Table of Contents

U.S.


UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark one)

☒
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDEDDECEMBER 31, 20192022
or
☐oTRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ________________ to________________________.

Commission File Number:000-52898

001-39933

URBAN-GRO, INC.

(Exact name of registrant as specified in its charter)

Colorado46-5158469
Delaware46-5158469
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)

1751 Panorama Point,

Unit G,

Lafayette, CO

8002680026(720) 390-3880
(Address of principal executive office)(Zip Code)(Registrant’s telephone number, Including area code)

Securities registered pursuant to Section 12(b) of the Act:None

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par valueUGRONASDAQ
Securities registered pursuant to Section 12(g) of the Act: Common Stock.

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par valueUGROOTCQX

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐o Yes ☒x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐o Yes ☒x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒o Yes ☐x No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).☒x Yes ☐o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large"large accelerated filer,” “accelerated filer”, “smaller" "accelerated filer," "smaller reporting company”,company," and “emerging"emerging growth company”company" in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer ☐oAccelerated filer ☐o
Non-accelerated filer ☒xSmaller Reporting Company ☒x
Emerging growth company ☒x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

o

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

audited the registrant's financial statements. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐o Yes ☒x No

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter on June 28, 201930, 2022 was $13,327,898.

$40,366,306.

As of May 8, 2020,March 16, 2023, the registrant had 28,709,31210,771,991 shares of Common Stock issuedoutstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report on Form 10-K is incorporated by reference from the Registrant’s definitive proxy statement relating to the 2022 Annual Meeting of Stockholders, which will be filed with the Securities and outstanding.

Exchange Commission within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates.



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EXPLANATORY NOTE

As previously reported by urban-gro, Inc. (the “Company”) in its Current Report on Form 8-K as filed with the Securities and Exchange Commission (“SEC”) on March 30, 2020, in accordance with the SEC’s Order under Section 36 of the Securities Exchange Act of 1934 Granting Exemptions From Specified Provisions of the Exchange Act and Certain Rules Thereunder dated March 4, 2020 (Release No. 34-88318) (as modified on March 25, 2020 by Release No. 34-88465, the “Order”), the Company disclosed that it was relying on the relief provided by the Order in connection with the filing of this Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “Report”) due to the circumstances related to the coronavirus disease 2019 (“COVID-19”). In particular, COVID-19 caused disruptions in the Company’s day-to-day operations resulting in limited access to the Company’s facilities and limited support from its staff and professional advisors, in turn, delayed the Company’s ability to complete its audit and prepare the Report.

FORWARD LOOKING STATEMENTS


Cautionary Information about Forward-Looking Statements

This Annual Report on Form 10-K (this “Report”("Form 10-K" or this "Report") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”"Exchange Act"). The, including statements regarding urban-gro, Inc. contained in this Reportrelated to: future events; challenges we may face; growth strategy; expansion and future operations; the ability to recognize backlog as revenue; financial position; estimated or projected revenues, losses, costs, gross profit, earnings or other financial items; business strategy, prospects, plans and objectives of management; anticipated or pending investigations, legal claims, proceedings or litigation that may involve or affect us; implementation of ESG initiatives; industry-specific trends, events or regulations and the impact of those trends, events and regulations on us or our financial performance; and updates to regulations and the impact of those regulations on us. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not historical in nature, particularly those that utilize terminologyalways, identified by the use of words such as “may,” “will,” “should,” “likely,” “expects,” “anticipates,” “estimates,” “believes”"seek," "anticipate," "plan," "continue," "estimate," "expect," "may," "will," "project," "predict," "potential," "targeting," "intend," "could," "might," "should," "believe," "outlook" and variations of such words or “plans,”their negative and similar expressions. Forward-looking statements should not be read as a guarantee of future performance or comparable terminology,results and may not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are forward-looking statements based on current expectationsmanagement’s belief, based on currently available information, as to the outcome and assumptions, and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements.

timing of future events


Important factors known to us that could cause such material differences are identified in this Report, including the factors described in Part I, Item 1A, “Risk Factors”."Risk Factors," and other cautionary statements described in this Report on Form 10-K. These factors are not necessarily all of the important factors that could cause actual results or events to differ materially from those expressed in the forward-looking statements. Other unknown or unpredictable factors could also cause actual results or events to differ materially from those expressed in the forward-looking statements. We undertake no obligation to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any future disclosures we make on related subjects in future reports to the Securities and Exchange Commission (“SEC”("SEC").

PART I

Item

ITEM 1. Business.

Business Overview

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” “us,” converted to a Colorado corporation and exchanged shares of our” common stock for every member interest issued and outstanding on the “Company,” or “urban-gro”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") is a leadingand industrial and other commercial ("Commercial") sectors. Our evolution, both organically and through the acquisition of engineering, design services company that integratesarchitecture, 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 create high-performance indoor cultivation facilities forthose same facilities.
We aim to work with our clients from inception of their project in a way that provides value throughout the global commercial horticulture market. Our custom-tailored, plant-centriclife 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, providesproviding a single point of accountability across all aspects of a project.

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For our CEA clients in particular, we create high-performance indoor growing operations.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 customersclients achieve operational efficiency and economic advantages through a full spectrum of professional services and programs focused on facility optimization and integrated pest management programsenvironmental health which establish facilities that promote environmental health.

THE URBAN-GRO SOLUTION

We offer customers a solutionallow clients to help engineer, design,manage, operate and operate high-performance indoor cultivation facilities. Our systemic approach to growing superior crops with a focus on maximizing plant yields and lowering overall operational costs helps customers achieveperform at the highest level throughout their objectives for quality and profitability.Our solution offers functionality that helps customers manage the 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 facilitymaking 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 design to operationconstruction-management services, introducing new equipment solutions, products and day-to-day management. We offer afull range of custom services integrated with select cultivation equipment and product solutions, which we primarily source from third party technology and manufacturing partners but also develop in-house.

Our service offerings include full facility programming, engineering, and design services, start-up facility and equipment commissioning services, facility optimization services, and integrated pest management (“IPM”successfully diversifying into several additional commercial sectors beyond cannabis-focused CEA, including produce-focused CEA; or vertical farming, healthcare, industrial, commercial packaged goods ("CPG") planning, and strategy services. Complementing these services,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.
ugro-20221231_g1.jpg

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Outlined below is an example of a complete end-to-end design-build project that demonstrates how we work with customersprovide value to sourceour clients over time.
ugro-20221231_g2.jpg

Our design-build solution, when focused on indoor CEA, offers an integrated suite of select cultivationin-house services and equipment systems that generally fall within the following categories:
•Service Solutions:
•Architectural Design, Engineering, and cropConstruction 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 products,
iii.Property Condition Assessment ("PCA")
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•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 include: (1)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.
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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) CO2; 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, systems; (2) freshwater,a complete line of water treatment and wastewater reclamation systems, and condensation treatment systems; (3) purpose-built 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, (4) light-emitting diode (“LED”), high-pressure sodium (“HPS”) and ceramic metal halide (“CMH”) lighting systems; (5) rolltop, multi-tier,rolling and automated container benching systems; (6)systems, specialty fans, fertigation/irrigation systems, environmental control systems, and microbial mitigation and odor mitigation & microbial reduction systems; (7) airflow systems; (8) industrial spray applicators; (9) pesticidessystems. The acquired knowledge of how each of these systems work in combination with and bio-controls; (10) plant nutrition products; (11) substratein tangent to the overall ecosystem is a significant benefit that our engineers and coco bag solutions; and (12)product experts offer to our Soleil® technology data analytics platform that includes wireless environmental & substrate sensing and remote monitoring and support.

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our strategy for growth

Our strategy is to continue to establish our end-to-end solution as the industry standard for commercial indoor cultivation. We intend to continue to focus on integrating our expertise and service offeringsclients. Not only are many competing products reviewed in each category with the intention of vetting the best availablesolution, but we also continually search out and review competing technologies to achieve operational superiority and profitability. Weensure 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. In addition to further developing our focus on general horticulture,

Today, we believe we will see continued growth opportunities as the cannabis industry evolves and matures on a global basis.

We may also seek additional growth opportunities through strategic acquisitions and investments. For instance, we acquired Impact Engineering, Inc., a provider of mechanical, electrical, and plumbing (“MEP”) engineering services in March 2019. Impact Engineering, operating under the name Grow2Guys, has provided design and engineering services on 300+ projects, representing over 3,500,000 square feet, including cultivation and extraction facilities, dispensaries, and MIP kitchens. We also have a strategic investment in Edyza, Inc. (“Edyza”), a hardware and software technology company that enables dense sensor networks in agriculture, healthcare, and other environments that require precise micro-climate monitoring. We intend to continue to pursue synergistic investments, acquisitions, and joint venture opportunities to the extent they may support our growth objectives. When analyzing these opportunities, we intend to focus on those that will help us secure exclusive rights totypically do not sell products, services, or technologies to support the global cannabis industry better. However, our efforts to grow by strategic acquisitions are subject to, among other things, the availability of capital, as well as legal and regulatory restrictions relating to the cannabis and horticulture industry.

OUR PRODUCTS AND SERVICES:

Our indoor commercial cultivation solution offers an integrated suite of services, equipment systems, and products that generally fall within the following categories: engineering design services, integration of complex environmental equipment systems, integration ofany cultivation equipment systems and post start-up product and service solutions.

•Engineering design services. Our engineering design services include cultivation space programming, integrated cultivation design and full-facility MEP engineering.
•Integrationindividually as a one-time sale. The majority of complex environmental equipment systems. This includes the integration of environmental controls, fertigation and irrigation distribution, a complete line of water treatment and reclamation systems, purpose-built HVAC systems, and odor mitigation & microbial reduction systems.
•Integration of cultivation equipment systems. This includes the integration of commercial grade light systems including LED, HPS and CMH, rolling and automated bench systems and fans.
•Post start-up product and service solutions. Our post start-up solutions are primarily offered through our Environmental Sciences Group (“ESG”), which focuses on designing preventative IPM plans, sourcing IPM products such as fertilizers, nutrients, pesticides, and biologicals. We also offer a full line of professional consulting services focusing on post start-up facility optimization, and the implementation of our Soleil® technology data analytics platform

We currently have two proprietary brands, our Soleil® technology offering and our OPTI-DURA® cultivation equipment and product offering.

Soleil®

Soleil® issales are sold as part of a recurring revenue focusedlarger all-encompassing project solution that we offer primarilyspans over a 12 to 24 month period and includes design, engineering, and the cannabis operators through a partnershipsale of both custom complex and more standard equipment systems.

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Strategic Vendor Relationships with Edyza. Edyza’s platform comprises a cloud-based services back-end management and administration system, and an intuitive customer interface. Edyza’s platform employs a robust, high performance, proprietary, tree-mesh wireless network topology. The user interface is designed for intuitive ease-of-use navigation of the customer’s systems, and as a universal user interface that will integrate typically all disparate systems within the grow environment.

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Premier Manufacturers

Soleil® utilizes wireless hardware sensors to acquire data within the grow environment. Sensed data is transmitted over the wireless network and to cloud services. Data undergoes processing for reporting analysis and data visualizations important to the grower for actions and corrections to the grow environment equilibrium and balance. The current Soleil® sensor product family includes sensing for temperature, humidity, carbon dioxide, organic compounds, barometric pressure, soil moisture, conductance (nutrients), and grow light output intensity. The combination of sensing with the environmental factors that are measured are essential components to achieve the careful balance of a grow environment.

As water resources become scarce and transportation, energy, and labor costs rise, controlled environment agriculture is quickly gaining interest and investment. The ability to precisely monitor environmental and plant conditions in a regulated, indoor environment helps optimize crop yield and quality. With just a few clicks, cultivators are able to assess temperature, moisture content, nutrient content, and pH—among other factors—in order to maintain ideal growing conditions. While existing substrate (soil) sensing technology is very costly to implement and is subject to scalability, wire, efficiency, and reliability constraints, the demand for a wireless solution that provides real-time data is on the rise. Soleil® offers a complete solution that can help increase operational efficiency, efficient use of hardware and network systems, and reduction of waste – all leading to improvements in profitability.

In addition to environmental and soil sensing, the same platform is being leveraged to economically monitor mission critical mechanical systems using vibration, energy consumption, and temperature. The sensors will alert cultivators to potential equipment failures like broken fans, clogged emitters, or inefficient HVAC systems.

The Soleil® business model is a subscription-based, data services product. We believe the subscription sales contracts will help increase adoption in the industry due to lower capital costs for acceptance and implementation by customers. We have partnered with Edyza on a weighted profit share basis where we are responsible for sales and marketing and Edyza provides all manufacturing, business and product development, software build out and continual improvement. Hardware and network services remain the property of Edyza, who also manages data hosting, data analysis, reporting and visualizations. Standard and customized data visualizations are provided and available, and types and details are dependent on the subscribed level of service. Standard reporting consists of graphs and charts, and custom visualizations also include Augmented Reality and Mixed Reality data representations.

Opti-Dura® Cultivation Product & Equipment Offering

Supplementing our best-in-class complex equipment systems that we procure from top manufacturers in the horticulture industry, we have created a high-quality, value-driven “house brand” of cultivation products and equipment, which we sell under our OPTI-DURA® brand. Our sourcing of cultivation products and equipment has been researched and developed by cultivators that know first-hand the quality and specifications desired by cultivators.

Today, our OPTI-DURA®product line consists of OPTI-DURA®large-scale pesticide applicators that wepurchasefrom a U.S.-based company and sell under our brand. Our commercial applicators are made in America and built by farmers. They are particularly useful for commercial cultivation facilities utilizing high pressure and special spray nozzles that help “twists” the liquid under the leaves where pests often hide. We are an exclusive distributor of the heaviest duty sprayers on the market.

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OUR PRIMARY VENDOR RELATIONSHIPS

We work closely with leading technology and manufacturing providers to deliver an integrated solution designed to achieve the stated objectives of our customers. Althoughclients. We pride ourselves as being equipment agnostic – meaning we do not have numerous provider relationships, two vendors are particularly importantallegiances to any single manufacturer – we offer the solution that will best meet the design and budget constraints of our solution: Argus Controls (“Argus”)clients and Fluence Bioengineering (“Fluence”):

oArgus provides automated control systems for the horticulture and aquaculture industries. Argus systems provide three essential functions: (i) fully integrated equipment control; (ii) advanced monitoring and alarms; and (iii) comprehensive crop and environmental data acquisition and management information. Argus capabilities include facilities automation and specialty monitoring and control applications to support the needs of cultivators. Argus’ systems are used in horticulture and biotechnology research facilities, universities, aquaculture and aquaponics, and many other custom control applications at sites throughout the world.

oOn December 11, 2019, we renewed our multi-year strategic agreement with Argus to provide cannabis cultivators in North America with industry-leading, plant-centric solutions for environmental control, automation, and nutrient management.

oWe have worked with Argus on over 50 projects and the extended agreement demonstrates both companies’ commitment to client success through early and ongoing collaboration with cannabis cultivators throughout their project lifecycles.

oFluence’s LED-based lighting systems are designed to provide high levels of photosynthetically active radiation ideal for commercial cultivation and research applications from microgreens to cannabis. From sole-source indoor grow lighting to supplemental greenhouse lighting, Fluence custom tailors the light spectrum and form-factors to optimize plant growth and increase yields while consuming less energy and reducing operating costs versus legacy technologies. Sales of Fluence’s LED lighting systems accounted for 25% of our consolidated revenue for the year ended December 31, 2019.

Wedesign, 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 not experienced any material changeschanged. 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 availabilitytens 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 from Argus, Fluence or any other vendor or supplier.

OUR CUSTOMERS

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 productssolutions to clients in the CEA and services toCommercial sectors. In the CEA sector, our clients include operators of commercial indoor cultivation facilitiesand 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 Canada. 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 date, our primary customer base has been comprisedthis end, the urban-gro Board of indoor commercial cultivators seeking to grow high-quality cannabis crops. One customer represented 21%Directors ("Board") recently established an ESG committee as part of our total revenue for the year ended December 31, 2019. Since launching the engineering and design division in 2018,Board. In addition, we have designedengaged 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 build-out of 200+ projects for some of the largest independent and multi-state operators in both the United States and Canada. With Grow2Guys’ 300+ projects, our engineering and design teams have combined experiencecreation of over 500+ projects.

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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.

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Although


•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 rapidly expanding cannabis market has been our target market and substantially all of our revenues to datefollowing organizations:
◦Charities: We have been generated from customersa 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 seekingacted 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
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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 customerservice 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 by expanding intothat 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 segments of the indoor horticultural market, including targeting cultivators of high value cropsservices such as tomatoes, strawberries, chilies, peppers,engineering; or construction management or general contracting, to provide further value to our clients and leafy greens. During 2019,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 began exploring the potential demand forplan to continue to expand our solutions in select countries, including thosereach within Latin America and Europe.

SALES AND MARKETING

Sales Strategy

Our sales team is comprised


After completing approximately 18 months of one Executive Vice President, one Director of Enterprise Solutions, three Directors of Sales, and one Sales Associate. The Directors of Sales, serving as “relationship ambassadors,” are located across the United States and are tasked with finding, building and supporting sales and customer relationships.

With the experience garnered from providing engineering and design services to 500+ projects, and our continued research on finding best in class complex equipment solutions, our customers choose to work with us because our solution is custom tailored to address the combination of process flow, efficient industry best equipment solutions, complex environment systems, and the sensitivities of the plant.

When potential customers express an interest in our solution, we provide them with a technical expert, or Sales Engineer, who can quickly and effectively explain a proposed solution to resolve the customers’ specific challenges. We believe this technical sales process requires true segment expertise, which we also believe has not been readily available to indoor cultivators, particularly thosedue diligence in the cannabis industry. AsEuropean market, in Q3 of 2022, we hired a systems integrator,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 employ abegan to build our European team, of segment-specific educated and technical experts with deep experienceincluding investing in each of the five solution segments, including:

Environmental Controls, Fertigation, Irrigation Distribution;

Water Treatment;

Integrated Pest Management;

Lighting Systems; and

Mechanical Systems (HVAC).

Our team includes talented and experienced individuals including individuals with Masters Degrees in Business Administration, Plant Science, Horticulture, and post-secondary degrees in Environmental Science, Horticulture, Agricultural Engineering, and Electrical/Mechanical/Controls Engineering. We leverage these technical experts in their areas of expertise to continually find and vet what we believe are the best-in-class solutions, and then educate and inform our customers on best solution use and techniques.

In addition to leads generated from the execution of our marketing strategy, for additional new business opportunities, we focus on referrals generated from our relationships with industry partners and from contract referral agents. By offering a referral program to consultants whose primary business model is to help their customers set up cultivation facilities from the design stage through cultivation, we ensure access to a strong network of cultivators.

Contractual Sales Cycle

We generate revenue and profits based on the value we provide for design, engineering, and complex systems expertise. At the outset of a customer project, we utilize a proprietary project estimation tool that accounts for multiple variables relating to the size and complexity of the new or retrofitted facility. This tool optimizes the facility layout taking into consideration the costs of systems, materials, people and utilities,hiring in-market as well as relocating a previously U.S. based Company Vice President with vast experience in CEA cultivation design to the movement of peopleregion.


We are focused on securing and plants,providing value to provide a facility that meets the business goals of the customer. After the project estimate is determined, a design fee and project deposit are determined. The design fee is dependent on the desired design services and on project complexity, including facility and canopy size, type and complexity of controls system, number of irrigation zones, types of nutrients, and the number of individual plants that require individual irrigation. We provide our solution pursuant to a contract that typically requires a project design deposit equal to 50% of the project estimate, with the remaining balance being due prior to delivery of the construction documents, which collectively takes, on average, a period of up to six months.

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Following the design stage, we contract with customers to provide customized equipment systems. To begin the procurement process, we charge an equipment system deposit ranging from 20% to 50% of total cost, which varies based on lead time, complexity, and the type of systems. After the procurement window, which ranges from one week to five months to allow for the manufacturing and assembly of systems, we charge a final shipment payment for the balance owed, which is due within two weeks of system readiness and prior to shipment. Following installation of the system, we dispatch an engineering team to commission the system.

To date, the cost to our customers for our systems has ranged between $75,000 and $4,000,000, depending on the size of cultivation, the complexity of systems, types, and the number of systems utilized from our product portfolio. We do not provide direct financing to our customers.

Marketing Strategy

We provide customers with services and solutionsfor the life of their grow — from early stage facility programming, engineering design, and the integration of complex equipment systems, through commissioning / facility start-up, and followed by an operational consulting services offering. Our team of scientists and experts understands the highly regulated market, challenges, and opportunities unique to cultivators. The following outlines the various stages of cultivation operation and defines the ways in which we serve the needs of cultivators and their stakeholders.

Early-Stage Engagement ->Planning and Building Consensus -> Custom Design and Integration of Complex Systems & Equipment -> Commissioning -> Operational Consulting Services

·Early-Stage Engagement ->Planning and Building Consensus:

oCultivation Space Programming:

§Early-stage engagement with stakeholders provides for an optimized interaction between people, plants and process which saves stakeholders money and time through smart, informed decision-making.

oIntegrated Cultivation Design:

§Professionally designed layouts for climate control, fertigation, benches, fans, and lighting ensure optimal space utilization and product performance.

oMEP Engineering:

§Our MEP engineering focuses on the full building, not just the cultivation space. This eliminates the “gap” between cultivation and the building systems. We provide HVAC engineering and design; plumbing engineering and design; electrical engineering and design; and securing documentation for the building permits necessary to obtain certificates of occupancy.

·Custom Design and Integration of Complex Systems & Equipment:

oIntegration of Complex Environmental Equipment Systems:

§Custom designed and sale of vetted and purpose-built controls and fertigation systems, water treatment, and mechanical systems.

oIntegration of Cultivation Equipment Systems:

§Sale of vetted and best-in-class rolling and automated container benching systems, HAF/VAF fans, lighting solutions and microbial mitigation and odor reduction systems.

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·Commissioning:

oToday’s cultivation systems are custom designed and extremely complex. Our team of project managers and engineers supports the installation process by coordinating with a customer’s engineers and stakeholders to avoid project bottlenecks and support construction trades. Our commissioning team ensures that the equipment is installed according to the design and operates as committed.

·Operational Consulting Services

oAfter a facility is operational, we offer a full range of consulting services focused on facility optimization. Our technical experts are available to travel on-site and offer facility audit reports as well as detailed standard operating procedures and product recommendations to better optimize the facility.

Environmental Sciences Group (“ESG”)

In addition to our design and integrated systems offering, our ESG helps drive a recurring revenue stream. The ESG team provides strategic and tactical consulting for cultivators to create IPM programs that minimize crop loss resulting from pest outbreaks. Our plant scientists are experts in IPM and, for customersclients in the cannabis industry,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 an unparalleled understanding of the complex cannabis cultivation lawsthus 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 vary by state, county,our experience and city.

Throughexpertise combined with our IPM subscription service, we work with cultivators to provide cutting-edge pesticide and biocontrol regimens that adhere to a customer’s regulatory environment. Our procurement team leverages our national buying power to ensure the best product value. These are consumables that commercial cultivators purchase on a regular basis. They include pesticides, nutrients and fertilizers and are paid for prior to shipping or on terms for existing customers. The ESG has also begun integrating the Soleil® technology platform into IPM planning, in turn providing the customer with real-time data to make informed decisions to optimize crop environments, preventing crop loss through actionable alerts and programmed responses to conditions.

Competition

While we feel that no other competitor offers a comparable complex end-to-end solution,design-build solutions places us as a growing leader in the indoor-CEA sector. Within that CEA sector, we do face competition from a few companies that offer some, varying selectionsbut not all, portions of engineering design services. Further, these companies often outsource to third-partiesan all-encompassing design-build facility solution. We compete for the integration and sale of equipment systems and products, particularly within the cannabis industry. We also competeprojects with other smaller and mid-sized companies that focus primarilysolely on eitherarchitectural and interior design, engineering, design servicesconstruction, or product sales. Within theFor services, space, there are several product or serviceswe see these competitors as offering similar specific competitors that offer similar services, sucharea solutions, though not integrated nor as MEP services or basicin depth on fertigation design. OurFor product offering faces competition from several competitors who offer similar products to those offered by us, including many who have greater financial resources thansales, we currently have available. Currently, we view our competition to be focused on equipment sales that are predominantly commodity “off-the-shelf”"off-the-shelf" items like lighting and other cultivation staple products, both prepre-startup and post-startup. This competition comes from traditional wholesale traditional horticulture dealers, online retailers, and some manufacturers who sell direct.

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Greenhouse manufacturers and European Systems Integratorssystems 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 indoor cultivationon indoor-CEA facilities. European Systems Integrators,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. Further, althoughInstead of competing with these integrators, we frequently partnerfind ourselves working with direct manufacturersthem and combining synergies to deliverwork on projects together.

For our customized solution, these manufacturers may seek to engage with customers directly to deliver their products. In addition,clients from non-CEA sectors such as Industrial, Food and Beverage CPG, Healthcare, Education, and Civic, we sometimes compete with electrical contractors with respect to specific components of facility engineering and design.

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As the cannabis market continues to mature and develop and legalization becomes more prevalent,believe we expect to seeface 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 agricultural product and service providers. These companies may have longer operating histories, greater name recognition, larger customer 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 customers, 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

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. MarijuanaTetrahydrocannabinol ("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 marijuanacannabis 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 1I controlled substances as “the"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,cannabis, persons that are charged with distributing, possessing with intent to distribute, or growing marijuanacannabis 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.

As of the date of this report, 33 states and the District of Columbia allow their citizens to use medical marijuana. The District of Columbia and 11 states – Alaska, California, Colorado, Illinois, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont and Washington – have adopted the most expansive laws legalizing marijuana for adult use. Most recently, Michigan voters approved a ballot measure permitting adults age 21 and over to purchase and possess adult use marijuana. Vermont became the first state earlier this year to legalize marijuana for adult use through the legislative process, rather than via a ballot measure. Vermont's law allows for adults age 21 and over to grow and possess small amounts of cannabis. However, it does not permit the sale of nonmedical cannabis. Some other state laws similarly decriminalized marijuana, but did not initially legalize retail sales. These state laws are in conflict with the federal Controlled Substances Act, which makes marijuana use and possession illegal on a national level. If the federal government decides to enforce the Controlled Substances Act with respect to marijuana, it will cause significant financial damage to us.

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 has revised this policy. Specifically, the Attorney General vacated the Cole Memorandum in favor of deferral of any enforcement of federal regulation to the individual states Department of Justice/US Attorney. However, certain other protections remain in place via budgetary element embedment (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 Substance 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;

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·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 marijuanaTHC is illegal under federal law, most federally chartered banks will not accept deposit funds from businesses involved with marijuana.cannabis. Consequently, businesses involved in the marijuanacannabis industry often have trouble finding agenerally bank willing to accept their business. The inability to open bank accounts may make it difficult for our customers to operate. There have been recent movement to allowwith state-chartered banks and credit unions towho provide banking to the industry, but as of December 31, 2019, there were only nominal entities that have been formed that offer these services.

industry.


Although cultivation and distribution of marijuanacannabis for medical use is permitted in many states, providedsubject to compliance with applicable state and local laws, rules, and regulations, marijuanaTHC is illegal under federal law. Strict enforcement of federal law regarding marijuana would likelycannabis could result in the inability to proceed withmaterial adverse effects on our business plan and could expose us and our management to potential criminal liability and subject their properties to civil forfeiture.revenues. Though the cultivation and distribution of marijuanacannabis 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 marijuana.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.

For a comprehensive and up to date perspective on this process and current states and territories cannabis laws please refer to the following link:http://www.mpp.org/states/key-marijuana-policy-reform.html.


In order to participate in either the medical or adult use sides of the marijuanacannabis industry, in Colorado and elsewhere, all businesses and employees must obtain licenses from the state and for businesses, local jurisdictions. Colorado issues four types of business licenses including cultivation, manufacturing, dispensing, and testing. In addition, in most jurisdictions, all owners and employees must obtain an occupational license to be permitted to own or work in a facility. All applicantsApplicants for licenses undergo a background investigation, including a criminal record check for all owners and employees.

Colorado has also enacted stringent regulations governing the facilities and operations of marijuana businesses. All facilities are required to be licensed by the state and local authorities and are subject to comprehensive security and surveillance requirements. In addition, each facility is subject to extensive regulations that govern its businesses practices, which includes mandatory seed-to-sale tracking and reporting, health and sanitary standards, packaging and labeling requirements, and product testing for potency and contaminants.

Laws and regulations affecting the medical marijuanacannabis industry are constantly changing, which could detrimentally affect our existing and proposed operations. Local, state and federal medical marijuanacannabis 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 regulationsRegulations may be enacted in the future that willmay be directly applicable to our business. These ever-changing regulations could even affect federal tax policies that may make it difficult to claim tax deductions on our returns. 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 itsour business.

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CANADIAN REGULATIONS


Canadian Regulations
Summary of the Cannabis Act

On October 17,

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 force as law with the effect of legalizingand legalized 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 ana registered individual who is registered with Health Canada to produce cannabis on their behalf for personal medicalsuch purposes.

Pursuant to the Cannabis Act, subject to provincial regulations, individuals over the age of 18 are be 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 &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 the newthis framework for regulating cannabis in Canada, the federal government has introduced new penalties under the Criminal Code (Canada),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, taking cannabis across the Canadian border, giving or selling cannabis to a youth and involving a youth to commit a cannabis-related offence.

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limits.

On July 11,In 2018, the Canadian federal government published new regulations in the Canada Gazetteand amended existing regulations to support the Cannabis Act, including the Cannabis Regulations, the new Industrial Hemp Regulations, along with proposed amendments to the Narcotic Control Regulations and certainAct. These 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 RegulationsThey also 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 alsoregulations maintain a distinct system for access to cannabis. With

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 Cannabis Act nowU.S. and similar laws in force, cannabis has ceasedother countries, confidentiality agreements and procedures and other contractual arrangements to be regulatedprotect 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 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.

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Security Clearances

The Cannabis Regulations require that certain people associated with cannabis licensees, including individuals occupying a “key position” directors, officers, large shareholders 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.

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 theCannabis 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.

Employees

Soleil brand. As of the date of this Report, the following summarizes the status of our registrations, pending applications, and issued U.S. patents:

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Trademarks
We have received the following trademark registrations:
TrademarkJurisdictionRegistration NumberRegistration DateStatus
URBAN-GROUnited States4618322October 07, 2014Registered
URBAN-GROUnited Kingdom3266415January 19, 2018Registered
URBAN-GROEuropean Union017391806October 31, 2018Registered
URBAN-GROWIPO1548013July 08, 2020Registered
URBAN-GROUnited KingdomUK0081548013July 08, 2020Registered
URBAN-GROCanada (Madrid)A0098111July 08, 2020Registered
URBAN-GROEuropean Union (Madrid)A0098111July 08, 2020Registered
URBAN-GROUnited States97213742February 7, 2023Registered
SOLEILUnited States5209707May 23, 2017Registered
SOLEILUnited Kingdom3266410March 09, 2018Registered
SOLEILCanada1083969October 07, 2020Registered
SOLEILEuropean Union017391781September 11, 2018Registered
SOLEILUnited KingdomUK00917391781September 08, 2018Registered
OPTI-DURAUnited States5770091June 04, 2019Registered
OPTI-DURACanadaTMA1070145January 20, 2020Registered
GRO-CAREEuropean Union1560748August 24, 2020Registered
GRO-CAREEuropean Union017391806October 29, 2019Registered
GRO-CAREUnited KingdomUK00917391806October 29, 2018Registered
GRO-CARECanada (Madrid)A0099548August 24, 2020Registered
GRO-CAREWIPOA0099548August 24, 2020Registered
We have applied for and are awaiting receipt of the following trademark registrations:
TrademarkJurisdictionApplication NumberFiling DateStatus
URBAN-GROCanada1930075November 13, 2018Pending
URBAN-GROUnited States88898690May 03, 2020Pending
URBAN-GROUnited States97213778January 11, 2022Pending
GRO-CAREUnited States88898692May 03, 2020Pending
Patents
TitleJurisdictionApplication NumberFiling DatePatent Number and Issue DateStatus
Sensor bus architecture for modular sensor systemsUnited States15/626,085June 17, 201710,499,123
(December 3, 2019)		Issued
Expire in 2037
Modular sensor architecture for soil and water analysis at various depths from the surfaceUnited States15/626,079June 17, 201710,405,069
(September 3, 2019)		Issued
Expire in 2037
Modular sensor architecture for soil and water analysis at various depths from the surfaceUnited States16/519,800July 23, 201910,955,402
(March 23, 2021)		Issued
Expire in 2037

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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 employ 37 persons,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 34were full-time employees. This is an increase of 66 employees (77%) from December 31, 2021. Our employees are full-time, one is part-time, and two are currently on furlough. Nonecritical to our continued success. With approximately two-thirds of our employees are covered by collective bargaining agreements. We also utilize the services of one independent contractor who is focused on increasing operational efficiencies within the business, three electrical engineers, and a revolving number of referral agents. We require allconsidered experts, we view our employees and consultantsthe depth and breadth of their experience and expertise as our competitive advantage. As such, we strive to signprovide an environment where urban-gro employees can have a confidentialityfulfilling and non-disclosure agreement.productive career. We believe that our future success will depend, in part, on our abilityoffer industry-leading employee benefits and programs to hire and retain qualified personnel.

Trademarks and Patents

Our success depends upon our technology and intellectual property rights. We seek to protect such rights andensure the valuediverse needs of our corporate brands and reputation through a variety of measures, including: patents, domain name registrations, confidentiality and intellectual property assignment agreements with employees and third parties, protective contractual provisions,their families are met, including access to healthcare choices, continued growth opportunities for career development, and laws regarding copyrights, trademarks,resources such as 401(k) plans and trade secrets. We hold multiple registered trademarkscounseling to support their financial well-being.


The table below summarizes the change in full-time employee headcount that has occurred by quarter for the United Statesyears ended December 31, 2022 and in various foreign countries, and we may apply for additional trademarks as business needs require. We also have rights to certain patents pursuant to our agreements with Edyza.

Certain protections normally available to us related to design or other utility patents in the cannabis industry may not currently be enforceable under federal law.

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2021:

20222021
Fourth
Quarter		Third
Quarter		Second
Quarter		First
Quarter		Fourth
Quarter		Third
Quarter		Second
Quarter		First
Quarter
Beginning of period headcount115121988677514640
Net change in headcount13(6)3129656
2WR acquisition000002000
Emerald acquisition002000000
DVO acquisition240000000
Ending of period headcount1521151219886775146

History

We were 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 (“Common Stock”) for every member interest issued and outstanding on the date of conversion. In June 2018, we formed urban-gro Canada Technologies, Inc. as a wholly owned Canadian subsidiary, which we utilize for all our Canadian sales operations. Effective March 7, 2019, we acquired 100% of the stock of Impact Engineering, Inc., d/b/a Grow2Guys, a provider of MEP engineering services.

AVAILABLE INFORMATION

Available Information
Our internet address iswww.urban-gro.com and our investor relations websiteinternet address is located atir.urban-gro.com.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 includescontains reports, proxy and information aboutstatements, and the filings ofother information regarding issuers that that file electronically with the SEC.

Item

ITEM 1A. Risk Factors.

