urban-gro, Inc. (NASDAQ:UGRO) Q1 2024 Earnings Call Transcript

urban-gro, Inc. (NASDAQ:UGRO) Q1 2024 Earnings Call Transcript April 30, 2024

urban-gro, Inc. misses on earnings expectations. Reported EPS is $-0.4 EPS, expectations were $-0.13. UGRO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the urban-gro First Quarter 2024 Earnings Conference Call. As a brief reminder, all participants are currently in a listen-only mode. [Operator Instructions] 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 today, April 30, 2024 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 call over to Christian Monson, urban-gro’s Executive Vice President and General Counsel. Sir, please go ahead.

Christian Monson: Good afternoon, and thank you for joining us. Today’s call will be led by Brad Nattrass, Chairman and Chief Executive Officer; and Dick Akright, Chief Financial Officer. I’d like to remind our listeners that remarks made during this call will include a discussion of non-GAAP metrics, including adjusted EBITDA and backlog. These items should not be utilized as a substitute for urban-gro’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-Q filed with the Securities and Exchange Commission. It can be accessed from the Investor Relations section of our website at ir.urban-gro.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-gro’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-gro 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 website for replay for today’s call may be found on the Investor Relations section of our website which again is ir.urban-gro.com. With that I will now turn the call over to Brad.

Brad Nattrass: Thank you, Christian and good afternoon, everyone, and thank you for joining us today. What a phenomenal day for the cannabis industry. As I’m sure most of you are now aware a few hours ago there were credible reports in the media indicating that the US Drug Enforcement Agency is supporting the Department of Health recommendation to reclassify cannabis from the most stringent Schedule I to the less stringent Schedule III, in turn providing a long awaited catalyst for the cannabis industry. While there still is a review period to complete with the expected removal of the two ADE-related tax burden from the DOJ addressing state run programs through a guidance memo, we believe many cannabis operators will realize significant increases to their working capital that in turn could be reinvested in their business infrastructure to refresh existing facilities and build out new ones.

For the last two years, I’m proud to sit on the board of the National Cannabis Roundtable alongside CELs from some of the leading multi-state operators in this space. The tireless dedication of MSL leaders like these and the lobbying efforts from organizations like NCR that has paved the way for our industry and the exciting wins along the way. As it relates to what this news and the subsequent final approval of rescheduling means for urban-gro’s future, it’s significant. With over 1000 projects completed in the cannabis market over the last eight years, with 120 employees which include architects, engineers construction managers and horticulture, as urban-gro the leading professional services firm in the cannabis industry that refreshes existing operations, designs and or build new dispensary and cultivation facilities and further procures and integrates cultivation equipment solutions as well.

The successful rescheduling of cannabis is a long-awaited catalyst that we’ve anticipated to reinvigorate an industry. It has been facing strong headwinds for the last couple of years. With that said and moving on, I’m excited to report that in the first quarter, we had positive cash flow from operations and in turn delivered our strongest quarterly and adjusted EBITDA results in two years. This improved performance is attributed to both the diversified revenue streams that we’ve been seeking and building out, as well as our focused efforts throughout 2023 to reduce operating expenses on a go-forward basis. Today our multi-sector focused professional services and design build firm, operates out of offices in three states and Europe and our targeted markets extend from the cannabis and vertical farming sectors, to also include light industrial, commercial, hospitality, recreation, education and healthcare sector.

Looking at the highlights from our first quarter performance, both revenue of $15.5 million and a slight adjusted EBITDA loss of $0.3 million beat our quarterly guidance. The $3.1 million year-over-year improvement in adjusted EBITDA was driven by a combination of reduced operating expenses and strengthening margins. It relates to the reduced expenses, as a result of the optimization efforts made in 2023, we began to benefit from the previously communicated $8 million reduction in general and administrative expenses. In fact, we realized the $2.8 million improvement from the first quarter versus Q1 of 2023. The margin growth in the first quarter was tied to both increased productivity from our professional services providers, as well as the strengthening of our returns delivered by our construction business and further backlog remained strong at $99 million.

As a result relating to full year 2024, we are maintaining our guidance to recognize more than $84 million in revenue and to generate positive adjusted EBITDA. I’ll further note, that this does not take into consideration today’s rescheduling related developments, as there are still unknowns including timing that need to be clarified. Looking at market trends, diversification has most definitely assisted in insulating our business from the previously discussed headwinds that we’ve been facing within the cannabis and vertical farming sectors for the last couple of years. Consistent with the sector breakout in 2023, in the first quarter approximately 72% of our revenues came from the commercial sectors that we serve and 28% from Controlled Environment in Ag. In the commercial sector, our client base continues to be comprised of top tier companies that include Fortune 50 and 500 firms and revenues recognized in the quarter were from a combination of ongoing and new projects.

