urban-gro Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 27, 2024

There are 9 speakers on the call.

Operator

Greetings. Welcome to the Urban Grow, Inc. 4th Quarter and Full Year 2023 Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Operator

Please note this conference is being recorded. At this time, I'd like to turn the conference call over to Christian Monson, Urban Grow's Executive Vice President and General Counsel. 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 Acheray, 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'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 ks filed with the Securities and Exchange Commission and can be assessed 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 and involve risks and uncertainties. Forward looking statements on this call are made pursuant the Safe Harbor provisions of the federal securities laws and 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.

Speaker 1

Some of the factors that could cause actual results to differ materially from such forward looking statements are discussed in the periodic reports Urban Grove 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 a webcast replay for today's call may be found on the Investor Relations section of our website, which again is ir. Urban grow.com.

Speaker 1

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

Speaker 2

Thank you, Christian, and good afternoon, everyone, and thank you for joining us today. After delivering sequential improvements to both the top and bottom line in the 1st 3 quarters of 2023, we were met with the confluence of delays across multiple projects in the 4th quarter, which resulted in a disappointing performance. Although we are frustrated by these circumstances, fortunately, none of the delayed contracts were lost. All are currently active in the Q1, and we expect that the majority of these delayed revenues will be recognized over the course of 2024 beginning in the Q1. Our model is working.

Speaker 2

Our diversification strategy is continuing to broaden our presence across multiple industries, which is visible in our expanding backlog. And further, the significant efforts made to optimize and align our SG and A expenses in 2023 positions us well for 2024. All considered, we are confident that 2024 will prove to be a step up year for Urban Growth, where we expect to deliver positive adjusted EBITDA, a goal that we have consistently identified as our top near term priority. 2023 was a successful year of evolution for the company. Although we faced ongoing headwinds within the cannabis sector, our team continued to execute on our sector diversification strategy and we finished the year with revenues of $72,000,000 representing growth of 7%.

Speaker 2

Of this, dollars 50,000,000 or 70% of our revenues are from the commercial markets that we serve and $22,000,000 or 30% are from CEA. Further, while our year over year CEA revenues decreased by $22,000,000 or 36 percent, this was offset with our revenue growth in commercial, which increased by $27,000,000 or 36%. These numbers demonstrate a reversal from trends we experienced in 2022 and highlight the value of our diversification. The prolonged multiyear compression of our equipment revenues resulting from continued softness within the CEA sector remains the most material headwind to our financial performance given the advantageous margins that this category represents. In 2023, our equipment revenues decreased to a 3 year low of $13,000,000 which represents a $21,000,000 or 62 percent decrease from 2022 and moreover a $43,000,000 or 77% decrease from 2021.

Speaker 2

At an average equipment margin of approximately 14%, replacing this margin with gross profit from our other areas of business has been a large hurdle to overcome. But as we enter 2024, we have done just this. That being said, there are some significant regulatory changes that could serve as catalysts to reignite the cannabis market and therefore provide a material and sustained lift to our future financial performance. As a result of these persistent headwinds across the CEA sector, we have optimized the size of the company to align with the current performance levels and reduced our SG and A expenses by more than $8,000,000 on an annualized basis, all of which we expect to realize in 2024. We have an in house team of experts who include architects, interior designers, engineers, construction managers, project managers, horticulturists and others that focus on serving clients in multiple sectors, including CEA and commercial.

Speaker 2

A combination of this team's expertise, our integrated solutions and our focus on sector diversification differentiates us as a company that continue to deliver growth in a turbulent environment. Now looking at trends in the markets in which we operate. 1st, in regards to the strategic investments we have made in our European entity over the last 2 years, the suppressed demand in their CEA markets continues as well. As a result, we have downsized the workforce and reduced general expenses to better align our costs with near term demand levels. Looking forward, the European cannabis market is continuing to open up, most notably with the early stages of adult use legislation and legalization in Germany, and we continue to anticipate that there will be increasing demand for the services that we provide.

Speaker 2

In the domestic market, our business in the commercial sectors continues to generate strong organic growth. In addition to signed contracts upon which we're executing, we have a qualified pipeline of projects with both existing and new clients as demonstrated by our growing backlog. Looking forward in the year, we intend to continue building out our business development focus in commercial by adding to our roster of sector experienced individuals and integrating other innovative initiatives. In the CEA sector, we continue to expand our vertical farming focus, albeit at a slower pace than anticipated due to ongoing sector capital challenges. While almost all of the related business that we currently engage in utilizes our professional services, we're continuing to interface with a variety of new clients for which Urbandrow is a perfect fit for fulfilling their urban vertical farming design build needs.

