Flash Sports & Media Holdings, Inc. 10-Q

ITEM 2. 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 “Forward Looking Statements” on page 3 of this Report. Overview and History urban-gro, Inc. (“we,” “us,” “our,” the “Company,” or “urban-gro”) is a fully integrated architectural design, engineering, procurement, and construction management (“E.P.C.”) design-build firm specializing in indoor Controlled Environment Agriculture (“CEA”). On July 30, 2021, we acquired three architecture design firms (2WR Colorado, Inc, 2WR Georgia, Inc. and MJ12 Design Studios, Inc., collectively the “2WR Entities”) from their shareholders. The 2WR Entities were under common ownership and management. We engineer and design indoor CEA facilities and then integrate complex environmental equipment systems into those facilities. Through this work, we create 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, procurement, and equipment integration provides a single point of accountability across all aspects of indoor growing operations. We also help 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 establish facilities that allow clients to manage, operate and perform at the highest level throughout their entire cultivation lifecycle once they are up and running. 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 design, engineering, construction management, and managed services complemented by a vetted suite of select cultivation equipment systems. We can provide these services in a turnkey fashion, operating as a single point of responsibility for our clients, or they can pick and choose from the variety of services we offer. Outlined below is an example of a complete project that demonstrate how we provide value to our clients. 15 Our indoor commercial cultivation solution offers an integrated suite of services and equipment systems that generally fall within the following categories: ● Service Solutions: ● Design, Engineering, and Construction Management Services – A comprehensive collection of services including: i. Pre-Construction Services ii. Cultivation Space Programming Planning (“CSP”) iii. Architectural Design v. Integrated Cultivation Design (“ICD”) vi. Construction Management (“CM”) ● An ongoing service offering including: i. Facility and Equipment Commissioning Services ii. Gro-Care Crop and Asset Protection Services including Training Services, Equipment Maintenance Services, Crop Protection Program, and an Interactive Online Operating Support System (“OSS”) for Gro-Care ● 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 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 clients value is the depth of experience of our employees and our Company. We currently employ approximately 125 individuals. Approximately two-thirds of our employees are considered experts in their areas of focus, and our team includes Designers (Architects, Interior Designers, Cultivation Space Planners), Professional Engineers (Mechanical, Electrical, Plumbing), Engineers (Controls, and Agricultural), Construction Managers (superintendents, supervisors, project managers) and individuals with Masters Degrees in Plant Science, Horticulture, and Business Administration. As a company, we have worked on over 500 projects at indoor CEA facilities and believe that the experience of our team and Company provides clients with the confidence that will proactively keep them from making common costly mistakes during the build out process that impact operational stages. Our expertise translates into clients saving time, money, and resources through 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 three months ended March 31, 2022 and 2021 During the three months ended March 31, 2022, we generated revenues of $21.1 million compared to revenues of $12.0 million during the three months ended March 31, 2021, an increase of $9.1 million, or 76%. Equipment systems revenue increased $5.7 million, primarily due to an increase in cultivation equipment sales, services revenue increased $3.4 million, primarily from the acquisition of the 2WR Entities, and consumable product sales decreased $0.1 million. During the three months ended March 31, 2022, cost of revenues was $16.2 million compared to $9.4 million during the three months ended March 31, 2021, an increase of $6.8 million, or 72%. This increase is directly attributable to the increase in revenues indicated above. Gross profit was $4.9 million (23% of revenues) during the three months ended March 31, 2022, compared to $2.6 million (22% of revenue) during the three months ended March 31, 2021. Gross profit as a percentage of revenues increased primarily due to an increase in higher margin services revenues. Operating expenses increased by $3.3 million, or 132%, to $5.8 million for the three months ended March 31, 2022 compared to $2.5 million for the three months ended March 31, 2021. This was due to a $2.7 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, and a $0.6 million increase in stock-based compensation expense, primarily due to an increase in the number of employees included under the plan. 16 Non-operating income was $0.1 million for the three months ended March 31, 2022, compared to non-operating expense of $1.7 million for the three months ended March 31, 2021, a change of $1.8 million (104%). Interest expense, decreased by $0.3 million to $0.0 million compared to $0.3 million in the three months ended March 31, 2021, due to the elimination of debt. Other income increased by $0.1 million due to the interest earned on the XS Financial investment. The Company incurred a $0.8 million loss on the extinguishment of debt and a $0.6 million interest expense related to the conversion of debt to equity at a discount to the offering price for the three months ended March 31, 2021. Deferred income tax benefit increased by $0.1 million. As a result of the above, we incurred a net loss of $0.7 million for the three months ended March 31, 2022, or a net loss per share of $0.07, compared to a net loss of $1.6 million for the three months ended March 31, 2021, or a net loss per share of $0.20. 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, and acquisition costs, 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: Three months Ended March 31, 2022 2021 Net Loss $ (696,217 ) $ (1,588,582 ) Interest expense 7,658 317,443 Interest expense – BCF - 636,075 Interest income (79,852 ) - Income tax benefit (108,060 ) - Depreciation and amortization 218,278 55,685 EBITDA (658,193 ) (579,379 ) Loss on extinguishment of debt - 790,723 Stock-based compensation 882,000 290,805 Transaction costs 55,225 6,687 Non-recurring legal fees 161,546 - Adjusted EBITDA $ 440,578 $ 508,836 BACKLOG Our backlog as of March 31, 2022 was approximately $22 million. Our backlog as of December 31, 2021 was approximately $30 million. The current backlog consists of $16 million of equipment systems and $6 million of services to be performed. We define backlog as signed contracts for which deposits have been received. Historically, the majority of our backlog has been retired and converted into revenue within two quarters. Liquidity and Capital Resources As of March 31, 2022, we had cash of $27.1 million, which represented a decrease of $7.5 million from December 31, 2021 due to the changes outlined below. Net cash used by operating activities was $3.8 million during the three months ended March 31, 2022 This use of cash is primarily the net effects of a $6.1 million reduction in customer deposits offset by a $1.1 million increase in accounts payable and accrued expenses, and a $1.2 million increase in prepayments and other assets. As of March 31, 2022, we had $7.2 million in customer deposits compared to $13.3 million as of December 31, 2021. We require prepayments from customers before any design work is commenced and before any material is ordered from the vendor. These prepayments are booked to the customer deposits liability account when received. We expect customer deposits to be relieved from the deposits account no longer than 12 months for each project. As of March 31, 2022, we had $10.1 million of vendor prepayments compared to $11.2 million as of December 31, 2021. As of March 31, 2022, we had $11.0 million in accounts payable and accrued expenses compared to $9.9 million as of December 31, 2021. Net cash used in investing activities was $0.0 million for the three months ended March 31, 2022. We have no material commitments for capital expenditures as of March 31, 2022. Net cash used by financing activities was $3.8 million for the three months ended March 31, 2022. Cash used in financing activities during the three months ended March 31, 2022 primarily relates to $3.7 million used in treasury shares acquired. 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 three months ended March 31, 2022. 17 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 For a detailed discussion about the Company’s significant accounting policies, refer to Note 2 — “Summary of Significant Accounting Policies,” in the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. During the three months ended March 31, 2022, there were no material changes made to the Company’s significant accounting policies. 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are a smaller reporting company and are not required to provide the information under this Item pursuant to Regulation S-K.