urban-gro Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 10, 2023

There are 7 speakers on the call.

Operator

Hello, and welcome to the Urban Grow Inc. 2023 First Quarter Earnings Conference Call. Please note that this conference call is being recorded At this time, I'd like to turn the conference call over to Dan Drohler, are Executive Vice President of Corporate Development and Investor Relations at Urban Growth. Sir, please go ahead.

Speaker 1

Good afternoon and thank you for joining us. Today's call will be led by Brad Mattress, Chairman and Chief Executive Officer And Dick Aker, Chief Financial Officer. I'd like to remind our listeners that remarks made during this call will include discussion of non GAAP metrics, These items should not be utilized as a substitute for Urban Growth 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 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.

Speaker 1

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 are based on UrbanGrow'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 these contemplated by such forward looking statements are discussed in the periodic reports that Urban Growth files with the Securities and These documents are available in the Investors section of the company's website and on the Securities and Exchange Commission's website.

Speaker 1

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 at ir.urban grow With that, I'll now turn the call over to Brad.

Speaker 2

Thank you, Dan. Good afternoon, everyone, and welcome. I'll begin today's call by providing an update on the current state of our business and then provide some context around our expectations for the balance of the year. This will be followed by Dick reviewing our financial results in greater detail, and then we'll open the call for your questions. Our first quarter performance was consistent with our prior communicated expectations, but we remain on are in the range of 2,000,000,000 to 3 full year revenue and adjusted EBITDA guidance.

Speaker 2

In the near term, we're focused on executing on our are in the primary corporate priority of achieving positive adjusted EBITDA and are working hard to get there as soon as possible. Our record reported backlog speaks to the diversification that we've brought to our business, both in terms of capabilities and end market exposure. In the Q1, we signed over $28,000,000 of additional projects spread over more than 25 contracts with a diverse set of clients, are in the range of $105,000,000 This is approximately 5 times our backlog at the end of the Q1 of 2022 And over 13% higher than the backlog of $93,000,000 that we reported at the end of 2022. Revenues for the Q1 were $16,800,000 which is consistent with the expectations that we laid out on our Q4 2022 call. In terms of the drivers, while construction design build revenue increased by $10,200,000 professional services remained relatively flat.

Speaker 2

The most notable difference versus the prior year period is the $14,200,000 decrease in equipment revenues. While our focus on diversification enabled us to achieve solid results in design, building services, the ongoing cannabis sector weakness continues to put pressure on our higher margin sales within the equipment category. Adjusted EBITDA for the Q1 was negative $3,400,000 And while we did anticipate and guide on this performance, we do view this as the low point for the year. Further, now that we fully integrated our acquisitions and have been operating on the same ERP system since the end of April, We now have increased visibility on individual productivity as it pertains to our architecture, engineering and construction employees. Accordingly, we're tactically reallocating resources and optimizing our spending where appropriate to ensure that our infrastructure is aligned with the size of our business.

Speaker 2

Through these efforts, at the start of the second quarter, we reduced our SG and A expense by an annualized $2,000,000 we will continue to seek efficiencies where available to position our business for long term profitable growth. As it pertains to our balance sheet, we ended the Q1 with approximately $7,300,000 of cash and no bank debt. I feel that it's important to emphasize that this sequential decrease can be partially attributed to the timing of cash payments from our publicly traded Fortune 50 and Fortune 500 clients and in turn is supported by our greater quarter ending accounts receivables balance of $22,100,000 While we continue to place a strong focus on keeping our AR current, Much of this is simply a reflection of where we stood as of March 31st reporting. As it relates The EEA sector has been a reliable and resilient source of revenue for our company and has indeed helped to offset a large amount of the softness in the cannabis space. Our team has been successful in securing a pipeline of projects that are strong, qualified and consistently growing.

Speaker 2

Our focus on building relationships, delivering quality services and meeting the evolving needs of our Fortune 50 and 500 and other clients in our commercial continue to drive growth and maximizing value for our company. In the CEA cannabis sector, Despite ongoing challenges, we remain very well positioned in the space. When new states work through the current regulatory delays and award licenses, are confident that we will move our clients to the turnkey construction and equipment integration stages. In the meantime, in addition to executing on design contracts, we'll continue to also focus on both the design and design build of retail dispensers. Internationally and based out of our Netherlands office, our team is active.

Speaker 2

They are signing professional services contracts And we continue to monitor the impact of the newly proposed legislation in Germany. This and many other developments, It gives us the confidence that the strategic investments made will position us for global growth over the long term.

Speaker 3

As it relates to

Speaker 2

our CEA produce focused clients, we're experiencing consistent interest and continue to sign professional services contracts. Moreover, in addition to initial projects with these clients and based on our successful service delivery, in multiple situations, were being invited to bid on new projects and further been successful in securing follow on contracts. Now shifting to our guidance for full year 2023, we are reiterating consolidated revenues to be within a range of are in the range of negative $3,000,000 to $120,000,000 and adjusted EBITDA to be within a range of negative $3,000,000 to slightly positive. In terms of cadence for the balance of the year, we continue to expect sequential quarterly improvement on both the top and bottom line. And with the bias to the second half of the year given some timing shifts for client projects as a result of the broader macroeconomic environment.

