivation and distribution of marijuana remains illegal under federal law, H.R. 83, enacted by Congress on December 16, 2014, provides that none of the funds made available to the DOJ pursuant to the 2015 Consolidated and Further Continuing Appropriations Act may be used to prevent states from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana. While this appropriations measure continued from 2016 through 2020, and remains in effect, continued re-authorization cannot be guaranteed. If this appropriations rider is no longer in effect, the risk of federal enforcement and override of state marijuana laws would increase. However, state laws do not supersede the prohibitions set forth in the federal drug laws. In order to participate in either the medical or adult use sides of the marijuana industry, all businesses and employees must obtain licenses from the state and, for businesses, local jurisdictions. In addition, all owners and employees must obtain an occupational license to be permitted to own or work in a facility. All applicants for licenses undergo a background investigation, including a criminal record check for all owners and employees. 11 Laws and regulations affecting the medical marijuana industry are constantly changing, which could detrimentally affect our proposed operations. Local, state and federal medical marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or alter our business plan. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our operations. It is also possible that regulations may be enacted in the future that will be directly applicable to our business. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business. Canadian Regulations Summary of the Cannabis Act On October 17, 2018, the Cannabis Act came into force as law with the effect of legalizing adult recreational use of cannabis across Canada. The Cannabis Act replaced the Access to Cannabis for Medicinal Purposes Regulations (“ACMPR”) and the Industrial Hemp Regulations, both of which came into force under the Controlled Drugs and Substances Act (Canada) (the “CDSA”), which previously permitted access to cannabis for medical purposes for only those Canadians who had been authorized to use cannabis by their health care practitioner. The ACMPR replaced the Marihuana for Medical Purposes Regulations (Canada) (the “MMPR”), which was implemented in June 2013. The MMPR replaced the Marihuana Medical Access Regulations (Canada) (the “MMAR”) which was implemented in 2001. The MMPR and MMAR were initial steps in the Government of Canada’s legislative path towards the eventual legalization and regulating recreational and medical cannabis. The Cannabis Act permits the recreational adult use of cannabis and regulates the production, distribution and sale of cannabis and related oil extracts in Canada, for both recreational and medical purposes. Under the Cannabis Act, Canadians who are authorized by their health care practitioner to use medical cannabis have the option of purchasing cannabis from one of the producers licensed by Health Canada and are also able to register with Health Canada to produce a limited amount of cannabis for their own medical purposes or to designate an individual who is registered with Health Canada to produce cannabis on their behalf for personal medical purposes. Pursuant to the Cannabis Act, subject to provincial regulations, individuals over the age of 18 are able to purchase fresh cannabis, dried cannabis, cannabis oil, and cannabis plants or seeds and are able to legally possess up to 30 grams of dried cannabis, or the equivalent amount in fresh cannabis or cannabis oil. The Cannabis Act also permits households to grow a maximum of four cannabis plants. This limit applies regardless of the number of adults that reside in the household. In addition, the Cannabis Act provides provincial and municipal governments the authority to prescribe regulations regarding retail and distribution, as well as the ability to alter some of the existing baseline requirements of the Cannabis Act, such as increasing the minimum age for purchase and consumption. Provincial and territorial governments in Canada have made varying announcements on the proposed regulatory regimes for the distribution and sale of cannabis for adult-use purposes. For example, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Yukon and the Northwest Territories have chosen the government-regulated model for distribution, whereas Saskatchewan and Newfoundland & Labrador have opted for a private sector approach. Alberta, Ontario, Manitoba, Nunavut and British Columbia have announced plans to pursue a hybrid approach of public and private sale and distribution. 12 In connection with the new framework for regulating cannabis in Canada, the federal government has introduced new penalties under the Criminal Code (Canada), including penalties for the illegal sale of cannabis, possession of cannabis over the prescribed limit, production of cannabis beyond personal cultivation limits, taking cannabis across the Canadian border, giving or selling cannabis to a youth and involving a youth to commit a cannabis-related offence. On July 11, 2018, the Canadian federal government published regulations in the Canada Gazette to support the Cannabis Act, including the Cannabis Regulations, the new Industrial Hemp Regulations, along with proposed amendments to the Narcotic Control Regulations and certain regulations under the Food and Drugs Act (Canada). The Industrial Hemp Regulations and the Cannabis Regulations, among other things, outline the rules for the legal cultivation, processing, research, analytical testing, distribution, sale, importation and exportation of cannabis and hemp in Canada, including the various classes of licenses that can be granted, and set standards for cannabis and hemp products. The Industrial Hemp Regulations and the