In addition toRISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the following risks and all of the other information set outcontained in this Report, the following specific factors could materially adversely affect us and should be considered whenreport before deciding whether to make aninvest in our common stock. If any of the following risks are realized, our business, financial condition and results of operations could be materially and adversely affected. In that event, the trading price of our common stock could decline and you could lose all or part of your investment in us and our Common Stock. Othercommon stock. Additional risks and uncertainties that we do not presently consider to be material, or of which we are not presently aware or that we currently believe are immaterial may become important factors that affectalso harm our future financial conditionbusiness and results of operations. The occurrenceSome statements in this report, including such statements in the following risk factors, constitute forward-looking statements. See the section entitled Cautionary Information about Forward-Looking Statements in Part I of any of the risks discussed below could materially adversely affect our business, prospects, financial condition, results of operations or cash flow.

this Report.

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Risks Related to Our Operations

The COVID-19 pandemic could continue to materially adversely affect our business, financial condition, results of operations, cash flows and day-to-day operations.

The recent outbreak of COVID-19, a novel strain of coronavirus first identified in China, which has spread across the globe including the U.S., has had an adverse impact on our operations and financial condition. Most recently, the response to this coronavirus by federal, state and local governments in the U.S. has resulted in significant market and business disruptions across many industries and affecting businesses of all sizes. This pandemic has also caused significant stock market volatility and further tightened capital access for most businesses. Given that the COVID-19 pandemic has caused a significant economic slowdown it appears increasingly likely that it could cause a global recession, which could be of an unknown duration and could have had an adverse effect on our liquidity and profitability.

As a result of these events, we assessed our near-term operations, working capital, finances and capital formation opportunities, and implemented, in late March 2020, a downsizing of our operations and workforce to preserve cash resources and focus our operations on customer-centric sales and project management activities. The duration and likelihood of success of this workforce reduction are uncertain. If this downsizing effort does not meet our expectations, or additional capital is not available, we may not be able to continue our operations. Other factors that will affect our ability to continue operations include the market demand for our products and services, our ability to service the needs of our customers and prospects with a reduced workforce, potential contract cancellations, project scope reductions and project delays, our ability to fulfill our current backlog, management of our working capital, the availability of cash to fund our operations, and the continuation of normal payment terms and conditions for purchase of our products. In light of these extenuating circumstances, there is no assurance that we will be successful in growing and maintaining our business with our customers. If our customers or prospects are unable to obtain project financing and we are unable to increase revenues, or otherwise generate cash flows from operations, we will not be able to successfully execute on the various strategies and initiatives we have set forth in this Report to grow our business.

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The ultimate magnitude of COVID-19, including the extent of its impact on our financial and operational results, which could be material, will depend on the length of time that the pandemic continues, its effect on the demand for our products and our supply chain, the effect of governmental regulations imposed in response to the pandemic, as well as uncertainty regarding all of the foregoing. We cannot at this time predict the full impact of the COVID-19 pandemic, but it could have a larger material adverse effect on our business, financial condition, results of operations and cash flows beyond what is discussed within this Report.

We have a relatively limited history of operations, a history of losses, and our future earnings, if any, and cash flows may be volatile, resulting in uncertainty about our ability to service and repay our debt when it comes due and uncertainty about our prospects generally. There is substantial doubt about our ability to continue as a going concern.

We were initially organized as a limited liability company in the State of Colorado on March 20, 2014. In March 2017, we converted into a corporation withand on February 12, 2021, we completed an uplisting to the expectationNasdaq Stock Market under the ticker symbol UGRO. The following is a summary of becomingour recent historical operating performance:
•During the year ended December 31, 2022, we generated revenue of $67.0 million and incurred a public reporting, trading company. net loss of $15.3 million.
•During the year ended December 31, 2021, we generated revenue of $62.1 million and incurred a net loss of $0.9 million.
•During the year ended December 31, 2020, we generated revenue of $25.8 million and incurred a net loss of $5.1 million.
•During the year ended December 31, 2019, we generated revenuesrevenue of $24.2 million and incurred a net loss of $8.3 million. During the year ended December 31, 2018, we generated revenues of $20.1 million and incurred a net loss of $3.9 million. During the year ended December 31, 2017, we generated revenue of $12.3 million, and incurred a net loss of $2.6 million.

Our lack of a significant history and the evolving nature of the market in which we operate make it likely that there are risks inherent to our business that are yet to be recognized by us or others, or not fully appreciated, and that could result in us suffering further losses. As a result of the foregoing, and concerns regarding the economic impact from COVID-19,the coronavirus disease of 2019 ("COVID-19"), an investment in our securities necessarily involves uncertainty about the stability of our operating results, cash flows and, ultimately, our abilityprospects generally.
We had negative cash flow from operations for the fiscal years ended December 31, 2022 and December 31, 2021.
We had negative cash flow from operations of $12.6 million for the fiscal year ended December 31, 2022 and $1.6 for the fiscal year ended December 31, 2021. To the extent that we have negative cash flow from operations in future periods, we may need to service and repayallocate a portion of our cash reserves to fund such negative cash flow. We may also be required to raise additional funds through the issuance of equity or debt and our prospects generally.

In August 2019, due to liquidity constraints, we commenced certain targeted cost reduction initiatives to focus on our company’s core services and reduce our operating costs and general and administrative expenses, including reducing employee headcount, marketing expenditures and corporate functions and activities, as well as eliminating outsourced product development.

Notwithstanding these measures, there remain risks and uncertainties regarding our abilitysecurities. We may not be able to generate sufficient revenuespositive cash flow from our operations and additional capital or other types of financing may not be available when needed or on terms favorable to pay our debt obligationsus.

Our architecture, engineering, design, and accounts payable when due. These risks and uncertainties raise substantial doubt about our ability to continue as a going concern within one year after the date that the consolidated financial statements in connection with this Report are issued. The consolidated financial statements included in this Reportconstruction management services have been prepared on a going concern basisused and do not include any adjustments relatingmay continue to the recoverabilitybe contracted for use in emerging industries that may be subject to quickly changing and classification of recorded asset amounts or amounts of liabilities that might result from the outcome of this uncertainty. The Company’s ability to continue as a going concern is dependent upon, among other things, its ability to generate revenue, control costsinconsistent laws, regulations, practices and if necessary, raise capital on acceptable terms.

Substantially all of our revenues to date have been generated from customers in the cannabis industry, which is an emerging industry and has only been legalized in some states and remains illegal in others and under U.S. federal law, making it difficult to accurately predict and forecastperceptions.

Although the demand for our solution.

Althougharchitecture, engineering, design, and construction management services may be negatively impacted depending on how laws, regulations, administrative practices, judicial interpretations, and consumer perceptions develop, we are looking to expand into other segmentscannot reasonably predict the nature of such developments or the horticulture market, including the rapidly growing vertical farming segment, substantially all ofeffect, if any, that such developments could have on our revenues to date have been generated from customers in the cannabis industry. The cannabis industry is immature in the Unites States and has only been legalized in some states and remains illegal in others and under U.S. federal law, making it difficult to accurately predict and forecast the demand for our solution. Because of our limited operating history and the recent development of the cannabis industry in general, it is difficult to evaluate our business and future prospects.business. We will continue to encounter risks and uncertainty relating to our operations that may be difficult to overcome. To do so, we believe it will be important to:

·Execute our business and marketing strategy successfully;
·Increase and diversify our customer base;
·Meet customer demand with quality, timely services;
·When appropriate, partner with affiliate marketing companies to explore demand;
·Leverage relationships with existing customers;
·Enhance the solutions that we offer and provide wider distribution; and
·Attract, hire, motivate and retain qualified personnel.

Due to our current dependence on the cannabis market, we are relying heavily upon the various U.S. federal governmental memos issued in the past (including the memorandum issued by the DOJ on October 19, 2009, known as the “Ogden Memorandum”, the Cole Memorandum and other guidance), as well as recent assurances issued by the Trump administration, to remain acceptable to those state and federal entities that regulate, enforce, or choose to defer enforcement of certain current regulations regarding cannabis and that the U.S. federal government will not change its attitude to those practitioners in the cannabis industry as long as they comply with their state and local jurisdictional rules and authorities.

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The cannabis industry is not yet well-developed, and many aspects of this industry’s development and evolution cannot be accurately predicted. While we have attempted to identify many risks specific to the cannabis industry, you should carefully consider that there are other risks that cannot be foreseen or are not described in this Report, which could materially and adversely affect our business and financial performance. We expect that the cannabis market and our business evolve in ways that are difficult to predict. For example, it is anticipated that over time, we will reach a point in most markets where we have achieved a market penetration level in which new customer acquisitions are less productive, and the continued growth of our revenue will require more focus on increasing the rate at which existing customers purchase products and services across our platforms. Our long-term success will depend on our ability to successfully adjust its strategy to meet the changing market dynamics. If we are unable to successfully adapt to changes in the cannabis industry our operations could be adversely affected.

We may continue to incur losses in the near future, which may impact our ability to implement our business strategy and adversely affect our financial condition.

While we haveare focused significantly on decreasingcontrolling our operating expenses by reducingmanaging variable expenses, employee count, and contracting our marketing activities in order to become cash flow positive, such decreasesthese measures may adversely affect our future operating results if we are unable to support the business effectively. In turn, this would have a negative impact on our financial condition and potentially our share price.

We also cannot assure you that we will bemay not become profitable or generate sufficient profits from operations in the future. If our revenues do not continue to grow or our product category gross margins beginprofits deteriorate substantially, we are likely to decline, we maycontinue to experience a losslosses in one or more future periods. Collectively, this may impact our ability to implement our business strategy and adversely affect our financial condition. This potentially would also have a negative impact on our share price.

We are attempting to build a business without the support of financial institutions and traditionally available banking support.

Even though we are not actively engaged in the production of cannabis, the federal prohibitions on the cannabis industry in the United States inhibit our ability to establish traditional banking support and opportunities. Specifically, banks are currently unwilling to provide us with any financing normally available to growth stage companies similar to ourselves, including purchase order financing. As a result, we have been forced to finance our expansion by raising capital privately, as well as through private debt and operating capital. This has placed a significant constraint on our cash flow. While current legislation brought before the U.S. Congress may be enacted in the future to alleviate this problem, there are no assurances this will occur. Our failure to obtain additional debt or equity financing in the future could have a negative impact on our ability to continue to grow and expand our operations, which will have a negative impact on our anticipated results of operations.

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We may become subject to additional regulation of farmCEA facilities.
Our engineering and design services are focused on facilities that grow products.

We do not believea wide variety of crops that our targeted products are subject to regulation by the United States Food and Drug Administration and other federal, state or foreign agencies. Changes to any similar state agency inregulations and laws that could complicate the United States. However, changes in the industry, including growth or additional regulation makesengineering of these CEA facilities, such as waste water treatment and electricity-related mandates, make it possible that such regulations may be put into placepotential related enforcement could decrease the demand for our services, and that such regulations could impact sales or otherwisein turn negatively impact our revenues and business opportunities.

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Competition in our industry is intense.

There are many competitors in the horticulture industry, and, in particular the cannabis industry, including many who offer somewhat categorically similar productsequipment solutions and services as those offered by us. There can be no guarantees that inIn the future other companies won’tmay enter this arena by developing productssolutions that are in direct competitiondirectly compete with us. We anticipate the presence as well as entry of other companies in this market space butand acknowledge that we may not be able to establish, or if established to maintain, a competitive advantage. Some of these companies may have longer operating histories, greater name recognition, larger customerclient bases and significantly greater financial, technical, sales and marketing resources. This may allow them to respond more quickly than us to market opportunities. It may also allow them to devote greater resources to the marketing, promotion and sale of their products and/or services. These competitors may also adopt more aggressive pricing policies and make more attractive offers to existing and potential customers,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.

A drop in the retail price of cannabis products may negatively impact our business.

The fluctuations in economic and market conditions that impact the prices of commercially grown cannabis, such as increases in the supply of cannabis and decreases in demand for cannabis,COVID-19 pandemic could have a negative impact on cannabis producers that we service, and therefore could negatively impact our business.

Our principal shareholders have the abilitycontinue to significantly influence or control matters requiring a shareholder vote and other shareholders may not have the ability to influence corporate transactions.

Currently, our principal shareholders own in excess of a majority of our outstanding Common Stock. As a result, they have the ability to determine the outcome on all matters requiring approval of our shareholders, including the election of directors and approval of significant corporate transactions.

Our management does not have significant financial reporting experience on the OTCQX, or significant experience in managing a public company.

Only our Chief Financial Officer (“CFO”) has public company management experience. This may make it difficult for us to establish and maintain effective internal controls over financial reporting, which may lead to delays in filing reports required by the rules and regulations of the SEC and the suspension of quotation of our securities on the OTCQX, which will make it more difficult for you to sell your securities. The OTCQX and other national stock exchanges limit quotations to securities of issuers that are current in their reports filed with the SEC. Our failure to file such reports with the SEC in a timely manner could also result in a delisting.

We are highly dependent on our management team, and the loss of our senior executive officers or other key employees could harm our ability to implement our strategies, impair our relationships with customers andmaterially adversely affect our business, financial condition, results of operations, cash flows and growth prospects.

Our success depends,day-to-day operations.

The outbreak of COVID-19, a novel strain of coronavirus first identified in large degree,China, which has spread across the globe including the U.S., had an adverse impact on our operations and financial condition by causing temporary delays in our projects. The response to coronavirus by federal, state and local governments resulted in significant market and business disruptions across many industries and affected businesses of all sizes. This pandemic also caused significant stock market volatility and further tightened capital access for most businesses. Given that the skillsCOVID-19 pandemic and its disruptions are of our management team and our ability to retain, recruit and motivate key officers and employees. Our active senior executive leadership team, including Brian Zimmerman, Jonathan Nassar, Mark Doherty, and particularly Bradley Nattrass and Dick Akright, have significant experience, and their knowledge and relationships would be difficult to replace. Leadership changes will occur from time to time, and we cannot predict whether significant resignations will occur or whether we will be able to recruit additional qualified personnel. Competition for senior executives and skilled personnel in the horticulture industry is intense, which means the cost of hiring, paying incentives and retaining skilled personnel may continue to increase.

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We need to continue to attract and retain key personnel and to recruit qualified individuals to succeed existing key personnel to ensure the continued growth and successful operation of our business. In addition, as a provider of custom-tailored horticulture solutions, we must attract and retain qualified personnel to continue to grow our business, and competition for such personnel can be intense. Our ability to effectively compete for senior executives and other qualified personnel by offering competitive compensation and benefit arrangements may be restricted by cash flow and other operational restraints. The loss of the services of any senior executive or other key personnel, or the inability to recruit and retain qualified personnel in the future,an unknown duration, they could have a materialan adverse effect on our business, financial conditionliquidity and profitability.

We continue to monitor the status of COVID-19. While it seems like the negative effects of the virus have largely dissipated, if a new variant or resultsother new development cause a substantial increase of operations. In addition,cases, it could disrupt the businesses of our customers and suppliers, which, in turn, could negatively impact market demand, interfere with our ability to attracttimely service the needs of our clients and retain personnelprospects, cause contract cancellations, scope reductions and delays, and interfere with appropriate skillsour ability to procure equipment and knowledge to supportraw materials from our business, we may offer a varietysuppliers. Any of benefits, whichthese effects could reduce our earnings or have a material adverse effect onthereby negatively impact our business, financial condition, or results of operations.

We could be liable for fraudulent or illegal activity by our employees, contractors and consultants resulting in significant financial losses as a result of claims against urban-gro.

We are exposed to the risk that our employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to urban-gro that violate government regulations. It is not always possible for us to identify and deter misconduct by our employees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against urban-gro, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of urban-gro’s operations, any of which could have a material adverse effect on our business, financial condition and results of operations.

Our insurance may not adequately cover our operating risk.

The Company has insurance to protect its assets, operations and employees. While the Company believes its insurance coverage addresses all material risks to which it is exposed and is adequate and customary in its current state of operations, such insurance is subject to coverage limits and exclusions and may not be available for the risks and hazards to which the Company is exposed. In addition, no assurance can be given that such insurance will be adequate to cover the Company’s liabilities or will be generally available in the future or, if available, that premiums will be commercially justifiable. If the Company were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if the Company were to incur such liability at a time when it is not able to obtain liability insurance, its business, results of operations and financial condition could be materially adversely affected.

or prospects.

We are dependentdepend upon third partythird-party suppliers of our raw materials.

for the equipment solutions that we sell.

We are dependentdepend on outside vendorsmanufacturers for our supplies of raw materials.the equipment solutions that we sell. For the year ended December 31, 2019, two vendors, Argus and2022, one vendor, Fluence wereBioengineering, Inc. ("Fluence"), a provider of lighting systems, was particularly important to our solution. Salesintegrated sales solutions. We use Fluence as one of Fluence’sthe LED lighting systems accounted for 25%options in our designs and then act as VAR and sell these systems to our clients as part of our consolidated revenue for the year ended December 31, 2019.overall package. While we believe that there are sufficient sources of supply available, if the third partythird-party suppliers, such as Argus or Fluence, were to cease production or otherwise fail to supply us with quality raw materialsproducts in sufficient quantities on a timely basis and we were unable to contract on acceptable terms for these servicesequipment type products with alternative suppliers, our ability to produce our productssell these solutions would be materially adversely affected. If a sole source supplier was to go out of business, we may be unable to find a replacement for such source in a timely manner or at all. If a sole source supplier were to be acquired by a competitor, that competitor may elect not to sell to us in the future. Any inability to secure required supplies and servicesproducts or to do so on appropriate terms could have a materially adverse impact on the business, financial condition, results of operations or prospects of urban-gro.

As indicated above, we continue to monitor the outbreak

We have historically depended on a small number of the COVID-19 coronavirus. Should the outbreak continue to become more widespread, it could disrupt the businesses of our industry partners and third party suppliers, which, in turn, could impact our ability to procure equipment and raw materials from them and thereby negatively impact the business, financial condition, results of operations or our prospects.

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We depend on significant customersclients for a substantial portion of our revenue. If we fail to retain or expand our customerclient relationships, or if thisa significant customerclient were to terminate its relationship with us or reduce its purchases, our revenue could decline significantly.

One customer represented 21% of our total revenue for

During the year ended December 31, 2019. We had2022, three clients represented 40% of total revenue. During the year ended December 31, 2021 one customer that accounted for 14%client represented 46% of our total revenue for 2018. We believe that ourrevenue. Although we have been able to successfully generate substantial sales to different clients over time, we may not be able to continue to do this in the future. Our operating results for the foreseeable future willcould continue to depend on substantial sales to a small number of customers. These customersclients. Our clients have no purchase commitments and may cancel, change or delay purchases with little or no notice or penalty. As a result of this, customer concentration, our revenue could fluctuate materially and could be materially and disproportionately impacted by purchasing decisions of these customers or any other significant customer. In the future, these customersclient. Clients who represented a substantial portion of our
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historical revenue may decide to purchase less productproducts and services from us than they haveother providers in the past, may alter purchasing patterns at any time with limited notice, or may decide not to continue to purchase our products at all, any offuture, which could cause our revenue to decline materially and materially harmnegatively impact our financial condition and results of operations. If we are unable to diversify our customerclient base, we will continue to be susceptible to risks associated with customerclient concentration.

Our contracts

A portion of our business depends on our clients obtaining appropriate licenses from various licensing agencies.
A portion of our business depends on our clients obtaining appropriate licenses from various licensing agencies. Any or all licenses necessary for our clients to operate their businesses may not be legally enforceable in the United States.

Because manyobtained, retained or renewed. If a licensing body were to determine that one of our contracts relateclients had violated applicable rules and regulations, there is a risk the license granted to services that are ancillaryclient could be revoked, which could adversely affect future sales to the cannabis industrythat client and other activities that areour operations. Our existing clients may not legal under U.S. federal lawbe able to retain their licenses going forward and under some state laws, wenew licenses may face difficulties in enforcing our contracts in U.S. federalnot be granted to existing and certain state courts.

new market entrants.

System security risks, data protection breaches, cyber-attacks and systems integration issues could disrupt our internal operations or services provided to customers

clients.

Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack or otherwise exploit any security vulnerabilities of the products that we may sell in the future. Such disruptions could adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales, lower profits, or lost customersclients resulting from these disruptions could adversely affect our financial results, stock price and reputation.

We may be forced to litigate to defend our intellectual property rights, or to defend against claims by third parties against urban-gro relating to intellectual property rights

rights.

We may be forced to litigate to enforce or defend itsour intellectual property rights, to protect itsour trade secrets or to determine the validity and scope of other parties’ proprietary rights. Any such litigation could be very costly and could distract itsour management from focusing on operating our business. The existence and/or outcome of any such litigation could harm our business.

Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.

U.S. generally accepted accounting principles (“GAAP”) and related pronouncements, implementation guidelines and interpretations with regard to a wide variety of matters that are relevant to our business, such as, but not limited to, revenue recognition, stock-based compensation, trade promotions, sports sponsorship agreements and income taxes are highly complex and involve many subjective assumptions, estimates and judgments by our management. Changes to these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported results.

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Our ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially adversely affect our business and the value of our common stock.

Our reputation is a valuable component of our business. Threats to our reputation can come from many sources, including adverse sentiment about our industry generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our customers. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results and the value of our common stock may be materially adversely affected.

We may not be able to successfully identify, consummate or integrate acquisitions or to successfully manage the impacts of such transactions on our operations.

Part of our business strategy includes pursuing synergistic acquisitions. We have expanded, and plan to continue to expand, our business by making strategic acquisitions and regularly seeking suitable acquisition targets to enhance our growth. Material acquisitions, dispositions and other strategic transactions involve a number of risks, including: (i) the potential disruption of our ongoing business; (ii) the distraction of management away from the ongoing oversight of our existing business activities; (iii) incurring additional indebtedness; (iv) the anticipated benefits and cost savings of those transactions not being realized fully, or at all, or taking longer to realize than anticipated; (v) an increase in the scope and complexity of our operationsoperations; and (vi) the loss or reduction of control over certain of our assets.

The pursuit of acquisitions may pose certain risks to us. We may not be able to identify acquisition candidates that fit our criteria for growth and profitability. Even if we are able to identify such candidates, we may not be able to acquire them on terms or financing satisfactory to us. We will incur expenses and dedicate attention and resources associated with the review of acquisition opportunities, whether or not we consummate such acquisitions.

Additionally, even if we are able to acquire suitable targets on agreeable terms, we may not be able to successfully integrate their operations with ours. Achieving the anticipated benefits of any acquisition will depend in significant part upon whether we integrate such acquired businesses in an efficient and effective manner. We may not be able to achieve the anticipated operating and cost synergies or long-term strategic benefits of our acquisitions within the anticipated timing or at all. The benefits from any acquisition will be offset by the costs incurred in integrating the businesses and operations. We may also assume liabilities in connection with acquisitions to which we would not otherwise be exposed. An inability to realize any or all of the anticipated synergies or other benefits of an acquisition as well as any delays that may be encountered in the integration process, which may delay the timing of such synergies or other benefits, could have an adverse effect on our business, results of operations and financial condition.

Our indebtedness could adversely affect

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Risks Related to the Legal Cannabis Industry
To date, the majority of our financial conditionrevenues have come from providing architecture and prevent usengineering design services and selling equipment systems into facilities prior to the facility becoming operational. The majority of our revenues to date have been generated from fulfillingclients that operate in the legal cannabis industry.
We are broadening our debt servicemarket reach beyond the legal cannabis industry and are placing a substantial sales effort on expansion into the rapidly growing non-cannabis CEA vertical farming sector as well as the Commercial sector. However, on a historic basis, the majority of our clients to whom we provide facility architecture and engineering design services and sell equipment systems prior to the facility becoming operational have primarily been in the legal cannabis industry. In addition to selling directly to these clients, we also sell our equipment solutions to third parties, such as general contractors and other obligations.

Our indebtednessintermediaries, like equipment leasing companies. The majority of these solutions have been resold into the legal cannabis industry. A significant decrease in demand in the legal cannabis industry could have significant effectsa material adverse effect on our revenues and the success of our business. For example,

The cannabis industry in the U.S. is an emerging industry and has only been legalized in some states while remaining illegal in others and under U.S. federal law. Federal Prohibition makes it could:

·make it more difficult for us to satisfy our financial obligations, including with respect to our indebtedness, and any failure to comply with the obligations of any of our debt agreements, including financial and other restrictive covenants, could result in an event of default under the agreements governing our indebtedness;
·increase our vulnerability to general adverse economic,difficult to accurately forecast the demand for our solutions in this specific industry. Losing clients from this industry and competitive conditions;
·limit our ability to borrow additional funds; and
·limit our financial flexibility.

Each of these factors may have a material and adverse effect on our revenues and the success of our business.

The legal cannabis industry is not mature in the United States and has been legalized in only some states and remains illegal in others and under U.S. federal law, making it difficult to accurately forecast demand for our solutions. Revenues could materially decline if the U.S. Department of Justice ("DOJ") enforces federal law against the industry and some of our clients are negatively impacted.
The legal cannabis industry in the U.S. remains in state of flux, and many aspects of this industry’s development and evolution cannot be accurately predicted. Therefore, losing any clients could have a material adverse effect on our business. While we have attempted to identify our business risks in the legal cannabis industry, investors should carefully consider that there are other risks that cannot be foreseen or are not described in this Report, which could materially and adversely affect our business and financial conditionperformance.
There is heightened scrutiny by Canadian regulatory authorities related to the cannabis industry.
Our existing operations in the United States, and viability. Ourany future operations or investments, may become the subject of heightened scrutiny by regulators and other authorities in Canada. As a result, we may be subject to significant direct and indirect interaction with public officials. This heightened scrutiny may in turn lead to the imposition of certain restrictions on our ability to make paymentsoperate or invest in the United States.
On February 8, 2018, following discussions with the Canadian Securities Administrators and recognized Canadian securities exchanges, the TMX Group announced the signing of the TMX Memorandum of Understanding ("MOU") with Aequitas NEO Exchange Inc., the Canadian Securities Exchange ("CSE"), the Toronto Stock Exchange, and the TSX Venture Exchange ("TSXV"). The MOU outlines the parties’ understanding of Canada’s regulatory framework applicable to the rules, procedures, and regulatory oversight of the exchanges and Canadian Depository for Securities Limited ("CDS") as it relates to issuers with cannabis-related activities in the United States. The MOU confirms, with respect to our indebtedness andthe clearing of listed securities, that CDS relies on the exchanges to satisfy any other debt obligations will dependreview the conduct of listed issuers. As a result, there is no CDS ban on our future operating performance, which willthe clearing of securities of issuers with cannabis-related activities in the United States. However, this approach to regulation may not continue in the future. If such a ban were to be affected by prevailing economic conditions and financial, business and other factors affecting usimplemented, and our industry, manyshares were listed on a Canadian exchange, it would have a material adverse effect on the ability of which are beyondholders of our control.

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securities to make and settle trades.

Risks Related to Our Industry

As marijuanacannabis remains illegal under United States federal law, it is possible that we may have to stop providing productsequipment systems and services to companies who are engaged in marijuanacannabis cultivation and other marijuana-relatedcannabis-related activities.

Marijuana

Cannabis, which is referred to as "Marijuana" in the Controlled Substances Act, is currently classified as a Schedule I controlled substance under the Controlled Substances Act and is illegal under United States federal law. It is illegal under United States federal law to grow, cultivate, sell or possess marijuanacannabis for any purpose or to assist or conspire with those who do so. Additionally, 21 U.S.C. 856 makes it illegal to “knowingly"knowingly open, lease, rent, use, or maintain any place, whether permanently or temporarily, for the purpose of manufacturing, distributing, or using any controlled substance.”" Even in those states in which the use of marijuanacannabis has been authorized under state law, its use remains a violation of federal law. Since federal law criminalizing the use of marijuanacannabis is not preempted by state laws that legalize its use, strict enforcement of federal law regarding marijuana would likelycannabis may result in the inability of our customers’ inabilityclients that are involved in the cannabis industry to proceed with their operations, which would adversely affect our operations.

Cannabis growers use equipment that we offer for sale.

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Our solutions are used by legal and licensed cannabis growers. While we are not aware of any threatened or current federal or state law enforcement actions against any supplier of equipment that might be used for cannabis growing,cultivation, law enforcement authorities, in their attempt to regulate the illegal use of marijuana,cannabis, may seek to bring an action or actions against us under the Controlled Substances Act for assisting or conspiring with persons engaged in the cultivation of marijuana.

cannabis.

There is also a risk that our activities could be deemed to be facilitating the selling or distribution of cannabis in violation of the Controlled Substances Act. Although federal authorities have not focused their resources on such tangential or secondary violations of the Controlled Substances Act, nor have they threatened to do so, with respect to the sale of equipment that might be used by legal and licensed cannabis cultivators, or with respect to any supplies marketed to participants in the medical and recreational cannabis industry, if the federal government were to change its practices, or were to expend its resources investigating and prosecuting providers of equipment that could be usable by participants in the medical or recreational cannabis industry, such actions could have a materially adverse effect on our operations our customers, orand the sales of our products.

Uncertaintyproducts and services.

As a company with clients operating in the legal cannabis industry, we face many particular and evolving risks associated with that industry, including uncertainty of United States federal enforcement and the need to renew temporary safeguards.

On January 4, 2018, former Attorney General Sessions rescinded the previously issued memoranda (known as the Cole Memorandum) from the DOJ that had de-prioritized the enforcement of federal law against marijuana users and businesses that comply with state marijuana laws, adding uncertainty to the question of how the U.S. federal government will choose to enforce federal laws regarding marijuana. Former Attorney General Sessions issued a memorandum to all United States Attorneys in which the DOJ affirmatively rescinded the previous guidance as to marijuana enforcement, calling such guidance “unnecessary.” This one-page memorandum was vague in nature, stating that federal prosecutors should use established principles in setting their law enforcement priorities. Under previous administrations, the DOJ indicated that those users and suppliers of medical marijuana who complied with state laws, which required compliance with certain criteria, would not be prosecuted. As a result, it is now unclear if the DOJ will seek to enforce the Controlled Substances Act against those users and suppliers who comply with state marijuana laws.

Despite Attorney General Sessions’ rescission of the Cole Memorandum, the Department of the Treasury, Financial Crimes Enforcement Network, has not rescinded the “FinCEN Memo”

The "FinCEN Memo" dated February 14, 2014, which de-prioritizes enforcement of the Bank Secrecy Act against financial institutions and marijuanacannabis related businesses which utilize them. This memomemorandum appears to be a standalone document and is presumptively still in effect. At any time, however, the Department of the Treasury, Financial Crimes Enforcement Network, could elect to rescind the FinCEN Memo. This would make it more difficult for our customersclients and potential customersclients to access the U.S. banking systems and conduct financial transactions, which would adversely affect our operations.

In December 2019,2014, Congress passed a spending bill (the “2020("2015 Appropriations Bill”Bill") containing a provision (the “Appropriations Rider”("Appropriations Rider") blocking federal funds and resources allocated under the 20202015 Appropriations Bill from being used to prevent any U.S. states or territories “from"prevent such States from implementing their own laws that authorize the use, distribution, possession, or cultivation ofState medical marijuana.” While themarijuana law." The Appropriations Rider seemsseemed to prohibithave prohibited the federal government from interfering with the ability of states to administer their medical marijuanacannabis laws, although it doesdid not codify federal protections for medical marijuanacannabis patients orand producers. In fact,Moreover, despite the 2020 Appropriations Bill also contains provisions prohibitingRider, the use of federal funds allocated thereunder “to enact or carry out any law, rule, or regulation to legalize or otherwise reduce penalties associated with the possession, use, or distribution of any schedule I substance under the Controlled Substances Act (21 U.S.C. 801 et seq.) or any [THC] derivative.” Accordingly, the DOJJustice Department maintains that it can still prosecute violations of the federal marijuana ban.cannabis ban and continue cases already in the courts. Additionally, the Appropriations Rider must be re-enacted every year. We cannot predict whetherWhile it has been continued every year since 2015, including most recently in 2022, continued re-authorization of the Appropriations Rider willcannot be extended in future years or if a new budget will be enacted after the upcoming 2020 presidential election.guaranteed. If the AppropriationsAppropriation Rider is no longer in effect, the risk of federal enforcement and override of state marijuanacannabis laws would increase.

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Further legislative development beneficial to our operations is not guaranteed.

Among other things, the business of our businessclients in the legal cannabis industry involves the cultivation, distribution, manufacture, storage, transportation and/or sale of medical and adult use cannabis products in compliance with applicable state law. The success of our business with respect to these clients depends on the continued development of the cannabis industry and the activity of commercial business and government regulatory agencies within the industry. The continued development of the legal cannabis industry is dependent upon continued legislative and regulatory authorization of cannabis at the state level and a continued laissez-faire approach by federal enforcement agencies. Any number of factors could slow or halt progress in this area. Further regulatory progress beneficial to the industry cannot be assured. While there may be ample public support for legislative action, numerous factors impact the legislative and regulatory process, including election results, scientific findings or general public events. Any one of these factors could slow or halt progressive legislation relating to cannabis and the current tolerance for the use of cannabis by consumers, which could adversely affect our operations.

The legal cannabis industry could face strong opposition from other industries.

We believe that established businesses in other industries may have a strong economic interest in opposing the development of the cannabis industry. Cannabis may be seen by companies in other industries as an attractive alternative to their products, including recreational marijuanacannabis as an alternative to alcohol, and medical marijuanacannabis as an alternative to various commercial pharmaceuticals. Many industries that could view the emerging legal cannabis industry as an economic threat are well established, with vast economic and United States federal and state lobbying resources. It is possible that companiesCompanies within these industries could use their resources to attempt to slow or reverse legislation legalizing cannabis. Any inroads these companies make in halting or impeding legislative initiatives that would be beneficial to the legal cannabis industry could have a detrimental impact on our customersclients and, in turn on our operations.

The legality of marijuanacannabis could be reversed in one or more states.

The voters or legislatures of states in which marijuanacannabis has already been legalized could potentially repeal applicable laws which permit the operation of both legal medical and retail marijuanacannabis businesses. These actions might force us to cease operations in one or more states entirely.

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Changing legislation and evolving interpretations of law, which could negatively impact our customersclients and, in turn, our operations.

Laws and regulations affecting the legal medical and adult-use marijuanacannabis industry are constantly changing, which could detrimentally affect our customersclients involved in that industry and, in turn, our operations. Local, state and federal marijuanacannabis laws and regulations are often broad in scope and subject to constant evolution and inconsistent interpretations, which could require our customersclients and ourselves to incur substantial costs associated with modification of operations to ensure compliance. In addition, violations of these laws, or allegations of such violations, could disrupt our customers’clients’ business and result in a material adverse effect on our operations. In addition, it is possible that regulations may be enacted in the future that will limit the amount of cannabis growth or related products that our commercial customersclients are authorized to produce. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can itwe determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our operations.

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Regulatory scrutiny of relating to our target marketthe legal cannabis industry may negatively impact our ability to raise additional capital.

Our

The business activities of certain of our clients rely on newly established and/or developing laws and regulations in multiple jurisdictions. These laws and regulations are rapidly evolving and subject to change with minimal notice. Regulatory changes may adversely affect our profitability or cause us to cease operations entirely. The legal cannabis industry may come under the scrutiny or further scrutiny by the United States Food and Drug Administration (the "FDA"), the SEC, the DOJ, the Financial Industry Regulatory AdvisoryAuthority or other federal, state or nongovernmental regulatory authorities or self-regulatory organizations that supervise or regulate the production, distribution, sale or use of cannabis for medical or nonmedical purposes in the United States. The FDA currently is authorized to promulgate regulations for and oversight of CBD products. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any proposals will become law. The regulatory uncertainty surrounding the industry that we service may adversely affect our business and operations, including without limitation, the costs to remain compliant with applicable laws and the impairment of itsour ability to raise additional capital.

