Flash Sports & Media Holdings, Inc. 10-K/A

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 Information about Forward-Looking Statements" and elsewhere in this Report. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS As described in the Explanatory Note above and in Note 1A to our Consolidated Financial Statements, we have restated our Consolidated Financial Statements as of December 31, 2023, and 2022 and for the years ended December 31, 2023 and 2022 contained in this Amendment No. 2. As a result, the previously reported financial information as of December 31, 2023 and 2022 and for the years ended December 31, 2023, and 2022, in this Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, has been updated to reflect the relevant restatements. See Note 1A, Restatement of Previously Filed Financial Statements, and Note 20, Quarterly Financial Information (Unaudited), in the Consolidated Financial Statements for additional information related to the restatement, including descriptions of the adjustments and the impacts on our Consolidated Financial Statements. Other than the effect of the restatement, this section has not been otherwise modified and does not reflect any information or events occurring after March 28, 2024, the filing date of the Annual Report, or modify or update those disclosures affected by events that occurred at a later date or facts that subsequently became known to the Company, except to the extent they are otherwise required to be included and discussed herein. OVERVIEW AND HISTORY urban-gro is an integrated professional services and Design-Build firm. Our business focuses primarily on providing fee-based professional services, Design-Build solutions, as well as the value-added reselling and integration of equipment systems. 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 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 light industrial, healthcare, higher education, laboratories, 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 (As Restated) Comparison of Results of Operations for the years ended December 31, 2023 and 2022 During the year ended December 31, 2023, we generated revenues of $69.9 million compared to revenues of $66.3 million during the year ended December 31, 2022, an increase of $3.6 million, or 5%. This increase in revenues is the net result of the following changes in individual revenue components: • Construction design-build revenues increased $25.5 million, primarily due to significant organic growth within this group; • Services revenue decreased $1.2 million, which was the result of a decrease in revenues in our existing business due to negative market conditions in the CEA sector; • Equipment systems revenue decreased $20.4 million due to negative market conditions in the CEA sector and a reduction in capital equipment spending by customers; and • Other revenue decreased $0.3 million. During the year ended December 31, 2023, cost of revenues was $60.0 million compared to $54.1 million during the year ended December 31, 2022, an increase of $5.9 million, or 11%. This increase is directly attributable to the increase in revenues indicated above. Gross profit was $9.9 million (14% of revenue) during the year ended December 31, 2023, compared to $12.2 million (18% of revenue) during the year ended December 31, 2022. Gross profit as a percentage of revenues decreased overall due to increases in lower margin construction design-build revenue combined with decreases in higher margin equipment systems and services revenue. Operating expenses increased by $6.1 million, or 23%, to $33.2 million for the year ended December 31, 2023 compared to $27.1 million for the year ended December 31, 2022. This increase was due to the net effects of the following: • For the year ended December 31, 2023, we recorded goodwill impairments of $5.3 million and intangible asset impairments of $0.9 million, as compared to no impairments for the year ended December 31, 2022. • a $3.0 million increase in general and administrative expenses due to an increase in legal fees defending lawsuits, increases in the average number of personnel and increases in construction design-build revenue which increased business insurance and lease costs; and • a $3.3 million decrease in a one-time business development expense related to satisfying an equipment lighting issue encountered by a major customer Non-operating expense was $2.1 million for the year ended December 31, 2023, compared to $1.3 million for the year ended December 31, 2022, an increase of $0.8 million. This increase was primarily due to a $0.5 million loss on settlement and a $0.3 million write down of investment in 2023 compared to a $— million write down of investment recorded in 2022. Income tax expense was $0.1 million for the year ended December 31, 2023, compared to an income tax benefit of $1.0 million for the year ended December 31, 2022, a decrease of $1.1 million. This decrease was the result of a reduction in income tax benefits related to accounting for acquisitions in 2022 as compared to 2023. As a result of the above, we incurred a net loss of $25.4 million for the year ended December 31, 2023, or a net loss per share of $2.34, compared to a net loss of $15.3 million for the year ended December 31, 2022, or a net loss per share of $1.41. 