urban-gro, Inc. (NASDAQ:UGRO) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Hello, and welcome to the urban-gro Inc. 2023 First quarter Earnings Conference Call. As a brief reminder, all participants are currently in a listen-only mode. [Operator Instructions] Following the presentation, there will be a question-and-answer session for those on the teleconference line. Please note that this conference call is being recorded, and a replay will be made available on the company’s website following the end of the call. At this time, I’d like to turn the conference call over to Dan Droller, Executive Vice President of Corporate Development and Investor Relations at urban-gro. Sir, please go ahead.

Dan Droller: Good afternoon, and thank you for joining us. Today’s call will be led by Brad Nattrass, Chairman and Chief Executive Officer; and Dick Akright, Chief Financial Officer. I’d like to remind our listeners that remarks made during this call will include discussion of non-GAAP metrics, including adjusted EBITDA and backlog. These items should not be utilized as a substitute for urban-gro’s financial results prepared in accordance with GAAP. Reconciliations of our GAAP net loss to adjusted EBITDA are available in our press release and in our Form 10-Q filed with the Securities and Exchange Commission, and those can be accessed from the Investor Relations section of our website. On this call, we may state management’s intentions, beliefs, expectations or future projections.

These are forward-looking statements that involve risks and uncertainties. Forward-looking statements on this call are made pursuant to the safe harbor provisions of the federal securities laws and are based on urban-gro’s current expectations. Actual results could differ materially. As a result, you should not place undue reliance on any forward-looking statements. Some of the factors that could cause actual results to differ materially from these contemplated by such forward-looking statements are discussed in the periodic reports urban-gro filed with the Securities and Exchange Commission. These documents are available in the Investors section of the company’s website and on the Securities and Exchange Commission’s website. We 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-gro.com. With that, I’ll now turn the call over to Brad.

Brad Nattrass: 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. We remain on track to achieve our 2023 full year revenue and adjusted EBITDA guidance. In the near term, we’re focused on executing on our 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 first quarter, we signed over $28 million of additional projects spread over more than 25 contracts with a diverse set of clients, resulting in a total backlog of $105 million. This is approximately five times of our backlog at the end of the first quarter of 2022 and over 13% higher than the backlog of $93 million that we reported at the end of 2022. Revenues for the first quarter were $16.8 million, which is consistent with the expectations that we laid out on our fourth quarter 2022 call. In terms of the drivers, while construction design build revenue increased by $10.2 million, and professional services remained relatively flat. The most notable difference versus the prior year period is the $14.2 million decrease in equipment revenues.

So 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 first quarter was negative $3.4 million. 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 are tactically reallocating resources and optimizing our spending where appropriate to ensure that our infrastructure is aligned with the size of our business.

Through these efforts, at the start of the second quarter, we reduced our SG&A expense by an annualized $2 million, and we will continue to seek efficiencies were available to position our business for long-term profitable growth. As it pertains to our balance sheet, we ended the first quarter with approximately $7.3 million of cash and no bank debt. I feel that it’s important to emphasize that the 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 a greater quarter ending accounts receivable balance of $22.1 million. While we continue to place a strong focus on keeping our AR current, much of data is simply a reflection of where we stood as of March 31 reporting.

As it relates to the current sector trends that we’re seeing, and evidenced by our backlog, the continued interest for both our professional services and turnkey design build solutions remains robust and continues to increase. Our commercial or non-CEA sector has been a reliable and resilient source of revenue for our company that 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. 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 sector allowed us to establish ourselves as a trusted partner.

We remain committed to capitalizing on the opportunities outside of CEA to continue driving 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 their current regulatory delays in award licenses, we’re 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 [indiscernible] build of retail dispensaries. Internationally and based out of our Netherlands office, our team is active. They are signing professional services contracts and they 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. As it relates to our CEA produce focused clients, we’re experiencing consistent interest and continue to sign professional services contract. Moreover, in addition to initial projects of these clients, and based on our successful service delivery. In multiple situations we’re 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 $100 million to $120 million and adjusted EBITDA to be within a range of negative $3 million 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 a bias to the second half of the year given some timing shifts for client projects as a result of the broader macroeconomic environment. 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 with the synergistic acquisitions that we’ve made. Thank you. And with that, I will now turn the call over to Dick.

