urban-gro, Inc. Q2 FY2022 earnings call

Key Points

• Team resilience amid cannabis industry headwinds.
• Backlog of professional services contracts strong with over 150 open service contracts.
• Diversification strategy ongoing, including sector and European business development.
• In cannabis, despite equipment sales delays, pipeline is strong and expected to rebound in Q4.
• In food-focused vertical farming, strong momentum in North American and International markets.
• In commercial sector, diversification into industrial and healthcare segments via acquisitions like Emerald Construction Management, leading to new contracts.

In the second quarter of 2022, urban-gro achieved revenue of $16.3 million, representing a 27% growth compared to $12.8 million in the second quarter of 2021. For the three business sectors:

• Cannabis: Impacted by uncertain federal regulation, licensing delays in various states, and reduced access to capital, leading to temporarily delayed cultivation equipment spending. However, the pipeline of contracts is strong.
• Food-focused vertical farming: Continues to see strong momentum in North American and International markets, with increasing interest and demand for services due to food security concerns and environmental/geopolitical events.
• Non-CEA focused commercial: Represents diversification into industrial and healthcare segments. The acquisition of Emerald Construction Management has led to new design build and related contracts, strengthening prospects and pipeline. Revenue contribution details: Total revenue $16.3M, with equipment systems revenue down, construction design build revenue up $2.9M, and services revenue up $2.7M.

Guidance

• Withdrawn full-year 2022 guidance, shifting to quarterly guidance.
• Anticipates Q3 revenues to be in the range of $10 to $11 million and adjusted EBITDA loss to be in the range of $2.6 million to $2.4 million.
• Expect cultivation equipment sales to resume upward trend in Q4.
• Took steps to optimize resources, creating approximately $1.25 million of annualized savings to remain nimble and protect adjusted EBITDA.

Risks

• Macro-economic and industry forces impacting cannabis sector, leading to delayed cultivation equipment spending.
• Licensing delays in various states affecting progress in cannabis markets.
• Reduced access to capital and higher capital rates forcing industry operators to delay plans, impacting equipment sales.
• Supply chain issues affecting equipment procurement and sales timelines.

Q: Assessment on current capital environment in CEA industry versus cannabis?

A: CEA space sees large operators in food space raising hundreds of millions, while Europe has some weakness in cannabis funds but expects increase in fall.

Q: Sales cycle for design build side?

A: End-to-end design build is about 18 months, architecture up front is 3-4 months, engineering stage is when equipment is purchased. Supply chain issues can be mitigated.

Q: Opportunity in Europe, revenue generation and margins?

A: European business to start with services contracts leading to equipment sales. Cannabis services business has 50% margins. Food side dependent on Urban Health Farms signing end-user deals. Design build in Europe has 10%+ margins with high margin services ahead.

Q: How long will larger operators and MSOs scale persist and role of regulation?

A: Persistence depends on regulatory changes. Once institutions can invest in larger operators, they'll have funds to grow quicker. Regulatory changes will benefit the industry overall, and urban-gro has a turnkey dispensary offering now.