What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-30 compared with 2022-03-29 · 151 added, 215 removed, 13 unchanged (97% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 Note Regarding 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.

AND HISTORY – See “Item 1.

Business” for a further description of our History and Background

are a leading engineering and design services company focused on the sustainable commercial indoor horticulture market.

We engineer and

design indoor CEA facilities and then integrate complex environmental equipment systems into those facilities.

aim to work with our clients from inception of their project in a way that provides value throughout the life of their facility.

a trusted partner and advisor to our clients and offer a complete set of engineering and managed services complemented by a vetted suite

of select cultivation equipment systems.

Outlined below is an example of a complete project with estimated time frames for each phase

that demonstrate how we provide value to our clients for the life of their facility.

indoor commercial cultivation solution offers an integrated suite of services and equipment systems that generally fall within the following

Architecture,

Engineering Design Services – A comprehensive triad of services including:

Space Programming (“CSP”)

Cultivation Design (“ICD”)

Full-Facility

Mechanical, Electrical, and Plumbing (“MEP”)

- A recurring revenue subscription-based managed service offering including:

Monitoring, Reporting, Support, and Training Services

and Equipment Commissioning & Audit Services

Environmental

Sciences Groups’ (“ESG”) Compliance and Program Services

Equipment Solutions:

Source, and Integration of Complex Environmental Equipment Systems Including Purpose-Built Heating, Ventilation, and Air Conditioning

(“HVAC”) solutions, Environmental Controls, Fertigation, and Irrigation Distribution.

Reselling (“VAR”) of Cultivation Equipment including a Complete line of Lighting, Fans and Rolling Benching Systems

Vendor Relationships with Premier Manufacturers

The majority of our clients

are commercial CEA cultivators.

We believe one of the key points of our differentiation that our clients value is the depth of experience

of our employees and our Company.

We currently employ approximately 100 individuals.

Approximately two-thirds of our employees

are considered experts in their areas of focus, and our team includes Architects, Engineers (Mechanical, Electrical, Plumbing, Controls,

and Agricultural), Professional Engineers, horticulturalists and individuals with Masters Degrees in Plant Science and Business Administration.

As a company, we have worked on more than 450 indoor CEA facilities, and believe that the experience of our team and Company provides

clients with the confidence that we will proactively keep them from making common costly mistakes during the build out and operational

Our expertise translates into clients saving time, money, and resources, and provides them ongoing access to 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.

OF OPERATIONS

of Results of Operations for the years ended December 31, 2021 compared to 2020

the year ended December 31, 2021, we generated revenues of $62.1 million compared to revenues of $25.8 million during the year ended

December 31, 2020, an increase of $36.3 million, or 140%.

Equipment systems revenue increased $33.5 million primarily due to an increase

in cultivation equipment sales, services revenue increased $3.1 million primarily due to the acquisition of the 2WR Entities, and

consumable product sales decreased $0.3 million.

the year ended December 31, 2021, cost of revenues was $47.4 million compared to $20.1 million during the year ended December 31, 2020,

an increase of $27.2 million, or 135%.

This increase is directly attributable to the increase in revenue indicated above.

profit was $14.8 million (24% of revenue) during the year ended December 31, 2021, compared to $5.7 million (22% of revenue) during the

year ended December 31, 2020.

Gross profit as a percentage of revenues increased primarily

due to an increase in higher margin services revenues.

expenses increased by $6.4 million, or 77%, to $15.0 million for the year ended December 31, 2021 compared to $8.5 million for the year

ended December 31, 2020.

This was due to a $6.4 million increase in general operating expenses, mainly due to an increase in salary,

marketing, and travel expenses, in part related to the acquisition of the 2WR Entities.

Non-operating

expense was $0.7 million for the year ended December 31, 2021, compared to $2.3 million for the year ended December 31, 2020, a decrease

of $1.6 million (71%).

Interest expense, decreased by $1.2 million to $0.3 million compared to $1.5 million in the year ended December

31, 2020, due to the elimination of debt.

For the years ended December 31, 2020, the Company recognized an impairment loss of

$0.3 million related to the investment in Total Grow Control Holdings Inc.

The Company incurred a $0.2 million expense

for contingent consideration from the acquisition of Impact Engineering, Inc.

during the year ended December 31, 2020.

The Company also

recorded a foreign exchange loss of $0.4 million in the year ended December 31, 2020 due to the revaluation of our Canadian denominated

a result of the above, we incurred a net loss of $0.9 million for the year ended December 31, 2021, or a net loss per share of $0.09,

compared to a net loss of $5.1 million for the year ended December 31, 2020, or a net loss per share of $1.06.

