Q4 2023 urban-gro Inc Earnings Call

Greetings and welcome to the urban grow Inc. Fourth quarter and full year 2023 results conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star.

Operator: Greetings. Welcome to the Urban-Gro Inc. fourth quarter and full year 2023 results conference call. At this time, all participants are in a listen-only mode.

Operator: A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. At this time, I'd like to turn the conference call over to Christian Monson, Urban-Gro's Executive Vice President and General Counsel.

Zero on your telephone keypad. Please note this conference is being recorded.

Time, I'd like to turn the conference call over to Christian Matson Urban gross executive Vice President and General Counsel Sir. Please go ahead.

Good afternoon, and thank you for joining us today's call will be led by Brad Mattress, Chairman and Chief Executive Officer, and <expletive> accurate Chief Financial Officer.

Christian Monson: Good afternoon, and thank you for joining us. Today's call will be led by Brad Nattrass, Chairman and Chief Executive Officer, and Dick Akright, Chief Financial Officer. I'd like to remind our listeners that remarks made during this call will include discussion of non-GAAP metrics, including adjusted EBITDA and backlog. These items should not be utilized as a substitute for Urban-Gro's financial results prepared in accordance with GAAP

I would like to remind our listeners that remarks made during this call will include discussion of non-GAAP metrics, including adjusted EBITDA and backlog. These.

These items should not be utilized as a substitute for urban growth financial results prepared in accordance with GAAP rent.

Christian Monson: Reconciliations of our Gap Net Loss to Adjusted EBITDA are available in our press release and in our Form 10-K filed with the Securities and Exchange Commission and can be assessed from the Investor Relations section of our website at ir.urban-gro.com. During this call, we may state management's intentions, beliefs, expectations, or future projections. These are forward-looking statements and involve risks and uncertainty. Forward-looking statements on this call are made pursuant to the safe harbor provisions of the federal securities laws and are based on Urban-Gro's current executive. However, actual results could differ materially. As a result, you should not place undue reliance on any forward-looking statement. Some of the factors that could cause actual results to differ materially from such forward-looking statements are discussed in the periodic reports Urban-Gro files with the Securities and Exchange Commission. These documents are available in the Investors section of the company's website and on the Securities and Exchange Commission's website.

Reconciliations of our GAAP net loss to adjusted EBITDA are available in our press release and in our Form 10-K filed with the Securities and Exchange Commission and can be assessed from the Investor Relations section of our website at IR Dot urban dash grow dot com.

On this call we may state management's intentions beliefs expectations or future projections. These are forward looking statements and involve risks and uncertainties.

Forward looking statements on this call are made pursuant to the safe Harbor provisions of the federal Securities laws and are based on urban growth current expectations.

Actual results could differ materially.

As a result, you should not place undue reliance on any forward looking statements. Some of the factors that could cause actual results to differ materially from such forward looking statements are discussed in the periodic reports Bourbon grow files with the Securities and Exchange Commission.

These documents are available in the investors section of the company's website and on the Securities and exchange commissions Web site. We do encourage you to review these documents carefully.

Bradley John Nattrass: We do encourage you to review these documents carefully. 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, which is again ir.urban-gro.com. With that, I will now turn the call over to Brad.

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, which again is IR dot Bourbon dash grow dot com.

With that I will now turn the call over to Brad.

Brad: Thank you Christian and good afternoon, everyone and thank you for joining us today.

Bradley John Nattrass: Thank you, Christian, and good afternoon, everyone, and thank you for joining us. After delivering sequential improvements to both the top and bottom line in the first three quarters of 2020, we were met with a confluence of delays across multiple projects in the fourth quarter, which resulted in a disappointing performance. Although we are frustrated by these circumstances, Fortunately, none of the delayed contracts were lost, all are currently active in the first quarter, and we expect that the majority of these delayed revenues will be recognized over the course of 2024, beginning in the first quarter. Our model is working. Our diversification strategy is continuing to broaden our presence across multiple industries, which is visible in our expanding backlog. And furthermore, the significant efforts made to optimize and align our SG&A expenses in 2023 position us well for 2024.

Brad: After delivering sequential improvements to both the top and bottom line in the first three quarters of 2023, we were met with the confluence of delays across multiple projects in the fourth quarter, which resulted in a disappointing performance.

Brad: Although we are frustrated by these circumstances Fortunately none of the delayed contracts where lot. All are currently active in the first quarter and we expect that the majority of these delayed revenues will be recognized over the course of 2024, beginning in the first quarter.

Brad: Our model is working our diversification strategy is continuing to broaden our presence across multiple industries, which is visible in our expanding backlog.

Brad: Further the significant efforts made to optimize and align our SG&A expenses in 2023.

Brad: Positions us well for 2024.

Bradley John Nattrass: All considered, we are confident that 2024 will prove to be a step-up year for Urban-Gro, where we expect to deliver positive adjusted EBITDA, a goal that we have consistently identified as our top near-term priority. 2023 was a successful year of evolution for the company. Although we faced ongoing headwinds within the cannabis sector, our team continued to execute on our sector diversification strategy, and we finished the year with revenues of $72 million, representing growth of 7%. Of this, $50 million, or 70% of our revenues, are from the commercial markets that we serve, and $22 million, or 30%, are from CEA.

Brad: All considered we are confident the 'twenty 'twenty four will prove to be a step up year for urban growth, where we expect to deliver positive adjusted EBITDA. A goal that we have consistently identified is our top near term priority.

Brad: 2023 was a successful year of evolution for the company.

Brad: Although we face ongoing headwinds within the cannabis sector. Our team continued to execute on our sector diversification strategy we.

Brad: Finished the year with revenues of $72 million representing growth of 7%.

Brad: Of this $50 million or 70% of our revenues are from the commercial markets that we serve and 22 million or 30% are from C E.

Brad: Further while our year over year revenues decreased by 22 million or 36%. This was offset with our revenue growth in commercial which increased by $27 million or 36%.

Bradley John Nattrass: Further, while our year-over-year CEA revenues decreased by $22 million, or 36%, this was offset by our revenue growth in commercial, which increased by $27 million, or 36%. These numbers demonstrate a reversal from the trends we experienced in 2022 and highlight the value of our diversification. The prolonged multi-year compression of our equipment, resulting from continued softness within the CEA sector, remains the most material headwind to our financial performance given the advantageous margins that this category represents. In 2023, our equipment revenues decreased to a three-year low of $13 million, which represents a $21 million or 62% decrease from 2022, and moreover, a $43 million or 77% decrease from 2021. At an average equipment margin of approximately 14%, replacing this margin with gross profit from our other areas of business has been a large hurdle to overcome. But as we enter 2024, we have done just that.

Brad: These numbers demonstrate a reversal from trends, we experienced in 2022 and highlight the value of our diversification.

Brad: The prolonged multiyear compression of our equipment revenues, resulting from continued softness with MSC a sector remains the most material headwind to our financial performance given the advantageous margins. This category represents.

Brad: In 2023, our equipment revenues decreased with three year low of $13 million, which represents a $21 million or 62% decrease from 2022, and Moreover, it's $43 million or 77% decrease from 2021.

Brad: And then average equipment margin of approximately 14%, replacing this margin with gross profit from our other areas of business. There's been a large hurdle to overcome but as we enter 2024, we have done just that.

Brad: That being said there are some significant regulatory changes that could serve as catalysts to reignite the cannabis market and therefore provide a material and sustained lift or our future financial performance.

Bradley John Nattrass: That being said, there are some significant regulatory changes that could serve as catalysts to reignite the cannabis market and therefore provide a material and sustained lift to our future financial performance. As a result of these persistent headwinds across the CEA sector, we have optimized the size of the company to align with the current performance levels and reduced our SG&A expenses by more than $8 million on an annualized basis, all of which we expect to realize in 2024. We have an in-house team of experts that include architects, interior designers, engineers, construction managers, project managers, horticulturists, and others that focus on serving clients in multiple sectors, including CEA and commercial.

Brad: As a result of these persistent headwinds across the sector. We have optimized the size of the company to align with the current performance levels and reduced our SG&A expenses by more than $8 million on an annualized basis, all of which we expect to realize in 2024.

Brad: We have an in house team of experts who include architects and interior designers engineers construction managers project managers, Horticulturists and others, there's focus on serving clients in multiple sectors, including CE and commercial a.

Bradley John Nattrass: The combination of this team's expertise, our integrated solutions, and our focus on sector diversification differentiates us as a company that continues to deliver growth in a turbulent environment. They're looking at trends in the markets in which we operate. First, in regards to the strategic investments we have made in our European entity over the last two years. However, suppressed demand in their CEA markets continues as well. As a result, we have downsized the workforce and reduced general expenses to better align our costs with near-term demand levels. Looking forward, the European cannabis market is continuing to open up, most notably with the early stages of adult use legislation and legalization in Germany, and we continue to anticipate that there will be increasing demand for the services that we provide. In the domestic market, our business in the commercial sectors continues to generate strong organic growth.

Brad: A combination of this team's expertise our integrated solutions and our focus on sector diversification differentiates us as a company to continue to deliver growth in a turbulent environment.