We are dependent on the licensing of our customers.

Our business is dependent on our customers obtaining various licenses from various municipalities and state licensing agencies. There can be no assurance that any or all licenses necessary for our customers to operate their businesses will be obtained, retained or renewed. If a licensing body were to determine that one of our customers had violated applicable rules and regulations, there is a risk the license granted to that customer could be revoked, which could adversely affect our operations. There can be no assurance that our existing customers will be able to retain their licenses going forward, or that new licenses will be granted to existing and new market entrants.

Banking regulations could limit access to banking services.

Since the use of marijuanacannabis is illegal under federal law, federally chartered banks will not accept deposit funds from businesses involved with marijuana.cannabis. Consequently, businesses involved in the legal cannabis industry often have trouble finding a bank willing to accept their business. The inability to open bank accounts may make it difficult for our customersclients in the legal cannabis industry to operate and their reliance on cash can result in a heightened risk of theft, which could harm their businesses and, in turn, harm our business. Additionally, some courts have denied marijuana-relatedlegal cannabis-related businesses bankruptcy protection, thus, making it very difficult for lenders to recoup their investments, which may limit the willingness of banks to lend to our customersclients and to us.

A drop in the retail price of cannabis products may negatively impact our business.
The fluctuations in economic and market conditions that impact the prices of commercially grown cannabis, such as increases in the supply of cannabis and decreases in demand for cannabis, could have a negative impact on our clients that are legal cannabis producers, and therefore could negatively impact our business.
Our contracts may not be legally enforceable in the United States.
Many of our historic contracts, and those we may enter into in the future, relate to services that are ancillary to the legal cannabis industry and other activities that are not legal under U.S. federal law and under some state laws. As a result, we may face difficulties in enforcing our contracts in U.S. federal and certain state courts.
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Risks Related to Ownership of Our Common Stock

Our Common Stock was recently approvedstock price could be extremely volatile. As a result, shareholders may not be able to trade onresell their shares at or above the OTCQX, but there has been very little trading activity inprice they paid for them.
The market price of our Common Stock and there can be no assurance that such a market will develop in the future.

Our application to list our Common Stock for trading on the OTCQX was approved on October 7, 2019. To date, there has been very little trading in our Common Stock, and there can be no assurance that a market will develop in the future or, if developed, that it will continue. In the absence of a public trading market, an investorcommon stock may be unablehighly volatile and could be subject to liquidate their investmentwide fluctuations. Volatility in our Company.

Any adverse effect on the market price of our Common Stockcommon stock, as well as general economic, market or political conditions, may prevent shareholders from being able to sell their shares at or above the price they paid for their shares and may otherwise negatively affect the liquidity of our common stock. Shareholders may experience a decrease, which could make it difficultbe substantial, in the value of their stock, including decreases unrelated to our operating performance or prospects, and shareholders could lose part or all of their investment. The price of our common stock has been, and could continue to be, subject to wide fluctuations in response to a number of factors, including those described elsewhere in this Report and others such as:

•the effect of the COVID-19 pandemic on our business and operations;
•our ability to generate revenues sufficient to achieve profitability and positive cash flow;
•competition in our industry and our ability to compete effectively;
•our ability to attract, recruit, retain and develop key personnel and qualified employees;
•reliance on significant clients and third-party suppliers;
•our ability to successfully identify and complete acquisitions and effectively integrate those acquisitions into our operations;
•our actual or anticipated operating and financial results, including how those results vary from the expectations of management, securities analysts and investors;
•changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to us or other industry participants;
•developments in our business or operations or our industry sectors generally;
•any future offerings by us of our common stock;
•any coordinated trading activities or large derivative positions in our common stock, for usexample, a "short squeeze" (a short squeeze occurs when a number of investors take a short position in a stock and have to raise additional capital through sales of equitybuy the borrowed securities to close out the position at a time that other short sellers of the same security also want to close out their positions, resulting in a surge in stock prices, i.e., demand is greater than supply for the stock sold short);
•legislative or regulatory changes affecting our industry generally or our business and at aoperations specifically;
•the operating and stock price performance of companies that we deem appropriate.

Salesinvestors consider to be comparable to us;

•announcements of substantial amountsstrategic developments, acquisitions, restructurings, dispositions, financings and other material events by us or our competitors;
•actions by our current shareholders, including future sales of common shares by existing shareholders, including our Common Stock,directors and executive officers;
•proposed or final regulatory changes or developments;
•anticipated or pending regulatory investigations, proceedings, or litigation that may involve or affect us; and
•the other factors described under Risk Factorsin anticipation that such sales could occur, may materially and adversely affect prevailing market prices for our Common Stock, if and when such market develops in the future.

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Part I, Item 1A of this Report.

The market priceIn response to any one or more of our Common Stock may fluctuate significantly in the future.

We expect thatthese events, the market price of shares of our Common Stock may fluctuate in response to one or more of the following factors, many of which are beyond our control:

·competitive pricing pressures;
·our ability to market our services on a cost-effective and timely basis;
·our inability to obtain working capital financing, if needed;
·changing conditions in the market;
·the occurrence or threat of epidemic or pandemic diseases, such as the recent outbreak of coronavirus, or any government response to such occurrence or threat;
·changes in market valuations of similar companies;
·stock market price and volume fluctuations generally;
·regulatory developments;
·fluctuations in our quarterly or annual operating results;
·additions or departures of key personnel; and
·future sales of our Common Stock or other securities.

The price at which you purchase our Common Stock may not be indicative of the price that will prevail in the trading market. You may be unable to sell your Common Stock at or above your purchase price, which may result in substantial losses to you and which may include the complete loss of your investment.common stock could decrease significantly. In the past, securities class action litigation has often been broughtinitiated against a companycompanies following periods of volatility in their stock price volatility. We may be the targetprice. This type of similar litigation in the future. Securities litigation could result in substantial costs and divert our management’s attention and resources and could also require us to make substantial payments to satisfy judgments or to settle litigation.

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Shareholders may be diluted by future issuances of preferred stock or additional common stock in connection with our resources away fromincentive plans, acquisitions or otherwise; future sales of such shares in the public market, or the expectations that such sales may occur, could lower our business.stock price.
Our certificate of incorporation authorizes us to issue shares of our common stock and options, rights, warrants and appreciation rights relating to our common stock for the consideration and on the terms and conditions established by our Board in its sole discretion. We could issue a significant number of shares of common stock in the future in connection with investments or acquisitions. Any of the risks described abovethese issuances could adversely affectdilute our salesexisting shareholders, and profitability and also the price of our Common Stock.

There is heightened scrutiny by Canadian regulatory authorities

Our existing operations in the United States, and any future operations or investments, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, we maysuch dilution could be subject to significant direct and indirect interaction with public officials. No assurance can be provided that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on our ability to operate or invest in the United States, in addition to those described herein.

It had been reported in Canada that the Canadian Depository for Securities Limited considered a policy shift that would see its subsidiary, CDS, refuse to settle trades for cannabis issuers or issuers with cannabis related activities that have investments in the United States. CDS is Canada’s central securities depository, clearing and settling trades in the Canadian equity, fixed income and money markets. The TMX Group, the owner and operator of CDS, subsequently issued a statement on August 17, 2017 reaffirming that there is no CDS ban on the clearing of securities of issuers with cannabis-related activities in the United States, despite media reports to the contrary and that the TMX Group was working with regulators to arrive at a solution that will clarify this matter, which would be communicated at a later time. On February 8, 2018, following discussions with the Canadian Securities Administrators and recognized Canadian securities exchanges, the TMX Group announced the signing of the TMX Memorandum of Understanding (“MOU”) with Aequitas NEO Exchange Inc., the Canadian Securities Exchange (“CSE”), the Toronto Stock Exchange, and the TSXV. The TMX MOU outlines the parties’ understanding of Canada’s regulatory framework applicable to the rules, procedures, and regulatory oversight of the exchanges and CDS as it relates to issuers with cannabis-related activities in the United States. The MOU confirms, with respect to the clearing of listed securities, that CDS relies on the exchanges to review the conduct of listed issuers. As a result, there is no CDS ban on the clearing of securities of issuers with cannabis-related activities in the United States. However, there can be no guarantee that this approach to regulation will continue in the future. Ifsignificant. Moreover, such a ban were to be implemented at a time when the Common Stock are listed on a stock exchange, it woulddilution could have a material adverse effect on the abilitymarket price for the shares of our common stock.

The future issuance of shares of preferred stock with voting rights may adversely affect the voting power of the holders of Common Stockshares of our common stock, either by diluting the voting power of our common stock if the preferred stock votes together with the common stock as a single class, or by giving the holders of any such preferred stock the right to makeblock an action on which they have a separate class vote, even if the action were approved by the holders of our shares of our common stock.
The future issuance of shares of preferred stock with dividend or conversion rights, liquidation preferences or other economic terms favorable to the holders of preferred stock could adversely affect the market price for our common stock by making an investment in the common stock less attractive. For example, investors in the common stock may not wish to purchase common stock at a price above the conversion price of a series of convertible preferred stock because the holders of the preferred stock would effectively be entitled to purchase common stock at the lower conversion price, causing economic dilution to the holders of common stock.
We do not anticipate paying any cash dividends on our common stock in the foreseeable future.
We currently intend to retain our future earnings, if any, for the foreseeable future, to fund the development and settle trades. In particular,growth of our business. We do not intend to pay any dividends to holders of our common stock in the Common Stock would become highly illiquid until an alternative was implemented,foreseeable future. Any decision to declare and investors would have nopay dividends in the future will be made at the discretion of our Board taking into account various factors, including our business, operating results and financial condition, current and anticipated cash needs, plans for expansion, any legal or contractual limitations on our ability to effectpay dividends under our loan agreements or otherwise. As a traderesult, if our Board does not declare and pay dividends, the capital appreciation in the price of our common stock, if any, will be our shareholders only source of gain on an investment in our common stock, and shareholders may have to sell some or all of their common stock to generate cash flow from their investment.
If securities or industry analysts do not publish research or reports about our business, or if they downgrade their recommendations regarding our common stock, its trading price and volume could decline.
We expect the trading market for our common stock to be influenced by the research and reports that industry or securities analysts publish about us, our business or our industry. If no additional securities or industry analysts commence coverage of our company, the trading price for our stock may be negatively impacted. If one or more of our covering analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline and our common stock to be less liquid. Moreover, if one or more of the Common Stock through the facilitiesanalysts who cover us downgrades our stock or publishes inaccurate or unfavorable research about our business, or if our results of operations do not meet their expectations, our stock price could decline.
Taking advantage of the CSE.

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reduced disclosure requirements applicable to "emerging growth companies" may make our common stock less attractive to investors.

We qualify as an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012 ("JOBS Act"). An emerging growth company may take advantage of certain reduced reporting and other requirements that are otherwise generally applicable to public companies, as described above. We currently intend to take advantage of each of these exemptions. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make a comparison of our financial statements with the financial statements of a public company that is not an emerging growth company, or the financial statements of an emerging growth company that has opted out of using the extended transition period, difficult or impossible because of the potential differences in accounting standards used. We could be an emerging growth company until December 31, 2023. We cannot predict if investors will find our common stock less attractive if we elect to rely on these exemptions, or if taking advantage of these exemptions would result in less active trading or more volatility in the price of our common stock.

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Provisions of our Articlescertificate of incorporation and bylaws may delay or prevent a take-over that may not be in the best interests of our shareholders.

Provisions of our Articlescertificate of incorporation and bylaws may be deemed to have anti-takeover effects, which include when and by whom special meetings of our shareholders may be called, and may delay, defer or prevent a takeover attempt.

In addition, our Articles authorizecertificate of incorporation authorizes the issuance of up to 10,000,000 shares of preferred sharesstock with such rights and preferences determined from time to time by our Board. As of December 31, 2019, noneNone of our preferred shares wereare currently issued or outstanding. Our Board may, without shareholder approval, issue additional preferred shares with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of our Common Stock.

common stock.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain executive management and qualified boardBoard members.

As a public company, we are subject to the reporting requirements of the Exchange Act, as amended, the Sarbanes-Oxley Act, the Dodd-Frank Act, and other applicable securities rules and regulations. Compliance with these rules and regulations involves significant legal and financial compliance costs, may make some activities more difficult, time-consuming or costly and may increase demand on our systems and resources, particularly after we are no longer an “emerging"emerging growth company,”" as defined in the Jumpstart our Business StartupsJOBS Act. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. We may need to hire more employees in the future or engage outside consultants, which will increase our costs and expenses.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us, and our business may be adversely affected.

However, for as long as we remain an “emerging"emerging growth company,”" we may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not “emerging"emerging growth companies”companies" including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes OxleySarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an “emerging"emerging growth company.”" We would cease to be an “emerging"emerging growth company”company" upon the earliest of: (i) the firstlast day of the fiscal year following the fifth anniversary of the first sale of our Common Stockcommon stock under an effective Securities Act registration statement, as an emerging growth company;which will occur on December 31, 2023; (ii) the first fiscal year after our annual gross revenues are $1.0$1.07 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (iv) as of the end of any fiscal year in which the market value of the Common Stockcommon stock held by non-affiliates exceeded $700 million as of the end of Q2the second quarter of that fiscal year.

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage once we put such coverages in place, which we intend to implement in the near future. These factors could also make it more difficult for us to attract and retain qualified members of our Board, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

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As a result of disclosure of information in this Report and in filings required of a public company, our business and financial condition will become moreare highly visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results.

We may lack effective internal controls.

Effectiveare subject to ongoing regulatory burdens resulting from our public listing.

We continually work with our legal, accounting and financial advisors to identify those areas in which changes should be made to our financial management control systems to manage our obligations as a public company listed on Nasdaq. These areas include corporate governance, corporate controls, disclosure controls and procedures and financial reporting and accounting systems.
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We have made, and will continue to make, changes in these and other areas, including our internal controls are necessaryover financial reporting. However, these and other measures that we might take may not be sufficient to allow us to satisfy our obligations as a public company listed on Nasdaq on a timely basis. In addition, compliance with reporting and other requirements applicable to public companies listed on Nasdaq creates additional costs for us and requires the time and attention of management. The additional costs that we incur, the timing of such costs and the impact that management’s attention to provide reliable financial reportsthese matters may adversely affect our business and to help prevent fraud. Although we will undertake a number of proceduresoperating results.
General Risk Factors
We are highly dependent on our management team, and will implement a number of safeguards, in each case, in order to help ensure the reliabilityloss of our financial reports, including those imposed by applicable securities law, we cannot be certain that such measures will ensure that we will maintain adequate control over financial processes and reporting. Failure to implement required newexecutive officers or improved controls, or difficulties encountered in their implementation,other key employees could harm our ability to implement our strategies, impair our relationships with clients and adversely affect our business, results of operations or cause usand growth prospects.
Our success depends, in large degree, on the skills of our management team and our ability to failretain, recruit and motivate key officers and employees. Our senior executive leadership team has significant experience, and their knowledge and relationships would be difficult to meet our reporting obligations. If we or our auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our consolidated financial statements and materially adversely affect the trading price of the shares.

We do not anticipate paying dividends.

We have not paid dividends on our Common Shares and do not anticipate paying dividends in the foreseeable future. Our dividend policyreplace. Leadership changes will be reviewedoccur from time to time, by our board of directorsand we cannot predict whether significant resignations will occur or whether we will be able to recruit additional qualified personnel. Competition for senior executives and skilled personnel in the contexthorticulture industry is intense, which means the cost of hiring, paying incentives and retaining skilled personnel may continue to increase.

We need to continue to attract and retain key personnel and to recruit qualified individuals to succeed existing key personnel to ensure the continued growth and successful operation of our business. In addition, as a provider of custom-tailored horticulture solutions, we must attract and retain qualified personnel to continue to grow our business, and competition for such personnel can be intense. Our ability to effectively compete for senior executives and other qualified personnel by offering competitive compensation and benefit arrangements may be restricted by cash flow and other operational restraints. The loss of the services of any senior executive or other key personnel, or the inability to recruit and retain qualified personnel in the future, could have a material adverse effect on our business, financial condition or results of operations. In addition, to attract and retain personnel with appropriate skills and knowledge to support our business, we may offer a variety of benefits, which could reduce our earnings or have a material adverse effect on our business, financial condition or results of operations.
Our insurance may not adequately cover our operating risk.
We have insurance to protect our assets, operations and employees. While we believe our insurance coverage addresses all material risks to which we are exposed and is adequate and customary in our current state of operations, such insurance is subject to coverage limits and exclusions and may not be available for the risks and hazards to which we are exposed. In addition, such insurance may not be adequate to cover our liabilities or may not be generally available in the future or, if available, premiums may not be commercially justifiable. If we were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if we were to incur such liability at a time when we are not able to obtain liability insurance, our business, results of operations and financial condition could be materially adversely affected.
We may be exposed to currency fluctuations.
Although our revenues and expenses are expected to be predominantly denominated in United States dollars, we may be exposed to currency exchange fluctuations. Recent events in the global financial markets have been coupled with increased volatility in the currency markets. Fluctuations in the exchange rate between the U.S. dollar, the Canadian dollar, the Euro, and the currency of other regions in which we may operate may have a material adverse effect on our business, financial condition and operating results. We may, in the future, establish a program to hedge a portion of our foreign currency exposure with the objective of minimizing the impact of adverse foreign currency exchange movements. However, even if we develop a hedging program, there can be no assurance that it will effectively mitigate currency risks.

Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.
U.S. generally accepted accounting principles ("U.S. GAAP") and related pronouncements, implementation guidelines and interpretations with regard to a wide variety of matters that are relevant to our business, such as, but not limited to, revenue recognition, stock-based compensation, trade promotions, and income taxes are highly complex and involve many subjective assumptions, estimates and judgments by our management. Changes to these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported results.
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Our ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially adversely affect our business and the value of our common stock.
Our reputation is a valuable component of our business. Threats to our reputation can come from many sources, including adverse sentiment about our industry generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our clients. Negative publicity regarding our business, employees, or clients, with or without merit, may result in the loss of clients, investors and employees, costly litigation, a decline in revenues and increased governmental regulation. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results and the value of our common stock may be materially adversely affected.

Increased attention to climate change and ESG matters may adversely impact our business.

We are subject to a variety of risks arising from ESG matters. ESG matters include increasing attention to climate change, climate risk, expectations on companies to address climate change, hiring practices, the diversity of the work force, racial and social justice issues involving the Company’s personnel, customers and third parties with whom it otherwise does business, and investor and societal expectations regarding ESG matters and disclosures.

Risks arising from ESG matters may adversely affect, among other relevant factors. Untilthings, reputation and the time thatmarket price of our stock. Further, we pay dividends,may be exposed to negative publicity based on the identity and activities of those we do business with and the public’s view of the approach and performance of our customers and business partners with respect to ESG matters. Any such negative publicity could arise from adverse news coverage in traditional media and could also spread through the use of social media platforms. Our relationships and reputation with our existing and prospective customers and third parties with which we do business could be damaged if we were to become the subject of any such negative publicity. This, in turn, could have an adverse effect on our ability to attract and retain customers and employees and could have a negative impact on the market price for our stock. Investors have begun to consider the steps taken and resources allocated by financial institutions and other commercial organizations to address ESG matters when making investment and operational decisions. Certain investors are beginning to incorporate the business risks of climate change and the adequacy of companies’ responses to the risks posed by climate change and other ESG matters into their investment theses. These shifts in investing priorities may neverresult in adverse effects on the market price of our stock to the extent investors determine we have not made sufficient progress on ESG matters.

In addition, customers, employees, regulators and suppliers have also been focused on ESG matters. Companies that do not adapt to or comply with ESG expectations and standards, or that are perceived to have not responded appropriately to the growing concern regarding ESG issues, regardless of whether there is a legal requirement to do so, may suffer from reputational damage and other adverse consequences. To the extent ESG matters negatively impact our shareholders willreputation, we may not be able to receivecompete as effectively to recruit or retain employees, which may adversely affect our operations.

Further, growing public concern about climate change has resulted in the increased focus of local, state, regional, national and international regulatory bodies on greenhouse gas emissions and climate change issues. Policy changes and changes in federal, state and local legislation and regulations based on concerns about climate change, including regulations aimed at limiting greenhouse gas emissions and the implementation of "green" building codes, could result in increased capital expenditures on our existing properties (for example, to improve their energy efficiency) without a returncorresponding increase in revenue, resulting in adverse impacts to our results of operations.

In March 2022, the SEC issued proposed rules on their Common Stock unless they sell them.

Our Common Stock is subject toclimate change disclosure requirements that, if adopted as proposed, will require disclosure of extensive and detailed climate-related information, by all registrants, including us. The final rules have not yet been adopted, and the “penny stock” rulesultimate scope and impact of the proposed rules on our business remain uncertain. To the extent new rules, if finalized, impose additional reporting obligations on us, we could face increased costs. The SEC has also announced that it is scrutinizing climate-change related disclosures in public filings, increasing the potential for enforcement if the SEC were to allege that our existing climate disclosures are misleading or deficient. However, any assessment of the potential impact of future climate change legislation, regulations or industry standards, as well as any international treaties and accords, is uncertain given the trading marketwide scope of potential regulatory change.

The current political climate and military actions in Eastern Europe could result in disruption to our securities is limited, which makes transactionsoperations.
Expansion into Europe to meet the demand for our services could be disrupted by the ongoing military actions in Eastern Europe. If we are unable to continue our Common Stock cumbersomeexpansion into Europe, or our expansion requires greater capital than we have budgeted, our operating results and may reduce the value of an investmentour common stock may be materially adversely affected.

Further, the conflict has led to increases in our Common Stock.

the cost of energy and the potential for energy shortages, especially in Europe. The SEC has adopted Rule 15g-9 which establishesEuropean energy crisis escalated in 2022 amid the definitionRussia and Ukraine war, fueling supply uncertainties and increasing the risk of a "penny stock," forenergy shortages across Europe due to the purposes relevant to us, as any equity security that has a market pricelack of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:

·that a broker or dealer approve a person's account for transactions in penny stocks; and

·the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

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In order to approve a person's account for transactionsgas from Russia. This resulted in penny stocks, the broker or dealer must:

·obtain financial information and investment experience objectives of the person; and

·make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribeddecisive measures implemented by the SEC relatingEuropean

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Union to help manage security of supply and establish new sources of gas. Our customers and potential customers experienced a rapid increase in energy costs and our expectation is that the penny stock market, which:

·sets forth the basis on which the broker or dealer made the suitability determination; and

·that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

Generally, brokers may be less willingenergy cost inflation will continue into 2023.


Failure to execute transactions in securities subjectretain our existing workforce and to the "penny stock" rules. This may make it more difficult for investors to dispose of our Common Stock and cause a declineattract qualified new personnel in the current labor market valuecould adversely affect our business and results of operations.

The current U.S. labor shortage has and may continue to impact our Common Stock

ability to hire and retain qualified personnel and may impact our ability to operate our business effectively. We may experience a labor shortage preventing us from filling targeted staffing levels. A labor shortage may also impact our ability to attract qualified new personnel. Additionally, the COVID pandemic has changed the way businesses operate with companies allowing employees to work remotely from home or in hybrid work models. We may not be able to attract, hire or retain qualified personnel if competing companies offer a more desirable work model.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

Item

ITEM 2. Properties.

PROPERTIES

Our principal place of business is located at 1751 Panorama Point, Unit G, Lafayette, Colorado, 80026. This location is leased and consists of approximately 10,000 square feet, including approximately 3,500 square feet of office space and 6,500 square feet of warehouse space. ThisAdditionally, we have six other office leases in the United States and one office lease will expire on August 31, 2021, unless the Company elects to exercise the one-year extension, which is exercisable at the Company’s discretion. We currently pay monthly rent of $11,625, through August 2020, and $12,000 per month for the remaining term of the lease.

We also have a satellite office centrally located in the Denver metro area that allows us to access larger engineering talent pools. On September 1, 2019, we moved our location to 414 14th Street, Suite 250, Denver, Colorado, 80202 and entered into a 28 month sublease for 5,250 square feet of office space. After a two month period of free rent, the sublease has a monthly rent of $8,094 plus utilities for twelve months, then a monthly rent of $8,313 plus utilities for the next twelve months, and a monthly rent of $8,531 plus utilities for the last two months.

Netherlands. We currently do not own any property.

Item

ITEM 3. Legal Proceedings.

LEGAL PROCEEDINGS


From time to time, we become involved in or are threatened with what we considerlegal disputes. While most of these disputes are not likely to have a material effect on our business, financial condition, or operations, the following matters are deemed by the Company to be immaterial disputes. Currently,material either due to the costs of litigation or the potential negative impacts to the Company should these matters not be resolved in our favor:
•Great Green Theory – On June 10, 2022, Emerald filed a lien and brought a suit in the Superior Court of Berkshire, Massachusetts to foreclose on the lien against Great Green Theory Land, LLC and Great Green Theory Cultivation, LLC who are the owners of the land and a construction project in Lee, Massachusetts. Emerald is claiming breach of contract and quantum merit against Great Green Theory for failure to pay approximately $1.3 million in payment applications, of which approximately half of that amount is due and owed to subcontractors on the project. Great Green Theory has filed counterclaims against Emerald claiming liquidated damages of approximately $1.0 million for alleged unjustifiable delays on the project and alleging construction defects in the project. Two subcontractors on the project have brought suit against Emerald for non-payment to them of which Emerald has not received payment from Great Green Theory.
◦Accounts receivable and accounts payable related to Great Green Theory – The selling Emerald shareholders have agreed to indemnify and defend the Company for any litigation or judgement stemming from this lawsuit. The Company has recorded $1.3 million as a receivable and $0.4 million as a payable to sub-contractors on the opening balance sheet as of the date of the acquisition.
◦Legal Costs to collect Great Green Theory accounts receivable – The Company has agreed to split the legal costs of this claim until the funds are recovered or until the claim of liquidated damages is relieved. Total estimated legal costs associated with this claim are approximately $0.3 million. The Company recorded 50% of this amount as a liability on the opening balance sheet as of the date of the acquisition.
•Pullar – urban-gro’s former Chief Financial Officer, George Pullar, filed a suit in the District Court of Boulder County, Colorado against urban-gro and Bradley Nattrass, in his capacity as urban-gro’s CEO, claiming breach of fiduciary duty. The claims stem from a settlement agreement with Mr. Pullar and allegations that Mr. Nattrass and urban-gro failed to share enough non-public material information about urban-gro’s plans for fundraising that would have impacted Mr. Pullar’s decision to enter into the settlement agreement. urban-gro’s director and officer liability insurance carrier has indicated coverage is available to Mr. Nattrass for this suit. We believe we have substantial defenses to the claim asserted in this lawsuit and intend to vigorously defend this action.
•Crest Ventures, LLC – urban-gro was sued on July 29, 2021, by Crest Ventures, LLC in a breach of contract case in the District Court for Arapahoe County, Colorado. The allegations in the action are based on a claim that Crest Ventures, LLC is entitled to commission compensation on the February 2021 uplisting of our common stock to the Nasdaq Capital Market. urban-gro joined as a third-party defendant, Andrew Telsey, for breach of fiduciary duty and fraud. urban-gro also counter-claimed Crest Ventures, LLC for fraud and declaratory judgment. Mr. Telsey was urban-gro's counsel at the
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time and he claims he was also a member of Crest Ventures. urban-gro entered into a finder's fee agreement with Crest Ventures for a potential M&A transaction. Crest Ventures and Mr. Telsey claim the finder's fee agreement also applies to the uplisting onto the Nasdaq. urban-gro denies these claims, believes Crest Ventures and Mr. Telsey are perpetrating fraud, and Mr. Telsey breached his fiduciary duties as legal counsel for urban-gro in the transaction. We believe we have substantial defenses to the claim asserted in this lawsuit and intend to vigorously defend this action.
•Sunflower Bank – urban-gro filed a lawsuit on November 5, 2021, against Sunflower Bank in the District Court for Boulder County, Colorado related to fraudulent wire transfers of approximately $5.1 million that were made from our accounts at Sunflower Bank in October 2021. During 2022, $1.7 million of these funds were returned to us and we received $0.25 million from our insurance company. We sued Sunflower Bank for $3.4 million, exclusive of the insurance proceeds, under a theory of breach of contract, negligence, and breach of UCC standards, as we believed that Sunflower Bank failed to follow industry standard procedures designed to prevent such a theft and was therefore liable for the unrecovered balance. Sunflower Bank filed counterclaims against us for breach of contract and negligence. urban-gro entered into a settlement agreement with Sunflower bank and received $2.4 million in settlement proceeds on March 27, 2023. The case was dismissed with prejudice on March 29, 2023.

There can be no assurance that future developments related to pending claims filed in the future, whether as a result of adverse outcomes or as a result of significant defense costs, will not involved in any legal proceedings, nor are we aware of any legal proceedings threatened or in which any director or officer or any of their affiliates is a party adverse to our Company or hashave a material interest adverse to us.

effect on urban-gro's financial condition, results of operations or cash flows.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

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applicable.

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PART II

Item

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

On February 17, 2021, we completed a public offering of 6,210,000 shares of our common stock, inclusive of the underwriters’ full overallotment, at $10.00 per share for total gross offering proceeds of $62,100,000. In connection with the offering, we received approval to list our common stock on the Nasdaq Capital Market under the symbol "UGRO." Prior to the offering, shares of our common stock were quoted on the OTC Markets Group, Inc. OTCQX Marketplace under the symbol "UGRO." Although our shares were quoted on the OTCQX Marketplace from October 7, 2019 our Common Stock was approved forthrough February 11, 2021, because trading on the OTCQX underMarketplace was infrequent and limited in volume, the prices at which such transactions occurred did not necessarily reflect the price that would have been paid for our common stock in a more liquid market.
The trading symbol UGRO.

price of our common stock has been, and may continue to be, subject to wide price fluctuations in response to various factors, many of which are beyond our control, including those described in Part I, Item 1A, "Risk Factors."

The following table sets forth the high and low closing bid price information for our Common Stockcommon stock on the Nasdaq Capital Market for the time periods indicated. The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions. Trading activity for our Common Stockcommon stock on the OTCQX Marketplace can be found at www.otcmarkets.com.

PeriodLowHigh
October 7, 2019 thru December 31, 2019$1.20$2.55

Holders

www.otcmarkets.com.

Quarter EndedLowHigh
December 31, 2022$2.63 $2.87 
September 30, 2022$2.76 $2.98 
June 30, 2022$4.68 $5.12 
March 31, 2022$10.26 $11.24 
Quarter EndedLowHigh
December 31, 2021$8.78 $14.77 
September 30, 2021$8.51 $17.30 
June 30, 2021$6.75 $10.50 
March 31, 2021$6.90 $13.80 
HOLDERS
As of May 18, 2020,March 16, 2023, we had 13452 holders of record forof our Common Stock.

Dividend Policy

We The number of shareholders of record does not include beneficial owners of our common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries.


DIVIDENDS
Since our inception, we have not paid any dividends sinceon our incorporationcommon stock, and do not anticipate the payment of dividends inwe currently expect that, for the foreseeable future. At present, our policy is to retainfuture, all earnings, if any, to develop and market our products. The payment of dividendswill be retained for use in the development and operation of our business. In the future, will depend upon, among other factors, our earnings, capital requirements,Board may decide, at its discretion, whether dividends may be declared and operating financial conditions.

Reports

paid to holders of our common stock.

REPORTS
We are subject to certain reporting requirements and furnish annual financial reports to our stockholders,shareholders, certified by our independent accountants, and furnish unaudited quarterly financial reports in our quarterly reports filed electronically with the SEC. All reports and information filed by us can be found at the SEC website, www.sec.gov.

Item



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UNREGISTERED SALES OF EQUITY SECURITIES

During the years ended December 31, 2022, 2021 and 2020, we issued the following securities that were not registered under the Securities Act:
•On October 31, 2022 the Company issued 271,875 shares of the Company’s common stock at a price per share of $4.06 for a total value of $1.1 million as part of the Initial Purchase Price of the DVO Acquisition as more fully described in Note 1 to the Condensed Consolidated Financial Statements.
•On April 29, 2022, the Company issued 283,515 shares of the Company’s common stock at a price per share of $8.82 for a total value of $2.5 million as part of the Initial Purchase Price of the Emerald Acquisition as more fully described in Note 1 to the Condensed Consolidated Financial Statements.
•On June 28, 2021, the Company issued 202,066 shares of the Company’s common stock at a price per share of $9.90 for a total value of $2.0 million as part of the initial consideration paid pursuant to the 2WR Purchase Agreement as more fully described in Note 1 to the Condensed Consolidated Financial Statements.
•On February 21, 2020, we entered into a letter agreement (the "Credit Agreement") by and among us, as borrower, urban-gro Canada Technologies Inc. and Impact Engineering, Inc., as guarantors, various lenders, which may include Bridging Finance Inc., as administrative agent for the lenders (the "Agent"). As additional consideration for the entering into the Credit Agreement, we issued 83,333 shares of our common stock and warrants to purchase 20,746 shares of common stock with an exercise price of $14.46 per share to the Agent. We relied upon the exemption from registration provided by Section 4(a)(2) of the Securities Act to issue the securities.
•On December 15, 2020, we signed a $1,854,500 convertible note (the "Note") by and among us, as borrower, and various lenders, which may include Bridging Finance Inc., as lender (the "Bridge Financing"). The Bridge Financing was a combination of $1,354,500 received on November 20, 2020, and an additional $500,000 received on December 15, 2020. The lenders in our Bridge Financing were a combination of our Board, our current investors and two new institutional funds. In connection with the Bridge Financing, an outstanding $1,000,000 promissory note and $4,500 interest accrued thereon was converted into the Notes. The Notes were issued in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act. The Notes carried interest at the rate of 12% and were scheduled to mature on December 31, 2021. Pursuant to the mandatory conversion provisions therein, the Notes plus accrued interest of $53,725 were converted into 254,430 shares of common stock upon completion of our 2021 public offering.

The foregoing issuances of restricted shares of common stock were issued under Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. The Company believes the issuance of the foregoing restricted shares was exempt from registration as a privately negotiated, isolated, non-recurring transaction not involving a public solicitation. No commissions were paid regarding the share issuances, and the share certificates were issued with a Rule 144 restrictive legend.

