UGRO

Hello, and welcome to the urban-gro First Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please note that this conference call is being recorded today, April 30, 2024 and a replay will be made available on the company's website following the end of the call. At this time, I'd like to turn the conference call over to Christian Monson, urban-gro's Executive Vice President and General Counsel. Sir, please go ahead.

Good afternoon, and thank you for joining us. Today's call will be led by Brad Nattrass, Chairman and Chief Executive Officer; and Dick Akright, Chief Financial Officer. I'd like to remind our listeners that remarks made during this call will include a discussion of non-GAAP metrics, including adjusted EBITDA and backlog. These items should not be utilized as a substitute for urban-gro's financial results prepared in accordance with GAAP. Reconciliations of our GAAP net loss to adjusted EBITDA are available in our press release and in our Form 10-Q filed with the Securities and Exchange Commission. It can be accessed from the Investor Relations section of our website at ir.urban-gro.com. On this call, we may state management's intentions, 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. 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 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 do encourage you to review these documents carefully. Lastly a copy of our earnings press release and website for replay for today's call may be found on the Investor Relations section of our website which again is ir.urban-gro.com. With that I will now turn the call over to Brad.

Thank you, Christian and good afternoon, everyone, and thank you for joining us today. What a phenomenal day for the cannabis industry. As I'm sure most of you are now aware a few hours ago there were credible reports in the media indicating that the US Drug Enforcement Agency is supporting the Department of Health recommendation to reclassify cannabis from the most stringent Schedule I to the less stringent Schedule III, in turn providing a long awaited catalyst for the cannabis industry. While there still is a review period to complete with the expected removal of the 2 ADE-related tax burden from the DOJ addressing state run programs through a guidance memo, we believe many cannabis operators will realize significant increases to their working capital that in turn could be reinvested in their business infrastructure to refresh existing facilities and build out new ones. For the last 2 years, I'm proud to sit on the board of the National Cannabis Roundtable alongside CELs from some of the leading multi-state operators in this space. The tireless dedication of MSL leaders like these and the lobbying efforts from organizations like NCR that has paved the way for our industry and the exciting wins along the way. As it relates to what this news and the subsequent final approval of rescheduling means for urban-gro's future, it's significant. With over 1000 projects completed in the cannabis market over the last 8 years, with 120 employees which include architects, engineers construction managers and horticulture, as urban-gro the leading professional services firm in the cannabis industry that refreshes existing operations, designs and or build new dispensary and cultivation facilities and further procures and integrates cultivation equipment solutions as well. The successful rescheduling of cannabis is a long-awaited catalyst that we've anticipated to reinvigorate an industry. It has been facing strong headwinds for the last couple of years. With that said and moving on, I'm excited to report that in the first quarter, we had positive cash flow from operations and in turn delivered our strongest quarterly and adjusted EBITDA results in 2 years. This improved performance is attributed to both the diversified revenue streams that we've been seeking and building out, as well as our focused efforts throughout 2023 to reduce operating expenses on a go-forward basis. Today our multi-sector focused professional services and design build firm, operates out of offices in 3 states and Europe and our targeted markets extend from the cannabis and vertical farming sectors, to also include light industrial, commercial, hospitality, recreation, education and healthcare sector. Looking at the highlights from our first quarter performance, both revenue of $15.5 million and a slight adjusted EBITDA loss of $0.3 million beat our quarterly guidance. The $3.1 million year-over-year improvement in adjusted EBITDA was driven by a combination of reduced operating expenses and strengthening margins. It relates to the reduced expenses, as a result of the optimization efforts made in 2023, we began to benefit from the previously communicated $8 million reduction in general and administrative expenses. In fact, we realized the $2.8 million improvement from the first quarter versus Q1 of 2023. The margin growth in the first quarter was tied to both increased productivity from our professional services providers, as well as the strengthening of our returns delivered by our construction business and further backlog remained strong at $99 million. As a result relating to full year 2024, we are maintaining our guidance to recognize more than $84 million in revenue and to generate positive adjusted EBITDA. I'll further note, that this does not take into consideration today's rescheduling related developments, as there are still unknowns including timing that need to be clarified. Looking at market trends, diversification has most definitely assisted in insulating our business from the previously discussed headwinds that we've been facing within the cannabis and vertical farming sectors for the last couple of years. Consistent with the sector breakout in 2023, in the first quarter approximately 72% of our revenues came from the commercial sectors that we serve and 28% from Controlled Environment in Ag. In the commercial sector, our client base continues to be comprised of top tier companies that include Fortune 50 and 500 firms and revenues recognized in the quarter were from a combination of ongoing and new projects. In the cannabis sector, while the market sentiment has been stronger than it has been in more than a year especially after today, we're actively engaged with clients on multiple fronts. However, cautious optimism has been the status quo for operators so far this year. In the interim, and while we wait for the rescheduling narrative to play out in the months ahead, we're expecting to see steady activity and to continue signing both services and construction contracts and legal markets across the US as operators work through persistent state-level regulatory and legal delays. This being said, in addition today's announcement through a couple of key additional catalysts, which could also result in a significant and sustained positive change in momentum for our business. First, on the federal level, there's prospects of successfully passing a banking related bill by year-end continues to be discussed of particular importance. This would potentially include a Capital Markets clause, that allows plant-touching businesses to list on the larger public market exchanges, providing a more efficient path for them to access capital and create greater liquidity, as would attract institutional investors that can participate via these exchanges or provide capital directly to the issuers. Second, at the state level progress continues to be made on legalization in multiple states. We maintain our position, but the most impactful change would be in Florida, the nation's third most populous state and one of the fastest growing in the country. Now that it's confirmed to be on the ballot in November, a successful vote to allow adult use recreational sales would have a profound and sustained impact for Florida operators and we anticipate for urban growth as well. In closing, and supported by our $99 million backlog, our qualified pipeline the recognition of last year's $8 million our general and administrative expense reduction and today's positive regulatory developments, we believe that we are well positioned to continue building momentum through the end of the year and beyond. Thank you. And with that, I will now turn the call over to Dick.

Thanks Brad. In the first quarter of 2024, we generated revenue of $15.5 million, which represents a sequential improvement of $0.5 million or 4% over the $15.0 million of revenue generated in the fourth quarter of 2023 and a $1.2 million or 7% decrease over the $16.8 million of revenue generated in the prior year period. The decrease in revenue over the prior year period was driven by a $0.4 million decrease in construction design-build revenue, which reflected a decrease in the number of projects and average size of projects during those periods. Equipment Systems revenue decreased by $0.4 million and services revenue decreased by $0.3 million, which corresponds to the historical downturn in the cannabis industry. Gross profit was $3.1 million or 20% of revenue in the first quarter of 2024 compared to 1.7 million or 11% of revenue in the fourth quarter of 2023 and 2.1 million or 17% of revenue in the prior year period. The increase in gross profit dollars and margin percentage from both of these comparable periods was driven by the impact of improved margins in Services and Construction design-build revenues, as we experienced improvements in delivery of services projects and started work on higher-margin construction design-build projects during the current quarter. Operating expenses were $5.2 million in the first quarter of 2024, which on a sequential basis, it's a decrease of $1.2 million and on a year-over-year basis is $2.7 million less than operating expenses of $7.9 million in the first quarter of 2023. Both of these decreases are associated with the Company's expense optimization and resource reallocation initiative. Net loss was $2.1 million or a negative $0.18 per diluted share in the current quarter compared to a net loss of $5.1 million or a negative $0.48 per diluted share in the prior year period. Adjusted EBITDA improved by $2.7 million sequentially to negative $0.3 million in the first quarter of 2024. This is an improvement in adjusted EBITDA of $3.1 million compared to the prior year period. The improvement in our adjusted EBITDA for both periods was driven by lower operating expenses as previously discussed. Turning to our balance sheet. We ended the quarter with $0.7 million of cash and a balance on our line of credit of $2.0 million. With the support of the working capital line of credit that we put in place in December, we currently do not see the need to bring new dilutive capital into the company. Our total backlog as of March 31, 2024 was approximately $99 million, reflecting a decrease of $11 million or 10% on a sequential basis. This backlog is comprised of $93 million in construction design-build, $5 million of professional services and $1 million of equipment systems contracts. Breaking backlog out by sector, 76% is with clients in the CYA sector and 24% is with clients in the commercial sector. Supported by our backlog and pipeline, we remain confident that our cash position combined with our $10 million line of credit will provide us the necessary flexibility to manage through various macroeconomic scenarios. We continue to remain focused on our execution and returning to positive adjusted EBITDA on an ongoing basis. That concludes our prepared remarks. Operator, please open the call for questions.

[Operator Instructions] And the first question today is coming from Eric Des Lauriers from Craig-Hallum.

Great. Thanks for taking my questions. So first one is [Technical Difficulty].

Apologies. Apologies Eric, your line is really bad quality. We will and we'll reconnect you will dial out to you, so that we can get a better connection, if that's okay with you. Brad, it's okay, I'll move on to the next question and we will reconnect Eric as soon as possible.

That's great. Thank you.

I'll move on to the next question and we'll reconnect Eric as soon as possible for those people. Take from Scott Fortune, ROTH MKM.

Hopefully, you can hear me better. I will leave the, CEA question for Eric. But just curious, on Florida Brad, if you're obviously that's for adult use a ballot vote now. It's still a big hurdle to get 60% of the vote. But are you seeing now that it's up for vote, are you seeing operators come in engaging more in your services as it looked a build-out? Is it the potential vote in Florida or is still kind of muted interest from that standpoint to wait to see if this does pass in Florida from adult use side of things. Just curious on kind of the operators kind of emphasis for moving forward now and building out potential ahead of some of these states.

Thanks Scott. Thanks. Thanks for the question. Yes, Florida, it is a hurdle at the 60%. And there's a lot of confidence that will be that will be beat. But the heavy work starts now and the grade for people to donate and to give to the path that Trulieve has created in the state with a lot of the other multi-state leaders, so they can get the word out and keep pushing hard. The polls are trending higher than 60%, at this time from what I've heard. But again, it's -- it's early stage and it's important to give so we can fight, that fight. In terms of uptake, yes for sure. In terms of the -- the uptake and the excitement and the planning moving forward to hard large orders, that's not quite here. The conversations on many fronts that we've been having are preparing to be in a good place from an equipment standpoint. Some equipment needs to be ordered 4 to 6 months in advance. Others is entering the design stage for new facilities and then, at some point in the future proceeding to the build, but absolutely a very positive uptake in the state so far.

I appreciate color there. Thank you. And then just focus on guidance you guys are giving guidance of more than $84 million in revenue for 2024 with the projects and the backlog and focus. Can you provide a little more cadence to kind of the remaining of the 24 year? Obviously, you had some delays from 4Q. And I assume those projects are recognized here in 1Q, but just kind of step us through the year, as you see your backlog move second half kind of loaded from the cadence standpoint to meet your revenue guidance?

Yes. First addressing the 3 projects that we discussed on the on the 2023 or Q4 2023 call. All 3 projects that are active, 2 of them are recognizing revenue in Q1 and third has begun recognizing for us in the second quarter. So those are those are all on track. We remain right now, we're cautiously optimistic. We believe that we've turned the corner. And I'm excited about where we're moving. And that's before today is a development came to light. We are trying to under-promise and over-deliver in terms of our setting expectations. We're off to a good start in Q1. The backlog remains strong. Of course, we'd like to see it start to appreciate an increase again, but we're in a very good place. We feel good, especially with the right sizing of the company in terms of an SG&A standpoint. We've lowered the break-even level for the company, Scott, so that feels good as we're going forward, and we can keep growing the business as the demand increases.

Perfect. I appreciate the detail. And I'll jump back from the queue. Congrats on -- well, still the DA moving forward today, so thanks.

Thanks, Scott.

Thank you. It looks like Eric Des Lauriers from Craig-Hallum has reconnected, and we will try his line again. Eric, your line is live.

