urban-gro Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 14, 2023

There are 7 speakers on the call.

Operator

Welcome to the Urban Gro 2023 Second 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 over to Dan Drohler, Executive Vice President of Corporate Development and Investor Relations at Urban Gro.

Operator

Sir, please go ahead.

Speaker 1

Good afternoon and thank you for joining us. Today's call will be led by Brad Nattress, Chairman and Chief Executive Officer and Dick Ackroy, 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 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 and can be accessed from the Investor Relations section of our website at ir.urbangrow.com.

Speaker 1

On this call, we may state management's intentions, beliefs, expectations or future projections. These are forward looking statements 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 Urban Growth's current expectations. Actual results could differ materially. As a result, you should not place undue reliance on any forward looking statements.

Speaker 1

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 Growth files with the Securities and Exchange Commission. These documents are available in the Investors section of our 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 a webcast replay for today's call may be found on the Investor Relations section of our website, which again is at ir. Urban gro.com.

Speaker 1

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

Speaker 2

Thank you, Dan. Good afternoon, everyone, and thank you for joining us. Our evolution into a professional services consulting firm continues to gain momentum. And in addition to our focus on controlled environment also known as CEA, we continue to expand growth outside of this market in the industrial, commercial and healthcare sectors. With the dedication and support of our leaders and their teams and consistent with the expectations that we communicated in May, We've continued to do what we said we would do.

Speaker 2

We recorded another sequential improvement in both revenues and adjusted EBITDA. We increased our quarter end cash position. We continue to have 0 bank debt and we've removed additional costs from the business. With this said, it comes as no surprise that we've been operating in a very challenging environment in first half of twenty twenty three. Our reductions in SG and A to offset decreased margin dollars, especially in the equipment category, have yielded positive results.

Speaker 2

And coupled with our ongoing business development initiative across all segments in which we operate, we are confident that our model will continue to prove its efficiencies in the quarters ahead. Our messaging remains consistent and that our top corporate priority is returning to sustained positive adjusted EBITDA as soon as possible. Based on our Q3 to date trending, along with the costs we've taken out of the business, our increasing revenues and a systems enhanced insight into our project margins, We believe that we are close to reaching that inflection point and moreover are not in a position where we would need to raise dilutive capital. In the Q2, we generated net revenue of $18,800,000 which represents a 12% sequential improvement over the Q1 and a 16% improvement over last year. Adjusted EBITDA for the Q2 was negative $2,000,000 marking a significant $1,400,000 to ensure that our infrastructure is aligned with the size of our business.

Speaker 2

Through these initiatives, year to date, we've now reduced our annualized SG and A expense by $2,900,000 While these were difficult decisions, they were necessary ones, and we're now a leaner and more efficient organization than we were at the end of last year. Additionally, we now have improved visibility into our business with all entities operating on the same ERP system, will continue to take action as necessary to position our business for long term profitable growth. Now turning to current sector trends. Sector diversification continues to help insulate our business from the broader weakness of the cannabis and produce focused vertical farming sectors are working through. Although these sectors remain an important component of our future growth, Through our successful diversification strategy initiated a year ago, we've evolved into a professional services consulting company that offers turnkey design build solutions to multiple markets.

Speaker 2

In fact, approximately 2 thirds of our revenue this quarter were from Other targeted markets in which we have diversified. We've established ourselves as a trusted partner for all of our clients' projects and the quality and level of service we provide lends itself to a high rate of repeat clients and speaks to our ability to attract top tier companies, including including Sun Fortune 50 as clients of the company. In the CEA sector and as we've detailed on past calls, Our equipment revenues have been significantly impacted for over a year now by the weak cannabis market. On a positive note, The Q2 represented the 1st sequential increase in equipment sales since the Q2 of 2022, the primary driver downturn and year to date more than half of our services revenue is from markets outside of CEA. Overall, we remain well positioned in the sector and will most definitely be ready to handle the surge in demand when the cannabis market rebounds in the future.

