urban-gro, Inc. Q4 FY2023 earnings call

• Diversification strategy: The company's commercial market revenues grew by $27 million (36%) in 2023, offsetting a 36% decrease in CEA revenues. • Headwinds: Prolonged softness in the CEA sector continued to impact equipment revenues, which had advantageous margins. • SG&A expenses: The company reduced annualized SG&A expenses by over $8 million in 2023. • Backlog: Total backlog as of December 31, 2023, was approximately $110 million, a 40% sequential increase from the third quarter. • Market trends: In the cannabis sector, potential regulatory changes like federal rescheduling or SAFER Banking Bill could impact business. In Europe, the cannabis market in Germany is developing slowly with social licenses. In the commercial space, the company serves sectors like post-secondary, healthcare, laboratories, and retail with a niche of single-point responsibility for projects under $50 million.

In 2023, urban-gro had total revenues of $72 million. Commercial markets contributed $50 million, which is 70% of the total revenues, and CEA contributed $22 million, making up 30% of the total. Equipment revenues decreased to a three-year low of $13 million in 2023, a $21 million (62%) decrease from 2022, and a $43 million (77%) decrease from 2021.

• 2024 outlook: Anticipates consolidated revenues >$84 million (17% increase from 2023) and positive adjusted EBITDA. • Q1 2024: Expect revenues >$15 million and adjusted EBITDA > negative $0.5 million. • Cadence: Sees sequential quarterly growth in revenues and adjusted EBITDA building to full-year guidance. • Expense reductions: Identified over $8 million of general and administrative expense reductions for 2024 to achieve positive adjusted EBITDA.

• Project delays: Unexpected delays in multiple projects in Q4 2023, though contracts weren't lost. • Regulatory uncertainties: Potential lack of progress in cannabis regulatory changes (federal rescheduling, SAFER Banking Bill, state legalization) could impact related business. • Soft CEA demand: Continued softness in the CEA sector remains a material headwind to financial performance.

Q: Expand on project delays and cost revisions in Q4.

A: Brad Nattrass mentioned three projects pushed into 2024, with one existing recreation project having no business in Q4. Dick Akright noted a cost revision on a project, working with the customer to negotiate a contract revision.

Q: About fiscal '24 guidance and visibility on delays/cost revisions.

A: Brad Nattrass stated guidance doesn't include cannabis catalysts, and with the ERP system, they have better visibility but can't completely rule out delays. Dick Akright added the new ERP system improves insight into construction design build projects.

Q: Backlog color and industries.

A: Brad Nattrass said $110 million backlog, 70% from CEA, with commercial sectors including post-secondary, healthcare, laboratories, retail. The company has a niche of single-point responsibility for projects under $50 million.

Q: SAFER Banking Act and international markets.

A: Dick Akright said the SAFER Banking Act could help operators access capital, and Germany's cannabis bill (social licenses) has slow near-term opportunity with existing operators.

Q: Commercial space niche and equipment business.

A: Brad Nattrass said the niche is single-point responsibility for projects under $50 million. On equipment, it's tough but they focus on strategic partnerships and energy rebates to improve margins.

Q: 2024 guide and adjusted EBITDA breakeven.

A: Brad Nattrass and Dick Akright explained that SG&A reductions and improved margins have lowered the revenue breakeven point for positive adjusted EBITDA, now around $16-19 million in revenue.