All right. Great. Thank you. Is this any better?

It's a little bit.

Yes. All right. I'll give it a try. If this doesn't work, we'll just take the questions offline. So, on the DA, I was anticipating this for the day. I was wondering if you could provide us sort of an overview on the typical timing of one of your projects from your Canvas operators. What's the sort of timing for a project to go from discussion phase to pipeline to backlog and revenue? I was really looking to kind of understand how quickly you'll be able to add visibility into potential, bona fide backup in capital expenditures in the Canvas industry? Thanks.

Perfect. Eric, I got most of that. Perfect. First of all, it depends on the size, right, and zoning, and where we're located, state, city and county, and those requirements around the country. But typically, they could take as long as, without any delays, as long as 2 years, depending on the size, probably as short as 9 months, on average a year and a half. From initial discussions, we move into the design stage, architecture and engineering, and the cultivation design. Civil and structural are all part of the engineering side there, too. Once we have a whole set of CDs, it's put out to bid. Clients usually will look at multiple bids in which we're participating. And if awarded, we immediately move forward. We can be -- we can cut weeks, sometimes months off, if we're proactively involved at certain stages. But overall, I'd say 9 months to 2 years is a good average without delays.

And how long would you take to see that there is an increase in CapEx coming sort of industry-wide? I understand that some of these projects, from discussion to completion, can take up to 2 years. But how long will it take you to notice if there's a bona fide capital expenditure increase in the cannabis industry resulting from the DEA? Would you have -- is it a few weeks of lead time of discussions picking up and leading to pipeline and deposits? Or is that -- could these discussion phases last several months that it's hard to see if there's a true pickup or not?

I think on the Q2 earnings call and looking at backlog at that point, from a services standpoint, a new contract that we've signed, that will be a really good indicator. And then also from an equipment standpoint, equipment in a strong cannabis market was a tremendous source of revenue for urban-gro. When you look at 2021, it was $56 million. It decreased in 2022 to $33 million as we reported last month. And 2023, it was down to $13 million. And so the backlog that we reported at the end of Q1 for equipment was $1 million. So watch the backlog at the end of Q2 as well. That should be strengthening. I think the early indicators will be on services and on equipment. But I can tell you as a result of today's announcement, I already know it's stronger. We know it's stronger. Good, strong discussions with clients and some signatures today already.

That's very good to hear. And I just have one more question, given my poor connection here. Gross margin expansion you called out increased productivity from architects, engineers and an increase in construction margins. Because I guess just wondering if you could expand on [Technical Difficulty] I am wondering if their [Technical Difficulty] projects in Q1 and medical went themselves to higher productivity or higher construction margins. And ultimately what I'm wondering is we expect productivity levels to remain somewhat steady going forward because there's something we feature fluctuate quarter-to-quarter and we got a little lucky this quarter and I'm just wondering how to think about that going forward.

Dick, I'll let you take that one please.

Thanks, Brad. Eric, yes, with regard to we expect kind of that same type margin. It certainly was a very high margin for us in the first quarter of 2024. I don't necessarily expect that it's going to be exactly that high on a go forward basis. It was very low in the fourth quarter of 2023 as we I've talked about from a construction project that we had that incurred. Some additional costs went over budget and we weren't able to pass all those on to our customer because of a couple of the construction projects that did get started in Q1. They are at very nice margins for us above kind of what we typically see for construction projects and so even though we might not expect that the Q1 margin we experienced just going to continue at that level going forward, we wouldn't expect it to fall off very much. And as always and we've talked about before from the standpoint of our total gross profit and margin it depends on that revenue mix that we have. So you still have to pay close attention to what happens as the equipment or services total revenue number changes over time and that impact on the gross margin.

And I'll add all that in on the back there a little bit. It has been almost 2 years Eric since we completed the acquisition of the construction company. And so there were some legacy projects that we came with the acquisition and that ended up not being what we would have hoped, right? So we call them legacy projects and they're pretty much finished now the project that Dick alluded to in the fourth quarter and some surprise costs come in was tied to one of those projects. So that's behind us. That's great positive. Second in the middle of 2023, we had all of the acquired companies on the same ERP. We've talked about that before. And as a result our COO and his team were able to put some stronger internal controls in place and now we're seeing the results of those move. So definitely trending in the right direction and we don't we weren't lucky in the quarter. I guess to answer that last question for you. Yes that all makes sense to me and I'm certainly glad to hear that some of these initiatives like getting everyone on the same ERP system has led to some structural changes in margins but understand that that's would be some degree of fluctuation going forward. Very helpful. Thank you for taking my questions.

Thank you. The next question is coming from Anthony Vendetti from Maxim Group. Anthony, your line is live.

You had just a couple of questions on the backlog of 99 million at the end of March. I know today obviously big data talk about cannabis and what this impact could mean in terms of future business. But in terms of the backlog how -- what percent of that is cannabis related and what percent, obviously not non-cannabis?

72% was commercial or non-cannabis segment sorry Dick -- 76. Go ahead, Dick.

Sorry. Yes, 76% of it was CEA related and 24% was commercial. That's pretty consistent with what we reported at the end of December in terms of the split by the factors that we have. So even though our recent revenue performance has been a shift of that where we have had substantially more commercial than CEA, the backlog still continues to be a more higher percentage on CEA than it is on commercial partly, due just to the size of some of the CEA projects that we have in backlog.

Okay. That's helpful. And then what this could mean, obviously less stringent rules should open up investments -- the tax benefit as well what I know it's just happened a couple of hours ago, but have you heard from any potential customers eager to maybe speed up investment if indeed this gets passed and maybe elaborate a little bit on, what you think the timing is for a final like consent decree to come down say okay, boom this is going to move and from a Schedule I to Schedule III potentially.

It's neither -- the 280E -- the removal of 280E is most definitely the largest benefit to a successful rescheduling. Some of the large multistate operators have publicly stated that the annual savings from the removal of 280E can range from the $130 million to $180 million plus. So it's significant funds that we believe -- as some of them have also stated publicly that they're looking to reinvest those funds into the company, with refreshing existing facilities and building out new ones. And so that's definitely the largest benefit there. Yes, the period that it will be open for anywhere from 3 to 5 months before the final approval would take place. But it has been stated publicly that FA supported the Department of Health it will -- all indicators are it will absolutely be approved in the long run. Then not my opinion, but just opinions that I've read, so transformational for the industry. As for clients, yes, just as we have had increased discussions and interest and excitement from clients in Florida would be on the ballot addition for November. We're having the same today and I just I'm not sure if you'd heard on an earlier answer, but we've had good strong interest even had some signatures today as well. So, it'll take time right, like there's a lot of excitement today. We're playing it cool. We didn't want to increase our guidance or anything at this point. There's so many unknowns and we just want to we want to under-promise and over-deliver with exciting time for the industry and for Urban-gro as well, today.

Right. Okay. So that you will be upside? And if it goes from Schedule 1 to Schedule 3, do you think that expedites changes in the banking regulations, as well.

I don't believe they're related. I think any momentum in the industry is fantastic. And from a banking standpoint, you've seen that because the FA bill they thought they could tie safer banking to that as of late, they've said that it won't be connected now that it looks like it would go to the lame duck section later or session later in the year and that would be the best avenue to have it passed. But I think positive overall cannabis industry sentiment it helps go a long way. The people are speaking. And I believe from a banking standpoint, politicians they have no option but to listen. So I do see, overall, they're working together for a better industry for sure.

Okay. But let's separate on the banking thing. Okay. And then just in terms of productivity improvements, cost cutting, how -- obviously, you decreased expenses, but where are you sort of in that process halfway through completed. Maybe just give us an understanding where you're at?

From a productivity standpoint, it tied into some of the reductions in general and administrative expenses last year when we had line of sight in the middle of last year when they all run the same ERP, we realized that we were -- we had too many service providers on the team. And that's when we started to adjust and we've got to a size now where we're capturing a large amount of those salaries in COGS, that's the key. On the last call we had stated that, in 2023 we moved over $1.3 million down into salaries just because of the fact that we weren't as productive as we wanted to be. So the results in Q1 were very strong there. In terms of optimization, we don't anticipate at this time making any further reductions. We're right-sized right now. A year-over-year from the efforts and the moves we made in 2023. We're expecting to recognize $8 million in 2024 of savings from a G&A standpoint. And in Q1, we've already recognized the 2.8 million versus Q1 of 2023. So we feel, we're in a great place and we've lowered the breakeven level for the company, which is key and we do not anticipate making additional cut to business. At this time -- that being said, we're always looking at expenses, overall expenses and trimming where we can. Dick, is there anything you'd add to that?

Yes. I think the only thing I would potentially add, Anthony, is just, during the first quarter, there continued to be some reductions. But generally, when we hit the end of the first quarter that was where we got to the headcount levels we were looking to get to. So, I think the ways you're thinking about things go on further out. Yes, there -- the first quarter contains a little bit high on the G&A side that there would be further reductions expected for Q2. But by the time we got to the end of the quarter, we were kind of at exactly at levels where we're looking to get to.

Okay. Great. That's good color. Thanks guys. I'll hop back in the queue. Appreciate it.

Thank you. And the next question is coming from Eric Beder from SCC Research. Eric, your line is live.

Good afternoon. Let's talk a little bit about something the size of phases here. Commercial, what are you seeing in terms of demand for the commercial business? Has it continued to be as robust and have you been able to continue to expand the services you can offer for that division?

We haven't expanded the services at all at this point any further. Demand is remained strong. So the one area where we're watching closely is the length of time. I talked about it in Q4 as well. But the length of time that passes in between where we're being verbally awarded contracts and we're actually getting signatures. And so far in Q1, that hasn't gotten worse, but it hasn't gotten better either. So that's one area that we're watching closely, but where the licenses were not losing. So, it'd be one thing if we're losing clients or opportunities, but we're not losing. So it's just a timing issue. Our pipeline remains strong and we don't publicly speak about the quantity of pipeline, but it remains strong and very qualified for sure.

And are you seeing -- when you look at kind of your top accounts here, are you seeing them give you larger contracts going forward? I'm saying as they kind of like because I know the commercial is a little bit, it's not as much a one off and managed sometimes as the cannabis business can be. So are you seeing that trend continue?

We have seen that trend continue over or progress over the last year, not in Q1. We hit a lot of solid singles in Q1, but with no triples or home runs and hence the backlog backed off a little bit 10%, right sequentially, but hitting a lot a lot of add-on contracts to existing projects where they increase the scope and some new smaller projects. But on the larger ones, we do have some that are close and out. We believe that we will secure them. But we don't have the signatures yet, but no real material increase in size in Q1 to report.

Sure. You can update on Europe. What are you seeing in terms of trends there? I know there's been talk about Germany. What are you seeing in terms of the European business on forward?

So overall in Germany is slow and steady, right? If they're just coming into themselves, they made that announcement a couple of months ago with social licenses to start. So there's no requirement for the design and or build a significant sized facilities. Overall in Europe for us, the demand is -- remains weak. We talked on the last call about rightsizing the organization in Europe, aligning the expense structure with the size of the opportunity right now. That all being said, we believe we've right-sized that there's definitely business. It could be had in Europe. We want to be a part of the European cannabis and also in the future vertical farming market, it's going to grow a lot from a cannabis standpoint, a lot of the CEOs of multistate operators who are expanding into the European market have significant forecasts for where that market's going to grow over the next decade. So we know we want to be there. That being said, in Q1, there was no additional new contract signed in Europe. However, we did have a nice services contracts signed in Q2 so far. So, we expect to continue signing contracts, but we don't expect any robust material improvement in the business throughout the remainder of the year.

Okay. All right. Thank you, and congrats.

Thank you. Appreciate it.

Thank you. There were no other questions at this time. And that does conclude today's conference. You may disconnect your lines at this time. Have a wonderful day. Thank you for your participation.