Brad: Now looking at trends in the markets in which we operate.

Brad: First in regards to the strategic investments we have made in our European entity over the last two years.

Brad: The suppressed demand in their CE markets continues as well as a result, we have downsized the workforce and reduced general expenses to better align our cost with near term demand levels.

Brad: Looking forward the European cannabis market is continuing to open up most notably with the early stages of adult use legislation legislation that legalization in Germany, and we continue to anticipate that there'll be increasing demand for the services that we provide.

In the domestic market, our business and the commercial sectors continues to generate strong organic growth.

Brad: In addition to signed contracts upon which we're executing with a qualified pipeline of projects with both existing and new clients.

Bradley John Nattrass: In addition to the signed contracts upon which we're executing, we have a qualified pipeline of projects with both existing and new clients, the demonstrated buyer going back. Looking forward in the year, we intend to continue building out our business development focus and commercial activities by adding to our roster of sector-experienced individuals and integrating other innovative initiatives. In the CEA sector, we continue to expand our vertical farming focus, albeit at a slower pace than anticipated due to ongoing sector capital. While almost all of the related business that we currently engage in utilizes our professional services, we're continuing to interface with a variety of new clients for which Urban-Gro is a perfect fit for fulfilling their urban vertical farming design-build needs, as it relates to our business in the cannabis segment.

Brad: Demonstrating by our growing backlog.

Brad: Looking forward in the year, we intend to continue building out our business development focus and commercial by adding to our roster of sector experienced individuals and integrating other innovative initiatives.

Brad: In the <unk> sector, we continue to expand our vertical farming focus, albeit at a slower pace than anticipated due to ongoing sector capital challenges.

Brad: Almost all of the related business that we currently engage and utilizes a professional services, we're continuing to interface with a variety of new clients for which urban there was a perfect fit for fulfilling their urban vertical farming design build needs.

Brad: As it relates to our business in the cannabis segment.

Brad: We've remained active in delivering design build solutions as well as architecture interior design and engineering services.

Brad: Individually and also combined for both dispensaries and cultivation facility.

Brad: As it pertains to our outlook on the cannabis sector.

Brad: We believe the current market sentiment is more positive than it has been for a couple of years.

Brad: Fueled by heightened awareness and anticipated progress around potential regulatory changes there are a few catalysts, which could result in a significant and positive change in momentum for our business within the sector.

Bradley John Nattrass: We've remained active in delivering design-build solutions as well as architecture, interior design, and engineering services, both individually and also combined for both dispensaries and cultivation facilities. This relates to our outlook on the cannabis sector. We believe that current market sentiment is more positive than it has been for a couple of years, fueled by heightened awareness and anticipated progress around potential regulatory changes. There are a few catalysts which could result in a significant and positive change in momentum for our business within this sector. First, at the federal level, the potential rescheduling of cannabis from Schedule 1 to 3 would provide operators with significant working capital increases resulting from the removal of the 280e-related tax burden. We believe operators will use this significant incremental capital to fund future CapEx growth, including refreshing existing facilities and building out new ones.

Brad: Yeah.

Brad: First on the federal level, the potential rescheduling of cannabis from schedule one to three would provide operators with significant working capital increases, resulting from the removal of the 280 <unk> related tax burden.

Brad: We believe operators will use the significant incremental capital to fund future capex growth, including refreshing existing facilities and building out new ones.

Brad: Second and again on the federal level the prospects of successfully passing the safer banking bill.

Brad: We need to be discussed and would potentially include a capital market's clause that allows plant touching businesses to not only lift on the larger exchanges, but Moreover, provide more efficient access to capital.

Brad: And third at the state level well progress continues to be made on legalization in multiple states. We believe the most impactful change would be in Florida.

Brad: A successful vote to allow the adult use recreational sales in the state would have a profound and sustained impact for the state's operators.

Brad: Now turning to our full year, 'twenty 'twenty four outlook and associated cadence.

Bradley John Nattrass: Second, and again on the federal level, the prospects of successfully passing the Safer Banking Bill continue to be discussed and would potentially include a capital markets clause that allows plant-touching businesses to not only list on the larger exchanges but, moreover, provide more efficient access to capital. And third, at the state level, progress continues to be made on legalization in multiple states. We believe the most impactful change would be in Florida, a successful vote to allow adult-use recreational sales in the state that would have a profound and sustained impact on the state's operators.

Brad: We anticipate consolidated revenues to be greater than $84 million, a 17% increase over 2023.

Brad: And we expect to generate positive adjusted EBITDA.

Brad: Well achieving these results are still heavily dependent on category revenue mix. The actions, we took to reduce our SG&A expenses in 2023 have significantly reduced our revenue breakeven point for generating positive adjusted EBITDA relative to what we've previously communicated.

Brad: For the first quarter of 2024.

Bradley John Nattrass: Now turning to our full year, 2024 Outlook and associated costs. We anticipate consolidated revenues to be greater than $84 billion. 17% increase over 2023, and we expect to generate positive adjusted EBITDA. However, achieving these results is still heavily dependent on category revenue. The actions we took to reduce our SG&A expenses in 2023 have significantly reduced our revenue break-even point for generating positive adjusted EBITDA relative to what we've previously communicated. For the first quarter of 2024, we're providing some guidance on our expected results given we are approaching the end of the quarter with just two days remaining. We expect revenues to be greater than $15 million and adjusted EBITDA to be greater than $0.5 million.

Brad: Providing some guidance on our expected results given we are approaching the end of the quarter with just two days remaining.

Brad: We expect revenues to be greater than $15 million and adjusted EBITDA to be greater than negative $5 million.

Brad: Looking at the quarterly cadence for the year, we expect to deliver sequential quarterly growth of both revenues and adjusted EBITDA building to our entire full year guidance.

Brad: In closing as we look more broadly the 'twenty 'twenty four and backed by both our closed contract backlog of a $110 million and the $8 million reduction in annualized SG&A. We believed we believe we're in the strongest position that we've been in over 18 months.

Brad: Further and supported by a qualified pipeline that continues to grow we see increasing demand for our solutions in multiple sectors with the right regulatory progress in the cannabis sector, we anticipate seeing a resurgence in our related business later this year.

Brad: To date urban growth model is stronger more durable and more efficient than it has ever been.

Bradley John Nattrass: Looking at the quarterly cadence for the year, we expect to deliver sequential quarterly growth in both revenues and adjusted EBITDA, building to our entire full-year guidance. In closing, as we look more broadly to 2024, and backed by both our closed contract backlog of $110 million and the $8 million reduction in annualized SG&A, we believe we're in the strongest position that we've been in over 18 months. Further, and supported by a qualified pipeline that continues to grow, we see increasing demand for our solutions in multiple sectors. With the right regulatory progress in the cannabis sector, we anticipate seeing a resurgence in our related business later this year. Today, Urban-Gro's model is stronger, more durable, and more efficient than it has ever been.

Brad: Business is fundamentally secure.

Brad: The support of the working capital line of credit that we put in place in December we do not see the need to bring new capital into the company at this time.

Brad: Thank you and with that I will now turn the call over to Deb to discuss further details of the fourth quarter as well as full year 2023 results deck.

Thanks, Brad and good afternoon, everyone revenue was 15, four zero million dollars in the fourth quarter of 2023 compared to $17 $3 million in the prior year period.

Deb: This decrease was the result of reductions in all revenue categories, including construction design build revenue of $1.3 million professional services revenue of zero point $8 million.

Equipment systems revenue zero point $2 million.

Deb: Construction design build revenue decreased due to several projects being pushed into 2024.

Richard A. Akright: Our business is fundamentally secure, and with the support of the working capital line of credit that we put in place in December, we do not see the need to bring new capital into the company at this time. Thank you, and with that, I will now turn the call over to Dick to discuss further details of the fourth quarter, as well as full year 2023 results.

Deb: The reduction in equipment systems and services revenue as a result of continued soft demand in the U S cannabis market because of ongoing state level regulatory delays and the license awarding process as well as the lack of movement by key industry financial support models such as.

Deb: Rescheduling this paper bags.

Deb: Gross profit was $1 $7 million or 11% of revenue in the fourth quarter of 2023.

Richard A. Akright: Thanks, Brad, and good afternoon, everyone. Revenue was $15.0 million in the fourth quarter of 2023 compared to $17.3 million in the prior year period. This decrease was the result of reductions in all revenue categories, including construction design build revenue of $1.3 million, professional services revenue of $0.8 million, and equipment systems revenue of $0.2 million. Construction design and build revenue decreased due to several projects being pushed into 2024. The reduction in equipment systems and services revenue is a result of continued soft demand in the US cannabis market because of ongoing state level regulatory delays in the license awarding process, as well as the lack of movement by key industry financial support models such as rescheduling and the safer bank. Gross profit was $1.7 million, or 11% of revenue, in the fourth quarter of 2023, compared to $3.2 million, or 19% of revenue, in the prior year period The decrease in gross profit of $1.5 million correlates to the decrease in revenue, as well as a shift in mix toward lower-margin construction design build revenue.

Deb: Paired with $3 $2 million or 19% of revenue in the prior year period.

