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 Market under the ticker symbol UGRO. Overview urban-gro is an integrated professional services and construction design-build firm. Our business focuses primarily on providing fee-based knowledge-based services as well as the value-added reselling of equipment. We derive income from our ability to generate revenue from our clients through the billing of our employees’ time spent on client projects. We offer value-added architectural, engineering, systems procurement and integration, and construction design-build solutions to customers operating in the controlled environment agriculture ("CEA") and industrial and other commercial ("Commercial") sectors. Our evolution, both organically and through the acquisition of engineering, architecture, and construction management firms has enabled us to successfully diversify into the commercial sectors of the clients we serve, as well as the capabilities we offer, which we believe has helped insulate our business from any one sector. Even with this successful diversification, our main focus and value-add has always been and remains in providing solutions to our CEA clients, where we have experience and expertise in designing, engineering, building, and integrating complex environmental equipment systems into indoor CEA cultivation and retail facilities, and then providing ongoing maintenance, training, and support services to those same facilities. We aim to work with our clients from inception of their project in a way that provides value throughout the life of their facility. Clients, regardless of sector they are in, engage us to deliver their vision because of our experience and expertise, and because our integrated, design-build solutions offer a value-add approach to design, engineering, procurement, construction-management, construction, and equipment integration, providing a single point of accountability across all aspects of a project. 3 For our CEA clients in particular, we create high-performance indoor cultivation facilities to grow specialty crops, including cannabis as well as produce such as leafy greens, vegetables, herbs and berries. We also provide design-build solutions for our CEA clients' retail facilities. We 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. For these CEA clients, our team provides services to meet the most stringent regulatory environments, whether they are energy efficiency goals, Good Agricultural and Collection Practices (GACP), or Good Manufacturing Practice ("GMP") and/or European Medicine Agency EU GMP ("EU/GMP") certification. While we have successfully diversified our target markets across several commercial sectors, the majority of our clients are commercial CEA cultivators. We believe a key differentiation point that clients value is the depth of our employees’ and Company’s experience. As of December 31, 2022, we employed 152 full time employees, approximately two-thirds of which are considered experts in their areas of focus. Our team includes Designers (Architects, Interior Designers, Cultivation Space Planners), Engineers (Mechanical, Electrical, Plumbing, Controls, and Fire Protection), Construction Managers (Project Managers and Supervisors), and horticulturists. As a company, we have worked on over 1000 CEA projects, 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 design and build process that would 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 Solutions Since commencing business in March 2014, we have expanded our ongoing operations across North America and Europe while diversifying our services offerings organically and through acquisitions into full design-build solutions by adding design, engineering, construction, and construction-management services, introducing new equipment solutions, products and services, and successfully diversifying into several additional commercial sectors beyond cannabis-focused CEA, including produce-focused CEA; or vertical farming, healthcare, industrial, commercial packaged goods ("CPG"), and retail. We are a trusted partner and adviser to our clients and provide value to our clients regardless of the sector in which they sit or solution for which they are utilizing us. As is detailed in the Project Delivery Comparison chart below, in the CEA sector, the advantages of the urban-gro design-build model vs the traditional owner-contracted model are clear. There is a single responsible party for our clients' needs from conception through operational start. This results in greater efficiencies throughout the design-build process and a faster speed to launch. Additionally, our experience and expertise within our sectors help to prevent costly mistakes for our clients. 4 Outlined below is an example of a complete end-to-end design-build project that demonstrates how we provide value to our clients over time. Our design-build solution, when focused on indoor CEA, offers an integrated suite of in-house services and equipment systems that generally fall within the following categories: • Service Solutions: • Architectural Design, Engineering, and Construction Services – A comprehensive collection of services including: i. Pre-Construction Services ii. Cultivation Space Programming ("CSP") iii. Architectural Design and Interior Design iv. Engineering v. Integrated Cultivation Design ("ICD") vi. Owner's Representative Services / Construction Management ("CM") vii. General Contracting ("GC") • Additional Service Offerings including: i. Facility and Equipment Commissioning Services ii. gro-care ® Crop and Asset Protection Services including Training Services, Equipment Maintenance Services, Asset Protection Program, and an Interactive Online Operating Support System ("OSS") for gro-care ® and client document delivery and project management iii. Property Condition Assessment ("PCA") 5 • Integrated Equipment Systems Solutions: • Design, Source, and Integration of Complex Environmental Equipment Systems including Heating, Ventilation, and Air Conditioning ("HVAC") solutions, Environmental Controls, Fertigation, and Irrigation Distribution • Value-Added Reselling ("VAR") of Cultivation Equipment Systems • Strategic Vendor Relationships with Premier Manufacturers Service Solutions Architectural Design, Engineering, and Construction Services We generate revenue by providing our clients with design-build service offerings that include architectural, interior, and engineering design, construction and construction management, as well as services for the operational stages of the facility. Our in-house architectural, interior design, engineering, construction and cultivation design services integrate design with pre-construction services and thereby reduce project schedule and capital investments. 