urban-gro Inc. Q1 2023 Earnings Call

Speaker 1: That there, that V cour, that it.

Speaker 2: I.

Speaker 3: Hello and welcome to the Urban Grow Inc. 2023 first quarter earnings conference call. As a brief reminder all participants are currently in a listen-only mode.

Speaker 4: If anyone should require operator assistance during the conference, please press star then zero on your telephone keypad.

Speaker 5: Following the presentation, there will be a question and answer session for those on the teleconference line.

Speaker 6: Please note that this conference call is being recorded and a replay will be made available on the company's website following the end of the call.

Speaker 7: At this time, I'd like to turn the conference call over to Dan Jola, Executive Vice President of Corporate Development and Investor Relations at Urban Growth. So, please go ahead.

Speaker 8: Good afternoon, and thank you for joining us. Today's call will be led by Brad Mattress, Chairman and Chief Executive Officer, and <expletive> Ackray, Chief Financial Officer.

Speaker 9: I'd like to remind our listeners that remarks made during this call will include discussion of non-gap metrics, including adjusted EBITDA and backlog.

Speaker 10: These items should not be utilized as a substitute for urban gross financial results prepared in accordance with GAAP.

Speaker 11: Reconciliation of our Gap Net loss to adjusted EBITDA are available in our press release and in our Form 10Q file with Securities and Exchange Commission and can be accessed from the Investor Relations section of our website.

Speaker 12: On this call, we may state management's intentions, beliefs, expectations, or future projections.

Speaker 13: These are forward-looking statements and involve risks and uncertainties.

Speaker 14: Board-looking statements on this call are made pursuant to the safe harbor provisions of the federal securities laws and are based on urban-grows current expectations. Actual results could differ materially. As a result, you should not place undue alliance on any forward-looking statements.

Speaker 15: Some of the factors that could cause actual results to differ materially from these contemplated by such four-looking statements are discussed in the Periodic Reports to Urban Girl Files with the Security and Exchange Commission.

Speaker 16: These documents are available in the Investors section of the company's website and on the Security and Exchange Commission's website. We do encourage you to review these documents carefully.

Speaker 17: Lastly, a copy of our earnings press release and a webcast replay for today's call may be found on the Investor Relations Section of our website at ir.urban-grow.com.

Speaker 18: A copy of our earnings press release and a webcast replay for today's call may be found on the Investor Relations Section of our website at ir.urban-grow.com. With that, I'll now turn the call over to Brett.

Speaker 19: Thank you, Dan. Good afternoon, everyone, and welcome. I'll begin today's call by providing an update on the current state of our business and then provide some context around our expectations for the balance of the year.

Speaker 20: This will be followed by Decor doing our financial results in greater detail and then we'll open the call for your questions.

Speaker 21: Our first quarter performance was consistent with our prior communicated expectations. We remain on track to achieve our 2020-23 full year revenue in adjusted EBITDA guidance.

Speaker 22: In the near term, we're focused on executing on our primary corporate priority of achieving positive adjusted evida and are working hard to get there as soon as possible.

Speaker 23: Our record reported backlog speaks to the diversification we've brought to our business both in terms of capabilities and and market exposure.

Speaker 24: In the first quarter, we signed over $28 million of additional projects, spread over more than 25 contracts with a diverse set of clients, resulting in a total backlog of $105 million.

Speaker 25: This is approximately five times our backlog at the end of the first quarter of 2022 and over 13% higher than the backlog of 93 million that we reported at the end of 2022.

Speaker 26: Revenues for the first quarter were $16.8 million, which is consistent with the expectations that we laid out on our fourth quarter 2022 call. In terms of the drivers. Let's take a look at the Demonstrators threshold of functionality gagen, based off likeobject,

Speaker 27: construction design build revenue increased by 10.2 million dollars. The professional services remained relatively flat.

Speaker 28: The most notable difference versus the prior year period is the $14.2 million decrease in equipment revenues.

Speaker 29: to solid results and design building services. Beyond going cannabis sector weakness, continues to put pressure on our higher margin sales within the equipment category. 2.

Speaker 30: Adjusted EBITDA for the first quarter was negative $3.4 million. Well, we did anticipate and guide on this performance. We do view this as the low point to the year. Further, now that we fully integrated our acquisitions and have been operating on the same ERP system since the end of April , we now have increased visibility. The HOD, an individual productivity is offered.

