urban-gro Inc (UGRO) 2020 Q4 法說會逐字稿

Hello, and welcome to the urban-gro fourth-quarter and year-end 2020 earnings conference call. (Operator Instructions) Note that this conference call is being recorded at the company's request and will be made available on the company's website following the end of the call.

At this time, I'd like to remind all listeners that remarks made during this call state that management's intentions, hopes, beliefs, expectations, or future projections. These are forward-looking statements and involve risks and uncertainties. Forward-looking statements on this call are made pursuant to the Safe Harbor provisions of the federal securities laws and are based on urban-gro's current expectations, and actual results could differ materially. As a result, you should not place undue reliance on any forward-looking statements.

Some of the factors that could cause actual results to differ materially from these contemplated by such forward-looking statements are discussed in the periodic reports urban-gro files with the Securities and Exchange Commission. These documents are available in the Investors section of the company's website and on the Securities and Exchange Commission's website. We encourage you to review these documents carefully.

I would now like to turn the call over to Mr. Bradley Nattrass, Chairman and CEO of urban-gro. Mr. Nattrass, please go ahead.

Thank you, Diego, and good morning, everyone. We appreciate you joining us and are honored to have so much interest. We've come a long way in the last year. And after just completing the $62 million raise and Nasdaq up-listing in February, this is our first earnings call, and we couldn't be more excited to finally start telling our story as we continue to deliver results.

My name is Bradley Nattrass, I'm the Co-Founder, Chairman, and CEO of urban-gro. And joining me on the call today is our Chief Financial Officer, Dick Akright, who you'll hear from later.

To begin our call today, I'd first like to discuss who we are, why there's a demand for our solutions, and how we're naturally expanding our reach? For those new to the story, urban-gro is an engineering and design services company that's successfully integrating complex environmental equipment systems into high-performance facilities in the global Controlled Environment Agriculture segment.

Further, for facilities that are already operational, we offer a managed services platform that leverages our expertise and provides our clients with a suite of service solutions to prevent downtime and drive continuity at the facilities. In summary, we program, engineer, design, procure, supply, integrate, commission, and support custom, indoor, control environment ag facilities.

Based in Colorado, we have 47 employees, of which approximately two-thirds we refer to as experts: professional engineers, mechanical, plumbing, agricultural, controls engineers, master of plant science, horticulturists, environmental scientists -- overall, a group of individuals who have a strong history of growing multiple-crop types. It's these skill sets and the expertise acquired from working on more than 300 Controlled Environment Ag facilities that sets us apart and provides our competitive advantage.

From the client's perspective, and apart from our facility project work, it's our willingness to solve the toughest issues that they face, whether it be an odd-shaped building that requires cultivation space programming to make most efficient use of the space and, in turn, maximize yield for them.

Or perhaps an underspecified mechanical system that needs to be optimized, or perhaps a severe pest outbreak that requires our plant scientists to not only solve but then design an integrated pest management program to proactively prevent further future outbreaks. It's this dedication to work side-by-side with our clients that attracts new business and drives continued revenue growth and market share.

We have the company secured in the right position. We're now poised to make -- to take advantage of not one but two significant market opportunities in Controlled Environment Ag. After working primarily in the legalized cannabis space over the last six years, we've acquired a massive knowledge and momentum. And not only are we continuing to capture more market share in the global cannabis market, we're also aggressively expanding our reach within a second horticulture subsegment, food-focused vertical farming.

Before I discuss the business highlights in greater detail, I'll first have Dick present our results for the fourth quarter and fiscal-year 2020. And along these lines, it's important to note that both Dick and I will be discussing some non-GAAP metrics on the call, primarily adjusted EBITDA. This is defined as net income or loss determined in accordance with GAAP, but it excludes the effects of certain non-cash (inaudible) expenses. These include, but are not limited to, interest expense, stock-based compensation, and the depreciation and amortization of assets. Dick, please take it from there.

Thanks, Brad, and good morning, everyone. First, I want to say that, after joining the company in early 2019, I must say that I'm very proud to have been part of the team to build the company into the entity which we are today. And that's one that is not only trading on Nasdaq but has the substantial cash position that will fuel future smart growth. So with that, I'd like to get started.