Purchase of Equity Securities by Issuer and Affiliated Purchasers

The following table summarizes purchases by us of our common stock during the during the indicated quarters and months, and year ended December 31, 2022:

PeriodTotal number of shares purchasedAverage price paid per shareTotal number of shares purchased as part of publicly announced plans or programsMaximum number (or approximate dollar value ) of shares that may be purchased under the plan(s)
First quarter of 2022419,088 9.00924,003 $18,333 
Second quarter of 2022— — 924,003 $18,333 
Third quarter of 202263,123 2.90987,126 $1,835,063 
October 1 - October 31, 202273,784 3.621,060,910 $1,567,666 
November 1 - November 30, 202229,690 3.641,090,600 $1,459,466 
December 1 - December 31, 20229,233 3.251,099,833 $1,429,458 
Total594,918 7.331,099,833 $1,429,458 
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The Company’s Board has authorized the Company to repurchase common stock through a variety of methods, including open market repurchases, purchases by contract (including, without limitation, 10b5-1 and 10b-18 plans), and/or privately negotiated transactions. The amount, timing, or prices of repurchases, may vary based on market conditions and other factors. The program does not have an expiration date and can be modified or terminated by the Board at any time. On May 24, 2021, the Board authorized a stock repurchase program to purchase up to $5.0 million of outstanding shares of the Company’s common stock. On January 18, 2022, the Board authorized a $2.0 million increase to the stock repurchase program, to a total of $7.0 million. On February 2, 2022, the Board authorized an additional $1.5 million increase to the stock repurchase, to a total of $8.5 million. On September 12, 2022, the Board authorized an additional $2.0 million increase to the stock repurchase program, to a total of $10.5 million. Since inception of the stock repurchase programs, the Company has repurchased 1.1 million shares at an average price per share of $8.25 for a total of $9.1 million. In February 2021, the Company repurchased 350,000 shares of common stock with an average price per share of $8.50, for a total repurchase of $3.0 million, outside of any stock repurchase or publicly announced program.
ITEM 6. Selected Financial Data.

As a smaller reporting company, we are not required to provide this information.

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[RESERVED]

Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our results of operations and financial condition should be read in conjunctiontogether with our consolidatedthe financial statements and related notes theretoand the other financial information included herein. In connection with,elsewhere in this Report. Such discussion and because we desire to take advantageanalysis reflects our historical results of the “safe harbor” provisionsoperations and financial position. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussionvarious factors, including those set forth under "Risk Factors" and "Cautionary Information about Forward-Looking Statements" and elsewhere in this reportReport. All share and in any other statement made by, or on our behalf, whether or not in future filings withper share amounts presented herein have been restated to reflect the Securities and Exchange Commission. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, manyimplementation of which are beyond our control and manythe 1-for-6 reverse stock split as if it had occurred at the beginning of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on our behalf. We disclaim any obligation to update forward looking statements.

Overview

the earliest period presented.

OVERVIEW AND HISTORY – SEE "ITEM 1. BUSINESS" FOR A FURTHER DESCRIPTION OF OUR HISTORY AND BACKGROUND
urban-gro is a leadingan integrated professional services and 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, design services company that integrates complex environmental equipment systems to create high-performance indoor cultivation facilities for the global commercial horticulture market. Our custom tailored, plant-centric approach to design, procurement and integration, provides a single point of accountability across all aspects of indoor growing operations. Our solution offers functionality that helpsand construction design-build solutions to customers manageoperating in the entire cultivation lifecycle, from facility engineeringCEA and design to operationCommercial sectors. In the CEA sector, our clients include operators and day-to-day management. We offer a full range of custom services that are integrated with select cultivation equipmentfacilitators in both the cannabis and product solutions, which we primarily source from third party technologyproduce markets in the United States, Canada, and manufacturing partners but also develop in-house.

Our service offerings include full facility programming, engineering and design services, start-up facility and equipment commissioning services, facility optimization services and IPM planning and strategy services. Complementing these services,Europe. In the Commercial sector, we work with customers to source an integrated suite of select cultivation equipment systemsleading Food and crop management products, which include: (1) environmental controls, fertigation, and irrigation distribution systems; (2) freshwater, wastewater, and condensation treatment systems; (3) purpose-built HVAC solutions; (4) light emitting diode (“LED”), high-pressure sodium (“HPS”) and ceramic metal halide (“CMH”) lighting systems; (5) rolltop, multi-tier, and automated container benching systems; (6) odor mitigation & microbial reduction systems; (7) air flow systems; (8) industrial spray applicators; (9) pesticides and bio-controls; (10) plant nutrition products; (11) substrate and coco bag solutions; and (12) our Soleil® technology data analytics platform that includes wireless environmental & substrate sensing and remote monitoring and support.

We primarily market and sell our products and services to operators of commercial indoor cultivation facilitiesBeverage CPG companies in the United States, and Canada. To date, our primary customer base has been comprised of indoorclients in other commercial cultivators seeking to grow high-quality cannabis crops. Since launching the engineeringsectors including healthcare, higher education, and design division in 2018,hospitality. During 2021 and 2022, we have designed and assisted in the build-out of over 200+ projects for some of the largest independent and multi-state operators (MSOs) in both the United States and Canada. With Grow2Guys’ experience on over 300 projects, our engineering and design teams have combined experience of over 500 projects.

Although the rapidly expanding cannabis market has been our target market and substantially all of our revenues to date have been generated from customers in the cannabis industry, we are seeking to diversify our customer base by expanding into other segments of the indoor horticultural market, including targeting cultivators of high value crops such as tomatoes, strawberries, chilies, peppers, and leaf lettuce. During 2019, we also began exploring the potential demand for our solutions in select countries, including those within Latin America and Europe.

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RECENT DEVELOPMENTS

As the cannabis industry has matured, so has the scrutiny by the capital markets. Both investors and analysts are evaluating companies and their focus on profitability. In August 2019, due to liquidity constraints, we commenced targeted cost reduction initiatives to focus on our company’s core services. We believe these targeted efforts will reduce our ongoing operating expenses, including general and administrative costs, as follows:

·Reduced employee headcount by 15, which we expect to result in future annual savings of up to $1.8 million, including benefits and travel;

·Reduced annual marketing expenditures by $0.5 million by limiting participation in tradeshows and outsourced marketing functions;

·Eliminated outsourced product development, which we spent approximately $0.3 million on during the year ended December 31, 2019; and

·Reduced corporate functions and activities, which is expected to result in future annual savings of up to $0.2 million.

Credit Agreement

On February 21, 2020, we entered into a letter agreement (the “Credit Agreement”) by and among the Company, as borrower, urban-gro Canada Technologies Inc. and Impact Engineering, Inc., as guarantors, the lenders party thereto (the “Lenders”), and Bridging Finance Inc., as administrative agent for the Lenders (the “Agent”). The Credit Agreement, which is denominated in Canadian dollars (C$), is comprised of (i) a 12-month senior secured demand term loan facility in the amount of C$2.7 million ($2.0 million), which was funded in its entirety on the closing date (the “Term Loan”); and (ii) a 12-month demand revolving credit facility of up to C$5.4 million ($4.0 million), which may be drawn from time to time, subject to the terms and conditions set forth in the Credit Agreement and described further below (the “Revolving Facility,” and together with the Term Loan, “the Facilities”).

The final maturity date of the Facilities is the earlier of (i) demand, and (ii) the date that is 12 months after the closing date, with a potential extension to the date that is 24 months after the closing date (the “Maturity Date”). The Facilities bear interest at the annual rate established and designated by the Bank of Nova Scotia as the prime rate, plus 11% per annum. Accrued interest on the outstanding principal amount of the Facilities will be due and payable monthly in arrears, on the last business day of each month, and on the Maturity Date.

The Revolving Facility may be borrowed and re-borrowed on a revolving basis by us during the term of the Facilities, provided that borrowings under the Revolving Facility will be limited by a loan availability formula equal to the sum of (i) 90% of insured accounts receivable, (ii) 85% of investment grade receivables, (iii) 75% of other accounts receivable, (iv) 50% of eligible inventory, and (v) the lesser of C$4.05 million ($3.0 million) and (A) 75% of uncollected amounts on eligible signed equipment orders for equipment systems contracts and (B) 85% of uncollected amounts on eligible signed professional services order forms for design contracts. The Revolving Facility may be prepaid in part or in full without a penalty at any time during the term of the Facilities, and the Term Loan may be prepaid in full or in part without penalty subject to 60 days prior notice in each case subject to certain customary conditions. As of April 30, 2020, C$0.4 million ($0.3 million) of the Revolving Facility was available for future borrowings.

We used a portion of the proceeds from the Term Loan to pay the Agent a commitment fee in the amount of C$162,000 ($116,000). Pursuant to the Credit Agreement, we will be required to pay the Agent an annual administration and monitoring fee in the amount of C$32,400 ($23,000) plus applicable taxes. As additional consideration for the entering into the Credit Agreement, we issued 500,000 shares of Common Stock on the closing date to the Agent, or the Lenders or their nominee, in each case as directed by the Agent. In addition, we utilized a portion of the proceeds from the Term Loan to refinance existing indebtedness, including a $2.0 million loan with Hydrofarm Holdings Group, Inc., dated December 6, 2018. We terminated the Hydrofarm Loan Agreement concurrently with the closing of the transactions contemplated by the Credit Agreement. Remaining proceeds from the Facilities are expected to be used (i) to pay down existing debt obligations and (ii) for general working capital purposes.

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The obligations of the Company under the Facilities are secured on a first lien basis (subject to certain permitted liens as set forth in the Credit Agreement) by substantially all of the assets of the Company and certain wholly-owned subsidiaries of the Company, as well as a limited recourse personal guarantee of Bradley Nattrass, our Chief Executive Officer (“CEO”).

The Credit Agreement also contains customary provisions, representations, warranties and events of default for facilities of this nature and affirmative and negative covenants, including without limitation, covenants relating to maintenance of collateral, reorganization and change of control transactions, creation of liens and incurrence of indebtedness.

Amendment of Promissory Note and Subordination Agreement

In connection with the execution of the Credit Agreement, on February 21, 2020, we entered into an agreement to amend the promissory note (the “Promissory Note”) dated October 18, 2018, as amended on May 20, 2019, between the Company and Cloud9 Support Inc. (“Cloud9”), an entity owned by James Lowe, a director of the Company (the “Amending Agreement”). Pursuant to the Amending Agreement, Cloud9 agreed to extend the maturity date of the promissory note from December 31, 2019 to the date which is the earlier of 60 days following the date: (a) on which demand for repayment is made by the Lender under the Credit Agreement; or (b) which is the Maturity Date of the Credit Agreement.

In addition, on February 25, 2020, the Company entered into a subordination, postponement and standstill agreement with Cloud9 (the “Subordination Agreement”) pursuant to which Cloud9 agreed to postpone and subordinate all payments due under the Promissory Note until the Facilities have been fully and finally repaid. The term for the Subordination Agreement will continue in force as long as the Company is indebted to the Agent or Lenders under the Credit Agreement. In consideration for Cloud9’s agreement to extend the maturity date of the Promissory Note and to enter into the Subordination Agreement, we issued 100,000 shares of common stock to Mr. Lowe as designee of Cloud9.

COVID-19 Pandemic

In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. In January 2020, this coronavirus spread to other countries, including the United States, and efforts to contain the spread of this coronavirus intensified. In March 2020, the World Health Organization declared the outbreak of the coronavirus a pandemic. We are a business that supplies other essential businesses with support and supplies necessary to operate and we therefore believe we are an essential business allowed to continue operating under the Stay-At-Home Orders issued by many states and cities. However, the extent to which the COVID-19 pandemic impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact. The outbreak and any preventative or protective actions that governments or we may take in respect of COVID-19 may result in a period of business disruption, reduced customer business and reduced operations.

Due to the uncertainty and adverse impact on our operations and financial condition resulting from the outbreak of COVID-19, we took the following actions:

·In March 2020, we began executing a substantial reduction in discretionary marketing and general & administrative expenses;

·On March 30, 2020, we reduced our headcount by 13 people (27%), from 48 to 35, by terminating ten employees and furloughing three other employees, including one member of our leadership team;

·Effective April 6, 2020, we reduced compensation for almost every remaining employee, including a 20% reduction for the senior members of our leadership team.

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acquisitions:

•July 2021 - Three affiliated architecture design companies (the "2WR Entities")

The effects from the COVID-19 pandemic began in the latter portion of the first quarter of 2020; therefore, there was no impact to our 2019 results of operations, financial condition and cash flows discussed in more detail herein. Any resulting financial impact cannot be reasonably estimated at this time but may materially affect our business, financial condition, results of operations, and cash flows.

Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

On March 27, 2020, the CARES Act was enacted. The CARES Act is an approximate $2 trillion emergency economic stimulus package passed in response to the coronavirus outbreak. The CARES Act, among other things, includes broad sweeping provisions such as direct financial assistance to Americans in the form of one-time payments to individuals; aid to businesses in the form of loans and grants; and efforts to stabilize the U.S. economy and keep Americans employed in general. On

•April 16, 2020, we received a loan in the amount of $1,020,600 under the Paycheck Protection Program (“PPP”2022 - A construction design-build firm ("Emerald") of the CARES Act. The PPP provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. The PPP provides a mechanism for forgiveness of up to the full amount borrowed after eight weeks as long as the borrower uses the loan proceeds during the eight-week period after the loan origination for eligible purposes, including payroll costs, certain benefits costs, rent and utilities costs or other permitted purposes, and maintains its payroll levels, subject to certain other requirements and limitations. The amount of loan forgiveness is subject to reduction, among other reasons, if the borrower terminates employees or reduces salaries during the eight-week period. The interest rate on the loan is 1.0% per annum. Payments of principal and interest are deferred for seven months from the date of the loan (the “Deferral Period”
•October 2022 - An engineering firm ("DVO"). Any unforgiven portion of the PPP Loan is payable over the two-year term, with payments deferred during the Deferral Period. The Company is permitted to prepay the loan at any time without payment of any premium.

RESULTS OF OPERATIONS

We generate revenue from (i) engineering design service fees received for the engineering and design of cultivation facilities and complex equipment systems, (ii) the sale, integration, and commissioning of these equipment systems, and (iii) selling consumable products and professional consulting services once facilities are operational.


Comparison of Results of Operations for the years ended December 31, 2019 compared to 2018

2022 and 2021


During the year ended December 31, 2019,2022, we generated revenues of $24.2$67.0 million compared to revenues of $20.1$62.1 million during the year ended December 31, 2018,2021, an increase of $4.1$4.9 million, (21%)or 8%. While thisThis increase in revenues is partially attributable to the general growthnet result of the following changes in individual revenue components:
•Construction design-build revenues increased $19.8 million as a result of the acquisition of Emerald;
•Services revenue increased $7.8 million, primarily from the acquisition of the 2WR Entities;
•Equipment systems revenue decreased $22.2 million due to negative market conditions in the cannabis industry in North America,sector and a corresponding increasereduction in the demand for our solutions, we believe that our increased marketing effortscapital equipment spending by customers; and industry demand for large, environmentally controlled, grow facilities primarily contributed to the increase in our revenues. The increase in
•Other revenue primarily resulted from an increase of $4.3 million in sales of cultivation equipment, an increase of $2.2 million in professional services, an increase of $0.8 million in environmental sciences revenues offset by a decrease in sales of complex equipment systems and other revenue of $3.2decreased $0.5 million. The overall increase in our revenues was primarily driven by an increase in the number of sales that we generated.

In 2019, we implemented a strategic initiative to more closely align with our customers and sell an all-encompassing enterprise platform solution. This solution is a full service consultative integrated facility package for interior cultivation design. Supporting this directive, for

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During the year ended December 31, 2019, the Company secured engineering design service contracts for 76 projects, totaling 1,914,030 square feet.

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Cost2022, cost of sales increasedrevenues was $52.8 million compared to $17.6$47.4 million during the year ended December 31, 2019, compared to $13.9 million during the year ended December 31, 2018,2021, an increase of $3.7$5.47 million, (27%)or 12%. This increase wasis directly relatedattributable to anthe increase in revenue from our lower margin equipment sales, change in salary allocation, and an increase in payables for contractors related to our design services.

revenues indicated above.


Gross profit increased to $6.6was $14.2 million (27%(21% of revenue) during the year ended December 31, 2019,2022, compared to $6.2$14.8 million (31%(24% of revenue) during the year ended December 31, 2018.2021. Gross profit as a percentage of revenuerevenues decreased overall due to increased salesthe offsetting effects of the following: initiation of lower margin products, primarily lightingconstruction design-build revenue (10% gross profit margin); margins on equipment systems during 2019.

revenue, which made up 89% of total revenues in 2021 and 50% of total revenues in 2022, declined from 24% in 2021 to 16% in 2022; and an increase in services revenue which had a 52% gross profit margin in 2022.


Operating expenses increased by $11.9 million, or 79%, to $12.5$26.8 million for the year ended December 31, 2019,2022 compared to $10.0$15.0 million for the year ended December 31, 2018, an2021. This increase of $2.5was due to:
•a $7.1 million (25%). General and administrative expense, excluding amortization of broker issuing costs and broker warrants associated with our offering of convertible debentures of $0.4 million, increased by $1.5 million (19%), due primarily to our expanding work force. Many of our new employees are members of management, hold advanced degrees, and are expertsincrease in their area of focus, which increased compensation expense. Stock compensation expense increased by $0.6 million primarily as a result of the timing of vesting of stock grants and stock options previously issued under our stock grant and stock option programs.

As discussed above in “Recent Developments”, beginning in August 2019, due to liquidity constraints, we implemented certain cost reduction initiatives that we anticipate will reduce our future operating expenses, including general and administrative costs.

Interestexpenses due to an increase in personnel, salaries, marketing, and travel expenses attributable to the acquisitions, investments made to service our backlog and future growth, and expansion into Europe;

•a one-time $3.3 million business development expense excludingrelated to satisfying a lighting issue encountered by a major customer;
•a $0.7 million increase in stock-based compensation expense due to increased personnel; and
•a $0.8 million increase in intangible asset amortization related to the convertible debentures of $1.3acquisitions.

Non-operating expense was $3.0 million infor the year ended December 31, 2019, was2022, compared to $0.7 million compared to $0.1 million incurred duringfor the year ended December 31, 2018,2021, an increase of $2.3 million. This increase was primarily due to a $2.7 million expense from the impairment of the Edyza investment of $1.7 million and an impairment recorded upon settlement of a wire fraud receivable of $1.0 million, as well as a result$0.4 million expense recognized from the remeasurement of increased debt.

contingent consideration from the 2WR acquisition.

As a result of the above, we incurred a net loss of $8.4$15.3 million for the year ended December 31, 2019 ($0.322022, or a net loss per share)share of $1.44, compared to a net loss of $3.9$0.9 million for the year ended December 31, 2018 ($0.162021, or a net loss per share).share of $0.09.
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NON-GAAP FINANCIAL MEASURES
The Company uses the supplemental financial measure of Adjusted Earnings before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") as a measure of our operating performance. Adjusted EBITDA is not calculated in accordance with U.S. GAAP and it is not a substitute for other measures prescribed by U.S. GAAP such as net income (loss), income (loss) from operations, and cash flows from operating activities. We define Adjusted EBITDA as net income (loss) attributable to urban-gro, Inc., determined in accordance with U.S. GAAP, excluding the effects of certain operating and non-operating expenses including, but not limited to, interest expense/income, income taxes/benefit, depreciation of tangible assets, amortization of intangible assets, impairment losses, unrealized exchange gains/losses, debt forgiveness and extinguishment, stock-based compensation expense, acquisition costs, and other nonrecurring expenses that we do not believe reflect our core operating performance.
Our Board and management team focus on Adjusted EBITDA as a key performance and compensation measure. We believe that Adjusted EBITDA assists us in comparing our operating performance over various reporting periods because it removes from our operating results the impact of items that our management believes do not reflect our core operating performance.
The following table reconciles net loss attributable to the Company to Adjusted EBITDA for the periods presented:
Years Ended December 31,
20222021
Net loss$(15,277,909)$(875,667)
Interest expense54,579 334,056 
Interest expense – beneficial conversion of notes payable— 636,075 
Interest income(329,012)— 
Income tax benefit(322,092)— 
Depreciation and amortization1,483,065 495,276 
EBITDA$(14,391,369)$589,740 
  
Loss on extinguishment of debt— 790,723 
PPP loan forgiveness— (1,032,316)
Non-recurring legal fees352,173 126,246 
One-time employee expense819,089 125,000 
Contingent consideration436,905 – 
Business development3,299,864 — 
Impairment loss2,660,934 — 
Stock-based compensation2,571,785 1,840,913 
Transaction costs347,317 238,495 
Adjusted EBITDA$(3,903,302)$2,678,801 
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Backlog

Backlog is a financial measure that generally reflects the dollar value of revenue that the Company expects to realize in the future. Although backlog is not a term recognized under U.S GAAP, it is a common measure used by companies operating in our industries. We report backlog for the following revenue categories: (i) Equipment Systems; (ii) Construction Design-Build; and (iii) Services. We define backlog for Equipment Systems and Services as signed contracts, with Equipment Systems contracts generally requiring receipt of a customer deposit prior to being included in backlog. Construction Design-Build backlog is comprised of construction projects once the contract is awarded and to the extent we believe funding is probable. Our Construction Design/Build backlog consists of uncompleted work on contracts in progress and contracts for which we have executed a contract but have not commenced the work. For uncompleted work on contracts in progress, we include (i) executed change orders, (ii) pending change orders for which we expect to receive confirmation in the year endedordinary course of business, and (iii) claims that we have made against our customers for which we have determined we have a legal basis under existing contractual arrangements and as to which we consider collection to be probable.

Backlog for each of our revenue categories as of December 31, 2019, $4.2 million of this loss relates to non-cash expenses compared to $1.4 million of non-cash expenses incurred2022 and December 31, 2021 is reflected in the year endedfollowing tables:

December 31, 2022
CEACommercialTotalRelative Percentage
(in millions)
Equipment systems$5 $— $5 5 %
Services4 2 6 6 %
Construction design-build (1)
67 15 82 88 %
Total backlog$76 $17 $93 100 %
Relative percentage82 %18 %100 %
Note: Percentages may not add up due to rounding.
(1) Construction design-build revenue and backlog relate to the operations of Emerald, which was acquired by the Company on April 29, 2022.
December 31, 2021
CEACommercialTotalRelative Percentage
(in millions)
Equipment systems$25 $— $25 83 %
Services3 2 5 17 %
Total backlog$28 $2 $30 100 %
Relative percentage93 %7 %100 %
Note: Percentages may not add up due to rounding.

Historically, the majority of our Equipment Systems and Services backlog has been retired and converted into revenue within two quarters. At December 31, 2018.

Liquidity2022, we expected approximately 60% of our Construction Design-Build backlog to be completed in the next 12 months. At December 31, 2022, one customer accounted for 46% of total backlog.


Certain Construction Design-Build contracts contain options that are exercisable at the discretion of our customer to award additional work to us, without requiring us to go through an additional competitive bidding process. In addition, some customer contracts also contain task orders that are signed under master contracts pursuant to which we perform work only when the customer awards specific task orders to us.

Contracts in our Construction Design-Build backlog may be canceled or modified at the election of the customer. Many Construction Design-Build projects are added to our contract backlog and Capital Resources

completed within the same fiscal year and therefore may not be reflected in our beginning or quarter-end Construction Design-Build backlog amounts.

LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2019,2022, we had working capital of $10.3 million, compared to working capital of $34.5 million as of December 31, 2021, a decrease of $24.2 million. This decrease in working capital was primarily due to a decrease in cash orof $22.6 million (which is further detailed below) and the net effects of reductions in customer deposits of $10.8 million and prepaid expenses and other current assets of $7.4 million. The reductions in customer deposits and prepaid expenses and other current assets
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corresponds to a reduction in customer orders for equipment systems which is reflected in the reduction in equipment systems backlog from December 31, 2021 to December 31, 2022 outlined in Backlog above. Due to the acquisition of Emerald in 2022, the Company includes in working capital contract receivables and liabilities related to construction projects. These construction working capital balances are described in further detail in our consolidated financial statements, including the accompanying notes.
As of December 31, 2022, we had cash equivalents were $448,703,of $12.0 million, which represented a decrease of $730,149$22.6 million from $34.6 million as of December 31, 2018.

Since inception, we have incurred significant operating losses and have funded our operations primarily through issuances of equity securities, debt, and operating revenue.2021. As of December 31, 2019,2021, we had cash of $34.6 million, which represented an accumulated deficitincrease of $16,890,626, a working capital deficit of $7,318,980, and negative stockholders’ equity of $5,008,334. See “Recent Developments” above regarding certain cost reduction initiatives that we implemented in August 2019 to focus on our company’s core services and reduce our operating costs and general and administrative expenses. Notwithstanding these measures, there remain risks and uncertainties regarding our ability to generate sufficient revenues to pay our debt obligations and accounts payable when due. These risks and uncertainties raise substantial doubt about our ability to continue as a going concern within one year after the date that the consolidated financial statements in connection with this Report are issued. The consolidated financial statements included in this Report have been prepared on a going concern basis and do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might result from the outcome of this uncertainty. Our ability to continue as a going concern is dependent upon, among other things, our ability to generate revenue, control costs and raise capital. Other than the amount availability pursuant to the Revolving Facility, we do not currently have an agreement with any third party to provide us with such financing and there can be no assurances that we will be able to raise any capital on commercially reasonable terms, or at all. If we require additional capital and are unable to raise the same, it could have a material negative impact on our results of operations.

Although we are not actively engaged in the production of cannabis, federal law prohibitions on the cannabis industry in the United States inhibit our ability to establish traditional banking support and opportunities. Specifically, conventional banks are currently unwilling to provide us with any financing normally available to growth stage companies similar to ourselves, including purchase order financing. As a result, we have been forced to finance our expansion primarily by raising capital privately, as well as through private debt and operating capital. This has placed a significant impediment to our cash flows. However, as described above in “Recent Developments”, on February 21, 2020, we entered into the Credit Agreement, providing for a 12-month senior secured demand term loan facility in the amount of C$2.7 million ($2.0 million) and a 12-month demand revolving credit facility of up to C$5.4 million ($4.0 million). Our failure to obtain additional debt or equity financing in the future could have a negative impact on our ability to continue as a going concern or to grow and expand our operations, which will have a negative impact on our anticipated results of operations.

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Effective January 9, 2019, we executed a letter agreement with 4Front Capital Partners, Inc., Toronto, Canada (“4Front”), whereby 4Front agreed to act as our exclusive placement agent in connection with a private placement offering. Beginning in March 2019, 4Front initiated an offering (the “Offering”) of up to $6.0$34.4 million from the sale$0.2 million as of Units, with each Unit consisting of a $1,000 Convertible Debenture (the “Debentures”)December 31, 2020. Changes in cash during 2022 and Common Stock Purchase Warrants (the “Warrants”) to purchase 207.46 shares of our Common Stock at $3.00 per share for a period of two years from the purchase date. The Debentures were due May 31, 2021 and bore interest at 8%, compounded annually, with interest due at maturity. On October 16, 2019, the $2.6 million in Debentures plus $92,037 in accrued interest were converted into 1,102,513 Common Shares at $2.41 per share pursuant to their terms as a result of our registration of the securities on a registration statement that was declared effective on such date. The Warrants contain a mandatory exercise provision if the weighted average share price of our Common Stock exceeds $5.00 per share for a period of five consecutive days.

are discussed below.

Operating Activities:
Net cash used in operating activities was $2.5$12.6 million during the year ended December 31, 2019, compared2022. This use of cash was the net effect of the net loss of $15.3 million, offset by non-cash expenses of $6.9 million, and a reduction in net operating assets and liabilities of $4.2 million. The $4.2 million reduction in net operating assets and liabilities was due to $2.3the net effects of a $10.8 million decrease in customer deposits, a $1.1 million increase in accounts payable and accrued expenses, a $8.2 million decrease in prepayments and other assets, and a $2.5 million increase in accounts receivable.
Net cash used in operating activities was $1.6 million during the year ended December 31, 2021. This use of cash was the net effect of the net loss of $0.9 million, offset by non-cash expenses of $2.9 million, and a decrease in net operating assets and liabilities of $3.6 million. The $3.6 million decrease in net operating assets and liabilities was due to the net effects of a $10.5 million increase in accounts receivable, an $8.1 million increase in prepayments and other assets, an $8.5 million increase in customer deposits, and a $6.5 million increase in accounts payable and accrued expenses.
Investing Activities:
Net cash used in investing activities was $4.5 million for the year ended December 31, 2018. Operating2022. This use of cash has been positively impacted from an increase in customer deposits as our business continueswas due to grow. At December 31, 2019, we had $2.9 million in customer deposits related to customer orders. We require prepayments from customers before any design work is commenced and before any material is ordered from the vendor. These prepayments are booked to the customer deposits liability account when received. Our standard policy is to collect the following before action is taken on a customer order: 50% deposit; and the remaining 50% payment made prior to shipping. We expect customer deposits to be relieved from the deposits account no longer than 12 months for each project. At December 31, 2019, we had $1.3 million in prepayments and advances. This is primarily comprised of prepayments to vendors to initiate orders. We do not have trade payable terms with most of our vendors and as a result, we are required to prepay a portion or all of the total order. Due to the increase in customer projects we had increased prepayments to order materials from vendors.

Net cash used in investing activities was $1.1$0.6 million for the year ended December 31, 2019, compared to $1.3purchase of fixed assets needed for our growing workforce and $3.9 million during the year ended December 31, 2018. Historically,in net cash has been used to increase our investments in strategic partnershipsacquire Emerald and to acquire property and equipment.DVO. We do not anticipate using significant cash in the future to invest in strategic partnerships. We will continue to have ongoing needs to purchase property and equipment to maintain our operations. We havehad no material commitments for capital expenditures as of December 31, 2019.

2022.

Net cash provided by financingused in investing activities was $2.9$8.3 million for the year ended December 31, 2019,2021. This use of cash was due to $5.5 million from the acquisition of the 2WR Entities, $2.5 million to acquire an investment in XS Financial and $0.3 million for the purchase of fixed assets.
Financing Activities:
Net cash used by financing activities was $5.5 million for the year ended December 31, 2022, compared to $3.1$44.3 million cash provided by financing activities during the year ended December 31, 2018.2021. Cash providedused from financing activities during the year ended December 31, 20192022 primarily relates to $2.6$4.4 million in proceeds we received from our Offering of Units in addition to a short term note payable for $1.0 million. Unless we revise the terms of our existing outstanding debt, including the Facilities, we will need to make significant paymentsused in the future to pay off these outstanding obligations.

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In October 2018, we issued arepurchase of common stock and $1.0 million unsecured note payable to Cloud9 Support, Inc. (“Cloud9”), an entity ownedpaid for acquisition related contingent consideration.

Net cash provided by James Lowe, a director, which became due April 30, 2019. The loan had a one-time origination fee of $12,500. Interest accrued at the rate of 12% per annum andfinancing activities was paid monthly. As additional consideration$44.3 million for the loan we granted Mr. Lowe, as designee for Cloud9, an option to purchase 30,000 shares of our Common Stock at an exercise price of $1.20 per share, which option is exercisable for a period of five years. The loan is guaranteed by Mr. Nattrass, our CEO, a director and one of our principal shareholders, and by Mr. Gutierrez, one of our principal shareholders, a director, and a former officer of the Company. The due date for the note payable was extended in May 2019 toyear ended December 31, 2019 and2021. This increase in cash was the interest rate was decreased to 9% per year. In consideration for Cloud9 extendingnet effect of $57.7 million raised from the maturity dateissuance of the note and reducing the interest rate, we agreed to issue 10,000 shares of our Common Stock to Mr. Lowe, as designee for Cloud9. In December 2019,common stock in connection with our entry into the Facilities, the due date for the note payable was extendeduplisting to December 31, 2021, and we agreed to issue Mr. Lowe, as designee for Cloud9, an additional 100,000 sharesNasdaq offset by repurchases of Common Stock in exchange for this extension and his agreement to subordinate the loan to the obligations underlying the Facilities.

Gross debt, excluding operating leases, was $3.8common stock of $7.7 million and $3.5 million asrepayments of December 31, 2019 and December 31, 2018, respectively. This represents an increase in gross debt of $0.3 million primarily due$5.8 million.

Material Cash Requirements:
Our material cash requirements include payments on the promissory note associated with the DVO acquisition and operating lease payments. These obligations are described in detail in our consolidated financial statements, including the accompanying notes.
INFLATION

Inflation has resulted in increased costs for our customers. In addition, the U.S. Government has responded to a $0.7 million short term note payable offsetinflation by principal paydowns.

Inflation

Althoughraising interest rates, which has increased the cost of capital for our customers. We believe this has resulted in some customers delaying projects, reducing the scope of projects or potentially canceling projects, as well as increased costs of our operations, are influenced by general economic conditions, we do not believe that inflation had a material effect on ourwhich has negatively impacted the results of our operations during the year ended December 31, 2019.

2022. We maintain strategies to mitigate the impact of higher material, energy and commodity costs, including cost reduction, alternative sourcing strategies, and passing along cost increase to customers, which may offset only a portion of the adverse impact. We believe the current inflationary environment has negatively impacted our customers which has led to delays in our customers starting projects, which in turn has delayed our customers from signing contracts with us.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical Accounting Policies and Estimates

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. See Please refer to Note 2 – Summary of Significant Accounting Policies to set forth immediately following the Notes to Consolidated Financial Statements contained insignature page of this Report for a discussion ofmore information on our significant accounting policies.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

From time

Please refer to time,Recently Issued Accounting Pronouncements in Note 2 – Summary of Significant Accounting Policies set forth immediately following the Financial Accounting Standards Board (“FASB”) or other standards setting bodies issuesignature page of this Report for information on new authoritative accounting pronouncements. Updates to the FASB’s Accounting Standard Codifications (“ASCs”) are communicated through issuance of an Accounting Standards Update ("ASU"). Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our financial statements upon adoption.

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guidance.

In June 2018, the FASB issued ASU 2018-17 Consolidation (ASU 2018-17)- Targeted Improvements to Related Party Guidance for Variable Interest Entities.ASU 2018-17 broadens the scope of the private company alternative to include all common control arrangements that meet specific criteria (not just leasing arrangements). ASU 2018-17 also eliminates the requirement that entities consider indirect interests held through related parties under common control in their entirety when assessing whether a decision-making fee is a variable interest. Instead, the reporting entity will consider such indirect interests on a proportionate basis. ASU 2018-17 is effective for fiscal years beginning after December 15, 2019. The Company is currently assessing the timing and impact of adopting the updated provisions to its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments” (ASU 2016-13), creating ASC Topic 326 – Financial Instruments – Credit Losses. ASU 2016-13 is intended to improve financial reporting by requiring timelier recording of credit losses on financial assets measured at amortized cost basis (including, but not limited to loans), net investments in leases recognized as lessor and off-balance sheet credit exposures. ASU 2016-13 eliminates the probable initial recognition threshold under the current incurred loss methodology for recognizing credit losses. Instead, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The Company will continue to evaluate the extent of the impact of ASU 2016-13 on the Company’s financial position, results of operations and cash flows. With the release of ASU 2019-10, the Company will monitor this impact through the effective date for fiscal years beginning after December 15, 2022.

There are other various updates recently issued by the FASB, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company's financial position, results of operations or cash flows.

Management has reviewed all other recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial condition or the results of our operations.

Off-Balance Sheet Arrangements

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

Item 7a. Quantitative And Qualitative Disclosures About Market Risk

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide this information.

Item

ITEM 8. Financial Statements And Supplementary Data

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary financial information required by this Item are set forth immediately following the signature page and are incorporated herein by reference.

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Item

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None

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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item

ITEM 9A. Controls and Procedures

Disclosure Controls and Procedures

Disclosure Controls and Procedures– CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange ActAct) as of the end of the period covered by this Report.

These controls are designed to ensure that information required to be disclosed in the reports we file or submit pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO to allow timely decisions regarding required disclosure.

Based on this evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of December 31, 2019,2022, at reasonable assurance levels.