Speaker 2

As it relates to our business in the cannabis segment, we've remained active in delivering design build solutions as well as architecture, interior design and engineering services, both individually and also combined for both dispensaries and cultivation facilities. As it pertains to our outlook on the cannabis sector, we believe that current market sentiment is more positive than it has been for a couple of years, fueled by heightened awareness and anticipated progress around potential regulatory changes. There are a few catalysts which could result in a significant and positive change in momentum for our business within this sector. First, on the federal level, the potential rescheduling of cannabis from Schedule 1 to 3 would provide operators with significant working capital increases resulting from the removal of the 2 ADE related tax burden. We believe operators will use this significant incremental capital to fund future CapEx growth, including refreshing existing facilities and building out new ones.

Speaker 2

2nd, and again on the federal level, the prospects of successfully passing the SAFR banking bill continue to be discussed and would potentially include a capital markets clause that allows plant touching businesses to not only list on the larger exchanges, but moreover provide more efficient access to capital. And third, at the state level, while progress continues to be made on legalization in multiple states, we believe the most impactful change would be in Florida. A successful vote to allow adult use recreational sales in the state would have a profound and sustained impact for the state's operators. Now turning to our full year 2024 outlook and associated cadence. We anticipate consolidated revenues to be greater than $84,000,000 a 17% increase over 2023, and we expect to generate positive adjusted EBITDA.

Speaker 2

While achieving these results are still heavily dependent on category revenue mix, the actions we took to reduce our SG and A expenses in 2023 have significantly reduced our revenue breakeven point for generating positive adjusted EBITDA relative to what we've previously communicated. For the Q1 of 2024, we're providing some guidance on our expected results given we are approaching the end of the quarter, which is 2 days remaining. We expect revenues to be greater than $15,000,000 and adjusted EBITDA to be greater than negative $500,000 Looking at the quarterly cadence for the year, we expect to deliver sequential quarterly growth of both revenues and adjusted EBITDA building to our entire full year guidance. In closing, as we look more broadly to 2024 and backed by both our closed contract backlog of 110,000,000 dollars and the $8,000,000 reduction in annualized SG and A. We believe we're in the strongest position that we've been in over 18 months.

Speaker 2

Further and supported by a qualified pipeline that continues to grow, we see increasing demand for our solutions in multiple sectors. With the right regulatory progress in the cannabis sector, we anticipate seeing a resurgence in our related business later this year. Today, Urban Growth's model is stronger, more durable and more efficient than it has ever been. Our business is fundamentally secure and with the support of the working capital line of credit that we put in place in December, we do not see the need to bring new capital into the company at this time. Thank you.

Speaker 2

And with that, I will now turn the call over to Dick to discuss further details of the Q4 as well as full year 2023 results. Dick?

Speaker 3

Thanks, Brad, and good afternoon, everyone. Revenue was $15,000,000 in the Q4 of 2023 compared to $17,300,000 in the prior year period. This decrease was the result of reductions in all revenue categories, including construction design build revenue of $1,300,000 professional services revenue of $800,000 and equipment systems revenue of $200,000 Construction design build decreased due to several projects being pushed into 2024. The reduction in equipment systems and services revenue is a result of continued soft demand in the U. S.

Speaker 3

Cannabis market because of ongoing state level regulatory delays in the license awarding process as well as the lack of movement by key industry financial support models such as rescheduling and the SAFER Banking Act. Gross profit was $1,700,000 or 11% of revenue in the Q4 of 2023 compared to $3,200,000 or 19 percent of revenue in the prior year period. The decrease in gross profit of $1,500,000 correlates to the decrease in revenue as well as a shift in mix toward lower margin construction design build revenue. This was further impacted by a project cost revision in the 4th quarter that negatively impacted project profitability. Operating expenses were $6,400,000 in the 4th quarter of 2023 compared to $6,200,000 in the prior year period, representing an increase of $200,000 The increase in operating expenses was the net effect of an increase in general and administrative expenses of $3,800,000 and a $3,300,000 reduction in a one time business development expense.