Speaker 2

We also remain confident in the strategic investment that we've made in Europe and believe that we're well positioned for long term growth. In regards to our backlog, which decreased to $79,000,000 at the end of Q2, the drop is predominantly tied to design build cannabis cultivation project that was actively in production. Our project that was actively in production. Our client is unfortunately facing some funding uncertainty and so we had to pause the project. While we remain in close contract with the contact with the client, the contract does remain open And we felt it prudent to remove it from our reported backlog until their funding sources solidified.

Speaker 2

As communicated on past calls, Urban Grow's backlog is a realistic and trusted indication of our future business. And although there was a quarterly decrease, As of today, we have multiple contracts currently out for signature, which are collectively worth well more than this sequential reduction. Now turning to our guidance for full year 2023. Due in part to the pause of the project discussed above, as well as some other timing shifts where projects have extended out to additional quarters, we are updating our guidance for consolidated revenues to be within a range of 90 to $95,000,000 and adjusted EBITDA in the range of negative $6,000,000 to negative $5,000,000 To put this in perspective, I'd note that our adjusted EBITDA in the first half of twenty twenty three is negative $5,500,000 Which implies that we expect neutral or breakeven adjusted EBITDA performance in the second half of the year. In terms of cadence, for the balance of the year, We continue to anticipate sequential increases to both revenue and adjusted EBITDA.

Speaker 2

In summary, we remain closely aligned with the interests of our shareholders and insider ownership now represents approximately 30% of outstanding shares. This alignment is further supported by, 1st, the recent open market equity purchases by myself and other directors totaling about 1.5 percent of shares outstanding. And second, the commitment of my leadership team. Near the beginning of Q3 and led with a 50% commitment from myself, each Executive Vice President and Officer of the company voluntarily opted to take a stock grant in lieu of 20% to 50% of their base salary for a 3 month period. The key takeaway here, our Board and our leadership team strongly believe in the future of the company.

Speaker 2

We look forward to continuing to deliver improvements in both the top and bottom line and further unlocking the value for ourselves and for our shareholders that we know our business can provide. Thank you. And with that, I will now turn the call over to Dick. Thanks, Brad. In the Q2 of 2023, we generated net revenue of $18,800,000 Which represents a 12% sequential improvement over the Q1 of 2023 and a 16% improvement over 16 point reached $3,000,000 in the prior year period.

Speaker 2

This increase was driven by an $8,100,000 increase in construction design build revenue associated with the Emerald acquisition in April 2022, while professional services revenue of $3,000,000 remained relatively flat year over year. Although equipment revenues decreased 5 point 59% relative to the Q1 and further more than 2 times what we reported in the Q4 of 2022. Combined, we believe this is an early indicator that we are seeing more recovery in equipment spending from our cannabis sector clients. Gross profit was $2,900,000 or 15 percent of revenue in the 2nd quarter compared to 3 point are $5,000,000 or 22 percent of revenue in the prior year period. The decrease in overall gross profit margin was driven by the impact in lower margin construction design build revenue.

Speaker 2

Operating expenses were $6,800,000 in the 2nd quarter. On a sequential basis, our operating expenses decreased by $1,100,000 In addition to the annualized savings reductions that we had reported in the Q1 and after aligning all entities into one ERP system, we've taken additional steps to optimize and reallocate our resources, which now total $2,900,000 of estimated annualized operating expense savings are year to date. Non operating expenses were $1,600,000 in the 2nd quarter, Which includes a $1,500,000 legal settlement. As a result, net loss was $5,400,000 are negative $0.50 per diluted share in the 2nd quarter, of which approximately $0.14 per diluted share is due to the $1,500,000 settlement I just mentioned. This compares to a net loss of $1,700,000 or negative 0.17 profit due to a change in revenue mix.