We believe that our financial statements presented in this Report fairly present, in all material respects, our financial position, results of operations, and cash flows for all periods presented herein.

Inherent Limitations –

Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. In particular, many of our current processes rely upon manual reviews and processes to ensure that neither human error nor system weakness has resulted in erroneous reporting of financial data.

Changes in Internal Control over Financial Reporting –
There were no changes in our internal control over financial reporting during our fiscal year ended December 31, 2019,2022, which were identified in conjunction with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

This Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Report.

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MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act. Those rules define internal control over financial reporting as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

·Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
·Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and the receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the Company; and
·Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the company’s assets that could have a material effect on the financial statements.

•Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and the receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019.2022 and concluded that the Company’s internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. In making this assessment, our management used the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)("COSO").

Based on its assessment, management has concluded that as

This Report does not include an attestation report of December 31, 2019, our disclosure controls and procedures andregistered public accounting firm regarding internal control over financial reporting were effective, basedreporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in part on the issues discussed above.

this Report.

Item 9b. Other Information

None.

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ITEM 9B. OTHER INFORMATION

None.

ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table sets forth

Information concerning our directors and officers is incorporated by reference to our Definitive Proxy Statement on Schedule 14A to be filed with the names, ages and positionsSEC within 120 days after the end of our executive officers and directors as of May 14, 2020:

NameAgePosition
Bradley J. Nattrass47Chief Executive Officer and Chairman of the Board
Richard (Dick) A. Akright61Chief Financial Officer and Director
Jonathan Nassar50Executive Vice President – Sales
Mark Doherty41Executive Vice President – Operations
Brian Zimmerman59Executive Vice President – Engineering
James H. Dennedy54Director
Lance Galey44Director
Octavio Gutierrez48Director
James R. Lowe(1)40Director
Lewis O. Wilks(1)(2)(3)66Director

Executive Officers

Bradley J. Nattrass is one of our founders and was our Managing Member from March 2014 until March 2017 when we converted to a corporation and he became our Chief Executive Officer and our Chairman. From October 2015 to August 2016, he was the Managing Member of enviro-glo, LLC, a Colorado limited liability company engaged in the manufacturing and branding of commercial lighting products.Previously, from January 2012 through August 2016, he was the Managing Member of Bravo Lighting, LLC, a Colorado limited liability company engaged in the distribution of commercial lighting products. From April 2011 to January 2014, he was a Vice President for Barbeque Wood Flavors, Inc., a Texas corporation engaged in the manufacturing, import and sale of barbeque grilling products. Mr. Nattrass received a Bachelor of Commerce degree from the University of Calgary in marketing in 1995 and an MBA from the University of Phoenix in 2001. Mr. Nattrass brings executive leadership experience, organizational experience, and extensive experience in the industry to the Board. Mr. Nattrass is familiar with the Company’s day-to-day operations and performance and the horticulture industry in general. Mr. Nattrass’ insight into the Company’s operations and performance is critical to Board discussions.

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fiscal year.

Richard (Dick) A. Akright was appointed as our Interim Chief Financial Officer in August 2019 and was appointed as our Chief Financial Officer in December 2019. He was appointed as a director of our company in February 2020. From August 2018 to present, Mr. Akright has been a director with Akright Group International LLC, where he performs financial consulting services for small and mid-sized businesses. From May through July 2018, he was unemployed. From July 2013 through May 2018, he served as Chief Financial Officer for LABS, Inc., a privately held company. Mr. Akright was a director and chair of the Audit Committee for Koala Corporation (Nasdaq: KARE) in 2003. He has served as Chief Financial Officer of companies owned by private equity investors and in the top financial position of corporate divisions of publicly traded companies. He received a Bachelor of Business degree in Accounting from Western Illinois University in 1980 and a Master of Science in Business Administration from Colorado State University in 1989. Mr. Akright is a former chief financial officer who brings more than 20 years of executive leadership experience across a variety of industries. In addition, he brings prior public company director experience to our Board. His prior experience and financial expertise provide the Board with important insights into business operations.

Jonathan Nassar joined urban-gro in September 2018 as Executive Vice President of Sales where he oversees urban-gro’s global sales efforts and “Go to Market” strategy. From October 2016 to present, Jonathan has been a founder in Steelgenix, an advanced building systems company. From December 2014 to December 2016 Jonathan was Senior Vice President of Sales for Documoto, a cloud-based solutions company. Jonathan has over 20 years of technology leadership and sales experience and has also been a real estate developer. Jonathan received a Bachelor of Science in Business Management from Wesley College, Delaware.

Mark Doherty joined urban-gro in March 2016 and was appointed as our Executive Vice President of Operations in December 2019. Prior to his appointment, Mark served urban-gro in the roles of Director of Sales, Director of Project Management and Vice President of Cultivation Technologies. From 2013 until joining the urban-gro team, Mark served as Managing Partner for MedCann Advisors, a consulting firm focused on license acquisition in competitive bid cannabis markets. Mark began his career in controlled environment agriculture in 2010 when he founded Aqua Vita Farms, a 14,000 square foot indoor aquaponic operation producing fish, lettuce, and basil. Mark earned his BS in Business Administration from SUNY Polytechnic Institute and holds an MBA from the State University of New York.

Brian L. Zimmerman was appointed as our Executive Vice President of Engineering in December 2019. Mr. Zimmerman is also President of Impact Engineering, Inc., where he has served since he formed the company in June 1997. The Company acquired Impact Engineering, Inc. in March of 2019. Mr. Zimmerman has over 30 years of experience as a designer, engineer and owner in the commercial HVAC, plumbing and electrical engineering markets. Mr. Zimmerman received a Bachelor of Science Degree in Mechanical Engineering Technology from Metropolitan State University in 1989 and passed the Colorado Professional Engineering Exam in 1992. Mr. Zimmerman is a registered Professional Engineer in Colorado and has Professional Engineering reciprocity in Arizona and California.

Directors

James H. Dennedy was appointed as a director of our Company in August 2018. From January 2017 to present, Mr. Dennedy has served as Director and Chief Financial Officer for Interurban Capital Group, a capital investment and management services company. From May 2011 through January 2017, he was the President and Chief Executive Officer of Agilysys, Inc., a company offering software solutions to the hospitality industry. Mr. Dennedy served as a director for Agilysis, Inc. (Nasdaq: AGYS) from June 2009 to January 2017. Mr. Dennedy received an MA degree in Economics from the University of Colorado, Boulder, an MBA degree from The Ohio State University and a BS degree in Economics from the US Air Force Academy. Mr. Dennedy has extensive financial, executive leadership, and organizational experience. Mr. Dennedy also has experience serving as a director of a public company, which brings important insights into board oversight and corporate governance matters. Mr. Dennedy is chairman of the Company’s Audit Committee and an Audit Committee financial expert with experience in various accounting and financial roles.

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Lance Galey was appointed as a director of our Company in August 2018. Since 2020, Mr. Galey has served as the Chief Software Architect of Autodesk, Inc. From July 2017 to January 2020, Mr. Galey served as Vice President, SaaS Engineering, Oracle Cloud Infrastructure at Oracle. From June 2016 to July 2017, Mr. Galey was Chief Technology Officer for MassRoots, Inc., a publicly traded company providing a technology platform for the cannabis industry. From May 2016 through June 2017, Mr. Galey was the Principal Cloud Architect at Dynamics 365 at Microsoft, Inc. From February 2014 through April 2016, he was Chief Cloud Architect at Autodesk, Inc., where he helped transform their products into strategic SaaS businesses. From June 2012 through February 2014, he was Vice President and Principal Architect at Salesforce.com, where he led the architecture and development of numerous core infrastructure services underlying a large portfolio of Salesforce SaaS applications and was selected as the executive MVP for the technology division of Salesforce.com. Prior to his time at Salesforce, Mr. Galey served as Chief Architect and Head of OpenStack Engineering of Cloud Services for WebEx, a division of Cisco and as the Director of Architecture for the Disney Connected and Advanced Technologies division of The Walt Disney Company. Mr. Galey also served as Senior Program Manager at Microsoft Inc. and began his career at Amazon and Level 3 Communications. He received a Bachelor of Science degree from Regis University in 2004. Mr. Galey is a seasoned executive with technical and management experience in the industry in which the Company operates. Mr. Galey brings vital technological expertise to the Board and provides important insights to our Board regarding the Company’s equipment and product offering and the business development of the Company.

Octavio (“Tavo”) Gutierrez is one of our founders and was one of our Managing Members from March 2014 until March 2017 when we converted to a corporation and he became our Chief Development Officer and a director. In February 2019 he transitioned to a new role as Executive Vice President of International Business. He resigned as our Executive Vice President and was appointed as our Secretary in August 2019 when he ceased full time employment with us. He has since formed Sigmet, LLC, and is focused on expanding various U.S. companies’ presence and market development in Latin America. Starting in October 2015 he has been the Managing Member of enviro-glo, LLC, a Colorado limited liability company engaged in the manufacturing and branding of commercial lighting products. Previously, starting in January 2012 he has been the Managing Member of Bravo Lighting, LLC, a Colorado limited liability company engaged in the distribution of commercial lighting products. From July 2010 through November 2013, he was the Vice President of Operations for Stone Lighting, LLC, an Illinois limited liability company engaged in the material sourcing, manufacturing, assembly, and distribution of premium decorative and low voltage lighting systems. Mr. Gutierrez received a Bachelor of International Business from Universidad Autonoma de Guadalajara in Guadalajara, Mexico.

James R. Lowe was appointed as a director of our Company in August 2018. Mr. Lowe cofounded MJardin Group in 2014 where he served as President of Cultivation, overseeing all cultivation operations through 2017. Mr. Lowe left MJardin Group to become EVP of Operations of GrowForce, a spinout from MJardin Group based in Canada focusing on international cannabis opportunities. Mr. Lowe is no longer an officer of Growforce. Mr. Lowe has served as a director of MJardin Group (CSE: MJAR) (OTCQX: MJARF) since March 2014. Since December 2015, he has also been an owner of Potco LLC, one of the highest grossing single site medical cannabis dispensary and grow facilities in Colorado. He has also been a cultivation advisor for Lightshade Labs, LLC, where he has provided guidance on cultivation operations since 2012. Mr. Lowe is also the owner of Next1 Labs, a vertically integrated extraction and concentrate business with a multi-acre outdoor farm complex and the one of the largest producers of live resin products in the state of Colorado. Lastly, Mr. Lowe entered the legal cannabis market in 2009 as the owner of Cloud9 Support LLC, a retail horticulture supplies and design company that was responsible for over 50 design projects and construction assists while laying the groundwork for future endeavors. Mr. Lowe brings to the Board significant experience in the horticulture and cannabis industry and prior public company director experience within the industry. Mr. Lowe’s extensive knowledge of the industry brings valuable insights to the Board regarding customer demand and product offerings. These views add important insights within discussions of the Board.

Lewis O. Wilks was appointed as a director of our Company in August 2018. Since 2004, Mr. Wilks has been the Senior Managing Partner at Bright Peaks Venture Capital LLC, where he oversees the company’s investments. In addition, since November 2015, he has been the Executive Chairman of NCS Analytics, a Denver based company that is implementing its patent pending, predictive analytics engine to provide financial, regulatory, and audit service to clients with real-time alerts for cash intensive businesses. Since June 2017, he has also been Chairman of FuseIntel, a company doing intelligence sector analytics. From September 1997 to September 2001, he served as the Chief Strategy Officer for Qwest Communications. Mr. Wilks received a Bachelor of Science degree in Computer Science from the University of Central Missouri in 1979. Mr. Wilks brings valuable experience to the Board through his prior management and technical experience. His business understanding and technological background provide the Board with important insights regarding the Company’s operations, product offering and business development.

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To the best of the Company’s knowledge, there are no arrangements or understandings between any director or executive officer and any other person pursuant to which any person was selected as a director or executive officer. There are no family relationships between any of the Company’s directors or executive officers. To the Company’s knowledge, there have been no material legal proceedings as described in Item 401(f) of Regulation S-K during the last ten years that are material to an evaluation of the ability or integrity of any of the Company’s directors or executive officers.

Delinquent Section 16(a) Reports

Section 16(a) of the Exchange Act requires the Company’s directors, executive officers, and any persons who own more than 10% of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the SEC. SEC regulations require executive officers, directors, and greater than 10% stockholders to furnish us with copies of all Section 16(a) forms they file. Based solely on the Company’s review of the copies of such forms furnished or available to the Company, the Company believes that its directors, executive officers, and 10% stockholders complied with all Section 16(a) filing requirements for the year ended December 31, 2019, except as follows: Jonathan Nassar (1 known failure to file); Mark Doherty (1 known failure to file); and Brian Zimmerman (1 known failure to file).

Code of Business Conduct and Ethics

Our Code of Business Conduct and Ethics applies to all of our officers, employees and directors, including our Chief Executive Officer and Chief Financial Officer. We have always conducted our business in accordance with the highest standards of conduct. Full compliance with the letter and spirit of the laws applicable to our businesses is fundamental to us. Equally important are equitable conduct and fairness in our business operations and in our dealings with others. Our Code of Business Conduct and Ethics reflects the foregoing principles. The full text of our Code of Business Conduct and Ethics is published on our website at https://ir.urban-gro.com/investors/.

We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K relating to amendments to or waivers from any provision of the Code of Business Conduct and Ethics applicable to our Chief Executive Officer and Chief Financial Officer by posting such information on our website https://ir.urban-gro.com/investors/.

Corporate Governance Guidelines

The Board has also adopted a set of Corporate Governance Guidelines that reflect our governance principles and our commitment to maintaining high corporate governance standards. The Corporate Governance and Nominating Committee is responsible for periodically reviewing the Corporate Governance Guidelines and the Code of Business Conduct and Ethics and making recommendations on governance issues that should be addressed by the Board.

Audit Committee

Our Board has established an Audit Committee, which as of February 2020 consists of three independent directors, Mr. Dennedy (Chairperson), Mr. Wilks and Mr. Galey. The Audit Committee’s primary duties are to: (1) review and discuss with management and our independent auditor our annual and quarterly financial statements and related disclosures, including disclosure under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the results of the independent auditor’s audit or review, as the case may be; (2) review our financial reporting processes and internal control over financial reporting systems and the performance, generally, of our internal audit function; (3) oversee the audit and other services of our independent registered public accounting firm and be directly responsible for the appointment, independence, qualifications, compensation and oversight of the independent registered public accounting firm, which reports directly to the Audit Committee; (4) provide an open means of communication among our independent registered public accounting firm, management, our internal auditing function and our Board; (5) review any disagreements between our management and the independent registered public accounting firm regarding our financial reporting; (6) prepare the Audit Committee report for inclusion in our proxy statement for our annual stockholder meetings; (7) establish procedures for complaints received regarding our accounting, internal accounting control and auditing matters; and (8) approve all audit and permissible non-audit services conducted by our independent registered public accounting firm.

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The Board has determined that each of our Audit Committee members are independent of management and free of any relationships that, in the opinion of the Board, would interfere with the exercise of independent judgment and are independent, as that term is defined under the enhanced independence standards for audit committee members in the Securities Exchange Act of 1934, as amended, and the rules promulgated thereunder.

The Board has determined that Mr. Dennedy is an “audit committee financial expert,” as that term is defined in the rules promulgated by the SEC pursuant to the Sarbanes-Oxley Act of 2012. The Board has further determined that each of the members of the Audit Committee shall be financially literate and that at least one member of the committee has accounting or related financial management expertise, as such terms are interpreted by the Board in its business judgment.

ITEM 11. EXECUTIVE COMPENSATION

This Item 11 describes the compensation arrangements we have with

Information concerning our named executivedirectors and officers as set forth under the rules of the SEC. Consistent with SEC rules, we are providing disclosure for Bradley J. Nattrass,is incorporated by reference to our Chairman and Chief Executive Officer, and our two other most highly compensated executive officers as of December 31, 2019, Jonathan Nassar, Executive Vice President – Sales, and Mark Doherty, Executive Vice President – Operations.

We have a Compensation Committee comprised of Messrs. Wilks, Dennedy and Galey. Under our Compensation Committee charter, our Compensation Committee determines and approves all elements of executive officer compensation. The Compensation Committee’s primary objectives in determining executive officer compensation are (i) developing an overall compensation package that is at market levels and thus fosters executive officer retention and (ii) aligning the interests of our executive officers with our stockholders by linking a significant portion of the compensation packageDefinitive Proxy Statement on Schedule 14A to performance.

Fiscal Year 2019 and 2018 Summary Compensation Table

The following Fiscal Year 2019 and 2018 Summary Compensation Table contains information regarding compensation for 2019 and 2018 that the Company paid to Mr. Nattrass and its two other most highly compensated executive officers as of December 31, 2019.

Name and Principal Position Year Salary
($)		 Bonus
($)		 Stock
awards
($)(1)		 

Option

awards

($)(1)

 

Non-equity incentive plan compensation

($)

 

Nonqualified deferred compensation earnings

($)

 All other
compensation
($)		 Total
($)
Bradley J. Nattrass 2019 240,962 – – –  –– 19,950(2) 260,912
Chairman of the Board and Chief Executive Officer 2018 202,998 25,000 – –  –– – 227,998
                   
Jonathan Nassar(3) 2019 212,000 – – –  –– – 212,000
Executive Vice President - Sales 2018 53,606 – 125,000 134,406  –– – 313,012
                   
Mark Doherty(4) 2019 148,846 18,000 – 40,545  ––   207,391
Executive Vice President - Operations 2018 161,896 35,000 – –  –– 28,307(5) 225,203
________________________                   

(1)Amounts shown in the columns captioned “Stock awards” and “Option awards” represent the aggregate grant date fair value of the awards computed in accordance with ASC 718. For a description of the assumptions used by the Company to value these awards, see Note 13 to our financial statements included in the Annual Report.
(2)Represents amounts paid to Mr. Nattrass pursuant to a car allowance and health insurance premiums paid on Mr. Nattrass’ behalf.
(3)Mr. Nassar received a restricted Common Stock grant of 125,000 shares on August 18, 2018 and a stock option to purchase 150,000 shares of Common Stock at an exercise price of $1.10 per share on August 18, 2018.
(4)Mr. Doherty received a stock option to purchase 45,000 shares of Common Stock at an exercise price of $1.20 per share on January 1, 2019.
(5)Represents moving expense reimbursements.

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Employee Agreements

We do not have employment agreements with any of our named executive officers.

Equity Incentive Awards

Mr. Nattrass has not received any equity incentive awards.

Mr. Nassar received a restricted Common Stock grant of 125,000 shares on August 18, 2018 that vests proportionately on each August 31 over a 3-year period beginning on August 31, 2019. Mr. Nassar received a stock option grant to purchase 150,000 shares of Common Stock at an exercise price of $1.10 per share on August 18, 2018 that vests proportionately on each August 31 over a 3-year period beginning on August 31, 2019.

Mr. Doherty received a restricted a stock option grant to purchase 45,000 shares of Common Stock at an exercise price of $1,20 per share on January 1, 2019 that vests proportionately on each December 31 over a 3-year period beginning on December 31, 2019.

Retirement Benefits

We provide all qualifying employeesbe filed with the opportunity to participate in our tax-qualified 401(k) plan. The plan allows employees to defer receipt of earned salary, up to tax law limits, on a pre-tax basis. Accounts may be invested in a wide range of mutual funds. The Company has not provided any employer contributions to the plan.

Fiscal Year 2019 Outstanding Equity Awards At Fiscal Year-End Table

The following table lists all of the outstanding equity awards held on December 31, 2019 by each of the Company’s named executive officers. The table also includes the value of awards based on the closing price of the Common Stock on December 31, 2019, which was $1.20 per share.

  Option Awards Stock Awards
Name 

Number of securities underlying unexercised options exercisable

(#)

 

Number of securities underlying unexercised options unexercisable

(#)

 

Equity incentive plan awards: Number of securities underlying unexercised unearned options

(#)

 

Option exercise price

($)

 Option expiration date 

Number of shares or units of stock that have not vested

(#)

 

 

Market value of shares of units of stock that have not vested
($)

 

Equity

incentive

plan awards: Number of

unearned

shares, units or other rights that have not vested

(#)

 Equity
incentive
plan awards: Market or payout value of
unearned
shares, units or other rights that have not vested
($)
Bradley J. Nattrass – – – – – – – – –
                   
Jonathan Nassar 50,000(1) 100,000(1) – $1.20 August 18, 2028 66,667 80,000 – –
                   
Mark Doherty 15,000(2) 30,000(2) – $1.20 January 1, 2029 – – – –
____                  
 (1)Mr. Nassar received a stock option to purchase 150,000 shares of Common Stock at an exercise price of $1.10 per share on August 18, 2018. Such options vest proportionately over three years, commencing on August 31, 2019. 
 (2)Mr. Doherty received a stock option to purchase 45,000 shares of Common Stock at an exercise price of $1.20 per share on January 1, 2019. Such options vest proportionately over three years, commencing on January 1, 2020. 
                      

43

Compensation of Directors

Elements of Director Compensation

Prior to January 2020, non-employee directors were provided with a stock option to purchase 100,000 shares of Common Stock upon their appointment to the Board. All such stock options are subject to vesting proportionately over a 3-year period, commencing on April 30th of each year following the year of the grant. In addition, each director who serves as a member of a standing committee of the Board was entitled to receive an additional stock option to purchase 10,000 shares of Common Stock for each committee on which he or she serves, which options vested atSEC within 120 days after the end of each year of service on the applicable committee. The exercise price for any stock options issued to our non-employee directors will be at least equal to the fair market value on the applicable date of grant. Beginning in January 2020, non-employee directors were granted restricted shares of Common Stock as an annual retainer and for serving as a member of a standing committee. Each director will be required to attend a minimum of 75% of all Board meetings per year in person or telephonically. Directors are reimbursed for travel and other expenses directly associated with Company business. Directors that are also employees of the Company do not receive any additional compensation for their role as a director at this time.

Fiscal Year 2019 Director Compensation Table

The following table provides information regarding director compensation during 2019. Mr. Gutierrez did not receive director compensation as he was an employee during the majority of 2019. Mr. Nattrass’ compensation is reported in the Fiscal Year 2019 and 2018 Summary Compensation Table.

Name Fees Earned or
Paid in Cash
($)		 Stock Awards
($)		 Option Awards
($)(1)(2)		 Non-equity incentive plan compensation
($)		 Change in pension value and nonqualified deferred compensation earnings 

All other compensation

($)

 Total
($)
James H. Dennedy(3)  –   –   17,827   –   –   –   17,827 
Lance Galey(4)  –   –   17,827   –   –   –   17,827 
Octavio Gutierrez  –   –   –   –   –   –   – 
James R. Lowe(5)  –   –   8,913   –   –   –   8,913 
Lewis O. Wilks(6)  –   –   26,740   –   –   –   26,740 

________________________

(1)The amounts in this column represent the aggregate grant date fair value of stock options computed in accordance with Accounting Standards Codification (“ASC”) 718,Compensation—Stock Compensation (“ASC 718”). The fair value of stock options is calculated using the Black-Scholes option-pricing model.

(2)The chart below shows the aggregate number of outstanding restricted stock units and stock options held by each non-employee director as of December 31, 2019.

DirectorRestricted Stock UnitsStock Options
Dennedy–120,000
Galey–120,000
Gutierrez––
Lowe–110,000
Wilks–130,000

(3)Mr. Dennedy received an option under the Company’s 2019 Equity Incentive Plan (the “2019 Plan”) to purchase 20,000 shares at an exercise price of $1.20 for serving on the Audit Committee and Compensation Committee.

(4)Mr. Galey received an option under the 2019 Plan to purchase 20,000 shares at an exercise price of $1.20 for serving on the Compensation Committee and Corporate Governance and Nominating Committee.

(5)Mr. Lowe received an option under the 2019 Plan to purchase 10,000 shares at an exercise price of $1.20 for serving on the Corporate Governance and Nominating Committee.

(6)Mr. Wilks received an option under the 2019 Plan to purchase 30,000 shares at an exercise price of $1.20 for serving on the Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee.

44
fiscal year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The Company’s only outstanding class of voting securities

Information concerning our directors and officers is its Common Stock. The following table sets forth information known to the Company about the beneficial ownership of its Common Stock on May 5, 2020incorporated by (i) each current director and director nominee; (ii) each named executive officer; and (iii) all of the Company’s executive officers and directors as a group. Other than as set forth below, no person known to us beneficially owns 5% or more of the outstanding Common Stock as of May 5, 2020.

Unless otherwise indicated in the footnotes, each person listed in the following table has sole voting power and investment power over the Common Stock listed as beneficially owned by that person. Percentages of beneficial ownership are based on 28,709,312 Common Stock outstanding on May 5, 2020. Unless otherwise indicated in the footnotes, the address for each listed person is urban-gro, Inc., 1751 Panorama Point, Unit G, Lafayette, Colorado 80026.

  Shares Beneficially Owned(1)
Name of Beneficial Owner Number Percent
Bradley J. Nattrass(2) 9,569,684 33%
Richard (Dick) A. Akright 3,125 *
Jonathan Nassar 108,333 *
Mark Doherty 236,242 1%
James H. Dennedy(3) 195,000 1%
Lance Galey 115,000 *
Octavio Gutierrez��9,569,684 33%
James R. Lowe(4) 889,775 3%
Lewis O. Wilks 128,334 *
     
All executive officers and directors as a group (10 persons) 21,315,177 74%

*Less than 1% of the outstanding Common Stock.

(1)Beneficial ownership as reported in the table has been determined in accordance with Rule 13d-3 under the Exchange Act and is not necessarily indicative of beneficial ownership for any other purpose. The number of shares of Common Stock shown as beneficially owned includes shares of Common Stock which may not be beneficially owned but over which a person would be deemed to exercise control or direction. The number of shares of Common Stock shown as beneficially owned includes shares of Common Stock subject to stock options exercisable and restricted stock units that were outstanding on May 5, 2020 and that will vest within 60 days of May 5, 2020. Shares of Common Stock subject to stock options exercisable and restricted stock units that will vest within 60 days after May 5, 2020 are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person.
(2)Mr. Nattrass pledged his 9,569,684 shares of Common Stock to Bridging Finance Inc. as security for loans provided by Bridging Finance Inc. to the Company under a term loan facility and revolving credit facility as further described in Note 17 to the consolidated financial statements included in the Annual report.
(3)Includes 75,000 shares owned by HMG MRB Partners of which Mr. Dennedy is a partner and may be deemed to be the beneficial owner.
(4)Mr. Lowe is the sole equity holder of Cloud9 Support, LLC and as such may be deemed to beneficially own 644,775 shares held by Cloud9 Support, LLC.

45

EQUITY COMPENSATION PLAN INFORMATION

The following table summarizes information about our equity compensation plans as of December 31, 2019. All outstanding awards relatereference to our Common Stock.

Plan category Number of securities to be issued upon vesting of grants and exercise of outstanding options, warrants and rights Weighted-average exercise price of
outstanding options, warrants and rights		 Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plan approved by stockholders(1)  151,000  $1.69   3,328,200 
Equity compensation plan not approved by stockholders(2)  1,963,668  $ 1.14   – 
Total  2,114,668  $1.21   3,328,200 

_________________________

(1)The 2019 Plan was adopted in March 2019.
(2)The Company’s 2018 Equity Incentive Plan was adopted in January 2018.
Definitive Proxy Statement on Schedule 14A to be filed with the SEC within 120 days after the end of our fiscal year.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Certain Relationships

Information concerning our directors and Related Transactions

The Company’s policy requires that any transactions with related parties require a formal agreementofficers is incorporated by reference to our Definitive Proxy Statement on Schedule 14A to be entered into andfiled with the approval ofSEC within 120 days after the Board.

We purchase certain cultivation products from Bravo Lighting, LLC d/b/a Bravo Enterprises (“Bravo”), Bravo Aviation, and Enviro-Glo, LLC (“Enviro-Glo”), distributors of commercial building lighting and other product solutions, which are each controlled by Bradley Nattrass, our Chief Executive Officer, and Octavio Gutierrez, a director of the Company. Purchases from Bravo, Bravo Aviation and Enviro-Glo for the year ended December 31, 2019 totaled $45,129. Outstanding receivables from Bravo and Enviro-Glo as of December 31, 2019 totaled $0. Net outstanding payables incurred for purchases of inventory and other services to Bravo and Enviro-Glo as of December 31, 2019 totaled $8,570.

We entered into a lease agreement with Bravo to sublease office space for 12 months commencing in September 2017, which was renewed in September 2018. We made lease payments totaling $24,000 in 2019.

We have worked with Cloud9 Support, LLC, a company owned by James Lowe, a director of the Company. Cost of revenues provided by Cloud9 Support, LLC during 2019 totaled $97,329. Cloud9 Support, LLC also purchases materials from us. Total purchases by Cloud9 Support, LLC from us during the year ended December 31, 2019 was $392,963. Outstanding receivables from Cloud9 Support, LLC as of December 31, 2019 was $49,659. Net outstanding payables incurred for purchases of inventory and other services to Cloud9 Support, LLC as of December 31, 2019 totaled $16,402.

46

In October 2018, we issued a $1 million unsecured note payable from to Cloud9 Support Inc. (“Cloud9 Support”), an entity owned by James R. Lowe, a director of the Company, which originally became due April 30, 2019. The note is personally guaranteed by Bradley Nattrass, our Chief Executive Officer, and Octavio Gutierrez, a director of the Company. The loan had a one-time origination fee of $12,500. Interest accrued at the rate of 12% per annum and was paid monthly. As additional consideration for the loan, we granted Mr. Lowe (as designee of Cloud9 Support) an option to purchase 30,000 sharesend of our Common Stock at an exercise price of $1.20 per share, which option is exercisable for a period of five years. The due date for the note payable was extended in May 2019 to December 31, 2019 and the interest rate was decreased to 9% perfiscal year. In consideration for Cloud9 Support extending the maturity date of the note and reducing the interest rate, we issued 10,000 shares of our Common Stock to Mr. Lowe (as designee of Cloud9 Support). In December 2019, in connection with our entry into the Credit Agreement (as defined below), the due date for the note payable was extended to December 31, 2021, and we issued Mr. Lowe (as designee of Cloud9 Support) an additional 100,000 shares of Common Stock in exchange for this extension and his agreement to subordinate the loan to the obligations set forth in the Credit Agreement.

On February 21, 2020, we entered into an agreement to amend the promissory note to extend the maturity date of the promissory note from December 31, 2019 to the date which is the earlier of 60 days following the date: (a) on which demand for repayment is made by the lender under the letter agreement by and among the Company, as borrower, urban-gro Canada Technologies Inc. and Impact Engineering, Inc., as guarantors, the lenders party thereto, and Bridging Finance Inc., as administrative agent for the lenders (the “Credit Agreement”); or (b) which is the maturity date of the Credit Agreement.

In addition, on February 25, 2020, the Company entered into a subordination, postponement and standstill agreement with Cloud9 Support (the “Subordination Agreement”) pursuant to which Cloud9 Support agreed to postpone and subordinate all payments due under the promissory note until the facilities under the Credit Agreement have been fully and finally repaid. The term for the Subordination Agreement will continue in force as long as the Company is indebted to the agent or lenders under the Credit Agreement. In consideration for Cloud9 Support’s agreement to extend the maturity date of the promissory note and to enter into the Subordination Agreement, we issued 100,000 shares of common stock to Mr. Lowe (as designee of Cloud9 Support). The largest aggregate amount of principal outstanding during 2019 was $1,000,000. As of May 13, 2020, $1,000,000 was outstanding under the note. The amount of principal and interest paid on the note during 2019 was $0 and $136,094, respectively.

Director Independence

The standards relied upon by the Board in affirmatively determining whether a director is “independent” are those set forth in the rules of the NYSE American Company Guide, which generally provide that independent directors are persons other than the Company’s executive officers or employees.

The NYSE American rules provide that members of the audit committee must also comply with the independence standards under Rule 10A-3 of the Exchange Act, which provide that a member of an audit committee of a company, other than an investment company, may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (i) accept directly or indirectly any consulting, advisory, or other compensatory fee from the Company or any subsidiary thereof, provided that, unless the rules of the national securities exchange or national securities association provide otherwise, compensatory fees do not include the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the Company (provided that such compensation is not contingent in any way on continued service); or (ii) be an affiliated person of the Company or any subsidiary thereof.

In accordance with the NYSE American independence definitions, the Board also makes an affirmative determination that each potential independent director does not have any relationship that, in the Board’s opinion, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

47

The Board, in applying the above-referenced standards, has affirmatively determined that the following directors are “independent” within the meaning of the NYSE American rules: Messrs. Dennedy, Galey and Wilks. In addition, the Board has affirmatively determined that each of Messrs. Dennedy, Wilks and Galey, who comprise the Company’s Audit Committee, meet the additional independence requirements applicable to audit committee members under the NYSE American rules and Rule 10A-3 under the Exchange Act.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Fees Paid

Information concerning our directors and officers is incorporated by reference to BF Borgers CPA PC

The following table shows the aggregate fees for professional services provided to the Company by BF Borgers CPA PC for 2019 and 2018:

  2019 2018
Audit Fees $135,000  $126,900 
Audit-Related Fees  3,240   – 
Tax Fees  –   5,800 
All Other Fees  –   – 
Total $138,240  $132,700 

Audit Fees.This category includes the audit of the Company’s annual consolidated financial statements, reviews of the Company’s financial statements included in the Company’s Quarterly Reportsour Definitive Proxy Statement on Form 10-Q, and services that are normally provided by its independent registered public accounting firm in connection with its engagements for those years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of the Company’s interim financial statements.

Audit-Related Fees.This category consists of assurance and related services by its independent registered public accounting firm that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include audit-related work regarding acquisitions, divestitures, the incurrence of additional indebtedness, and debt covenant compliance.

Tax Fees.This category consists of professional services rendered by the Company’s independent registered public accounting firm for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and statutory tax audit services and tax compliance services.

All Other Fees.This category consists of fees for other miscellaneous items.

Our Audit Committee is responsible for approving all audit, audit-related, tax and other fees. The Audit Committee pre-approves all auditing services and permitted non-audit services, including all fees and termsSchedule 14A to be performed for us by our independent auditor atfiled with the beginning of the fiscal year. Non-audit services are reviewed and pre-approved by project at the beginning of the fiscal year. Any additional non-audit services contemplated by usSEC within 120 days after the beginningend of theour fiscal year are submitted to the Audit Committee Chairperson for pre-approval prior to engaging the independent auditor for such services. Such interim pre-approvals are reviewed with the full Audit Committee at its next meeting for ratification. The audit, audit-related fees, tax fees, and other fees paid to BF Borgers CPA PC with respect to 2019 and 2018 were pre-approved by the Audit Committee.

48
year.

38


PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES.
A list of financial statements filed herewith is contained is set forth on page F-1 of the financial statements that immediately follow the signature page of this Report and is incorporated by reference herein. The financial statement schedules have been omitted because they are not required, not applicable or the information has been included in our financial statements. The exhibits required by this Item 15. Exhibits, Financial Statements Schedules.