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 value engineering options. The integration of Pre-Construction Services can expedite project completion, lower initial project costs, and help reduce costly change orders. 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, plumbing and electrical engineering, fire protection, 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. Mechanical, Electrical, and Plumbing ("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, 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. Construction and Construction Management provides all the additional necessary parts to deliver our clients' projects, from the initial estimate and bid process, to subcontractor selection, and management of all construction details. Our skilled project managers, specialized within our clients' sectors, maintain knowledgeable open lines of communication with both clients, onsite superintendents, and internal and external construction partners to manage expectations, costs and schedules. 6 Our Additional Service Offerings Our Facility and Equipment Commissioning Services provide a cultivation-level view of the complex system made up by each piece of equipment and ensures systems are running properly. Many of the current service options available to CEA cultivation clients are isolated to vendors providing post-sale service for a single piece of equipment. Our team confirms contractors and specialty trades are installing systems to the design intent allowing for rapid installation, continuous process improvement, and increased revenue for our clients. gro-care ® is a highly differentiated service offering that provides a combination of CEA cultivation facility commissioning and an asset protection program through training, equipment maintenance, on-demand support, standard operating procedures ("SOP"), and a client-specific 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. Our PCA offering provides value to all clients regardless of sector, but also adds unique value for our clients in the CEA sector. PCA includes researching historical records of the building as related to code issues, field documentation of existing conditions, a report of findings with materials systems categorized by condition, and a capital expenditure report for correction of any deficiencies. For our clients in the CEA sector, our PCA offering provides analysis of components specifically within CEA facilities, both with an eye towards critical cultivation and manufacturing systems as well as helping clients understand a facility's ability to meet any state regulations that may have evolved such as adherence to standards such as Current Good Manufacturing Practices ("cGMP"), EU-GMP, and/or World Health Organization guidelines on GACP. PCA provides necessary data for clients to understand options for optimizing operational performance, understanding deficiencies, and property preparing for necessary capital expenditures. 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 vapor pressure deficit ("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. The complex equipment systems that we design and procure for our clients play an important role in helping control and maintain the cultivation facility's environment for plants. Design, Source, and Integration of Complex Environmental Equipment Systems Complex Environment Systems for CEA include environmental controls, fertigation and irrigation distribution, a complete line of water treatment and wastewater reclamation systems, and HVAC equipment systems. As related to systems and equipment, the most significant and influential variable within a CEA facility is the ability to control and maintain the cultivation environment. This is accomplished through the integration of mechanical systems (HVAC), lighting, air movement systems, irrigation systems, and environmental controls. Maintaining a consistent desired temperature and humidity level within the cultivation spaces ensures less stress on plants. urban-gro designs these systems to fit within our clients' budgets and provides our clients' facilities a more stable environment to maximize plant health and yields, minimize crop loss, minimize utility costs, save on capital equipment, and maximize sustainability. Value-Added Reselling of Cultivation Equipment Systems We act as an experienced vendor providing VAR to our clients when selling vetted best-in-class commercial horticulture lighting solutions, rolling and automated container benching systems, specialty fans, fertigation/irrigation systems, environmental control systems, 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, but we also 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 24 month period and includes design, engineering, and the sale of both custom complex and more standard equipment systems. 