Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion
should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Report. In addition,
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.
Overview
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. The
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. During
the fourth quarter of 2025, the Company wound down its remaining services businesses and furloughed the associated employees. The Merger
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
Revenue. 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%. This
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.
Net Loss. Net loss
from continuing operations was $21.6 million for the year ended December 31, 2025, compared to $29.4 million for the comparable prior-year
period. 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.
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Liquidity and Capital Resources
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. 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. These
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 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. Income
Taxes (ASC 740) — We maintain a full valuation allowance against net deferred tax assets. Significant judgment is required in evaluating realizability and estimating provisions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
As a smaller reporting company,
we are not required to provide this information.