Thank you.

Greetings. Welcome to the urban-gro, Inc. Fourth Quarter and Full Year 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. Please note this conference call is being recorded. At this time, I'd like to turn the conference call over to Christian Monson, Urban-gro Executive Vice President and General Counsel. Sir, please go ahead.

Good afternoon, and thank you for joining us. Today's call will be led by Brad Nattrass, Chairman and Chief Executive Officer; and Dick Akright, Chief Financial Officer. I'd like to remind our listeners that remarks made during this call will include discussion of non-GAAP metrics, including adjusted EBITDA and backlog. These items should not be utilized as a substitute for urban-gro's financial results prepared in accordance with GAAP. Reconciliations of our GAAP net loss to adjusted EBITDA are available in our press release and in our Form 10-K filed with the Securities and Exchange Commission and can be accessed from the Investor Relations section of our Web site at ir.urban-gro.com. On this call, we may state management's intentions, 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. 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 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 Web site and on the Securities and Exchange Commission's Web site. We do encourage you to review these documents carefully. Lastly, a copy of our earnings press release and a webcast replay for today's call may be found on the Investor Relations section of our Web site, which again is at ir.urban-gro.com. With that, I will now turn the call over to Brad.

Thank you, Christian. And good afternoon, everyone, and thank you for joining us today. After delivering sequential improvements to both the top and bottom line in the first three quarters of 2023, we were met with the confluence of delays across multiple projects in the fourth quarter, which resulted in a disappointing performance. Although, we are frustrated by these circumstances, fortunately, none of the delayed contracts were lost. All are currently active in the first quarter and we expect that majority of these delayed revenues will be recognized over the course of 2024, beginning in the first quarter. Our model is working. Our diversification strategy is continuing to broaden our presence across multiple industries, which is visible in our expanding backlog. And further, the significant efforts made to optimize and align our SG&A expenses in 2023 positions us well for 2024. All considered, we are confident that 2024 will prove to be a step up year for urban-gro where we expect to deliver positive adjusted EBITDA, a goal that we have consistently identified as our top near term priority. 2023 was a successful year of evolution for the company. Although, we faced ongoing headwinds within the cannabis sector, our team continued to execute on our sector diversification strategy and we finished the year with revenues of $72 million, representing growth of 7%. Of this, $50 million or 70% of our revenues are from the commercial markets that we serve and $22 million or 30% are from CEA. Further, while our year-over-year CEA revenues decreased by $22 million or 36%, this was offset with our revenue growth in commercial, which increased by $27 million or 36%. These numbers demonstrate a reversal from trends we experienced in 2022 and highlight the value of our diversification. The prolonged multiyear compression of our equipment revenues, resulting from continued softness within the CEA sector remains the most material headwind to our financial performance given the advantageous margins that this category represents. In 2023, our equipment revenues decreased to a three year low of $13 million, which represents a $21 million or 62% decrease from 2022, and moreover, a $43 million or 77% decrease from 2021. And an average equipment margin of approximately 14% replacing this margin with gross profit from our other areas of business has been a large hurdle to overcome. But as we entered 2024, we have done just this. That being said, there are some significant regulatory changes that could serve as catalysts to reignite the cannabis market and therefore, provide a material and sustained lift to our future financial performance. As a result of these persistent headwinds across the CEA sector, we have optimized the size of the company to align with the current performance levels and reduced our SG&A expenses by more than $8 million on an annualized basis, all of which we expect to realize in 2024. We have an in-house team of experts who include architects, interior designers, engineers, construction managers, project managers, horticulturists and others that’s focused on serving clients in multiple sectors, including CEA and commercial. A combination of this team's expertise, our integrated solutions and our focus on sector diversification differentiates us as a company that continue to deliver growth in a turbulent environment. Now looking at trends in the markets in which we operate. First, in regards to the strategic investments we have made in our European entity over the last two years. The suppressed demand in their CEA markets continues as well. And as a result, we have downsized the workforce and reduced general expenses to better align our costs with near term demand levels. Looking forward, the European cannabis market is continuing to open up, most notably with the early stages of adult use legislation and legalization in Germany, and we continue to anticipate that there will be increasing demand for the services that we provide. In the domestic market, our business in the commercial sectors continues to generate strong organic growth. In addition to signed contracts upon which we're executing, we have a qualified pipeline of projects with both existing and new clients as demonstrated by our growing backlog. Looking forward in the year, we intend to continue building out our business development focus in commercial by adding to our roster of sector experienced individuals and integrating other innovative initiatives. In the CEA sector, we continue to expand our vertical farming focus, albeit at a slower pace than anticipated due to ongoing sector capital challenges. While almost all of the related business that we currently engage in utilizes our professional services, we're continuing to interface with a variety of new clients for which urban-gro is a perfect fit for fulfilling their urban vertical farming design build needs. As it relates to our business in the cannabis segment, we've remained active in delivering design build solutions as well as architecture, interior design and engineering services, both individually and also combined for both dispensaries and cultivation facilities. As it pertains to our outlook on the cannabis sector, we believe that current market sentiment is more positive than it has been for a couple of years, fueled by heightened awareness and anticipated progress around potential regulatory changes. There are a few catalysts which could result in a significant and positive change in momentum for our business within this sector. First, on the federal level, the potential rescheduling of cannabis from Schedule 1 to 3 would provide operators with significant working capital increases resulting from the removal of the 280E related tax burden. We believe operators will use this significant incremental capital to fund future CapEx growth, including refreshing existing facilities and building out new ones. Second, and again on the federal level, the prospects of successfully passing the SAFER Banking Bill continue to be discussed and would potentially include a capital markets clause that allows plant touching businesses to not only list on the larger exchanges but moreover provide more efficient access to capital. And third, at the state level, while progress continues to be made on legalization in multiple states, we believe the most impactful change would be in Florida. A successful vote to allow adult use recreational sales in the state would have a profound and sustained impact for the state's operators. Now turning to our full year 2024 outlook and associated cadence. We anticipate consolidated revenues to be greater than $84 million, a 17% increase over 2023 and we expect to generate positive adjusted EBITDA. While achieving these results are still heavily dependent on category revenue mix, the actions we took to reduce our SG&A expenses in 2023 have significantly reduced our revenue breakeven point for generating positive adjusted EBITDA relative to what we've previously communicated. For the first quarter of 2024, we're providing some guidance on our expected results given we are approaching the end of the quarter, which is two days remaining. We expect revenues to be greater than $15 million and adjusted EBITDA to be greater than negative $0.5 million. Looking at the quarterly cadence for the year, we expect to deliver sequential quarterly growth of both revenues and adjusted EBITDA building to our entire full year guidance. In closing, as we look more broadly to 2024 and backed by both our closed contract backlog of $110 million and the $8 million reduction in annualized SG&A, we believe we are in the strongest position that we have been in over 18 months. Further and supported by a qualified pipeline that continues to grow, we see increasing demand for our solutions in multiple sectors. With the right regulatory progress in the cannabis sector, we anticipate seeing a resurgence in our related business later this year. To date, urban-gro's model is stronger, more durable and more efficient than it has ever been. Our business is fundamentally secure. And with the support of the working capital line of credit that we put in place in December, we do not see the need to bring new capital into the company at this time. Thank you. And with that, I will now turn the call over to Dick to discuss further details of the fourth quarter as well as full year 2023 results. Dick?

Thanks, Brad. And good afternoon, everyone. Revenue was $15 million in the fourth quarter of 2023 compared to $17.3 million in the prior year period. This decrease was the result of reductions in all revenue categories, including construction design build revenue of $1.3 million, professional services revenue of $0.8 million and equipment systems revenue of $0.2 million. Construction design build revenue decreased due to several projects being pushed into 2024. The reduction in equipment systems and services revenue is a result of continued soft demand in the US cannabis market, because of ongoing state level regulatory delays in the license awarding process as well as the lack of movement by key industry financial support models, such as rescheduling and the SAFER Banking Act. Gross profit was $1.7 million or 11% of revenue in the fourth quarter of 2023 compared to $3.2 million or 19% of revenue in the prior year period. The decrease in gross profit of $1.5 million correlates to the decrease in revenue as well as a shift in mix toward lower margin construction design build revenue. This was further impacted by a project cost revision in the fourth quarter that negatively impacted project profitability. Operating expenses were $6.4 million in the fourth quarter of 2023 compared to $6.2 million in the prior year period, representing an increase of $0.2 million. The increase in operating expenses was the net effect of an increase in general and administrative expenses of $3.8 million and a $3.3 million reduction in a onetime business development expense. The increase in general and administrative expense was the result of increased professional fees associated with legal defense costs and increased personnel costs associated with an increase in the average number of employees. As Brad mentioned, we've been able to reduce our annual general and administrative expense spending by over $8 million, which will favorably impact our results in 2024. I'll provide some more context on this a little later. Non-operating expenses of $0.1 million in the fourth quarter of 2023 related primarily to interest expense and were down significantly from $1.3 million incurred in the fourth quarter of 2022, which included an impairment loss of $1 million related to settlement of a litigation receivable and $0.4 million in expenses recognized from fully guaranteeing the remaining contingent consideration associated with 2WR acquisition. Net loss was $4.7 million or a negative $0.40 per diluted share in the fourth quarter of 2023 as compared to net loss of $4.2 million or a negative $0.39 per diluted share in the prior year period. Adjusted EBITDA was negative $3 million in the fourth quarter of 2023 compared to negative $1.7 million in the prior year period. The decrease in adjusted EBITDA was driven by lower revenues and gross profit as well as an increase in general and administrative expenses. On a full year basis, we reported total revenue of $71.5 million compared to $67 million in the prior year, representing an increase of 6.7%. This increase in revenue was predominantly driven by the increasing momentum that the company has in the commercial sectors in which it operates outside of the CEA market. Further, significant increases in construction design build revenues were offset by continued decreases in equipment systems revenues related to the sustained softness in demand in the US cannabis market. Net loss was $18.7 million compared to a net loss of $15.3 million and adjusted EBITDA was negative $9.7 million compared to negative $3.9 million in the prior year comparable period. Now turning to the balance sheet. We entered 2024 with $1.1 million of cash and a total of $2.5 million drawn on our $10 million working capital ABL that we put in place in December 2023. The line is serving its purpose and is providing us the necessary flexibility to manage our working capital needs, which are tied directly to our clients' projects. In fact, the drawn balance at year end is tied to $8 million of anticipated collections that moved from late December 2023 to mid-January 2024. We are consistently collecting on our AR and paying down our AP and the ABL provides flexibility needed to support our growth as we return to positive adjusted EBITDA in 2024. As was expected, increased construction design build revenue drove increases to receivable and payable balances on a year-over-year basis. Moving to reported backlog. Our total backlog as of December 31, 2023 was approximately $110 million, a $26 million or 40% sequential increase over the third quarter of 2023. Approximately half of this increase is attributed to the delayed project delivery that we experienced in the fourth quarter and detailed earlier. This backlog is comprised of $102 million in construction design build, $7 million of professional services and $1 million of equipment systems contracts. As previously mentioned, in 2024, we have identified more than $8 million of general and administrative expense reductions as compared to 2023 to ensure that we will be able to achieve positive adjusted EBITDA based on our projected revenue in 2024. Those expense savings will correspond to reductions in personnel related expenses, professional fees, marketing expenses and a variety of other expenses across all departments. Additionally, in 2024, the financial services division of the company has set three primary strategic goals that I feel will assist the company in delivering more consistent results on a sequential basis. First, now that all entities are on the same ERP system, improved tactical reporting on a weekly basis will provide our business development and operations teams with better line of sight on projected performance, so they can both plan accordingly and adjust operating targets on a real time basis, including accelerated billing on construction design build projects to improve cash flow. Second, drive cost reductions in insurance and facilities costs. And third, strategic utilization of the line of credit, which will enable us to better manage our vendor relationships in order to maximize our purchasing opportunities and reduce overall costs, primarily on construction design build projects, which will in turn aid in increasing margins on projects. That concludes our prepared remarks. Operator, please open the call for questions.

