urban-gro, Inc.

Hello and welcome to the Urban Grow 2022 Third Quarter Earnings Conference Call. As a brief reminder, all participants are currently in a listen-only mode. If anyone requires operator assistance during the conference, please press star zero on your telephone keypad. 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 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 UrbanGrow. Sir, please go ahead.

Good afternoon, and thank you for joining us. Today's call will be led by Brad Mattress, 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 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 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 UrbanGrowth's current expectations, and the 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 those contemplated by such forward-looking statements are discussed in the periodic reports UrbanGrowth 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. That is 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 update on the state of our business. including a focus on our execution, results, market conditions, and vision. This will be followed by Dick reviewing our financial results in greater detail, and then we'll open the call for your questions. Well, I'm pleased that we exceeded our revised guidance on both revenue and adjusted EBITDA. That should not be misconstrued as being satisfied. While our results were directly impacted by the headwinds associated with decreased capital expenditures within the cannabis sector, One of the positive aspects of our performance is that our results demonstrate our sector and capability diversification strategy is paying off. This diversification strategy, coupled with the strength of our professional services delivery model that we've been building over the last 18 months, has built our project backlog to a company record $67 million as of the quarter end, an increase of over $40 million, on both a sequential and year-over-year basis. This is a clear indication that the model that we have built is working as intended, and I'm proud of what we've been able to accomplish amid this dynamic environment. Briefly touching on our third quarter results, we achieved revenues of $12.4 million, which is above our third quarter guidance of $10 to $11 million. From a positive standpoint, year-over-year, Construction design build revenue increased by $5.4 million, and professional services revenue increased by $1.4 million, with both increases being driven by the synergies we are creating with our strategic acquisition. Offsetting this growth was the $12.6 million year-over-year decrease in cultivation equipment revenue due to pressure resulting from macroeconomic conditions and further state regulatory delays tied to the cannabis sector. As we continue to invest in both scaling our team to service 2023 demand and into expanding our European operations, adjusted EBITDA for the third quarter was negative $2.3 million, just above the high end of our guidance range of negative $2.4 to $2.6 million. And as it pertains to our balance sheet, entering Q4 with approximately $18.6 million of cash and no debt, It remains strong, agile, and is providing us with the flexibility to continue investing and grow. Moving on, I'll now shift to our most recent acquisition, current sector trends that we're seeing, and the outlook for the balance of 2022. The increasing market demand for our services in all sectors is precisely why we made the decision to acquire Dawson Van Orden, the DVO, a 24-person world-class engineering firm based in Texas with considerable experience and expertise in the indoor CEA and commercial sectors. This accretive and synergistic transaction both increases our professional services revenues and margins and further provides immediate cross-selling opportunities to leverage both UrbanGrow and DVO's existing clients and contracts. To be clear, the demand for both our professional services, including engineering, as well as our turnkey design build solution across all sectors is strong and increasing rapidly. As such, this acquisition allowed us to immediately add depth to our suite of services, as well as a deep bench of talent and engineering leadership structure to efficiently service our clients. More specifically, this transaction adds new and enhanced expertise in the areas of mechanical, electrical, plumbing, and fire safety engineering and includes the addition of an industrial architecture team that had been recruited prior from a global leading engineering procurement and construction company. Given that our respective teams have experience working together on joint projects prior to the close, I'm confident that we'll see a quick and smooth integration process over the next several months and be able to take advantage of the immense opportunities that lie in front of us. Furthermore, I'm excited about the opportunity to build a hub in Texas. Located in Houston, we plan to build out our office to accommodate both CEA and commercial opportunities that we have identified in the region. Not only have we determined that there's a solid and accessible labor pool to work with, but forward-looking, we expect the state to provide an influential business opportunity as cannabis legalization is considered in the future. Now shifting to our business development in the commercial sector. Not only is our success here beginning to have a positive material impact on our financial performance and is effectively beginning to bridge the cannabis sector weakness experience, it also truly promotes the consistency and effectiveness of our well-thought-out and executed M&A strategy. Following the acquisition of Emerald Construction Management and in turn the successful launch of our design-build division in the second quarter, we now possess the ability to add value through service levels provided within a single point of responsibility across all aspects of our clients' operations. The launch has been successful, and our pipeline of projects is strong, qualified, and growing. Last month, we announced the signing of over $50 million of new design-build contracts in the third quarter. These contracts, which are from CEA, healthcare, and industrial clients, including a leading global consumer package goods enterprise, are for the design-build portion of a project only and are separate from any associated professional services or equipment contracts that we sign. This progress demonstrates that client interest and engagement in our turnkey design-build capabilities has continued to gain momentum as expected and gives me great confidence that the investments we are making in the business are positioning urban growth for sustainable and consistent global growth over the long term. Coupled with the continued integration of our recent acquisitions, including 2WR, Emerald, and now DVO, our combined team that now exceeds 150 employees enables us to address a larger market and capitalize on opportunities in adjacent markets where we've collectively built decade-plus long relationships. Our ability to penetrate these new markets with cross-selling opportunities and service a set of high-profile customers speaks well to both the end-to-end set of capabilities we have and the quality of our experienced team.