Speaker 3

The increase in general and administrative expense was the result of increased professional fees associated with legal defense costs and increased personnel costs associated with an increase in the average number of employees. As Brad mentioned, we've been able to reduce our annual general and administrative expense spending by over $8,000,000 which will favorably impact our results in 2024. I'll provide some more context on this a little later. Non operating expenses of $100,000 in the Q4 of 2023 related primarily to interest expense and were down significantly from $1,300,000 incurred in the Q4 of 2022, which included an impairment loss of $1,000,000 related to settlement of a litigation receivable and $400,000 in expenses recognized from fully guaranteeing the remaining contingent consideration associated with the 2WR acquisition. Net loss was $4,700,000 or a negative $0.40 per diluted share in the Q4 of 2023 as compared to net loss of $4,200,000 or a negative $0.39 per diluted share in the prior year period.

Speaker 3

Adjusted EBITDA was negative $3,000,000 in the 4th quarter of 2023 compared to negative $1,700,000 in the prior year period. The decrease in adjusted EBITDA was driven by lower revenues and gross profit as well as an increase in general and administrative expenses. On a full year basis, we reported total revenue of $71,500,000 compared to 67 point $1,000,000 in the prior year, representing an increase of 6.7%. This increase in revenue was predominantly driven by the increasing momentum that the company has in the commercial sectors in which it operates outside of the CEA market. Further, significant increases in construction design build revenues were offset by continued decreases in equipment systems revenues related to the sustained softness in demand in the U.

Speaker 3

S. Cannabis market. Net loss was $18,700,000 compared to a net loss of $15,300,000 and adjusted EBITDA was negative $9,700,000 compared to negative $3,900,000 in the prior year comparable period. Now turning to the balance sheet. We entered 2024 with $1,100,000 of cash and a total of $2,500,000 drawn on our $10,000,000 working capital ABL that we put in place in December 2023.

Speaker 3

The line is serving its purpose and is providing us the necessary flexibility to manage our working capital needs, which are tied directly to our clients' projects. In fact, the drawn balance at year end is tied to $8,000,000 of anticipated collections that move from late December 2023 to mid January 2024. We are consistently collecting on our AR and paying down our AP and the ABL provides flexibility needed to support our growth as we return to positive adjusted EBITDA in 2024. As was expected, increased construction design build revenue drove increases to receivable and payable balances on a year over year Moving to reported backlog. Our total backlog as of December 31, 2023, was approximately $110,000,000 a $26,000,000 or 40 percent sequential increase over the Q3 of 2023.

Speaker 3

Approximately half of this increase is attributed to the delayed project delivery that we experienced in the Q4 and detailed earlier. This backlog is comprised of 102,000,000 dollars in construction design build, dollars 7,000,000 of professional services and $1,000,000 of equipment systems contracts. As previously mentioned, in 2024, we have identified more than $8,000,000 of general and administrative expense reductions as compared to 2023 to ensure that we will be able to achieve positive adjusted EBITDA based on our projected revenue in 2024. Those expense savings will correspond to reductions in personnel related expenses, professional fees, marketing expenses and a variety of other expenses across all departments. Additionally, in 2024, the Financial Services division of the company has set 3 primary strategic goals that I feel will assist the company in delivering more consistent results on a sequential basis.

Speaker 3

1st, now that all entities are on the same ERP system, improved tactical reporting on a weekly basis will provide our business development and operations teams with better line of sight on projected performance so they can both plan accordingly and adjust operating targets on a real time basis, including accelerated billing on construction design build projects to improve cash flow. 2nd, drive cost reductions in insurance and facilities costs. And 3rd, strategic utilization of the line of credit, which will enable us to better manage our vendor relationships in order to maximize our purchasing opportunities and reduce overall costs, primarily on construction design build projects, which will in turn aid in increasing margins on projects. That concludes our prepared remarks. Operator, please open the call for questions.

Operator

Thank you. At this time, we will be conducting a question and answer The first question comes from Eric Dezeliere with Craig Hallum. Please proceed.

Speaker 4

Great. Thanks for taking my questions. First one for me, just hoping you could expand a bit on the project delays and especially the cost revisions in the quarter. We've seen a few a couple project delays in the past. Obviously, these things can happen with large projects.

Speaker 4

Cost revision is newer, I think. So just any more color on kind of what happened in the quarter would be very helpful. Thanks.

Speaker 2

Sure, Eric. Hi, thanks for the question. So in Q4, we had 3 projects that pushed. 2 of them, it was on their kickoff date, which we expected to be in December. We still held hope at the start of December that they would kick off.

Speaker 2

We procured started procuring materials to deliver to the site and both clients asked to push back those kickoff dates until the 1st 2 weeks in January. So we did that. The 3rd was an existing project, a recreation project that we had announced early in the year. And in Q4, we had expected significant revenues from the project, but it also pushed and there was no business completed in Q4. So those three contracts, they're all active, recording revenue in Q1.

