urban-gro, Inc. (NASDAQ:UGRO) Q4 2023 Earnings Call Transcript March 27, 2024
urban-gro, Inc. misses on earnings expectations. Reported EPS is $-0.34 EPS, expectations were $-0.1. 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: Greetings. Welcome to the urban-gro, Inc. Fourth Quarter and Full Year 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. Please note this conference call is being recorded. At this time, I’d like to turn the conference call over to Christian Monson, Urban-gro 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 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-K filed with the Securities and Exchange Commission and can be accessed from the Investor Relations section of our Web site 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 Web site and on the Securities and Exchange Commission’s Web site. 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 Web site, which again is at 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. After delivering sequential improvements to both the top and bottom line in the first three quarters of 2023, we were met with the confluence of delays across multiple projects in the fourth quarter, which resulted in a disappointing performance. Although, we are frustrated by these circumstances, fortunately, none of the delayed contracts were lost. All are currently active in the first quarter and we expect that majority of these delayed revenues will be recognized over the course of 2024, beginning in the first quarter. Our model is working. Our diversification strategy is continuing to broaden our presence across multiple industries, which is visible in our expanding backlog.
And further, the significant efforts made to optimize and align our SG&A expenses in 2023 positions us well for 2024. All considered, we are confident that 2024 will prove to be a step up year for urban-gro where we expect to deliver positive adjusted EBITDA, a goal that we have consistently identified as our top near term priority. 2023 was a successful year of evolution for the company. Although, we faced ongoing headwinds within the cannabis sector, our team continued to execute on our sector diversification strategy and we finished the year with revenues of $72 million, representing growth of 7%. Of this, $50 million or 70% of our revenues are from the commercial markets that we serve and $22 million or 30% are from CEA. Further, while our year-over-year CEA revenues decreased by $22 million or 36%, this was offset with our revenue growth in commercial, which increased by $27 million or 36%.
These numbers demonstrate a reversal from trends we experienced in 2022 and highlight the value of our diversification. The prolonged multiyear compression of our equipment revenues, resulting from continued softness within the CEA sector remains the most material headwind to our financial performance given the advantageous margins that this category represents. In 2023, our equipment revenues decreased to a three year low of $13 million, which represents a $21 million or 62% decrease from 2022, and moreover, a $43 million or 77% decrease from 2021. And an average equipment margin of approximately 14% replacing this margin with gross profit from our other areas of business has been a large hurdle to overcome. But as we entered 2024, we have done just this.
That being said, there are some significant regulatory changes that could serve as catalysts to reignite the cannabis market and therefore, provide a material and sustained lift to our future financial performance. As a result of these persistent headwinds across the CEA sector, we have optimized the size of the company to align with the current performance levels and reduced our SG&A expenses by more than $8 million on an annualized basis, all of which we expect to realize in 2024. We have an in-house team of experts who include architects, interior designers, engineers, construction managers, project managers, horticulturists and others that’s focused on serving clients in multiple sectors, including CEA and commercial. A combination of this team’s expertise, our integrated solutions and our focus on sector diversification differentiates us as a company that continue to deliver growth in a turbulent environment.
Now looking at trends in the markets in which we operate. First, in regards to the strategic investments we have made in our European entity over the last two years. The suppressed demand in their CEA markets continues as well. And as a result, we have downsized the workforce and reduced general expenses to better align our costs with near term demand levels. Looking forward, the European cannabis market is continuing to open up, most notably with the early stages of adult use legislation and legalization in Germany, and we continue to anticipate that there will be increasing demand for the services that we provide. In the domestic market, our business in the commercial sectors continues to generate strong organic growth. In addition to signed contracts upon which we’re executing, we have a qualified pipeline of projects with both existing and new clients as demonstrated by our growing backlog.