We finished the year with a lot of momentum. In the fourth quarter of 2020, we had total revenue of a record $9.2 million versus $7.1 million in the fourth quarter of 2019, which was an increase of 29% due primarily to an increase in cultivation equipment sales.

Our adjusted EBITDA was $0.2 million versus a loss of $1.2 million in the same period last year or an improvement of $1.4 million, due primarily to reduced operating expense and improved gross margin. Net loss was $1.1 million, which compares favorably to a net loss of $2.6 million in Q4 2019 or a $1.9 million improvement.

For fiscal-year 2020, net revenue was a record $25.8 million versus $24.2 million in 2019, which represented an increase of 7%. We're pleased with the revenue increase on a year-over-year basis, given the impact of COVID-19 in the first half of 2020.

Although we did not lose any projects, we did have delays of two to three months on the majority of our contracts. This is clearly evidenced by the revenues recognized in the first half of the year compared to the second.

Revenues in the first half of 2020 were $8.2 million, which was a 28% reduction versus the first half of 2019. In the second half of 2020, revenues were a record $17.6 million or a 38% increase over the second half of 2019. Moreover, in demonstrating strong momentum, we ended 2020 with over $14 million of backlog, which we defined as contractually committed orders for which revenue has not been recognized.

Adjusted EBITDA for full-year 2020 was a loss of $0.7 million versus a loss of $3.3 million in the prior year, an improvement of $2.4 million, driven primarily by reduced operating expenses on a year-over-year basis. Net loss for 2020 was $5.1 million versus a loss of $8.4 million in the prior year, an improvement of $3.3 million.

The reduction in our operating expenses in 2020 was as expected and planned, reflecting our focus on decreasing our overall operating expenses, which was an initiative that we began in 2019. This also reflects the lack of in-person trade show participation for the majority of the year due to the pandemic.

We will continue to report backlog on a quarterly basis. We expect to realize the majority of the $14 million backlog reported at the end of 2020 within the first two quarters of fiscal-year 2021.

Moving to the balance sheet. Cash as of December 31, 2020, was $0.2 million compared to $0.4 million at December 31, 2019. However, with the proceeds from our equity raise in February 2021, our cash position, as we sit today, is $50 million, ensuring that we are well positioned to take advantage of a variety of opportunities available to us in the marketplace.

Net debt as of December 31, 2020, was $8.2 million compared to $3.9 million on December 31, 2019, which reflects the new debt we took on in the first quarter of 2020. From the proceeds of the equity raise, we repaid $5.8 million of debt in February 2021, and another $1.9 million of debt as of December 31, 2020 was converted into equity, leaving us today with only $1 million of remaining debt.

Additionally, I want to point out that we have a very clean capitalization structure with only common stock outstanding and no preferred shares or convertible debt components to our equity structure.

We continue to progress on bringing urban-gro to balance top- and bottom-line growth and profitability as we continue to make progress in reining in our operating expenses, scaling our offering and reach, adjusting our revenue mix, more aggressively focusing on further building out our higher-margin services offering, and investing in our future. While we are pleased with the progress that we're making, we understand that we have more to do, and we're working diligently to deliver continued value to our shareholders for fiscal 2021.

In summary, we're pleased with these results given the challenges that we encountered. Entering 2020, we've set a goal to be operational cash flow positive by the fourth quarter. And we not only met this goal, but we also ended the year with back-to-back cash [flow], positive quarters.

As previously stated, these improvements in adjusted EBITDA and net loss were primarily driven by a reduction in operating expenses on a year-over-year basis as we were laser focused on attaining our goal and made adjustments accordingly. With that, let me turn the call back to Brad to present some business highlights. Brad, I'll hand it back to you.

Perfect. Thanks, Dick. For this portion of the call, I plan to discuss a few highlights from 2020 that evidence the tailwinds for the business, which we believe will continue to favor urban-gro. And I'll also further provide a summary of some more recent updates as well.

