Flash Sports & Media Holdings, Inc. 10-K

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 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. Overview AND HISTORY – See “Item 1. Business” for a further description of our History and Background We 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. We aim to work with our clients from inception of their project in a way that provides 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. 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. Our indoor commercial cultivation solution offers an integrated suite of services and equipment systems that generally fall within the following categories: Service Solutions: ● Architecture, Engineering Design Services – A comprehensive triad of services including: i. Architecture ii. Cultivation Space Programming (“CSP”) iii. Integrated Cultivation Design (“ICD”) iv. Full-Facility Mechanical, Electrical, and Plumbing (“MEP”) ● gro-care® - A recurring revenue subscription-based managed service offering including: i. Remote Monitoring, Reporting, Support, and Training Services ii. Facility and Equipment Commissioning & Audit Services iii. Environmental Sciences Groups’ (“ESG”) Compliance and Program Services Integrated Equipment Solutions: ● Design, Source, and Integration of Complex Environmental Equipment Systems Including Purpose-Built Heating, Ventilation, and Air Conditioning (“HVAC”) solutions, Environmental Controls, Fertigation, and Irrigation Distribution. ● Value-Added Reselling (“VAR”) of Cultivation Equipment including a Complete line of Lighting, Fans and Rolling Benching Systems ● Strategic 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 stages. 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. RESULTS OF OPERATIONS Comparison of Results of Operations for the years ended December 31, 2021 compared to 2020 During 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. During 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. Gross 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. 30 Operating 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. (“TGH”). 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 debt. As 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. 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 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. Our 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. The following table reconciles net loss attributable to the Company to Adjusted EBITDA for the periods presented: Years Ended December 31, 2021 2020 Net Loss $ (875,667 ) $ (5,073,695 ) Interest expense 334,056 1,497,469 Interest expense - BCF 636,075 – Depreciation and amortization 495,276 258,440 EBITDA $ 589,740 $ (3,317,786 ) Loss on extinguishment of debt 790,723 – PPP loan forgiveness (1,032,316 ) – Transaction related costs 238,495 – One-time employee expense 125,000 – Impairment loss – 310,000 Stock-based compensation 1,840,913 1,803,403 Unusual legal costs 126,246 - Contingent consideration – purchase price – 155,000 Unrealized exchange loss – 397,292 Adjusted EBITDA $ 2,678,801 $ (652,091 ) 31 Liquidity and Capital Resources As 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. Net 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 order: 50% deposit; 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. We had no material commitments for capital expenditures as of December 31, 2021. 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. Gross debt, excluding operating leases, was $0.0 million and $8.4 million as of December 31, 2021 and December 31, 2020, respectively. This 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. Inflation Although 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. 32 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 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. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS From 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. In 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. In 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. ASU 2020-06 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 statements. There 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. Management 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. 33 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. Item 7a. Quantitative And Qualitative Disclosures About Market Risk As a smaller reporting company, we are not required to provide this information. Item 8. Financial Statements And Supplementary Data 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. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None