7 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. We pride ourselves as being equipment agnostic – meaning we do not have allegiances to any single manufacturer – we offer the solution that will best meet the design and budget constraints of our clients and design, engineer, and integrate whatever equipment fits the client's needs. Revenues and Gross Profit Margins As our business has evolved and diversified into design-build offerings, our margin profiles have changed. Professional 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. Construction design-build contracts can run in the tens of millions of dollars depending on the overall size of the facility. Equipment 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 other 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: • Professional services - greater than forty percent; • Construction design-build services - greater than six percent; • Customized equipment systems - greater than ten percent; and • Other products revenues - greater than fifteen percent. Gross profit margins are highly dependent on the complexity and size of the project. Our Clients We primarily market and sell our solutions to clients in the CEA and Commercial sectors. In the CEA sector, our clients include operators and facilitators in both the cannabis and produce markets in the United States, Canada, and Europe. In the Commercial sector, we work with leading food and beverage consumer packaged goods companies in the United States, and clients in healthcare, higher education, and hospitality. Environment, Social, and Governance We are continuously striving to develop, maintain, and build upon our environmental, social, and governance ("ESG") practices and credentials. We greatly value ESG considerations as they enable us to better identify material risks and growth potential, leading to better-informed decisions and business outcomes with the goal of maximizing value creation for our shareholders. To this end, the urban-gro Board of Directors ("Board") recently established an ESG committee as part of our Board. In addition, we have engaged with the services of an independent consulting solution to help educate us and guide us as we develop our ESG roadmap and work towards establishing our priorities in this space. While we engage in those activities, we continue to support ESG in the following ways: • Environment: As a professional services design-build firm, and 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 our and future generations. In general, we are aligned with industry best practices around CEA, which include a focus on water conservation and reuse, reducing the carbon footprint of the production and distribution process, and increasing the efficiency of harvests. Utilizing the expertise of our employees, we have assisted in the creation of over 500 CEA facilities worldwide and counting with Leadership in Energy and Environmental Design ("LEED") certified and/or GMP facilities in a variety of commercial sectors focused on reducing waste, water consumption, and carbon consumption. We believe we present a strong opportunity for investors looking for companies focused on 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 within the CEA sector and projects within other sectors. We are actively exploring opportunities to lower energy use for our customers including but not limited to: active energy management, efficiency measures in HVAC, and innovations in lighting. 8 • Social : We strive to hire and promote from underrepresented communities in order to become a diverse organization which we believe will bring strength and value to our organization and our shareholders. In addition, we currently are members of and work with the following organizations: ◦ Charities: We have been a supporter of Teens for Food Justice ("TFFJ") which is catalyzing a youth-led movement to end food insecurity in one generation through high-capacity, school-based hydroponic farming. We have 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 in addition to working with them on future vertical farms. ◦ Associations and Organizations: We are currently members of good standing in several industry organizations and trade groups such as the New England Healthcare Engineer Society ("NEHES"), the Georgia City-County Management Association ("GCMA"), The Georgia Chapter of APPA ("GAPPA"), American Hort, Association for Vertical Farming, the American Society of Heating, Refrigerating, and Air-Conditioning Engineers ("ASHRAE"), the National Cannabis Industry Association ("NCIA") and the National Cannabis Roundtable ("NCR"). Those last two groups, as a part of their work and being born out of the cannabis industry, are dedicated to sensible regulation, criminal justice reform, social equity and community reinvestment. • Governance: We have several 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. We publish our Board Diversity Matrix on our website at ir.urban-gro.com as well as within our proxy materials each year. ◦ Board Committees: We currently utilize four Board committees: • The Audit Committee which is focused on internal controls, risk management, and multi-discipline oversight enabled by its charter and structure; ▪ The Compensation Committee which is focused on compensation principles, policies, and practices for all employees; ▪ The Nominating and Corporate Governance Committee which oversees the Company's corporate governance practices and procedures; and ▪ The Environmental, Social, and Governance Committee, recently created, which is overseeing the Company's approach to ESG practices and procedures. ◦ Guiding Policies: In addition to the above committee charters, we have a Code of Business Ethics and Conduct as well as a Whistleblower Policy which can be found on our website. ◦ Cybersecurity: We utilize external consultants to help inform cybersecurity best practices, employ cybersecurity software that is preventative and detective for our infrastructure, and require and provide consistent ongoing training for all employees. Growth Strategy Our employees and the application of their acquired knowledge are our most valuable assets 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. Leverage our Sector Diversification and In-House Capability Offerings 2. Focus on Design-Build Solution 3. Expansion of