Speaker 31: S-GNA expense plan annualized $2 million. And we will continue to seek deficiencies we're available to position our business for long-term profitable growth. S-GNA expense plan annualized $2 million.

Speaker 32: when annualized $2 million, and we will continue to seek deficiencies we're available to position our business for long-term profitable growth. As it became so our balance sheet.

We ended the first quarter with approximately $7.3 million of cash and no bank debt.

I feel that it's important to emphasize this sequential decrease can be partially attributed to the timing of cash payments from our publicly traded Fortune 50 and Fortune 500 clients and in turn is supported by a rate of quarter ending accounts receivables selling of $22.1 million.

Will we continue to place a strong focus on keeping our AR current? Much of this is simply a reflection of where we stood as of March 31st reporting.

As it relates to the current sector trends that we're seeing and evidenced by our backlog, the continued interest for both our professional services and turnkey design-build solutions remains robust and continues to increase.

Our commercial or non-CEA sector has been a reliable and resilient source of revenue for our company, and has indeed helped offset a large amount of the softness in the cannabis space.

Our team has been successful in securing a pipeline of projects that are strong, qualified, and consistently growing.

focus on building relationships, delivering quality services, and meeting the evolving needs of our Fortune 50 and 500 and other clients in our commercial sector, to allow us to establish ourselves as a trusted partner.

We remain committed to capitalizing on the opportunities outside of CEA to continue driving growth and maximizing value for our company.

In the CEA cannabis sector, despite ongoing challenges, we remain very well positioned in this space.

when new states work through the current regulatory delays in award licenses.

for confidence that we will move our clients to the turnkey construction and equipment integration stages. In the meantime, in addition to executing on design contracts, we'll continue to also focus on both the design and design build of retail dispensers.

Internationally and based out of our Netherlands office, our team's active. They're signing professional services contracts and they continue to monitor the impact of the newly proposed legislation in Germany. This and many other developments. It gives us the confidence that the strategic investments made will position us for global growth of an long term.

As it relates to our CEA produce focus clients, we're experiencing consistent interest and continue to sign professional services contract.

Moreover,

In addition to initial projects with these clients, they started our successful service delivery. In multiple situations, we're being invited to bid on new projects, and further been successful in securing follow-on contracts.

Now shifting to our guidance for full year 2023, we are reiterating consolidated revenues to be within a range of $100 million to $120 million and adjusted EBITDA to be within a range of negative $3 million to slightly possible.

In terms of cadence for the balance of the year, we continue to expect sequential quarterly improvement on both the top and bottom line. With a bias to the second half of the year, given some timing shifts for client projects, as a result of the broader macroeconomic environment.

Looking ahead, we remain focused on positioning our business for long-term, profitable growth. We'll continue to maintain a sound balance sheet, optimizer expenses.

Let the HR professional services to our growing base of diverse clients and further integrate and drive new business with the synergistic acquisitions that we've made.

Thank you and with that I will melt your in the call over to death.

Thank you and with that I will melt your in the call over to <expletive> . Thanks Brad.

Revenue was $16.8 million in the first quarter of 2023 compared to $21.1 million in the prior year period. This decrease was driven by a decrease in equipment systems revenue of $14.2 million. The majority of which was offset by the accretive acquisition of Emerald Construction Management.

in April of 2022, which resulted in a $10.2 million in construction design build revenue.

Our professional services revenue of $3.5 million was nearly flat versus the prior year.

Gross profit was $2.8 million or 17% of revenue on the first quarter of 2023 compared to $4.9 million or 23% of revenue in the prior year period.

While the lower gross profit dollars are primarily due to the lower revenue versus the prior year, the decrease in gross profit margin was driven by the impact of revenue next. Or we experienced a decrease in higher margin equipment systems revenue.

offset by an increase in lower margin construction design build revenue. Operating expenses were $7.9 million in the first quarter of 2023.

On a sequential basis, our operating expenses increased by $1.9 million.

This was due to the expenses to lock in our Go Forward leadership team, including the addition of our chief operating officer, inflation-related company-wide wage increases, retention incentives, increased insurance expenses, our investment into the European PNMD, as well as significantly increased professional expenses.

predominantly tied to elevated legal fees associated with the sunflower bank settlement and ongoing litigation.

As Brad noted, in the second quarter, and after aligning all entities into one ERP system, we have optimized and reallocated our resources, which has created an initial $2 million of estimated annual operating expense savings.