Speaker 2

And we expect them now to finish probably a quarter longer. That's why I said the majority would be complete in 2024, but they'll go about a quarter longer than they were before. Overall, with projects, I feel that we're working on an increasing amount of larger projects. And as we come into 2024 and continue to sign new projects, 1 moving or 2 moving will have less of an effect on the organization. But now when 1 or 2 moves, it has a material effect.

Speaker 2

When 3 move, unexpectedly, it has the disappointing effect that we saw. In addition to that, our services, we at the time, it takes about a month after quarter end to reconcile all of the services revenue and it was a surprising disappointment. Actually from the CEA sector, there was no work done by engineering in the Q4. That's resumed with momentum in Q1. The actions we took for that in the last couple of months, we now have an active line of sight on what's happening at all times with our services and what's been invoiced.

Speaker 2

We did get everyone on the same ERP in the middle of 2023. And so as we give guidance for Q1 today, we have only 2 days left, we have a solid grasp on exactly where that is. And then finally, on equipment, about a couple of $1,000,000 in projects, we held hope it would be even higher than that, just disappeared. They didn't push. They just disappeared right at the tail end of 2023.

Speaker 2

So it's very disappointing, of course, but it's also the strong news is with the construction contracts. They weren't lost, it's a timing issue. And it doesn't hurt the long term fundamentals of the company. It's just a timing issue and they moved into Q1. In terms of project costing, Dick, do you want to take that one, please?

Speaker 3

Yes. Let me comment on that, Eric. We certainly did have a project that we had a cost revision, increased cost on that occurred during the quarter. We are working with the customer in order to negotiate a revision of that contract. But in the construction industry, with the way things go in terms of the way we have to account for that, because we didn't get those negotiations finalized by the end of the year.

Speaker 3

We couldn't include a contract revision in as part of our calculations for contract revenue and the contract costs. So we needed to have that flow through our financials with the way it is, which is the increased project costs right now. We are highly confident that we're going to be able to negotiate an increase in the contract revenue for that project and that that will come through in the first half of twenty twenty four. But like I say, not too atypical in the construction industry. When you have a situation like this, you just need to account When you have a situation like this, you just need to account let the accounting happen as it does.

Speaker 3

And we just felt we needed to show that contract that cost revision in the quarter.

Speaker 4

All right. I appreciate that color there. And then just thinking about fiscal 'twenty four guidance, obviously Q1 were largely done right now. But in terms of just the overall guidance for $84,000,000 in revs and then positive EBITDA, and I suppose for the sequential improvement in both of those from Q1 levels. I'm just kind of wondering what visibility you have on those What visibility you have on potential project delays and cost revisions impacting future quarters?

Speaker 4

Is this something that with the ERP system now being on all every entity is now on the same ERP system that you'll have better visibility into some of these delays and cost revisions as well. I'm just kind of wondering, yes, how to think about that guidance, both overall and the sort of cadence? And then just the follow-up to that is, if the guidance includes any of these potential legislative catalysts within it? Thank

Speaker 2

you. I'll start with the last one. The guidance does not include any of the potential catalysts in the cannabis space. We do have active design build projects in this space, Eric. And when even existing legal states that have regulatory delays and haven't awarded licenses like New York, when they award licenses, we have clients, multiple clients in that state alone that have designs, have spent considerable amount of money, some of them getting the CDs, but until their license is awarded, they cannot access their funds and therefore go to the build.

Speaker 2

So we do have that ongoing business and we're doing a lot of work right now, more and more work on dispensaries for our clients, both multistate operators and single state operators across the country, some just design and some design build. As it relates to line of sight, as of right now, we don't anticipate any additional delays. However, look, those 3 came up with weeks notice at the end of the year. We don't anticipate any now, but you never know what could happen, of course. As I had started early with that answer, as we have many more projects that we're working on at the same time, it won't have as material of impact if one of them pushes.

Speaker 2

As for tracking the delays in the ERP, that's really the delays will come through our project management office. And then we have an online portal project management portal that's built time, both viewable from the clients and then from our team, and we'll see it through there first. On the ERP, that's mostly tied to timely tabulation of results. And we have taken action since we had that disappointment and the services coming in under where we had forecast even as late as the middle of December. And so I do not anticipate us to be off on the services again with a guide.

Speaker 2

When I talk about sequential, we have contracts that really are executed over the next 2 to 4 months from a construction standpoint. They're in the project management portal, and we know exactly when they'll be executed. So we're very confident, of course, in Q1 with 2 days left. And then as we go forward into Q2 and beyond, it's not completely baked. But with the contracts we have, as long as everything proceeds like it should, then we don't anticipate issues sequentially improving the top and bottom line.