Speaker 2

The decrease in adjusted EBITDA year on year was due to higher operating expenses, Predominantly associated with increased compensation, headcount from both organic growth and our acquisitions, increased professional and insurance related expenses and the investment in our European entity, which began in Q3 2022. Turning to our balance sheet, we ended the 2nd quarter with $8,600,000 of cash, a $1,300,000 or 18% sequential improvement over the Q1. This cash combined with no bank debt provides us the necessary flexibility to manage through The macroeconomic market circumstances until we return the business to positive adjusted EBITDA. And in regards to backlog, our total backlog as of June 30, 2023 was approximately $79,000,000 This is down from the $105,000,000 that we reported at the end of the Q1 of 2023, primarily due to the removal of the client's project as Brad previously discussed. This backlog is comprised of $5,000,000 of equipment systems contracts.

Speaker 2

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

Operator

We will now begin the question and answer session. At this time, we will pause momentarily to assemble our roster. The first question comes from Eric Beder with CC Research. Please go ahead.

Speaker 3

Good afternoon.

Speaker 2

Hi, Eric.

Speaker 3

Hi. Can you talk a little bit about the G and A? You've lowered it significantly. Obviously, I think we'll see probably a little more of that benefit roll through the rest of the year. Do you have the ability to Leverage that, is this a leverageable number or are you going to have to start ramping it up going forward?

Speaker 3

And when you look at it, How has it affected your ability do you think to do projects or other pieces here?

Speaker 2

Thanks, Eric. We do not anticipate needing to make more cuts in order to get to are targeted positive adjusted EBITDA. That being said, we will experienced the benefit of some of those cuts that we made in the second quarter. We'll have a full quarter To take on those cuts we made in Q2, in addition, those benefits from the leadership team taking stock in lieu of salary, That will be predominantly recognized in the Q2 as well. And as For your second part of your question, it's the most exciting part of our model.

Speaker 2

We've got a strong team. We do have A large number of Vice Presidents and higher positions. However, we've invested to build out This roster of individuals, actually even in Q1, we added our Controller and our Chief Operating Officer. And the good news is, as we build, as revenues double and triple, we don't need to add any more Executive Vice Presidents or higher. Will need to add architects, will need to add engineers, construction management individuals just to meet the demand and deliver the services, But we will not need to proportionally increase the G and A with the revenue.

Speaker 2

So it's the exciting Future ahead of us that Urban Growth brings for sure.

Speaker 3

Great. Could you also talk a little bit about The ERP, how many did you have before? And going forward, how do you how can you leverage that? And how should we be thinking about that in

Speaker 2

Dick, will you take that please? Sure. Hey, Eric, thanks for the question. And just kind of to clarify, you're asking about with regard to the ERP system in terms of how we're able To leverage that into our operations and reporting How

Speaker 3

many did you have before that you collapsed into 1? And what is 1 ERP as opposed to multiple ERPs mean in terms of your ability to drive more business and drive more profit.

Speaker 2

Okay, fair enough. Yes, so with the acquisitions that we did, everybody had kind of their own ERP. The primary one that Irvin Grow had developed and acquired to really handle the business going forward is the one that we are using on a consolidated basis going forward. But with the 3 acquisitions that we did, 2 of them have the same ERP, and the other one had a different one. So that was 3 different ERP systems.

Speaker 2

Combining those into our existing ERP system going forward, which is conducive to handling the construction design build business that we're doing. It's just been a matter of taking their existing projects, making sure we get them into our new ERP system, But that we get the reporting out to all of the project managers and division managers, so that they understand How their business is trending, how profitable it is, and then the things that they have in their pipeline coming into the business, So that they can schedule their people and projects accordingly. So it's been Not been an easy effort from that standpoint because we had to keep the business running, but now we've finally gotten that to where all the business are in the Urban Gro existing ERP and making it so that we're just are frankly more efficient with regard to doing the work going forward. That did result in some of the headcount savings That we were able to reduce our headcount by,

Speaker 4

Not as much as

Speaker 2

in some of the areas where we did have some reductions, but there were some savings with regard to those aspects of things.