First and very important to the future state of the company, we're continuing to build out our managed services offering, which we branded, gro-care. This platform leverages urban-gro's commissioning engineers, our experts as I touched on earlier, and our acquired expertise to provide a suite of important services to our clients once their facilities are operational.

Through a monthly subscription model, this program offers solutions that prevent downtime and drive business continuity, and are offered at a fraction of the cost of the alternative, clients in-house staffing these specific skill sets.

Some of the services provided include: ongoing access to our experts for troubleshooting; ongoing staff training on complex environmental equipment systems; maintenance plans to assist in maintaining assets; complete facility audits and, in turn, optimization recommendations; peer reviews on mechanical systems; integrated pest management troubleshooting services; and the proactive design of IPM crop protection programs; and in 2021, we intend to add in a facility, remote monitoring component as well.

While gro-care is in early development, we just soft launched it in the second half of 2020. We believe it will prove to be very significant to both the company and shareholders in the long run as it will provide increased visibility to future revenue and earnings due to its recurring platform, higher service-based gross margins to drive further profitability, and strong valuations for the business.

The second highlight I'll touch on today revolves around urban-gro's evolution to a position of becoming crop-agnostic with our solutions. The majority of our revenue to date has been derived from working with clients in the cannabis segment, and working with the highest value crop in the world has been invaluable.

While we most definitely see sustained increasing demand and continue to aggressively target globally, we've also begun expansion into providing our solutions to food-focused vertical farming facilities as well. It's a market that's forecast to exceed $13 billion by 2026 in the US alone.

Based on an internal market study conducted in 2020, we determined that regardless of the crop, whether it be cannabis or herbs or leafy greens, these indoor Controlled Environment Ag facilities are built using the same services and the same complex environmental equipment systems that we offer today. In fact, earlier this month, we announced that we signed our first engineering and design contract in Canada with a leafy-greens-focused vertical pharma company.

The third highlight focuses on our expansion to Europe. The European market represents a tremendous opportunity for urban-gro. In my opinion, it's a market that's very similar to where the US and Canadian cannabis markets were four to five years ago.

The market, which is today estimated as low as $250 million, is forecast to exceed $30 billion in the next decade. And there's a strong demand, not only for urban-gro's service and equipment solutions, but we believe future demand for our gro-care solution as well.

While we delayed opening an office in Europe due to the pandemic last year, we did still begin executing upon our expansion strategy and booked six-engineering design contracts within Europe in 2020. Further, we're continuing to build on this momentum and the global integrated partnerships that we formed. As announced last week, we signed two commercial representation agreements in the Netherlands and France, focused on a large part of the European marketplace.

The fourth highlight focuses on launching our turnkey facility offering. We've identified a gap in the market, and we're in the process of building a solution to fill it. There's an increasing demand for end-to-end solutions in the form of complete turnkey Controlled Environment Ag cultivation facilities.

And by making just two to three acquisitions, in our opinion, we believe we can tap into these significant revenues. We're targeting, in terms of acquisitions, accretive, synergistic, service-focused companies -- service companies that complement our existing business with a cascading effect to further increase revenues and profit margins.

The fifth and final highlight, and of course the most exciting development for the company this year, revolves around our recent $62 million financing and Nasdaq up-listing. It's definitely a game changer for urban-gro. And we're now funding our growth plan and leveraging every avenue to take advantage of our forward momentum.

Our continued commitment to our team, our clients, our vendor partners, and our shareholders, combined with our strong financial position will allow us to deliver the vision and promise that we've been building this entire time. With that, we'll now open the call to questions. So I'll turn the call back over to the operator to administer. Diego, please proceed.

(Operator Instructions) Michael Layman, Emerald Shoals Targeted Opportunities.

Congratulations on your recent up-listing to the Nasdaq. My question is what percentage of your revenues are equipment sales? What are the margins for equipment and service revenues? And what do you expect them to change or be in 2021?

Thanks, Michael, for your questions. A combination of cultivation equipment and complex environmental equipment systems such as environmental controls and mechanical systems, today represents approximately 85% of our revenues. That really ebbs and flows; it was 76% in 2019.