Speaker 2

And we definitely realize that we've got to walk the talk and earn confidence back in our ability to predict quarters.

Speaker 4

Thanks for taking my question.

Speaker 3

Yes. And Eric, just commenting on it. As evident, the backlog for construction design build is really quite large, and we are getting much better insight and visibility into how those projects, costs on those projects are starting to come into site over the course of 2024. So that's just really improving with the new ERP system that we've put in place, much improvement on that even just over the last 6 weeks. So anyway, just wanted to add that comment.

Speaker 2

Appreciate the color. Thanks, sir.

Operator

Next question comes from Scott Fortune with Roth MKM. Please proceed.

Speaker 5

Yes, good afternoon and thanks for the questions.

Speaker 6

Just a little bit

Speaker 5

of follow-up on Eric, I'll kind of provide a little more color on the backlog here and ongoing discussions or opportunities kind of outside the CEA and those different industries? Just kind of highlight some of the different industries. And then even within the CEA, how much is the backlog coming from CA versus non of that $10,000,000 And then just unpack a little bit more the color of the strength of the end markets you're seeing, anything kind of on industries or categories of the projects you're seeing the strength in? Just a little more color on that would be great. Thanks.

Speaker 2

Thanks, Scott. Dick, do you want to start on the backlog?

Speaker 3

Yes. So from a backlog perspective, what we have is and I'm sorry, I'm getting to it now, but the of the $110,000,000 a substantial amount is coming in from the CEA sector. We do have some large construction design build projects that are in the backlog as of December 31, 70% is from CEA. A large portion of the construction is now comprised of some CEA projects. And so that makes up the biggest part of the backlog for the year.

Speaker 3

On the commercial side, it's tended to be the existing contracts that are the existing customers that were in place with the company that when we acquired it, which was a large CPG customer, but we're expanding that out into healthcare and additionally into some secondary education customers that are part of that backlog.

Speaker 5

And just kind of a quick follow-up, do you see the backlog switching a little bit, going out more diversified to these CPG healthcare as you build out? Just kind of a little bit color on those opportunities.

Speaker 2

I'll take this one, Nick. So on in the CEA side, Scott, when we're building a cultivation facility, that can take as long as 6 quarters. On the commercial side, if it's a manufacturing facility or some recreational buildings or a laboratory, those can be completed in as quick as 2 or 3 quarters. What we had underestimated in the 1st year in commercial is when we're verbally awarded a project to when the contract is officially signed or a PO is sent, that period is not a week, for example, like it could be in the CEA space like we're used to. It can be up to months.

Speaker 2

And so those projects, once they do start, were ready. They verbally told us what exactly to do in the steps, so we can immediately hit the ground running, recognize costs, recognize revenue and get going quickly. So they're done relatively quickly once they're signed. So they eat the timeframes a lot less. And in terms of these end markets, Dick mentioned post secondary, we have multiple architecture and engineering contracts right now between $400,000 $800,000 high margin projects that we're working on.

Speaker 2

In healthcare, we work on both, sometimes the design of hospitals, all design, no build there. But then on some smaller healthcare facilities like an MRI facility or something like that, So that would be done relatively quickly over 3 quarters as well. So there's strength there. Laboratories, we're seeing strength in laboratories. And then also on retail, nothing to talk about right now any further on that, but some good strong retail opportunities as well for us.

Speaker 2

So when you take a step back and you think that over the last six quarters, we have secured $50,000,000 little over $50,000,000 of commercial business in sectors where we didn't set out to go down that path when we listed on the NASDAQ. But we've taken that path as a diversification strategy that really has paid off nicely for the company thus far, set us up nicely for the future. And when the cannabis industry does have its resurgence, which everyone, of course, hopes is quicker rather than longer, we're not going to stop on the other side. We're going to invest in continuing to build out because what we've learned is we can utilize all of our professional services experts and our site troopers and project managers in all areas. So we have that big pool of talent and expertise that can be used on that build or on the design regardless of what sector it's in.

Speaker 2

So exciting for the future. But bringing it back to today, we have to execute quarter by quarter and earn credibility back.

Speaker 5

That's great. And then one quick follow-up for me then on the CE side, obviously, kind of dependent on rescheduling when that happens. But moving forward, it's still a state led growth story for a lot of the cannabis industry. And like you mentioned, Dow, New York, you're seeing a ramp there potentially. Ohio comes on board in the fall of 'twenty four.

