Hello, and welcome to the urban-gro First Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please note that this conference call is being recorded today, April 30, 2024 and a replay will be made available on the company's website following the end of the call..

At this time, I'd like to turn the conference call over to Christian Monson, urban-gro's 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 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 a 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..

Reconciliations of our GAAP net loss to adjusted EBITDA are available in our press release and in our Form 10-Q filed with the Securities and Exchange Commission. It can be accessed from the Investor Relations section of our website at ir.urban-gro.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-gro's 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 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. We do encourage you to review these documents carefully..

Lastly a copy of our earnings press release and website for replay for today's call may be found on the Investor Relations section of our website which again is ir.urban-gro.com..

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

Thank you, Christian and good afternoon, everyone, and thank you for joining us today. What a phenomenal day for the cannabis industry.

As I'm sure most of you are now aware a few hours ago there were credible reports in the media indicating that the US Drug Enforcement Agency is supporting the Department of Health recommendation to reclassify cannabis from the most stringent Schedule I to the less stringent Schedule III, in turn providing a long awaited catalyst for the cannabis industry..

While there still is a review period to complete with the expected removal of the 2 ADE-related tax burden from the DOJ addressing state run programs through a guidance memo, we believe many cannabis operators will realize significant increases to their working capital that in turn could be reinvested in their business infrastructure to refresh existing facilities and build out new ones..

For the last 2 years, I'm proud to sit on the board of the National Cannabis Roundtable alongside CELs from some of the leading multi-state operators in this space. The tireless dedication of MSL leaders like these and the lobbying efforts from organizations like NCR that has paved the way for our industry and the exciting wins along the way..

As it relates to what this news and the subsequent final approval of rescheduling means for urban-gro's future, it's significant.

With over 1000 projects completed in the cannabis market over the last 8 years, with 120 employees which include architects, engineers construction managers and horticulture, as urban-gro the leading professional services firm in the cannabis industry that refreshes existing operations, designs and or build new dispensary and cultivation facilities and further procures and integrates cultivation equipment solutions as well.

The successful rescheduling of cannabis is a long-awaited catalyst that we've anticipated to reinvigorate an industry. It has been facing strong headwinds for the last couple of years..

With that said and moving on, I'm excited to report that in the first quarter, we had positive cash flow from operations and in turn delivered our strongest quarterly and adjusted EBITDA results in 2 years.

This improved performance is attributed to both the diversified revenue streams that we've been seeking and building out, as well as our focused efforts throughout 2023 to reduce operating expenses on a go-forward basis. .

Today our multi-sector focused professional services and design build firm, operates out of offices in 3 states and Europe and our targeted markets extend from the cannabis and vertical farming sectors, to also include light industrial, commercial, hospitality, recreation, education and healthcare sector..

Looking at the highlights from our first quarter performance, both revenue of $15.5 million and a slight adjusted EBITDA loss of $0.3 million beat our quarterly guidance. The $3.1 million year-over-year improvement in adjusted EBITDA was driven by a combination of reduced operating expenses and strengthening margins.

It relates to the reduced expenses, as a result of the optimization efforts made in 2023, we began to benefit from the previously communicated $8 million reduction in general and administrative expenses..

In fact, we realized the $2.8 million improvement from the first quarter versus Q1 of 2023. The margin growth in the first quarter was tied to both increased productivity from our professional services providers, as well as the strengthening of our returns delivered by our construction business and further backlog remained strong at $99 million..

As a result relating to full year 2024, we are maintaining our guidance to recognize more than $84 million in revenue and to generate positive adjusted EBITDA. I'll further note, that this does not take into consideration today's rescheduling related developments, as there are still unknowns including timing that need to be clarified..

Looking at market trends, diversification has most definitely assisted in insulating our business from the previously discussed headwinds that we've been facing within the cannabis and vertical farming sectors for the last couple of years.

Consistent with the sector breakout in 2023, in the first quarter approximately 72% of our revenues came from the commercial sectors that we serve and 28% from Controlled Environment in Ag..