Dick Akright: Thanks, Brad. Revenue was $16.8 million in the first quarter of 2023, compared to $21.1 million in the prior year period. This decrease was driven by a decrease in equipment systems revenue of $14.2 million, the majority of which was offset by the accretive acquisition of Emerald Construction Management in April of 2022, which resulted in a $10.2 million increase in construction design build revenue. Our professional services revenue of $3.5 million was nearly flat versus the prior year. Gross profit was $2.8 million or 17% of revenue in the first quarter of 2023 compared to $4.9 million 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 $7.9 million in the first quarter of 2023. On a sequential basis, our operating expenses increased by $1.9 million. 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 predominantly tied to elevated legal fees associated with the Sunflower Bank settlement and ongoing litigation. As Brad noted, in the second quarter and after aligning all entities into one ERP system, we’ve optimized and reallocated our resources, which has created an initial $2 million of estimated annual operating expense savings.

Non-operating expenses were $0.2 million in the first quarter of 2023 and primarily reflect expenses recognized from fully guaranteed the remaining contingent consideration associated with the Emerald acquisition. Net loss was $5.1 million or negative $0.48 per diluted share in the first quarter of 2023 as compared to a net loss of $0.7 million or a negative $0.07 per diluted share in the prior year period. Adjusted EBITDA was negative $3.4 million in the first quarter of 2023 compared to positive $0.4 million 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 Q3 2022.

Now turning to our balance sheet. We ended the first quarter with $7.3 million of cash on our no bank debt, which provides us the necessary flexibility to manage through the macroeconomic market circumstances until we return the business to positive adjusted EBITDA. We are also maintaining sufficient levels of working capital in the business to allow the business to grow as we are projecting. Moving to reported backlog. Our total backlog as of March 31, 2023, was approximately $105 million and is made up of $93 million that we reported at the end of the fourth quarter of 2022. The backlog is comprised of $96 million in construction design build, $$ of professional services, and $5 million of equipment systems contract. The March 31 backlog of $105 million that we are reporting today, while still a record is lower than the estimated $123 million in backlog that we reported on a preliminary basis in early April.

This reduction is based upon a final reconciliation of signed contracts recorded in our CRM system versus our ERP system, which was fully integrated in late April. This difference is predominantly due to a contract unsigned as of March 31, 2023, with an existing Fortune 50 client with whom we currently have multiple signed and active contracts. 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. Operator, please open the call for questions.

Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question is from Eric Des Lauriers of Craig-Hallum. Please go ahead.

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

Operator: This concludes the Q&A session. Apologies. We actually have another question. The next question is from Brian Wright of ROTH MKM. Please go ahead.

A – Brad Nattrass: Brian, we — I mentioned in the last call for the calendar year 2023. We estimate that about two-thirds of our business will be CEA, one-third will be commercial. And I understand in the first quarter that’s a little bit more than reversed. There has been some slippage in the cannabis space. On the last call, I talked about two projects that had moved from January and kicked off well into March. But I think that’s just — it’s just a indication of that quarter. But we’re focused on adding clients all across the board in all sectors that I discussed 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 start to move in Q3 forward over to a higher CEA percentage for not only that quarter but also for the year.

A – Brad Nattrass: I guess it’s a nice value of a diversified model, right? When there’s some weakness are another set

A – Brad Nattrass: Thank you.

Operator: Ladies and gentlemen, this concludes the Q&A session. Please reach out to investors at urban-gro.com with any additional questions. That also then concludes the conference call for today. Thank you for joining us. You may now disconnect your lines.