In the cannabis sector, while the market sentiment has been stronger than it has been in more than a year especially after today, we’re actively engaged with clients on multiple fronts. However, cautious optimism has been the status quo for operators so far this year. In the interim, and while we wait for the rescheduling narrative to play out in the months ahead, we’re expecting to see steady activity and to continue signing both services and construction contracts and legal markets across the US as operators work through persistent state-level regulatory and legal delays. This being said, in addition today’s announcement through a couple of key additional catalysts, which could also result in a significant and sustained positive change in momentum for our business.

First, on the federal level, there’s prospects of successfully passing a banking related bill by year end continues to be discussed of particular importance. This would potentially include a Capital Markets clause, that allows plant-touching businesses to list on the larger public market exchanges, providing a more efficient path for them to access capital and create greater liquidity, as would attract institutional investors that can participate via these exchanges or provide capital directly to the issuers. Second, at the state level progress continues to be made on legalization in multiple states. We maintain our position, but the most impactful change would be in Florida, the nation’s third most populous state and one of the fastest growing in the country.

Now that it’s confirmed to be on the ballot in November, a successful vote to allow adult use recreational sales would have a profound and sustained impact for Florida operators and we anticipate for urban growth as well. In closing, and supported by our $99 million backlog, our qualified pipeline the recognition of last year’s $8 million our general and administrative expense reduction and today’s positive regulatory developments, we believe that we are well positioned to continue building momentum through the end of the year and beyond. Thank you. And with that, I will now turn the call over to Dick.

Dick Akright: Thanks Brad. In the first quarter of 2024, we generated revenue of $15.5 million, which represents a sequential improvement of $0.5 million or 4% over the $15.0 million of revenue generated in the fourth quarter of 2023 and a $1.2 million or 7% decrease over the $16.8 million of revenue generated in the prior year period. The decrease in revenue over the prior year period was driven by a $0.4 million decrease in construction design-build revenue, which reflected a decrease in the number of projects and average size of projects during those periods. Equipment Systems revenue decreased by $0.4 million and services revenue decreased by $0.3 million, which corresponds to the historical downturn in the cannabis industry.

Gross profit was $3.1 million or 20% of revenue in the first quarter of 2024 compared to 1.7 million or 11% of revenue in the fourth quarter of 2023 and 2.1 million or 17% of revenue in the prior year period. The increase in gross profit dollars and margin percentage from both of these comparable periods was driven by the impact of improved margins in Services and Construction design-build revenues, as we experienced improvements in delivery of services projects and started work on higher-margin construction design-build projects during the current quarter. Operating expenses were $5.2 million in the first quarter of 2024, which on a sequential basis, it’s a decrease of $1.2 million and on a year-over-year basis is $2.7 million less than operating expenses of $7.9 million in the first quarter of 2023.

Both of these decreases are associated with the Company’s expense optimization and resource reallocation initiative. Net loss was $2.1 million or a negative $0.18 per diluted share in the current quarter compared to a net loss of $5.1 million or a negative $0.48 per diluted share in the prior year period. Adjusted EBITDA improved by $2.7 million sequentially to negative $0.3 million in the first quarter of 2024. This is an improvement in adjusted EBITDA of $3.1 million compared to the prior year period. The improvement in our adjusted EBITDA for both periods was driven by lower operating expenses as previously discussed. Turning to our balance sheet. We ended the quarter with $0.7 million of cash and a balance on our line of credit of $2.0 million.

With the support of the working capital line of credit that we put in place in December, we currently do not see the need to bring new dilutive capital into the company. Our total backlog as of March 31, 2024 was approximately $99 million, reflecting a decrease of $11 million or 10% on a sequential basis. This backlog is comprised of $93 million in construction design-build, $5 million of professional services and $1 million of equipment systems contracts. Breaking backlog out by sector, 76% is with clients in the CYA sector and 24% is with clients in the commercial sector. Supported by our backlog and pipeline, we remain confident that our cash position combined with our $10 million line of credit will provide us the necessary flexibility to manage through various macroeconomic scenarios.

We continue to remain focused on our execution and returning to positive adjusted EBITDA on an ongoing basis. That concludes our prepared remarks. Operator, please open the call for questions.

See also 15 Fastest Rising Universities in the US and 15 Countries with the Lowest Saving Rates in Europe.

Q&A Session

Operator: Certainly. At this time, we will be conducting a question-and-answer session. [Operator Instructions] And the first question today is coming from Eric Des Lauriers from Craig-Hallum. Eric, your line is live.

Eric Des Lauriers: Great. Thanks for taking my questions. So first one is [Technical Difficulty]

Operator: Apologies. Apologies Eric, your line is really bad quality. We will and we’ll reconnect you will dial out to you, so that we can get a better connection, if that’s okay with you. Brad, its okay, I’ll move on to the next question and we will reconnect Eric as soon as possible.

Brad Nattrass: That’s great. Thank you.

Operator: I’ll move on to the next question and we’ll reconnect Eric as soon as possible for those people. Take from Scott Fortune, ROTH MKM next. Scott, your line is live.