Theare contained in the Exhibit Index beginning on the following exhibitspage of this Annual Report on Form 10-K and are included with this report:

incorporated herein by reference.
EXHIBIT INDEX
Exhibit No.Description
4.1Exhibit
No.		Exhibit Description
2.1
3.1
3.2
3.3
3.4
4.1
10.10*10.1
10.2
10.3
10.4
10.5
10.6
10.7*
10.8*
10.9*
10.10*
39

10.11Exhibit
No.		Exhibit Description
10.11
10.12
10.13
10.14
10.15
21.1

List of Subsidiaries (filed herewith)

23.1Consent of BF Borgers CPA P.C. (filed herewith)
31.1Certification of Chief Executive Officer required by Rule 13a-14(a) under the Exchange Act (filed herewith)
31.2Certification of Chief Financial Officer required by Rule 13a-14(a) under the Exchange Act (filed herewith)
32Certification of Principal Executive, Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (filed herewith)

49

The following exhibits have previously been filed with the Securities and Exchange Commission on the date indicated.

Exhibit No.Description
3.1Articles of Incorporation filed with the Colorado Secretary of State on March 10, 2017 (incorporated by reference to Exhibit 10.15 to Form S-1 Registration Statement10-K filed on May 18, 2018)2020).
3.210.16
BylawsFirst Amendment to Loan Agreement, dated as of RegistrantSeptember 4, 2020, by and among urban-gro, Inc., urban-gro Canada Technologies Inc., Impact Engineering, Inc. and Bridging Finance Inc. (incorporated by reference to Exhibit 10.1 to Form S-1 Registration Statement10-Q filed on May 18, 2018)November 3, 2020).
3.310.17
Specimen Stock Certificate (incorporated by reference to Form S-1 Registration Statement filed on May 18, 2018)

10.1Letter Agreement between Edyza, Inc. and Registrant (incorporated by reference to Form S-1 Registration Statement filed on May 18, 2018)
10.2Intellectual Property Purchase and Assignment Agreement between Edyza, Inc. and Registrant (incorporated by reference to Form S-1 Registration Statement filed on May 18, 2018)
10.3Business Lease between JW Properties, LLC and Registrant dated July 22, 2015 (incorporated by reference to Form S-1Registration Statement filed on May 18, 2018)
10.4Commercial Lease Agreement between Bravo Lighting, LLC and Registration (incorporated by reference to Form S-1 Registration Statement filed on May 18, 2018)

10.5Form of Common Stock Purchase Warrant issued to Michael Sandy Bank dated April 19, 2018 (incorporated by reference to Form S-1/A Registration Statement filed on July 11, 2018)
10.6Redemption Agreement with Total Grow Holdings LLC dated January 24, 2020 (incorporated by referenced to Form 8-K filed on January 30, 2020)
10.7*Separation Agreement, dated as of March 20,September 18, 2020, by and between urban-gro, Inc. and Larry DodsonGeorge (Bob) Pullar (incorporated by reference to Exhibit 10.2 to Form 8-K10-Q filed on March 23,November 3, 2020).
10.8*10.18*
10.19*
10.20

50
.

Exhibit No.Description
10.9*10.21
urban-gro, Inc. 2019 Equity Incentive PlanForm of Amended and Restated Promissory Note (incorporated by reference to Exhibit 10.2 to Form S-88-K filed on August 27, 2019)November 25, 2020).
101.INS10.22
10.23
21.1
23.1
24.1
31.1
31.2
32.1
40

Exhibit
No.		Exhibit Description
101.INSInline XBRL Instance DocumentDocument.
101.SCHInline XBRL Schema DocumentDocument.
101.CALInline XBRL Calculation Linkbase DocumentDocument.
101.DEFInline XBRL Definition Linkbase DocumentDocument.
101.LABInline XBRL Label Linkbase DocumentDocument.
101.PREInline XBRL Presentation Linkbase DocumentDocument.

*Denotes management contract or compensatory plan.

10451Cover Page Interactive Data File (embedded within the Inline XBRL document).

_____________________

*Denotes a management contract or compensatory plan or arrangement.
ITEM 16. FORM 10-K SUMMARY
None.
41

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned thereunder duly authorized.

URBAN-GRO, INC.
URBAN-GRO, INC.
Dated: May 18, 2020By:
Date: March 30, 2023By:/s/ Bradley Nattrass

Bradley Nattrass

Principal
Chairperson of the Board of Directors and Chief Executive Officer

By:/s/ Richard A. Akright

Richard A. Akright

Principal Financial and Accounting Officer

In accordance

POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Bradley Nattrass, his or her true and lawful attorney-in-fact and agent, with the Exchange Act,full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that such attorney-in-fact and agent, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicatedand on May 18, 2020

the dates indicated.
SignatureTitleDate
/s/ Bradley NattrassChairperson of the Board of Directors and Chief Executive OfficerMarch 30, 2023
Bradley Nattrass Director(Principal Executive Officer)
/s/ Octavio Gutierrez
Octavio Gutierrez, Director
/s/ Richard A. AkrightChief Financial OfficerMarch 30, 2023
Richard A. Akright Director
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ Lewis O. WilksDirectorMarch 30, 2023
Lewis O. Wilks Director
/s/ David HsuDirectorMarch 30, 2023
/s/ James H. DennedyDavid Hsu
James H. Dennedy, Director
/s/ Sonia LoDirectorMarch 30, 2023
Sonia Lo
/s/ Lance Galey
Lance Galey, Director/s/ Anita BrittDirectorMarch 30, 2023
Anita Britt
/s/ James LoweDirectorMarch 30, 2023
James Lowe Director

52

42


INDEX TO FINANCIAL STATEMENTS

Page
Page No.
F-2
F-2
Audited Financial Statements:
F-3
F-3
F-4
F-4
Consolidated Statement of Changes in Stockholders’Shareholders’ Equity (Deficit) for the yearsYears ended December 31, 20192022 and 20182021
F-5
F-5
F-6
F-6
F-7

F-1F-8

F-1


Report of Independent Registered Public Accounting Firm

To the shareholders and the boardBoard of directorsDirectors of urban-gro, Inc.

and subsidiaries

Opinion on the Financial Statements


We have audited the accompanying consolidated balance sheets of urban-gro, Inc. and subsidiaries (the "Company") as of December 31, 20192022 and 2018,2021, the related consolidated statements of operations and comprehensive income,loss, shareholders’ deficitequity and cash flows for each of the two years in the periodthen ended, December 31, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows each offor the two years in the periodthen ended, December 31, 2019, in conformity with accounting principles generally accepted in the United States.

Going Concern Uncertainty

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion


These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.


We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.


Our auditsaudit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.


/s/ BF Borgers CPA PC

BF Borgers CPA PC (PCAOB ID 5041)

We have served as the Company'sCompany’s auditor since 2017.

Lakewood, CO

May 18, 2020

F-2

March 30, 2023


F-2


urban-gro, Inc.

CONSOLIDATED BALANCE SHEETS

  December 31, December 31,
  2019 2018
     
Assets        
Current Assets        
Cash $448,703  $1,178,852 
Accounts receivable, net  1,564,969   501,191 
Inventories, net  676,175   1,214,224 
Related party receivable  49,658   122,356 
Prepayments and advances  1,258,700   928,682 
Total current assets  3,998,205   3,945,305 
         
Non-current assets        
Property, plant, and equipment, net  165,035   441,141 
Operating lease right of use assets, net  215,848   – 
Investments  2,020,358   1,261,649 
Goodwill  902,067   – 
Other assets  106,179   96,669 
Total non-current assets  3,409,487   1,799,459 
         
Total assets $7,407,692  $5,744,764 
         
Liabilities        
Current liabilities        
Accounts payable $3,753,862  $1,630,893 
Accrued expenses  1,686,841   1,144,142 
Related party payable  24,972   18,802 
Customer deposits  2,915,406   3,298,609 
Related party note payable  1,000,000   1,000,000 
Notes payable  2,812,709   2,478,869 
Operating lease liabilities  123,395   – 
Total current liabilities  12,317,185   9,571,315 
         
Non-current liabilities        
Operating lease liabilities  98,841   – 
Total non-current liabilities  98,841   – 
         
Total liabilities  12,416,026   9,571,315 
         
Commitments and contingencies, Note 11        
         
Equity        
Preferred stock, $0.10 par value; 10,000,000 shares authorized; 0 shares issued and outstanding as of December 31, 2019 and December 31, 2018  –   – 
Common stock, $0.001 par value; 100,000,000 shares authorized; 28,209,312 and 25,229,833 shares issued and outstanding as of December 31, 2019, and December 31, 2018 respectively  28,209   25,230 
Additional Paid in Capital  11,854,083   4,688,272 
Accumulated deficit  (16,890,626)  (8,540,053)
Total shareholders’ deficit  (5,008,334)  (3,826,551)
         
Total liabilities and shareholders’ deficit $7,407,692  $5,744,764 

See
As of December 31,
20222021
ASSETS
Current assets:
Cash$12,008,003 $34,592,190 
Accounts receivable, net15,380,292 13,125,685 
Contract receivables3,004,282 — 
Inventories320,372 514,756 
Prepaid expenses and other current assets3,844,588 11,248,266 
Total current assets34,557,537 59,480,897 
Non-current assets:
Property and equipment, net1,307,146 207,496 
Operating lease right of use assets, net2,618,825 689,704 
Investments2,559,307 4,210,358 
Goodwill15,572,050 7,992,121 
Intangible assets, net5,450,687 1,575,466 
Total non-current assets27,508,015 14,675,145 
Total assets$62,065,552 $74,156,042 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable$9,960,364 $6,066,896 
Accrued expenses3,196,961 3,878,278 
Contract liabilities1,294,452 — 
Customer deposits2,571,161 13,345,451 
Contingent consideration2,799,287 1,563,000 
Promissory note3,832,682 — 
Operating lease liabilities600,816 152,459 
Total current liabilities24,255,723 25,006,084 
Non-current liabilities:
Operating lease liabilities2,044,782 542,003 
Deferred tax liability1,033,283 440,625 
Total non-current liabilities3,078,065 982,628 
Commitments and contingencies (note 12)
Shareholders’ equity:  
Preferred stock, $0.10 par value; 10,000,000 shares authorized; 0 shares issued and outstanding— — 
Common stock, $0.001 par value; 100,000,000 shares authorized; 12,220,593 issued and 10,770,760 outstanding as of December 31, 2022, and 11,588,110 shares issued and 10,733,195 outstanding as of December 31, 202112,221 11,588 
Additional paid-in capital84,882,982 78,679,220 
Treasury shares, cost basis: 1,449,833 shares as of December 31, 2022 and 854,915 as of December 31, 2021(12,045,542)(7,683,490)
Accumulated deficit(38,117,897)(22,839,988)
Total shareholders’ equity34,731,764 48,167,330 
Total liabilities and shareholders’ equity$62,065,552 $74,156,042 

The accompanying notes toare an integral part of these consolidated financial statements

F-3

F-3


urban-gro, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED December 31, 2019 and 2018

  For the Years Ended
  December 31, December 31,
  2019 2018
     
Revenue $24,189,803  $20,050,776 
         
Cost of revenue  17,563,594   13,892,025 
Gross profit  6,626,209   6,158,751 
         
Operating expenses        
Marketing  1,016,073   992,288 
General and administrative  9,207,737   7,721,221 
General and administrative – amortization of broker issuing costs and broker warrants associated with convertible debentures  432,578   – 
Stock-based compensation  1,830,426   1,245,826 
Total operating expenses  12,486,814   9,959,335 
         
Loss from operations  (5,860,605)  (3,800,584)
         
Non-operating expenses:        
Interest expense  (704,230)  (119,961)
Interest expense – amortization of warrants and conversion price associated with convertible debentures  (1,333,520)  – 
Write-down of investment  (505,766)  – 
Other income, net  53,548   24,672 
Total non-operating expenses  (2,489,968)  (95,289)
         
Loss before income taxes  (8,350,573)  (3,895,873)
         
Income Tax benefit  –   – 
         
Net income (loss) $(8,350,573) $(3,895,873)
         
Comprehensive income (loss) $(8,350,573) $(3,895,873)
         
Earnings (loss) per share        
Net loss per share - basic and diluted $(0.32) $(0.16)
         
Weighted average outstanding shares for the years ended December 31, 2019 and December 31, 2018 - basic and diluted  26,318,059   24,848,239 

SeeLOSS
For the Years Ended
December 31,
20222021
Revenues:
Equipment systems$33,333,574 $55,560,126 
Services12,862,308 5,043,764 
Construction design-build19,822,901 — 
Other1,011,151 1,509,291 
Total revenues and other income67,029,934 62,113,181 
Cost of revenues:
Equipment systems27,963,258 42,195,136 
Services6,225,634 4,051,229 
Construction design-build17,905,172 — 
Other730,151 1,106,930 
Total cost of revenues52,824,215 47,353,295 
Gross profit14,205,719 14,759,886 
Operating expenses:  
General and administrative19,911,276 12,852,168 
Stock-based compensation2,571,785 1,840,913 
Intangible asset amortization1,059,779 271,549 
Business development3,299,864 — 
Total operating expenses26,842,704 14,964,630 
Loss from operations(12,636,985)(204,744)
Non-operating income (expenses):
Interest expense(54,579)(334,056)
Interest expense – beneficial conversion of notes payable— (636,075)
Interest income329,012 23,566 
Loss on extinguishment of debt— (790,723)
Contingent consideration(436,905)— 
Impairment loss(2,660,933)— 
PPP loan forgiveness— 1,032,316 
Other income (expense)(139,611)34,049 
Total non-operating income (expenses)(2,963,016)(670,923)
Loss before income taxes(15,600,001)(875,667)
  
Income tax benefit322,092 — 
Net loss$(15,277,909)$(875,667)
  
Comprehensive loss$(15,277,909)$(875,667)
  
Loss per share – basic and diluted$(1.44)$(0.09)
Weighted average shares – basic and diluted10,610,84110,020,301

The accompanying notes toare an integral part of these consolidated financial statements

F-4

F-4


urban-gro, Inc.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

FOR THE YEARS ENDED December 31, 2019 and 2018

        Additional  Retained  Total 
  Common Stock  Paid in  Earnings  Shareholders' 
  Shares  Amount  Capital  (deficits)  Deficit 
Balance, December 31, 2017  25,046,000  $25,036  $3,258,116  $(4,644,180) $(1,361,028)
Clawback of stock granted  (375,000)  (375)  375   –   – 
Payment of outstanding balance for PPM  –   –   80,000   –   80,000 
Stock based compensation  –   –   1,345,825   –   1,345,825 
Stock Grant Program Vesting  558,833   568   (568)  –   – 
Warrants  –   –   4,525   –   4,525 
Net loss for year ended December 31, 2018  –   –   –   (3,895,873)  (3,895,873)
Balance, December 31, 2018  25,229,833  $25,230  $4,688,272  $(8,540,053) $(3,826,551)

      Additional Retained Total
  Common Stock Paid in Earnings Shareholders'
  Shares Amount Capital (deficits) Deficit
Balance, December 31, 2018  25,229,833  $25,230  $4,688,272  $(8,540,053) $(3,826,551)
Stock based compensation  –   –   1,830,426   –   1,830,426 
Stock options issued for loan term revisions  –   –   37,829   –   37,829 
Stock grants issued for loan term revisions  16,000   16   31,284   –   31,300 
Stock Grant Program Vesting  1,360,966   1,360   (1,360)  –   – 
Stock issuance related to conversion of convertible debentures  1,102,513   1,103   2,655,934   –   2,657,037 
Stock issuance related to acquisition  500,000   500   999,500   –   1,000,000 
Warrants issued related to convertible debentures  –       614,041   –   614,041 
Equity value of exercise price associated with convertible debentures  –       719,479   –   719,479 
Broker warrants associated with issuance of convertible debentures  –       278,678   –   278,678 
Net loss for year ended December 31, 2019  –   –   –   (8,350,573)  (8,350,573)
Balance, December 31, 2019  28,209,312  $28,209  $11,854,083  $(16,890,626) $(5,008,334)

SeeSHAREHOLDERS’ EQUITY

Common StockAdditional
Paid in
Capital		Accumulated DeficitTreasury
Stock		Total
Shareholders’
Equity
SharesAmount
Balance, December 31, 20204,718,714$4,719 $14,553,438 $(21,964,321)$— $(7,406,164)
Stock-based compensation— — 1,840,913 — — 1,840,913 
Beneficial conversion feature— — 636,075 — — 636,075 
Conversion of bridge financing254,425 254 1,907,971 — — 1,908,225 
Common stock repurchased— — — — (7,683,490)(7,683,490)
Stock issuance related to offering6,210,000 6,210 57,345,005 — — 57,351,215 
Stock issuance related to acquisition202,066 202 1,999,798 — — 2,000,000 
Stock issued in conversion of warrants22,490 22 9,974 — — 9,996 
Stock grant program vesting118,366 119 (119)— — – 
Stock options exercised62,049 62 386,165 — — 386,227 
Net loss— — — (875,667)— (875,667)
Balance, December 31, 202111,588,110 $11,588 $78,679,220 $(22,839,988)$(7,683,490)$48,167,330 
Stock-based compensation— — 2,571,785 —  2,571,785 
Common stock repurchased— — — — (4,362,052)(4,362,052)
Stock issuance related to acquisition555,390 555 3,603,258 — — 3,603,813 
Stock issued in conversion of warrants34,863 35 (35)— — — 
Stock grant program vesting37,675 38 (38)— — — 
Stock options exercised4,555 5 28,792 — — 28,797 
Net loss— — — (15,277,909)— (15,277,909)
Balance, December 31, 202212,220,593 $12,221 $84,882,982 $(38,117,897)$(12,045,542)$34,731,764 

The accompanying notes toare an integral part of these consolidated financial statements

F-5

F-5


urban-gro, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

  For the years ended
  December 31, December 31,
  2019 2018
     
Cash Flows from Operating Activities        
Net Loss $(8,350,573) $(3,895,873)
Adjustment to reconcile net loss from operations:        
Depreciation and amortization  266,476   154,136 
Amortization of convertible debenture components  1,612,197   – 
Stock-based compensation expense  1,830,426   1,245,826 
Impairment of investment  505,766   – 
Warrant Expense  –   3,394 
Inventory write-offs  94,727   77,531 
Bad debt expense  67,633   106,464 
Gain on disposal of assets  (72,416)  – 
Changes in Operating Assets and Liabilities:        
Accounts receivable  (849,355)  (73,917)
Inventory  443,322   (167,040)
Prepayments and other assets  (324,273)  (88,684)
Accounts payable and accrued expenses  2,671,838   205,667 
Customer deposits  (383,203)  147,360 
Net Cash Provided by (Used in) Operating Activities  (2,487,435)  (2,285,136)
         
Cash Flows from Investing Activities        
Purchases of investments  (1,085,975)  (861,649)
Purchases of property and equipment  (192,954)  (369,480)
Proceeds from sale of assets  121,500   – 
Cash acquired in acquisition  49,742   – 
Purchases of intangible assets  (40,255)  (33,674)
Net Cash Used Provided By (Used In) Investing Activities  (1,147,942)  (1,264,803)
         
Cash Flows from Financing Activities        
Issuance of convertible debentures  2,565,000   – 
Issuance of capital stock  –   80,000 
Proceeds from notes payable  970,000   1,992,000 
Repayment of notes payable  (629,772)  – 
Proceeds from related party loan  –   1,000,000 
Net Cash Provided by (Used In) Financing Activities  2,905,228   3,072,000 
         
Net Increase (Decrease) in Cash  (730,149)  (477,939)
Cash at Beginning of Period  1,178,852   1,656,791 
Cash at End of Period  448,703   1,178,852 
         
Supplemental Cash Flow Information:        
Interest Paid  612,138   119,961 
Income Tax Paid  –   – 
         
Supplemental disclosure of non-cash investing and financing activities:        
Convertible debentures and accrued interest converted into common stock  2,657,037   – 
Stock issuance related to acquisition  1,000,000   – 
Common stock retired  –   375 
Operating lease right of use asset  326,092   – 

See

For the Years Ended
December 31,
20222021
Cash flows from operating activities:
Net loss$(15,277,909)$(875,667)
Adjustments to reconcile net loss to net cash used in operating activities:  
Depreciation and amortization1,483,065 495,276 
Deferred income tax benefit(322,092)— 
Loss on extinguishment of debt— 790,723 
Stock-based compensation expense2,571,785 1,840,913 
Interest expense – beneficial conversion of notes payable— 636,075 
Impairment loss2,660,933 — 
Change in fair value of contingent consideration436,905 — 
PPP loan forgiveness— (1,032,316)
Other, net54,858 209,363 
Changes in operating assets and liabilities (net of acquired amounts):  
Accounts receivable(2,517,745)(10,547,883)
Inventories190,219 45,479 
Prepayments and other assets8,207,488 (8,063,663)
Accounts payable and accrued expenses1,087,807 6,472,004 
Operating lease liability(413,770)— 
Customer deposits(10,774,290)8,466,588 
Net cash used in operating activities(12,612,746)(1,563,108)
  
Cash flows from investing activities:  
Purchases of investments— (2,500,000)
Purchases of property and equipment(580,347)(292,428)
Acquisitions, net of cash acquired(3,871,452)(5,544,846)
Net cash used in investing activities(4,451,799)(8,337,274)
  
Cash flows from financing activities:  
Proceeds from issuance of common stock, net of offering costs28,796 57,747,438 
Repurchase of common stock(4,362,052)(7,683,490)
Repayment of finance lease ROU liability(146,000)— 
Payments to settle contingent consideration(1,040,386)— 
Repayment of debt— (5,755,845)
Net cash provided by (used in) financing activities(5,519,642)44,308,103 
  
Net change in cash(22,584,187)34,407,721 
Cash at beginning of period34,592,190 184,469 
Cash at end of period$12,008,003 $34,592,190 
The accompanying notes toare an integral part of these consolidated financial statements

F-6



F-6

urban-gro, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2019 and 2018

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended
December 31,
20222021
Supplemental cash flow information:  
Cash paid for interest$28,147 $230,424 
Net cash paid for income taxes$16,253 $— 
  
Supplemental disclosure of non-cash investing and financing activities:  
Stock issued for acquisitions$3,603,813 $2,000,000 
Operating lease right of use assets and liabilities extension$1,929,121 $600,815 
The accompanying notes are an integral part of these consolidated financial statements
F-7

urban-gro, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND ACQUISITIONS, BUSINESS PLAN, AND LIQUIDITY


Organization and Acquisitions


urban-gro, Inc. (“("we,” “us,” our”" "us," "our," the "Company," or the “Company”"urban-gro") is an integrated professional services and design-build firm. We offer value-added architectural, engineering, and construction management solutions to the Controlled Environment Agriculture ("CEA"), industrial, healthcare, and other commercial sectors. Innovation, collaboration, and a leading engineeringcommitment to sustainability drive our team to provide exceptional customer experiences. To serve our horticulture clients, we engineer, design services company that integratesand manage the construction of indoor CEA facilities and then integrate complex environmental equipment systems tointo those facilities. Through this work, we create high performancehigh-performance indoor cultivation facilities for the global commercial horticulture market.our clients to grow specialty crops, including leafy greens, vegetables, herbs, and plant-based medicines. Our custom tailored, plant-centriccustom-tailored approach to design, construction, procurement, and equipment integration provides a single point of accountability across all aspects of indoor cultivationgrowing operations. Our solution offers functionalityWe 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 helps customersallow clients to manage, operate and perform at the highest level throughout their entire cultivation lifecycle from facilityonce they are up and running. Further, we serve a broad range of commercial and governmental entities, providing them with planning, consulting, architectural, engineering and designconstruction design-build services for their facilities. We aim to operationwork with our clients from the inception of their project in a way that provides value throughout the life of their facility. We are a trusted partner and day-to-day management. Weadvisor to our clients and offer a full rangecomplete set of custom services that are integrated with select cultivation equipment and product solutions, which we primarily source from third party technology and manufacturing partners but also develop in-house.

Our service offerings include full facility programming, engineering and designmanaged services start-up commissioning services, facility optimization services and IPM planning and strategy services. Complementing these services, we work with customers to source an integratedcomplemented by a vetted suite of select cultivation equipment systems and crop management products, which include: (1) environmental controls, fertigation, and irrigation distribution systems; (2) freshwater, wastewater, and condensation treatment systems; (3) light emitting diode (“LED”), high-pressure sodium (“HPS”systems.


Acquisitions

DVO

Effective October 31, 2022, the Company entered into an agreement with Dawson Van Orden, Inc. ("Seller" or "DVO") and ceramic metal halide (“CMH”DVO's shareholders (the "DVO Shareholders") lighting systems; (4) rolltop, multi-tier, and automated container benching systems; (5) odor mitigation & microbial reduction systems; (6) air flow systems; (7) industrial spray applicators; (8) pesticides and bio-controls; (9) plant nutrition products; (10) substrate and coco bag solutions; and (11) our Soleil® technology data analytics platform that includes wireless environmental & substrate sensing and remote monitoring and support.

In June 2018, the Company formed urban-gro Canada Technologies, Inc. as a wholly owned Canadian subsidiary which it currently utilizes for its Canadian sales operations.

Effective March 7, 2019, the Company acquired 100%to acquire substantially all of the stockoperating assets and liabilities of Impact Engineering, Inc. (d/b/DVO, a Grow2Guys) (“Impact”),Texas-based engineering firm with significant experience in indoor CEA. The purchase price of $6.1 million, after working capital adjustments, was comprised of (i) $1.2 million in cash, (ii) a provider$3.8 million Seller's promissory note, and (iii) $1.1 million of mechanical electrical and plumbing (“MEP”) engineering services predominantly focusedthe Company's common stock. The Seller's promissory note is to be paid out over four quarters beginning in January 2023. The purchase price excludes up to $1.1 million of contingent consideration earnout that may become payable to the sellers dependent on the cannabis industry. Management believescontinued employment of the acquisition of Impact will improve the Company’s ability to better serve its current and future customer base by expanding on the fully integrated products and services offered by the Company.DVO Shareholders. The Company issued 500,000contingent consideration earnout is payable in cash or shares of Common Stock (“Common Stock”) valuedthe Company's common stock at $2.00 per share to effect the acquisitiondiscretion of Impact. the Company.


The Company has initially accounted for the acquisition of Impact as follows:

Purchase Price $1,000,000 
     
Allocation of Purchase Price:    
Cash $49,742 
Accounts receivable, net $93,811 
Goodwill $902,067 
Accrued expenses $45,620 

Basis

Purchase price$6,072,366 
Allocation of purchase price:
Accounts receivable, net$1,134,909 
Right of use asset$1,197,310 
Property and equipment$229,058 
Goodwill$3,444,926 
Intangible assets$1,276,000 
Accrued expenses$(12,527)
Right of use liability$(1,197,310)
Pro-forma disclosure of Presentation

the DVO acquisition is not required as the historical results of DVO were not material to the Company's consolidated financial statements. Acquired goodwill from DVO represents the value expected to arise from organic growth and an opportunity to expand into a well-established market for the Company.


F-8

Emerald

Effective April 29, 2022, the Company acquired all of the issued and outstanding capital stock of Emerald Construction Management, Inc. ("Emerald") from its shareholders (the "Emerald Sellers"). The purchase price of $7.7 million, after working capital adjustments, was comprised of (i) $3.4 million in cash, (ii) $2.5 million of the Company’s common stock, and (iii) $1.8 million of estimated contingent consideration earnout payable to the Emerald Sellers over the term of the earnout. The Emerald Sellers may earn up to $2.0 million of total contingent consideration earnout based on the performance of Emerald during the two year period following the closing of the Emerald acquisition. The contingent consideration earnout is equal to 35% of Emerald's quarterly gross profit and is payable quarterly in shares of the Company’s common stock with the value of such shares being determined based upon the volume-weighted average price ("VWAP") of the Company’s common stock in the ten trading days prior to the end of the applicable quarter for which the quarterly gross profit is calculated.

The Company accounted for the acquisition as follows:

Purchase price$7,671,557 
Allocation of purchase price:
 Cash$622,641 
Accounts receivable, net$2,666,811 
Contract receivable$494,456 
Prepayments and other assets$38,086 
Property and equipment$403,008 
Right of use asset$82,408 
Goodwill$4,135,006 
Intangible assets$3,659,000 
Accrued expenses$(2,361,302)
Contract liabilities$(1,071,399)
Right of use liability$(82,408)
Deferred tax liability$(914,750)

The following pro-forma amounts reflect the Company’s results as if the acquisition of Emerald had occurred on January 1, 2021. These pro-forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results of the acquisition to reflect the additional amortization of intangibles.

For the Years Ended
December 31,
20222021
Revenue$78,711,382 $88,251,443 
Net loss$(13,268,226)$(1,694,783)

Acquired goodwill from Emerald represents the value expected to arise from organic growth and an opportunity to expand into a well-established market for the Company.

F-9

2WR

Effective July 30, 2021, the Company acquired three affiliated architecture design companies (the "2WR Entities") from their selling shareholders (the "2WR Sellers"). In connection with the acquisition of the 2WR Entities, the Company entered into an affiliate relationship with a fourth architecture design company owned by one of the 2WR Sellers. The purchase price of $10.1 million, after working capital adjustments, was comprised of the following: (i) $6.5 million in cash, (ii) $2.0 million of the Company's common stock, and (iii) $1.6 million of estimated contingent earnout payable to the 2WR Sellers over the term of the earnout. The agreement included up to $2.0 million of total contingent consideration earnout based on the performance of the 2WR Entities payable to the 2WR Sellers. Based on the performance of the 2WR Entities since the time of the acquisition, in the fourth quarter of 2022, the Company agreed to pay the remaining $0.4 million contingent consideration earnout. This resulted in the Company recording additional contingent consideration expense of $0.4 million related to the acquisition in the fourth quarter of 2022.

The Company accounted for the acquisition as follows:
Purchase price$10,058,536 
Allocation of purchase price:
Cash$950,690 
Accounts receivable, net$1,676,208 
Prepayments and other assets$42,752 
Property and equipment$9,351 
Goodwill$7,090,054 
Intangible assets$1,762,500 
Accrued expenses$(1,032,394)
Deferred tax liability$(440,625)
The following pro-forma amounts reflect the Company’s results as if the acquisition of the 2WR Entities had occurred on January 1, 2020. These pro-forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results of the acquisition to reflect the additional amortization of intangibles.
For the Years Ended
December 31,
20222021
Revenue67,029,934 66,802,623 
Net income (loss)(14,327,334)196,595 
Acquired goodwill from the 2WR Entities represents the value expected to arise from organic growth and an opportunity to expand into a well-established market for the Company.
Liquidity and Going Concern
The accompanying consolidated financial statements are presented in United States dollars and have been prepared in accordance with United States generally accepted accounting principles (“GAAP”).

F-7

Liquidity and Going Concern

Since inception,assuming that the Company has incurred significant operating losses and has funded its operations primarily through issuance of equity securities, debt, and operating revenue. As of December 31, 2019, the Company had an accumulated deficit of $16,890,626, a working capital deficit of $7,318,980, and negative stockholders’ equity of $5,008,334. These facts and conditions raise substantial doubt about the Company’s ability towill continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date that the financial statements are issued. The Company continually evaluates opportunities to raise equity and debt financing as well as implementing cost reduction and revenue enhancing measures that will allow it to increase profitability and continue operations. There can, however, be no assurances that the Company will be able to raise equity or debt financing in sufficient amounts, when and if needed, on acceptable terms or at all, nor can there be any assurances that the Company will be able to implement cost reduction and revenue enhancing measures that will enable the Company to achieve profitable operations going forward. The accompanying financial statements have been prepared on a going concern basis.

Pursuant to Accounting Standards Codification (“ASC”) 205-40,Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,we assess going concern uncertainty for our consolidated financial statements to determine if we have sufficient cash and cash equivalents on hand and working capital to operate for a period of at least one year from the date the consolidated financial statements are issued or are available to be issued. As part of this assessment, based on conditions that are known and reasonably knowable to us, we will consider various scenarios, forecasts, projections, and estimates, and make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and our ability to delay or curtail those expenditures or programs, among other factors, if necessary. It is probable that management’s plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Basis of Presentation, Principles of Consolidation and Business Combinations

These consolidated financial statements include the accounts of urban-gro, Inc. and its wholly owned subsidiaries. They are presented in United States dollars and have been prepared in accordance with U.S. GAAP. On December 31, 2020, we effected a 1-for-6 reverse stock split with respect to our common stock. All share and per share information in these consolidated financial statements give effect to this reverse stock split.

Acquisitions of businesses are accounted for using the acquisition method of accounting (Accounting Standards Codification 805-10-225). The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the
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acquisition date fair values of the assets transferred, liabilities incurred to the former owners of the acquired entities and the equity interests issued in exchange for control of the acquired entities. Acquisition related costs are recognized in net income (loss) as incurred.

Use of Estimates


In preparing consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reported period.periods. Actual results could differ from those estimates. Significant estimates include estimated revenues earned under percentage of completion construction contracts, professional service contracts, estimated useful lives and potential impairment of long-lived assets and goodwill, inventory write offs,write-offs, allowance for deferred tax assets and deferred tax liabilities, and allowance for bad debt.

Basis of Presentation and Principles of Consolidation

bad-debt.

Reclassification

Certain prior year amounts have been reclassified for consistency with the current year presentation. These consolidated financial statements are presented in United States dollars and they includereclassifications had no effect on the accounts of urban-gro, Inc. and its wholly-owned subsidiaries. The financialreported results of Impact have been includedoperations.

Balance Sheet Classifications

The Company includes in current assets and liabilities the Company’s consolidated financial statementsfollowing amounts that are in connection with construction contracts that may extend beyond one year: contract assets and contract liabilities (including retainage invoiced to customers contingent upon anything other than the passage of time), capitalized costs to fulfill contracts, retainage payable to sub-contractors and accrued losses on uncompleted contracts. A one-year time period is used to classify all other current assets and liabilities when not otherwise prescribed by the applicable accounting principles.

Contract Assets and Liabilities

The timing between when Company collects cash from its construction design-build customers can create a contract asset or contract liability. Please refer to Note 3 - Revenue from Contracts with Customers for further discussion of the date of acquisition on March 7, 2019Company's contract assets and all intercompany transactions have been eliminated.

Recently Issued Accounting Pronouncements

From time to time, the Financial Accounting Standards Board (the “FASB”) or other standards setting bodies issue new accounting pronouncements. The FASB issues updates to new accounting pronouncements through the issuance of an Accounting Standards Update ("ASU"). Unless otherwise discussed, the Company believes that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on the Company’s financial statements upon adoption.

liabilities.


Functional and reporting currencyReporting Currency and foreign currency translation

Foreign Currency Translation


The functional and reporting currency of the Company and its subsidiaries is US dollars. All transactions in currencies other than US dollars are translated into US dollars on the date of the transaction. Any exchange gains and losses related to these transactions are recognized in the current period’speriod earnings as other income (expense).

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Fair Value of Financial Instruments

The Company’s financial instruments consist principally of cash, and cash equivalents, accounts receivable, accounts payable, notes payablepromissory note and other current assets and liabilities. We value our financial assets and liabilities using fair value measurements. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:

•Level 1: Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

•Level 2: Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated with observable market data.

•Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.

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The carrying amount of our cash, and cash equivalents, accounts receivable, accounts payable, promissory note, and other current assets and liabilities in our consolidated financial statements approximates fair value because of the short-term nature of the instruments.instruments as of December 31, 2022 and 2021. Investments in non-marketable equity securities are carried at cost less other-than-temporary impairments. The carrying amountimpairments as of our notes payable and convertible debt at December 31, 20192022 and December 31, 2018 approximates their fair values based on our incremental borrowing rates.

2021.