Looking forward, I look at the proportion in terms of percentage of revenue. And because we're [intergrating] a mechanical system offering in 2021 into our offering, it's going to drive revenues higher. So I think it's important for urban-gro to look in the future at margin dollars from equipment sales versus margin dollars that are driven from service solutions.

Going a little bit deeper, with the effect of COVID, our new contracts -- new design contracts were really affected the most. I would say, they had about a three-month delay tied to them. Dick, would you add to that at all?

I think from that perspective, you're right on with regard to talking about it really ebbs and flows from the standpoint of what's required by our customers in terms of if they're needing certain types of equipment sales at any given point in time.

I think an additional part of what the question was, was kind of what the range of our gross profit margins have been. For our services, those are typically in the 30% to 60% range. And then the customized equipment systems, those can range anywhere from mid-teens to mid-30%, and it just depends on the type of systems being offered.

And I would echo what Brad said, though, we're highly focused on the gross margin dollars, not necessarily so much on the equipment side on what the percentage is. We want to make sure we offer a full-equipment solution or product offering to our customers. So we focus on doing that as part of delivering our end result.

Ed Antoian, Zeke Capital.

I've got a couple of questions, all kind of centered around backlog. Number one, what percent in any quarter, maybe a range in a quarter, would you have revenue recognized that booked and billed in the quarter, i.e., it wasn't a backlog at the beginning of the year or the beginning of the period? And second, can you update us on backlog as of 3/31?

Perfect. Dick, do you want to take that one?

Sure. With regard to kind of within the quarter, Ed, it's -- to your point, it's a range. It can be anywhere from, I'm going to say, 20% to 50%. And again, it depends on the type of equipment being ordered or required by the customer when they sign for that type of equipment and to the extent there's any kind of backlog with the vendors. But I'd say, the range is typically 20% to 50%.

With regard to the second part of your question on an update on backlog, we'll have one in the next couple of weeks. We are looking to do similar to what we've done in the past, which was basically pre-announce on the quarter. And as part of that, we will include an update on our backlog.

And I'll add to that, Ed, a little bit. On a quarterly basis, the three metrics that are important that -- I feel important for our shareholders to track, our revenue, adjusted EBITDA, and backlog really shows the momentum. To fill in a little more around in a specific quarter, a project end-to-end can take anywhere from 12 to 16 months to go from design all the way through to commissioning.

But we also fill in those peaks and valleys of the project with single-design contracts or peer reviews or gro-care services. And even have sometimes, if it's placed early in the quarter, we do have some lower-lead time cultivation equipment solutions that can still ship within that quarter.

There are no further questions at this time. I'll now turn it back to Mr. Nattrass for closing remarks.

Well, thank you, Diego. I greatly appreciate it. If I may, I'd like to take this opportunity to thank the very talented, loyal, and dedicated team that we have at urban-gro. Their work truly drives our success. And as I referenced earlier, our greatest asset, that's unfortunately not on the balance sheet, is our people. Without them, we wouldn't have gotten through all the challenges we faced in our short history, nor would we be set up for such a stellar 2021 as we are now.

I also want to thank our manufacturing partners, who closely worked with us throughout the engineering, integration, and commissioning process; our many clients who entrust us with their business; and of course, our shareholders for supporting our vision.

In closing, urban-gro continues to make exceptional progress as we execute on our strategy; capitalize on our momentum; and focus our energies and resources on growing top line revenues; increasing gross margins; continuing to build on our positive adjusted EBITDA and backlog trends; and finally, expanding our global reach while delivering sustainable value to our clients and our shareholders.

This is just the beginning of what I believe will be a transformational year for us. It's actually already started. We're at the right place, the right time. And with the global momentum in both cannabis and food-focused Controlled Environment Ag, we're a properly capitalized company that's excited for the journey. But in my opinion, it is really just getting started, and we're excited to bring you with us.

I thank you all again for your interest. We look forward to updating you on our progress during the 2021 first-quarter earnings call. Thanks, and have a wonderful day.

Thank you. And this concludes today's conference. All parties may disconnect. Have a great day.