Scott Fortune: Thank you for the question. Hopefully, you can hear me better. I will leave the, CEA question for Eric. But just curious, on Florida Brad, if you’re obviously that’s for adult use a ballot vote now. It’s still a big hurdle to get 60% of the vote. But are you seeing now that it’s up for vote, are you seeing operators come in engaging more in your services as it looked a build-out? Is it the potential vote in Florida or is still kind of muted interest from that standpoint to wait to see if this does pass in Florida from adult use side of things. Just curious on kind of the operators kind of emphasis for moving forward now and building out potential ahead of some of these states.

Brad Nattrass: Thanks Scott. Thanks. Thanks for the question. Yeah, Florida, it is a hurdle at the 60%. And there’s a lot of confidence that that will be that will be beat. But the heavy work starts now and the grade for people to donate and to give to the path that Trulieve has created in the state with a lot of the other multi-state leaders, so they can get the word out and keep pushing hard. The polls are trending higher than 60%, at this time from what I’ve heard. But again, it’s — it’s early stage and it’s important to give so we can we can fight, that fight. In terms of uptake, yes for sure. In terms of the — the uptake and the excitement and the planning moving forward to hard large orders, that’s not quite here. The conversations on many fronts that we’ve been having are preparing to be in a good place from an equipment standpoint.

Some equipment needs to be ordered four to six months in advance. Others is entering the design stage for new facilities and then, at some point in the future proceeding to the build, but absolutely a very positive uptake in the state so far.

Scott Fortune: I appreciate color there. Thank you. And then just focus on guidance you guys are giving guidance of more than $84 million in revenue for 2024 with the projects and the backlog and focus. Can you can you provide a little more cadence to kind of the remaining of the 24 year? Obviously, you had some delays from 4Q. And I assume those projects are recognized here in 1Q, but just kind of step us through the year, as you see your backlog move second half kind of loaded from the cadence standpoint to meet your revenue guidance?

Brad Nattrass: Yeah. First addressing the three projects that we discussed on the on the 2023 or Q4 2023 call. All three projects that are active, two of them are recognizing revenue in Q1 and third has began recognizing for us in the second quarter. So those are those are all on track. We remain right now, we’re cautiously optimistic. We believe that we’ve turned the corner. And I’m excited about where we’re moving. And that’s before today is a development came to light. We are trying to under-promise and over-deliver in terms of our setting expectations. We’re off to a good start in Q1. The backlog remains strong. Of course, we’d like to see it start to appreciate an increase again, but we’re in a very good place. We feel good, especially with the right sizing of the company in terms of an SG&A standpoint. We’ve lowered the break-even level for the company, Scott, so that feels good as we’re going forward, and we can keep growing the business as the demand increases.

Scott Fortune: Perfect. I appreciate the detail. And I’ll jump back from the queue. Congrats on — well, still the DA moving forward today, so thanks.

Brad Nattrass: Thanks, Scott.

Operator: Thank you. It looks like Eric Des Lauriers from Craig-Hallum has reconnected, and we will try his line again. Eric, your line is live.

Eric Des Lauriers: All right. Great. Thank you. Is this any better?

Brad Nattrass: It’s a little bit.

Eric Des Lauriers: Yeah. All right. I’ll give it a try. If this doesn’t work, we’ll just take the questions offline. So, on the DA, I was anticipating this for the day. I was wondering if you could provide us sort of an overview on the typical timing of one of your projects from your Canvas operators. What’s the sort of timing for a project to go from discussion phase to pipeline to backlog and revenue? I was really looking to kind of understand how quickly you’ll be able to add visibility into potential, bona fide backup in capital expenditures in the Canvas industry? Thanks.

Brad Nattrass: Perfect. Eric, I got most of that. Perfect. First of all, it depends on the size, right, and zoning, and where we’re located, state, city and county, and those requirements around the country. But typically, they could take as long as, without any delays, as long as two years, depending on the size, probably as short as nine months, on average a year and a half. From initial discussions, we move into the design stage, architecture and engineering, and the cultivation design. Civil and structural are all part of the engineering side there, too. Once we have a whole set of CDs, it’s put out to bid. Clients usually will look at multiple bids in which we’re participating. And if awarded, we immediately move forward. We can be — we can cut weeks, sometimes months off, if we’re proactively involved at certain stages. But overall, I’d say nine months to two years is a good average without delays.

Eric Des Lauriers: And how long would you take to see that there is an increase in CapEx coming sort of industry-wide? I understand that some of these projects, from discussion to completion, can take up to two years. But how long will it take you to notice if there’s a bona fide capital expenditure increase in the cannabis industry resulting from the DEA? Would you have — is it a few weeks of lead time of discussions picking up and leading to pipeline and deposits? Or is that — could these discussion phases last several months that it’s hard to see if there’s a true pickup or not?