Non-operating expenses were $0.2 million in the first quarter of 2023 and primarily reflect expenses recognized from fully guaranteeing the remaining contingent consideration associated with the Emerald acquisition.

Net loss was $5.1 million or negative $48 cents per diluted share in the first quarter of 2023. As compared to a net loss of $0.7 million or a negative $0.7 per diluted share in the prior year period.

Adjusted EBITDA was negative $3.4 million in the first quarter of 2023, compared to positive $0.4 million in the prior year period. In addition to being driven by lower revenues and gross profit due to a change in revenue

The decrease in adjusted EBITDA was due to higher operating expenses predominantly associated with increased compensation, headcount from both organic growth and our acquisitions.

increased professional insurance related expenses.

and reducing our risk levels by adding a $250,000 allowance for doubtful accounts.

and the investment in our European entity, which began in Q3 2022. Now turning to our balance sheet.

We ended the first quarter with $7.3 million of cash on our end no bank debt.

which provides us the necessary flexibility to manage through the macroeconomic market circumstances until we return the business to positive adjusted EBITDA.

We are also maintaining sufficient levels of working capital in the business to allow the business to grow as we are projecting.

Moving to reported backlog, our total backlog as of March 31st, 2023, was approximately $105 million, and is made up of $93 million.

that we reported at the end of the fourth quarter of 2022.

The backlog is comprised of $96 million in construction design build, $4 million of professional services, and $5 million of equipment systems contracts. The March 31 backlog of $105 million that we are reporting today.

While still a record is lower than the estimated $123 million in backlog that we reported on a preliminary basis in early April .

This reduction is based upon a final reconciliation of signed contracts recorded in our CRM system versus our ERP system which was fully integrated in late April .

This difference is predominantly due to a contract unsigned as of March 31, 2023 with an existing Fortune 50 client with whom we currently have multiple signed and active contracts.

While we anticipate that the full scope of this project will move forward and into our backlog, it is important that we maintain the integrity of our backlog and as such we have reduced it in our numbers reported today.

That concludes our prepared remarks. Operator, please open the call for questions. Thank you. We will now be conducting the question and on cessation.

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the Laurier of Craig Hallum. Please go ahead.

Thank you for taking my questions. I was wondering first if you could expand on the projects or relationships you have with these, you know, fortunate 50 and 500 customers. I think this is the first time that you guys are calling them out.

You know, some color on the projects that you're working on as we look forward to here. Thanks.

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We acquired contracts and other segments outside of the VA and that's really fed the diversification of the company today.

All three were working with Fortune 500 companies and predominantly the construction firm that we acquired Emerald has been working with two Fortune 50 client. It started out where they were either doing construction management or construction builds.

projects for these clients, whether it's building a small manufacturing facility, extension to a existing cooler or warehouse projects that are anywhere from five to 15 million dollars. But we've been able to really show the value of our model as we've evolved.

architecture and the engineering. So essentially a full of parties design build.

Let's appreciate that color there. I'm wondering if you could...

Just expand on the outlook that you have.

for services sales, as well as some of these equipment sales, just kind of zooming in on these higher margin line items here. Just give us a better sense of the kind of project that you're working on here and maybe how you expect these sales to kind of trend as we look into the back half of this year. Thanks.

Thanks, Eric. First on the construction that makes up the majority of our backlog right now. And so we're strong in. In both the cannabis and also the non commercial segments in the area of construction for services, architecture, interior design and engineering.

line of sight on employee efficiency and that led to some of the reductions that we made at the start of the quarter.

But it comes to the cannabis sector right now. As I always talk with the poor for urban growth is the seven, eight states right now that have been legalized but are tied up in regulatory delays. And we'll put those.

regulatory delays are worked out and licenses are awarded. We have approximately more than 20 projects right now that have been in design. We're confident that we're going to be able to move those clients through to not only the construction, but also the equipment integration side. So the market.

and cannabis. The funding issues are more prevalent than ever right now. And so a lot of our cannabis-ca clients have not been focused on cat-backed expenditures, whether it's optimizing their facilities or building new ones. So that will be a function of the environment in the sector.

and what we'll be ready for sure when each state opens up. Great, thank you for taking my questions.

each state opened up. Great, thank you for taking my questions. Thank you, Art.

