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 an integrated professional services and design-build firm. We offer 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 drive our team to provide exceptional customer experiences. On April 29, 2022, we acquired Emerald Construction Management, a general contracting and construction management firm. 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 design and build high performance facilities in several sectors. Within the CEA sector, we design these facilities and while building them, we then integrate complex environmental equipment systems into them. 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 in all sectors 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. Within the CEA sector, this is complemented by a vetted suite of select cultivation equipment systems. We 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 Design-Build Services – A comprehensive collection of services including: i. Pre-Construction Services ii. Cultivation Space Planning (“CSP”) iii. Architectural Design iv. Engineering 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: i. 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. ii. Value-Added Reselling (“VAR”) of Cultivation Equipment Systems iii. Strategic Vendor Relationships with Premier Manufacturers Historically, the majority of our clients are commercial CEA cultivators. However, through our acquisitions we have seen our client base across the industrial, healthcare, and other commercial sectors grow as well. 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 1000s of projects and well 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 June 30, 2022 and 2021 During the three months ended June 30, 2022, we generated revenues of $16.3 million compared to revenues of $12.8 million during the three months ended June 30, 2021, an increase of $3.5 million, or 27%. This increase in revenues is a result of the following changes in individual revenue components: ● Construction design-build revenue increased $2.9 million, exclusively from the acquisition of Emerald; ● Services revenue increased $2.7 million, primarily from the acquisition of the 2WR Entities: ● Equipment systems revenue decreased $2.1 million due to a reduction in capital equipment spending by customers: and ● Consumable product sales decreased $0.1 million. During the three months ended June 30, 2022, cost of revenues was $12.8 million compared to $9.9 million during the three months ended June 30, 2021, an increase of $2.9 million, or 29%. This increase is directly attributable to the overall increase in revenues indicated above. Gross profit was $3.5 million (22% of revenues) during the three months ended June 30, 2022, compared to $2.9 million (23% of revenue) during the three months ended June 30, 2021. Gross profit as a percentage of revenues decreased primarily due to an increase in lower margin construction design/build revenue offset by an increase in higher margin services revenue. Operating expenses increased by $2.7 million, or 101%, to $5.4 million for the three months ended June 30, 2022 compared to $2.7 million for the three months ended June 30, 2021. This was due to a $1.8 million increase in general operating expenses, mainly due to an increase in salary, marketing, and travel expenses, in part related to the acquisitions of the 2WR Entities and Emerald, a $0.6 million increase in stock-based compensation expense, primarily due to an increase in the total number of employees and the number of employees included under the plan, and a $0.3 million increase in intangible asset amortization primarily due to the acquisitions of the 2WR Entities and Emerald. 16 Non-operating income was $0.1 million for the three months ended June 30, 2022, compared to non-operating income of $1.0 million for the three months ended June 30, 2021, a decrease of $0.9 million. Other income increased by $0.1 million due to the interest earned on the XS Financial investment. The Company recorded a $1.0 million gain from the PPP loan forgiveness in the three months ended June 30, 2021. Deferred income tax benefit increased by $0.1 million due to the acquisitions of the 2WR Entities and Emerald. As a result of the above, we incurred a net loss of $1.7 million for the three months ended June 30, 2022, or a net loss per share of ($0.17), compared to a net gain of $1.3 million for the three months ended June 30, 2021, or a net gain per share of $0.11. Comparison of Results of Operations for the six months ended June 30, 2022 and 2021 During the six months ended June 30, 2022, we generated revenues of $37.3 million compared to revenues of $24.9 million during the six months ended June 30, 2021, an increase of $12.4 million, or 50%. This increase in revenues is a result of the following changes in individual revenue components: ● Services revenue increased $6.2 million due primarily to the acquisition of the 2WR Entities; ● Equipment systems revenue increased $3.6 million primarily due to an increase in cultivation equipment capital expenditure purchases by our customers; ● Construction design-build revenue increased $2.9 million exclusively due to the acquisition of Emerald; and ● Consumable product sales decreased $0.2 million. During the six months ended June 30, 2022, cost of revenues was $28.9 million compared to $19.3 million during the six months ended June 30, 2021, an increase of $9.6 million, or 50%. This increase is directly attributable