[Operator Instructions] The first question comes from Eric Des Lauriers with Craig-Hallum.

First one from me, just hoping you could expand a bit on the project delays and especially the cost revisions in the quarter. We've seen a few or a couple of project delays in the past. Obviously, these things can happen with large projects. Cost revision is newer, I think. So just any more color on kind of what happened in the quarter would be very helpful.

So in Q4, we had three projects that pushed. Two of them, it was on their kickoff date, which we expected to be in December. We still held hope at the start of December that they would kickoff. We procured started procuring materials to deliver to the site, and both clients asked to push back those kickoff dates until the first two weeks in January. So we did that. The third was an existing project, a recreation project that we had announced early in the year. And in Q4, we had expected significant revenues from the project, but it also pushed and there was no business completed in Q4. So those three contracts, they're all active, recording revenue in Q1. And we expect them now to finish probably a quarter longer that's why I said the majority would be complete in 2024, but they'll go about a quarter longer than they were before. Overall, with projects, I feel that we're working on an increasing amount of larger projects. And as we come into 2024 and continue to sign new projects, one moving or two moving will have less of an effect on the organization. But now when one or two moves, it has a material effect. When three move, unexpectedly, it has the disappointing effect that we saw. In addition to that, our services, we at the time, it takes about a month after quarter end to reconcile all of the services revenue, and it was a surprising disappointment. Actually from the CEA sector, there was no work done by engineering in the fourth quarter. That's resumed with momentum in Q1. The actions we took for that in the last couple of months, we now have an active line of sight on what's happening at all times with our services and what's been invoiced. We did get everyone on the same ERP in the middle of 2023. And so as we give guidance for Q1 today with only two days left, we have a solid grasp on exactly where that is. And then finally on equipment, about a couple of million dollars in projects we held hoped it would be even higher than that just disappeared. They didn't push. They just disappeared right at the tail end of 2023. So it's very disappointing, of course, but it's also -- the strong news is with the construction contracts, they weren't lost, it's a timing issue. And it doesn't hurt the long term fundamentals of the company, it's just a timing issue and they moved into Q1. In terms of project costing, Dick, do you want to take that one, please?

Yes, let me comment on that, Eric. We certainly did have a project that we had a cost revision, increased cost on that occurred during the quarter. We are working with the customer in order to negotiate a revision of that contract. But in the construction industry with the way things go in terms of the way we have to account for that, because we didn't get those negotiations finalized by the end of the year, we couldn't include a contract revision as part of our calculations for contract revenue and the contract cost, so we needed to have that flow through our financials with the way it is, which is the increased project costs right now. We are highly confident that we're going to be able to negotiate an increase in the contract revenue for that project and that that that'll come through in the first half of 2024. But like I say, not too atypical in the construction industry when you have a situation like this, you just need to account, let the accounting happen as it does. And we just felt we needed to show that contract that cost revision for the quarter.

And then just thinking about fiscal '24 guidance, obviously Q1 we’re largely done right now. But in terms of just the overall guidance for $84 million in revs and then positive EBITDA, and I suppose for the sequential improvement in both of those from Q1 levels. I'm just kind of wondering what visibility you have on those, what visibility you have on potential project delays and cost revisions impacting future quarters? Is this something that with the ERP system now being on all -- every entity is now on the same ERP system that you'll have better visibility into some of these delays in cost revisions as well? I'm just kind of wondering, how to think about that guidance, both overall and the sort of cadence? And then just the follow-up to that is, if the guidance includes any of these potential legislative catalysts within it?

I'll start with the last one. The guidance does not include any of the potential catalysts in the cannabis space. We do have active design build projects in the space, Eric. And when -- even existing legal states that have regulatory delays and haven't awarded licenses like New York when they award licenses, we have clients, multiple clients in that state alone that have designs and spent a considerable -- got considerable amount of money, some of them getting to CDs. But until their license is awarded, they cannot access their funds and therefore go to the build. So we do have that ongoing business. And we're doing a lot of work right now, more and more work on dispensaries for our clients, both multi-state operators and single state operators across the country, some just design and some design build. As it relates to line of sight, as of right now, we don't anticipate any additional delays. However, look, those three came up with weeks notice at the end of the year. We don't anticipate any now but you never know what could happen, of course. As I had started early with that answer, as we have many more projects that we're working on at the same time, it won't have as material of a impact if one of them pushes. As for tracking the delays in the ERP, that's really -- the delays will come through our project management office. And then we have a online portal, project management portal that's build time, both viewable from the client and then from our team, and we'll see it through there first. On the ERP, that's mostly tied to timely tabulation of results. And we have taken actions since we had that disappointment and the service is coming in under where we had forecast even as late as the middle of December. And so I do not anticipate us to be off on the services again with a guide. When I talk about sequential, we have contracts that really are executed over the next two to four months from a construction standpoint. They're in the project management portal and we know exactly when they'll be executed. So we're very confident, of course, in Q1 with two days left. And then as we go forward into Q2 and beyond, it's not completely baked. But with the contracts we have as long as everything proceeds like it should then we don't anticipate issues sequentially improving the top and bottom line. And we definitely realize that we've got to walk the talk and earn confidence back in our ability to predict quarters.

Thanks for taking my questions.

And Eric, just commenting on it, as evidenced, the backlog for construction design build is really quite large and we are getting much better insight and visibility into how those projects, costs on those projects are starting to come into site over the course of 2024. So that's just really improving with the new ERP system that we've put in place, much improvement on that even just over the last six weeks. So anyway, just wanted to add that comment.

Next question comes from Scott Fortune with ROTH MKM.

Just a little bit of follow-up on Eric, on kind of provide a little more color on the backlog here and ongoing discussions or opportunities kind of outside the CEA and those different industries. Just kind of highlight some of the different industries. And then even within the CEA, because how much is --is the backlog coming from CEA versus non-CEA of that $110 million? And then just unpack a little bit more of the color, the strength of the end markets you're seeing. Anything kind of on industries or categories of the projects you're seeing the strength in? Just a little more color on that would be great.

Dick, do you want to start on the backlog?

So from a backlog perspective, what we have is, and I'm sorry, I'm getting to it now. But of the $110 million substantial amount is coming in from the CEA sector. We do have some large construction design build projects that are in the backlog. As of December 31st, 70% is from CEA. A large portion of the construction is now comprised of some CEA projects. And so that makes up the biggest part of the backlog for the year. On the commercial side, it's tended to be the existing contracts that are -- the existing customers that were in place with the company that when we acquired it, which was a large CPG customer, but we're expanding that out into healthcare and additionally into some secondary education customers that are part of that backlog.

And just kind of a quick follow-up. Do you see the backlog switching a little bit, going out more diversified to the CPG healthcare as you build out? Just kind of little bit color on those opportunities.

I'll take that one. So in the CEA side, Scott, when we're building on the cultivation facility that can take us as long as six quarters. On the commercial side, if it's a manufacturing facility or some recreational buildings or a laboratory, those can be completed in as quick as two or three quarters. What we had underestimated in the first year in commercial is when we're verbally awarded a project to when the contract is officially signed or a PO is sent that period is not a week, for example, like it could be in the CEA space like we're used to. It can be up to months. And so those projects, once they do start, we’re ready. They verbally told us what exactly to do and steps so we can immediately hit the ground running, recognize cost, recognize revenue and get going quickly. So they're done relatively quickly once they're signed. So the time frame is a lot less. And in In terms of these end markets, as Dick mentioned, post secondary, we have multiple architecture and engineering contracts right now between $400,000 and $800,000 high margin projects that we're working on. In healthcare, we work on both sometimes the design of hospitals, all design, no build there. But then on some smaller healthcare facilities like an MRI facility or something like that, so that would be done relatively quickly over three quarters as well. So there's strength there. Laboratories, we're seeing strength on laboratories. And then also on retail, nothing to talk about right now any further on that, but some good strong retail opportunities as well for us. And when you take a step back and you think that over the last six quarters, we have secured $50 million, little over $50 million of commercial business in sectors where we didn't set out to go down that path when we listed on the NASDAQ, but we've taken that path as a diversification strategy that really has paid off nicely for the company thus far, set us up nicely for the future. And when the cannabis industry does have its resurgence, which everyone, of course, hopes is quicker rather than longer, we're not going to stop on the other side. We're going to invest and continuing to build out, because what we've learned is we can utilize all of our professional services experts and our site troopers and project managers in all areas. So we have that big pool of talent and expertise that can be used on the build or on the design regardless of what sector it's in. So exciting for the future. But bringing it back to today, we have to execute in quarter-by-quarter and earn credibility back.

And then one quick follow-up for me then on the CEA side. Obviously, kind of dependent on rescheduling when that happens. But moving forward, is this still a state led growth story for a lot of the cannabis industry? And like you mentioned down in New York, you're seeing a ramp there potentially, Ohio comes on board in the fall of '24. But the big opportunity is Florida. We're seeing or we're hearing a lot of the cannabis MSOs are looking to actually build out. They need to build out production capacity ahead of Florida potentially flipping. But just kind of your sense of color in the pipeline, the discussion of capacity builds in the key states as we see regulation kind of play out here in the second half? Just kind of discussions you're having on capacity adds from that standpoint?

New Jersey, New York, Ohio, Pennsylvania and Florida, so no contracts, but lots of discussion, lots of planning. The planning could be design of the facilities or design of the dispensaries. But from a build standpoint, I believe that the state, the operators in these states will want to get a little further down the road. First hurdle in Florida is having the Florida Supreme Court not say anything before April 1st, right? And fingers crossed that that doesn't happen, then it'll be on the ballot, then they have to finish with a total over 60% and they're pulling above that right now. So lots of eyes on Florida, that's sort of the exciting rallying cry right now, I'd say, in the industry for sure. Second is Pennsylvania and getting it on the ballot there. But the working capital, getting rid of -- with rescheduling and abolishing the 280E that's going to give some of the larger multi-state operators $120 million, $180 million per year in working capital, and these leaders have said publicly that they're going to put those funds back in to expand their footprint. And that's what urban-gro does. We design facilities and dispensaries and we build them. So I feel that it will be very positive for the company should rescheduling happen. Let's say for banking, that'll bring money in. And Scott, that's the biggest hurdle right now is there positive optimism more than I've seen in terms of sentiment for a couple of years, for sure, but still the working capital is not there. And so everybody is positive but we got to have some sort of catalyst.

The next question is from Anthony Vendetti with Maxim Group.

This is Thomas McGovern on for Anthony. So yes, just to kind of touch back on some of this regulatory front, I know you've talked about it quite a bit on this call, but I wanted to hone in a little bit more on the SAFER Banking Act. You just mentioned its importance in terms of funding a lot of these deals. But with that on the horizon, I just want to see like ignoring any potential statewide legalizations, if this act were to be passed, do you guys have potential projects that are maybe not yet considered backlog that are more pipeline projects that you expect to kind of progress once funding frees up, or just kind of tell us how that would play out as a catalyst in '24?

Thomas, the answer is for sure, right? To be in our backlog, we have to have a signed contract and there’s equipment, there's deposit received and we're actively working on it. And we treat backlog very serious. We've taken items out of backlog a couple of times actually in early 2023. So we really truly want that to be a barometer of how we're going to perform in the next one to six quarters. And so when it’s signed it becomes backlog. Right now, that would be in pipeline and we have a strong growing qualified pipeline. We don't announce the size of the pipeline but we absolutely have a lot of projects that would fit in there once one of those catalysts gets. And so with the SAFE Banking or SAFER Banking, that would potentially allow the operators to list on the larger exchanges and then access -- have easier, more efficient access to capital and institutional investors as well. So that would be phenomenal for the industry. Now you did mention also state or federal legalization or state rights. We don't see interstate commerce or legal -- interstate commerce for maybe a decade, legalization still three to five years. I think this will be a state gain for the foreseeable future for us.