Speaker 2

Looking ahead, we remain focused on positioning our business for long term profitable growth. We'll continue to maintain a sound balance sheet, optimize our expenses, leverage our professional services to our growing base of diverse clients and further integrate and drive new business Thank you. And with that, I will now turn the call over to Dick.

Speaker 4

Thanks, Brad. Revenue was $16,800,000 in the Q1 of 2023 compared to 21 are in the prior year period. This decrease was driven by a decrease in equipment systems revenue of $14,200,000 The majority of which was offset by the accretive acquisition of Emerald Construction Management in April of 2022, are in the Q1 of 2023 compared to $4,900,000 or 23% of revenue in the prior year period. While the lower gross profit dollars are primarily due to the lower revenue versus the prior year, The decrease in gross profit margin was driven by the impact of revenue mix, where we experienced a decrease in higher margin equipment systems revenue offset by an increase in lower margin construction design build revenue. Operating expenses were $7,900,000 in the Q1 of 2023.

Speaker 4

On a sequential basis, Our operating expenses increased by $1,900,000 This was due to the expenses to lock in our go forward leadership team, Including the addition of our Chief Operating Officer, inflation related company wide wage increases, retention incentives, Increased insurance expenses, our investment into the European entity, as well as significantly increased professional expenses, are predominantly tied to elevated legal fees associated with the Sunflower Bank settlement and ongoing litigation. As Brad noted, in the Q2 and after aligning all entities into 1 ERP system, we've optimized and reallocated our resources, Non operating expenses were $200,000 in the Q1 of 2023 And primarily reflect expenses recognized from fully guaranteeing the remaining contingent consideration associated with the Emerald acquisition. Net loss was $5,100,000 or negative $0.48 per diluted share in the Q1 of 2023 As compared to a net loss of $700,000 or a negative $0.07 per diluted share in the prior year period. Adjusted EBITDA was negative $3,400,000 in the Q1 of 2023 compared to positive 0 are in the prior year period. In addition to being driven by lower revenues and gross profit due to a change in revenue mix, The decrease in adjusted EBITDA was due to higher operating expenses, predominantly associated with increased compensation, Headcount from both organic growth and our acquisitions, increased professional insurance related expenses And reducing our risk levels by adding a $250,000 allowance for doubtful accounts and the investment in our European entity, which began in Now turning to our balance sheet.

Speaker 4

We ended the Q1 with $7,300,000 of cash on our Until we return the business to positive adjusted EBITDA, we are also maintaining sufficient levels of working capital in the business Moving to reported backlog. Our total backlog as of March 31, 20 23 was approximately $105,000,000 and is made up of $93,000,000 that we reported at the end of Q4 of 2022. The backlog is comprised of $96,000,000 in construction design build, are in the range of $4,000,000 of professional services and $5,000,000 of equipment systems contracts. The March 31 backlog of $105,000,000 that we are reporting today, while still a record, This reduction is based upon a final reconciliation of signed contracts recorded on our CRM system are unsigned as of March 31, 2023 with an existing Fortune 50 client with whom we currently have multiple signed and active While we anticipate that the full scope of this project will move forward and into our backlog, It is important that we maintain the integrity of our backlog and as such we have reduced it in our numbers reported today. That concludes our prepared remarks.

Speaker 4

Operator, please open the call for questions.

Operator

Thank you. We will now be conducting a question and answer session. The first question is from Eric Delourier of Craig Hallum. Please go ahead.

Speaker 5

Hey, thanks for taking my questions. I was wondering first if you could expand on the projects or relationships you have with these Fortune 5500 customers. I think this is The first time that you guys are calling them out, as Fortune 5500 customers, if I'm not mistaken. So Perhaps just give us a better understanding of the kind of relationships that you have with these customers and perhaps some color on the projects

Speaker 2

Thanks, Eric. We have through the acquisitions of outside of CEA and that's really fed the diversification of the company today. All three We're working with Fortune 500 Companies and predominantly the construction firm that we acquired. Emerald has been working with 2 It started out where they were either doing construction management or construction build Projects for these clients, whether it's building a small manufacturing facility, expansion to a Existing cooler or warehouse projects that are anywhere from $5,000,000 to $15,000,000 But we've been able to really show the value of our model as we've evolved since that acquisition. It started with just construction.

Speaker 2

Some of the projects then started to integrate in architecture and now a lot of the projects that we're working on with our largest Commercial client actually include the construction, the architecture and the engineering. So essentially a full turnkey design build.

Speaker 5

That's great. I appreciate that color there. And then I'm wondering if you could Just expand on the outlook that you have for services sales as well as some of these equipment sales, just Kind of zooming in on these higher margin line items here, just give us a better sense of the kind of Projects that you're working on here and maybe how you expect these sales to kind of trend as we look into the back half of this year? Thanks.