Speaker 5

But the big opportunity is Florida. We're seeing or we're hearing a lot of the cannabis MSOs are looking to actually build out. They need to build out production capacity ahead of Florida potentially flipping. But just kind of your sense of color in the pipeline, the discussion of capacity builds in the key states as we see regulation kind of play out here in the second half? Just kind of discussions you're having on capacity adds from that standpoint.

Speaker 2

New Jersey, New York, Ohio, Pennsylvania and Florida. So no contracts, but lots of discussion, lots of planning. The planning could be design of the facilities or design of the dispensaries. But from a build standpoint, I believe that the operators in these states will want to get a little further down the road. First hurdle in Florida is having the court of Supreme Court not say anything before April 1, right?

Speaker 2

And fingers crossed that that doesn't happen, then it will be on the ballot, and then they have to finish with a total over 60%. And they're pulling above that right now. So lots of eyes on Florida. That's sort of the exciting rallying cry right now, I'd say, in the industry for sure. 2nd is Pennsylvania and getting it on the ballot there.

Speaker 2

But the working capital, getting rid of WIF rescheduling and abolishing the 280E that's going to give some of the larger multi state operators $120,000,000 $180,000,000 per year in working capital. And these leaders have said publicly that they're going to put those funds back in to expand their footprint. And that's what Urban Grove does. We design facilities and dispensaries and we build them. So I feel that it will be very positive for the company should rescheduling happen.

Speaker 2

The safer banking, that will bring money in. And Scott, that's the biggest hurdle right now is there is positive optimism more than I've seen in terms of sentiment for a couple of years, for sure. But still, the working capital is not there. And so everybody's positive, but we've got to have some sort of catalyst.

Speaker 5

I appreciate the color. I will jump back in the queue. Thanks.

Speaker 2

Thank you.

Operator

The next question is from Anthony Vendetti with Maxim Group. Please proceed.

Speaker 7

Hey, guys. This is Thomas McGovern on for Anthony.

Speaker 2

So yes, just how is

Speaker 7

it going? So just to kind of touch back on some of this regulatory front, I know you've talked about it quite a bit on this call, but I wanted to hone in a little bit more on the SAFR Banking Act. You just mentioned its importance in terms of funding a lot of these deals. But with that on the horizon, I just want to see like ignoring any potential statewide legalizations, if this act were to be passed, do you guys have potential projects that are maybe not yet considered backlog that are more pipeline projects that you expect to kind of progress once funding frees up? Or just kind of tell us how that would play out as a catalyst in 2024?

Speaker 2

Okay, Thomas. The answer is for sure, right? To be in our backlog, we have to have a signed contract that's equipment, there's deposit received, and we're actively working on it. And we treat backlog very serious. We've taken items out of backlog a couple of times actually in early 2023.

Speaker 2

So we really truly want that to be a barometer of how we're going to perform in the next one to 6 quarters. And so when it comes to backlog, right now that would be in pipeline. We have a strong growing qualified pipeline. We don't announce the size of the pipeline, but we absolutely have a lot of projects that would fit in there once one of those catalysts gets. And so with the safe banking or safer banking, that would potentially allow the operators to list on the larger exchanges and then access have easier, more efficient access to capital and institutional investors as well.

Speaker 2

So that would be phenomenal for the industry. Now you did mention also state or federal legalization or state rights. We don't see interstate commerce or legal interstate commerce for maybe a decade, legalization still 3 to 5 years. I think this will be a state gain for the foreseeable future for us.

Speaker 7

Good. I appreciate that color. And then another thing you touched on, on the call was the international markets. And you just wanted to comment because I saw an article that was published 6 hours ago saying that Germany's marijuana bill had been signed and passed into law and that it would take effect on Monday. And I haven't really had a chance to dive into this further.

Speaker 7

But I just want to know, with that news, the recent news kind of hitting the headlines now, hitting the wire, how does that shape I know again, I know that you guys are calling back expenses on that front, but do you see yourselves becoming more aggressive or maybe accelerating some of the conversations you were having with potential clients in Germany and whether or not that or if you could maybe provide color on whether or not that would play into revenues maybe in the back half of 'twenty four?

Speaker 2

Sure. The issue with Germany is it's going to be social licenses. So sort of like Maine in the U. S, social clubs where people can grow their own cannabis. And so it's going to take a while for that market to build out and to develop.