There have been no changes in Level 1, Level 2, and Level 3 categorizations and no changes in valuation techniques for these assets or liabilities for the years ended December 31, 20192022 and 2018.

2021.

Cash and Cash Equivalents

The Company considers all highly liquid short-term cash investments with an original maturity of three months or less to be cash equivalents. As of December 31, 20192022 and 2018,2021, the Company did not maintain any cash equivalents. The Company maintains cash with financial institutions that may from time to time exceed federally-insured limits. The Company has not experienced any losses related to these balances and believes the risk to be minimal. There are no restricted or compensating cash balances as of December 31, 2019.

2022.


Accounts Receivable, Net


Trade Accounts Receivable

Trade accounts receivables are carried at the original invoiced amounts less an allowance for doubtful accounts. As of December 31, 20192022 and 2018,2021, the balance of allowance for doubtful accounts was $18,920.$103,653 and $51,203, respectively. The allowancesallowance for doubtful accounts areis calculated based on a detailed review of certain individual customer accounts and an estimation of the overall economic conditions affecting the Company'sCompany’s customer base. The Company reviews a customer'scustomer’s credit history before extending credit to the customer. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additions to the allowance would be required. A provision is made against accounts receivable to the extent they are considered unlikely to be collected. Occasionally, the Company will write off bad debtbad-debt directly to the bad debtbad-debt expense account when the balance is determined to be uncollectable. Bad debtuncollectible. Bad-debt expense for the years ended December 31, 20192022 and 20182021 was $67,633$110,000 and $106,464,$75,137, respectively.

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Non-trade Accounts Receivable

Non-trade accounts receivable consist of amounts due to the Company outside of our normal operating business. As of December 31, 2022 and 2021, the Company had a total of $2,914,112 and $5,103,132 of non-trade accounts receivable, respectively. As of December 31, 2022, non-trade accounts receivables was comprised of miscellaneous non-trade accounts receivables totaling $514,112 and non-trade accounts receivable related to litigation involving fraudulent wire transactions of $2,400,000. As of December 31, 2021, non-trade accounts receivable was comprised of amounts related to litigation involving fraudulent wire transactions of $5,103,132. On March 27, 2023, the Company entered into an agreement to settle this litigation and received a cash payment of $2,400,000 on March 27, 2023. In connection with this settlement, the Company recorded an impairment in the fourth quarter of 2022 of $950,576.

The following table summarizes the changes in non-trade accounts receivable related to the fraudulent wire transactions for the years ended December 31, 2022 and 2021:

For the Years Ended
December 31,
20222021
Beginning fraudulent wire receivable$5,103,132 $— 
Additions— 5,103,132 
Payments received(1,752,556)— 
Impairment recorded upon settlement(950,576)— 
Ending fraudulent wire receivable$2,400,000 $5,103,132 

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Inventories


Inventories, consisting entirely of finished goods, are stated at the lower of cost or net realizable value, with cost determined using the weighted average cost method. The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions. Write-downs and write-offs are charged to cost of goods sold at the realization of change in value. Once written down, inventories are carried at this lower basis until sold or scrapped.

Property, Plant, and Equipment,

net


Property and equipment is stated at cost less accumulated depreciation and impairment. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses other depreciation methods (generally accelerated) for tax purposes where appropriate. No impairment charges were recorded for the years ended December 31, 20192022 and 2018.

2021.


The estimated useful lives for significant property and equipment categories are as follows:

Computer and Technology Equipmenttechnology equipment3 years
Furniture and Equipmentequipment5 years
Leasehold ImprovementsimprovementsLease term
Vehicles3 years
Other Equipmentequipment3 or 5 years
Software3 years


Operating Lease Right of Use Assets


Operating lease right of use assets are stated at cost less accumulated depreciation, amortization and impairment. The Company has twovarious operating and finance equipment and office leases with an imputed annual interest rate of 8%. The terms of the first lease are 24 months commencing on September 1, 2018 and ending on August 31, 2020. The terms of the second lease are 28 months commencing on September 1, 2019 and ending December 31, 2021. Operating lease right of use asset costs incurred in 2019 were $123,563.

Convertible Notes

The Company accounts for its convertible notes at issuance by allocating the proceeds received from a convertible note among freestanding instruments according to ASC 470, Debt, based upon their relative fair values. The fair value of debt and common stock is determined based on the closing price of the common stock on the date of the transaction, and the fair value of warrants, if any, is determined using the Black-Scholes option-pricing model. Convertible notes are subsequently carried at amortized cost. The fair value of the warrants is recorded as additional paid-in capital, with a corresponding as a debt discount from the face amount of the convertible note. Each convertible note is analyzed for the existence of a beneficial conversion feature (“BCF”), defined as the fair value of the common stock at the commitment date for the convertible note, less the effective conversion price. Beneficial conversion features are recognized at their intrinsic value, and recorded as an increase to additional paid-in capital, with a corresponding reduction in the carrying amount of the convertible note (as a debt discount from the face amount of the convertible note). The discounts on the convertible notes, consisting of amounts ascribed to warrants and beneficial conversion features, are amortized to interest expense, using the effective interest method, over the terms of the related convertible notes. Beneficial conversion features that are contingent upon the occurrence of a future event are recorded when the contingency is resolved.


Intangible Assets


The Company’s intangible assets, consistingconsist of legal fees for application of patents and trademarks, as well as customer relationships, trademarks and license fees paid for inspection services,trade names and backlog from the acquisitions of DVO, 2WR and Emerald. Our patents and trademarks are recorded at cost. Patentscost, while the intangibles from our acquisitions are recorded at fair value and trademarks, once approved, will beare amortized using the straight-line method over an estimated life, generally 5 years for patents, and 10 to 205 years for trademarks. License fees are amortized over 10 years.trademarks and trade names, 7 years for customer relationships, and 1 year for backlog. Intangible assets are includedreported in “other assets”the "Intangible Asset" line on the balance sheets. The net balance of intangible assets for December 31, 2019 and 2018 was $86,151 and $63,755, respectively. Amortization expense totaled $1,879 and $974 for the years ended December 31, 2019 and 2018, respectively.

sheet.


Goodwill


Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is not amortized but is tested for impairment annually as of December 31st and at any time when events or circumstances suggest impairment may have occurred.

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The testing for impairment consists of a comparison of the fair value of the reporting unit with its carrying amount. If the carrying amount of the reporting unit, including goodwill, exceeds the fair value, an impairment will be recognized equal to the difference between the carrying value of the reporting unitunit’s goodwill and the implied fair value of the goodwill. In testing goodwill for impairment, we determine the estimated fair value of our reporting units based upon a discounted future cash flow analysis. Goodwill, istrade names and patents are our only indefinite-lived intangible asset.assets. Definite-lived intangible assets are amortized using the straight linestraight-line method over the shorter of their contractual term or estimated useful lives.


Impairment of Long-lived Assets


The Company evaluates potential impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment will be recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value.

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Investments


Investments without readily determinable fair values and for which the Company does not have the ability to exercise significant influence are accounted for at cost with adjustments for observable changes in prices or impairments.

Revenue Recognition


The Company recognizes revenue in accordance with ASC 606,Revenue from Contracts with Customers, which requires that five basic steps be followed to recognize revenue: (1) a legally enforceable contract that meets criterialcriteria standards as to composition and substance is identified; (2) performance obligations relating to provision of goods or services to the customer are identified; (3) the transaction price, with consideration given to any variable, noncash, or other relevant consideration, is determined; (4) the transaction price is allocated to the performance obligations; and (5) revenue is recognized when control of goods or services is transferred to the customer with consideration given to whether that control happens over time or not. Determination of criteria (3) and (4) are based on our management's judgments regarding the fixed nature of the selling prices of the services and products delivered and the collectability of those amounts.

Our service


The Company derives revenue predominately from the sale of equipment systems, services, construction design-build, and product revenues arise from other various immaterial contracts with customers. Service revenues include full facility programming, engineering and design services, start-up commissioning services, facility optimization services and IPM planning and strategy services. Product revenues include an integrated suite of select cultivationPlease refer to Note 3 - Revenue from Contracts with Customers for additional discussion.
Customer Deposits
For equipment systems and crop management products. We enter into separate contracts, for the service and product revenues we provide to our customers so to clarify our obligations under the terms of the contracts. New contracts are entered into if the services to be performed or products to be delivered need to be modified. Service revenues are satisfied when services are rendered or completed in accordance with the terms of the contract. Product revenues are satisfied when control of the products is transferred to the customer.

Revenues for services and products for the year ended December 31, 2019 were $3,167,237 and 21,022,566, respectively. Revenues for services and products for the year ended December 31, 2018 were $928,063 and $19,122,713, respectively.

Customer Deposits

The Company’s policy is to collect deposits from customers at the beginning of the contract. ThePlease refer to Note 3 - Revenue from Contracts with Customers for further discussion of the Company's customer payments received are recorded as a customer deposit liability on the balance sheet. When the contract is complete and meets all the criteria for revenue recognition, the customer is billed for the entire contract amount and the deposit is recorded against the customer’s receivable balance. In certain situations when the customer has paid the deposit and services have been performed but the customer chooses not to proceed with the contract, the Company may keep the deposit and recognize revenue. Of the outstanding customer deposit balance of $3,298,609 at December 31, 2018, $2,678,565 was recognized as revenue in the year ended December 31, 2019. At December 31, 2017, the entire customer deposit balance of $3,151,250 was recognized as revenue in the year ended December 31, 2018.

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deposits.

Cost of Revenue

Revenues

The Company’s policy is to recognize cost of revenues in the same manner as, and in conjunction with, revenue recognition. The Company’s cost of revenues includes the costs directly attributable to revenue recognized and includes expenses related to the purchasing of products and providing services, costs related to construction design-build contracts, fees for third-party commissions, and shipping costs. Total shipping costs included in the cost of goods soldrevenues for the years ended December 31, 20192022 and 2018 was $679,9112021 were $893,517 and $490,526,$1,253,506, respectively.

Advertising Costs

The Company expenses advertisingsadvertising costs in the periods the costs are incurred. Prepayments made under contracts are included in prepaid expenses and expensed when the advertisement is run. Total advertising expense incurred for the years ended December 31, 20192022 and 20182021 was $159,728$504,738 and $153,878,$263,609, respectively.

Warrants

Stock-Based Compensation
The Company periodically issues shares of its common stock and stock options to employees, directors, and consultants in non-capital raising transactions for fees and services. The Company accounts for its warrantsstock grants and stock options issued in accordanceto employees and directors with the GAAP accounting guidance under ASC 480, “Distinguishing Liabilities from Equity”.award being measured at its fair value at the date of grant and amortized ratably over the vesting period. The Company estimatedaccounts for stock issued to consultants with the value of the stock compensation based upon the measurement date as determined at the grant date of the award.
Beneficial Conversion Feature of Convertible Notes
The Company accounted for its convertible notes at issuance by allocating the proceeds received from a convertible note among freestanding instruments according to ASC 470, Debt, based upon their relative fair values. The fair value of debt and common stock was determined based on the closing price of the common stock on the date of the transaction, and the fair value of thesewarrants was determined using the Black-Scholes option-pricing model. Convertible notes were subsequently carried at amortized cost. The fair value of the warrants is recorded as additional paid-in capital, with a corresponding amount recorded as a debt discount from the face amount of the convertible note. Each convertible note was analyzed for the existence of a beneficial conversion feature ("BCF"), defined as the fair value of the common stock at the commitment date for the convertible note, less the effective conversion price. BCFs were recognized at their intrinsic value, and recorded as an increase to additional paid-in capital, with a corresponding reduction in the carrying amount of the convertible note (as a debt discount from the face amount of the convertible note). The discounts on the convertible notes, consisting of amounts ascribed to warrants and beneficial conversion features, is amortized to interest expense,
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using the effective interest method, over the terms of the related convertible notes. BCFs that are contingent upon the occurrence of a future event are recorded when the contingency is resolved.
Warrants
The Company estimates the fair value of warrants at the respective balance sheet dates using the Black-Scholes option pricingoption-pricing model based on the estimated market value of the underlying common stock at the valuation measurement date, the remaining contractual term, risk-free interest rate, and expected volatility of the price of the underlying common stock. There is a moderate degree of subjectivity involved when using option pricing models to estimate the warrants and the assumptions used in the Black-Scholes option-pricing model are moderately judgmental.

Stock-Based Compensation

The Company periodically issue shares of its common stock to employees and consultants in non-capital raising transactions for fees and services.

The Company accounts for stock issued to non-employees with the value of the stock compensation based upon the measurement date as determined at the grant date of the award.

The Company accounts for stock grants issued and vesting to employees with the award being measured at its fair value at the date of grant and amortized ratably over the vesting period. The Company also estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from its estimates.

Income Taxes

The Company files income federal tax returns in the United States, Canada, and Canadathe Netherlands, and state and local tax returnreturns in applicable jurisdictions. Provisions for current income tax liabilities, if any, would be calculated and accrued on income and expense amounts expected to be included in the income tax returns for the current year. Income taxes reported in earnings, if any, would also include deferred income tax provisions.

Deferred income tax assets and liabilities, if any, would be computed on differences between the financial statement bases of assets and liabilities at the enacted tax rates. Changes in deferred income tax assets and liabilities would be included as a component of income tax expense. The effect on deferred income tax assets and liabilities attributable to changes in enacted tax rates would be charged or credited to income tax expense in the period of enactment. Valuation allowances would be established for certain deferred tax assets when realization is not likely.

Assets and liabilities would be established for uncertain tax positions taken or positions expected to be taken in income tax returns when such positions, in the judgment of the Company, do not meet a more-likely-than-not threshold based on the technical merits of the positions. Valuation allowances would be established for certain deferred tax assets when realization is not likely.

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Loss Perper Share

The Company computes net loss per share by dividing net loss available to common stockholdersshareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share would be computed by dividing net loss by the weighted-average of all potentially dilutive shares of common stock that were outstanding during the periods presented. The diluted earnings per share calculation is not presented as it results in an anti-dilutive calculation of net loss per share.

The treasury stock method would be used to calculate diluted earnings per share for potentially dilutive stock options and share purchase warrants. This method assumes that any proceeds received from the exercise of in-the-money stock options and share purchase warrants would be used to purchase common shares at the average market price for the period.

Recently AdoptedIssued Accounting Pronouncements

From time to time, the Financial Accounting Standards Board (the "FASB") or other standards setting bodies issue new accounting pronouncements. The FASB issues updates to new accounting pronouncements through the issuance of an Accounting Standards Update ("ASU"). Unless otherwise discussed, the Company believes that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on the Company’s financial statements upon adoption.
In FebruaryJune 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This update replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This adoption of this update had no impact to the Company's consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06—Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)—Accounting For Convertible Instruments and Contracts in an Accounting Standards Update (“ASU”) amendingEntity’s Own Equity. ASU 2020-06 simplifies accounting for convertible instruments by removing major separation models required under historical U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. ASU 2020-06 also simplifies the diluted net income per share calculation in certain areas. The adoption of this update had no impact to the Company's consolidated financial statements.
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There are other various updates recently issued by the FASB, most of which represented technical corrections to the accounting for leases. The new guidance requires the recognition of lease assetsliterature or application to specific industries and liabilities for operating leases with terms of more than 12 months, in additionare not expected to those currently recorded,have a material impact on the Company’s consolidated balance sheets. Presentation of leases within the consolidated statementsfinancial position, results of operations or cash flows.

Management has reviewed all other recently issued, but not yet effective, accounting pronouncements and comprehensive loss and consolidated cash flows willdoes not believe the future adoption of any such pronouncements may be generally consistent withexpected to cause a material impact on the prior lease accounting guidance. The ASU was effective for reporting periods beginning after December 15, 2018, with early adoption permitted. Company's financial condition or the results of our operations.
NOTE 3 – REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company adoptedrecognizes revenue predominantly from the ASU effective January 1, 2019sale of equipment systems, services, construction design-build, and from other various immaterial contracts with customers from its CEA and Commercial sectors. The table below presents the revenue by source for the years ended December 31, 2022 and 2021:

For the year ended December 31, 2022
CEACommercialTotalRelative Percentage
Equipment systems$33,333,574 $— $33,333,574 50%
Services8,016,433 4,845,875 12,862,308 19%
Construction design-build1,664,538 18,158,363 19,822,901 30%
Other1,011,151 — 1,011,151 2%
Total revenues and other income$44,025,696 $23,004,238 $67,029,934 100%
Relative percentage66 %34 %100 %
Note: Percentages may not calculate due to rounding.

For the year ended December 31, 2021
CEACommercialTotalRelative Percentage
Equipment systems$55,560,126 $— $55,560,126 89%
Services3,102,945 1,940,819 5,043,764 8%
Construction design-build— — — —%
Other1,509,291 — 1,509,291 2%
Total revenues and other income$60,172,362 $1,940,819 $62,113,181 100%
Relative percentage97 %3 %100 %
Note: Percentages may not calculate due to rounding.

Under ASC 606, a performance obligation is a promise in a contract with a customer, to transfer a distinct good or service to the customer. Equipment systems contracts are lump sum contracts, which require the performance of some, or all, of the obligations under the modified retrospective methodcontract for a specified amount. Service revenue contracts, which include both architectural and engineering designs, generally contain multiple performance obligations which can span across multiple phases of a project and are generally set forth in the contract as distinct milestones. The majority of construction design-build contracts have a single performance obligation, as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. Some contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the project life cycle (design and construction).

The transaction price for service contracts and construction design-build contracts is allocated to each distinct performance obligation and recognized as revenue when, or as, each performance obligation is satisfied. When there are multiple performance obligations under the same service contract, the Company allocates the transaction price to each performance obligation based on the standalone selling price. In general, payment is fixed at the time of the contract and are not subject to discounts, incentives, payment bonuses, credits, and penalties, unless negotiated in an amendment.

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When establishing the selling price to the customer, the Company uses various observable inputs. For equipment systems, the stand-alone selling price is determined by forecasting the expected costs of the products, and then adding in the appropriate margins established by management. For service revenues and construction design-build revenues, the Company estimates the selling price by reference to certain physical characteristics of the project, which include the facility size, the complexity of the design, and the mechanical systems involved, which are indicative of the scope and complexity for those services. Significant judgments are typically not required with respect to lease contracts in effect asthe determination of the adoption date. The adoptiontransaction price based on the nature of the ASU increasedselling prices of the products and services delivered and the collectability of those amounts. Accordingly, the Company does not consider estimates of variable consideration to be constrained.

The Company recognizes equipment systems, services, and construction design-build revenues when the performance obligation with the customer is satisfied. For satisfaction of equipment system revenues, the Company recognizes revenue when control of the promised good transfers to the customer, which predominately occurs at the time of shipment. For service revenues, satisfaction occurs as the services related to the distinct performance obligations are rendered or completed in exchange for consideration in an amount for which the Company is entitled. The time period between recognition and satisfaction of performance obligations is generally within the same reporting period; thus, there are no material unsatisfied or partially unsatisfied performance obligations for product or service revenues at the end of the reporting period.

Construction design-build revenues are recognized as the Company's obligations are satisfied over time, using the ratio of project costs incurred to estimated total costs for each contract because of the continuous transfer of control to the customer as all of the work is performed at the customer’s site and, therefore, the customer controls the asset as it is being constructed. This continuous transfer of control to the customer is further supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay the Company for costs incurred plus a reasonable profit and take control of any work in process. This cost-to-cost measure is used for our assetsconstruction design-build contracts because management considers it to be the best available measure of progress on these contracts.

Contract modifications through change orders, claims and liabilities by $326,095incentives are routine in 2019the performance of the Company’s construction design-build contracts to account for changes in the contract specifications or requirements. In most instances, contract modifications are not distinct from the existing contract due to the recognitionsignificant integration of rightservices provided in the contract and are accounted for as a modification of usethe existing contract and performance obligation. Either the Company or its customers may initiate change orders, which may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of completion of the work. Change orders that are unapproved as to both price and scope are evaluated as claims. The Company considers claims to be amounts in excess of approved contract prices that the Company seeks to collect from its customers or others for customer-caused delays, errors in specifications and designs, contract terminations, change orders that are either in dispute or are unapproved as to both scope and price, or other causes of unanticipated additional contract costs.

The timing of when the Company bills customers on long-term construction design-build contracts is generally dependent upon agreed-upon contractual terms, which may include milestone billings based on the completion of certain phases of the work, or when services are provided. When as a result of contingencies, billings cannot occur until after the related revenue has been recognized; the result is unbilled revenue, which is included in contract assets. Additionally, the Company may receive advances or deposits from customers before revenue is recognized; the result is deferred revenue, which is included in contract liabilities. Retainage subject to conditions other than the passage of time are included in contract assets and leasecontract liabilities.

Contract assets represent revenues recognized in excess of amounts paid or payable (contract receivables) to the Company on uncompleted contracts. Contract liabilities represent the Company’s obligation to perform on uncompleted contracts with respectcustomers for which the Company has received payment or for which contract receivables are outstanding.

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The following table provides information about contract assets and contract liabilities from contracts with customers:

As of December 31,
20222021
Contract assets:
Revenue recognized in excess of amounts paid or payable (contract receivables) to the Company on uncompleted contracts (contract asset), excluding retainage$2,874,141 $— 
Retainage included in contract assets due to being conditional on something other than solely passage of time130,141 — 
Total contract assets$3,004,282 $— 
As of December 31,
20222021
Contract liabilities:
Payments received or receivable (contract receivables) in excess of revenue recognized on uncompleted contracts (contract liability)$1,294,452 $— 
Retainage included in contract liabilities due to being conditional on something other than solely passage of time— — 
Total contract liabilities$1,294,452 $— 

Accounts receivable, net of allowance for doubtful accounts, balances from contracts with customers within the accompanying balance sheets as of December 31, 2022, and 2021, were $12,466,180 and $8,022,553, respectively.

For equipment systems contracts, the Company’s predominant policy is to operating leases.

collect deposits from customers at the beginning of the contract and the balance of the contract payment prior to shipping. The Company does, in some cases, collect deposits or retainers as down payments on service contracts. Consumable products orders may be paid for in advance of shipment or for recurring customers with credit, payment terms of 30 days or less may be extended by the Company. Customer payments that have been collected prior to the performance obligation being recognized are recorded as customer deposit liabilities on the balance sheet. When the performance obligation is satisfied and all the criteria for revenue recognition are met, revenue is recognized. In certain situations when the customer has paid the deposit and services have been performed but the customer chooses not to proceed with the contract, the Company is entitled to keep the deposit and recognize revenue. Of the outstanding customer deposit balance of $13,345,451 at December 31, 2021, $13,186,579 was recognized as revenue in the year ended December 31, 2022. The entire customer deposit balance of $4,878,863 at December 31, 2020 was recognized as revenue in the year ended December 31, 2021.

NOTE 34 – RELATED PARTY TRANSACTIONS

In October 2018, the Company received a $1,000,000, unsecured, interest only, promissory note (the “Promissory Note”) from Cloud9 Support Inc. (“Cloud9”), an entity owned 100% by

On December 15, 2020, James Lowe, a director of the Company.Company, agreed to convert a $1,000,000 note plus $4,500 of accrued interest into a convertible note bridge financing (see "Bridge Financing" in Note 10 – Notes Payable). The Promissory Notenote carried interest at a rate of 12% and matured on December 31, 2021. The note was originally due April 30, 2019. The Promissory Note is personally guaranteed by the Company’s two majority shareholders, Bradley Nattrass, who is the Company’s Chairman and Chief Executive Officer, and Octavio Gutierrez, a director and former officerconverted into shares of the Company. The Promissory Note includes additional consideration of 30,000 options at an exercise price of $1.20 per share. Under the initial terms of the Promissory Note, the interest rate was 12.0% per year with interest payable monthly. In May 2019, the due date of the Promissory Note was extended to December 31, 2019 and the interest rate was decreased to 9.0% per year payable monthly. InCompany's common stock in connection with the execution of the Credit Agreement (see Note 17), onCompany's uplisting to Nasdaq in February 21, 2020, the Company entered into2021.
Cloud9 Support, an agreement to amend the Promissory Note (the “Amending Agreement”). Pursuant to the Amending Agreement, Cloud9 agreed to extend the maturity date of the Promissory Note from December 31, 2019 to the date which is the earlier of 60 days following the date: (a) on which demand for repayment is made by the Lender under the Credit Agreement; or (b) which is the Maturity Date of the Credit Agreement.

The Company purchases some cultivation products from Bravo Lighting, LLC (d/b/a Bravo Enterprises) (“Bravo”) and Enviro-Glo, LLC (“Enviro-Glo”), manufacturers and distributors of commercial building lighting and other product solutions with common control by the Company’s two major shareholders, Bradley Nattrass and Octavio Gutierrez. Purchases from Bravo and Enviro-Glo totaled $45,129 and $276,443 for the years ended 2019 and 2018, respectively. Outstanding receivables from Bravo and Enviro-Glo for the years ended 2019 and 2018 totaled $0 and $43,120, respectively. Net outstanding payables incurred for purchases of inventory and other services to Bravo and Enviro-Glo as of December 31, 2019 and 2018, was $8,570 and $5,562, respectively.

The Company has purchased goods from Cloud 9 Support, LLC (“Cloud 9”), a companyentity owned by James Lowe, a director, shareholder, and debt holder. Purchases from Cloud 9 were $97,329 and $84,746 during the years ended 2019 and 2018, respectively. Cloud 9 also purchases materials from the Company for use with their customers. Total sales to Cloud 9 from the CompanyCloud9 Support were $392,963$27 and $273,760$106,310 during the years ended 20192022 and 2018,2021, respectively. Outstanding receivables from Cloud 9Cloud9 Support as of December 31, 20192022 and 20182021 totaled $49,659$3,920 and $79,235,$6,797, respectively. NetThere was no outstanding payables for purchases of inventory andor other services to Cloud 9Cloud9 Support as of December 31, 20192022 and 2018, totaled $16,402 and $13,240, respectively.

F-13
2021.

F-18


NOTE 45 – PREPAYMENTS & ADVANCES

OTHER ASSETS

Prepayments and advancesother assets are comprised of prepayments paid to vendors to initiate orders and prepaid services and fees. The prepaid balances are summarized as follows:

  December 31, December 31,
  2019 2018
Vendor Prepayments $1,070,788  $776,478 
Prepaid Services and Fees  187,912   152,204 
Prepayments and Advances $1,258,700  $928,682 

As of December 31,
20222021
Vendor prepayments$2,459,389 $10,652,962 
Prepaid services and fees1,346,430 587,505 
Others38,769 7,799 
Total prepayments and other assets$3,844,588 $11,248,266 
NOTE 56 - PROPERTY PLANT & EQUIPMENT, NET

Property Plant and Equipment balances are summarized as follows:

  December 31, December 31,
  2019 2018
Computers & Technology Equip $87,300  $61,910 
Furniture and Fixtures  42,518   30,162 
Leasehold Improvements  164,072   143,215 
Vehicles  57,414   132,875 
Software  142,721   233,783 
R&D Assets  3,031   84,031 
Other Equipment  38,355   65,140 
Accumulated depreciation  (370,376)  (309,975)
Property plant and equipment, net $165,035  $441,141 

As of December 31,
20222021
Computers and technology equipment$232,405 $106,825 
Furniture and fixtures234,389 110,006 
Leasehold improvements306,719 164,072 
Vehicles456,797 20,000 
Software685,580 229,621 
Other equipment58,525 36,548 
Accumulated depreciation(667,269)(459,576)
Total property plant and equipment, net$1,307,146 $207,496 
Depreciation expense for the years ended December 31, 20192022 and 20182021 totaled $264,597$423,286 and $153,162,$223,727, respectively.

NOTE 67 – INVESTMENTS

The changes in the components of the Investments for the years ended December 31, 2019 and 2018investments are summarized as follows:

  Year Ended December 31, 2019
  Edyza TGH Total
Beginning Balances as of 1/1/2019 $812,883  $448,766  $1,261,649 
Purchase of additional shares under SPOA  897,475   –   897,475 
Initial purchase of Membership interest  –   367,000   367,000 
Additional Membership interest purchased with first option  –   –   – 
Impairment of investment  –   (505,766)  (505,766)
Legal fees  –   –   – 
Ending Balances as of 12/31/2019 $1,710,358  $310,000  $2,020,358 

  Year Ended December 31, 2018
  Edyza TGH Total
Beginning Balances as of 1/1/2018 $400,000  $–  $400,000 
Purchase of additional shares under SPOA, including $75,000 reflected in Accrued Expenses  400,000   –   400,000 
Initial purchase of Membership Interest  –   125,000   125,000 
Additional Membership interest purchased with first option  –   150,000   150,000 
Additional Membership interest purchased with second option  –   158,000   158,000 
Legal fees  12,883   15,766   28,649 
Ending Balances as of 12/31/2018 $812,883  $448,766  $1,261,649 

F-14

XS FinancialEdyzaTotal
Balances, as of December 31, 2021$2,500,000 $1,710,358 $4,210,358 
Impairment— (1,710,358)(1,710,358)
Paid in kind interest59,307 – 59,307 
Balances, as of December 31, 2022$2,559,307 $— $2,559,307 

Edyza

In August 2017,

XS Financial
On October 30, 2021, the Company entered intoparticipated in a Simple Agreement for Future Equity (“SAFE”) with Edyza,convertible note offering of Xtraction Services, Inc. (“Edyza”, a/k/a XS Financial Inc. (CSE: XSF) (OTCQB: XSHLF) ("XSF"), a developerspecialty finance company providing CAPEX financing solutions, including equipment leasing, to CEA companies in the United States. The Company invested $2,500,000 of wireless sensor technology,a total $43,500,000 raised by XSF. Prior to provideany Nasdaq listing, the investment incurs 9.5% interest payable, of which, 7.5% is cash interest and 2.0%. is interest paid in kind. Subsequent to any Nasdaq listing, the investment incurs 8.0% interest. The debt matures on October 28, 2023, with a one-year option at the sole discretion of XSF to extend the maturity date. In addition, the Company received 1.25 million warrants denominated in Canadian dollars ("C$") with a C$0.45 share price as subject to the rightwarrant instrument. No value was attributed to obtain an ownership interest in Edyza to be issued when Edyza engaged in a priced round of investment. The Company paid Edyza $400,000 for the SAFE.

In August 2018,warrants at the Company and Edyza entered into a Stock Purchase and Option Agreement (“SPOA”) whereby the Company and Edyza agreed to terminate the SAFE in exchange for Edyza issuing the Company 442,685 shares of Edyza Common Stock at $0.903577 per share, or $400,000 in the aggregate. In connection with the SPOA, the Company agreed to pay Edyza an additional $400,000 in six monthly installments ($50,000 a month in August and September 2018 and $75,000 a month from October 2018 thru January 2019) in exchange for Edyza issuing the Company an additional 442,685 shares of Edyza Common Stock at $0.903577 per share. As of December 31, 2018, the Company had paid $325,000time of the additional $400,000 to investment.

F-19

Edyza under this installment payment plan. The remaining installment payment of $75,000 is included in Accrued Expenses on the Company’s Balance Sheet as of December 31, 2018 and was paid to Edyza in January 2019. During 2019, the Company acquired an additional 827,018 shares for $897,475.

The Company has capitalized an additional $12,883a strategic investment in legal fees associated with the purchases of the Edyza, Common Stock.Inc. ("Edyza"), a hardware and software technology company that enables dense sensor networks in agriculture, healthcare, and other environments that require precise micro-climate monitoring. The Company measures this investment at cost, less any impairment changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.

TGH

In February 2018,


During the third quarter of 2022, the Company entered intofully impaired this investment. The Company notes that the intent and ability to retain its investment for a Membership Interestperiod of time sufficient to allow for any anticipated recovery has passed, causing an "other than temporary loss." The Company will continue to monitor any future changes to this impairment and Purchase Agreement (“MIPA”) with Total Grow Holdings, LLC (d/b/a/ Total Grow Control, LLC) (“TGH”), a developerseek to recover any remaining value of environmental controls and fertigation/irrigation distribution products, to purchase 5% of TGH’s membership interests on a fully diluted basis for $125,000.its 19.5% ownership. The MIPA also contained two separate options for the Company to purchase additional membership interests in TGH and a purchase right for the Company to acquire all of the outstanding membership interests in TGH. The first optionimpairment recorded was exercisable from July 1, 2018 thru August 31, 2018 and allowed the Company to acquire an additional 5% of TGH’s membership interests on a fully diluted basis for $150,000. $1.7 million.

NOTE 8 – GOODWILL & INTANGIBLE ASSETS

Goodwill

The second option was initially exercisable from February 15, 2019 thru May 15, 2019 and allowed the Company to acquire an additional 15% of TGH’s membership interests on a fully diluted basis for $600,000. The purchase right is exercisable from May 15, 2019 thru February 15, 2020 and allows the Company to acquire all of the outstanding membership interests in TGH based on a total valuation of TGH of $7,500,000.

In July 2018, the Company exercised its initial option and purchased an additional 5% of TGH’s fully diluted membership interests for $150,000. As of December 31, 2018, the Company owned 10% of the membership interests in TGH.

In January 2019, the Company and TGH renegotiated the terms of the second option, accelerating the beginning of the exercise period to January 2019 from February 15, 2019, and reducing the purchase price for the additional 15% of TGH’s membership interests on a fully diluted basis from $600,000 to $525,000. In January 2019, the Company elected to exercise this renegotiated second option and purchased an additional 15% of TGH’s fully diluted membership interests for $525,000.

Prior to December 31, 2018, the Company had advanced TGH $158,000 for equipment orders the Company had placed with TGH. TGH agreed to apply this $158,000 in equipment advances toward the second option membership interest purchase price of $525,000, and the Company has reflected this $158,000 as an investmentrecorded goodwill in TGHconjunction with acquisitions it has completed. The goodwill balances as of December 31, 2018. The remaining balance of $367,000 for the second option membership interest was due in installments of $35,000 every two weeks through May 2019. As of March 31, 2019, the Company had made total payments of $336,000.2022 and 2021 were $15,572,050 and $7,992,121. Goodwill is not amortized. The Company capitalized an additional $15,766 in legal fees associated with the purchases of the TGH membership interests. As of December 31, 2018, the Company’s fully diluted ownership interest in TGH was less than 20% and, the Company measured these investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. As of December 31, 2018, the Company determined that no impairment of its investment in TGH was necessary given the recent valuations and no change in qualitative factors.

The Company also made the remaining $367,000 in additional payments to TGH under the renegotiated agreement reached in January 2019 to acquire additional Membership Interests in TGH. When the payment plan was completed in May 2019, the Company was issued the additional ownership interest in TGH resulting in the Company owning 24% of TGH’s membership interest. The Company believed that this ownership interest in TGH resulted in the Company being able to exercise significant influence over TGH and that the Company should begin to account for its investment in TGH under the equity method beginning in July 2019 since the operations of TGH were insignificant in June 2019.

F-15

In September 2019, the Company decided that it should remain independent with regard to any investments in environmental controls and fertigation/irrigation distribution entities and decided it should divest itself of the ownership interest in TGH. The Company entered into preliminary negotiations with TGH to sell its ownership interest in TGH back to TGH. In connection with those negotiations, the Company determined it shoulddid not record any equity interests in TGH and the Company recorded a $505,766 write-down of its investment in TGHimpairment charges related to an amount the Company anticipates receiving in proceeds from the sale of the TGH investment back to TGH.