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 accounting principles generally accepted in the United

States of America (“GAAP”) and it is not a substitute for other measures prescribed by 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 GAAP, excluding the effects of certain operating and non-operating expenses including, but not limited

to, interest expense, income taxes/benefit, depreciation of tangible assets, amortization of intangible assets, impairment of investments,

unrealized exchange 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.

board of directors 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.

following table reconciles net loss attributable to the Company to Adjusted EBITDA for the periods presented:

Ended December 31,

$ (5,073,695 )

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 – S EE "I TEM 1.

B USINESS" FOR A FURTHER DESCRIPTION OF OUR H ISTORY AND B ACKGROUND

urban-gro is an 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, systems procurement and integration, and construction design-build solutions to customers operating in the CEA and Commercial sectors.

In the CEA sector, our clients include operators and facilitators in both the cannabis and produce markets in the United States, Canada, and Europe.

In the Commercial sector, we work with leading Food and Beverage CPG companies in the United States, and clients in other commercial sectors including healthcare, higher education, 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, 2022 and 2021

During the year ended December 31, 2022, we generated revenues of $67.0 million compared to revenues of $62.1 million during the year ended December 31, 2021, an increase of $4.9 million, or 8%.

This increase in revenues is the net 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 sector and a reduction in capital equipment spending by customers;

• Other revenue decreased $0.5 million.

During the year ended December 31, 2022, cost of revenues was $52.8 million compared to $47.4 million during the year ended December 31, 2021, an increase of $5.47 million, or 12%.

This increase is directly attributable to the increase in revenues indicated above.

Gross profit was $14.2 million (21% of revenue) during the year ended December 31, 2022, compared to $14.8 million (24% of revenue) during the year ended December 31, 2021.

Gross profit as a percentage of revenues decreased overall due to the offsetting effects of the following:

initiation of lower margin construction design-build revenue (10% gross profit margin);

margins on equipment systems 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 $26.8 million for the year ended December 31, 2022 compared to $15.0 million for the year ended December 31, 2021.

This increase was due to:

• a $7.1 million increase in general and administrative expenses 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 related to satisfying a lighting issue encountered by a major customer;

• a $0.7 million increase in stock-based compensation expense due to increased personnel;

• a $0.8 million increase in intangible asset amortization related to the acquisitions.

Non-operating expense was $3.0 million for the year ended December 31, 2022, compared to $0.7 million for the year ended December 31, 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 $0.4 million expense recognized from the remeasurement of contingent consideration from the 2WR acquisition.

As a result of the above, we incurred a net loss of $15.3 million for the year ended December 31, 2022, or a net loss per share of $1.44, compared to a net loss of $0.9 million for the year ended December 31, 2021, or a net loss per share of $0.09.

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,

Net loss $ (15,277,909) $ (875,667)

Interest expense 54,579 334,056

Interest expense - BCF

Interest expense – beneficial conversion of notes payable — 636,075

Interest income (329,012) —

Income tax benefit (322,092) —

Depreciation and amortization 1,483,065 495,276

$ (3,317,786 )

EBITDA $ (14,391,369) $ 589,740

Loss on extinguishment of debt — 790,723

PPP loan forgiveness — (1,032,316)

Transaction related costs

Non-recurring legal fees 352,173 126,246

One-time employee expense 819,089 125,000

Contingent consideration 436,905 –

Business development 3,299,864 —

Impairment loss 2,660,934 —

Stock-based compensation 2,571,785 1,840,913

Unusual legal costs

Contingent consideration – purchase price

Unrealized exchange loss

Transaction costs 347,317 238,495

Adjusted EBITDA $ (3,903,302) $ 2,678,801

and Capital Resources

of December 31, 2021, we had cash of $34.6, which represented an increase of $34.4 million from December 31, 2020.

This increase in cash

and cash equivalents is primarily due to the net proceeds received from our equity offering in February of 2021 of $57.4 million

offset by $5.8 million of debt repayment, $7.7 million of treasury stock purchases, $5.1 million due to the fraudulent wire transfers

initiated by an unauthorized third party, a cash investment of $2.5 million for XS Financial, and $5.5 million net cash

payments made for the acquisition of the 2WR entities.

The remaining change is due to a $3.6 million increase due

to timing of deposits and prepayments to vendors during the year ended December 31, 2021.

cash used in operating activities was $1.6 million during the year ended December 31, 2021, compared to $3.6 million used for

the year ended December 31, 2020.

Operating cash has been positively impacted from an increase in client deposits as demand for our services

and equipment solutions increased in the year ended December 31, 2021.

At December 31, 2021, we had $13.3 million in client deposits

related to client orders, which compared favorably to client deposits of $4.9 million as of December 31, 2020.

We require prepayments

from clients before any design work is commenced and before any material is ordered from the vendor.

These prepayments are booked to

the client deposits liability account when received.