Deb: The decrease in gross profit of $1.5 million correlates to the decrease in revenue as well as a shift in mix toward lower margin construction design build revenue.

Deb: This was further impacted by a project cost revision in the fourth quarter that negatively impacted project profitability.

Deb: Yeah.

Deb: Operating expenses were $6 $4 million in the fourth quarter of 2023 compared to $6 $2 million in the prior year period, representing an increase of zero point $2 million.

Deb: The increase in operating expenses was a matter of fact of an increase in general and administrative expenses of $3 $8 million.

None: Yeah, the $3 3 million dollar reduction and a one time business development expense.

The increase in general and administrative expense was the result of increased professional fees associated with legal defense costs and increased personnel costs associated with an increase in the average number of employees.

None: As Brad mentioned, we've been able to reduce our annual general and administrative expense spending by over $8 million, which will favorably impact our results in 2024.

Richard A. Akright: This was further impacted by a project cost revision in the fourth quarter that negatively impacted project profitability. Operating expenses were $6.4 million in the fourth quarter of 2023, compared to $6.2 million in the prior year period, representing an increase of $0.2 million. The increase in operating expenses was the net effect of an increase in general and administrative expenses of $3.8 million and a $3.3 million reduction in a one-time business development expense. The increase in general and administrative expenses was the result of increased professional fees associated with legal defense costs and increased personnel costs associated with an increase in the average number of employees.

None: I'll provide some more context on this a little later.

None: Non operating expenses of zero point $1 million in the fourth quarter of 2023 related primarily to interest expense and were down significantly from $1 $3 million incurred in the fourth quarter of 2022.

None: Which included an impairment loss of $1.0 million related to settlement of litigation receivables.

None: Zero point $4 million in expenses recognized from fully guaranteeing the remaining contingent consideration associated with the two WR acquisition.

None: Net loss was $4 $7 million or a negative 40 cents per diluted share in the fourth quarter of 2023.

Richard A. Akright: As Brad mentioned, we've been able to reduce our annual general and administrative expense spending by over $8 million, which will favorably impact our results in 2024. I'll provide some more context on this a little later. Non-operating expenses of $0.1 million in the fourth quarter of 2023 related primarily to interest expense and were down significantly from $1.3 million incurred in the fourth quarter of 2022, which included an impairment loss of $1.0 million related to settlement of a litigation receivable and $0.4 million in expenses recognized from fully guaranteeing the remaining contingent consideration associated with the 2WR Act. Net loss was $4.7 million, or a negative 40 cents per diluted share Adjusted EBITDA was negative $3.0 million in the fourth quarter of 2023, compared to negative $1.7 million in the prior year period. The decrease in adjusted EBITDA was driven by lower revenues in gross profit, as well as an increase in general and administrative expenses.

None: Compared to net loss of $4 $2 million or a negative 39 cents per diluted share in the prior year period.

None: Adjusted EBITDA was negative $3.0 million in the fourth quarter of 2023 compared to negative one $7 million in the prior year period.

None: The decrease in adjusted EBITDA was driven by lower revenues and gross profit as well as an increase in general and administrative expenses.

Yeah.

None: On a full year basis, we reported total revenue of $71.5 million compared to 67.00 a million dollars in the prior year, representing an increase of six 7%.

None: This increase in revenue was predominantly driven by the increasing momentum that the company has and the commercial sectors in which it operates outside of the CE market.

None: Further significant increases in construction design build revenues were offset by continued decreases in equipment systems revenues related to the sustained softness in demand in the U S cannabis market.

None: Net loss was $18 $7 million compared to a net loss of $15 $3 million and adjusted EBITDA was negative $9 $7 million compared to negative $3 $9 million in the prior year comparable period.

None: Now turning to the balance sheet.

None: We entered 2024 with $1 $1 million of cash and a total of $2 5 million draw $2.5 million drawn on our $10 million working capital ABL that we put in place in December 2023.

Richard A. Akright: On a full-year basis, we reported total revenue of $71.5 million, compared to $67.00 million in the prior year, representing an increase of 6.7%. This increase in revenue was predominantly driven by the increasing momentum that the company has in the commercial sectors in which it operates outside of the CEA mark. Further, significant increases in construction design build revenues were offset by continued decreases in equipment systems revenues related to the sustained softness and demand in the U.S. canopy. The net loss was $18.7 million compared to a net loss of $15.3 million, and adjusted EBITDA was negative $9.7 million compared to negative $3.9 million in the prior year comparable period.

None: The line is serving its purpose and is providing us the necessary flexibility to manage our working capital needs, which are tied directly to our clients' projects.

None: In fact, the drawn balance at year end is tied to $8 million of anticipated collections that moved from late December 'twenty two 'twenty three to mid January 2024.

None: We are consistently collecting on our radar and paying down our a pea in the ABL provides flexibility needed to support our growth as we returned to positive adjusted EBITDA in 2024.

None: As was expected increased construction design build revenue drove increases to receivable and payable balances on a year over year basis.

None: Yeah.

None: Moving to reported backlog our total backlog as of December 31, 2023 was approximately $110 million, a $26 million or 40% sequential increase over the third quarter of 2023.

Richard A. Akright: Now turning to the balance, we entered 2024 with $1.1 million of cash and a total of $2.5 million drawn on our $10 million working capital, ABL, that we put in place in December 2023. The line is serving its purpose and is providing us with the necessary flexibility to manage our working capital needs, which are tied directly to our clients' projects. In fact, the drawn balance at year-end is tied to $8 million of anticipated collections that move from late December 2023 to mid-January 2024.

None: Approximately half of this increase is attributed to the delayed project delivery that we experienced in the fourth quarter and detailed earlier.

None: This backlog is comprised of $102 million and construction design build.

None: Millions of dollars of professional services and $1 million of equipment systems contracts.

None: As previously mentioned in 2024, we have identified more than $8 million of general and administrative expense reductions as compared to 2023 to ensure that we will be able to achieve positive adjusted EBITDA based on our projected revenue in 2024.

Richard A. Akright: We are consistently collecting on our AR and paying down our AP, and the ABL provides the flexibility needed to support our growth as we return to positive adjusted EBITDA in 2024. As expected, increased construction design build revenue drove increases to receivable and payable balances on a year-over-year basis. Moving to reported backlog, our total backlog as of December 31, 2023 was approximately $110 million, a $26 million or 40% sequential increase over the third quarter of 2023. Approximately half of this increase is attributed to the delayed project delivery that we experienced in the fourth quarter and detailed earlier. This backlog is comprised of $102 million in construction design build, $7 million of professional services, and $1 million of equipment systems. As previously mentioned, in 2024, we have identified more than $8 million of general and administrative expense reductions as compared to 2023 to ensure that we will be able to achieve positive adjusted EBITDA based on our projected revenue in 2021. Those expense savings will correspond to reductions in personnel-related expenses, professional fees, marketing expenses, and a variety of other expenses across all departments.

None: Those expense savings will correspond to reductions in personnel related expenses professional fees marketing expenses and a variety of other expenses across all departments.

None: Additionally, in 2020 for the financial services Division of the company has three primary strategic goals like Bill will assist the company and delivering more consistent results on a sequential basis.

None: First now that all entities around the same ERP system improved tactical reporting on a weekly basis, we will provide our business development and operations teams with better line of sight on projected performance. So they can plan accordingly, and adjust operating targets on a.

None: A real time basis, including accelerated billing on construction design build projects to improve cash flow.

None: Becker.

None: <unk> cost reductions in insurance and facilities costs.

None: And third strategic utilization of our line of credit, which will enable us to better manage our vendor relationships in order to maximize our purchasing opportunities and reduce overall costs, primarily on construction design build projects, which will in turn aid in increasing margins.

None: On projects.

None: That concludes our prepared remarks, operator, please open the call for questions.

None: Thank you at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick.

Richard A. Akright: Additionally, in 2024, the financial services division of the company has set three primary strategic goals that I feel will assist the company in delivering more consistent results on a sequential basis. First, now that all entities are on the same ERP, improved technical reporting on a weekly basis will provide our business development and operations teams with a better line of sight on projected performance so they can both plan accordingly and adjust operating targets on a real-time basis, including accelerated billing on construction design-build projects to improve cash flow. Second, drive cost reductions and insurance and facilities costs.

None: Up your handset before pressing the star keys, one moment. Please while we poll for questions. Once again. Please press star one if you have a question or comment.

None: The first question comes from Eric des <unk> with Craig Hallum. Please proceed.

Eric: Great. Thanks for taking my questions.

Eric: First one for me just I'm, hoping you could expand a bit on the project delays.

Eric: And especially the cost revisions in the quarter.

Eric: We've seen a few.

None: Couple of project delays in the past obviously these things can happen with large projects.

Operator: And third, strategic utilization of the line of credit, which will enable us to better manage our vendor relationships in order to maximize our purchasing opportunities and reduce overall costs, primarily on construction design-build projects, which will, in turn, aid in increasing margins on Pratt. That concludes our prepared remarks. Operator, please open the call for questions. Thank you.

None: Cost revision is newer I think so just any more color on kind of what happened in the quarter would be very helpful. Thanks.