Speaker 3

Great. Good luck for the rest of the year.

Speaker 2

Thanks, Ed. Thank you.

Operator

Our next question comes from Eric De LaRiers with Craig Hallum Capital Group. Please go ahead.

Speaker 5

Great. Thank you for taking my questions and congrats on the cost cuts made on the G and A side of things. It's impressive to see. My first question is just kind of getting a status quo on the cannabis projects. It sounds like there was one that was paused in the quarter and then in the prepared remarks I think I maybe picked up on some that maybe have resumed.

Speaker 5

So just wondering if you could kind of give us a status quo of your current cannabis projects, Maybe how many you have active? And then just in terms of the guidance, what's implied in terms of new cannabis projects starting up in the second half. Thank you.

Speaker 2

Thanks, Eric. Yes, as far as that one project, that was a design build project That launched late in Q1 and we had anticipated to recognize about 3 quarters of it or close $15,000,000 this year. It's paused right now, but there is a chance it will resume, but we've assumed for now that aside, that's why we took it off of it. It was a prudent thing to do. I've mentioned on past calls that we have over 20 Projects that have in the cannabis space that are at the design build stage, but for a variety of reasons, typically tied to Either legal states expanding and the regulatory delays that are surrounding that or new states that have legalized, But they haven't awarded their licenses yet or they did and pulled them back like in Alabama, for example.

Speaker 2

That's what's holding our projects up right now. And so as those issues, regulatory issues get worked through, We expect them to release. And when they release, we feel we have a very good shot at moving to the build side and moving on to the spine the In the cannabis space, there's further than that, The single state, multi state operators are really watching their CapEx expenditures. The projects that did open up for us were just in 2 states, I think it was Mass and also Georgia. But we've started working on those projects in the middle of 'twenty two.

Speaker 2

Overall, look, I think there has to be some sort of banking, safe banking movement, Which unfortunately I don't see happening this year, getting rid of 280E And getting a de or rescheduling, allowing the operators to list on a major change and to take in strong capital. That's what it's going to take. But we some of the contracts that we had signed in Q4 and Q1 that are picking up are going to result in a strong sequential lift for us entering Q3. And so it's as we have revised the guidance due to that contract, it's not, hey, it's all going to happen in Q4. It is sequential, But it's going to increase strong in Q3 as well.

Speaker 2

We'll be ready, Eric, right? Like that's the nice thing about our model. Will be ready to take advantage of the opportunities when they present themselves. Because Because of our diversification, we're able to generate profits, margins and other segments. So it's working out fine for us, but it's taken about a year to get here.

Speaker 5

Yes. So it sounds like with those 2 projects that resumed, that's going to be driving some of the sequential increase from Q2 to Q3. Does the guidance assume that any of these other cannabis projects release or that there is some regulatory change that's going cause more revenue to be recognized from new cannabis projects either in Q3 Q4, is there anything like that implied in the guidance?

Speaker 2

No, there isn't. On our backlog, about 70 Senabit is in CEA, the majority of that is cannabis, 30% non CEA. And the projects that have released right now. There's a couple of small $5,000,000 to $8,000,000 ones that we're expecting to release in the next 4 weeks or so. We proportionately added some of those into the guidance, but guidance is really dependent on continuing with the non TEA and executing it.

Speaker 2

As you saw in Q2, about 2 thirds of our revenues were from the non CEA side of the business.

Speaker 5

Yes, that's great. So if I heard you correctly, you're saying 30% of the backlog is Non CEA, about 2 thirds of the recognized revenue in Q2 was non CEA. Could you maybe, I guess, just Final kind of question or 2 for me here. Can you give us a sense of the sort of pipeline of non CEA Projects, understanding that you guys have a difference in your very prudent and strict definition of backlog. Just in terms of the pipeline of new projects, can you just kind of give us a sense of how those are going with non CEA projects and just how that momentum of kind of combining these various businesses together to be that one stop solution, just kind of talk about how that momentum has carried over into some of these discussions and then just as a final one for me.