And then another thing you touched on, on the call was the international markets, and you specifically called out Germany where I know you guys have done a lot of work, although, you are pulling back some of the expenses associated with that subsidiary, reducing headcount and the like. I just wanted to comment, because I saw an article that was published 6 hours ago saying that Germany's marijuana Bill had been signed and passed into law and that it would take effect on Monday. And I haven't really had a chance to dive into this further. But I just want to know with that news, that recent news kind of hitting the headlines now hitting the wire, how does that shape? I know -- again, I know that you guys aren’t pulling back expenses on that front. But do you see yourselves becoming more aggressive or maybe accelerating some of the conversations you were having with potential clients in Germany? And whether or not that -- or if you could maybe provide color on whether or not that would play into revenues maybe in the back half of '24?

The issue with Germany is it's going to be social licenses, so sort of like Maine in the US, social clubs where people can grow their own cannabis. And so it's going to take a while for that market to build out and to develop. So I don't see a lot of near term opportunity. There's three existing operators in the country now. I think they will be the first probably to grow into it, so we'll watch them closely. In Europe, overall, when we entered and built our entity up two years ago, we had a signed contract to build out 20 vertical farms in urban centers, like in food service distribution centers or near hotel groups, for example. And then we built out that team and sure enough about a month later, the war in Eastern Europe broke out. And that just wreaked havoc on the horticulture marketplace, energy prices skyrocketed. And manufacturers in Europe and all of the ancillary companies and that horticulture industry really suffered for a couple of years. So we fortunately had green sprouts in the cannabis space, right? So we designed in Israel and Switzerland, Portugal. We're actively working on projects right now in the Netherlands. Portugal, I think, will be a strong year. But we just couldn't wait around anymore. We had burnt considerable funds over there. And we have to be -- we have to show that we can run a profitable company. And that is absolutely what we're going to do. And so the managing director is a phenomenal individual who is a great leader, but the business wasn't there. So we released the managing director and a couple of others. But we've kept some key experts that deliver the design, horticulturists that have experience in hundreds of facilities over here, because I do believe we want to align into Europe. There's not a lot of Curaleaf, the most outspoken group, of course, that is aggressively growing on an international spread. We want to be there. There's going to be facilities built and we have that expertise. So we're just slowing it down a little bit and keeping our lines of communication with multiple groups open. Similar to the US, it's the same story, it's all about capital and being able to raise their funds. So we have some strong -- you asked earlier about the pipeline. We've got some strong design builds in our pipeline for Europe as well, but they won't materialize until they can access those funds.

Up next is Eric Beder with SCC Research.

Most of my questions have already been answered, but I want to talk about some other things here. On the commercial space, what -- when you look at the why people are hiring you and what is the niche, what is the pitch to the commercial client for your business, and how are you winning these businesses forward?

So there's a lot of design build firms that operate on $0.5 billion, $1 billion plus or infrastructure, jobs around the world like the AECOM or Stantec, large companies like that. Jacob Solutions, among others. We had -- the niche for us is the all under one roof, one single point of responsibility on projects, we say under $50 million, the largest so far for us is around $30 million. But clients have, not in the commercial space, been able to access all one single point of responsibility in the space. They've had to hire their own project managers and go to an architect and find an engineer, then hire those GCs themselves, then procure the equipment either directly or through the contractors. We've realized that having it all provides a big service that allows us to complete their facility quicker than they would have before. And for the large Fortune 50 clients that we have right now, we're able to really turn projects quickly and we can do a good job at it and we can make money out of it. It's the larger $1 billion type project companies, they don't want to operate at these smaller levels. So right now, it's a perfect size for us. In the future, as we continue expansion, we would look at increasing the size. But right now, we've got a great niche and it's working.

And the equipment business has been tough for a number of years now. So what are you seeing on the other side of that when you go to buy from these equipment manufacturers, are they more to give you a deal, a better deal? Are there less equipment players out there? How should we be thinking about that in terms of potential when that potentially comes back to be able to generate margins that used to be or even better?

So on the controlled environment ag side for cannabis and horticulture, it's been tough for manufacturers over the last two years. A lot of large reductions of force, some are no longer in operation. So I feel that we have the ability now to have some really strong strategic partnerships with these manufacturers. They don't have to go out and hire or build out their sales team when they're just selling one product line. And with us, with good strong relationships to the end client and we've had a chance to build that relationship and trust early from working from the design stages forward, we're able to take them in and therefore, it can be an easier path to success for them. Moreover, from purchasing to our standpoint, if we're purchasing and procuring for a lot of facilities, that gives us a nice advantage. Right now, there's a phenomenal opportunity in the US cannabis market as it relates to rebates, energy rebates. And we're really focusing on that area to help go to our clients and provide a value to them where they could refresh or relight, for example, their facilities with more energy efficient LED lighting, as one example, with relatively low amounts of working capital out of their pocket. So when times get tough and it's been tough in equipment, you find a way to -- for everyone to win. And so that's what we've definitely been doing. Moreover, we have successfully been able to integrate equipment systems into our first large mechanical retrofit by adding mechanical systems or air conditioning to a super large distribution center, and we were able to integrate that equipment in. Now important to note, when we -- that equipment's part of a larger project. So equipment to the commercial side will not show up on our financials as a separate -- as part of the equipment line that is really equipment to the controlled environment and ag marketplace. Our equipment is built into the construction so that gives us the confidence, as Dick mentioned earlier, that we can increase our margins in the construction side in 2024. Now unfortunately, we had an fourth quarter one project that went the other way. So it looks like we're underperforming on that initiative to increase margins in Q3, but things are in Q4. But as Dick explained, that just was a point in time, 90 days. Now we go to the project that was decreased and we work to get a change order to get it back into place for ourselves. So we are really focused on increasing our margins in all categories this year, Eric.

The next question comes from Ellis Acklin with First Berlin.

Thanks for the insights into Q4. I just got one topic to discuss with you guys. If we can circle back to your initial 2024 guide, the last time on the Q3 call, I believe we were talking about needing a -- the magic number for you guys to reach adjusted EBITDA breakeven was around $30 million in revenues. So I'm just trying to square those comments with your new guide of $8 million in revenue and a positive EBITDA. Maybe you can help me out there.

So it all depends, first of all, on the revenue mix, right? So if it's high in the lower margin construction, you would need that $30 million. But we've already sort of looked at $24 million to $26 million. Now a couple of things have happened. A, it goes back to what I just talked. We did not show what we're -- the progress we're really making on increasing margins in construction, we didn't show that in Q4 because of that one project that took us down to low single digits. But also in the professional services side. In professional services, when we got everyone on the same ERP at the beginning of third quarter, we realized that we weren't as productive as we thought we were. We were around, when you look at billable hours, we were in the mid around 55% productivity. So in 2023, we actually had to put $1.2 million of COGS down into salaries. And our goal is to have all of our professional service providers, all of their salary, what we pay them should be up in COGS because we're billing adequately. In Q1, we're tracking above 90%. So that's one of the areas when we talk about the SG&A, I'm going to have Dick chime in here shortly, but that's one of the areas where we're doing a lot better. But Dick, will you tag on to the back then apart from increasing the margins, maybe focus on the SG&A side?

And Ellis, to your point, I mean, you're right, when we talked before with that larger revenue number on the initial guidance for Q4, certainly looked like it was going to take a lot of revenue for us to be breakeven on a go forward basis. With the G&A reductions that we've made that are taking place right now in Q1 2024 and will be there for all of 2024, we are significantly reducing that breakeven point. And again, it goes back to -- depends a little bit on mix but breakeven for us now is looking more like it's around the $16 million to $19 million of revenue, even with still having a decent amount, high percentage of our revenues being construction. But because of those G&A cuts, we have been able to really reduce that breakeven point for us. And you're just going to see that going forward into 2024. It's going to show up immediately when we do report our Q1 numbers. When you see a year-over-year basis, it's going to be rather dramatic from the standpoint of the reductions and how they're flowing through the income statement.

I just wanted to hear whether you guys were banking on any sort of pick up in the equipment or anything that was going to improve the margins to get to that target. So that's very helpful. I appreciate it.

Thank you, Ellis. And I hope everything -- Ellis, you're in Germany right now. I hope everything looks smooth on Monday with the kickoff. Look forward to seeing you soon.

Thank you. We have reached the end of the question-and-answer session. And I will now turn the call over to management for closing remarks.

Thanks, John. In closing, we're -- the management team, we're disappointed in the quarter for sure, right? I'm the largest shareholder, I'm disappointed. But I'm also very confident, our model is strong, our company, fundamentals, they’re secure. Every negative -- when you break down Q4 results, every negative is explainable, it's tactical, none of the issues are tied to longer term issues. And that's why we're confident, extremely confident about the company's ability to deliver strong positive adjusted EBITDA quarters this year. And it's happened, can't change it. We're focused on the future and we know that we have to earn the credibility and the confidence from the market and doing just this, delivering. So thank you for your time today. And look forward to talking to you probably in a month for our Q1 earnings call. Have a nice evening.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

Hello, and welcome to the Urban-gro, 2023 Third Quarter Earnings Conference Call. As a brief reminder, all participants are currently in a listen-only-mode. [Operator Instructions] Please note that this conference call is being recorded, and a replay will be made available on the company's website following the end of the call. At this time, I'd like to turn the conference over to Dan Droller, Investor Relations at Urban-gro. Sir, please go ahead.

Good afternoon, and thank you for joining us. Today's call will be led by Brad Nattrass, Chairman and Chief Executive Officer; and Richard Akright, Chief Financial Officer. I'd like to remind our listeners that remarks made during this call will include discussion of non-GAAP metrics, including adjusted EBITDA and backlog. These items should not be utilized as a substitute for Urban-gro's financial results prepared in accordance with GAAP. A Reconciliations of our GAAP net loss to adjusted EBITDA are available in our press release and in our Form 10-Q filed with the Securities and Exchange Commission and can be accessed from the Investor Relations section of our website at ir.urban-gro.com. On this call, we may state management's intentions, 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 Growth's current expectations. 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 do encourage you to review these documents carefully. Lastly, a copy of our earnings press release and a webcast replay for today's call may be found on the Investor Relations section of our website, which again is at ir.urban-gro.com. With that, I'll now turn the call over to Brad.