to the increase in revenues indicated above. Gross profit was $8.4 million (23% of revenues) during the six months ended June 30, 2022 compared to $5.6 million (22% of revenue) during the six months ended June 30, 2021. Gross profit as a percentage of revenues increased primarily due to an increase in higher margin services revenues offset by an increase in lower margin construction design/build revenue. Operating expenses increased by $6.0 million, or 116%, to $11.2 million for the six months ended June 30, 2022 compared to $5.2 million for the six months ended June 30, 2021. This was due to a $4.4 million increase in general and administrative expenses, mainly due to an increase in salary, marketing, and travel expenses, in part related to the acquisitions of the 2WR Entities and Emerald, a $1.2 million increase in stock-based compensation expense, primarily due to an increase in the number of total employees and an increase in employees included under the plan, and a $0.5 million increase in intangible asset amortization from the acquisitions of Emerald and 2WR. Non-operating income was $0.2 million for the six months ended June 30, 2022, compared to non-operating expense of $0.7 million for the six months ended June 30, 2021, a change of $0.9 million. Interest expense decreased by $0.3 million to $0.0 million compared to $0.3 million in the six months ended June 30, 2021, due to the elimination of debt. Interest income increased by $0.1 million due to the interest earned on the XS Financial investment. For the six months ended June 30, 2021, the Company incurred a $1.0 million gain from the forgiveness of the PPP loan, 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. Deferred income tax benefit increased by $0.2 million due to the acquisitions of the 2WR Entities and Emerald. As a result of the above, we incurred a net loss of $2.4 million for the six months ended June 30, 2022, or a net loss per share of ($0.23), compared to a net loss of $0.3 million for the six months ended June 30, 2021, or a net loss per share of ($0.03). 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 June 30, Six months Ended June 30, 2022 2021 2022 2021 Net Income (Loss) $ (1,739,304 ) $ 1,257,444 $ (2,435,521 ) $ (331,138 ) Interest expense 7,658 4,624 15,317 322,067 Interest expense – BCF – – – 636,075 Interest income (47,275 ) – (127,126 ) – Income tax benefit (76,453 ) – (184,512 ) – Loss on extinguishment of debt – – – 790,723 Stock-based compensation 882,000 299,602 1,764,000 590,407 Depreciation and amortization 371,557 53,941 589,835 109,626 Transaction & new entity costs 15,535 - 70,760 – Non-recurring legal fees 57,382 - 218,929 – PPP Loan forgiveness – (1,032,316 ) – (1,032,316 ) Adjusted EBITDA $ (528,900 ) $ 583,295 $ (88,318 ) $ 1,085,444 BACKLOG 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 generally accepted accounting principles in the United States (“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 for which customer deposits have been received. 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. Our backlog as of June 30, 2022, March 31, 2022, and December 31, 2021 for each of our revenue categories is reflected in the following table (in millions of $): Revenue Category June 30, 2022 March 31, 2022 December 31, 2021 Equipment Systems $ 7 $ 16 $ 25 Construction Design-Build (1) 10 NA NA Services 5 6 5 Total $ 22 $ 22 $ 30 (1) - Construction Design-Build revenue and backlog relate to the operations of Emerald C.M. which was acquired by the Company on April 30, 2022. Historically, the majority of our Equipment Systems and Services backlog has been retired and converted into revenue within two quarters. At June 30, 2022, we expected approximately 85% of our Construction Design-Build backlog to be completed in the next 12 months. 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. Although the majority of the contracts in our Construction Design-Build backlog may be canceled or modified at the election of the customer, we have not experienced material amounts of contract cancellations or modifications. 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 year-end Construction Design/Build backlog amounts. Liquidity and Capital Resources As of June 30, 2022, we had cash of $22.8 million, which represented a decrease of $11.8 million from December 31, 2021 due to the following changes: ● Net cash used by operating activities was $4.9 million. This use of cash is primarily the net effects of a $10.1 million decrease in customer deposits, a $1.3 million decrease in accounts payable and accrued expenses, and a $6.1 million decrease in prepayments and other assets. As of June 30, 2022, we had $3.3 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 June 30, 2022, we had $6.1 million of vendor prepayments compared to $11.2 million as of December 31, 2021. As of June 30, 2022, we had $11.3 million in accounts payable and accrued expenses compared to $9.9 million as of December 31, 2021. ● Net cash used in investing activities was $3.1 million, primarily from the acquisition of Emerald. We have no material commitments for capital expenditures as of June 30, 2022. ● Net cash used by financing activities was $3.8 million, primarily due to the repurchase of treasury shares. 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 six months ended June 30, 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 six months ended June 30, 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.