Geographical Reach 9 1. Leverage our Sector Diversification and In-House Capability Offerings Our vision is to be the global leading provider for purpose-built turnkey indoor CEA facilities. To that end, we have and continue to seek to diversify our service capabilities to provide value to our clients through acting as a single point of responsibility in our turnkey design-build, approach. While we will continue to expand our services organically, we began this journey through the acquisition of engineering, architecture, and construction management firms over the last 18-month period. This in-house service capability diversification also brought with it a diversified client base that included clients from sectors outside of CEA. We expect to continue to compete successfully in all of these sectors as we believe it helps us attract the best talent, weather the downturns of any one sector, and continue to find growth and future returns for our shareholders. We believe that acting as a single point of responsibility as a provider of turnkey design-build solutions, especially one with the depth and breadth of experience within all sectors that we've served, we can get our clients to market more quickly and more efficiently than others. We intend to continue to leverage all our service capabilities within our design-build delivery model, across sectors, to grow the services and value we are providing to our clients. As an example, some clients may currently only be engaged with us for architectural design - we plan to leverage our in-house model and take advantage of every opportunity to cross sell our other services such as engineering; or construction management or general contracting, to provide further value to our clients and grow our revenues and margin dollars. 2. Focus on Design-Build Solution As written previously, through both organic and inorganic means, we have diversified our in-house service capabilities so that we are able to provide full turnkey design-build solutions to our clients. These design-build projects allow us to engage with a client at the conception of a project and act as a single point of responsibility to provide value throughout and beyond the project lifecycle. These design-build projects are also much larger from a revenue and project complexity perspective - instead of working on 100s of projects, our goal will be to grow through working on a smaller number of projects of a much larger size, allowing us to capture greater revenue and more margin dollars and overall, provide greater value to our clients. We expect these larger projects will also provide us with the foresight to more accurately forecast our future quarterly business performance. 3. Expansion of Geographical Reach While continuing to focus on building out our solution set and expanding our client base in all sectors, and more specifically establishing our end-to-end solution as the industry standard for CEA indoor cultivation in the U.S. market, we also plan to continue to expand our reach within Europe. After completing approximately 18 months of due diligence in the European market, in Q3 of 2022, we hired a Netherlands-based Managing Director, with experience and expertise in horticulture and pre-harvest and post-harvest equipment automation, to lead our Europe, Middle East, and Africa ("EMEA") market expansion. After opening an office in Dordrecht, Netherlands shortly thereafter, we began to build our European team, including investing in hiring in-market as well as relocating a previously U.S. based Company Vice President with vast experience in CEA cultivation design to the region. We are focused on securing and providing value to clients in the CEA sector, and continue to develop and iterate on our marketing and outreach plans, including taking part in trade shows, speaking engagements, and business development travel to areas in Europe with existing clients as well as other developing markets. We have thus far signed several engagements with CEA clients in multiple countries and look to continue our growth through this geographic expansion. Our Competition We believe that our experience and expertise combined with our complex end-to-end design-build solutions places us as a growing leader in the indoor-CEA sector. Within that CEA sector, we do face competition from companies that offer some, but not all, portions of an all-encompassing design-build facility solution. We compete for projects with other smaller and mid-sized companies that focus solely on architectural and interior design, engineering, construction, or product sales. For services, we see these competitors as offering similar specific area solutions, though not integrated nor as in depth on fertigation design. For product sales, we currently view our competition to be focused on predominantly commodity "off-the-shelf" items like lighting and other cultivation staple products, both pre-startup and post-startup. This competition comes from traditional wholesale horticulture dealers, online retailers, and some manufacturers who sell direct. 10 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. For our clients from non-CEA sectors such as Industrial, Food and Beverage CPG, Healthcare, Education, and Civic, we believe we face more competition from those who offer some, but not all, portions of a design-build facility solution but also those who employ the design-build methodology. We believe we compete successfully here because while the overall design-build projects come at higher revenues and margin dollars, the projects from non-CEA on which we typically engage are of a size that we believe is smaller than our design-build competitors are set up to take on. In addition, the majority of our non-CEA client base is developed from long-term relationships that provide our Company with a strategic advantage. Regulation As it relates to our business conducted in the legalized cannabis-focused CEA segment, the regulations for each region are detailed as follows. 