Thank you, Dan. Good afternoon, everyone, and thank you for joining us today. Slightly over a year ago, we launched the diversification initiative, focused upon leveraging our professional services tend to efficiently seek and build out additional revenue streams for the company. I'm excited to report that we continue to execute and gain momentum on this strategy as Urban-gro has evolved into a multi-sector focused professional services consulting firm. With more than 140 architects, interior designers, engineers, construction managers, project managers, horticulturists and others on our team. We have successfully expanded our operating focus beyond our core controlled environment ag practice to include clients across multiple centers, including industrial, commercial, hospitality, recreation, education and health care. In regards to our third quarter performance and consistent with expectations, we marked another sequential improvement in both revenues and adjusted EBITDA. Revenue of $20.9 million, a sequential improvement of $2.1 million or 11% came very close to exceeding our all-time quarterly high of $21.1 million reached in Q1 '22. The adjusted EBITDA loss was $1.3 million, a sequential improvement of $0.7 million. And while our significant revenues this quarter resulted in retiring 27% of our Q3 beginning backlog, we signed enough new contracts to drive our backlog entering the fourth quarter to $84 million, a 6% sequential increase. Despite the ongoing headwinds within the CEA sectors, our diversification strategy has served as a source of strength to the company. Our team is now more efficiently adapting to the shifting environment and we continue to focus on optimizing the productivity of our professional services employees as we work towards a period of more marked revenue acceleration. Although we made some difficult decisions to right-size our staff earlier in the first half of the year, we feel comfortable at current levels given the demand that we see. Now turning to current sector trends. Sector diversification is most definitely assisted in insulating our business from the broader weakness that the cannabis and vertical farming segments are working through. Although the CEA sector remains an important component of our future growth, our success is no longer fully dependent on its success. We've evolved into and are now regarded by our clients as a professional services consulting company that offers turnkey design, build and equipment integration solutions to multiple markets. Consistent with the second quarter, more than two-thirds of our revenue this quarter was generating in the sectors outside of CEA and included a combination of new projects with both existing and new clients and continues to include top-tier companies and some Fortune 50 clients as well. In the CEA sector, our equipment revenues continue to be compressed by the weak cannabis market. During the first nine months of '23, we have experienced a period-over-period decline of more than $20 million of 18% margin business. While it's impossible to ignore the negative impact that this has had on our financial performance. Our diversification has enabled us to keep our experienced team strong and intact. And as a result, we remain well positioned in the sector, and we'll be ready to handle the surge in demand when the cannabis market rebounds. This being said, in the interim, we're still seeing steady activity and are expecting to continue to sign design-build contracts in a variety of states. For Urban-gro today and apart from our cannabis clients lacking access to much needed capital, the primary block to more rapidly increasing our business in this market is one that we cannot control. However, it's also one that will continue to slowly dissipate. There are a number of legalized states, like New York, Alabama and Georgia, among others, for example, that have paused the awarding of licenses due to regulatory and legal delays within their state. We have a significant number of clients with projects in these states, some of which have already completed design, but we're confident the move forward of the construction build stage where these delays are resolved and licenses are received. This is evidenced in the third period where we had two such clients move forward to construction, and we'll continue to announce these successes as contracts are signed. As it relates to our European entity, the size and quality of the company's European pipeline is the strongest it's been since opening the entity since June of '22. While the cannabis markets abroad continue to show green shoots in multiple countries, our European business will still take time to sustainably scale its operations. I was in Europe last week, meeting with both clients and the team, and I can assure you that they remain diligently focused on driving strong returns. Now shifting to our guidance through the fourth quarter '23, demonstrating our ongoing commitment to deliver sequential growth on both the top and bottom line, we anticipate revenues to be approximately $30 million, which I'd add would be a new record for us by more than 40%, and we expect to realize breakeven to slightly positive adjusted EBITDA, which would mark an important shift back to positive cash flow and subsequently meeting our goal that we've been working hard to achieve this past year. In closing, the company continues to remain closely in line with the interest of our shareholders. In addition to the open market equity purchases made by myself and other directors in the second and third quarters, totaling about 1.5% of shares outstanding. My leadership team demonstrated their commitment as well, led with a 50% commitment for myself, each Executive Vice President and Officer of the company voluntarily opted to take a stock brand in lieu of up to 50% of their base salary during the third quarter. The key takeaways here. First, our Board as well as our leadership team and their teams continue to strongly believe in the future of the company. Second, our diversification strategy is working. It continues to gain momentum, and we have alignment on our goals across our organization. And third, we're doing everything in our power to maintain this positive momentum. Thank you. And with that, I will now turn the call over to Dick.

Thanks, Brad. In the third quarter of 2023, we generated revenue of $20.9 million, which represents a sequential improvement of $2.1 million or 11% over the $18.8 million of revenue generated in the second quarter of 2023 and an $8.6 million or 69% improvement over the $12.4 million of revenue generated in the prior year period. The increase in revenue over the prior year period was driven by a $9.4 million increase in organic growth of construction design build revenue, reflecting increases in the number of projects and average size of projects that we are working on in sectors outside of CEA. This increase was offset by a decrease in equipment systems revenue, which, as Brad discussed earlier, we attribute to the ongoing softness in the cannabis sector. Gross profit was $2.9 million or 14% of revenue in the third quarter of 2023 compared to $2.9 million or 15% of revenue in the second quarter of 2023 and $2.6 million or 21% of revenue in the prior year period. The decrease in gross profit margin for both of these comparative periods was driven by the impact of revenue mix where we experienced a substantial increase in lower margin construction design build revenue as well as a decrease in higher-margin equipment systems revenue. Operating expenses were $6 million in the third quarter of 2023, which, on a sequential basis, is a decrease of $0.8 million. Operating expenses in the third quarter of 2023 are $3.5 million less than operating expenses of $9.5 million in the third quarter of 2022. The prior year quarter included a onetime business development expense of $3.3 million. But even excluding this one-time expense, operating expenses decreased $0.2 million on a year-over-year basis. Both of these decreases are associated with the company's expense optimization and resource reallocation initiative. Net operating expenses were $0.3 million in the third quarter of 2023 compared to nonoperating expenses of $1.8 million in the prior year quarter. Net loss was $3.4 million or a negative $0.29 per diluted share in the current quarter compared to a net loss of $8.7 million or a negative $0.081 per diluted share in the prior year period. Adjusted EBITDA improved by $0.7 million sequentially to negative $1.3 million in the third quarter of 2023, which is an improvement of $1.0 million compared to the prior year period. The sequential improvement in our adjusted EBITDA was driven by lower operating expenses, as previously discussed. For the first nine months of 2023, we reported total revenue of $56.5 million compared to $49.7 million in the first nine months of 2022, representing an increase of $6.8 million or 14%. Net loss was $14.0 million compared to a net loss of $11.1 million, and adjusted EBITDA was negative $6.8 million compared to negative $2.2 million in the prior year comparable period. This decrease in adjusted EBITDA was predominantly due to the combined impact of an increase in general and administrative expenses of $3.2 million and a reduction in gross profit of $2.4 million. Turning to our balance sheet. We ended the third quarter with $4.8 million of cash and no bank debt. To support the strong performance of our construction operations, subsequent to September 30, we entered into a nondilutive asset-based lending facility in order to better manage our working capital. To date, the facility remains undrawn. Our total backlog as of September 30, 2023, was approximately $84 million, reflecting an increase of $5 million or 6% on a sequential basis and $17 million or 25% versus the prior year. This backlog is comprised of $77 million in construction design build, $5 million of professional services and $2 million of equipment systems contracts, and we continue to be encouraged by the increasing number of sectors that make up our backlog. As communicated on past calls, our backlog remains a realistic and trusted indication of our future business. Supported by our increasing backlog and pipeline, we remain confident that our cash position, combined with our asset-based nondilutive lending facility, will provide us the necessary flexibility to manage through the macroeconomic market circumstances. We continue to remain focused on our execution and returning to positive adjusted EBITDA. That concludes our prepared remarks. Operator, please open the call for questions.

[Operator Instructions]. Our first question is coming from Eric Des Lauriers of Craig-Hallum. Please go ahead.

Great. Thank you for taking my questions. First one is on the nondilutive asset-backed facility. Certainly, great to hear that you guys get some added balance sheet flexibility here. Could you just provide some more details on whether that's the overall size of the facility? What assets is this backed by? Just any more detail you can provide on that facility would be great.

Thanks, Eric. Dick, do you want to take that, please?

Sure. Eric, yes, it's a facility really backed by the receivables and primarily backed by the construction receivables. We've seen a large increase in that asset base for us as that construction operations sector has really grown for us. The facility we entered into is for up to $8 million lending on that. And then like I said, it's really based on receivables based.

And then is that a revolving facility? Were you able to sort of pay that down as needed or, yes.

Yes. It's not a term facility. So it is a kind of borrow as-needed basis from the standpoint of what we do under that facility. So we'll only incur interest as we have borrowing against that.

All right. We look at it to support the growth expected here in the quarters ahead.

Yes, that's great to hear. And again, great to see that added flexibility. My next question is on G&A. It's very nice to see these costs coming down here. Obviously, you guys are doing a good job kind of keeping a lid on that. I understood there's some deferrals to stock-based compensation over cash. How should we think of that G&A line, maybe excluding stock-based comp going forward, whether that's just kind of Q4 or sort of into 2024? As the business does ramp going forward, is this something that we should see? Should we see G&A sort of going up commensurate with revenues or with gross profit? Or are these sort of more permanent cost cuts that you've done? I guess if you could just provide some more color on some of the cost cuts that you've made so far and how to think of those going forward?

Thanks, Eric. I'll start, Dick, then I'll turn it to you for the detail. As I've communicated on past calls, Eric, we are and acknowledge we're top end loaded. When we made the acquisitions, we moved the leaders of those companies into senior EVP roles within the company. One of the reasons we made the acquisitions we did was to hire that specific skill set or talent. And so as we grow, as we start to deliver $30 million, $50 million-plus quarters, we do not anticipate needing to add any more senior management, EVP or hire. So it will be a nice evolution into the future. We didn't want to cut into the muscle when we cut earlier this year. So it was a sacrifice that we're willing to make in order to maintain the brain power for future quarters. Dick, do you want to jump in on the detail.

Yes. And I'd add to that, Eric, and this kind of goes to our adjusted EBITDA reconciliation. So in the current year, one of the items that we have included in G&A that we've talked about before is because of the growth we were seeing, we felt it necessary to put in a retention incentive program for 2023. That will not be in place going forward. That's going to be a reduction for us going into 2024. But to kind of reiterate with what Brad said, we really feel that with the staffing we have right now, we can handle much more revenue than we have in place today on a quarterly basis. We're seeing the number of jobs, the jobs that we have of a much larger size dollar amount, and we're able to handle that without really increasing the number of staffing that we have. So even though the G&A will go up some, it won't be anywhere near proportionate to the growth in the revenue we're going to see.

All right. It's great to hear. Thank you for taking my questions.

Thank you.

Thank you. The next question is coming from Brian Wright of ROTH Capital Partners. Please go ahead

Thanks. Good afternoon. I wanted to dive a little bit temper on that G&A reduction in place. I can tell you because like for the quarter, there were some deferrals where people were buying stock in either regular salary. So I'm seeing in the fourth quarter that refers unless that's being extended. So I just wondered that like for that line, I kind of understand what's the incremental increase in the quarter in the fourth quarter?

Yes, Brian. As you've indicated, there was a reflective reduction in G&A because of that salary option taken as stock by people. There was a little bit of it in Q2. It was primarily in Q3 so that does mean we're going to see a little bit of an increase in G&A in the fourth quarter. I mean, just to kind of clarify, we're not talking millions of dollars here or anything because of what people did. The total was right around $200,000 in terms of what people took as a reduction of their salary and stock instead. So there is going to be an increase in G&A related to that, but we're also going to see some other savings taking place in the fourth quarter to basically keep our G&A, although as projected right now slightly over where Q3 is not significantly over where Q3 is.

Great. Thank you so much for the additional color on that. I just -- maybe the key out, but I just haven't seen it yet. And so we wanted to think about just like end markets as far as the backlog and where the end market, how you would kind of allocate the backlog from tremendous end market perspective between however you want to do a health care versus CEA versus, you name it, but just some insights on to how to think about the industries of the backlog.

Sure, Brian. Brian, whereas our quarterly revenues more than two-thirds were non-CEA. Our backlog still are the majority of it, more than two-thirds is in the controlled and farming space. We anticipate growth on both sides. But on the non-CEA side, these contracts are typically shorter in length. And when they sign, they immediately want us to start executing whether it's design or on the construction side. The CEA contract, especially now is we're focused on the projects that we are signing, they're larger and they're more extensive with design and build. Those can spread out over six quarters, sometimes even as long as eight quarters.

Great. Thank you for that color. I'm kind of like torn because I choose your commentary about the $30 million in quarterly revenue and even $50 million optionality to get into those levels. So I'm assuming you see things that we don't see, right, as far as kind of that optimism. But then if I choose to that's great on the positive side. But then if I look at just like that ramp sequentially third quarter from the little $21 million up to the around $30 million for the fourth quarter. So is there like, how can we get comfort with that kind of ramp in the fourth quarter?