In the commercial sector, our client base continues to be comprised of top tier companies that include Fortune 50 and 500 firms and revenues recognized in the quarter were from a combination of ongoing and new projects.

In the cannabis sector, while the market sentiment has been stronger than it has been in more than a year especially after today, we're actively engaged with clients on multiple fronts. However, cautious optimism has been the status quo for operators so far this year..

In the interim, and while we wait for the rescheduling narrative to play out in the months ahead, we're expecting to see steady activity and to continue signing both services and construction contracts and legal markets across the US as operators work through persistent state-level regulatory and legal delays..

This being said, in addition today's announcement through a couple of key additional catalysts, which could also result in a significant and sustained positive change in momentum for our business.

First, on the federal level, there's prospects of successfully passing a banking related bill by year-end continues to be discussed of particular importance.

This would potentially include a Capital Markets clause, that allows plant-touching businesses to list on the larger public market exchanges, providing a more efficient path for them to access capital and create greater liquidity, as would attract institutional investors that can participate via these exchanges or provide capital directly to the issuers..

Second, at the state level progress continues to be made on legalization in multiple states. We maintain our position, but the most impactful change would be in Florida, the nation's third most populous state and one of the fastest growing in the country.

Now that it's confirmed to be on the ballot in November, a successful vote to allow adult use recreational sales would have a profound and sustained impact for Florida operators and we anticipate for urban growth as well. .

In closing, and supported by our $99 million backlog, our qualified pipeline the recognition of last year's $8 million our general and administrative expense reduction and today's positive regulatory developments, we believe that we are well positioned to continue building momentum through the end of the year and beyond..

Thank you. And with that, I will now turn the call over to Dick. .

Thanks Brad. In the first quarter of 2024, we generated revenue of $15.5 million, which represents a sequential improvement of $0.5 million or 4% over the $15.0 million of revenue generated in the fourth quarter of 2023 and a $1.2 million or 7% decrease over the $16.8 million of revenue generated in the prior year period.

The decrease in revenue over the prior year period was driven by a $0.4 million decrease in construction design-build revenue, which reflected a decrease in the number of projects and average size of projects during those periods..

Equipment Systems revenue decreased by $0.4 million and services revenue decreased by $0.3 million, which corresponds to the historical downturn in the cannabis industry.

Gross profit was $3.1 million or 20% of revenue in the first quarter of 2024 compared to 1.7 million or 11% of revenue in the fourth quarter of 2023 and 2.1 million or 17% of revenue in the prior year period.

The increase in gross profit dollars and margin percentage from both of these comparable periods was driven by the impact of improved margins in Services and Construction design-build revenues, as we experienced improvements in delivery of services projects and started work on higher-margin construction design-build projects during the current quarter..

Operating expenses were $5.2 million in the first quarter of 2024, which on a sequential basis, it's a decrease of $1.2 million and on a year-over-year basis is $2.7 million less than operating expenses of $7.9 million in the first quarter of 2023.

Both of these decreases are associated with the Company's expense optimization and resource reallocation initiative..

Net loss was $2.1 million or a negative $0.18 per diluted share in the current quarter compared to a net loss of $5.1 million or a negative $0.48 per diluted share in the prior year period. Adjusted EBITDA improved by $2.7 million sequentially to negative $0.3 million in the first quarter of 2024.

This is an improvement in adjusted EBITDA of $3.1 million compared to the prior year period. The improvement in our adjusted EBITDA for both periods was driven by lower operating expenses as previously discussed..

Turning to our balance sheet. We ended the quarter with $0.7 million of cash and a balance on our line of credit of $2.0 million. With the support of the working capital line of credit that we put in place in December, we currently do not see the need to bring new dilutive capital into the company.

Our total backlog as of March 31, 2024 was approximately $99 million, reflecting a decrease of $11 million or 10% on a sequential basis. This backlog is comprised of $93 million in construction design-build, $5 million of professional services and $1 million of equipment systems contracts..

Breaking backlog out by sector, 76% is with clients in the CYA sector and 24% is with clients in the commercial sector. Supported by our backlog and pipeline, we remain confident that our cash position combined with our $10 million line of credit will provide us the necessary flexibility to manage through various macroeconomic scenarios.

We continue to remain focused on our execution and returning to positive adjusted EBITDA on an ongoing basis..

That concludes our prepared remarks. Operator, please open the call for questions. .

[Operator Instructions] And the first question today is coming from Eric Des Lauriers from Craig-Hallum. .

Great. Thanks for taking my questions. So first one is [Technical Difficulty]. .

Apologies. Apologies Eric, your line is really bad quality. We will and we'll reconnect you will dial out to you, so that we can get a better connection, if that's okay with you. Brad, it's okay, I'll move on to the next question and we will reconnect Eric as soon as possible. .

That's great. Thank you. .

I'll move on to the next question and we'll reconnect Eric as soon as possible for those people. Take from Scott Fortune, ROTH MKM. .

Hopefully, you can hear me better. I will leave the, CEA question for Eric. But just curious, on Florida Brad, if you're obviously that's for adult use a ballot vote now. It's still a big hurdle to get 60% of the vote.

But are you seeing now that it's up for vote, are you seeing operators come in engaging more in your services as it looked a build-out? Is it the potential vote in Florida or is still kind of muted interest from that standpoint to wait to see if this does pass in Florida from adult use side of things.

Just curious on kind of the operators kind of emphasis for moving forward now and building out potential ahead of some of these states. .

Thanks Scott. Thanks. Thanks for the question. Yes, Florida, it is a hurdle at the 60%. And there's a lot of confidence that will be that will be beat.

But the heavy work starts now and the grade for people to donate and to give to the path that Trulieve has created in the state with a lot of the other multi-state leaders, so they can get the word out and keep pushing hard..

The polls are trending higher than 60%, at this time from what I've heard. But again, it's -- it's early stage and it's important to give so we can fight, that fight. In terms of uptake, yes for sure. In terms of the -- the uptake and the excitement and the planning moving forward to hard large orders, that's not quite here..

The conversations on many fronts that we've been having are preparing to be in a good place from an equipment standpoint. Some equipment needs to be ordered 4 to 6 months in advance.

Others is entering the design stage for new facilities and then, at some point in the future proceeding to the build, but absolutely a very positive uptake in the state so far. .

I appreciate color there. Thank you. And then just focus on guidance you guys are giving guidance of more than $84 million in revenue for 2024 with the projects and the backlog and focus.

Can you provide a little more cadence to kind of the remaining of the 24 year?.

Obviously, you had some delays from 4Q.

And I assume those projects are recognized here in 1Q, but just kind of step us through the year, as you see your backlog move second half kind of loaded from the cadence standpoint to meet your revenue guidance?.

Yes. First addressing the 3 projects that we discussed on the on the 2023 or Q4 2023 call. All 3 projects that are active, 2 of them are recognizing revenue in Q1 and third has begun recognizing for us in the second quarter. So those are those are all on track..

We remain right now, we're cautiously optimistic. We believe that we've turned the corner. And I'm excited about where we're moving. And that's before today is a development came to light. We are trying to under-promise and over-deliver in terms of our setting expectations. We're off to a good start in Q1. The backlog remains strong.

Of course, we'd like to see it start to appreciate an increase again, but we're in a very good place. We feel good, especially with the right sizing of the company in terms of an SG&A standpoint.

We've lowered the break-even level for the company, Scott, so that feels good as we're going forward, and we can keep growing the business as the demand increases. .

Perfect. I appreciate the detail. And I'll jump back from the queue. Congrats on -- well, still the DA moving forward today, so thanks. .

Thanks, Scott. .

Thank you. It looks like Eric Des Lauriers from Craig-Hallum has reconnected, and we will try his line again. Eric, your line is live. .

All right. Great. Thank you.

Is this any better?.

It's a little bit. .

Yes. All right. I'll give it a try. If this doesn't work, we'll just take the questions offline. So, on the DA, I was anticipating this for the day. I was wondering if you could provide us sort of an overview on the typical timing of one of your projects from your Canvas operators.

What's the sort of timing for a project to go from discussion phase to pipeline to backlog and revenue? I was really looking to kind of understand how quickly you'll be able to add visibility into potential, bona fide backup in capital expenditures in the Canvas industry? Thanks. .

Perfect. Eric, I got most of that. Perfect. First of all, it depends on the size, right, and zoning, and where we're located, state, city and county, and those requirements around the country.

But typically, they could take as long as, without any delays, as long as 2 years, depending on the size, probably as short as 9 months, on average a year and a half. From initial discussions, we move into the design stage, architecture and engineering, and the cultivation design. Civil and structural are all part of the engineering side there, too.

Once we have a whole set of CDs, it's put out to bid. Clients usually will look at multiple bids in which we're participating. And if awarded, we immediately move forward. We can be -- we can cut weeks, sometimes months off, if we're proactively involved at certain stages. But overall, I'd say 9 months to 2 years is a good average without delays. .

And how long would you take to see that there is an increase in CapEx coming sort of industry-wide? I understand that some of these projects, from discussion to completion, can take up to 2 years.

But how long will it take you to notice if there's a bona fide capital expenditure increase in the cannabis industry resulting from the DEA? Would you have -- is it a few weeks of lead time of discussions picking up and leading to pipeline and deposits? Or is that -- could these discussion phases last several months that it's hard to see if there's a true pickup or not?.

I think on the Q2 earnings call and looking at backlog at that point, from a services standpoint, a new contract that we've signed, that will be a really good indicator. And then also from an equipment standpoint, equipment in a strong cannabis market was a tremendous source of revenue for urban-gro. When you look at 2021, it was $56 million.

It decreased in 2022 to $33 million as we reported last month. And 2023, it was down to $13 million. And so the backlog that we reported at the end of Q1 for equipment was $1 million..

So watch the backlog at the end of Q2 as well. That should be strengthening. I think the early indicators will be on services and on equipment. But I can tell you as a result of today's announcement, I already know it's stronger. We know it's stronger. Good, strong discussions with clients and some signatures today already. .

That's very good to hear. And I just have one more question, given my poor connection here. Gross margin expansion you called out increased productivity from architects, engineers and an increase in construction margins.

Because I guess just wondering if you could expand on [Technical Difficulty] I am wondering if their [Technical Difficulty] projects in Q1 and medical went themselves to higher productivity or higher construction margins.

And ultimately what I'm wondering is we expect productivity levels to remain somewhat steady going forward because there's something we feature fluctuate quarter-to-quarter and we got a little lucky this quarter and I'm just wondering how to think about that going forward. .

Dick, I'll let you take that one please. .

Thanks, Brad. Eric, yes, with regard to we expect kind of that same type margin. It certainly was a very high margin for us in the first quarter of 2024. I don't necessarily expect that it's going to be exactly that high on a go forward basis.

It was very low in the fourth quarter of 2023 as we I've talked about from a construction project that we had that incurred. Some additional costs went over budget and we weren't able to pass all those on to our customer because of a couple of the construction projects that did get started in Q1..

They are at very nice margins for us above kind of what we typically see for construction projects and so even though we might not expect that the Q1 margin we experienced just going to continue at that level going forward, we wouldn't expect it to fall off very much.

And as always and we've talked about before from the standpoint of our total gross profit and margin it depends on that revenue mix that we have. So you still have to pay close attention to what happens as the equipment or services total revenue number changes over time and that impact on the gross margin. .

And I'll add all that in on the back there a little bit. It has been almost 2 years Eric since we completed the acquisition of the construction company.

And so there were some legacy projects that we came with the acquisition and that ended up not being what we would have hoped, right? So we call them legacy projects and they're pretty much finished now the project that Dick alluded to in the fourth quarter and some surprise costs come in was tied to one of those projects. So that's behind us.

That's great positive..

Second in the middle of 2023, we had all of the acquired companies on the same ERP. We've talked about that before. And as a result our COO and his team were able to put some stronger internal controls in place and now we're seeing the results of those move. So definitely trending in the right direction and we don't we weren't lucky in the quarter.

I guess to answer that last question for you..

Yes that all makes sense to me and I'm certainly glad to hear that some of these initiatives like getting everyone on the same ERP system has led to some structural changes in margins but understand that that's would be some degree of fluctuation going forward. Very helpful. Thank you for taking my questions. .

Thank you. The next question is coming from Anthony Vendetti from Maxim Group. Anthony, your line is live. .

You had just a couple of questions on the backlog of 99 million at the end of March. I know today obviously big data talk about cannabis and what this impact could mean in terms of future business.

But in terms of the backlog how -- what percent of that is cannabis related and what percent, obviously not non-cannabis?.

72% was commercial or non-cannabis segment sorry Dick -- 76. Go ahead, Dick. .

Sorry. Yes, 76% of it was CEA related and 24% was commercial. That's pretty consistent with what we reported at the end of December in terms of the split by the factors that we have.

So even though our recent revenue performance has been a shift of that where we have had substantially more commercial than CEA, the backlog still continues to be a more higher percentage on CEA than it is on commercial partly, due just to the size of some of the CEA projects that we have in backlog. .

Okay. That's helpful.

And then what this could mean, obviously less stringent rules should open up investments -- the tax benefit as well what I know it's just happened a couple of hours ago, but have you heard from any potential customers eager to maybe speed up investment if indeed this gets passed and maybe elaborate a little bit on, what you think the timing is for a final like consent decree to come down say okay, boom this is going to move and from a Schedule I to Schedule III potentially.

.

It's neither -- the 280E -- the removal of 280E is most definitely the largest benefit to a successful rescheduling. Some of the large multistate operators have publicly stated that the annual savings from the removal of 280E can range from the $130 million to $180 million plus.

So it's significant funds that we believe -- as some of them have also stated publicly that they're looking to reinvest those funds into the company, with refreshing existing facilities and building out new ones. And so that's definitely the largest benefit there..

Yes, the period that it will be open for anywhere from 3 to 5 months before the final approval would take place. But it has been stated publicly that FA supported the Department of Health it will -- all indicators are it will absolutely be approved in the long run.

Then not my opinion, but just opinions that I've read, so transformational for the industry. As for clients, yes, just as we have had increased discussions and interest and excitement from clients in Florida would be on the ballot addition for November..

We're having the same today and I just I'm not sure if you'd heard on an earlier answer, but we've had good strong interest even had some signatures today as well. So, it'll take time right, like there's a lot of excitement today. We're playing it cool. We didn't want to increase our guidance or anything at this point.

There's so many unknowns and we just want to we want to under-promise and over-deliver with exciting time for the industry and for Urban-gro as well, today. .

Right. Okay. So that you will be upside? And if it goes from Schedule 1 to Schedule 3, do you think that expedites changes in the banking regulations, as well. .

I don't believe they're related. I think any momentum in the industry is fantastic.

And from a banking standpoint, you've seen that because the FA bill they thought they could tie safer banking to that as of late, they've said that it won't be connected now that it looks like it would go to the lame duck section later or session later in the year and that would be the best avenue to have it passed.

But I think positive overall cannabis industry sentiment it helps go a long way. The people are speaking. And I believe from a banking standpoint, politicians they have no option but to listen. So I do see, overall, they're working together for a better industry for sure. .

Okay. But let's separate on the banking thing. Okay. And then just in terms of productivity improvements, cost cutting, how -- obviously, you decreased expenses, but where are you sort of in that process halfway through completed.

Maybe just give us an understanding where you're at?.

From a productivity standpoint, it tied into some of the reductions in general and administrative expenses last year when we had line of sight in the middle of last year when they all run the same ERP, we realized that we were -- we had too many service providers on the team.

And that's when we started to adjust and we've got to a size now where we're capturing a large amount of those salaries in COGS, that's the key. On the last call we had stated that, in 2023 we moved over $1.3 million down into salaries just because of the fact that we weren't as productive as we wanted to be.

So the results in Q1 were very strong there..

In terms of optimization, we don't anticipate at this time making any further reductions. We're right-sized right now. A year-over-year from the efforts and the moves we made in 2023. We're expecting to recognize $8 million in 2024 of savings from a G&A standpoint. And in Q1, we've already recognized the 2.8 million versus Q1 of 2023.

So we feel, we're in a great place and we've lowered the breakeven level for the company, which is key and we do not anticipate making additional cut to business. At this time -- that being said, we're always looking at expenses, overall expenses and trimming where we can.

Dick, is there anything you'd add to that?.

Yes. I think the only thing I would potentially add, Anthony, is just, during the first quarter, there continued to be some reductions. But generally, when we hit the end of the first quarter that was where we got to the headcount levels we were looking to get to. So, I think the ways you're thinking about things go on further out.

Yes, there -- the first quarter contains a little bit high on the G&A side that there would be further reductions expected for Q2. But by the time we got to the end of the quarter, we were kind of at exactly at levels where we're looking to get to. .

Okay. Great. That's good color. Thanks guys. I'll hop back in the queue. Appreciate it. .

Thank you. And the next question is coming from Eric Beder from SCC Research. Eric, your line is live. .

Good afternoon. Let's talk a little bit about something the size of phases here.

Commercial, what are you seeing in terms of demand for the commercial business? Has it continued to be as robust and have you been able to continue to expand the services you can offer for that division?.

We haven't expanded the services at all at this point any further. Demand is remained strong. So the one area where we're watching closely is the length of time. I talked about it in Q4 as well. But the length of time that passes in between where we're being verbally awarded contracts and we're actually getting signatures.

And so far in Q1, that hasn't gotten worse, but it hasn't gotten better either. So that's one area that we're watching closely, but where the licenses were not losing. So, it'd be one thing if we're losing clients or opportunities, but we're not losing. So it's just a timing issue.

Our pipeline remains strong and we don't publicly speak about the quantity of pipeline, but it remains strong and very qualified for sure. .

And are you seeing -- when you look at kind of your top accounts here, are you seeing them give you larger contracts going forward? I'm saying as they kind of like because I know the commercial is a little bit, it's not as much a one off and managed sometimes as the cannabis business can be.

So are you seeing that trend continue?.

We have seen that trend continue over or progress over the last year, not in Q1. We hit a lot of solid singles in Q1, but with no triples or home runs and hence the backlog backed off a little bit 10%, right sequentially, but hitting a lot a lot of add-on contracts to existing projects where they increase the scope and some new smaller projects.

But on the larger ones, we do have some that are close and out. We believe that we will secure them. But we don't have the signatures yet, but no real material increase in size in Q1 to report. .

Sure. You can update on Europe. What are you seeing in terms of trends there? I know there's been talk about Germany.

What are you seeing in terms of the European business on forward?.

So overall in Germany is slow and steady, right? If they're just coming into themselves, they made that announcement a couple of months ago with social licenses to start. So there's no requirement for the design and or build a significant sized facilities. Overall in Europe for us, the demand is -- remains weak.

We talked on the last call about rightsizing the organization in Europe, aligning the expense structure with the size of the opportunity right now. That all being said, we believe we've right-sized that there's definitely business. It could be had in Europe.

We want to be a part of the European cannabis and also in the future vertical farming market, it's going to grow a lot from a cannabis standpoint, a lot of the CEOs of multistate operators who are expanding into the European market have significant forecasts for where that market's going to grow over the next decade. So we know we want to be there.

That being said, in Q1, there was no additional new contract signed in Europe. However, we did have a nice services contracts signed in Q2 so far. So, we expect to continue signing contracts, but we don't expect any robust material improvement in the business throughout the remainder of the year. .

Okay. All right. Thank you, and congrats. .

Thank you. Appreciate it. .

Thank you. There were no other questions at this time. And that does conclude today's conference. You may disconnect your lines at this time. Have a wonderful day. Thank you for your participation. .

Thank you..