None: Sure Eric Thanks for the thanks for the question so.

None: In Q4, we had three projects.

None: That pushed two of them. It was on their kickoff date, which we expect it to be in December we still held hope at the start of December that they would kick off we procured started procuring materials to deliver to the site and both client asked pushed back those kickoff dates until.

Operator: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue.

None: Well the first two weeks in our in January So we did that the third was an existing project.

None: Creation project that we had announced earlier in the year and in Q4, we had expected significant revenues from the project, but it also pushed and there was no business completed in Q4, so those three contracts they're all active.

Operator: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star 2. One moment, please, while we poll for questions. Once again, please press star 1 if you have a question or comment. Our first question comes from Eric Des Lauriers with Craig Hallam. Great, thank you for taking my questions. First one for me, I just hope you could expand a bit on the project delays and, especially, the cost revisions in the quarter. You know, we've seen a few, you know, a couple project delays in the past. Obviously, these things can happen with large projects. Cost revision is newer, I think, so just any more color on kind of what happened in the quarter would be very helpful. Sure, Eric.

None: Recording revenue in Q1, and we expect them now to finish probably a quarter longer that's why I said the majority would be complete.

None: In 'twenty 'twenty, four but they'll go about a quarter longer than they were before.

None: Overall with with projects.

None: I feel that we're working on an increasing amount of larger projects and as we come into 2024 and continue to sign new projects, one moving or two moving will have less.

None: In fact on the organization, but now when when one or two moves that has a material effect when three move.

None: Unexpectedly it has the disappointing effect that we saw.

None: In addition to that our services.

Bradley John Nattrass: Thanks for the thanks for the question. So in Q4, we had three projects that pushed two of them back, it was on their kickoff date, which we expected to be in December. We still held hope at the start of December that they would kick off.

None: We at the time it takes about a month after quarter end to reconcile all of the services revenue and it was a surprising disappointment are actually from the C. E sector. There was no work done by engineering in the fourth quarter, that's that's resumed with momentum.

Bradley John Nattrass: We'd started procuring materials to deliver to the site, and both clients asked to push back those kickoff dates until the first two weeks in January. So we did that. The third was an existing project, a recreation project that we had announced early in the year. And in Q4, we had expected significant revenues from the project, but it also pushed, and there was no business completed in Q4. So those three contracts, they're all active, recording revenue in Q1. And we expect them now to finish for probably a quarter longer.

None: In Q1.

None: The actions we took for that in the last couple of months. We now have an active line of sight on what's happening at all times with our services and what's been Invoiced. We did get everyone on the same ERP in the middle of 2023, and so as we give guidance for Q1 today with only two days left.

None: We have a solid grasp.

None: Grasp on exactly where that is and then finally on equipment.

None: But a couple of million dollars in projects, we had hoped it would be even higher than that just disappeared. They didn't push they just disappeared right at the tail end of 2023, So you know.

Bradley John Nattrass: That's why I said the majority would be complete in 2024, but they'll take about a quarter longer than they were before. Overall, with projects. I feel that we're working on an increasing number of larger projects. And as we come into 2024 and continue to sign new projects, one move or two moves will have less of an effect on the organization, but now when one or two moves, it has a material effect. When three unexpectedly move, it unexpectedly has the disappointing effect that we saw. In addition to that, our services, we, at the time, took about a month after quarter end to reconcile all of the services revenue, and it was a surprising disappointment. Actually, from the CEA sector, there was no work done by engineering in the fourth quarter.

None: It's very disappointing of course, but it's also the strong news is with the construction contracts. They weren't lost its a timing issue and it doesn't hurt the long term fundamentals of the company. It's just a timing issue and they moved into Q1.

In terms of project costing <expletive> do you want to take that one please.

None: Yeah, let me comment on that Eric.

We certainly did have a project that we had a cost revision increased cost on that occurred during the quarter.

Expletive: We we are working with the customer in order to negotiate a revision of that contract but.

Expletive: And the construction industry with the way things go in terms of the way we have to account for that because we didn't get those negotiations finalized by the end of the year.

Bradley John Nattrass: That's resumed with momentum in Q1. The actions we took for that in the last couple of months, we now have an active line of sight on what's happening at all times with our services and what's been invoiced. We did get everyone on the same ERP in the middle of 2023, and so as we give guidance for Q1 today with only two days left, we have a solid grasp on exactly where that is. And then, on equipment, about a couple million dollars in projects we held hope that it would be even higher than that just disappeared. They didn't push, they just disappeared right at the tail end of 2023. So it's very disappointing, of course, but the good news is that with the construction contracts, they weren't lost; it's a timing issue, and it doesn't hurt the long-term fundamentals of the company. It's just a timing issue, and they moved into Q1.

Expletive: We couldn't include a contract revision and as part of our calculations for contract revenue on the contract costs. So we needed to have that flow through our financials with the way. It is which is the increased project costs right. Now we are highly confident that we're going to be able to negotiate.

Expletive: An increase in the contract revenue for that project.

Expletive: But that'll come through in the first half of 2024.

Expletive: But.

Expletive: Like I say not not too atypical of in the construction industry. When you have a situation like this you just need to account, let the accounting happen has it does and we just felt we needed to show that contract that cost revision in the quarter.

None: Alright, I appreciate that color there.

None: And then just thinking about you know.

None: Fiscal 'twenty four guidance, obviously Q1 were largely done right now.

Richard A. Akright: In terms of project costing, Dick, do you want to take that one? Yeah, let me comment on that, Eric. We certainly did have a project that we had a cost revision, increased cost on that occurred during the quarter. We are working with the customer in order to negotiate a revision of that contract, but in the construction industry with the way things go in terms of the way we have to account for that, because we didn't get those negotiations finalized by the end of the year, we couldn't include a contract revision as part of our calculations for contract revenue and the contract costs, so we needed to have that flow through our financials with the way it is, which is the increased project costs right now.

None: But in terms of just the overall guidance for $84 million in revs and then.

None: Positive EBITDA.

None: And I suppose for these you know.

None: Sequential improvement in both of those from Q1 levels I'm, just kind of wondering what.

None: What what visibility you have on those what visibility you have on potential project delays and cost revisions.

None: Packaging future quarters is this something that you know with the ERP system now being on all every entities now all on the same ERP system that.

None: You'll have better visibility into some of these delays and cost revisions as well I'm.

None: Just kind of wondering yes.

None: Yes.

None: Think about that that guidance, both overall and they're sort of cadence and then just the follow up to that is if the guidance includes any of these potential legislative catalysts.

Richard A. Akright: We are highly confident that we're going to be able to negotiate an increase in the contract revenue for that project and that that'll come through in the first half of 2024. But, as I say, not too atypical in the construction industry when you have a situation like this. You just need to account for it, let the accounting happen as it does, and we just felt we needed to show that contract, that cost revision, during the quarter. All right, I appreciate that color there.

None: Within it thank you.

None: So I'll start with the last one the guidance does not include any of the potential catalyst in the cannabis space. We do have active design build projects in this space Eric and win.

None: Even even existing legal states that have regulatory delays and havent awarded licenses like New York When they award licenses, we have clients multiple clients in that state alone that have designs have spent considerable got considerable amount of money some of them getting the C DS but until their license.

Bradley John Nattrass: And then just thinking about fiscal 24 guidance, obviously Q1, we're largely done right now. But in terms of just the overall guidance for $84 million in REVs and then positive EBITDA, and I suppose for the sequential improvement in both of those from Q1 levels, I'm just kind of wondering what. You know, what visibility you have on those, what visibility you have on potential project delays and cost revisions impacting future corridors. Is this something that, you know, with the ERP system now being on all, you know, every entity is now all on the same ERP system, you'll have better visibility into some of these delays and cost revisions as well. I'm just kind of wondering, yeah, how to think about that guidance, both overall and the sort of cadence. And then just the follow-up to that is whether the guidance includes any of these potential legislative catalysts within it. Thank you. But I'll start with the last one. The guidance does not include any of the potential catalysts in the cannabis space.

None: As awarded.

None: I cannot.

None: Access their funds and are therefore go to the bill. So we do have that ongoing business and we're doing a lot of work right now more and more work on dispensaries for our clients both multistate operator than single state operators.

None: Across the country, some just design and some design build.

None: As it relates to line of sight as of right now we don't anticipate any additional delays.

None: However, look the street came up with.

None: Weeks' notice that at the end of the year, we don't anticipate any now but.

None: You never know what could happen of course as I had started early with the answer.

None: We have many more projects that we're working on the same time.

None: It won't have as material of a impact yes.

None: One of them pushes.

None: Or you know tracking the delays in the ERP.

None: That's that's really the the delays will come through our project management office and then we have a online portal.

None: Perfect management portal that.

None: We build time, both are available from the clients and then from our team.

Bradley John Nattrass: We do have active design-build projects in the space, Eric, and when existing legal states that have regulatory delays and haven't awarded licenses like New York, when they award licenses, we have clients, multiple clients in that state alone that have designs that spend a considerable amount of money, some of them getting the CDs, but until their license is awarded, they cannot access their funds and, therefore, go to the build. So we do have that ongoing business, and we're doing a lot of work right now, more and more work on dispensaries for our clients, both multi-state operators and single-state operators, across the country, some just designed and some designed built. So as it relates to line-of-sight, as of right now, we don't anticipate any additional delays.

