urban-gro, Inc.

Good afternoon and welcome to the Urban Growth 2022 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Our 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Dan Drohler, EVP Corporate Development and IR. Please go ahead, sir.

Good afternoon, and thank you for joining us. Today's call will be led by Brad Natras, 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 10Q filed with the Securities and Exchange Commission and 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 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 UrbanGrow's current expectations, actual results could differ materially. As a result, you should not place undue reliance on any forward-looking statements. Some of the factors that could cause actual results to differ materially from these contemplated by such forward-looking statements are discussed in the periodic reports UrbanGrow files with the Securities and Exchange Commission. These documents are available in the investor section of the company's website and on the Securities and Exchange Commission's website. We 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 in the investor relations section of our website at ir.urban-grow.com. With that, I will now turn the call over to Brad.

Thank you, Dan. Good afternoon, everyone, and welcome. I'll begin today's call by providing an overview of the state of our business, including an update on our execution, results, and visions. This will be followed by Dick revealing our financial results in more detail, and then we'll open the call for your questions. I want to preface my remarks by stating that I'm very proud of our team for the resilience this quarter amid the well-documented headwinds that are impacting the cannabis industry. I'm not only the CEO of the company, but I'm also Urban Grow's largest shareholder. And despite our performance being below our internal expectations due to a variety of macroeconomic and industry forces, I remain incredibly confident and excited about the success that lies ahead. We've been laser focused on perfecting our go-to-market strategy through integrating strategic acquisitions and continuing to build out our internal capability, which kind has resulted in a pipeline that is qualified and growing. Before diving into my comments around our quarterly performance, I want to make sure that you have three key takeaways from today's call. First, And as seen in our backlog, our professional services business remains strong and meaningful contracts are being signed in all three sectors in which we operate. In fact, the team is currently working on more than 150 open service contracts as of today. Although we're actively diversifying our business on all fronts, we've been most negatively impacted by the overall turbulence in the cannabis sector and the associated downturn in cultivation equipment sales. While we're not recognizing the cultivation equipment sales as quickly as we had previously anticipated, no contracts have been canceled. Opportunities have been pushed back, but the business is still there, and we believe this pause will prove to be temporary. Second, we're confident that we've built the right model as a professional services and design build firm and continue to invest in our strategy of diversification, which includes both sector diversification and the development of our European business. And third, we're confident we can navigate through this dynamic environment with our committed team of talented experts in their respective areas. Coupled with our strong balance sheet with a cash position of $23 million and zero debt, we have the flexibility we need to continue pursuing growth and enhancing shareholder value. Now to the results. We achieved second quarter revenues of $16.3 million, which represents growth of 27% versus $12.8 million in the second quarter of 2021. Adjusted EBITDA for the second quarter was negative $500,000, which reflects both the impact of lower fixed cost absorption as our sales came in below plan and also our continued investment into our European expansions. And backlog at the end of the quarter was $22 million, consistent with backlog at the end of Q1. While Dick will go into more detail on the numbers later in the call, I'll now turn the focus to providing an update on each of the three business sectors in which we operate. Cannabis, food-focused vertical farming, and non-CEA-focused commercial. Starting with cannabis, as that has been most impactful to our performance as of late. To summarize, in addition to an uncertain federal regulatory outlook, the cultivation focus of the sector has been negatively impacted by not only delays in new state rollout, but also weakness in other legalized states related to a well-documented oversupply situation. Multiple states that were scheduled to start awarding licenses earlier this year further delayed their rollout. One notable example is New York, one of the most population-dense prospective legal cannabis markets in the country. Thus far, they've only granted conditional cultivation licenses to existing hemp farmers with severe limits to the size of operations and equipment that can be used. Further in the south, licensing delays for both medicinal and recreational markets have also slowed progress. Couple these delays with shifting macroeconomic forces And the result is reduced access to capital, combined with higher rates on that capital, forcing industry operators to rethink, for the time being, delay their capital deployment plan. They focus on creating efficiencies and preserving liquidity. This, we believe, has affected our results in the form of temporarily delayed cultivation equipment spending. As noted on the Q1 earnings call, we were beginning to see some softness in cultivation equipment sales, but we didn't foresee the pronounced pullback that we're experiencing, and others have now reported. During the second quarter, we saw the historical sales volumes from some of our largest clients brought materially compared to our forecasted sales, and that air pocket has persisted in the third quarter to date period as well. However, based on the strength of our pipeline, the increasing number of contracts being signed, and the company entering into full end-to-end design-build contracts that include full equipment integration, we currently expect equipment sales to resume their upward trend in the fourth quarter. Although we believe this air pocket to be temporary, and we are seeing progress in states that have experienced delays now resuming their pace, these delays are a prime example of why diversification remains a foundational component of our strategy at Earth & Growth. Our team has been working hard to enhance all facets of diversification over the past year through building out our turnkey design build platform, advancing our M&A strategy of acquiring synergistic, accretive, and cash flow positive service companies, and making efficient and targeted entries into new global markets. Expanding further on our international strategy, And as the Netherlands has been the epicenter of horticulture growing