MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included herein. See also "CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS " on page ii of 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 AND HISTORY
In 2025, urban-gro, Inc. was an integrated professional services and design-build firm. We offered value-added architectural, engineering, and construction management solutions to the Controlled Environment Agriculture ("CEA"), industrial, healthcare, and other commercial sectors. Innovation, collaboration, and a commitment to sustainability drove our team to provide exceptional customer experiences. To serve our horticulture clients, we engineered, designed and managed the construction of indoor CEA facilities and then integrate complex environmental equipment systems into those facilities. Through this work, we created high-performance indoor cultivation facilities for our clients to grow specialty crops, including leafy greens, vegetables, herbs, and plant-based medicines. Our custom-tailored approach to design, construction, procurement, and equipment integration provided a single point of accountability across all aspects of indoor growing operations. We also helped 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 established facilities that allowed clients to manage, operate and perform at the highest level throughout their entire cultivation lifecycle once they are up and running. Further, we served a broad range of commercial and governmental entities, providing them with planning, consulting, architectural, engineering and construction design-build services for their facilities. We aimed to work with our clients from the inception of their project in a way that provided value throughout the life of their facility. We are 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.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the three months ended June 30, 2025 and 2024
During the three months ended June 30, 2025, we generated revenues of $7.76 million compared to revenues of $17.9 million during the three months ended June 30, 2024, a decrease of $10.1 million, or approximately 57%. This decrease in revenues is the result of the following changes in individual revenue components:
| ● | Equipment systems revenue decreased $0.26 million. |
| ● | Services revenue decreased $1.2 million due to continued negative market conditions in the CEA sector. |
| ● | Construction design-build revenue decreased $8.5 million due to decreases in our construction design-build revenue contracts, and: |
| ● | Other revenues decreased $0.1 million. |
During the three months ended June 30, 2025, cost of revenues was $7.7 million compared to $15.5 million during the three months ended June 30, 2024, a decrease of $7.8 million, or approximately 50%. Gross profit was $0.04 million (approximately 0.01% of revenues) during the three months ended June 30, 2025, compared to $2.4 million (approximately 13% of revenue) during the three months ended June 30, 2024. This decrease in gross profit as a percentage of revenues, was primarily due to the 57% decrease in total revenues, compared to a lesser 50% decrease in total cost of revenues..
Operating expenses increased by $0.9 million, or approximately 18%, to $6.0 million for the three months ended June 30, 2025, compared to $5.1 million for the three months ended June 30, 2024. This overall increase in operating expenses was the result of a $1.1 million increase in general and administrative operating expenses due to increases in bad debt expenses and a $0.2 million decrease in depreciation and amortization.
Non-operating expense was relatively flat for the three months ended June 30, 2025, compared to the three months ended June 30, 2024.
Comparison of Results of Operations for the six months ended June 30, 2025 and 2024
During the six months ended June 30, 2025, we generated revenues of $17.3 million compared to revenues of $33.3 million during the six months ended June 30, 2024, a decrease of $16 million, or approximately 48%. This decrease in revenues is the result of the following changes in individual revenue components:
| ● | Equipment systems revenue increased $1.9 million. |
| ● | Services revenue decreased $2.7 million due to continued negative market conditions in the CEA sector. |
| ● | Construction design-build revenue decreased $15.1 million due to decreases in our construction design-build revenue contracts, and: |
| ● | Other revenues decreased $0.1 million. |
During the six months ended June 30, 2025, cost of revenues was $16.6 million compared to $27.9 million during the six months ended June 30, 2024, a decrease of $11.3 million, or approximately 41%. Gross profit was $0.6 million (approximately 4% of revenues) during the six months ended June 30, 2025, compared to $5.4 million (approximately 16% of revenue) during the six months ended June 30, 2024. This decrease in gross profit as a percentage of revenues, was primarily due to the 48% decrease in total revenues, compared to a lesser 41% decrease in total cost of revenues.
Operating expenses increased by $0.1 million, or approximately 1%, to $10.7 million for the six months ended June 30, 2025, compared to $10.6 million for the six months ended June 30, 2024. This overall increase in operating expenses was the result of a $0.6 million increase in general and administrative operating expenses due to increases in bad debt expenses and a $0.5 million decrease in depreciation and amortization.
Non-operating expense was relatively flat for the six months ended June 30, 2025, compared to the six months ended June 30, 2024.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2025, we had negative working capital of $36.2 million, compared to negative working capital of $26.5 million as of December 31, 2024, a decrease of $9.7 million. This decrease in working capital was primarily due to a decrease in accounts receivable of $5.3 million, as well as increases in accounts payable and customer deposits of $5.6 million.
As of June 30, 2025, we had cash of $0.7 million, which represented a decrease of $0.1 million from December 31, 2024 due to the following changes during the six months ended June 30, 2025:
| ● | Net cash provided by operating activities was $2.6 million. This source of cash is the net effect of the net loss of $10.2 million, offset by non-cash expenses of $1.1 million, and an increase in net operating assets and liabilities of $11.8 million. See the condensed consolidated statements of cash flows for further details on the non-cash expenses and net changes in operating assets and liabilities; |
| ● | Net cash provided by investing activities was $0.01 million. We have no material commitments for capital expenditures as of June 30, 2025. |
| ● | Net cash used in financing activities was $2.7 million. Cash used from financing activities primarily relates to payments made on the Line of Credit and other financing agreements. |
CRITICAL ACCOUNTING ESTIMATES
Critical Accounting Estimates
The Company's Unaudited Condensed Consolidated Financial Statements are prepared in conformity with U.S. GAAP. In preparing the Company's Unaudited Condensed Consolidated Financial Statements, management makes assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We regularly reevaluate our assumptions, judgments and estimates. The Company's significant accounting policies are described in the Company's Annual Report on Form 10-K for the year ended December 31, 2024.
Critical accounting estimates ("CAE") are those estimates that involve a significant level of estimation uncertainty and could have a material impact on our financial condition or results of operations.
There have been no material changes in CAE in the Company's Annual Report on Form 10-K for the year ended December 31, 2024.