In January 2020, the Company and TGH entered into an agreement whereby TGH agreed to purchase the Company’s remaining investment in TGH in consideration for a short-term note due April 24, 2020 in the amount of $200,000 and a long-term note due in a lump sum on January 27, 2025 in the amount of $110,000 with interest of 4.0% payable annually in arrears. Per the terms of the agreement, the Company retains its ownership interest in TGH until the $200,000 short-term note is repaid. As of the date of this report, TGH has not made any payments on the $200,000 short-term note and the Company has retained its ownership interest in TGH. The Company does not have the ability to exert significant influence on TGH and therefore has recorded the investment at its adjusted cost basis.

NOTE 7 – OTHER ASSETS

Included in other assets are the following intangible assets:

·Patents, consisting of legal costs paid to third parties to establish a patent, which are capitalized until such time that the patents are approved and issued or rejected. If approved, capitalized costs are amortized using the straight-line method over the estimated lives of the patents, generally five years. The Company has two issued patents as of December 31, 2019 and had no issued patents at December 31, 2018.

·License fees, which consist of fees paid to have the Company’s products certified by a nationally recognized organization. License fees are amortized over ten years.

The net balance of intangible assets as of December 31, 2019 and December 31, 2018 was $86,151 and $63,755, respectively. Amortization expense totaled $1,879 and $974goodwill for the years ended December 31, 20192022 and 2018,2021.

Intangible Assets Other Than Goodwill

Intangible assets as of December 31, 2022 and 2021 consisted of the following:
As of December 31, 2022
CostAccumulated AmortizationNet Book Value
Finite-lived intangible assets:
Customer relationships$4,212,100 $(401,997)$3,810,103 
Trademarks and trade names1,778,000 (307,817)1,470,183 
Backlog and Other768,113 (626,003)142,110 
Total finite-lived intangible assets6,758,213 (1,335,817)5,422,396 
Indefinite-lived intangible assets:
Trade names28,291 — 28,291 
Total indefinite-lived intangible assets28,291 — 28,291 
Total intangible assets, net$6,786,504 $(1,335,817)$5,450,687 

As of December 31, 2021
CostAccumulated AmortizationNet Book Value
Finite-lived intangible assets:
Customer relationships$834,100 $(49,649)$784,451 
Trademarks and trade names499,000 (41,583)457,417 
Backlog and Other490,113 (184,806)305,307 
Total finite-lived intangible assets1,823,213  (276,038) 1,547,175 
Indefinite-lived intangible assets:
Trade names28,291 — 28,291 
Total indefinite-lived intangible assets28,291 — 28,291 
Total intangible assets, net$1,851,504 $(276,038)$1,575,466 
F-20

Amortization expense for intangible assets subject to amortization for the years ended December 31, 2022 and 2021 was $1,059,779 and $271,549, respectively.

The estimated future amortization expense for intangible assets subject to amortization at December 31, 2022, is summarized below:
For the years ending December 31,
Estimated Future
Amortization Expense
2023$1,100,461 
2024957,329 
2025957,329 
2026915,745 
2027691,095 
Thereafter800,437 
Total estimated future amortization expense$5,422,396 

NOTE 89 – ACCRUED EXPENSES

Accrued expenses are summarized as follows:

  December 31, December 31,
  2019 2018
Accrued operating expenses $854,056  $240,941 
Accrued wages and related expenses  487,327   490,961 
Accrued interest expense  –   10,958 
Accrued sales tax payable  345,458   401,282 
  $1,686,841  $1,144,142 

As of December 31,
20222021
Accrued operating expenses$515,858 $628,871 
Accrued wages and related expenses639,614 1,887,124 
Accrued 401(k)262,599 23,520 
Accrued sales tax payable1,778,890 1,338,763 
Total accrued expenses$3,196,961 $3,878,278 
Accrued sales tax payable is comprised of prior period sales tax payableamounts due to various states and Canadian provinces for 2015 through 2019.2022.
NOTE 10 –BENEFICIAL CONVERSION FEATURE
During the fourth quarter of 2020 the Company entered into bridge financing notes (the "Bridge Financing Notes") totaling $1,854,500. The Bridge Financing Notes are a combination of $1,004,500 from James Lowe, (See Note 4 – Related Party Transactions), $350,000 received in November 2020, and an additional $500,000 received in December 2020. The Bridge Financing Notes carried interest at the rate of 12% and had a maturity date of December 31, 2021. The Bridge Financing Notes were mandatorily convertible upon the closing of a sale of the securities of the Company, has set up payment planswhether in a private placement or pursuant to an effective registration statement under the Securities Act, resulting in at least $2,500,000 of gross proceeds to the Company (a "Qualified Offering"). In the event of a Qualified Offering, the outstanding principal and interest of the Bridge Financing Notes were to be converted into the identical security issued at such Qualified Offering at 75% of the per security price paid by investors in connection with the various taxing agenciesQualified Offering. The offering described in Note 15 – Shareholders Equity, was a Qualified Offering and the Bridge Financing Notes were converted into equity in connection with the offering on February 17, 2021.
NOTE 11 – PROMISSORY NOTE AND DEBT
As part of the Asset Purchase Agreement of DVO, a non-negotiable promissory note in the aggregate principal amount of $3,806,250, payable to relieveDVO was issued effective November 1, 2022 (the "DVO Promissory Note"). The principal amount, together with the obligation. Thesimple interest accrued on the unpaid principal amount outstanding will be paid by the Company on a quarterly basis for the first four consecutive quarters, with the first payment plans require monthlypaid in January 2023, and the remaining three payments in various amounts over a perioddue ten days following the end of 12 months.

F-16

NOTE 9 – NOTES PAYABLE

Notes payable balances totaled $2,812,709 and $2,478,869 ateach subsequent fiscal quarter thereafter until the earlier of the end of the fourth full fiscal quarter following the closing date December 31, 20192023 or the payment in full of all amounts due. The DVO Promissory Note may be prepaid in whole or in part at any time without premium or penalty; provided, that each payment shall be accompanied by payment of all unpaid costs, fees and December 31, 2018, respectively.expenses, if any, which are due plus all accrued and unpaid interest due as of the date of such prepayment.

F-21

The outstanding principal balance under the DVO Promissory Note shall bear simple interest at a variable rate per annum equal to the rate of interest most recently published by JP Morgan Chase & Co. as the "prime rate" (the "Prime Rate"). Initially, interest will accrue at the Prime Rate as of the date of the DVO Promissory Note. The interest rate will be adjusted on a quarterly basis as of the first day of each full fiscal quarter following the first full fiscal quarter after the closing date to the then current Prime Rate. Interest expense incurredamounts accruing on the notes payable was $596,075outstanding principal balance of the DVO Promissory Note will be non-compounding and $119,961 for the years ended December 31, 2019 and 2018, respectively.

The following iswill be calculated on a summary of notes payable:

  December 31, December 31,
  2019 2018
     
Unsecured, interest only, note payable with Chris Parkes originally due December 31, 2018. Interest payments due monthly at an annual rate of 20.4%. Note payable revised in December 2018 extending the maturity date to March 31, 2020. During August 2019, the maturity date was extended to March 31, 2020 and the interest rate was decreased to an annual rate of 9%. In consideration for extending the due date of the Note and reducing the interest rate, the Company issued the Holder 3,000 shares of Common Stock. Beginning of March 31, 2020, the Company has made monthly payments in the amount of $10,000. $80,000  $80,000 
         
Unsecured, interest only, note payable with David Parkes originally due December 31, 2018. Interest payments due monthly at an annual rate of 18.0%. Note payable revised in December 2018 extending the maturity date to March 31, 2020. During August 2019, the maturity date was extended to March 31, 2020 and the interest rate was decreased to an annual rate of 9%. In consideration for extending the due date of the Note and reducing the interest rate, the Company issued the Holder 3,000 shares of Common Stock. Beginning of March 31, 2020, the Company has made monthly payments in the amount of $10,000  100,000   100,000 
         
Unsecured, interest only, note payable with Michael S. Bank originally due April 30, 2019. Interest at 19.8% per year is paid twice per month. The note contains a demand re-payment provision that can be executed by Mr. Bank at any time by providing a one-time notice. The Company may re-pay any part or the entire principal sum at any time with penalty and abatement of interest expense from date of early payment. The note includes six thousand warrants, each exercisable to purchase one share of the Company's Common Stock at a price of $1.00 per share. In March 2019, the Company repaid $35,000 of the principal and extended the maturity date to April 30, 2019. The note was repaid in full on April 30, 2019.  –   298,869 
         
Note payable with Hydrofarm Holdings Group, Inc. (“Hydrofarm”), secured by all currently existing and future assets. Interest accrues at 8.0% per year and is paid quarterly. The note matures on the earlier of: (a) 90 days’ notice from Hydrofarm; (b) acceleration of the note payable due to the Company being in default; or (c) December 2023.  2,000,000   2,000,000 
         
Secured agreement to sell future receivables to GCF Resources, LLC, net of $30,000 in closing fees. The agreement requires 32 weekly payments of $42,190 totaling $1,350,000. The agreement matures on May 7, 2020 but is repayable prior to maturity for less than the $1,350,000 in total payments.  632,709   – 
         
Total  2,812,709   2,478,869 
Less current maturities  (2,812,709)  (2,478,869)
Long term $–  $– 

F-17
quarterly basis.

Effective November 20, 2018,On February 21, 2020, the Company entered into a letter of intent (“LOI”agreement (the "Credit Agreement") with Hydrofarm Holdings Group,by and among the Company, as borrower, urban-gro Canada Technologies Inc. (“Hydrofarm”) whereby Hydrofarm agreed to acquire all ofand Impact, as guarantors, the Company’s issuedlenders party thereto (the "Lenders"), and outstanding common stockBridging Finance Inc., as administrative agent for the Lenders (the “Merger”"Agent"). PursuantThe Credit Agreement, which was denominated in Canadian dollars, was comprised of (i) a 12-month senior secured demand term loan facility in the amount of C$2.7 million (USD$2.0 million), which was funded in its entirety on the closing date (the "Term Loan"); and (ii) a 12-month demand revolving credit facility of up to C$5.4 million (USD$4.0 million), which could be drawn from time to time, subject to the terms of the LOI, Hydrofarm extended to the Company a secured, interest only noteand conditions set forth in the principal amount of $2 million. The note was secured by all of our currently existingCredit Agreement and future assets. In connectiondescribed further below (the "Revolving Facility," and together with the executionTerm Loan, the "Facilities"). The Credit Agreement was personally guaranteed by the Company’s CEO and Chairman, Bradley Nattrass, and was to be in place for the original term of the Credit Agreement (see Note 17),(1 year) plus a 1-year extension period at the discretion of the Lender as provided in the Credit Agreement.

The final maturity date of the Facilities was initially stipulated in the Credit Agreement as the earlier of (i) demand, and (ii) the date that is 12 months after the closing date, with a potential extension to the date that is 24 months after the closing date (the "Initial Maturity Date"). The Facilities bore interest at the annual rate established and designated by the Bank of Nova Scotia as the prime rate, plus 11% per annum. Accrued interest on the outstanding principal amount of the Facilities was due and payable monthly in arrears, on the last business day of each month, and on the Initial Maturity Date.
The Revolving Facility could initially be borrowed and re-borrowed on a revolving basis by the Company during the term of the Facilities, provided that borrowings under the Revolving Facility were limited by a loan availability formula equal to the sum of (i) 90% of insured accounts receivable, (ii) 85% of investment grade receivables, (iii) 75% of other accounts receivable, (iv) 50% of eligible inventory, and (v) the lesser of C$4.05 million (USD$3.0 million) and (A) 75% of uncollected amounts on eligible signed equipment orders for equipment systems contracts and (B) 85% of uncollected amounts on eligible signed professional services order forms for design contracts. The Revolving Facility could be prepaid in part or in full without a penalty at any time during the term of the Facilities, and the Term Loan could be prepaid in full or in part without penalty subject to 60 days prior notice in each case subject to certain customary conditions.
On September 4, 2020, the Company executed an amendment to the Credit Agreement (the "First Amendment") to extend the maturity date of the Facilities to December 31, 2021 (the "Revised Maturity Date"). The First Amendment also increased the rate at which the Facilities would bear interest to the annual rate established and designated by the Bank of Nova Scotia as the prime rate, plus 12% per annum.
As a result of the First Amendment, the Company was required to prepay, on or before January 31, 2021, $1,000,000 of the balance of the Term Loan and begin making monthly payments of $100,000 on the balance on the Term Loan starting on March 1, 2021. Additionally, the Company was required to make monthly payments of $50,000 on the balance under the Revolving Facility beginning October 1, 2020 and could make no more draws under the Revolving Facility.
The Company incurred $1,314,868 of debt issuance costs in connection with these Facilities, of which $676,822 was non-cash in the form of Common Stock and warrant issuances. The Company estimated the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option pricing based on the market value of the underlying Common Stock at the valuation measurement date of $6.00, the remaining contractual terms of the warrants of 5 years, risk free interest rate of 1.14% an expected volatility of the price of the underlying Common Stock of 100%. The Company recorded the debt issuance costs as either a deferred financing asset or a direct reduction of the loan obligation based on the pro-rata value of the Revolving Facility and Term Loan, respectively, on the closing date. The debt issuance costs were being amortized as interest expense over the life of the Facilities, until the Revised Maturity Date. On February 17, 2021, the Company repaid all amounts outstanding under the noteCredit Agreement and expensed the Merger was abandoned. 

NOTE 10 – UNIT OFFERING

Effective January 9, 2019, the Company executed a letter agreement with 4Front Capital Partners, Inc., Toronto, Canada (“4Front”), whereby 4Front agreed to actremaining unamortized debt issuance costs as the Company’s exclusive placement agent in connection with a private placement offering. Beginning in March 2019, 4Front initiated an offering (the “Offering”)loss on extinguishment of up to $6,000,000 from the saledebt. As of Units, with each Unit consisting of a $1,000 Convertible Debenture (the “Debentures” or a “Debenture”)December 31, 2022 and Common Stock Purchase Warrants (the “Warrants”) exercisable to purchase 207.46 shares of Common Stock at $3.00 per share for a period of two years from the purchase date. The Debentures are due MayDecember 31, 2021, and bear interest at 8%, compounded annually, with interest due at maturity. The Debentures, plus any accrued but unpaid interest, will automatically convert forthere was no additional consideration into Common Shares at a conversion price of $2.41 per share upon the occurrence of a liquidity event. A liquidity event means: (a) the date on which the Company’s Common Stock is listed for trading on a recognized stock exchange in either Canada or the United States; and (b) securities issued pursuantunamortized debt issuance costs remaining related to the Offering, including the Common Stock underlying both the conversion right included in the DebenturesRevolving Facility and underlying the Warrants, have been duly qualified by a registration statement in the United States, allowing the securities to be freely tradeable pursuant to the U.S. securities laws, or a prospectus in Canada. The Company filed a registration statement with the SEC on September 17, 2019, to register the securities in connection with the Offering. That registration statement was declared effective October 16, 2019, triggering the liquidity event indicated above and the $2,565,000 in Debentures plus $92,037 in accrued interest were converted into 1,102,513 Common Shares at $2.41 per share. The Warrants contain a mandatory exercise provision if the weighted average share price of the Company’s Common Stock exceeds $5.00 per share for a period of five consecutive days.

Term Loan, respectively.

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NOTE 1112 – OPERATING LEASE LIABILITIES &AND COMMITMENTS AND CONTINGENCIES

The Company has twoseven operating leasesoffice lease liabilities and one finance office lease liability with an imputed annual interest rate of 8%. The termsFive of the firstleases were assigned to the Company in connection with the acquisitions of 2WR, Emerald, and DVO. The remaining lease are 24 months commencing on September 1, 2018 and ending on August 31, 2020. The terms range from less than a year to 6 years, as of the second lease are 28 months commencing on September 1, 2019 and ending December 31, 2021.

2022. The following is a summary of operating lease liabilities:

  December 31,
2019		 December 31,
2018
Operating lease liabilities related to right of use assets. $222,236  $– 
Less current portion  (123,395)  – 
Long term $98,841  $– 

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As of December 31,
20222021
Operating lease liabilities related to right of use assets$2,645,598 $694,462 
Less current portion(600,816)(152,459)
Long term$2,044,782 $542,003 

The following is a schedule showing total future minimum lease payments:

Year ending Total Minimum 
December 31, Lease Payments 
2020  177,688 
2021  91,688 

For the years ending December 31,
Minimum
Lease Payments
2023$827,688 
2024708,364 
2025549,319 
2026398,835 
2027345,333 
Thereafter335,983 
Total minimum lease payments$3,165,522 
Less: Amount representing interest$(519,924)
Net lease obligations$2,645,598 
From time to time, the Company is involved in routine litigation that arises in the ordinary course of business. There are no legal proceedings for which management believes the ultimate outcome would have a material adverse effect on the Company’s results of operations and cash flows.

NOTE 1213 – RISKS AND UNCERTAINTIES

Concentration Risk

During


The tables below show customers who account for 10% or more of the year ended December 31, 2019, one vendor composed 24%Company’s total revenues and 10% or more of the Company’s accounts receivable for the periods presented:

Customers exceeding 10% of revenue
For the Years Ended
December 31,
Company Customer Number20222021
C00000146210 %46 %
C00000114013 %*
C00000218717 %*
*Amounts less than 10%


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Customers exceeding 10% of accounts receivable
As of December 31,
Company Customer Number20222021
C000001462*41 %
C000001140*23 %
C00000215110 %*
C00000218724 %*
*Amounts less than 10%

The table below shows vendors who account for 10% or more of the Company’s total purchases. Duringpurchases and 10% or more of the year ended December 31, 2018, two unrelated vendors composed 18% and 11% of total purchases.

The Company’s primary suppliers of automated environmental controls and fertigation represented 3% and 46% of total accounts payable outstanding asfor the periods presented:


Vendors exceeding 10% of December 31, 2019purchases
For the Years Ended
December 31,
Company Vendor Number20222021
V00000102913 %15 %
V000000453*14 %
V000001326*11 %
V000001372*15 %
*Amounts less than 10%

Vendors exceeding 10% of accounts payable:
As of December 31,
Company Vendor Number20222021
V000000453*20 %
V000001372*33 %
V000001326*12 %
V00000191011 %*
*Amounts less than 10%

Foreign Exchange Risk
Although our revenues and 2018, respectively.

During the year ended December 31, 2019, one customer represented 21% of total revenue. During the year ended December 31, 2018, one customer represented 14% of total revenue. At December 31, 2019, one customer represented 15% and another represented 11% of total outstanding accounts receivables. At December 31, 2018, one customer represented 19% and another represented 13% of total outstanding receivables.

Coronavirus Pandemic

In December 2019, a novel strain of coronavirus (COVID-19) was reportedexpenses are expected to have surfacedbe predominantly denominated in Wuhan, China. In January 2020, this coronavirus spread to other countries, including the United States and effortsdollars, we may be exposed to containcurrency exchange fluctuations. Recent events in the spread of this coronavirus intensified. In March 2020,global financial markets have been coupled with increased volatility in the World Health Organization declaredcurrency markets. Fluctuations in the outbreak ofexchange rate between the coronavirus a pandemic. We are a business that supplies other Essential Businesses with support and supplies necessary to operate and we therefore are an Essential Business and allowed to continue operating under Stay-At-Home Orders issued by many states and cities. However,U.S. dollar, the extent to whichCanadian dollar, the coronavirus impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirusEuro, and the actions to contain the coronavirus or treat its impact. The outbreak and any preventative or protective actions that governments orcurrency of other regions in which we may take in respect of this coronavirusoperate may result inhave a period of business disruption, reduced customer business and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but may materially affectmaterial adverse effect on our business, financial condition results of operations, and cash flows. Effects from the COVID-19 pandemic beganoperating results. We may, in the latterfuture, establish a program to hedge a portion of our foreign currency exposure with the first quarterobjective of 2020; therefore, there was nominimizing the impact to our 2019 results of operations, financial condition and cash flows.

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adverse foreign currency exchange movements. However, even if we develop a hedging program, it may not mitigate currency risks.

NOTE 1314 – STOCK-BASED COMPENSATION

Stock-based compensation expense for the years ended December 31, 20192022 and 20182021 was $1,830,426$2,571,785 and $1,245,826,$1,840,913, respectively based on the vesting schedule of the stock grants and options. During the year ended December 31, 2019, 1,361,9662022, 62,172 shares vested and were issued to employees.employees and directors. During the year ended December 31, 2021, 122,629 shares vested and were issued to employees and directors. No cash flow affectseffects are anticipated for stock grants.

In January 2017,

The Company has adopted equity incentive plans ("Incentive Plans") which provide for the Company began grantingissuance of incentive stock options, stock grants and stock-based awards to attract, retain,employees, directors, and reward employees with Common Stock. Stock grants are offered as partconsultants of the employment offer package, to ensure continuity of employment or as a reward for performance. Each of these grants requires a specific tenure of employment before the grant vests with typical vesting periods of 1 to 3 years of employment.

In January 2018, the Company implemented an equity incentive plan to reward and attract employees and compensate the Board and vendors for services when applicable. Stock optionsThe Incentive Plans are offered as part of an employment offer package, to ensure continuity of service or as a reward for performance. The stock option plan authorizes 3,000,000 shares of common stock. 1,995,499 options have been awarded underadministered by the Plan as of December 31, 2019 and 1,259,000 options were awarded as of December 31, 2018.

In May 2019, the Company adopted a new equity incentive plan, authorizing an aggregate of 3,500,000 shares of Common Stock for issuance thereunder.Company's Board. Stock grants under the equity incentive programsIncentive Plans are valued at the price of the stock on the date of grant. The fair value of the options is calculated using the Black-Scholes pricing model based on the estimated market value of the underlying common stock at the valuation measurement date, $0.90,

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the remaining contractual term of the options, of 10 years, risk-free interest rate of 2.75% and expected volatility of the price of the underlying common stock of 100%. There is a moderate degree of subjectivity involved when usingestimating the value of stock options with the Black-Scholes option pricing models to estimate the options andmodel as the assumptions used in the Black Scholes option-pricing model are moderately judgmental. Stock optionsgrants and stock grantsoptions are sometimes offered as part of an employment offer package, to ensure continuity of service or as a reward for performance.

Stock grants and stock options typically require a 1 to 3 year period of continued employment or service performance before the stock grant or stock option vests.

The following schedule shows stock grant activity for the yearyears ended December 31, 2019:

2022 and 2021:
Number of
Shares
Grants outstandingunissued as of December 31, 201820201,802,667118,889
Grants awarded41,800157,413
Forfeiture/Cancelledcancelled— (70,000)
Grants vested(1,361,966)(122,629)
Grants outstandingunissued as of December 31, 20192021153,673
Grants awarded542,584
Forfeiture/Cancelled412,501(139,226)
Grants vested(62,172)
Grants unissued as of December 31, 2022494,859

The following table summarizes stock grant vesting periods.

Number of  Unrecognized stock compensation  Year Ending
Shares  expense  December 31,
 264,167  $142,552  2020
 148,334   34,775  2021
 412,501  $177,327   

periods:

Number of
Shares		Unrecognized Stock
Compensation Expense		As of December 31,
336,800$1,150,112 2023
158,059518,530 2024
494,859$1,668,642 
The following schedule showsschedules show stock option activity for the yearyears ended December 31, 2019.

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2022 and 2021:

Number of
Shares
Weighted Average Remaining
Life (Years)
Weighted Average
Exercise
Price
Stock options outstanding as of December 31, 2020638,2787.25$6.49 
Issued76,0034.00$6.00 
Exercised(4,777)—$6.78 
Expired(68,167)4.31$7.89 
Stock options outstanding at December 31, 2021641,3377.55$6.27 
Stock options exercisable at December 31, 2021493,7247.69$6.46 

  Number of
Shares		 Weighted Average Remaining
Life (Years)		 Weighted Average
Exercise
Price
Stock options outstanding as of December 31, 2018  1,184,000   9.68  $1.15 
Issued  736,499   9.20  $1.38 
Exercised  –   –   – 
Expired  218,332   9.12  $1.33 
Stock options outstanding at December 31, 2019  1,702,167   9.21  $1.21 
Stock options exercisable at December 31, 2019  703,538   8.89  $1.17 

Number of
Shares
Weighted Average Remaining
Life (Years)
Weighted Average
Exercise
Price
Stock options outstanding as of December 31, 2021641,3377.55$6.27 
Issued76,2469.00$10.48 
Exercised(4,555)—$6.00 
Expired(43,640)6.25$6.04 
Stock options outstanding at December 31, 2022669,3887.85$6.77 
Stock options exercisable at December 31, 2022618,6516.74$6.30 
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The following table summarizes stock option vesting periods under the twoIncentive Plans:
Number of
Shares		Unrecognized Stock
Compensation Expense		As of December 31,
39,089$167,358 2023
11,64839,044 2024
50,737$206,402 
The aggregate intrinsic value of the stock options plans.

Number of Unrecognized stock compensation Year Ending
Shares expense December 31,
 540,998  $359,521  2020
 408,964   120,015  2021
 48,667   10,400  2022
 998,629  $489,936   
outstanding and exercisable at December 31, 2022 is $0.

NOTE 1415 – SHAREHOLDERS’ EQUITY

On February 17, 2021, we completed an offering of 6,210,000 shares of our common stock, inclusive of the underwriters full over allotment, at $10.00 per share for total gross offering proceeds of $62,100,000. In 2018,connection with this offering, we received approval to list our common stock on the Nasdaq Capital Market under the symbol "UGRO."

On May 24, 2021, we announced that the Board authorized a stock repurchase program to purchase up to $5.0 million of the currently outstanding shares of the Company’s common stock, over a period of 12 months through open market purchases, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. On January 18, 2022, the Board authorized a $2.0 million increase to the stock repurchase program, to a total of $7.0 million. On February 2, 2022, the Board authorized an executive leftadditional $1.5 million increase to the stock repurchase, to a total of $8.5 million. On September 12, 2022, the Board authorized an additional $2 million increase to the stock repurchase, for a total of $10.5 million. During the twelve months ended December 31, 2022 the Company and returned 375,000has repurchased 594,918 shares of common stock at an average price per share of $7.33, for a total price of $4.4 million. In total, the Company has repurchased 1,099,833 shares as part of common stock at an average price per share of $8.25 for a total of $9.1 million, under this program.

In February 2021, the related separation agreement. The Company retired therepurchased 350,000 shares and reduced its issued and outstandingof common stock by 375,000 shares.

with an average price per share of $8.50, for a total of $3.0 million, outside of any stock repurchase or publicly announced program.

NOTE 15 -16 – INCOME TAXES

The Company accounts for income taxes in accordance with the asset and liability method prescribed in ASC 740, “Accounting"Accounting for Income Taxes”.Taxes." The Company has adopted the provisions of ASC 740-10-25, which provides recognition criteria and a related measurement model for uncertain tax positions taken or expected to be taken in income tax returns. ASC 740-10-25 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. Tax positions that meet the more likely than not threshold are then measured using a probability weighted approach recognizing the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company had no tax positions relating to open income tax returns that were considered to be uncertain. The Company determined the valuation allowances are established when management determines is more likely than not that some portion or all of the deferred tax asset will not be realized.

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The Company files income federal tax returns in the United States and Canada and state and local tax return in applicable jurisdictions

The Company has experienced substantialcumulative losses for both book and tax purposes since inception and has no tax provision for the years ended December 31, 2019 and 2018.inception. The potential future recovery of any tax assets that the Company may be entitled to due to these accumulated losses is uncertain and theseany tax assets arethat that the Company may be entitled to have been fully reserved based on management’s current estimates.

Management intends to continue maintaining a full valuation allowance on the Company’s deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. The Company’s estimateddeferred income tax benefit for the year ended December 31, 2022 relates to the reduction in the deferred tax liability associated with the amortization of the intangible assets from the acquisitions of the Emerald and 2WR Entities.


As of December 31, 2022, the Company had approximately $23,088,658 of operating loss carryforwards and expiration dates for United States tax purposes, areexpiring as follows:

2016 - $1,618,386 expiring in 2036

2017 - $2,182,354

•$2,182,354 expiring in 2037

2018 - $3,060,443

•$20,906,304 with no expiration

2019 - $6,819,954 no expiration


Realization of operating loss carryforwards to offset future operating income for tax purposes are subject to various limitations including change of ownership and current year taxable income percentage limitations.

The Company has no credit carryforwards for tax purposes.

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The Company’s primary filing jurisdictions are the United States, Canada, and the Netherlands. Due to the Company’s net operating loss carryforwards, the Company’s income tax returns since inception areremain subject to examination by federal, foreign and most state taxing jurisdictionsauthorities for all tax years.
NOTE 17 – BUSINESS DEVELOPMENT
During 2021, the Company purchased lights from one of its international vendors to fulfill an order for a major customer. Subsequent to the sale, delivery and installation of the lights, the customer noted the lights were not performing as the manufacturer had stipulated. The Company performed tests of the lights and confirmed the performance metrics did not meet the manufacturer’s specifications. The Company worked with the customer to determine a lighting solution of replacement lights, sourced from the vendor, that would meet their needs. The customer has been a key customer to the Company and the Company expects to continue to do significant business with the customer in the United Statesfuture. In order to immediately satisfy the customer in this matter, the Company agreed to supply the replacement lighting solution to the customer at the Company’s expense while the Company continues to work with the vendor to resolve the original defective lighting issue, including, claims for reimbursement of the expense.

In total, the Company delivered $3.3 million of replacement lighting equipment to the customer and Canada.

recorded the full amount as a business development expense during the year ended December 31, 2022.

NOTE 1618 – WARRANTS

The following table shows warrant activity for the years ended December 31, 20192022 and 2018.

  December 31,
  2019
  Number of shares Weighted Average Exercise Price
Warrants outstanding as of December 31, 2018  6,000  $1.00 
Warrants issued in connection with convertible debenture offering (see Note 10):        
Issued to convertible debenture holders  532,134  $3.00 
Issued to 4Front as part of compensation  153,900  $2.41 
Warrants outstanding as of December 31, 2019  692,034  $2.88 
Warrants exercisable as of December 31, 2019  692,034  $2.88 

2021:

Number of sharesWeighted Average Exercise Price
Warrants outstanding as of December 31, 2020202,752$13.64 
Exercised(22,490)$14.94 
Issued in conjunction with equity offering310,500$12.50 
Expired(116,674)$18.00 
Warrants outstanding as of December 31, 2021374,088$11.26 
Warrants exercisable as of December 31, 2021374,088$11.26 
Number of sharesWeighted Average Exercise Price
Warrants outstanding as of December 31, 2021374,088$11.26 
Exercised(18,196)$6.00 
Terminated – cashless exercise(44,393)$6.00 
Expired— $— 
Warrants outstanding as of December 31, 2022311,499$12.32 
Warrants exercisable as of December 31, 2022311,499$12.32 
The fair value of the options is calculated using the Black-Scholes pricing model based on the estimated market value of the underlying common stock at the valuation measurement date of $10.00, the contractual term of the options is 3 years, 25 days, risk-free interest rate of 0.57% and expected volatility of the price of the underlying common stock of 100%. There is a moderate degree of subjectivity involved when estimating the value of warrants issued to convertible debenture holders expire June 24, 2021. with the Black-Scholes option pricing model as the assumptions used are moderately judgmental.
The weighted-average life of the warrants issued to 4Front as part of compensation expire May 31, 2021. Warrants issued to Mr. Lowe in 2018 expire March 31, 2023.is 1.85 years. The aggregate intrinsic value of the warrants outstanding and exercisable at December 31, 20192022 is $0.

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NOTE 1719 – SUBSEQUENT EVENTS

Credit Agreement

On February 21, 2020, we entered into a letter agreement (the “Credit Agreement”) by and among

As more fully described in Note 2 - Summary of Significant Accounting Policies, on March 27, 2023 the Company as borrower, urban-gro Canada Technologies Inc. and Impact Engineering, Inc., as guarantors, the lenders party thereto (the “Lenders”), and Bridging Finance Inc., as administrative agent for the Lenders (the “Agent”). The Credit Agreement, which is denominated in Canadian dollars (C$), is comprised of (i)received $2,400,000 to settle a 12-month senior secured demand term loan facility in the amount of C$2.7 million ($2.0 million), which was funded in its entirety on the closing date (the “Term Loan”); and (ii) a 12-month demand revolving credit facility of up to C$5.4 million ($4.0 million), which may be drawn from time to time, subject to the terms and conditions set forth in the Credit Agreement and described further below (the “Revolving Facility,” and together with the Term Loan, “the Facilities”).

The final maturity date of the Facilities will be the earlier of (i) demand, and (ii) the date that is 12 months after the closing date, with a potential extension to the date that is 24 months after the closing date (the “Maturity Date”). The Facilities will bear interest at the annual rate established and designated by the Bank of Nova Scotia as the prime rate, plus 11% per annum. Accrued interest on the outstanding principal amount of the Facilities will be due and payable monthly in arrears, on the last business day of each month, and on the Maturity Date.

The Revolving Facility may be borrowed and re-borrowed on a revolving basis by us during the term of the Facilities, provided that borrowings under the Revolving Facility will be limited by a loan availability formula equal to the sum of (i) 90% of insured accounts receivable, (ii) 85% of investment grade receivables, (iii) 75% of other accounts receivable, (iv) 50% of eligible inventory, and (v) the lesser of C$4.05 million ($3.0 million) and (A) 75% of uncollected amounts on eligible signed equipment orders for equipment systems contracts and (B) 85% of uncollected amounts on eligible signed professional services order forms for design contracts. The Revolving Facility may be prepaid in part or in full without a penalty at any time during the term of the Facilities, and the Term Loan may be prepaid in full or in part without penalty subject to 60 days prior notice in each case subject to certain customary conditions. As of April 30, 2020, C$0.4 million ($0.3 million) of the Revolving Facility was available for future borrowings.

The Company utilized a portion of the proceeds from the Term Loan to refinance existing indebtedness, including a $2.0 million loan with Hydrofarm. The Company terminated the Hydrofarm loan concurrently with the closing of the transactions contemplated by the Credit Agreement. Remaining proceeds from the Facilities are expected to be used (i) to pay down existing debt obligations and (ii) for general working capital purposes.

The obligations of the Company under the Facilities will be secured on a first lien basis (subject to certain permitted liens as set forth in the Credit Agreement) by substantially all of the assets of the Company and certain wholly-owned subsidiaries of the Company, as well as a limited recourse personal guarantee of Bradley Nattrass, the Chief Executive Officer of the Company.

The Credit Agreement also contains customary provisions, representations, warranties and events of default for facilities of this nature and affirmative and negative covenants, including without limitation, covenants relating to maintenance of collateral, reorganization and change of control transactions, creation of liens and incurrence of indebtedness.

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litigation matter.

F-27

Amendment of Promissory Note and Subordination Agreement

In connection with the execution of the Credit Agreement, the Company entered into an agreement to amend the promissory note (the “Promissory Note”) dated October 18, 2018, as amended on May 20, 2019, between the Company and Cloud9 Support Inc., an entity owned 100% by James Lowe, a director of the Company (the “Amending Agreement”). Pursuant to the Amending Agreement, Mr. Lowe agreed to extend the maturity date of the promissory note from December 31, 2019 to the date which is the earlier of 60 days following the date: (a) on which demand for repayment is made by the Lender under the Credit Agreement; or (b) which is the Maturity Date of the Credit Agreement.

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