Speaker 2

Thanks, Eric. First on the construction, that makes up the majority of our backlog right now. And so we're strong For services, architecture, interior design and engineering, we see that increasing quarter over quarter Throughout the remainder of the year, those are high margin services, 50%, 60% margins. Moreover, With the new ERP system there, we've been able to get a much clear line of sight on employee efficiency And that led to some of the reductions that we made at the start of the quarter. When it comes to the cannabis sector right now, as the I always talk what's important for Urban Gro is the 7, 8 states right now that have been legalized but are tied up in regulatory delays.

Speaker 2

And when those Regulatory delays are worked out and licenses are awarded. We have approximately more than 20 projects right now that have been in design. We're confident that we're going to be able to move those clients through to not only the construction, but also the equipment integration side. The market in cannabis, the funding issues, they're more prevalent than ever And so a lot of our cannabis CA clients have not been focused on CapEx expenditures, whether it's optimizing their facilities or building new ones. So that will be a function of the environment in the sector

Operator

The next question is from Eric Beder of SCC Research. Please go ahead.

Speaker 6

Good afternoon.

Speaker 2

Could you

Speaker 6

give us a little update on what you're seeing in Europe in terms of

Speaker 2

It's been a longer period of investment than we had originally anticipated. The Conflict in Eastern Europe had a drastic effect on energy prices and in turn had a are quite aggressive, so a negative effect on the CEA produce segment in Europe. Fortunately, cannabis For the first time since the pandemic has been increasing in momentum, we're working on services contracts right now, And we are signing additional contracts in additional countries. We're progressing. We're not progressing and don't foresee As the regulations become more clear, our team will be ready to move forward.

Speaker 2

They are, I believe, in June, we are in 2 May, June, we're in 2 events And also been working with some investment banks at their strategic events in Germany as well. So

Speaker 6

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

Speaker 2

It's a tough environment right now And if you look back at 2021, 90% of our revenues are in a construction design build company. That's very positive. But from an equipment standpoint, as our clients move through the design build process, We're very confident that we'll be able to integrate in the systems. Whether we are able to purchase them at a more aggressive price, I think would depend on the number of facilities and the equipment systems that we're procuring from each manufacturer at that time in terms of purchasing power. We're equipment agnostic.

Speaker 2

We work with 30 different manufacturers right now. We give our clients a variety of options Based somewhat on price and also on quality and have designed a holistic combination Happy most licenses awarded, having a Safe Banking Act or similar act passed by the end of the year and allowing our clients to access funding I will add on the tail end there, we are starting to look at equipment solution sales outside of The CEA cannabis space, we have good strong mechanical systems contacts and we've started to And we are also working with large automation manufacturers for the CEA produce side, are material right now either in our performance in Q1 or the backlog at the end of Q1, but we are seeing are starting to see some action as we make our way through Q2.

Speaker 6

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

Speaker 2

Thank you, Eric.

Operator

This concludes the Q and A session. The next question is from Brian Wright of Fros NKN. Please go ahead.

Speaker 3

Thanks. Good afternoon. I just wanted to follow-up a little bit on the backlog. I understand The issue with lacking a signature and just wanted to kind of understand, Is that something that's kind of expected imminently? And so come a couple of months from now The next quarter that we really think that that's going to come back in or just or is it kind of gone into the Fortune 50 kind of limbo land where you just kind of don't know at this point.

Speaker 4

Thanks for the question. We certainly anticipate that we're going to see this. What specific project we're talking about is a signed project. It is with an ongoing Fortune 50 client that we have a number of contracts with and are doing in are in progress on a number of clients or contracts, so we fully expect this to come into play. We just Because it wasn't officially signed, as we were doing our final reconciliation of the backlog, we decided We need to keep the integrity of the backlog that we report.

Speaker 4

So because it wasn't a signed contract At quarter end, we pulled it out from the numbers that we are reporting, but there is no indication from the customer that the project is going to Go away at all. It's before the clients' committee for final approval and certainly expect that we're going to have

Speaker 3

Just because we haven't seen we're still new to the commercial side of the business as as far as that customer base goes, we have this in our MSD dynamic where current revenue are heavily weighted towards commercial, right, but then the backlog is heavily weighted towards CEA. And is it just like what you would expect as far as that commercial you get to revenue then the backlog is kind of Beyond that is CEA or just like how to think about that because it is such a different Mix between the current revenue versus the backlog.

Speaker 2

Brian, we and I mentioned in the last call for The calendar year 2023, we estimate that about 2 thirds of our business will be CEA, a third will be commercial. And I understand in the Q1 that's a little bit more than reversed. There has been some In the cannabis space, on the last call, I had talked about 2 projects that had moved from January and kicked off are well into March, but I think that's just it's just a are in the range of the quarter, but we're focused on adding clients all across the board in all sectors that I discuss to derisk dependency. But at this point on a large project, if it does push, it can skew those numbers one way more than the other. But I think you'll see it

Speaker 3

Okay, great.

Speaker 2

Thank you. I guess it's the nice value of a diversified model, right, when there's some weakness in that area and other sectors.

Operator

Ladies and gentlemen, this concludes the Q and A session. Please reach out to investorsurbandro.com with any additional questions.

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