Speaker 5

Can you just give us sort of a sense of the Revenue mix of like a typical non CEA project. I know that, for example, for the cannabis or CEA projects, You have a high mix of equipment systems. I don't think that's the same for non CEA projects, but if you could just kind of give us a rough overview of what a typical non CEA project looks like, that would be great. Thank you.

Speaker 2

Perfect. Thanks, Eric. Well, first of all, right, in In non CA, there's a huge potential client list for us to go after in that side of the marketplace. For our non CA business now, we're doing a lot of repeat business. And this repeat business, I had mentioned in the prepared remarks that We have more contracts out for signature right now than more than we need to cover the decrease In our backlog.

Speaker 2

And there's a lot of verbal commitments from the clients, but we don't put it on to our backlog until it's signed. We're confident in those projects. We're sitting at the table. We're planning with our clients. There are strategic plans for CapEx expenditures for the remainder of the year and looking into 20 So we have a pretty good solid indication of where we're going.

Speaker 2

Now with the non CEA accounts, they're typically not signing contracts 6 months or giving us POs 6 months in advance. So it's a lot of verbal And then we're able to move forward quickly when we get that appeal from the client. In terms of equipment, yes, there is equipment in the CEA side of the business and there's mechanical, lights, airflow, Environmental Control Systems, etcetera, but we have been able to cross over into selling equipment in the non CEA side with the acquisition of DVO, their President, Jason Dawson, He has a long term working relationship with some of the largest mechanical manufacturers In the country, in the world. And so we have successfully closed our first deal. It's mixed in with construction costs.

Speaker 2

And not only are we looking at equipment like mechanical, but we're also starting down the path and looking at materials, so like IMP, insulated metal panels, for example. So we're looking at I do believe that we'll have a very strong uplift in the equipment side and right now that will be baked in with the construction. We won't separate it at this point. A project example in non CEA, it could be and this is the other nice thing about having all of the services under one roof. It could just be an architect design opportunity for a few $100,000 but then we're able integrate our engineering and we're able to integrate the construction in.

Speaker 2

With 1 of the Fortune 50 clients that we deal with that was The contract was brought through the acquisition of the construction management firm. When we made that acquisition, it was just construction. And now on those projects with that large CPG company, we're handling the architecture and we're handling the engineering as well. And we hope to handle some equipment reselling value added reselling into that client as well. There's a lot of some of the larger design build firms, companies, firms that are doing $5,000,000,000 $10,000,000,000 $20,000,000,000 per year, they operate $100,000,000 $250,000,000 as a minimum.

Speaker 2

We have found that under the $50,000,000 Project ceiling, so $10,000,000 to $30,000,000 on average. There's a great opportunity. There's not a lot of Turnkey design build firms in the market. There's individual architecture, engineering and construction firms or general contracting firms, But to have that all with one single point of responsibility like an urban grow, we're bringing a value add to the marketplace. Otherwise, the client has add the construction add the project management individuals onto their company and employ them, and we're able to handle all of that for them.

Speaker 2

But To summarize, a lot of repeat business on the non CEA side for us right now, and there's absolutely opportunities to add equipment into that type of business and look forward to talking about it more in future quarters.

Speaker 5

Great. Thank you for the color. Appreciate it.

Speaker 2

Are now

Operator

our next question comes from Brian Wright with ROTH MKM. Please go ahead.

Speaker 6

Thanks. Good afternoon. And to the team, I sure wish a lot of companies that I cover They go through bumpy periods would do what you have all done as far as the shock stock buying and Salary deferral. So I really want to applaud you, applaud the team for that and for their commitment. My question though is, When I look at the guidance for the year in terms of revenue and EBITDA, and I just from a modeling perspective, Is the right way to think about it on the cadence, a modest sequential increase in the 3rd quarter and then a more meaningful

Speaker 2

In the Q4 and on the revenue side. Thanks, Brian, and appreciate the accolades. We'll definitely pass those on. It's greatly appreciated. No, we have a strong we're are forecasting a strong sequential lift going into Q3 and then continuing to grow from there into Q4.