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: For the Years Ended December 31, 2023 2022 (As Restated) (As Restated) Net Loss (GAAP) $ (25,437,661) $ (15,254,676) Interest expense 271,686 54,577 Interest income (173,895) (329,012) Federal and state income tax (provisions) 94,209 (983,315) Federal and state income tax payments 185,910 16,253 Depreciation and amortization 1,636,667 1,483,065 EBITDA (non-GAAP) $ (23,423,084) $ (15,013,108) Non-recurring legal fees 1,249,133 352,173 One-time employee expenses — 819,089 Contingent consideration - change in fair value 160,232 436,905 Contingent consideration - DVO acquisition 278,559 — Reduction in force costs 346,725 — One time business development expenses — 3,299,864 Impairment of goodwill and intangibles 6,273,595 — Impairment on investment 258,492 2,660,934 Loss on settlement 1,500,000 — Retention incentive 1,242,000 — Stock-based compensation 2,199,046 2,571,785 Transaction costs 30,197 347,317 Adjusted EBITDA (non-GAAP) $ (9,885,105) $ (4,525,041) LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2023, we had negative working capital of $5.1 million, compared to positive working capital of $6.4 million as of December 31, 2022, a decrease of $11.5 million. This decrease in working capital was primarily due to a decrease in cash of $10.7 million (which is further detailed below) and the net effects of increases in current liabilities and increases in current assets excluding cash. 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, 2023, we had cash of $1.1 million, which represented a decrease of $10.7 million from $11.8 million as of December 31, 2022. Changes in cash during 2023 and 2022 are discussed below. On December 13, 2023, UG Construction, Inc, ("UG Construction"), a wholly owned subsidiary of the Company, entered into an interest only asset based revolving loan agreement ("the Line of Credit") with Gemini Finance Corp. ("Lender") pursuant to which Lender extended to UG Construction the Line of Credit in an amount not to exceed $10.0 million to be used to assist UG Construction and the Company with cash management. Lender will consider requests under the Line of Credit, which Lender may accept or reject in its discretion, until September 12, 2024 ("the Initial Term"), subject to an automatic extension for an additional nine-month term until May 12, 2025. provided that UG Construction is in compliance with all the terms of the applicable loan documents and Lender has not sent a written notice of non-renewal at least 60 days prior to expiration of the Initial Term. The Line of Credit contains standard events of default and representations and warranties by UG Construction and the Lender and the Company has entered into a Continuing Guaranty pursuant to which the Company will guarantee repayment of the loans associated with the Line of Credit (the “Guaranty Agreement”). Loans made under the Line of Credit earns interest at a monthly rate of one and seventy-five hundredths percent (1.75%). As of December 31, 2023, we had borrowed $2.5 million under the Line of Credit. Operating Activities: Net cash used in operating activities was $10.5 million during the year ended December 31, 2023. This use of cash was the net effect of the net loss of $25.4 million, offset by non-cash expenses of $11.8 million, and a reduction in net operating assets and liabilities of $3.2 million. The $3.2 million reduction in net operating assets and liabilities was due to the net effects of a $13.0 million increase in accounts payable, contract liabilities and accrued expenses, a $2.5 million decrease in prepayments and other assets, offset by a $11.9 million increase in accounts receivable and a decrease in contract assets, customer deposits, operating lease liability, and contingent consideration of $1.4 million. Net cash used in operating activities was $12.8 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 $5.4 million, and a decrease in net operating assets and liabilities of $2.9 million. The $2.9 million decrease in net operating assets and liabilities was primarily due to the net effects of a $3.2 million increase in accounts receivable, a $— million increase in customer deposits, offset by a $(6.5) million increase in accounts payable and accrued expenses, and an $7.9 million increase in prepayments and other assets. Investing Activities: Net cash provided by investing activities was $1.9 million for the year ended December 31, 2023, primarily from the sale of our investment in XS Financial for $2.4 million offset by the acquisition of property, plant and equipment of $0.5 million. We had no material commitments for capital expenditures as of December 31, 2023. Net cash used in investing activities was $4.3 million for the year ended December 31, 2022. This use of cash was due to $3.9 million related to the acquisitions of the Emerald and DVO entities and $0.7 million for the purchase of fixed assets. Financing Activities: Net cash used in financing activities was $2.0 million for the year ended December 31, 2023. Net cash used in financing activities during the year ended December 31, 2023 primarily relates to cash provided by our line of credit and notes payable of $2.5 million offset by $3.9 million of payments made on the DVO Promissory Note and $0.5 million of payments related to contingent consideration. Net cash used in financing activities was $5.5 million for the year ended December 31, 2022. This decrease in cash primarily relates to $4.4 million of payments to repurchase common stock and $1.0 million of payments related to contingent consideration. 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 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, 2023. 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. 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.