urban-gro, Inc. Q2 FY2023 earnings call

Key Points

• Evolution into a professional services consulting firm continues with expansion into industrial, commercial, and healthcare sectors.
• Sequential improvement in revenues and adjusted EBITDA in Q2, with a quarter-end cash position increase and zero bank debt.
• Reduced SG&A by $2.9 million year-to-date to optimize spending, making the organization leaner and more efficient.
• Sector diversification helps insulate the business from vertical farming sector weakness, with ~two-thirds of Q2 revenue from non-CEA markets.
• CEA equipment sales had first sequential increase since Q2 2022, though professional services revenue in CEA is affected by the downturn.
• Backlog decreased to $79 million at Q2 end due to a paused cannabis project, but multiple contracts are out for signature.
• Leadership team has engaged in stock buying and salary deferral to align with shareholder interests.

In the second quarter of 2023, urban-gro generated net revenue of $18.8 million, representing a 12% sequential improvement over the first quarter and a 16% improvement over the prior year. Adjusted EBITDA was negative $2 million, a significant $1.4 million improvement over the first quarter. Construction design build revenue increased by $8.1 million due to the Emerald acquisition in April 2022. Professional services revenue was $3 million, relatively flat year-over-year. Equipment revenues decreased $5.5 million year-over-year but increased ~59% sequentially from Q1 and more than 2 times Q4 2022. Gross profit was $2.9 million (15% of revenue) in Q2 compared to $3.5 million (22% of revenue) in the prior year period, driven by revenue mix changes with lower margin construction design build revenue offsetting higher margin equipment systems revenue. Approximately two-thirds of the quarter's revenue were from non-CEA targeted markets.

Guidance

• Full year 2023 consolidated revenue guidance revised to $90 million to $95 million.
• Adjusted EBITDA guidance revised to a range of negative $6 million to negative $5 million.
• Anticipate sequential increases in revenues and adjusted EBITDA in the third and fourth quarters, with neutral or breakeven adjusted EBITDA expected in the second half of the year.

Risks

• Challenges in the cannabis market, including regulatory delays in legal states, funding uncertainty for projects, and cautious CapEx expenditures by multi-state operators.
• Macroeconomic conditions impacting the overall business environment.
• Dependence on resolution of regulatory and funding issues in the cannabis sector for future growth.

Q: Can you talk a little bit about the G&A and ERP?

A: Brad Nattrass and Dick Akright discussed that G&A cuts made will provide benefits, and the ERP system was combined from multiple systems to improve operations and reporting, enabling better visibility into project profitability.

Q: Could you also talk a little bit about the cannabis projects and non-CEA pipeline?

A: Brad Nattrass explained that a cannabis design build project is paused, but there are over 20 design build projects in the cannabis space held up by regulatory issues. On non-CEA, there's strong repeat business and opportunities to integrate equipment into projects.

Q: When looking at the guidance for the year, how to think about the cadence?

A: Brad and Dick Akright stated there's a strong sequential lift into Q3 and continuing growth into Q4, with focus on margin improvement.

Q: Update on planned expansion in Europe and backlog contracts?

A: Brad Nattrass mentioned Europe has progress in Portugal and South Africa but market challenges, and backlog contracts out for signing are expected to be signed in Q3 with clearer communication on contract details.