Speaker 2

And as indicated, both on the top end and on the adjusted EBITDA side as well, I'm sure your next question may be about margin and sort of that's one that's flashing. So I'd like to address that because It's all about the bottom line, right? And that's what I tell the team as well. We could have all the revenues in the world, but if we're not positive adjusted EBITDA and then generating cash in subsequent quarters, We're not going to get the respect and attention that I feel we deserve. And so we're laser focused Right now on getting those margins back in line, I do feel that Q2 margins in a couple of the areas were outliers.

Speaker 2

As we grow and construction becomes a much more larger revenue portion of the business, That is going to tug down on the overall company's gross margin percentage. But just asking sorry, answering Eric's question, if We can move equipment at strong margins into the construction side or materials like insulated panels. It will really help us average out. In addition, we're not acquiring right now, but we do have plans in 2024 to resume the acquisition of profitable Services companies, doesn't have to be architecture or engineering. It can be Energy Efficiency or just other margin companies where they have good strong contracts that we can bring our other service offerings into.

Speaker 2

So Margin is a focus, laser focus for us. Dick, is there anything else you want to add to that because he's all over the team when it comes to margin? Yes. I would echo Brad's comments with regard to margin. And then in addition to that, Brian, I'd just say From the standpoint of our operating expenses, for Q3, we'll see some additional Savings reflected that were part of the reductions that occurred partway during the Q2.

Speaker 2

So we're going to see improvement there in the Q3, that a little bit more of a stabilization going forward. But as Brad commented on the overall call, We have a business that leverages very nicely as we look to grow and have the cannabis customers start purchasing equipment again. We're well staffed on the construction design build side from the are being able to support growth on that side of the business. So anyway, we really feel we've got ourselves well positioned So that we'll be able to handle or manage really the growth in the business without having an are pleased on the operating expenses.

Speaker 6

Great. That's super helpful. Can you, I just Want to go on the EBITDA side now, kind of given where we are year to date and what the guidance, How to think about that? Is it again flattish in the Q3? Or is it more another You know, slight down and then we get positive in the 4th quarter.

Speaker 6

Just understand kind of how to model that cadence

Speaker 4

a little bit better.

Speaker 6

And I know the mix Is an issue, but just anything you could help us out on that front would be great.

Speaker 2

Yes, yes. And I would say and to your point, it all is a little bit dependent on mix. There's no doubt about it. But with the way we see things right now, from the standpoint of where we think the adjusted EBITDA is going to be, I'd say it goes to the latter That you said there, which is probably still slight negative Q3 and then The improvement seeing in the Q4, but it will depend a little bit on the mix. But that's the way we kind of see the

Speaker 6

Okay. And then that's super helpful. And just one more, just More of a like a theoretical question. And based on what you've told us today, it may not be relevant for this quarter. But like Like does backlog age matter?

Speaker 6

Like is that something that you've ever considered like talking about Externally as far as just what the age of the backlog is relative to you know what I mean?

Speaker 2

I understand your question. Brad usually handles the theoretical questions, but I'm happy to answer this one. So we to the extent if we ever felt that there was something in backlog that All of a sudden it started to look like, hey, it's just something that the customer signed and there's no intent to move forward here. We would be looking to pull that out of backlog. So for the most part, Everything in our backlog is really pretty recently signed projects.

Speaker 2

And then on some of it on the construction build side, they are the remaining amounts left under the contracts that haven't been recognized yet. So the ongoing projects from the standpoint of construction, design, build are all good from our perspective because those are all ongoing projects. But we don't have anything that we see in backlog that we have a concern about that a customer signed and we feel that they don't have any can on going forward with it. And Brian, thank you. I'll go a little bit deeper here.