Looking forward in the year, we intend to continue building out our business development focus in commercial by adding to our roster of sector experienced individuals and integrating other innovative initiatives. In the CEA sector, we continue to expand our vertical farming focus, albeit at a slower pace than anticipated due to ongoing sector capital challenges. While almost all of the related business that we currently engage in utilizes our professional services, we’re continuing to interface with a variety of new clients for which urban-gro is a perfect fit for fulfilling their urban vertical farming design build needs. As it relates to our business in the cannabis segment, we’ve remained active in delivering design build solutions as well as architecture, interior design and engineering services, both individually and also combined for both dispensaries and cultivation facilities.
As it pertains to our outlook on the cannabis sector, we believe that current market sentiment is more positive than it has been for a couple of years, fueled by heightened awareness and anticipated progress around potential regulatory changes. There are a few catalysts which could result in a significant and positive change in momentum for our business within this sector. First, on the federal level, the potential rescheduling of cannabis from Schedule 1 to 3 would provide operators with significant working capital increases resulting from the removal of the 280E related tax burden. We believe operators will use this significant incremental capital to fund future CapEx growth, including refreshing existing facilities and building out new ones.
Second, and again on the federal level, the prospects of successfully passing the SAFER Banking Bill continue to be discussed and would potentially include a capital markets clause that allows plant touching businesses to not only list on the larger exchanges but moreover provide more efficient access to capital. And third, at the state level, while progress continues to be made on legalization in multiple states, we believe the most impactful change would be in Florida. A successful vote to allow adult use recreational sales in the state would have a profound and sustained impact for the state’s operators. Now turning to our full year 2024 outlook and associated cadence. We anticipate consolidated revenues to be greater than $84 million, a 17% increase over 2023 and we expect to generate positive adjusted EBITDA.
While achieving these results are still heavily dependent on category revenue mix, the actions we took to reduce our SG&A expenses in 2023 have significantly reduced our revenue breakeven point for generating positive adjusted EBITDA relative to what we’ve previously communicated. For the first quarter of 2024, we’re providing some guidance on our expected results given we are approaching the end of the quarter, which is two days remaining. We expect revenues to be greater than $15 million and adjusted EBITDA to be greater than negative $0.5 million. Looking at the quarterly cadence for the year, we expect to deliver sequential quarterly growth of both revenues and adjusted EBITDA building to our entire full year guidance. In closing, as we look more broadly to 2024 and backed by both our closed contract backlog of $110 million and the $8 million reduction in annualized SG&A, we believe we are in the strongest position that we have been in over 18 months.
Further and supported by a qualified pipeline that continues to grow, we see increasing demand for our solutions in multiple sectors. With the right regulatory progress in the cannabis sector, we anticipate seeing a resurgence in our related business later this year. To date, urban-gro’s model is stronger, more durable and more efficient than it has ever been. Our business is fundamentally secure. And with the support of the working capital line of credit that we put in place in December, we do not see the need to bring new capital into the company at this time. Thank you. And with that, I will now turn the call over to Dick to discuss further details of the fourth quarter as well as full year 2023 results. Dick?
Dick Akright: Thanks, Brad. And good afternoon, everyone. Revenue was $15 million in the fourth quarter of 2023 compared to $17.3 million in the prior year period. This decrease was the result of reductions in all revenue categories, including construction design build revenue of $1.3 million, professional services revenue of $0.8 million and equipment systems revenue of $0.2 million. Construction design build revenue decreased due to several projects being pushed into 2024. The reduction in equipment systems and services revenue is a result of continued soft demand in the US cannabis market, because of ongoing state level regulatory delays in the license awarding process as well as the lack of movement by key industry financial support models, such as rescheduling and the SAFER Banking Act.
Gross profit was $1.7 million or 11% of revenue in the fourth quarter of 2023 compared to $3.2 million or 19% of revenue in the prior year period. The decrease in gross profit of $1.5 million correlates to the decrease in revenue as well as a shift in mix toward lower margin construction design build revenue. This was further impacted by a project cost revision in the fourth quarter that negatively impacted project profitability. Operating expenses were $6.4 million in the fourth quarter of 2023 compared to $6.2 million in the prior year period, representing an increase of $0.2 million. The increase in operating expenses was the net effect of an increase in general and administrative expenses of $3.8 million and a $3.3 million reduction in a onetime business development expense.