None: We will see it through their first on the ERP, that's mostly tied to timely.

None: Calculation of results.

None: And we have taken action.

None: Since we had that disappointment in the services coming in under where we had.

None: Forecast, even as late as the middle of December.

None: And so I do not anticipate us to be off on the services again with a guide.

When I talk about sequential.

None: We have.

None: Contracts that that really.

None: Our executed over the next two to four months from a construction standpoint.

None: There and the project management portal, and we know exactly when they'll be exiting so we're very confident of course in Q1 was two days left and then as we go forward into Q2 and beyond it's not completely baked but with.

With the contracts, we have as long as everything proceeds like insured then we don't anticipate issues sequentially, improving the top and bottom line.

None: And we definitely realize that we've got to walk the talk and earn confidence back and our ability to predict quarters.

Bradley John Nattrass: However, look, those three came up with weeks' notice at the end of the year. We don't anticipate any now, but... You never know what could happen, of course, as I had started early with that answer, as we have many more projects that we're working on at the same time; it won't have as much material impact if one of them pushes.

None: Thanks for taking my question Yeah.

None: Yeah.

None: Just commenting on it as is evidenced the backlog for construction design builds really.

Quite large and we are getting a much better insight and visibility into how those projects cost on those projects are starting to come into the site over the course of 2024. So that that's just really improving with a new ERP system that we put in place a much much improvement on that even just.

Bradley John Nattrass: As for, you know, tracking the delays and the ERP, that's really, the delays will come through our project management office, and then we have an online project management portal that builds time both viewable from the client and then from our team, and we'll see it through there first. On the ERP, that's mostly tied to timely tabulation of results. And we have taken action since we had that disappointment with the services coming in under where we had forecasted even as late as the middle of December. And so I do not anticipate us being off on the services again with a guide. When I talk about sequential, you know, we have contracts that are really executed over the next two to four months from a construction standpoint. They're in the project management portal, and we know exactly when they'll be executed.

None: Over the last six weeks, so anyway, just wanted to add that comment.

None: I appreciate the color.

None: Thanks. Our next question comes from Scott Fortune with Roth M. K Emma. Please proceed.

Scott Fortune: Yeah, good afternoon, and thanks for the questions I'm, just a little bit follow up on Erik I'll kind of provide a little more color on the backlog here.

Scott Fortune: Ongoing discussions or opportunities kind of outside the C E.

Scott Fortune: And those different industries, just kind of highlight some of the different industries and then even within this year. How much is the backlog coming from Ta versus non T E and of that $10 million and then just unpack a little bit more of the color of the strength of the end markets, you're seeing anything past industries or cat.

Scott Fortune: <unk> of the projects you are seeing the strength and just little more color on that would be great. Thanks.

Bradley John Nattrass: So we're very confident. Of course, in Q1 with two days left, and then as we go forward into Q2 and beyond, it's not completely baked, but with the contracts we have, as long as everything proceeds like it should, then we don't anticipate issues sequentially improving the top and bottom line. And we definitely realize that we've got to walk the talk and earn confidence back in our ability to predict quarters. Thanks for taking my question. You're welcome.

Thanks, Scott addicted when I started in the backlog.

Scott Fortune: Yeah, so from a backlog perspective.

None: While we have is.

None: And I'm, sorry, I'm getting sorted out but of the $110 million of substantial amount he was coming in.

None: Let's see a sector. We do have some large we do have some large construction design build projects that are in a better in the backlog as of December 31, 70% is from CVA.

Richard A. Akright: Yeah, and Eric, just commenting on it, the backlog for construction design builds is really quite large, and we are getting much better insight and visibility into how those projects, costs on those projects, are starting to come into sight over the course of 2024. So that's really improving with the new ERP system that we've put in place, a lot of improvement on that even just over the last six weeks. So, anyway, just wanted to add that I appreciate the color.

None: A large portion of the construction that is now comprised of some C E O projects.

None: And so that makes that makes up the biggest part of the backlog for the year.

None: On the commercial side, it's tended to be the existing contracts that are they existing customers that were in place with the company that when we acquired it which was the large CPG.

Operator: The next question comes from Scott Fortune with Roth MKM. Please proceed. Yeah, good afternoon, and thanks for the questions.

None: CPG customer.

None: But we're expanding that out into health care and additionally into some.

None: Secondary education customers that are part of that backlog.

Operator: Just a little bit of follow-up on Eric to kind of provide a little more color on the backlog here and ongoing discussions or opportunities kind of outside the CEA and those different industries. Just kind of highlight some of the different industries and then even within the CEA because how much is the backlog coming from the CEA versus non-CEA and out of that 110 million. And then just unpack a little bit more the color or the strength of the end markets you're seeing, any kind of industries or categories of the projects you're seeing strength in. Just a little more color on that would be great.

None: And just a quick follow up do you see the backlogs, we came a little bit going out more diversified to the CPG health care as you build out is kind of will the color on those opportunities.

None: Okay.

None: I'll take them through that.

None: So on the <unk> side, Scott when we're building our cultivation facility that can take us at all as long as six quarters on the commercial side, if it's a manufacturing facility or some recreational buildings or a laboratory those can be completed in as quick as two years.

None: Three quarters.

Richard A. Akright: Thanks. Thanks, Scott. Dick, do you want to start on the backlog? Uh, yeah.

None: What we had underestimated in the first year in commercial is when we're verbally awarded a project to when the contract is officially signed or a P. O S. Fendt.

Richard A. Akright: So, uh, from a backlog perspective, uh, what we have is, and I'm sorry, I'm getting to it now, but of the $110 million, a substantial amount is coming in from the CEA sector. We do have some large construction design-build projects that are in the backlog as of December 31st. 70% is from CEA.

None: That period is not a week for example, it could be in the <unk> space like we were used to it can be up to months.

None: And so.

None: These projects once they do start we're ready they verbally told us what exactly to do and the steps. So we can immediately hit the ground running recognized costs recognized revenue and get going quickly. So theyre done relatively quickly once they are signed.

Richard A. Akright: A large portion of the construction is now comprised of some CEA projects, and so that makes up the biggest part of the backlog for the year. On the commercial side, it's tended to be the existing contracts that are, the existing customers that were in place with the company when we acquired it, which was a large CPG customer, but we're expanding that out into healthcare and additionally into some secondary education customers that are part of that backlog. And just kind of a quick follow-up, do you see the backlog switching a little bit, going out, more diversified to the CPG healthcare Just kind of a little bit of color on those opportunities. I'll take this one.

None: So the timeframe is a lot less in terms of these end markets. <expletive> mentioned post secondary we have multiple architecture and engineering contracts right now are.

None: Between 400000, and 800000 dollar high margin projects that were working on in health care. We work on both sometimes the design of hospitals all design no build there, but then on some.

None: Smaller.

None: Health care facilities, like an MRI facility or something like that so that would be done relatively quickly over three quarters as well. So there's a strength there laboratories.

Where we're seeing strength of laboratories, and then also on retail.

Bradley John Nattrass: So on the CEA side, Scott, when we're building a cultivation facility, that can take as long as six quarters. On the commercial side, if it's a manufacturing facility or some recreational buildings or a laboratory, those can be completed in as quick as two or three quarters. What we underestimated in the first year in commercial is when we're verbally awarded a project to when the contract is officially signed or a PO is sent. That period is not a week, for example, like it could be in the CEA space, like we're used to. It can take up to months.

None: Nothing nothing to talk about right now any further on that but but some good strong retail opportunities as well for us.

None: So when you when you take a step back and you think that over the last six quarters, we have secured $50 million little over $50 million of commercial business and in the sectors, where we.

None: We then set out to go down that path when we listed on the NASDAQ, but we've taken that path is a diversification strategy that really has paid off nicely for the company, thus far set us up nicely for the future.

Bradley John Nattrass: And so, um... Those projects, once they do start, we're ready. They verbally tell us what exactly to do and steps so we can immediately hit the ground running, recognize cost, recognize revenue, and get going quickly. So they're done relatively quickly once they're signed. So the time frame's a lot less.

None: And when the cannabis industry.

None: Does have its resurgence, which everyone of course hopes is quicker rather than longer we're not going to stop and the other side, we're going to invest and continuing to build out because what we've learned is we can utilize all of our professional services experts and our site to prison project managers in all areas.

Bradley John Nattrass: And in terms of these end markets, Dick mentioned post-secondary. We have multiple architecture and engineering contracts right now between $400,000 and $800,000, high-margin projects that we're working on. And healthcare. Sometimes the design of hospitals, all design, smaller healthcare facilities, like an MRI facility or something like that, so that would be done relatively quickly over three quarters as well. So there's strength there. Laboratories.

None: So we have that that big pool of talent and expertise that can be used on that build around the design, regardless of what the sector. It yet, but it's exciting for the future, but bringing it back to today, we have to execute in quarter by quarter and earn credibility back.

