Item 7. Management’s Discussion and Analysis
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 together with the financial statements and related notes
and the other financial information included elsewhere in this Report. Such discussion and analysis reflects our historical results of
operations 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
various factors, including those set forth under “Risk Factors” and “Cautionary Information about Forward-Looking Statements”
and elsewhere in this Report. All share and per share amounts presented herein have been restated to reflect the implementation of the
1-for-6 reverse stock split as if it had occurred at the beginning of the earliest period presented.
OVERVIEW AND HISTORY
In 2024, urban-gro was an
integrated professional services and Design-Build firm. Our business focused primarily on providing fee-based professional services,
Design-Build solutions, as well as the value-added reselling and integration of equipment systems. We derived income from our ability
to generate revenue from our clients through the billing of our employees’ time spent on client projects. We offered value-added
architectural, engineering, systems procurement and integration, and construction solutions to customers operating in the CEA and Commercial
sectors. In the CEA sector, our clients included operators and facilitators in both the cannabis and produce markets in the United States,
Canada, and Europe. In the Commercial sector, we worked with leading Food and Beverage CPG companies in the United States, and clients
in other commercial sectors including light industrial, healthcare, higher education, laboratories, and hospitality. During 2021 and
2022, we made the following acquisitions:
● July 2021 - Three affiliated architecture
design companies (the “2WR Entities”)
● April 2022 - A construction Design-Build
firm (“Emerald”)
● October 2022 - An engineering firm
(“DVO”)
RESULTS OF OPERATIONS
Comparison of Results of Operations for the
years ended December 31, 2024 and 2023
During the year ended December 31, 2024, we generated revenues
of $40.0 million compared to revenues of $69.9 million during the year ended December 31, 2023, a decrease of $29.9 million,
or 43%. This decrease in revenues is the net result of the following changes in individual revenue components:
●
Construction design-build revenues decreased $26.0 million due to decrease
in our business due to negative market conditions.
● Services
revenue decreased $3.1 million, which was the result of a decrease in revenues in our existing business due to negative market conditions
in the CEA sector;
● Equipment
systems revenue decreased $0.5 million due.
● Other
revenue decreased $0.4 million.
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During the year ended December 31, 2024, cost of revenues was
$37.1 million compared to $60.0 million during the year ended December 31, 2023, a decrease of $22.9 million, or 38%. This decrease
is directly attributable to the decrease in revenues indicated above.
Gross profit was $2.9 million (7% of revenue) during the year ended
December 31, 2024, compared to $9.9 million (14% of revenue) during the year ended December 31, 2023. Gross profit as a percentage
of revenues decreased overall due primarily to reduced margins on construction design-build revenue due to losses on certain jobs.
Operating expenses increased
by $5.2 million, or 16%, to $38.4 million for the year ended December 31, 2024 compared to $33.2 million ended December 31,
2023. This increase is primarily due to a $5.0 million increase in the impairment of goodwill and intangibles. Additionally, general
and administrative expenses were relatively flat due to restructuring costs in 2024, offset by bad debt expense write-downs in 2024.
Non-operating expense was $1.0 million for the year ended December 31,
2024, compared to $2.1 million for the year ended December 31, 2023, a decrease of $1.1 million. This decrease was primarily
due to a $0.2 million loss on settlement recorded in 2024 compared to a $1.5 million loss on settlement of debt recorded in 2023.
as well as no write-down on investment in 2024 compared to a $0.3 million write-down on investment. This was partially offset by
an increase in interest expense of $0.8 million.
As a result of the above, we incurred a net loss of $36.5 million for
the year ended December 31, 2024, or a net loss per share of $2.98, compared to a net loss of $25.4 million for the year ended December 31,
2023, or a net loss per share of $2.34.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2024,
we had negative working capital of $26.5 million, compared to negative working capital of $5.1 million as of December 31,
2023, an increase of $21.4 million. This decrease in working capital was primarily due to decreases in accounts receivables of $13.3
million and contract receivables of $4.3 million, and impairment of goodwill and intangible assets of $11.3 million, and increases in
customer deposits of $2.1 million, and notes payable of $3.6 million.