The next question is from Eric Bader of ACC Research. Please go ahead.

The next question is from Eric Beader of ACC Research. Please go ahead. Good afternoon.

Do you give us a little update on what you're seeing in Europe in terms of the capture market share there? What you think is going to happen there? Regulatory is going forward.

All right, for sure. You know, it's in a longer period of investment than we had originally anticipated the...

Conflict in Eastern Europe had a drastic effect on energy prices and in turn had a quite aggressive negative effect on the CEA produce segment in Europe . Fortunately, cannabis for the first time since the pandemic has been increasing.

So we're progressing. We're not progressing and the DOLC will see build in the next couple of quarters, but we are progressing on the services side. We're also closely watching Germany. As the regulations become more clear, our team will be ready to move forward. They are finally leaving June . We are in June .

May, June were in two events in Berlin and also been working with some investment banks at their strategic events in Germany as well. So we've got our finger on the pulse and we're ready to go with them.

Okay. In terms of equipment sales, obviously they've been hit significantly. How is that impact? Are you able to buy better in terms of potentially gaining more margin when equipment has come back right now given the fact that obviously equipment sales have been significantly down? I can't imagine that the equipment manufacturers are also kind

feeling the pain you're feeling too.

It's a tough environment right now in CEA for equipment manufacturers. If you look back at 2021,

90% of our revenues were equipment. And this year is probably gonna be more like 15%. So we've been able to diversify the company into the services and construction design build company. That's very positive. But from an equipment standpoint, as our clients move through the design build process, we're very...

that time in terms of purchasing power. We're equipment agnostic.

We work with 30 different manufacturers right now. We give our clients a variety of options based on what on price and also on quality and have designed a holistic combination of the equipment systems for their facility.

But it's really going to be tied to the sector. Happy most license of the board, having a safe banking act or similar act passed by the end of the year and allowing our clients the access funding to get there. I will build the ad on the channel end there.

We are starting to look at equipment solution sales outside of the CEA cannabis space. We have good, strong mechanical systems contacts, and we've started to quote those systems into our design-build contracts. We are also working with large automation manufacturers for the CEA.

starting to see some action as we make our way through Q2.

Great. Good luck for the rest of the year. Thank you. Thank you, Eric.

This concludes the Q&A session.

apologies, but actually have another question. The next question is from Brian Wright of Mayors passing through the

Thanks, Kudafri. I just wanted to follow up a little bit on the on the backlog. I understand the.

The issue with you know lacking a signature and just wanted to kind of understand You know is that something that's kind of expected imminently and so you know come you know A couple months from now you report the next quarter that you know, we really think

Thanks for the question. We certainly anticipate that we're going to see this specific project we're talking about as a signed project. It is with an ongoing Fortune 50 client that we have a number of contracts with and are doing in progress on a number of...

keep the integrity of the backlog that we report. So because it wasn't a signed contract at quarter end, we'd pulled it out from the numbers that we are reporting. But there is no indication from the customer that the project is going to go away at all. It's before it's kept it's before the compliance committee.

For final approval and certainly expect that we're going to have a back added back to our backlog and be an ongoing project for us.

Okay, great. And then just one of the, you know, think about should we...

Just because we haven't seen, you know, we're still new to the commercial side of the business as far as that customer base goes. We have this interesting dynamic where current revenue is heavily weighted towards commercial, right? And the backlog is heavily weighted.

And so that's kind of a nice base and then the growth beyond that is CEA or did you just like how to think about that because you know it is such a different.

Mix between the current revenue versus the backlog.

Brian , we, you know, I mentioned in the last call for the calendar year 23. We estimate that about two thirds of our business will be CEA. A third will be commercial. And I understand in the first quarter that's, you know, a little bit more than reversed. There has been some slippage.

quarter, but we're focused on adding clients all across the board and all sectors that I discuss to do risk dependency, but at this point on a large project, if it does push, it can skew those numbers one way more than the other. But I think you'll see it start to move and choose three forward over to a higher CEA.

percentage for not only that quarter but also for the year. I guess it's the nice value of a diversified model, right? Oh, and there's another cycle. I don't think it's that.

You've really massively reduced the volatility. It's great. Thank you. Ladies and gentlemen, this concludes the Q&A session. Please reach out to www.Obinger.com with any additional questions.

That also then concludes the conference call for today. Thank you for joining us. You may now disconnect your lines.

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