urban-gro, Inc.

Hello and welcome to the UrbanGrow 2023 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 telephone 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 Drohler, Investor Relations at Urban Grow. Sir, please go ahead.

Good afternoon, and thank you for joining us. Today's call will be led by Brad Natras, Chairman and Chief Executive Officer, and Dick Ackwright, 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 UrbanGrow'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 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 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 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'll now turn the call over to Brad. Thank you, Dan.

Good afternoon, everyone, and thank you for joining us today. Flatly over a year ago, we launched the Diversification Initiative, focused upon leveraging our professional services kind to efficiently seek and build out additional revenue streams for the company. I'm excited to report that we continue to execute and gain momentum on this strategy as Urban Grow has evolved into a multi-sector focused professional services consulting firm. With more than 140 architects, interior designers, engineers, construction managers, project managers, horticulturists, and others on our team, we have successfully expanded our operating focus beyond our core controlled environment ag practice to include clients across multiple sectors, including industrial, commercial, hospitality, recreation, education, and healthcare. In regards to our third quarter performance, and consistent with expectations, we marked another sequential improvement in both revenues and adjusted EBITDA. Revenue of $20.9 million, a sequential improvement of $2.1 million, or 11%, came very close to exceeding our all-time quarterly high of $21.1 million, reached in Q1 2022. The adjusted EBITDA loss was $1.3 million, a sequential improvement of $0.7 million, And while our significant revenues this quarter resulted in retiring 27% of our Q3 beginning backlog, we signed enough new contracts to drive our backlog entering the fourth quarter to 84 million, a 6% sequential increase. Despite the ongoing headwinds within the CEA sectors, our diversification strategy has served as a source of strength for the company. Our team is now more efficiently adapting to the shifting environment and we continue to focus on optimizing the productivity of our professional services employees as we work towards a period of more marked revenue acceleration. Although we made some difficult decisions to right-size our staff earlier in the first half of the year, we feel comfortable at current levels given the demand that we see. Now turning to current sector trends. Sector diversification has most definitely assisted in insulating our business from the broader weakness that the cannabis and vertical farming segments are working through. Although the CEA sector remains an important component of our future growth, our success is no longer fully dependent on its success. We've evolved into and are now regarded by our clients as a professional services consulting company that offers turnkey design, build, and equipment integration solutions to multiple markets. Consistent with the second quarter, More than two-thirds of our revenue this quarter was generated in the sectors outside of CEA. It included a combination of new projects with both existing and new clients and continues to include top-tier companies and some Fortune 50 clients as well. In the CEA sector, our equipment revenues continue to be compressed by the weak cannabis market. During the first nine months of 23, we have experienced a period-over-period decline, of more than $20 million of 18% margin business. While it's impossible to ignore the negative impact that this has had on our financial performance, our diversification has enabled us to keep our experienced team strong and intact. And as a result, we remain well positioned in the sector and we'll be ready to handle the surge in demand when the cannabis market rebounds. It's being said, in the interim, we're still seeing steady activity. and are expecting to continue to sign design-build contracts in a variety of states. For urban growth today, and apart from our cannabis clients lacking access to much-needed capital, the primary block to more rapidly increasing our business in this market is one that we cannot control. However, it's also one that will continue to slowly dissipate. There are a number of legalized states, like New York, Alabama, and Georgia, among others, for example, that have paused the awarding of licenses due to regulatory and legal delays within their state. We have a significant number of clients with projects in these states, some of which have already completed design, and we're confident they'll move forward to the construction build stage when these delays are resolved and licenses are received. This is evidenced in the third period where we had two such clients move forward to construction, and we'll continue to announce these successes as contracts are signed. As it relates to our European entity, the size and quality of the company's European pipeline is the strongest that it's been since opening the entity since June of 22. While the cannabis markets abroad continue to show green shoots in multiple countries, our European business will still take time to sustainably scale its operations. I was in Europe last week meeting with both clients and the team, and I can assure you that they remain diligently focused on driving strong returns. Now shifting to our guidance for the fourth quarter 23. Demonstrating our ongoing commitment to deliver sequential growth on both the top and bottom line, we anticipate revenues to be approximately $30 million, which I'd add would be a new record for us by more than 40%. And we expect to realize breakeven to slightly positive adjusted EBITDA, which would mark an important shift back to positive cash flow. and subsequently meeting a goal that we've been working hard to achieve this past year. In closing, the company continues to remain closely in line with the interests of our shareholders. In addition to the open market equity purchases made by myself and other directors in the second and third quarters and totaling about 1.5% of shares outstanding, my leadership team demonstrated their commitment as well. Led with a 50% commitment for myself. Each executive vice president and officer of the company voluntarily opted to take a stock grant in lieu of up to 50% of their base salary during the third quarter. The key takeaways here. First, our board, as well as our leadership team and their teams, continue to strongly believe in the future of the company. Second, our diversification strategy is working. It continues to gain momentum. and we have alignment on our goals across our organization. And third, we're doing everything in our power to maintain this positive momentum.