Understand, Brian, completely on the question and what we have insight into and haven't said anything on goes to kind of our sales funnel, which we don't talk about. But there are a lot of projects in the sales funnel getting ready to, in our mind, come to fruition, that would be announced when those are signed. Clearly, a substantial amount of the revenue that we're talking about for the fourth quarter is going to be from a construction perspective. So as those larger projects get signed, there's a lot of work that can be done on those projects upfront. So completely understand from the question that you asked and that you might not necessarily see it in the backlog that we're reporting as of the end of September. But with our insight into the funnel, we're highly confident that, that revenue is going to be there.

And Brian, I'll add to the back of it. In the third quarter, we retired 27% of our beginning backlog. And so now looking at entering the fourth quarter with $84 million, if we're able to maintain that proportion of what we recognize in the quarter, it shows the other side of what Dick was talking about in terms of the confidence level of where we're starting and then you add with Fix discussing on what we're anticipating to top it off in order to hit the $30 million market.

Great. And then are there any other things that are part of that are just details like Ohio approval for adult use, things of that nature like that you could point to as well?

For Ohio, fantastic, right? For the industry, another state legalized by the time they get the regulations in place, you're probably looking at third quarter of '24. So for us, it would be great. We were talking to clients ahead of time. They would start, hopefully, to move forward in more serious discussions with us. But I touched on it a little bit earlier. For us, we don't need the entire industry to turn around, like, of course, we're fully supportive in pulling for rescheduling and safe banking, et cetera, to pass. But for us, we have a lot of clients in these states that just have regulatory delays. And they are funded. All they need is a license and the funding will be released, and they move forward to the construction side. So very optimistic, the states like New Jersey is rapidly opening up now. Hopefully, New York won't be too far behind. And when they do open up and they award the licenses for us, we can't guess because it could take a week or it could take three months. But as soon as they open up, and we sign those contracts, we'll definitely want to get them out and announce them for sure. But we don't have to wait for an overall industry turnaround to successfully generate significant revenues and profits.

Great. That sounds great. I think that'll - I think that's it for me. Great. Thank you very much.

Appreciate it. See you next week.

Thank you. The next question is coming from Anthony Vendetti of Maxim Group. Please go ahead.

Hi, guys. This is Thomas McGovern on for Anthony. Thanks for taking my question. So to start just kind of pigging back on what you guys were just discussing. You just mentioned that New Jersey is starting to open up in the cannabis sector, and you're seeing some positive signs in New York. I'm just wondering now that we have a little bit more visibility off of last quarter, do you guys see any potential inflection points in the cannabis market as a whole? I know you just said that you don't need a full industry turnaround to start recognizing some revenue there. But just maybe if you could provide your industry insight and just how the market is starting to shape up. I'd appreciate that.

Sure. Thanks a lot. Thanks for the question. Inflection point, of course, the main one will be rescheduling. And as I sit on the Board of the National Cannabis Roundtable, and this is probably something that would take place in Q2 of next year. We remain very optimistic the industry needs something significant like rescheduling for sure. In terms of, at a state level for us, it could be awarding new licenses in existing states like Florida, for example, it is New York moving forward at a more rapid speed in expanding the award of licenses to additional groups that aren't tied into specific segments. On New Jersey, when it opened up, we've made great progress with certain clients, but there's also now their funding hurdle as well that these individual groups have to jump over to. So hopefully, something like, say, banking passing. It was hopeful again, like last year that could happen by the end of the year. It's now most highly unlikely that it will happen. It could go into Q1 or Q2, but there's a lot of hurdles, of course, facing the industry. But for us, it's just releasing the licenses that are active in already legal states and getting through those regulatory delays. I wish we could forecast it better for sure, but it's quite amazing how quickly they can pop up and how fast the clients want to move. We had two in Q3 and those were both projects that we had anticipated probably that would move forward a couple of quarters faster. And we had them in the schedule for Q4, Q1 and boom. They move forward once those licenses were released. So it's a nice pleasant surprise when it happens for sure.

Understood. I appreciate that color. My next question is on the international front. So last quarter, you guys mentioned you had the highest top line, and most of that have been driven by design. You also discussed how Germany was establishing some regulations, but it was taking some time that you were even looking at some opportunities in vertical farming in the Middle East. Being that you were just there last week, if you could provide us an update on how you guys are looking at the international market and kind of what to expect moving into '24 that would be appreciated as well?

Yes. In the Middle East, that's not a focus for us right now. It was interest when we opened that office, but we quickly decided just to focus in our backyard in and around the Netherlands, our offices right outside of Amsterdam. When I was there last week met with clients in both the cannabis side and then also the vertical farming side. On vertical farming, there's a strong focus on moving strawberries in doors. We've also had clients in the North American market, where we're having those same discussions of design building those facilities around moving berry production indoors. From a cannabis standpoint, the experiment that has been active in the Netherlands for over two years now, it is moving forward. These groups are being funded and they're moving forward with the build-out of their facilities. So that's nice to see because there was a long pause of about four or five quarters. So it's nice to see that start to move forward, and it would be a good strong accomplishment for Ingruto go to the next stage, past design with one of these entities. As far as Germany, similar to what I just mentioned on Ohio, it's just getting the regulations in place. Originally, they were going to move forward. facilities had to be built in country, but that went against the overall EU mandate. And so now they've toned it down or looking at more of a social club Phase 1 approach. Fortunately, for us, on a social club approach, it still requires the build-out of facilities because hundreds of social club licenses can go together to build out a facility. So right now, the Netherlands, the U.K. and Germany are key, I'd say, the top three countries we're focused on right now.

Great. I appreciate that. And if I could just ask one last quick question before hopping into queue. So you guys mentioned last call that you guys were starting to look at potentially resuming some of your M&A activity in 2024. I'm just curious, given the macro market, if that's still something you're looking at and kind of just your general perspective on returning to some of that acquisition activity you guys have done historically? I appreciate you guys taking the time to answer my questions.

Perfect. Thanks. Right now, we're just focused on getting back to generating cash and growing within our own shelf. As I mentioned at the start, we are top and loaded, and so we have a lot of room to grow within and really be able to register good, strong, profitable quarters and quarters ahead. Long run, of course, whether it's to access contracts or access a specific service area that we don't offer now, it's something we want to look at. But right now, it's not even on the near-term plan for sure. It's just getting back and maintaining positive cash flow.

Great. Thanks again.

Thank you.

Thank you. The next question is coming from Eric Beder of SCC Research.

Good afternoon. Hi, I want to step back and talk a little bit about your ability to win contracts outside of CEA. What you're competing against a lot larger people and people who have done it for multiple years. And with, I guess, you could argue certainly sometimes more resources. How are you winning those contracts? And what gives you the confidence going forward that you'll continue to win them and to get, as you mentioned, bigger contracts?

Great question, Eric. In terms of winning additional contracts with the current clients, we're doing it, right? When we acquired the construction management firm, they were working with a large Fortune 50 client and doing a couple of small projects a year. We're now doing multiple projects and looking to expand that portfolio and the project size is 3x to 6x larger. So we're locking the tuck. We're delivering on what we said we're going to do. And we're delivering good strong service levels. We have set up a project management office internally. We have on-site superintendents, internal project managers and a whole bizdev relationship team. So we've put a lot of work into building out that go-to-market strategy. When JT Archer joined us as COO, that's that expertise and brainpower that he brought in. We're also utilizing systems a lot more than we did in the past. We've got a great client and vendor-facing portal that allows clients to see real time where their project stands, where equipment or when equipment is arriving and what's needed or outstanding items to complete. So we're giving a good service level. Of course, there's a lot of large multibillion-dollar construction management companies. We are sub-in to some of those companies. They're not built to go after $10 million, $20 million projects, they're focusing on infrastructure projects and other large $1 billion-plus projects. We found a really nice sweet spot at around $10 million to $30 million, where the turnkey aspect doesn't really exist in the industry. We signed it was a Gulf or so actually at the hospitality and recreation project in the Southeast. And on that project, they were thrilled to find out that they could procure all of the services in one full package from Urban-gro. Otherwise, they were going to bring on their own site, superintendent that we're going to have to hire architecture and engineering on their own. So that was a really nice moment of awakening, for at least me to see that there's definitely a value in what we're offering for sure at that level. We're also working on a lot of projects. Another project is working with an international hotel chain, just to do $30,000, $40,000 of engineering, but 15 times a year for the foreseeable 3- to 5-year future. So it's not always design build our engineers. It's a 20-year company that we bought based in Houston. We have a lot of relationships. They have a lot of skill sets, one is fire and safety, for example, that there are no one fell in that specific Southwest Region. So we're building on our strengths and doing a good job in delivering on what we commit to do.

Great. A little more granular. When you look at Q4 revenues, do you still expect it to be about two-thirds non-CEA?

So for Q2 and Q3, it's maintained that. I would, based upon our pipeline and what's expected to close and the backlog that we have, I would expect it to stay at that level. If we continue to have good strong CEA announcements this quarter, like we started to see in Q3, I would say you could see that begin to go more towards the 50-50 mark in Q1 and Q2 next year as the cannabis facilities or the vertical farm facilities ramp up.

Great. And last question. In terms of the equipment, obviously, you need more CEA to drive the equipment business. Are there opportunities here given that your purchase have equipment here, and I'm assuming that a lot of people are in the same issues as you are with CEA that the margins in equipment when they come back can be, I guess, in theory, a little bit stronger because the equipment companies right now are having problems selling their product?

Yes. Thank you, Eric, I would look at it as we can't agree. Like when you look at the 9-month performance, that's close to $4 million, right, in margins that we weren't able to take advantage of this year. I feel we have relationships with dozens of manufacturers. And I feel that we're in a place to better serve our clients if we have a cost-plus markup. If we're working with them on is services, we're then moving forward to construction and then it goes to equipment, we want to be equipment agnostic. And to do that, we just have a set markup in our contracts and then we work with multiple manufacturers. And those manufacturers just are not in the U.S., we're also in Europe as well. We definitely want to increase the equipment, Eric. I think you asked on the last call, we have in Q3, we did successfully integrate mechanical or closed the mechanical contract. We haven't shipped it yet, but into a non-CEA, very large clients. So it is a focus for us to spread our Acasta a larger web and also sell into those other markets equipment systems too.

Thank you.

Thank you. The next question is coming from Ellis Acklin of First Berlin. Please go ahead.

Hi, guys. How's it going? Thanks for taking my questions. For starters, I'd like to circle back to your earlier comments about keeping your team and key staff members in place so that you have the capacity to handle much larger revenue going forward. I was just wondering if you could share some insight as to what the inflection point might be in terms of revenue volume so that you guys can consistently generate a positive adjusted EBITDA with the current staffing and G&A cost structure?

I'll take that one. Good question. I think as we've indicated before, we think we could still see a relatively substantial increase in the revenue with the staffing that we have. As I've sat here today kind of swagging that, I would say I'm pretty comfortable that we can get up to at least $40 million of quarterly revenue without having substantial increases from a personnel standpoint. And again, part of that is just we're just seeing an increase in the size of the jobs that we're doing, especially on the construction side. And then when the cannabis equipment side does come back, the ordering of that equipment doesn't take a lot of people. So I kind of played around with our projections going forward. And I certainly think that $40 million of revenue, even $45 million of revenue a quarter, it's not going to require very many more, if any, people for us. And that was kind of the way we've built the business. It's just unfortunately with the falloff in cannabis and especially with the way it hurt equipment, just kind of lacked is from the standpoint of our income statement with that downturn. But when it comes back, we've really got the people in place to be able to handle things.

I'll add on the back there, just a little bit, Acklin, I'll add on to the back there. As our revenues increase, we will add architects or engineers or site superintendents, those will be the key roles that we continue to hire and bringing operational expertise in certain areas, we'll bring those individuals as well. But as far as the senior executive team, EVP and hire, we don't anticipate much need for that in the very near future for sure.