Speaker 2

So I don't see a lot of near term opportunity. There's 3 existing operators in the country now. I think they will be the 1st probably to grow into it. So we'll watch them closely. In Europe overall, when we entered and built our entity up 2 years ago, We had a signed contract to build out 20 vertical farms in urban centers, like in food service distribution centers or near hotel groups, for example.

Speaker 2

And then we built out that team. And sure enough, about a month later, the war in Eastern Europe broke out. And that just wreaked havoc on the horticulture marketplace energy prices skyrocketed and manufacturers in Europe and all of the ancillary companies to that horticulture industry really suffered for a couple of years. So we fortunately had green sprouts in the cannabis space, right? So we designed in Israel and Switzerland, Portugal.

Speaker 2

We're actively working on projects right now in the Netherlands. Portugal, I think, will be a strong year. But we just couldn't wait around anymore. We had burnt considerable funds over there. And we have to be we have to show that we can run a profitable company.

Speaker 2

And that is absolutely what we're going to do. And so the Managing Director is a phenomenal individual who is a great leader, but the business wasn't there. So we released the managing director and a couple of others, but we've kept some key experts that deliver the design, horticulturists that have experience in hundreds of facilities over here, because I do believe we want to line into Europe. There's not a lot of Curaleaf's the most outspoken group, of course, that is aggressively growing on an international spread. We want to be there.

Speaker 2

There's going to be facilities built, and we have that expertise. So we're just slowing it down a little bit and keeping our lines of communication with multiple groups open. Similar to the U. S, it's the same story. It's all about capital and being able to raise their funds.

Speaker 2

So we have some strong you asked earlier about the pipeline. We've got some strong design builds in our pipeline for Europe as well, but they won't materialize until they can access those funds.

Speaker 7

I appreciate that color. I'll hop back in queue. Thanks.

Speaker 2

Thanks, Thomas.

Operator

Up next is Eric Beder with SCC Research. Please proceed, Eric.

Speaker 6

Good afternoon. Hi, Eric. Most of my questions have already been answered, but I want to talk about some other things here. On the commercial space, what can you look at the why people are hiring you? What is the niche?

Speaker 6

What is the pitch to the commercial client for your business? And how are you winning these businesses forward?

Speaker 2

So there's a lot of design build firms that operate on $500,000,000 $1,000,000,000 plus or infrastructure jobs around the world like the AECOMS or Stantec, large companies like that, Jacob Solutions, among others. The niche for us is the all under one roof, one single point of responsibility. On projects, we say under $50,000,000 The largest so far for us is around $30,000,000 But clients have not in the commercial space been able to access all one single point of responsibility in the space. They've had to hire their own project managers and go to an architect and find an engineer, then hire those GCs themselves, then procure the equipment either directly or through the contractors. We've realized that having it all provides a big service that allows us to complete their facility quicker than they would have before.

Speaker 2

And for the large Fortune 50 clients that we have right now, we're able to really turn projects quickly and we can do a good job at it, we can make money at it. It's the larger $1,000,000,000 type project companies. They don't want to operate at these smaller levels. So, right now, it's a perfect size for us. In the future, as we continue expansion, we would look at increasing the size.

Speaker 2

But right now, we've got a great niche, and it's working.

Speaker 6

Great. And the equipment business has been tough for a number of years now. So what are you seeing on the other side of that when you go to buy from these equipment manufacturers? Are they more likely potential when that potentially comes back to be able to generate margins that used to be or even better?

Speaker 2

On the controlled environment ag side, both cannabis and horticulture, it's been tough for manufacturers over the last 2 years. A lot of large reductions of force, Sahamar are no longer in operation. So I feel that we have the ability now to have some really strong strategic partnerships with these manufacturers. They don't have to go out and hire or build out their sales team when they're just selling one product line. And with us, with good strong relationships to the end client, and we've had a chance to build that relationship and trust early from working from the design stages forward, we're able to take them in and therefore it can be an easier path to success for them.

Speaker 2

Moreover, from purchasing power standpoint, if we're purchasing and procuring for a lot of facilities, that gives us a nice advantage. Right now, there's a phenomenal opportunity in the U. S. Cannabis market as it relates to rebates, energy rebates. And we're really focusing on that area to help go to our clients and provide a value to them where they could refresh or relight, for example, their facilities with more energy efficient LED lighting, as one example, with relatively low amounts of working capital out of their pocket.

Speaker 2

So when times get tough and it's been tough in equipment, you find a way to for everyone to win. And so that's what we've definitely been doing. Moreover, we have successfully been able to integrate equipment systems into our first large mechanical retrofit, adding mechanical systems or air conditioning to a super large distribution center. And we were able to integrate that equipment in. Now important to note, when we that equipment is part of a larger project.