None: That's great and then one quick follow up for me then.

None: He side, obviously kind of dependent on rescheduling, you know when that happens, but moving forward. It is still a state led growth story for a lot of they can this industry and like you mentioned down in New York, you're seeing a ramp there potentially your Ohio comes on board in the fall of 'twenty four but the big.

Bradley John Nattrass: We're seeing strength in laboratories and then also on retail, nothing to talk about right now any further on that, but some good strong retail opportunities as well for us. So, when you take a step back and think that over the last six quarters, we have secured $50 million, a little over $50 million of commercial business in sectors where we didn't set out to go down that path when we listed on NASDAQ. But we've taken that path as a diversification strategy that really has paid off nicely for the company thus far and set us up nicely for the future. When the cannabis industry does have its resurgence, which everyone, of course, hopes is quicker rather than later, we're not going to stop on the other side.

None: Florida, we're seeing or we're hearing a lot of the canvas msos are looking to actually build out they need to build out production capacity ahead of Florida.

None: Potentially slipping, but just kind of your sense of color in the pipeline discussion of capacity built in the key states as we see regulation kind of play out here in the second half to kind of discussions you're having on capacity adds from that standpoint.

Bradley John Nattrass: We're going to invest in continuing to build out because what we've learned is we can utilize all of our professional services experts and our site keepers and project managers in all areas. So we have that big pool of talent and expertise that can be used on the build or on the design regardless of what sector it's in. So exciting for the future. But bringing it back to today, we have to execute, quarter by quarter, and earn credibility back. That's great!

None: New Jersey, New York, Ohio, Pennsylvania, and Florida, So no contracts, but lots of discussion and lots of planning.

None: The planning could be designer that facilities or design of the dispensaries, but from a build standpoint, I believe that Toby state. The the operators in these states we wanted to get a little further down the road first hurdle in Florida is having the cordless of Supreme Court not say anything before April.

Bradley John Nattrass: And then one quick follow-up for me then on the CE side. Obviously, kind of dependent on rescheduling, you know, when that happens. But moving forward, this is still a state-led growth story for a lot of the Canvas industry. And as you mentioned, Dow, New York, you're seeing a ramp there potentially. You know, Ohio comes on board in the fall of 24.

None: Well first right and.

None: Fingers crossed that that doesn't happen then it'll be on the ballot and then they have to finish with Google over 60%.

None: We're pulling above that right now so lots of eyes on Florida, that's sort of the exciting.

None: And cry right now I'd say in the industry for sure.

None: India is Pennsylvania, and getting it on the ballot there but.

Bradley John Nattrass: But the big opportunity is Florida. We're seeing or we're hearing, you know, a lot of the Canvas MSOs are looking to actually, you know, build out – they need to build out production capacity ahead of Florida potentially flipping. But just kind of your sense of color in the pipeline, the discussion of capacity builds and the key states as we see regulation kind of play out here in the second half, and just the kind of discussions you're having on capacity ads from that standpoint. New Jersey, New York, Ohio, Pennsylvania, and Florida.

None: The the working capital.

None: Getting rid of.

None: With rescheduling and abolishing the two a need that's going to get some of the larger multistate operators 120, <unk> hundred $80 million per year in working capital and these leaders have said publicly that they're going to put to those funds back into to expand their footprint.

And that's what urban ROE does we designed facilities in dispensaries, and we built them. So I feel that it will be.

None: We will be very positive for the company should rescheduling happen the same for banking that'll bring money in Scott. That's the biggest hurdle right. Now is there is positive optimism more than than I've seen in terms of sediment for a couple of years for sure but still the working capital is not there.

Bradley John Nattrass: So no contracts, but lots of discussion, and lots of planning. The planning could be the design of the facilities or the design of the dispensaries. But from a build standpoint, I believe that the operators in these states will want to get a little further down the road. The first hurdle in Florida is having the Supreme Court not say anything before April 1st, right? And fingers crossed that that doesn't happen. Then it'll be on the ballot.

None: And so everybody is positive, but we got to have some sort of catalyst.

None: I appreciate the color I'll jump back in the queue. Thanks.

None: <unk>.

None: The next question is from Anthony Vendetti with Maxim Group. Please proceed.

Bradley John Nattrass: Then they have to finish with a total of over 60 percent. And they're polling above that right now. So lots of eyes are on Florida. That's sort of the exciting rallying cry right now, I'd say, in the industry for sure. Second is Pennsylvania and getting it on the ballot there, with rescheduling and abolishing the 280E.

None: Hey, guys. This is Thomas Mcgovern on for Anthony.

So Thomas.

Thomas Mcgovern: It hasn't gone, it's just to kind of touch back on some of these regulatory front I know you've talked about it quite a bit on this call, but I wanted to hone in a little bit more on the safe Banking Act you just mentioned its importance in terms of funding a lot of these deals but was that on the horizon I just wanted to see like you know.

Thomas Mcgovern: Ignoring any potential state wide Utilizations you know if if this afterwards to be passed do you guys have potential projects that are maybe not yet considered backlog. There that are more pipeline projects that you expect to kind of progress once funding frees up where we're just going to tell us how that would play out as a catalyst in 'twenty four.

Bradley John Nattrass: That's going to give some of the larger multi-state operators $120-$180 million per year in working capital, and these leaders have said publicly that they're going to put those funds back in to expand their footprint. And that's what Urban-Gro does.

None: Okay Thomas it for US the answer is poor sure right to be in our backlog we have to have a signed contract. That's equipment. There's deposit received and we're actively working on it and we treat backlog very serious we've taken items out of backlog a couple of times actually in early 2023.

Bradley John Nattrass: We design facilities and dispensaries, and we build them. So I feel that it will be very positive for the company should rescheduling happen. The state for the banking, that'll bring money in.

None: So we really truly want that to be a barometer of how we're going to perform in the next one to six quarters and so when that when it becomes backlog right now that would be in pipeline with a strong growing qualified pipeline. We don't we don't announce the size of the pipeline.

Bradley John Nattrass: And Scott, that's the biggest hurdle right now, is that there is positive optimism more than I've seen in terms of sediment for a couple of years, for sure, but still, the working capital is not there. And so everybody's positive, but we've got to have some sort of catalyst. I appreciate the color.

Operator: I will jump back in the queue. Thanks. Thank you. The next question is from Anthony Vendetti with Maxim Group. Please proceed. With that on the horizon, and Adam Smith. And I'm Brian Wright.

None: Yeah.

But we absolutely have a lot of projects that would fit in there.

None: Once our was one of those catalysts pit and so the safe banking or safer banking.

That would potentially allow the are the.

Bradley John Nattrass: I'll see you next time. Okay, Thomas. The answer is for sure, right? To be in our backlog, we have to have a signed contract for the equipment, there's a deposit received, and we're actively working on it. And we treat backlog very seriously. We've taken items out of backlog a couple times, actually, in early 2023. So we really, truly want that to be a barometer of how we're going to perform in the next one to six quarters. And so when it's signed, it becomes backlog.

The operators to list in the larger exchanges and then access have easier more efficient access to capital and an institutional investors as well so that would that'd be that'd be phenomenal for the industry.

None: Now you did mention also state or federal legalization or state rights, we don't see Interstate commerce or legal Interstate commerce, or maybe a decade legalization still three to five years I think this will be a state game for the foreseeable future for us.

Bradley John Nattrass: Right now, that would be in the pipeline. We have a strong, growing, qualified pipeline. But we don't announce the size of the pipeline.

None: Good I appreciate that color and then another thing you touched on in the call was the international markets and are you specifically called out in Germany, where I know you guys have done a lot of work that you are pulling back some of the expenses associated with that subsidiary you know reducing headcount and the like I just wanted to comment because I saw an order.

Bradley John Nattrass: But we absolutely have a lot of projects that would fit in there once one of those catalysts hits. And so safe banking, or safer banking... that would potentially allow the operators to list on the larger exchanges and then have easier, more efficient access to capital and institutional investors as well. So that would be phenomenal for the industry. Now, you did mention state or federal legalization or state rights.

None: Oh that was published six hours of dosing the Germanys marijuana Bill had been signed and passed into law and that it would take effect on Monday, and I haven't really had a chance to move into this further but I. Just wanted to know you know with that news of the recent news kind of hitting the hitting the headlines now hitting the wire.

None: How does that shape.

None: Again, I know that you guys are calling back expenses on that front, but you know do you see yourselves, becoming more aggressive or you know maybe accelerating some of the conversations you were having with potential clients in Germany, and you know whether or not to die.

Bradley John Nattrass: We won't see interstate commerce or legal interstate commerce for maybe a decade, legalization still three to five years. I think this will be a state game for the foreseeable future for us. I have a... [inaudible] Sure, the issue with Germany is that it's going to be social licenses, so sort of like Maine in the US, social clubs where people can grow their own cannabis. And so it's going to take a while for that market to build out and to develop. So I don't see a lot of near-term opportunity. There are three existing operators in the country now. I think, you know, they will probably be the first to grow into it.

None: Color on whether or not that would.

None: Play into revenues, maybe in the back half of 'twenty four.

