urban-gro, Inc.

Greetings. Welcome to the Urban Grow, Inc. fourth 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.

Good afternoon, and thank you for joining us. Today's call will be led by Brad Natris, Chairman and Chief Executive Officer, and Dick Ackrey, 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 UrbanGrowth'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-K filed with the Securities and Exchange Commission and can be assessed from the investor relations section of our website at ir.urban-grow.com. On this call, we may state management's intentions, beliefs, expectations, or future projections. These are forward-looking statements and involve risks and uncertainties. Forward-looking statements on this call are made pursuant to the safe harbor provisions of the federal securities laws and are based on UrbanGro'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 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. With that, I will now turn the call over to Brad.

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 first three quarters of 2023, We were met with a confluence of delays across multiple projects in the fourth 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 first quarter, and we expect that the majority of these delayed revenues will be recognized over the course of 2024, beginning in the first quarter. Our model is working. 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&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 million, representing growth of 7%. Of this, $50 million, or 70% of our revenues, are from the commercial markets that we serve, and 22 million, or 30%, are from CEA. Further, while our year-over-year CEA revenues decreased by 22 million, or 36%, this was offset with our revenue growth in commercial, which increased by 27 million, or 36%. These numbers demonstrate a reversal from trends we experienced in 2022 and highlight the value of our diversification. The prolonged multi-year 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 three-year low of $13 million, which represents a $21 million or 62% decrease from 2022 And moreover, a $43 million or 77% decrease from 2021. 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&A expenses by more than $8 million 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. A combination of this team's expertise, our integrated solutions, and our focus on sector diversification differentiates us as a company that continues to deliver growth in a turbulent environment. Now looking at trends in the markets in which we operate. First, in regards to the strategic investments we have made in our European entity over the last two 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. 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 Urban Grow is a perfect fit for fulfilling their urban vertical farming design-build needs. as it relates to our business in the cannabis sector. 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 280E-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. Second, and again on the federal level, the prospects of successfully passing the safer 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 million. 17% increase over 2023, and we expect to generate positive adjusted EBITDA. While achieving these results are still heavily dependent on category revenue mix, the actions we took to reduce our SG&A expenses in 2023 have significantly reduced our revenue break-even point for generating positive adjusted EBITDA relative to what we've previously communicated. For the first quarter of 2024, We're providing some guidance on our expected results given we are approaching the end of the quarter with just two days remaining. We expect revenues to be greater than $15 million and adjusted EBITDA to be greater than negative $0.5 million. 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 back by both our closed contract backlog of $110 million and the $8 million reduction in annualized SG&A. We believe we're in the strongest position that we've been in over 18 months. 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 Grow'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, and with that, I will now turn the call over to Dick to discuss further details of the fourth quarter, as well as full year 2023 results. Dick.