urban-gro, Inc. Q4 FY2022 earnings call

Management Statement and Operational Highlights

• 2022 was a year of evolution with sector diversification, including acquisitions of Emerald Construction Management and DVO engineering, appointment of a new COO, and opening of a global office in the Netherlands.
• Recorded a signed contract backlog of $93 million at the end of 2022, a sequential quarterly increase of nearly 40% and over three times the 2021 end-backlog.
• 2022 revenues: $17.3 million in Q4 and $67 million for the full year. Adjusted EBITDA was negative $1.66 million in Q4 and negative $3.9 million for the full year.
• Post-acquisition integration of DVO Engineering is proceeding nicely, increasing professional services revenues and margins.
• The commercial sector is bridging the short-term gap with a strong pipeline of projects, including master services agreements.
• In the CEA sector, there's demand from produce-focused clients but challenges with cannabis-focused clients due to regulatory delays.
• Expanded offering to include retail dispensaries in Q4, engaged in over a dozen dispensary projects across the country.

Segment Performance

• Construction Design Build: Fourth quarter revenue increased by $11.5 million year-over-year. Full-year 2022, construction design build revenues were boosted by acquisitions. Backlog at end of 2022 included $82 million in construction design build.
• Professional Services: Fourth quarter saw a $0.3 million year-over-year increase due to acquisitions. Full-year 2022, professional services revenue was enhanced by acquisitions, with backlog having $6 million in professional services.
• Cultivation Equipment: Fourth quarter decreased by $13.3 million year-over-year due to softness in the cannabis sector. Backlog at end of 2022 had $5 million in equipment systems contracts.

Guidance

• Full-year 2023 consolidated revenue expected to be between $100 million and $120 million. Adjusted EBITDA expected to be between negative $3 million and slightly positive.
• Q1 2023 revenue expected to be slightly below Q4 2022 due to delayed project kickoffs, but sequential quarterly growth in revenue and adjusted EBITDA is expected from Q2 through the rest of 2023.
• Anticipates positive sector expansion in the cannabis sector’s CapEx spending to resume later in the second half of 2023.

Risks

• Regulatory delays in cannabis license awarding impacting CapEx spending in the cannabis sector.
• Macro factors such as tightening credit and rising interest rates potentially affecting capital equipment purchases or longer-term contracts, though no issues observed with recent banking events.
• Uncertainty in project timing due to the current economic environment.

Question and Answer Q: On the commercial side trends and how much of the backlog is commercial versus CEA?

A: Brad states about 80% of the backlog is CEA and ~20% is commercial, expecting two-thirds to be CEA and one-third commercial by end of 2023.

Q: Visibility into the cannabis rebound in the second half?

A: Brad talks about regulatory issues in states, using New Jersey as an example where clients move from design/build to equipment sales 3-6 months later.

Q: Big backlog build and integration success?

A: Mention of a $20 million design build contract in New Jersey, backlog consists of signed contracts with varying timelines.

Q: Impact of macro credit, interest rates on contracts?

A: Backlog with well-funded clients, no issues seen with recent banking events, equipment CapEx down due to lack of retrofits.

Q: Europe cannabis timing and future acquisitions?

A: Germany waiting for EU ruling, team attending trade shows, focused on adding key team members instead of M&A for larger projects.