None: Yeah sure the issue with Germany is it's going to be social licenses, so sort of like Maine and.

None: In the U S social clubs, where people can grow their own cannabis and so it's going to take a while for that market to build out and to develop so I don't see a lot of near term opportunity. The three existing operators in the country now I think they will be the first probably.

None: To grow into it so we'll watch them closely.

Bradley John Nattrass: So we'll watch them closely. In Europe overall, when we entered, we built our entity up two years ago. We had a signed contract to build out 20 vertical farms in urban centers, like in food service distribution centers or near hotel groups, for example. And then we built out that team. And sure enough, about a month later, the war in Eastern Europe broke out.

None: Europe overall, when we when we entered and built our our entity up two years ago.

None: We had a signed contract to build out 'twenty vertical farms in urban centers like in foodservice distribution centers or near hotel groups. For example, and then we built out that team and sure enough about a month later the war in Eastern Europe broke out and that just reached have it.

Bradley John Nattrass: And that just re-tabbed on the horticulture marketplace. Energy prices skyrocketed, and manufacturers in Europe and all of the ancillary companies to that horticulture industry really suffered for a couple of years. Green Sprouts in the Cannabis Space, right?

None: On the.

None: Are the horticulture marketplace energy prices skyrocketed and manufacturers in Europe and in all of the ancillary companies because that horticulture industry really suffered for a couple of years. So we fortunately had.

Bradley John Nattrass: So we designed an Israel. Switzerland, Portugal, we're actively working on projects right now in the Netherlands. Portugal I think will be a strong year, but we just couldn't wait around anymore.

None: Green sprouts in the cannabis space right. So we designed in Israel and.

None: Switzerland, Portugal, we're actively working on projects right now in the Netherlands.

None:

None: Portugal, I think will be a strong strong year, but.

None: But we just couldn't wait around anymore. We you know we had burnt.

Bradley John Nattrass: We had burnt considerable funds over there, and we have to show that we can run a profitable company, and that is absolutely what we're going to do. And so the managing director is a phenomenal individual who is a great leader, but the business wasn't there. So we released the managing director and a couple of others, but we've kept some key experts that deliver the design, horticulturists that have experience in hundreds of facilities over here, because I do believe we want to go into Europe. There are not a lot of Cureleafs, the most outspoken group, of course, that is aggressively growing on an international basis.

None: <unk> funds over there.

None: We have to be we have to show that we can run a profitable company and that is absolutely what we're going to do and so the managing director is phenomenal individual who has had.

None: Great leader, but the business wasn't there. So we released a managing director in a couple of others, but we've kept some key experts that deliver the design horticulturists that have experienced in hundreds of facilities over here because I do believe we want a line into Europe.

None: Not a lot of purely the most outspoken group of course that is aggressively growing in international.

Bradley John Nattrass: We want to be there. There are going to be facilities built, and we have that expertise. We're just slowing it down a little bit and keeping our lines of communication with multiple groups open. Similar to the U.S., it's the same story.

None: Spread we want to be there there's gonna be facilities built and we have that expertise. So we're just slowing it down a little bit and and keeping our lines of communication with multiple groups open similar to the U S. It's the same story is all about capital and being able to raise their fund. So we have some strong it you asked earlier about the.

Bradley John Nattrass: It's all about capital and being able to raise their funds. You asked earlier about the pipeline. We've got some strong design builds in our pipeline for Europe as well, but they won't materialize until they can access those funds. Thanks, Tom.

None: The pipeline, we've got some strong design builds and our pipeline for Europe, as well, but they won't materialize until they can access those funds.

None: But I appreciate that color I'll hop back in queue.

None: Thanks, Tom.

None: Up next is Erik Peter with S. P. C Research. Please proceed Eric.

Eric Martin Beder: Good afternoon.

Bradley John Nattrass: Hi Eric. Most of my questions have already been answered, but I want to talk about some other things here, in the commercial space, you know, why people are hiring you and what is your niche, what is your pitch to the commercial client for your business? And you know, how are you winning businesses forward? So there are a lot of design-build firms that operate on half-billion, billion-dollar-plus infrastructure jobs around the world like AECOMS or Stantec, large companies like that, Jacobs Solutions, among others. We, the niche for us is all under one roof, one single point of responsibility on projects, we say under 50 million; the largest so far for us is around 30 million. Clients have not, in the commercial space, been able to access all one single point of responsibility in the space.

Eric Martin Beder: Most of my questions have already been answered, but I wanted to talk about some other things here.

Eric Martin Beder: On the commercial space you know what.

Eric Martin Beder: When you look at it.

Eric Martin Beder: So why people are hiring you and what is the niche what is the pitch to the commercial client for your business and you know how are you winning these businesses forward.

Eric Martin Beder: So there's a lot of design build firms that operate on half million billion dollar plus or infrastructure.

Eric Martin Beder: Jobs around the world like E coms or Stan Tech the large large companies like that Jacob solutions among others.

Eric Martin Beder: We the niche for US is the all under one roof. One single point of responsibility on projects, we say under 50 million the largest so far for US is is around $30 million, but.

Eric Martin Beder: Clients have not in the commercial space been able to access <unk>.

Eric Martin Beder: All one single point of responsibility in this space they've had to hire their own project managers and go to an architect and find an engineer then hire those G sees themselves and procure the equipment either directly or through the contractors.

Bradley John Nattrass: They had to hire their own project managers and go to an architect and find an engineer, then hire those general contractors themselves, then procure the equipment either directly or through the contractors. We've realized that having it all provides a big service that allows us to complete the facility quicker than they would have before. And for the large Fortune 50 clients that we have right now, we're able to really, [inaudible] Great. And, you know, the equipment business has been tough for a number of years now. So what are you seeing on the other side of that when you go to buy from these equipment manufacturers? Are they more likely to give you a deal, a better deal? Are there fewer equipment players out there?

Eric Martin Beder: We realized that having it all provides a big service that allows us to complete their facility quicker than they would have before and for the large fortune 50 clients that we have right now we're able to really.

Eric Martin Beder: Turn projects quickly and we can do a good job at it we can make money at it the larger billion dollar type project companies. They don't want to operate at these smaller level. So that's a perfect size for us.

Eric Martin Beder: In the future as we continue expansion, but we would look at increasing the size, but right now we've got a great niche and it's working.

Great and you.

Eric Martin Beder: You know the equipment business has been tough.

Eric Martin Beder: For a number of years now.

Eric Martin Beder: So what are you seeing on the other side of that when you go to buy from us equipment manufacturers or are they more likely to give you a deal a better deal are there less.

Bradley John Nattrass: I should be thinking about that in terms of the potential when that potentially comes back to be able to generate margins that used to be even better. So in the controlled environment ag side, cannabis and... and Portico. It's been tough for manufacturers over the last two years, a lot of, large reductions of force. SAHAMAR is no longer in operation.

Eric Martin Beder: <unk> players out there how should we be thinking about that in terms of the potential when that potentially comes back to be able to generate margins that used to be or even better.

Eric Martin Beder: So in a controlled environment AG side cannabis and.

Eric Martin Beder: Horticulture its.

Eric Martin Beder: It's been tough for manufacturers over the last two years a lot of.

Eric Martin Beder: A large reductions of a force.

Eric Martin Beder: Some are no longer in operation.

Bradley John Nattrass: So I feel that we now have the ability to have some really strong strategic partnerships with these manufacturers. They don't have to go out and hire or build out their sales team when they're just selling one product line. And with us, with good, strong relationships with the end client, and we've had a chance to build that relationship and trust early by working from the design stages forward, we're able to take them on, and therefore, it can be an easier path to success for them. Moreover, from a purchasing power standpoint, if we're purchasing and procuring for a lot of facilities, that gives us a nice advantage. Right now, there's a phenomenal opportunity in the U.S. cannabis market as it relates to rebates, energy rebates, and we're really focusing on that area to help go to our clients and provide value to them where they could refresh or relight, for example, their facilities with more energy efficient LED lighting, as one example, with relatively low amounts of working capital out of their pocket.

Eric Martin Beder: So I feel that we have the ability now to.

Eric Martin Beder: It hasn't really strong strategic partnerships with these manufacturers they don't have to go out and hire or build out their sales team. When they were just selling one product line and with us with good strong relationships to the to the end client and we've had a chance to build that relationship and trust early from working from the.

Eric Martin Beder: <unk> stages forward.

Eric Martin Beder: We're able to take them in and therefore, it can be an easier path to success for them.

Eric Martin Beder: Moreover, from purchasing power standpoint, if we're purchasing and procuring for a lot of facilities that gives us a nice advantage.

Eric Martin Beder: Right now, there's a phenomenal opportunity in the U S cannabis market as it relates to.

Eric Martin Beder: Rebates energy rebates, and we're really focusing on that area to help go to our clients and provide a value to them, where they could refresh or re light for example, their facilities with more energy efficient led lighting as well.

Eric Martin Beder: For example, with.

Eric Martin Beder: With relatively low amounts of working capital out of their pocket. So.