Cannabis Regulations include strict specifications for the plain packaging and labelling and analytical testing of all cannabis products as well as stringent physical and personnel security requirements for all federally licensed production sites. The Industrial Hemp Regulations and the Cannabis Regulations also maintain a distinct system for access to cannabis. With the Cannabis Act now in force, cannabis has ceased to be regulated under the CDSA and is instead regulated under the Cannabis Act, and both the ACMPR and the Industrial Hemp Regulations have been repealed effective October 17, 2018. On June 7, 2018, Bill-C45 passed the third reading in the Senate with a number of amendments to the language of the Cannabis Act. More specifically, the Senate proposed: ● establishing a committee of the Senate and a committee of the House of Commons to undertake a comprehensive review of the administration and operation of the Cannabis Act; ● assisting provinces and territories to facilitate the development of workplace impairment policies; ● allowing provinces to place restrictions on the ability of individuals to engage in home cultivation; ● that law enforcement be provided with the appropriate tools and resources to address concerns about continued illicit production, diversion, and sale of cannabis to youth, including preventing the sharing of marihuana among young adults by rendering it a ticketable offense; ● that the prices set for cannabis products and the applicable taxes reflect the dual objective of minimizing the health dangers of cannabis consumption and undercutting the illicit market of cannabis; ● mandatory health warnings for cannabis products, including warnings about the danger of smoking cannabis, the danger of exposure to second-hand cannabis smoke, and the risks of combining cannabis and tobacco; ● testing procedures for THC content be standardized to ensure accurate measurement to better protect consumer health and safety; ● that forthcoming regulations for edible products and other forms of cannabis ensure that product packaging is child-resistant and does not appeal to young people, and that the type of available products should be strictly limited; ● adequate and ongoing funding for sustained, evidence-based cannabis education and prevention programs to provide Canadians, especially young Canadians, with knowledge about the health risks of cannabis use, including on-going research initiatives on the impact of cannabis use on the developing brain; and that the federal government commit to on-going educational initiatives to ensure youth are informed on the effects of cannabis use; ● to prohibit licensees under the Cannabis Act to distribute branded merchandise, such as t-shirts and baseball caps and imposing a moratorium on loosening the regulations on the branding, marketing, and promotion of cannabis for 10 years; ● to set aggressive targets, comparable to the successful Federal Tobacco Control Strategy, to reduce the number of youth and adult cannabis users; and ● to ensure that the Cannabis Tracking System be operational upon the coming-into-force of the Cannabis Act. Security Clearances - The Cannabis Regulations require that certain people associated with cannabis licensees, including individuals occupying a “key position” directors, officers, large stockholders and individuals identified by the Minister of Health, must hold a valid security clearance issued by the Minister of Health. Officers and directors of a parent corporation must be security cleared. 13 Under the Cannabis Regulations, the Minister of Health may refuse to grant security clearances to individuals with associations to organized crime or with past convictions for, or an association with, drug trafficking, corruption or violent offences. Individuals who have histories of nonviolent, lower-risk criminal activity (for example, simple possession of cannabis, or small-scale cultivation of cannabis plants) are not precluded from participating in the legal cannabis industry, and the grant of security clearance to such individuals is at the discretion of the Minister of Health and such applications will be reviewed on a case-by-case basis. Cannabis Tracking System - Under the Cannabis Act, the Minister of Health is authorized to establish and maintain a national cannabis tracking system. The Cannabis Regulations set out a national cannabis tracking system to track cannabis throughout the supply chain to help prevent diversion of cannabis into, and out of, the illicit market. The Cannabis Regulations also provides the Minister of Health with the authority to make a ministerial order that would require certain persons named in such order to report specific information about their authorized activities with cannabis, in the form and manner specified by the Minister of Health. Cannabis Products - The Cannabis Regulations set out the requirements for the sale of cannabis products at the retail level permit the sale of dried cannabis, cannabis oil, fresh cannabis, cannabis plants, and cannabis seeds, including in such forms as “pre-rolled” and in capsules. The THC content and serving size of cannabis products is limited by the Cannabis Regulations. The sale of edibles containing cannabis and cannabis concentrates was not initially permitted, however the federal government anticipates that such products will be legalized within one year following the coming into force of the Cannabis Act. Intellectual Property The success of our business depends, in part, on our ability to maintain and protect our proprietary technologies, information, processes and know-how. We rely primarily on patent, trademark, copyright and trade secret laws in the U.S. and similar laws in other countries, confidentiality agreements and procedures and other contractual arrangements to protect our technology and confidential information. Our patents are