Speaker 2

I'll add on to the back end there. We have a backlog review team internally. It's made up of Dick, our COO, J. T. Archer and then 2 of our EVPs, Sam and Dan Droller, and they meet every 2 weeks.

Speaker 2

And they go through the backlog on both sides, making sure that's a representative from bizdev, finance, ops And then Corp Dev on there. So they're looking at making sure we're in regular communication with all clients. They're progressing. They're being invoiced. And that's how we made the decision I want it to continue to be a good strong indicator for future business for People should look at the backlog and investors should say, hey, look, they have $79,000,000 of 80% plus confidence revenue coming in the future.

Speaker 2

And that's what we intend it to be, so we have to maintain

Operator

Our next question comes from Thomas McGovern with Maxim Group. Please go ahead.

Speaker 4

Hey, guys. How are you doing? Thanks for taking my questions. Hey, guys.

Speaker 2

So firstly,

Speaker 4

I just want to see if you guys can provide an update on Your plant expansion in Europe last time we spoke, you discussed that you were monitoring, but there was not quite as much Visibility is we're hoping for at that time. Just wondering if you guys have a little bit more visibility going into the Q3 on that front?

Speaker 2

Thomas, Europe, the market on the horticulture side, it's Very tight, very tough right now still since 1 year later after the war broke out in Eastern Europe. On the cannabis side, it's a little bit looser, but it's similar to the issues we have at the state level here in the U. S. Germany, for example, they had regulations that went against the EU. And so they're trying to figure out their path.

Speaker 2

And until those regulations are defined, we won't invest aggressively in Germany, but will sure make sure we're in regular contact with the existing growers and the potential operators In the country. So we are operating right now in the Netherlands from a business standpoint. The other 2 that are active and increasing in terms of momentum for us, Portugal and even South Africa. So there's progress there. If there is any progress on the vertical farming side, While still quarters away, there is discussions, ongoing discussions in the industry in the Middle East.

Speaker 2

And, Sonya Lo, our Board member who has been the CEO of other vertical farming companies in the past, She's involved in playing a nice role for us there. But that's more biz dev early stage, But definitely an opportunity in the future. So hey, look, overall, Thomas, I would have hoped, we would have hoped That we would be breakeven in Europe by now. We would have been stronger. As far as top line, Q2 This year was the best quarter that Europe's experienced thus far, but it's still in the 100 of 1,000 of dollars of revenue and hasn't purchased the $1,000,000 mostly all design, no build at all at this point.

Speaker 2

But As it becomes material, we will absolutely talk more about it and we review it every board meeting and every month There's a leadership team internally. Great opportunity cheering them on and hoping they can sign contracts and we can get those released.

Speaker 4

Awesome. I appreciate that insight. And then finally, just on the backlog, you mentioned in prepared remarks that there were a number of contracts we're up for signing. Just wondering if you could provide any additional color on when we might start to see some of those being signed. Is that something we could expect to kind of pick up in the Q3?

Speaker 4

Or is it something that maybe will have more impact in the 4th and maybe early 2024? Thanks.

Speaker 2

So I would definitely expect the ones that are out for signing would be signed This quarter, they're AIA contracts, so a lot of work goes into them into the contract. Some of them have MOUs tied to them, but we don't announce them publicly or count them as backlog until we, a, have an AIA contract or a purchase order from the client. And on the CEA side, we have confidence and proof of funding. So we will as we progress down the path in Q3 and sign those contracts, We are going to announce some work. In the past, we've been very selective on what we announced.

Speaker 2

And in Q3, we're going to Be a little more better communicators with our investors on what's going on, what region, What market, CEA, non CEA and the dollar value of the contract and the period of time over which we expect the revenue to be recognized.

Speaker 4

Understood. Thanks again for taking my questions guys.

Speaker 2

Thank you. Appreciate it.

Operator

That is all the questions we have for today. Please reach out to investors at urbangrow.com with any additional questions. Thank you and have a nice

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urban-gro Q2 2023
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