urban-gro, Inc. Q3 FY2022 earnings call

• Exceeded revised guidance on revenue and adjusted EBITDA, though not satisfied. - Sector and capability diversification strategy paying off, with backlog at a record $67 million. - Acquired DVO, a 24-person engineering firm in Texas, adding expertise in mechanical, electrical, plumbing, and fire safety engineering, and planning a hub in Houston. - Success in commercial sector with over $50 million of new Design-Build contracts signed in the third quarter from CEA, health care, and industrial clients. - Combined team over 150 employees, enabling address of larger market and adjacent opportunities.

In the third quarter of 2022, urban-gro achieved revenues of $12.4 million, which was above the third quarter guidance of $10 million to $11 million. Construction Design-Build revenue increased by $5.4 million year-over-year, and Professional Services revenue increased by $1.4 million, driven by synergies from acquisitions. However, cultivation equipment revenue decreased by $12.6 million due to macroeconomic conditions and regulatory delays in the cannabis sector. The total backlog as of September 30, 2022, was approximately $67 million, with $56 million in construction Design-Build, $6 million in Professional Services, and $5 million in equipment systems contracts. Revenue for the first nine months of 2022 was $49.7 million, an increase of 15% compared to the prior year.

• Anticipates Q4 revenues to be approximately $17 million and adjusted EBITDA loss to be approximately negative $1.5 million, influenced by expenses for team building and European operations investment. - Looks forward to 2023 with expanding backlog, expecting continued accelerating demand for Professional Services and construction Design-Build across sectors, and material increase in equipment sales with cannabis sector recovery.

• Macro-economic conditions affecting cannabis sector capital expenditures. - Regulatory delays in cannabis license awarding process. - Potential impact of SAFE Banking Act uncertainty on cannabis industry funding. - Risk of talent acquisition bottlenecks in hiring qualified personnel to fill open positions.

Q: Can you help us understand the mix between CEA and non-CEA in contract wins?

A: About 75% of the $67 million backlog is in the CEA space (majority cannabis), and 25% is other. For construction Design-Build, about 80% of the $67 million backlog. The CPG company deal is from a long-term relationship with Emerald Construction Management.

Q: On the M&A front, what's still on your wish list?

A: One part of CEA not involved is greenhouses and food-focused CEA. Investing in European operations, with strategic work with architect and engineering firms in different European countries. Also, acqui-hiring and looking at right talent and contracts.

Q: Thoughts on Europe, especially with potential cannabis legalization in Germany?

A: Europe's food horticulture market is in downturn due to energy prices. Urban-gro's strength is in cannabis side in Europe, with Germany opening up and building facilities in-country instead of importing. Active in Portugal, Greece, The Netherlands, UK, Israel, etc.

Q: Risk of bottleneck in hiring qualified personnel?

A: Using job placement firms, cross-training, and having 8 offices in US helps. Not worried about bottleneck as CEA projects have time frames (18-24 months for CEA, 6-9 months for commercial), and working to secure high-quality talent quickly.

Q: Impact of SAFE Banking Act on urban-gro?

A: Impact is being ready to service clients when they are funded. Confidence SAFE Banking Act will pass in lame-duck session, allowing banking for single and multistate operators, though impact on MSO uplift to larger exchanges uncertain in short term.

Q: Progress on end-to-end contracts?

A: In cannabis, large full Design-Build of cultivation facility and dispensaries in backlog, with other contracts depending on state legalization and financing. In food CEA, signing multiple contracts per month with vertical farms, but not yet Design-Build; ready when opportunity presents.