limited to certain sensors that we obtain from third party manufacturers that do not contribute materially to our sales or profitability. Our trademarks are solely for branding purposes, although we no longer sell any goods or services under the Soleil brand. As of the date of this prospectus, the following summarizes the status of our registrations, pending applications, issued U.S. patents and one published U.S. patent application: Trademarks We have received the following trademark registrations: Trademark Jurisdiction Registration Number Registration Date Status URBAN-GRO United States 4618322 October 07, 2014 Registered URBAN-GRO United Kingdom 3266415 January 19, 2018 Registered URBAN-GRO European Union 017391806 October 31, 2018 Registered URBAN-GRO WIPO 1548013 July 08, 2020 Registered URBAN-GRO United Kingdom UK0081548013 July 08, 2020 Registered SOLEIL United States 5209707 May 23, 2017 Registered SOLEIL United Kingdom 3266410 March 09, 2018 Registered SOLEIL Canada 1083969 October 07, 2020 Registered SOLEIL European Union 017391781 September 11, 2018 Registered SOLEIL United Kingdom UK00917391781 September 08, 2018 Registered OPTI-DURA United States 5770091 June 04, 2019 Registered OPTI-DURA Canada TMA1070145 January 20, 2020 Registered GRO-CARE European Union 1560748 August 24, 2020 Registered GRO-CARE European Union 017391806 October 29, 2019 Registered GRO-CARE United Kingdom UK00917391806 October 29, 2018 Registered 14 We have applied for and are awaiting receipt of the following trademark registrations: Trademark Jurisdiction Application Number Filing Date Status URBAN-GRO Canada 1930075 November 13, 2018 Pending. Examination Completed. URBAN-GRO Canada (Madrid) A0098111 July 08, 2020 Pending. URBAN-GRO European Union (Madrid) A0098111 July 08, 2020 Pending. Examination Completed. URBAN-GRO United States 88898690 May 03, 2020 Pending. URBAN-GRO United States 97213742 January 11, 2022 Pending. URBAN-GRO United States 97213778 January 11, 2022 Pending. GRO-CARE United States 88898692 May 03, 2020 Pending. GRO-CARE WIPO A0099548 August 24, 2020 Pending. GRO-CARE Canada (Madrid) A0099548 August 24, 2020 Pending. SOLEIL GIVES YOUR CROP A VOICE United States 87671876 November 03, 2017 Abandoned. SOLEIL GIVES YOUR PLANTS A VOICE United States 87671878 November 03, 2017 Abandoned. Patents Title Jurisdiction Application Number Filing Date Patent Number and Issue Date Status Sensor bus architecture for modular sensor systems United States 15/626,085 June 17, 2017 10,499,123 (December 3, 2019) Issued Expire in 2037 Modular sensor architecture for soil and water analysis at various depths from the surface United States 15/626,079 June 17, 2017 10,405,069 (September 3, 2019) Issued Expire in 2037 Modular sensor architecture for soil and water analysis at various depths from the surface United States 16/519,800 July 23, 2019 n/a Published We rely on trade secret protection and confidentiality agreements to safeguard our interests with respect to proprietary know-how that is not patentable and processes for which patents are difficult to enforce. We believe that many elements of our design and engineering processes involve proprietary know-how, technology or data that are not covered by patents or patent applications, including technical processes, test equipment designs, algorithms and procedures. Our policy is for our employees to enter into confidentiality and proprietary information agreements with us to address intellectual property protection issues and require our employees to assign to us all of the inventions, designs and technologies they develop during the course of employment with us. However, we might not have entered into such agreements with all applicable personnel, and such agreements might not be self-executing. Moreover, such individuals could breach the terms of such agreements. 15 We attempt to protect our intellectual property via the deployment of non-disclosure agreements with both prospective clients and business partners as well as licensees. There are no assurances that these non-disclosure agreements will prevent a third party from infringing upon our rights. Backlog Discussion Our backlog as of December 31, 2021 was approximately $30 million, compared to an approximate value of $14.6 million on December 31, 2020. The current backlog consists of $25 million of equipment purchases and $5 million of services to be performed. For urban-gro, backlog is defined as signed contracts for which deposits have been received. Historically, the majority of our backlog has been retired and converted into revenue within two quarters. Human Capital Our employees are critical to our continued success. With approximately two-thirds of our employees considered experts, we view our employees and the depth and breadth of their experience and expertise as our competitive advantage. As such, we strive to provide an environment where urban-gro employees can have a fulfilling and productive career. We offer industry-leading employee benefits and programs to ensure the diverse needs of our employees and their families are met, including access to fantastic healthcare choices, continued growth opportunities for career development, and resources such as 401K plans and counseling to support their financial wellbeing. Available Information Our internet address is www.urban-gro.com and our investor relations website is located at ir.urban-gro.com . Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports can be found on our investor relations website, free of charge, as soon as reasonably practical after we electronically file such material with, or furnish it to, the SEC. Information contained on our website is not incorporated by reference into this Form 10-K. The SEC maintains a public website, www.sec.gov, which includes information about and the filings of issuers that file electronically with the SEC.