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Item 7. Management’s Discussion and Analysis

2026-04-15 compared with 2026-01-16 · 98 added, 141 removed, 8 unchanged (97% of the section changed)

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Report.

see “Cautionary Information about Forward-Looking Statements” included in this Report.

When applicable, all share and per share

amounts presented herein have been restated to reflect the implementation of the 1-for-25 reverse stock split as if it had occurred at

the beginning of the earliest period presented.

The fiscal year ended December

31, 2025 was a period of significant strategic transformation for the Company.

During the first three quarters of 2025, the Company continued

to operate its legacy Controlled Environment Agriculture (“CEA”) design-build and equipment reselling businesses while pursuing

the wind-down of its core operations.

In the third quarter of 2025, the Company made the decision to exit its core business sectors due

to changing market conditions and its inability to raise significant funds due to its filing status and compliance with the Nasdaq.

Company began selling assets, reducing its workforce, and preparing for a subsequent merger.

On October 14, 2025, the Company

entered into a binding letter of intent with Flash Sports & Media, Inc.

(“Flash”) regarding the proposed Merger.

the fourth quarter of 2025, the Company wound down its remaining services businesses and furloughed the associated employees.

with Flash was completed on February 17, 2026, subsequent to the fiscal year end covered by this Report.

As such, the financial results

presented herein for the fiscal year ended December 31, 2025 reflect the legacy urban-gro operations only and do not include any revenue

or expenses of Flash or IPG.

For a description of the Company’s post-Merger operations, see “Item 1 — Business.”

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,

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.

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;

systems revenue decreased $0.5 million due.

revenue decreased $0.4 million.

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,

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.

For the year ended December 31, 2025, the Company generated revenue

of $17.4 million compared to $31.2 million for the year ended December 31, 2024, a decrease of $13.8 million, or approximately 44%.

decrease was driven primarily by a $10.1 million decrease in construction design-build revenue and a $3.5 million decrease in equipment

systems revenue, reflecting the Company’s ongoing wind-down of legacy operations.

Cost of Revenue.

For the year ended December 31, 2025, cost of revenue was $17.2 million

compared to $31.6 million for the year ended December 31, 2024, a decrease of $14.3 million, or approximately 45%.

Gross profit was approximately

$174,000 for the year ended December 31, 2025, compared to gross loss of $388,000 for the comparable prior-year period.

The improvement

in gross margin from a gross loss to a gross profit reflects the Company’s cost reduction efforts outpacing the revenue decline during

the wind-down period.

Operating Expenses.

Operating expenses decreased by $9.8 million, or approximately 35%, to $18.1 million for the year ended December 31, 2025, compared to

$28.0 million for the comparable prior-year period.

This decrease resulted from a $3.7 million decrease in general and administrative

expenses, a $0.7 million decrease in depreciation and amortization and $6.0 million decrease in impairment of goodwill and intangibles,

reflecting headcount reductions and asset dispositions undertaken as part of the wind-down.

Non-Operating Expenses.

Non-operating expenses increased significantly for the year ended December 31, 2025 compared to the prior-year period, primarily due to

a $2.4 million loss recognized on the foreclosure of UG Construction assets in connection with the Gemini Finance Corp.

settlement, as

well as increased interest expense of $0.6 million.

from continuing operations was $21.6 million for the year ended December 31, 2025, compared to $29.4 million for the comparable prior-year

Total net loss, including discontinued operations, was $22.1 million for the year ended December 31, 2025, compared to $36.5 million

for the comparable prior-year period.

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.

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

As of December 31, 2024, we had borrowed $4.4 million under the Line of Credit.

Operating Activities:

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.

As of December 31, 2025, the

Company had cash of approximately $10,000 and negative working capital of approximately $44.8 million, compared to negative working capital

of $26.5 million as of December 31, 2024, a decrease of $18.3 million.

This deterioration in working capital was primarily attributable

to a decrease in accounts receivable of $6.1 million, as well as increases in accounts payable and customer deposits of $4.7 million.

Net cash provided by operating

activities was $0.8 million for the year ended December 31, 2025.

This source of cash is the net effect of the net loss of $21.6 million,

offset by non-cash expenses of $11.8 million, and an increase in net operating assets and liabilities of $11.2 million, offset by net

cash used in operating activities of discontinued operations of $0.5 million.

Net cash used in investing

activities was $1.8 million, primarily from purchase of property and equipment and discontinued operations.

Net cash used in financing

activities was $3.5 million for the year ended December 31, 2025.

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

Cash provided from financing activities during the year ended

December 31, 2025 primarily relates to additions to notes payable for $1.7 million, partially offset by $5.1 million of payments

made on notes payable.

The Company’s ability

to continue as a going concern is dependent on its ability to generate sufficient revenue and/or obtain financing sufficient to meet current

and future obligations.

The Company has produced multiple consecutive years of net losses and negative cash flows from operations.

factors raise substantial doubt about the Company’s ability to continue as a going concern.

Following the completion of the Merger

on February 17, 2026, the Company believes that the combined entity’s operations, including IPG’s revenue-generating cricket

commercialization business, will provide improved liquidity and a path toward sustainable operations.

The Company may also seek to raise

additional capital through equity or debt financing to support integration and growth initiatives.

There can be no assurance that the

Company will be able to raise capital on terms acceptable to the Company.

If it is unable to obtain sufficient amounts of additional capital,

it may be required to reduce the scope of its planned development, which could harm its business, financial condition, and operating results.

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.

AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The preparation of our consolidated financial

statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets,

liabilities, revenues, and expenses.

Our most significant estimates for FY2025 relate to:

Revenue Recognition (ASC 606) — For construction

design-build contracts, revenue is recognized over time using the cost-to-cost input method, requiring estimates of total contract costs.

Impairment of Long-Lived Assets and Goodwill (ASC 360-10-35 / ASC 350) — We evaluate recoverability whenever events indicate the

carrying amount may not be recoverable;

during 2025 impairment charges were recorded in connection with the wind-down.

Allowance for Credit

Losses (ASC 326-20) — Estimated based on historical loss experience, aging, current conditions, and forecasts;

significant judgment

was required given the wind-down.

Stock-Based Compensation — Measured at grant date fair value using the Black-Scholes model.

Taxes (ASC 740) — We maintain a full valuation allowance against net deferred tax assets.

Significant judgment is required in evaluating realizability and estimating provisions.

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

As a smaller reporting company,

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What changed 10-K

Item 7. Management’s Discussion and Analysis