The increase in general and administrative expense was the result of increased professional fees associated with legal defense costs and increased personnel costs associated with an increase in the average number of employees. As Brad mentioned, we’ve been able to reduce our annual general and administrative expense spending by over $8 million, which will favorably impact our results in 2024. I’ll provide some more context on this a little later. Non-operating expenses of $0.1 million in the fourth quarter of 2023 related primarily to interest expense and were down significantly from $1.3 million incurred in the fourth quarter of 2022, which included an impairment loss of $1 million related to settlement of a litigation receivable and $0.4 million in expenses recognized from fully guaranteeing the remaining contingent consideration associated with 2WR acquisition.
Net loss was $4.7 million or a negative $0.40 per diluted share in the fourth quarter of 2023 as compared to net loss of $4.2 million or a negative $0.39 per diluted share in the prior year period. Adjusted EBITDA was negative $3 million in the fourth quarter of 2023 compared to negative $1.7 million in the prior year period. The decrease in adjusted EBITDA was driven by lower revenues and gross profit as well as an increase in general and administrative expenses. On a full year basis, we reported total revenue of $71.5 million compared to $67 million in the prior year, representing an increase of 6.7%. This increase in revenue was predominantly driven by the increasing momentum that the company has in the commercial sectors in which it operates outside of the CEA market.
Further, significant increases in construction design build revenues were offset by continued decreases in equipment systems revenues related to the sustained softness in demand in the US cannabis market. Net loss was $18.7 million compared to a net loss of $15.3 million and adjusted EBITDA was negative $9.7 million compared to negative $3.9 million in the prior year comparable period. Now turning to the balance sheet. We entered 2024 with $1.1 million of cash and a total of $2.5 million drawn on our $10 million working capital ABL that we put in place in December 2023. The line is serving its purpose and is providing us the necessary flexibility to manage our working capital needs, which are tied directly to our clients’ projects. In fact, the drawn balance at year end is tied to $8 million of anticipated collections that moved from late December 2023 to mid-January 2024.
We are consistently collecting on our AR and paying down our AP and the ABL provides flexibility needed to support our growth as we return to positive adjusted EBITDA in 2024. As was expected, increased construction design build revenue drove increases to receivable and payable balances on a year-over-year basis. Moving to reported backlog. Our total backlog as of December 31, 2023 was approximately $110 million, a $26 million or 40% sequential increase over the third quarter of 2023. Approximately half of this increase is attributed to the delayed project delivery that we experienced in the fourth quarter and detailed earlier. This backlog is comprised of $102 million in construction design build, $7 million of professional services and $1 million of equipment systems contracts.
As previously mentioned, in 2024, we have identified more than $8 million of general and administrative expense reductions as compared to 2023 to ensure that we will be able to achieve positive adjusted EBITDA based on our projected revenue in 2024. Those expense savings will correspond to reductions in personnel related expenses, professional fees, marketing expenses and a variety of other expenses across all departments. Additionally, in 2024, the financial services division of the company has set three primary strategic goals that I feel will assist the company in delivering more consistent results on a sequential basis. First, now that all entities are on the same ERP system, improved tactical reporting on a weekly basis will provide our business development and operations teams with better line of sight on projected performance, so they can both plan accordingly and adjust operating targets on a real time basis, including accelerated billing on construction design build projects to improve cash flow.
Second, drive cost reductions in insurance and facilities costs. And third, strategic utilization of the line of credit, which will enable us to better manage our vendor relationships in order to maximize our purchasing opportunities and reduce overall costs, primarily on construction design build projects, which will in turn aid in increasing margins on projects. That concludes our prepared remarks. Operator, please open the call for questions.
See also 13 Hot Stocks to Invest in According to Wall Street Analysts and 12 Best Stocks to Buy in Falling Markets According to Analysts.
Q&A Session
Follow Urban-Gro Inc.
Follow Urban-Gro Inc.
Operator: [Operator Instructions] The first question comes from Eric Des Lauriers with Craig-Hallum.
