urban-gro, Inc.

Hello and welcome to the Urban Grow 2023 second 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 made 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 Droehler, 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 10-Q filed with Securities and Exchange Commission and can be accessed 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 Urban Grow'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 growth files with the Securities and Exchange Commission. These documents are available in the investor section of our 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 at ir.urban-gro.com. With that, I will now turn the call over to Brad.

Thank you, Dan. Good afternoon, everyone, and thank you for joining us. Our evolution into a professional services consulting firm continues to gain momentum. And in addition to our focus on controlled environment agriculture, also known as CEA, we continue to expand growth outside of this market, in the industrial, commercial, and healthcare sectors. With the dedication and support of our leaders and their teams, and consistent with the expectations that we communicated in May, we've continued to do what we said we would do. We recorded another sequential improvement in both revenues and adjusted EBITDA. We increased our quarter-end cash position. We continue to have zero bank debt, and we've removed additional costs on the business. With this said, it comes as no surprise that we've been operating in a very challenging environment in the first half of 23. Our reductions in SG&A to offset decreased margin dollars, especially in the equipment category, have yielded positive results. And coupled with our ongoing business development initiative across all segments in which we operate, we are confident that our model will continue to prove its efficiencies in the quarters ahead. Our messaging remains consistent and that our top corporate priority is returning to sustain positive adjusted EBITDA as soon as possible. Based on our third quarter to date trending, along with the cost we've taken out of the business, our increasing revenues and a systems enhanced insight into our project margins, we believe that we are close to reaching that inflection point and moreover, are not in a position where we would need to raise dilutive capital. In the second quarter, we generated net revenue of $18.8 million, which represents a 12% sequential improvement over the first quarter and a 16% improvement over last year. Adjusted EBITDA for the second quarter was negative $2 million, marking a significant $1.4 million improvement over the first quarter. We remain diligently focused on reallocating resources and optimizing our spending where appropriate, to ensure that our infrastructures align with the size of our business. Through these initiatives, year to date, we've now reduced our annualized SG&A expense by $2.9 million. While these were difficult decisions, they were necessary ones, and we're now a leaner and more efficient organization than we were at the end of last year. Additionally, we now have improved visibility into our business, with all entities operating on the same ERP system. and will continue to take action as necessary to position our business for long-term profitable growth. Now turning to current sector trends. Sector diversification continues to help insulate our business from the broader weakness that the cannabis and produce-focused vertical farming sectors are working through. Although these sectors remain an important component of our future growth, through our successful diversification strategy initiated a year ago, we've evolved into a professional services consulting company that offers turnkey design build solutions to multiple markets. In fact, approximately two-thirds of our revenue this quarter were from other targeted markets in which we have diversified. We've established ourselves as a trusted partner for all of our clients' projects, and the quality and level of service we provide lends itself to a high rate of repeat clients, and speaks to our ability to attract top-tier companies, including some Fortune 50, as clients to the company. In the CEA sector, and as we've detailed on past calls, our equipment revenues have been significantly impacted for over a year now by the weak cannabis market. On a positive note, the second quarter represented the first sequential increase in equipment sales since the second quarter of 22. the primary driver being projects that resumed after an extended pause. This being said, our professional services revenue is also being affected by this downturn, and year to date, more than half of our services revenue is from markets outside of CEA. Overall, we remain well positioned in the sector and will most definitely be ready to handle the surge in demand when the cannabis market rebounds in the future. We also remain confident in the strategic investment that we've made in Europe and believe that we're well positioned for long-term growth. In regards to our backlog, which decreased to 79 million at the end of Q2, the drop is predominantly tied to a design-build cannabis cultivation project that was actively in production. Our client is unfortunately facing some funding uncertainty, and so we had to pause the project. While we remain in close contract With the contact with the client, the contract does remain open, and we felt it prudent to remove it from our reported backlog until their funding source is solidified. As communicated on past calls, Urban Grow's backlog is a realistic and trusted indication of our future business. And although there was a quarterly decrease, as of today, we have multiple contracts currently out for signature, which are collectively worth well more than this sequential reduction. Now turning to our guidance for full year 2023. Due in part to the pause of the project discussed above, as well as some other timing shifts where projects have extended out to additional quarters, we are updating our guidance for consolidated revenues to be within a range of 90 to $95 million and adjusted EBITDA in the range of negative six to negative $5 million. To put this in perspective, I'd note that our adjusted EBITDA in the first half of 23 is negative $5.5 million, which implies that we expect neutral or break-even adjusted EBITDA performance in the second half of the year. In terms of cadence for the balance of the year, we continue to anticipate sequential increases to both revenue and adjusted EBITDA. In summary, we remain closely aligned with the interests of our shareholders. and insider ownership now represents approximately 30% of outstanding shares. This alignment is further supported by first, the recent open market equity purchases by myself and other directors, tolling about 1.5% of shares outstanding. And second, the commitment of my leadership team. Near the beginning of the third quarter, and led with a 50% commitment from myself, each executive vice president and officer of the company voluntarily opted to take a stock grant in lieu of 20% to 50% of their base salary for a three-month period. The key takeaway here, our board and our leadership team strongly believe in the future of the company. We look forward to continuing to deliver improvements in both the top and bottom line and further unlocking the value for ourselves and for our shareholders that we know our business can provide. Thank you, and with that, I will now turn the call over to Dick.