Bradley John Nattrass: So, you know, when times get tough, and it's been tough on equipment, you find a way for everyone to win, and so that's what we've definitely been doing. Moreover, we have successfully been able to integrate equipment systems into our first large mechanical retrofit by adding mechanical systems or air conditioning to a super large distribution center, and we were able to integrate that equipment in. Now, important to note, that equipment's part of a larger project, so equipment for the commercial side will not show up on our financials as part of the equipment line. That is really equipment for the controlled environment ag marketplace.

Eric Martin Beder: You know when when times get tough and it's been tough on equipment you you find a way to for everyone to win and so that's what we've definitely been doing Moreover, we have successfully been able to.

Eric Martin Beder: Integrate equipment systems into our first a large mechanical retrofit adding.

Eric Martin Beder: Cannibal systems or air conditioning to a super large distribution center, and we were able to integrate that equipment and now important to note. When we use that equipment as part of a larger project so equipment to the commercial side will not show up on our <unk>.

Eric Martin Beder: Financials as a separate as part of the equipment line that is that it is really equipment to the controlled environment in AG marketplace. Our equipment is built into the construction. So that gives us the confidence as <expletive> mentioned earlier that we can increase our margins in the construction side.

Bradley John Nattrass: Our equipment is built into the construction, so that gives us the confidence, as Dick mentioned earlier, that we can increase our margins on the construction side in 2024. Now, unfortunately, we had a fourth-quarter one project that went the other way, so it looks like we're underperforming on that initiative to increase margins in Q4, but as Dick explained, that just was a point in time, 90 days. Now, we go to the project that was decreased, and we work to get a change order to get it back into place for ourselves. We are really focused on increasing our margins in all categories this year. Okay. Well, guys, good luck in 2024. Thank you. Okay, the next question comes from Ellis Acklin with First Berlin. Please proceed. Afternoon, gentlemen. Thanks for the, uh... Well, hello.

Eric Martin Beder: In 2024 now Unfortunately, we had in fourth.

Eric Martin Beder: Fourth quarter, one project that went the other way so it looks like were underperforming on that initiative to increase margins in Q3, but I think I'm sorry in Q4, but as <expletive> explained that just was a point in time 90 days now we go to the project that that was decreased and we work to get a change order to get it back into play.

Eric Martin Beder: So ourselves. So we are really focused on increasing our margins in all categories. This year.

None: Okay, Oh gosh, good luck for 2024.

None: Thank you.

None: Okay. The next question comes from Alice Acklin.

With first Berlin. Please proceed.

Edward Ellis Acklin: Afternoon gentlemen.

Edward Ellis Acklin: Tango or the ER.

Edward Ellis Acklin: Hello. Thanks.

Operator: Thanks for the insights into Q4. I just have one topic to discuss with you guys. If we can circle back to your initial 2024 guide. The last time on the Q3 call, I believe we were talking about... Needing the magic number for you guys to reach just the EBITDA break-even was around $30 million in revenues. So I'm just trying to square those comments with your new guide of $80 million in revenue and a positive EBITDA. Maybe you can help me out there. Sure.

Edward Ellis Acklin: Thanks for the insights into Q4 I just got one topic to discuss with you guys. If we can circle back to your initial 'twenty 'twenty four God.

Edward Ellis Acklin: And the last time on the Q3 call I believe we were talking about.

Edward Ellis Acklin: Needing a the magic number for you guys to reach adjusted EBITDA breakeven was around $30 million in revenues. So I'm just trying to square those comments with your new guide of $80 million of revenue and a positive EBITDA maybe.

None: Maybe you can help me out there.

None: Sure.

Bradley John Nattrass: So, it all depends, first of all, on the revenue mix, right? So, if it's high in the lower margin construction, you would need that $30 million. But we've already sort of looked at $24 to $26. Now, a couple of things have happened. And, you know, it goes back to what I just talked about.

None: Got.

None: It all depends first of all on the revenue mix right. So if it's high in the lower margin construction, you would you would need that that $30 million, but we've already sort of looked at 24 to 26 now a couple of things have happened eight.

None: You know it goes back to what I just talked about we did not.

Bradley John Nattrass: We did not... show The progress we're really making on increasing margins in construction, we didn't show that in Q4 because of that one project that took us down to low single digits. But also in professional services, and Professional Services.

None: Show what.

None: What were the progress, we're really making on increasing margins in construction, we didn't show that in Q4 because of that one project that took us down.

None: So low single digits.

None: But also in the professional services side.

None: Professional services.

Bradley John Nattrass: When we got everyone on the same ERP at the beginning of the third quarter, we realized that we weren't as productive as we thought we were. We were around, when you look at billable hours, we were in the mid, around 55% productivity. So in 2023, we actually had to put 1.2 million of COGS down into salaries.

None: When we got everyone on the same ERP at the beginning of the third quarter, we realized that we weren't as productive as we thought we were we were around when you look at billable hours, where you were in the mid <unk> around 55% productivity. So in 2023 we actually had to put $1 2 million.

None: Of Cogs.

None: Down into salaries and and our goal is to have all of our professional service providers all of their their salary what we pay them should be up in Cogs, because we're building we're building adequate adequately in Q1 were tracking above 90%. So that's one of the areas. When we talk about the F G and H.

Bradley John Nattrass: And our goal is to have all of our professional service providers, all of their salaries, what we pay them, should be up in COGS because we're billing accordingly. In Q1, we're tracking above 90%. So that's one of the areas where we talk about the SGA, and I'm gonna have Dick chime in here shortly, but that's one of the areas where we're doing a lot better. But Dick, will you tag on to the back then, apart from increasing the margins, maybe focus on the SG&A side? Yeah, absolutely. And that was to your point. I mean, you're right.

None: I'm gonna have to chime in here shortly but that's one of the areas, where we're doing a lot better.

None: But <expletive> will you.

None: Tag onto the back then apart from increasing the margins maybe focus on the SG&A side.

None: Yeah, absolutely and that was to your point I mean, youre right. When we talked before that the larger revenue number on the initial guidance for Q4, certainly looked like it was going to take a lot of revenue for us to be breakeven on a go forward basis with the G&A reductions that were that we've made.

Richard A. Akright: What we talked about before with that larger revenue number on the initial guidance for Q4 certainly looked like it was going to take a lot of revenue for us to be break-even on a go-forward basis with how they're flowing through the income statement. Okay, I just wanted to hear whether you guys were banking on any sort of pickup in the equipment or anything that was going to improve the margins to get to that Target, so that's very helpful. I appreciate it, Terp. Thank you, Ellis, and I hope everything... Ellis, you're in Germany right now. I hope everything goes smoothly on Monday with the kickoff. I look forward to seeing you soon. Thank you. We have reached the end of the question and answer session, and I will now turn the call over to management for a closing remark. Thanks, John. In closing... We're the management team. We're disappointed in the quarter for sure, right?

None: Aid that are taken.

None: Taking place right now in Q1, 2024, and it will be there for all of 2024, we are seeing don't forget we are reducing that breakeven point.

None: Yeah, you know again it goes back to depends a little bit on mix, but breakeven for US now is looking more like its around the.

None: <unk> $16 million to $19 million of revenue.

None: Even with still having a decent amount a high percentage of our revenues being construction, but that.

None: Because of those G&A cuts, we have been able to really reduce that breakeven point for us.

None: You're just going to see that going forward into 'twenty 'twenty four.

None: It's going to it's going to show up immediately when we do report our Q1 numbers when you see a year over year basis is gonna be rather dramatic from the standpoint of the reductions and how they're flowing through the income statement.

Yeah.

None: Okay I just wanted to hear whether you guys were banking on any sort of pickup in our equipment or anything that was going to improve the margins to get to that target. So that's very helpful. I appreciate it.

None: Sure.

None: Well listen I hope everything else, you're in Germany, right now I hope everything goes smooth on Monday with the kickoff.

None: Look forward to seeing you soon.

Thank you we have reached the end of the question and answer session and I will now turn the call over to management for closing remarks.

None: Thanks, John.

Bradley John Nattrass: I'm the larger shareholder. I'm disappointed, but I'm also very confident our model is strong, and our company fundamentals are secure. Every negative, when you break down Q4 results, every negative is explainable, it's tactical, none of the issues are tied to longer-term issues, and that's why we're confident, extremely confident about the company's ability to deliver strong positive adjusted EBITDA quarters this year. And it's happened; can't change it.

None: Clothing.

None: Where the management team we were disappointed in the in the quarter for sure right on the larger shareholder I'm disappointed but I.

None: I'm also very confident our model is strong our company fundamentals they're secure.

None: Every negative when you break down Q4 results every negative is explainable as tactical none of the issues are tied to longer term issues and that's why we're confident extremely confident about the company's ability to deliver.

None: Strong positive adjusted EBITDA quarters this year.

None: And it's happened can change it when we're focused on the future and we know that we have to earn the credibility and the confidence from the market and doing just that delivering so thank you for your time today and.

Bradley John Nattrass: We're focused on the future, and we know that we have to earn credibility and confidence from the market by doing just as well as delivering. So thank you for your time today, and I look forward to talking to you probably in a month about our Q1 earnings. Have a nice day. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

None: Look forward to talking to you are probably in a month for our Q1 earnings call have a nice evening.

None: This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.