innovation for nearly a century, we felt it critical to build a formal presence in this region. Further to our commitment at the start of the year, we continue to make investments here, both in terms of infrastructure and reach in the overall CEA market. In addition to hiring a Netherlands-based managing director this quarter, we've begun building a team And based on the signing of cannabis-focused design contracts in approximately eight countries, we continue to expand our visibility by attending, presenting, and exhibiting at key industry trade shows and conferences in the Netherlands, Germany, Spain, Dubai, the UK, Israel, and early next month in Switzerland. Which brings me to our next business sector, food, and more specifically, food-focused controlled environment agriculture, which includes vertical farming. Venture within the CBA sector continues to be a strategic area of focus and a healthy source of future growth for the company. Our services capability and the equipment we help to procure are plant agnostic and working with one of the most valuable crops in the world has given us a great entry point in the produce. We have immense capabilities to service the indoor food focus sector and we continue to see strong momentum in the North American market. In the international markets, with food security being top of mind amid new environmental and geopolitical events, interest and demand for our services continues to increase here as well. The third and final sector that we operate in is the commercial sector. It primarily represents diversification of revenue outside of the CEA sector into the industrial and healthcare segments. Diversification of our offerings beyond CEA is not only a key area of organic growth for us, but also fosters a more durable operating model. We have the flexibility to position our design assets, our architects and our engineers, based on the demand variances in each market segment to maximize billable hours and cover our fixed overhead. The synergy that we create with our balance sheet has allowed us to bond larger construction management projects in turn providing us access to previously unavailable projects and revenue opportunities. Since the closing of our acquisition of Emerald Construction Management last quarter, and led by a long-term partnership with a world-leading CPG beverage manufacturer, we've signed many new design, build, and related contracts to design and build facilities located across the U.S. We're also making strides in other growth sectors, such as healthcare, where we've also signed many new contracts with both ongoing and new clients. And our prospects and pipeline are strengthening there as well. With the integration of our recent acquisitions, we're now able to address a larger market and capitalize on opportunities in the adjacent market, where our growing team has built decade-plus long relationships upon expertise and trust. Our ability to penetrate these new markets and service a set of high-profile customers speaks well for the end-to-end set of capabilities we have and the quality of our team. My vision of UrbanGrowth is now a reality. We strive to deliver a world-class level of service to a single point of responsibility across all aspects of our clients' operations. This is not only UrbanGrowth's value proposition, has been the foundation of our success to date. Before I turn the call over to Dick, I'm going to spend a few moments on our outlook for the second half of 2022 and share with you how we're navigating through this dynamic environment. As a result of the cannabis industry headwind, especially in the area of timing around cultivation equipment sales, we're withdrawing our full year 2022 guidance. Until we have improved visibility and in turn can provide greater certainty in our projected results, we're shifting our outlook to guide on a quarterly basis. So for the third quarter, based on an anticipated minimum amount of cultivation equipment sales being recognized, we anticipate revenues to be in the range of $10 to $11 million and an adjusted EBITDA loss to be in the range of $2.6 million to $2.4 million. This should not be inferred as a slowing of our long-term opportunity pipeline, as it's quite the opposite. However, while our ability to effectively predict timing of these opportunities turning into revenue has decreased, and this remains a moving target, based on the strength of our pipeline and the increasing number of contracts being signed, especially with design-build clients, we currently expect cultivation equipment sales to begin to show recovery in the fourth quarter. Again, while we believe this air pocket we are experiencing is temporary, we have taken steps to prepare our business for any further changes to the environment. Proactively, over the last couple of months, we've looked closely at every division of the company to ensure that we're operating as efficiently as possible. Our evolution to a turnkey professional services and design build firm has decreased our reliance on field business development reps to drive cultivation equipment sales. As our design-build business increases, the integration of equipment is more of a natural integration process versus a discrete sales process. By increasing the number of manufacturers that we work with, we now holistically design an equipment package that meets a client's budget, ensuring that we have three to five alternatives for our clients to consider in each equipment category, for example, mechanical cooling or environmental controls, We've increased our vendor partner network considerably, adding nearly 20 new manufacturing partners. In our model, we now use sales engineers, or more broadly referred to as equipment specialists, to educate clients on a variety of solutions from which to choose for each equipment category. As a result, many new clients are now being handled by a professional relationship project management structure that lasts for the life of the project. which can range from anywhere from 12 to 18 months. These adjustments, while tied to increasing the efficiencies of our model, allowed us to reallocate and optimize resources, in turn creating approximately $1.25 million of annualized savings to help us remain nimble and protect adjusted EBITDA while still being positioned for the growth that we see ahead in our pipeline. In closing, I want to be very clear that I'm confident that the investments we've been and are making in the business today will result in a strong future financial performance. Yes, there's uncertainty in one area of our business today that is affecting our actual performance versus forecast, but our pipeline of projects is strong, qualified, and growing, and our model's locked in and beginning to prove itself. We remain committed to advancing our diversification strategy which is reducing our exposure to any one sector. And we not only expect this to help insulate us in the short run, we're positioning our company for new and larger avenues of growth in the quarters and years to come. Thank you. And with that, I'll now turn the call over to Dick.