Speaker 2

So equipment for the commercial side will not show up on our financials as a separate as part of the equipment line that is really equipment to the controlled environment ag marketplace. Our equipment is built into the construction. So that gives us the confidence, as Dick mentioned earlier, that we can increase our margins in the construction side in 2024. Now, unfortunately, we had a 4th quarter one project that went the other way. So it looks like we're underperforming on that initiative to increase margins in Q3, but I'm sorry, in Q4.

Speaker 2

But as Dick explained, that just was a point in time, 90 days. Now we go to the project that was decreased and we work get a change order to get it back into place for ourselves. So we are really focused on increasing our margins in all categories this year,

Speaker 6

Eric. Okay. Well, guys, good luck for 2024.

Speaker 2

Thank you.

Operator

Okay. The next question comes from Ellis Aclin with First Berlin. Please proceed.

Speaker 8

Good afternoon, gentlemen. Thanks for the hello. Thanks for the insights on the Q4. I just got one topic to discuss with you guys. If we can circle back to your initial 2024 guide.

Speaker 8

The last time on the Q3 call, I believe we were talking about needing a the magic number for you guys to reach adjusted EBITDA breakeven was around $30,000,000 in revenues. So I'm just trying to square those comments with your new guide of $80,000,000 in revenue and a positive EBITDA. Maybe you can help me out there?

Speaker 2

Sure. So it all depends, first of all, on the revenue mix, right? So if it's high in the lower margin construction, you would need that $30,000,000 But we've already sort of looked at 24 $1,000,000 to $26,000,000 Now a couple of things have happened. A, it goes back to what I just talked about. We did not show what we're the progress we're really making on increasing margins in construction.

Speaker 2

We didn't show that in Q4 because of that one project that took us down to low single digits. But also in the professional services side, in professional services, when we got everyone on the same ERP at the beginning of Q3, we realized that we weren't as productive as we thought we were. We were around when you look at billable hours, we were in the mid around 55% productivity. So in 2023, we actually had to put $1,200,000 of COGS down into salaries. And our goal is to have all of our professional service providers, all of their salary, what we pay them should be up in cogs because we're billing adequately.

Speaker 2

In Q1, we're tracking above 90%. So that's one of the areas when we talk about the SG and A. I'm going to have Dick chime in here shortly, but that's one of the areas where we're doing a lot better. But Dick, will you tag on to the back then apart from increasing the margins, maybe focus on the SG and A side?

Speaker 3

Yes, absolutely. And Ellis, to your point, I mean, you're right, when we talked before with that larger revenue number on the initial guidance for Q4, Certainly, it looked like it was going to take a lot of revenue for us to be breakeven on a go forward basis. With the G and A reductions that we've made that are taking place right now in Q1 2024 and it will be there for all of 2024, we are significantly reducing that breakeven point. Again, it goes back to depends a little bit on mix, but breakeven for us now is looking more like it's around the $16,000,000 to $19,000,000 of revenue, even with still having a decent amount, high percentage of our revenues being construction. But that because of those G and A cuts, we have been able to really reduce that breakeven point for us.

Speaker 3

And you're just going to see that going forward into 2024. It's going to show up immediately when we do report our Q1 numbers.

Speaker 8

Okay. I just wanted to hear whether you guys were banking on any sort of pickup in the equipment or anything that was going to improve the margins to get to that target. So that's very helpful. I appreciate it.

Speaker 3

Sure.

Speaker 2

Thank you, Ellis. And I hope everything Ellis, you're in Germany right now. I hope everything moves smooth on Monday with the kickoff. Look forward to seeing you soon.

Operator

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

Speaker 2

Thanks, John. In closing, we're the management team, we're disappointed in the quarter for sure, right? I'm the largest shareholder, I'm disappointed. But I'm also very confident, our model is strong, our company fundamentals, we're secure. Every negative when you break down Q4 results, every negative is explainable, is tactical.

Speaker 2

None of the issues are tied to longer term issues. And that's why we're confident, extremely confident about the company's ability to deliver strong positive adjusted EBITDA quarters this year. And it's happened, can't change it. We're focused on the future and we know that we have to earn the credibility and the confidence from the market and doing just that, delivering. So thank you for your time today, and look forward to talking to you probably in a month for our Q1 earnings call.

Speaker 2

Have a nice

Powered by Quartr
Earnings Conference Call
urban-gro Q4 2023
00:00 / 00:00