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. Tetrahydrocannabinol ("THC"), one of the main active chemicals in cannabis, is a Schedule I controlled substance and is illegal under federal law. Even in those states in which the use of cannabis has been legalized, its use remains a violation of federal laws. 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 cannabis, persons that are charged with distributing, possessing with intent to distribute, or growing cannabis 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. Since the use of THC is illegal under federal law, most federally chartered banks will not accept deposit funds from businesses involved with cannabis. Consequently, businesses involved in the cannabis industry generally bank with state-chartered banks and credit unions who provide banking to the industry. Although cultivation and distribution of cannabis for medical use is permitted in many states, subject to compliance with applicable state and local laws, rules, and regulations, THC is illegal under federal law. Strict enforcement of federal law regarding cannabis could result in material adverse effects on our business and revenues. Though the cultivation and distribution of cannabis containing THC 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 cannabis. While this appropriations measure has remained in effect from 2016 through 2022, continued re-authorization cannot be guaranteed. If this appropriations rider is no longer in effect, the risk of federal enforcement and override of state cannabis 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 cannabis industry, all businesses must obtain licenses from the state and local jurisdictions. In addition, in most jurisdictions, all owners and employees must obtain an occupational license to be permitted to own or work in a facility. Applicants for licenses undergo a background investigation, including a criminal record check for all owners and employees. Laws and regulations affecting the medical cannabis industry are constantly changing, which could detrimentally affect our existing and proposed operations. Local, state and federal medical cannabis 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. Regulations may be enacted in the future that may 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. 11 Canadian Regulations Summary of the Cannabis Act In 2001, Canada began the legislative path towards the eventual legalization and regulation of recreational and medical cannabis. The laws in Canada have been revised since then and in 2018, the Cannabis Act came into effect and legalized adult recreational use of cannabis across Canada. The Cannabis Act 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 a registered individual to produce cannabis on their behalf for such 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. 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 and 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. In connection with this framework for regulating cannabis in Canada, the federal government introduced new penalties under its criminal code, including penalties for the illegal sale of cannabis, possession of cannabis over the prescribed limit, and production of cannabis beyond personal cultivation limits. In 2018, the Canadian federal government published new regulations and amended existing regulations to support the Cannabis Act. These regulations 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. They also include stringent security requirements for all federally licensed production sites. The regulations maintain a distinct system for access to cannabis. 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 Report, the following summarizes the status of our registrations, pending applications, and issued U.S. patents: 12 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 URBAN-GRO Canada (Madrid) A0098111 July 08, 2020 Registered URBAN-GRO European Union (Madrid) A0098111 July 08, 2020 Registered URBAN-GRO United States 97213742 February 7, 2023 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 GRO-CARE Canada (Madrid) A0099548 August 24, 2020 Registered GRO-CARE WIPO A0099548 August 24, 2020 Registered 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 URBAN-GRO United States 88898690 May 03, 2020 Pending URBAN-GRO United States 97213778 January 11, 2022 Pending GRO-CARE United States 88898692 May 03, 2020 Pending 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 10,955,402 (March 23, 2021) Issued Expire in 2037 13 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. 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; however, these non-disclosure agreements may not prevent a third party from infringing upon our rights. Human Capital As of December 31, 2022, we employed 152 employees, all of which were full-time employees. This is an increase of 66 employees (77%) from December 31, 2021. 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 healthcare choices, continued growth opportunities for career development, and resources such as 401(k) plans and counseling to support their financial well-being. The table below summarizes the change in full-time employee headcount that has occurred by quarter for the years ended December 31, 2022 and 2021: 2022 2021 Fourth Quarter Third Quarter Second Quarter First Quarter Fourth Quarter Third Quarter Second Quarter First Quarter Beginning of period headcount 115 121 98 86 77 51 46 40 Net change in headcount 13 (6) 3 12 9 6 5 6 2WR acquisition 0 0 0 0 0 20 0 0 Emerald acquisition 0 0 20 0 0 0 0 0 DVO acquisition 24 0 0 0 0 0 0 0 Ending of period headcount 152 115 121 98 86 77 51 46 Available Information Our internet address is www.urban-gro.com and our investor relations internet address is 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 contains reports, proxy and information statements, and other information regarding issuers that that file electronically with the SEC.