As of December 31, 2024,
we had cash of $0.8 million, which represented a decrease of $0.3 million from $1.1 million as of December 31, 2023. Changes
in cash during 2024 and 2023 are discussed below.
On December 13, 2023, UG Construction, Inc, (“UG Construction”),
a wholly owned subsidiary of the Company, entered into an interest only asset based revolving loan agreement (“the Line of Credit”)
with Gemini Finance Corp. (“Lender”) pursuant to which Lender extended to UG Construction the Line of Credit in an amount
not to exceed $10.0 million to be used to assist UG Construction and the Company with cash management. Lender will consider requests under
the Line of Credit, which Lender may accept or reject in its discretion, until September 12, 2024 (“the Initial Term”), subject
to an automatic extension for an additional nine-,month term until May 12, 2025, provided that UG Construction is in compliance with all
the terms of the applicable loan documents and Lender has not sent a written notice of non-renewal at least 60 days prior to expiration
of the Initial Term. The Line of Credit contains standard events of default and representations and warranties by UG Construction and
the Lender and the Company has entered into a Continuing Guaranty pursuant to which the Company will guarantee repayment of the loans
associated with the Line of Credit (the “Guaranty Agreement”). Loans made under the Line of Credit earns interest at a annual
rate of 12%. As of December 31, 2024, we had borrowed $4.4 million under the Line of Credit.
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Operating Activities:
Net
cash used in operating activities was $2.8 million during the year ended December 31, 2024. This use of cash was the net effect
of the net loss of $36.5 million, offset primarily by a $11.3 million impairment of goodwill and intangible assets, depreciation
and amortization of $1.4 million, stock-based compensation of $1.4 million, and a reduction in net operating assets and liabilities of
$18.6 million. The $18.6 million reduction in net operating assets and liabilities was primarily due to the a $1.6 increase
in accounts payable, contract liabilities and accrued expenses and a $17.6 million decrease in accounts receivable.
Net cash used in operating
activities was $10.5 million during the year ended December 31, 2023. This use of cash was the net effect of the net loss of
$25.4 million, offset by non-cash expenses of $12.7 million, and a decrease in net operating assets and liabilities of $2.2 million.
The $2.2 million decrease in net operating assets and liabilities was primarily due to the net effects of a $11.9 million increase
in accounts receivable, a $0.0 million increase in customer deposits, offset by a $13.0 million increase in accounts payable
and accrued expenses, and an $2.5 million increase in prepayments and other assets.
Investing Activities:
Net cash used in investing activities was $0.1 million for the
year ended December 31, 2024, primarily due to purchases of property and equipment. We had no material commitments for capital expenditures
as of December 31, 2024.
Net cash provided by investing
activities was $1.9 million for the year ended December 31, 2023, primarily from the sale of our investment in XS Financial for $2.4
million offset by the acquisition of property, plant and equipment of $0.5 million. We had no material commitments for capital expenditures
as of December 31, 2023.
Financing Activities:
Net cash provided by financing activities was $2.7 million for
the year ended December 31, 2024. Cash provided from financing activities during the year ended December 31, 2024 primarily
relates to additions to notes payable for $8.1 million, partially offset by $5.2 million of payments made on notes payable.
Net cash used in financing
activities was $2.0 million for the year ended December 31, 2023. Net cash used in financing activities during the year ended December
31, 2023 primarily relates to cash provided by our line of credit and notes payable of $2.5 million offset by $3.9 million of payments
made on the DVO Promissory Note and $0.5 million of payments related to contingent consideration.
Material Cash Requirements:
Our material cash requirements
include payments on the UG Construction Line of Credit.
CRITICAL ACCOUNTING ESTIMATES
Critical Accounting 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 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. Please refer to Note 2 – Summary of Significant Accounting Policies set forth immediately following
the signature page of this Report for more information on our significant accounting policies.
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ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company,
we are not required to provide this information.