Our standard policy is to collect the following before action is taken on a client

and the remaining 50% payment made prior to shipping.

We expect client deposits to be relieved from the deposits

account no longer than 12 months for each project.

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.

At December 31, 2021, we had $6.0 million in accounts payable, compared to $0.7

million at December 31, 2020.

Net cash used in investing activities was $8.3 million

for the year ended December 31, 2021, compared to $0.2 million during the year ended December 31, 2020.

Net cash used in investing

activities for the year ended December 31, 2021 was primarily related to the $5.5 million incurred to acquire the 2WR entities

and $2.5 million for the investment in XS Financial.

Historically, cash has been used to increase our investments

in strategic partnerships and to acquire property and equipment.

We will continue to have ongoing needs to purchase property and equipment

to maintain our operations.

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 ordinary 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, 2022 and December 31, 2021 is reflected in the following tables:

December 31, 2022

CEA Commercial Total Relative Percentage

(in millions)

Equipment systems

$ 5 $ — $ 5 5 %

Services 4 2 6 6 %

Construction design-build (1)

67 15 82 88 %

Total backlog

$ 76 $ 17 $ 93 100 %

Relative percentage 82 % 18 % 100 %

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

CEA Commercial Total Relative Percentage

(in millions)

Equipment systems

$ 25 $ — $ 25 83 %

Services 3 2 5 17 %

Total backlog

$ 28 $ 2 $ 30 100 %

Relative percentage 93 % 7 % 100 %

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, 2022, 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 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, 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 of $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

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 of $12.0 million, which represented a decrease of $22.6 million from $34.6 million as of December 31, 2021.

As of December 31, 2021, we had cash of $34.6 million, which represented an increase of $34.4 million from $0.2 million as of December 31, 2020.

Changes in cash during 2022 and 2021 are discussed below.

Operating Activities:

Net cash used in operating activities was $12.6 million during the year ended December 31, 2022.

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 the 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, 2022.

This use of cash was due to $0.6 million for the purchase of fixed assets needed for our growing workforce and $3.9 million in net cash used to acquire Emerald and DVO.

We had no material commitments for capital expenditures as of December 31, 2022.

Net cash provided by financing activities was $44.3

million for the year ended December 31, 2021, compared to $3.5 million during the year ended December 31, 2020.

Cash provided from

financing activities during the year ended December 31, 2021 primarily related to $57.4 million in net proceeds received

from the stock issuance related to the uplisting plus $0.4 million from the issuance of common stock, offset by $7.7 million used

in the repurchase of common stock and $5.8 million related to the repayment of debt.

debt, excluding operating leases, was $0.0 million and $8.4 million as of December 31, 2021 and December 31, 2020, respectively.

represents a decrease in gross debt of $8.4 million due to the payoff of all debt instruments during the year ended December 31, 2021.

our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of

operations during the year ended December 31, 2021.

Accounting Policies and Estimates

discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been

prepared in accordance with 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 Note 2, Summary of Significant Accounting Policies, to the Notes to Consolidated

Financial Statements contained in this Report for a discussion of our significant accounting policies.

ISSUED ACCOUNTING PRONOUNCEMENTS

time to time, the Financial Accounting Standards Board (“FASB”) or other standards setting bodies issue new 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.

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.

August 2020, the Financial Accounting Standards Board 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 Entity’s Own Equity.

ASU 2020-06 simplifies accounting for convertible instruments by removing

major separation models required under current 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.

also simplifies the diluted net income per share calculation in certain areas.

The new guidance is effective for annual and interim periods

beginning after December 15, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods

within those fiscal years.

The Company is currently evaluating the impact that this new guidance will have on its consolidated financial

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.

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.

Sheet Arrangements

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.

Net cash used in investing activities was $8.3 million for the year ended December 31, 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 $44.3 million cash provided by financing activities during the year ended December 31, 2021.

Cash used from financing activities during the year ended December 31, 2022 primarily relates to $4.4 million used in the repurchase of common stock and $1.0 million paid for acquisition related contingent consideration.

Net cash provided by financing activities was $44.3 million for the year ended December 31, 2021.

This increase in cash was the net effect of $57.7 million raised from the issuance of common stock in connection with our uplisting to Nasdaq offset by repurchases of common stock of $7.7 million and repayments of debt of $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 has resulted in increased costs for our customers.

In addition, the U.S.

Government has responded to inflation by raising 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, which has negatively impacted the results of our operations during the year ended December 31, 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.

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 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.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Please refer to Recently Issued Accounting Pronouncements in Note 2 – Summary of Significant Accounting Policies set forth immediately following the signature page of this Report for information on new authoritative accounting guidance.

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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

financial statements and supplementary financial information required by this Item are set forth immediately following the signature

page and are incorporated herein by reference.

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.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis