Brad Nattrass - Chairman, Chief Executive Officer Dick Akright - Chief Financial Officer Dan Droller - Executive Vice President of Corporate Development, Investor Relations.

Hello! And welcome to the urban-gro, 2021 Fourth Quarter Earnings Conference Call. As a brief reminder, all participants are currently in a listen-only mode. . Following the presentation, there will be a question-and-answer session for those on the teleconference line.

Please note that this conference call is being recorded and a replay will be made available on the company's website following the end of the call. At this time, I'd like to turn the conference call over to Dan Droller, Executive Vice President of Corporate Development and Investor Relations at urban-gro. 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. Following our prepared remarks, we will open up the call to questions for those on the teleconference line.

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.

Reconciliations of our adjusted EBITDA to GAAP net income or loss is available in our press release and in our Form 10-Q filed with the SEC, and can be accessed from the Investor Relations section of our website. 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 and 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 these contemplated by such forward-looking statements are discussed in the periodic reports urban-gro filed 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 encourage you to review these documents carefully. Lastly, a copy of our earnings press release may be found on the Investor Relations section of our website at ir.urban-gro.com.

In addition, a webcast replay for today's call will be available on the Events section of our IR site. With that, I would now like to turn the call over to Brad, Chairman and CEO..

First, geographic expansion; second, extension within the Controlled Environment Ag sector; and third continued expansion of our service capabilities. First, geographic expansion.

We continue to execute on opportunities in our core cannabis and food-focused vertical farming markets, and are making solid progress with our expansion into the EMEA region. Our ability to capture a greater share of these markets is based upon establishing a strong foundation to support our service platform and leverage it to new geographies.

Signing commercial agent partnerships and meeting new clients at trade shows, they continue to drive business in the EMEA region. In fact on this point, in the last two months we participated in trade shows in Dubai, Spain and also Israel and we have many more planned for the remainder of the year.

I'm pleased with the team's progress, building a strong pipeline to ensure that we continue to expand our reach. Our second area of focus is expansion within the Controlled Environment Ag sector to also include vertical farming.

We have immense capabilities to service the indoor food-focused sector and see strong momentum in both North American and European markets.

In addition to signing 20 project contracts with 10 vertical farming operators in the North American market since the start of 2021, our marquee projects with Urban Health Farms in Europe is poised to launch in the coming months as they complete their site selection process.

Again, our exclusive engagement provides for urban-gro to deliver up to 20 of these complete turnkey facilities, providing full architect led design build solutions. The third and final area of growth includes diversification of our service capabilities.

With the addition of 2WR and the pending acquisition of Emerald Construction Management Services and Design Build Capabilities, will not only possess a complete set of capabilities for the global indoor CEA market, but will also have the good fortune of further diversifying our revenues through their existing presence in non-CEA markets as well.

Well, we remain a CEA focused organization. Our complete set of in-house capabilities allows us to continue to offer world class service to other sectors in which these acquisitions operate. It includes hospitality, K-12 education, healthcare and retail and food service distribution as well.

Before passing the call over to Dick for his financial review, I’d like to share some exciting highlights from our performance in this first quarter of 2022. We have signed approximately 50 new service contracts for our architecture, engineering or cultivation design services, some of which are full turnkey inclusive of all services offered.

Of this number, four are within the food focused vertical farming sector. We signed approximately 60 new cultivation equipment contracts in the quarter and demonstrating our strength and accessing new legal cannabis market since they opened, we’ve signed five project contracts so far in Georgia and Mississippi.

From a supply chain standpoint, we continue to expand our global manufacturer partner network and signed five new supplier agreements. And finally, we continue to focus on building out a world-class team and adding expertise where applicable. We hired JT Archer in Q1 as our new Chief of Staff reporting direct to the President and COO.

For the three years prior to joining urban-gro, JT worked for U.S. based MSO and was responsible for managing the design build of seven facilities, as well as the dispensary. His skillset is definitely proving to be invaluable with the launch of our design build offering.

Again, all of these aforementioned successes are from signed businesses since the start of 2022 and definitely show that momentum continues to build for our company. In closing, I’m ecstatic with the team we built with a full set of capabilities that we're bringing to our clients, and how this is all translating to our continued growth and momentum.

The future remains extremely bright for urban-gro and I look forward to sharing many more accomplishments with you in the quarters ahead. With that, I'll now turn the call over to Dick. .

Thanks Brad. I'm excited to talk about our financial results with you today. They demonstrate how we are executing against the strategy that we've articulated and clearly reflect that we're continuing to grow in a smart, meaningful and profitable way.

We built upon our momentum and generated another quarter of record financial results in the fourth quarter. Revenue was $19 million in the fourth quarter of 2021, compared to $9.2 million in the prior year period, representing an increase of $9.8 million or 106%.

This increase was driven by a $7.2 million increase in equipment systems revenue and a $2.6 million increase in services revenue. The increase in equipment systems revenue is tied to an expansion in client base and is continued evidence of the underlying quality and growth potential of that business.

The increase in services revenue is primarily attributable to the acquisition of the 2WR entities at the end of July of 2021, which will continue to enhance our reported services revenue numbers on a go forward basis.

Gross profit was $4.9 million or 26% of revenue in the fourth quarter of 2021 compared to $1.7 million or 18% of revenue in the prior year period. This represents an increase of $3.2 million or approximately 800 basis points as a percent of revenue.

The increase in gross profit dollars and margin percentage was driven by an increase in equipment systems revenue dollars at higher margins than the prior year period and an increase in high margin services revenue, primarily due to the 2WR acquisition.

Operating expenses were $5.6 million in the fourth quarter of 2021, compared to $2 million in the prior year period, representing an increase of $3.6 million. This increase in operating expenses was driven primarily by increased headcount to support current and future growth initiatives, as well as costs associated with the 2WR acquisition.

Net loss was $0.6 million in the fourth quarter of 2021, which compared to a net loss of $1.1 million in the prior year period, representing an improvement of $0.5 million. Adjusted EBITDA was $0.6 million in the fourth quarter of 2021, which compares to $0.2 million in the prior year period.

The increase in adjusted EBITDA was driven by growth in revenues and gross profit, including the contribution from the acquisition of 2WR and partially offset by increased operating expenses reflecting key investments geared toward growth.

On a full year basis we reported total revenue in 2021 of $62.1 million, which represented an increase of 140% of our total revenue in 2020 of $25.8 million. We drove a $4.2 million reduction in that loss and most importantly, we delivered a $3.3 million increase in adjusted EBITDA to $2.7 million.

Moving to reported backlog, our total backlog as of December 31, 2021 was $30.2 million, comprised of equipment backlog of $24.8 million as compared to $22.5 million as of September 30, 2021, representing a sequential increase of 10%. The balance of the total reflects our services backlog of $5.4 million.

As a reminder, we began reporting services backlog at the end of the third quarter 2021. While there are several variables that influence the change in backlog, the two primary factors are signed orders and revenue recognized from signed orders during a stipulated period.

Because our backlog generally relates to capital expenditure commitments made by our customers, the dollar amount of signing customer orders in individual periods can fluctuate materially. Revenue recognition is then dependent on delivery of these orders. Now, I'd like to turn to our balance sheet.

Our capital structure is in excellent condition with cash as of December 31, 2021 of $34.6 million with no debt, which provides us the necessary flexibility to fuel our growth strategy including potential M&A targets.

With that, I'll shift your outlook for full year 2022, and also provide some commentary around the guidance build, so you have a greater appreciation for some of the moving parts. We are guiding consolidated revenues to approximately $110 million for full year 2022.

Included in that estimate is urban-gro’s base revenue, as well as revenue for the partial year contribution from our pending Emerald acquisition which is expected to close in early April.

We are also introducing pro-forma adjusted EBITDA guidance of greater than $5 million, which includes partial year contribution from the expected Emerald acquisition. As Brad had discussed, Emerald brings significant value to our platform and provides the final element in our turnkey solution.

However, this business has a different gross margin composition than our other service offerings and will have an impact on our consolidated results in 2022, which will also include comparability to prior year periods.

Our legacy revenue streams have a wide range of margins associated with them, each commensurate with the value that we bring to customers. The equipment systems and consumables have trended around the 20% gross margin range, while our engineering design services regularly exceed more than double that rate.

We expect the Emerald Construction Management projects to continue to generate approximately 10% gross margins.

While that’s at the low end of our margins stack, the added capabilities these projects bring to our platform are significant, again creating a holistic ecosystem for clients that offer a single point of accountability and accelerates their speed to market.

Thus we do anticipate some gross margin pressure due to revenue mix in 2022 as we include the Emerald Construction Management projects in our results. However, over the immediate to long term we remain encouraged by your ability to drive higher marginal rates as we further scale the business and become even more efficient.

From an operating expense perspective, we are planning for modest expansion in 2022 on a pro-forma basis. However, we anticipate that the growth we experience in gross profit dollars should well exceed this and flow through to adjusted EBITDA.

With regard to the cadence of the year, we expect our first quarter 2022 will more closely resemble fourth quarter 2021 in terms of revenue.

Beginning in second quarter 2022, we expect to realize the benefits from our Emerald acquisition and anticipate sequential growth thereafter to arrive at our guided pro forma consolidated revenues of approximately $110 million for full year 2022. In summary, we are incredibly pleased with our financial results and our continued momentum.

With that, I'll turn the call back to the operator and open the call for Q&A. .

Thank you. . Thank you. Our first question comes from Eric Beder with SCC Research. Please proceed with your question. .

Good afternoon! Congratulations on a solid year end. .

Thanks Eric, I appreciate it. .

Talk about you know – this acquisition makes I think a ton of sense.

When you look at potential further acquisitions here, what is kind of in your mind in terms of the thought process for the next, if there is a need for another potential deal here?.

Eric, we continue to look for service companies. We're not a manufacturer and don't intend to be a manufacturer, so accretive, synergistic, profitable service companies. That could include additional architecture, engineering and construction management firms, perhaps different parts of the country or different parts of the world.

They have contracts that would sit in nicely with our offering, but we are also looking at smaller firms in the U.S., I guess you could look at it as active hiring to really bring on strong experienced architects, engineers and project management, project managers, both onsite and remote.

For Europe, the same acquisitions will – as I had spoken before, will help us penetrate the market more rapidly and so definitely continuing to research those opportunities there. And finally in CEA, the one area in global CEA that we don't today operate in his greenhouses.

Our focus is on indoor controlled environment like facilities, whether they're new builds or retrofits. So in the future we may look to expand our reach into the greenhouse sector as well, but not today. .

Okay. When you look at – I know you signed your recently signed contract with an MSO and you know now yet you have this entire suite of basically from A to Z.

How are you being perceived by the larger players as kind of a choice here to be made in terms of picking you?.

I think with all of the service solutions and capabilities now under one roof and the fact that we have such a strong balance sheet, we’ll be here for the long haul and that means a lot. 125 employees, of which two-thirds are experts and have learned and acquired the expertise from 500-plus facilities with urban-gro, you know that’s a big advantage.

Essentially they can make a single called urban-gro and have all of their needs taken care of, regardless of that's just a turnkey service package or a full design build. For us we’re really laser focused Eric on speed.

Speed is so important for growth, especially in new markets in the cannabis segment, as cannabis is priced the highest at that entry point. So if we can get a client to market one or two harvest quicker, it means a lot on the back end as well.

So I feel that clients have been very receptive over the last two weeks since we announced the pending acquisition of Emerald and also Emerald clients have also been very excited as well.

They bond their projects and now with urban-gro larger, stronger balance sheet, they'll also be able to enter a new category with existing clients, so lots of synergies across the board. .

Okay, last one. We are now once again having his tease with the government in terms of essentially legalizing the product, cannabis. What is your thought process here and how much of that is an opportunity and how do you look at it? Thank you. .

So, I stood on the Board of the National Cannabis Round Table with a lot of other CPOs, from MSOs and ancillary companies. And you know just as you said, it’s another – it could be another tease. We execute the company along the lines of the basis of legalization is still a few years away, and we stay laser focused on helping our clients.

What we are most focused on as legalization comes closer into view, it’s just preserving state rights and ensuring that our clients, you know the pioneers in the industry who started eight to 10 years ago in the legal space, are those individuals are protected as well.

So we don't get too excited about it Eric and I believe it is just as you alluded to, it’s a tease. .

Thank you. Good luck for the rest of the year. .

Thank you. .

Thank you. Our next question is from Matt Bullock with Maxim Group. Please proceed with your question..

Hi Brad, Dick, Dan, thanks for taking my questions. Some great guidance you provided. I was hoping you might be able to provide some additional color on whether or not that guidance you know on a loose percentage basis, whether how much of that is CEA versus non-CEA, maybe North America versus Europe or cannabis versus vertical farming.

Any additional color there would be appreciated. .

Sure. First of all, CEA versus non-CEA, we are still heavily weighted to the CEA side and moreover breaking that down further for you Matt, heavily weighted to the cannabis side.

We are aggressively growing in the food sector with 20 projects with 10 vertical farm operators, but until the Urban Health Farms contracts come into play, none of those have been signed as of today. We are close and expect that in the coming months as I mentioned, but until that happens I think it will be stair step-up for us in that segment.

On the non-CEA side, it will be when we acquire the companies, when we acquire the architect firms MJ12, 2WR. They had about a third of their business in non-CEA at that time and it’s a 30 year firm, until great long term partnerships with large hotel chains and also healthcare institutions.

And with the acquisition of Emerald, Emerald and 2WR had worked in the past together, but Emerald it's the same situation; a 31 year old company, family owned, stayed in the family and they also will grow as I mentioned with the answer to the previous question by Eric, because they can now entertain larger projects.

So I believe that this year will still be at 90% or maybe 85% CEA, but we do plan to break that down on our quarterly earnings calls going forward.

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

No Brad, I would agree with you on the CEA, non-CEA. Then I think the only other part of that question was Europe potentially versus North America, if you wanted to expand on that. .

Yeah, good. Thanks Dick. So Matt, we continue to make great strides in Europe, you know addressing the uncertainty that you can see in the European markets right now. We are carefully monitoring it, but still COVID is more of a hindrance to our growth than the lack of stability in the region, its opening up.

We have continued to look from a due-diligence standpoint on acquiring service focused companies, so we can more aggressively grow. We formed Europe, urban-gro Europe in Q4 last year and we're at the final steps right now of securing a Dutch based managing director who has a couple of decades of experience in the global horticulture market.

So I think taking that move and building a team around this individual, acquiring service companies around this individual will really assist us in going much faster, but I do not look for that piece to be more than 5%, to be under 5% in 2022. .

Understood, thank you. And I think if I heard you right, you mentioned five project contracts in Georgia and Mississippi. I was hoping you could elaborate on your overall strategy in penetrating some of those U.S. states as they legalized cannabis, whether that be recreationally or medically. .

Yeah, sure. Whether it's recreational or medicinal, it doesn't really make a difference for urban-gro, because we are providing our turnkey in health services or providing the full now complete design build facility. We are actively working in new markets, I'd say up to a year before they are legalizing.

So our account execs have relationships built, and when these licenses are awarded in each individual state, it's just like another country. Both licenses are awarded out and facilities will be built regardless of how strong the infrastructure or the supply in the stats aside.

To do that, strong digital marketing strategy that we are interested is when we hired the VP of Marketing and after the up-list last year. We continue that digital strategy and then also trade shows.

Well, whereas trade shows in Europe are really the premier place to meet new clients, make new introductions right now, whether it's speaking on panels at those shows or just exhibiting.

It’s really playing the same purpose that it did for urban-gro five years ago in the U.S., and so we're in a lot of – we are exhibiting a lot of trade shows here as well, focusing on the large ones and then smaller regional shows that are geared towards newer states that are just opening or about to open in the near future. .

Excellent, I appreciate that. Then lastly for me, I was hoping you might be able to provide an update on what you're seeing in terms of the waterfall revenues from the 2WR acquisition? How those cross-selling opportunities are going and how that is compared to your initial expectations and I'll hop back in the queue. .

Okay, sure. Well as I announced in my section, we've closed 50, actually over 50 service contracts in Q1 and over 60 equipment contracts in Q1 and that’s you know backlog for us of course is recorded service or equipment orders that have not shipped or haven’t been recognized yet, but that won't be shown in the Q1 recognized revenues.

That will start to make its way through our P&L in Q2, Q3 and forward. On the service contract, they start to move into equipment contracts about six to eight months after they are engaged. It’s a good forecasting tool of course looking down the road into the future, but the acquisition over with 2WR and MJ12, I couldn’t be happier with it.

The question that I had before we started or before we made the acquisition is would clients embrace turnkey services or would they want to sign architecture, then move to engineering, then cultivation design and the results have been phenomenal. It is turnkey contracts are very popular.

We earned their trust, confidence, respect from the client and then just build on it after that. So very successful. It shows in the backlog as well, the fact that we had record backlog once again to end the year, that's a strong indication that a lot of quality revenues are there and growing. .

Excellent! Thank you. .

Thanks Matt. I appreciate it..

Our next question comes from Aaron Grey with Alliance Global Partners. Please proceed with your question..

Thanks for the questions and congrats on the success of the year.

You’ve talked about you know some of the new medical states, Mississippi and Georgia and in the northeast, but could you just remind us, you know maybe a lot of the talk in the market's been oversupply in some places like California, as well as some pricing pressure in some other more mature medical markets.

So in case you might know the exposure you might have there as your exposure more to the newer market is not really getting impacted by any types of delays from build-outs or construction plans and those more legacy markets? Thank you. .

Thanks for the question Aaron. No, we are not being impacted. California has not been a key market for urban-gro over the past five years. The opportunities I sealed for us in California are to help clients make their facilities – help optimize those facilities, so it drives down the cost and we can compete more aggressively against the rest.

But that has – we haven't had any downward pressure.

You know on the supply chain side, what we've learned from 2WR, MJ12 is since we’re touching clients two to three months earlier than we were, we're having a chance to really control the messaging or control the narrative with them, and so if for example mechanical cooling systems, they now have an eight monthly time versus three to four months in the past, it's okay when they are working with urban-gro, because we can just start that discussion four months earlier.

So I find that we've really been able to help with building the supply chain supply chain team after the uplift. We’ve really been able to help clients become much more efficient.

In terms of build-out’s, that can have effect if there is another construction management firm managing a property and there's delays in other parts of the facility that don't include urban-gro. That can include, that can delay how we would deliver some of the cultivation equipment systems or mechanical or environmental controls eventually as well.

So there has been – it's not a material effect, but there has been a softer sector sure for supply chain delays. In the future that won't be an issue Aaron, because hopefully we'll be able to show the value of our capabilities and the clients who choose us to have a better line growth. .

Okay, great. Thank you for that color, I appreciate that. Second question for me, when you talk about headwinds greater than five, so even a margin about 4.5%, you talked about some headwinds from that positions kind of at the earlier part. So talk about how you look to exit the interims of year to margin.

How you look to maybe over the next two or three years or more so at maturity? Thank you. .

Sure. Aaron, you cut in and out a little bit there, but Dick I’ll let you handle this, and if you can focus on the efficiencies that we expect and operating expenses too as we continue to grow..

Yeah sure, and Aaron, thanks for the question. We do see within the business as we continue to grow, the ability to just really leverage things from an operating expense standpoint.

So that – so as the top line grows, the efficiencies that we're seeing from the standpoint of the operation side of the business just really helps us, so that even though margins may modify change a little bit, it might be even go down in some aspects as they are going to do with the acquisition of Emerald, that we're still going to have these incredible efficiencies on the operating expense side, so that we expect to see continued growth from not just EBITDA dollars, but also the EBITDA percentage of percent of revenue from that standpoint.

So we're just, we're looking forward to that. Continue to add those revenues to the top line, so that then we can continue to drive that EBITDA and the EBITDA’s of percentage of revenues going forward and that's the way we’re forecasting kind of for the business ongoing. .

Well, I’ll add to that again there a little bit, just to bring a little bit more clarity to Emerald. There's two types of businesses that Emerald's composed of and combined is that convention, the average there last year to about 10%.

First is construction management services and that's when a client brings in Emerald to oversee the build-out of their facility place, a onsite superintendent for the duration of the project there on site. But the construction management services interviews, hires and manages the GC, but the GC payment goes directly through to the client.

So on construction management services, those will enter on our P&L as a service just like architectural services and those are higher margins. The second piece is the full design build.

When we're moving a project where we're doing the end-to-end complete design build services, equipment building itself and then moving it to go through in the back end. That will hit our P&L in its entirety, and so that is where we'll have the pull down on the overall margins.

But when we sign a first design build facility we’ll announce it and Dick and I plan to also discuss those numbers separately on our earnings calls going forward. But we're really laser focused now on driving construction the management services, just as much as we are as the design build.

And Chris, the CEO of Emerald has done a phenomenal job over the last year three years building this company, but he's at a point now where under the urban-gro umbrella, we can aggressively help him start to expand his business and we're doing just that right now with some job recs that we have about 10 of them for new build. .

Okay, great. Thanks very much for the color and best of luck in 2022. .

Thanks. I appreciate it Aaron..

Thank you. Our final question comes from Eric Beder with SCC Research. Please proceed with your question. .

I’m sorry, just a quick follow-up. Could you give us an update? I noticed you bought some action shares in Q4 and you mentioned you're continuing. What is available still for purchase and what should we be thinking about as the share count for 2022. .

Dick, if you’d handle that please..

Yeah Eric, so we did continue the program into 2022. Like I will say that we’ve now really kind of come to an end of that program for right now based on what we've announced in terms of what we were buying back, which you'll see when we report our first quarter numbers coming up here.

So that buyback happened at prices that were well, just under $9 a share basically from the standpoint of things as you would see from our publicly traded information.

So after that, with regard to things right now, there's no further buybacks that have been approved by the board at this stage, and then any kind of changes to share count going forward now are going to be related to well what we’ll have under the Emerald acquisition and then for what gets earned by through investing share or people exercising options that we have disclosed in the footnotes to the financial statements.

But the bigger aspect of things are going to be the shares that will get issued for the Emerald acquisition. .

And can you just remind us what that is please? I got you. .

Yeah, so $2.5 million, right Brad for the stock for the Emerald acquisition. .

A - Brad Nattrass:.

carriage:.

All righty guys, congrats! Thank you. .

Alright, thank you very much Eric. .

Thank you. That is all the questions we have for today. Please reach out to investors@urban-gro.com with any additional questions. I would now like to turn the call back over to Mr. Nattrass for any closing comments. .

Well, thank you Paul and thank you everybody. I’m grateful for your interest and ongoing support. We’re unwavering in our commitment to deliver sustainable long term value to both our clients and also our shareholders. So on that note, have a nice evening and we'll talk to you shortly for our Q1. .

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..