Eric Des Lauriers: First one from me, just hoping you could expand a bit on the project delays and especially the cost revisions in the quarter. We’ve seen a few or a couple of project delays in the past. Obviously, these things can happen with large projects. Cost revision is newer, I think. So just any more color on kind of what happened in the quarter would be very helpful.
Brad Nattrass: So in Q4, we had three projects that pushed. Two of them, it was on their kickoff date, which we expected to be in December. We still held hope at the start of December that they would kickoff. We procured started procuring materials to deliver to the site, and both clients asked to push back those kickoff dates until the first two weeks in January. So we did that. The third was an existing project, a recreation project that we had announced early in the year. And in Q4, we had expected significant revenues from the project, but it also pushed and there was no business completed in Q4. So those three contracts, they’re all active, recording revenue in Q1. And we expect them now to finish probably a quarter longer that’s why I said the majority would be complete in 2024, but they’ll go about a quarter longer than they were before.
Overall, with projects, I feel that we’re working on an increasing amount of larger projects. And as we come into 2024 and continue to sign new projects, one moving or two moving will have less of an effect on the organization. But now when one or two moves, it has a material effect. When three move, unexpectedly, it has the disappointing effect that we saw. In addition to that, our services, we at the time, it takes about a month after quarter end to reconcile all of the services revenue, and it was a surprising disappointment. Actually from the CEA sector, there was no work done by engineering in the fourth quarter. That’s resumed with momentum in Q1. The actions we took for that in the last couple of months, we now have an active line of sight on what’s happening at all times with our services and what’s been invoiced.
We did get everyone on the same ERP in the middle of 2023. And so as we give guidance for Q1 today with only two days left, we have a solid grasp on exactly where that is. And then finally on equipment, about a couple of million dollars in projects we held hoped it would be even higher than that just disappeared. They didn’t push. They just disappeared right at the tail end of 2023. So it’s very disappointing, of course, but it’s also — the strong news is with the construction contracts, they weren’t lost, it’s a timing issue. And it doesn’t hurt the long term fundamentals of the company, it’s just a timing issue and they moved into Q1. In terms of project costing, Dick, do you want to take that one, please?
Dick Akright: Yes, let me comment on that, Eric. We certainly did have a project that we had a cost revision, increased cost on that occurred during the quarter. We are working with the customer in order to negotiate a revision of that contract. But in the construction industry with the way things go in terms of the way we have to account for that, because we didn’t get those negotiations finalized by the end of the year, we couldn’t include a contract revision as part of our calculations for contract revenue and the contract cost, so we needed to have that flow through our financials with the way it is, which is the increased project costs right now. We are highly confident that we’re going to be able to negotiate an increase in the contract revenue for that project and that that that’ll come through in the first half of 2024.
But like I say, not too atypical in the construction industry when you have a situation like this, you just need to account, let the accounting happen as it does. And we just felt we needed to show that contract that cost revision for the quarter.
Eric Des Lauriers: And then just thinking about fiscal ’24 guidance, obviously Q1 we’re largely done right now. But in terms of just the overall guidance for $84 million in revs and then positive EBITDA, and I suppose for the sequential improvement in both of those from Q1 levels. I’m just kind of wondering what visibility you have on those, what visibility you have on potential project delays and cost revisions impacting future quarters? Is this something that with the ERP system now being on all — every entity is now on the same ERP system that you’ll have better visibility into some of these delays in cost revisions as well? I’m just kind of wondering, how to think about that guidance, both overall and the sort of cadence? And then just the follow-up to that is, if the guidance includes any of these potential legislative catalysts within it?
Brad Nattrass: I’ll start with the last one. The guidance does not include any of the potential catalysts in the cannabis space. We do have active design build projects in the space, Eric. And when — even existing legal states that have regulatory delays and haven’t awarded licenses like New York when they award licenses, we have clients, multiple clients in that state alone that have designs and spent a considerable — got considerable amount of money, some of them getting to CDs. But until their license is awarded, they cannot access their funds and therefore go to the build. So we do have that ongoing business. And we’re doing a lot of work right now, more and more work on dispensaries for our clients, both multi-state operators and single state operators across the country, some just design and some design build.