Okay. Just to continue along with this line of thinking, my question is more assuming that the business mix remains as it is going forward for a while and keeping the staff that you have in place, where is the point? Is it in revenues where you can break even consistently at the adjusted EBITDA level? Is that $25 million, $30 million, $35 million or like Dick was talking about $40 million. Is there a spot that you guys target? I was like okay, more breaking even here?

It all depends on that mix, right? So with --

Assuming the mix stays about what it is right now with depressed equipment sales.

Yes. That's where our guidance is, Ellis, right now, right approximately $30 million in revenue. And that's only with less than 10% equipment in the quarter. So that equipment changes, you see some inflection points hit in the cannabis space that can decrease. But our guidance is approximately $30 million in revenues and breakeven to positive EBITDA, we're there right now.

Okay. That's great. And then if I may, just one quick follow-up. Regarding the project you had to take out of the backlog last quarter. Is there any update on that? When that might stop idling or if you might be able to put it back in at some point?

We're still in discussions with that client. I do not believe that, that client will move forward, but they're working to sell their license and their facility. So we have talked to a couple of prospective purchasers of that license. So I remain positive that, that project can resume at some point in the future, but perhaps it won't be with that specific client.

Okay. Great. All right, guys. Thanks a lot. Have a good day out there.

Thank you very much, Ellis.

Thank you. That is all the questions we have for today. Please reach out to investors.uban.gro.com with any additional questions. Thank you, and have a nice evening.

Hello, and welcome to the urban-gro 2023 Second Quarter Earnings Conference Call. As a brief reminder, all participants are currently in a listen-only mode. [Operator Instructions] Following the presentation, there will be a question-and-answer session for those on the teleconference line. Please note that this conference call is being recorded, and a replay will be made available on the company's website following the end of the call. At this time, I'd like to turn the conference over to Dan Droller, Executive Vice President of Corporate Development and Investor Relations at urban-gro. Sir, please go ahead.

Good afternoon, and thank you for joining us. Today's call will be led by Brad Nattrass, Chairman and Chief Executive Officer; and Dick Akright, Chief Financial Officer. I'd like to remind our listeners that remarks made during this call will include discussion of non-GAAP metrics, including adjusted EBITDA and backlog. These items should not be utilized as a substitute for urban-gro's financial results prepared in accordance with GAAP. Reconciliations of our GAAP net loss to adjusted EBITDA are available in our press release and in our Form 10-Q filed with the Securities and Exchange Commission, and can be accessed from the Investor Relations section of our website at ir.urban-gro.com. On this call, we may state management's intentions, beliefs, expectations or future projections. These are forward-looking statements that 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. 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 filed 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 do encourage you to review these documents carefully. Lastly, a copy of our earnings press release and a webcast replay for today's call may be found on the Investor Relations section of our website, which again, is at ir.urban-gro.com. With that, I'll now turn the call over to Brad.

Thank you, Dan. Good afternoon, everyone, and thank you for joining us. Our evolution into a professional services consulting firm continues to gain momentum, and in addition to our focus on Controlled Environment Agriculture, also known as CEA, we continue to expand growth outside of this market in the industrial, commercial, and healthcare sectors. With the dedication and support of our leaders and their teams, and consistent with the expectations that we communicated in May, we've continued to do what we said we would do. We recorded another sequential improvement in both revenues and adjusted EBITDA. We increased our quarter end cash position. We continue to have zero bank debt, and we've removed additional costs from the business. With this said, it comes as no surprise that we've been operating in a very challenging environment in the first half of '23. Our reductions in SG&A to offset decreased margin dollars, especially in the equipment category, have yielded positive results. And coupled with our ongoing business development initiative across all segments in which we operate, we are confident that our model will continue to prove its efficiencies in the quarters ahead. Our messaging remains consistent and that our top corporate priority is returning to sustained positive adjusted EBITDA as soon as possible. Based on our third quarter to date trending, along with the cost we've taken out of the business, our increasing revenues and our systems enhanced insight into our project margins, we believe that we are close to reaching that inflection point, and moreover, are not in a position where we would need to raise dilutive capital. In the second quarter, we generated net revenue of $18.8 million, which represents a 12% sequential improvement over the first quarter and a 16% improvement over last year. Adjusted EBITDA for the second quarter was negative $2 million, marking a significant $1.4 million improvement over the first quarter. We remain diligently focused on reallocating resources and optimizing our spending where appropriate to ensure that our infrastructures align with the size of our business. Through these initiatives, year-to-date, we've now reduced our annualized SG&A expense by $2.9 million. Well, these were difficult decisions, they were necessary ones, and we're now a leaner and more efficient organization than we were at the end of last year. Additionally, we now have improved visibility into our business with all entities operating on the same ERP system, and we'll continue to take action as necessary to position our business for long-term profitable growth. Now turning to current sector trends. Sector diversification continues to help insulate our business from the broader weakness that the cannabis and produce focused vertical farming sectors are working through, although these sectors remain an important component of our future growth. Through our successful diversification strategy initiated a year ago, we've evolved into a professional services consulting company that offers turnkey design build solutions to multiple markets. In fact, approximately two-thirds of our revenue this quarter were from other targeted markets in which we have diversified. We've established ourselves as a trusted partner for all of our clients' projects, and the quality and level of service we provide lends itself to a high rate of repeat clients and speaks to our ability to attract top tier companies, including some Fortune 50 as clients to the company. In the CEA sector and as we've detailed on past calls, our equipment revenues have been significantly impacted for over a year now by the weak cannabis market. On a positive note, the second quarter represented the first sequential increase in equipment sales since the second quarter of '22, the primary driver being projects that resumed after an extended pause. This being said, our professional services revenue is also being affected by this downturn and year-to-date more than half of our services revenue is from markets outside of CEA. Overall, we remain well positioned in the sector and will most definitely be ready to handle the surge in demand when the cannabis market rebounds in the future. We also remain confident in the strategic investments that we've made in Europe and believe that we're well positioned for long-term growth. In regards to our backlog, which decreased to $79 million at the end of Q2, the drop is predominantly tied to a design build cannabis cultivation project that was actively in production. Our client is unfortunately facing some funding uncertainty, and so we had to pause the project. While we remain in close contact with the client, the contract does remain open and we felt it prudent to remove it from our reported backlog until their funding source is solidified. As communicated on past calls, urban-gro's backlog is a realistic and trusted indication of our future business. And although there was a quarterly decrease, as of today, we have multiple contracts currently out for signature, which are collectively worth well more than this sequential reduction. Now, turning to our guidance for full year 2023. Due in part to the pause of the project discussed above, as well as some other timing shifts where projects have extended out to additional quarters, we're updating our guidance for consolidated revenues to be within a range of $90 million to $95 million and adjusted EBITDA in the range of negative $6 million to negative $5 million. To put this in perspective, I'd note that our adjusted EBITDA in the first half of '23 is negative $5.5 million, which implies that we expect neutral or breakeven adjusted EBITDA performance in the second half of the year. In terms of cadence, for the balance of the year, we continue to anticipate sequential increases to both revenue and adjusted EBITDA. In summary, we remain closely aligned with the interest of our shareholders, and insider ownership now represents approximately 30% of outstanding shares. This alignment is further supported by: first, the recent open market equity purchases by myself and other directors, totaling about 1.5% of shares outstanding; and second, the commitment of my leadership team near the beginning of the third quarter and led with a 50% commitment for myself. Each executive Vice President and officer of the company voluntarily opted to take a stock grant in lieu of 20% to 50% of their base salary for a three months period. The key takeaway here, our Board and our leadership team strongly believe in the future of the company. We look forward to continuing to deliver improvements in both the top and bottom line and further unlocking the value for ourselves and for our shareholders that we know our business can provide. Thank you. And with that, I will now turn the call over to Dick.

Thanks, Brad. In the second quarter of 2023, we generated net revenue of $18.8 million, which represents a 12% sequential improvement over the first quarter of 2023, and a 16% improvement over $16.3 million in the prior year period. This increase was driven by an $8.1 million increase in construction design build revenue associated with the Emerald acquisition in April, 2022, while professional services revenue of $3 million remained relatively flat year-over-year. Although equipment revenues decreased $5.5 million versus the prior year, they increased approximately 59% relative to the first quarter and further more than 2 times what we reported in the fourth quarter of 2022. Combined, we believe this is an early indicator that we are seeing more recovery in equipment spending from our cannabis sector clients. Gross profit was $2.9 million or 15% of revenue in the second quarter compared to $3.5 million or 22% of revenue in the prior year period. The decrease in overall gross profit margin was driven by the impact of revenue mix where we experienced a decrease in higher margin equipment systems revenue, offset by an increase in lower margin construction design build revenue. Operating expenses were $6.8 million in the second quarter. On a sequential basis, our operating expenses decreased by $1.1 million. In addition to the annualized savings reductions that we had reported in the first quarter and after aligning all entities into one ERP system, we've taken additional steps to optimize and reallocate our resources, which now total $2.9 million of estimated annualized operating expense savings year-to-date. Non-operating expenses were $1.6 million in the second quarter, which includes a $1.5 million legal settlement. As a result, net loss was $5.4 million or a negative $0.50 per diluted share in the second quarter, of which approximately $0.14 per diluted share is due to the $1.5 million settlement I just mentioned. This compares to a net loss of $1.7 million or negative $0.17 per diluted share in the prior year period. Adjusted EBITDA was negative $2 million in the second quarter compared to negative $0.5 million in the prior year period. In addition to being driven by lower gross profit due to a change in revenue mix, the decrease in adjusted EBITDA year-on-year was due to higher operating expenses, predominantly associated with increased compensation, headcount from both organic growth and our acquisitions, increased professional and insurance related expenses, and the investment in our European entity, which began in Q3 2022. Turning to our balance sheet, we ended the second quarter with $8.6 million of cash, a $1.3 million or 18% sequential improvement over the first quarter. This cash, combined with no bank debt, provides us the necessary flexibility to manage through the macroeconomic market circumstances until we return the business to positive adjusted EBITDA. And in regards to backlog, our total backlog as of June 30, 2023, was approximately $79 million. This is down from the $105 million that we reported at the end of the first quarter of 2023, primarily due to the removal of a client's project as Brad previously discussed. This backlog is comprised of $70 million in construction design build, $4 million of professional services and $5 million of equipment systems contracts. That concludes our prepared remarks. Operator, please open the call for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Eric Beder with SCC Research.

Can you talk a little bit about the G&A? Significantly, obviously, I think we'll see probably a little more of that benefit roll through the rest of the year. Do you have the ability to leverage that? Is this a leveragable number or are you going to have to start ramping it up going forward? And when you look at it, how has it affected your ability do you think to do projects or other pieces here?

Thanks, Eric. We do not anticipate needing to make more cuts in order to get to our targeted positive adjusted EBITDA. That being said, we will experience the benefit to some of those cuts that we made in the second quarter. We'll have a full quarter to take on those cuts we made in Q2. And in addition, those benefits from the leadership team taking stock in lieu of salary, that will be predominantly recognized in the second quarter as well. And as per your second part of your question, it's the most exciting part of our model. We've got a strong team. We do have a large number of Vice President and higher positions. However, we've invested to build out this roster of individuals. Actually, even in Q1, we added our Controller and our Chief Operating Officer. And the good news is, as we build, as revenues double and triple, we don't need to add any more Executive Vice Presidents or hire. We'll need to add architects, we'll need to add engineers, construction management individuals, just to meet the demand and deliver the services. But we will not need to proportionally increase the G&A with the revenue. So it's the exciting future ahead of us that urban-gro brings for sure.

Could you also talk a little bit about the ERP? How many did you have before? And going forward, how can you leverage that and how should we be thinking about that in terms of opportunities?

Dick, will you take that please?

Sure. Hey, Eric, thanks for the question. And just kind of to clarify, you're asking about, with regard to the ERP system in terms of, how we're able to leverage that into our operations and reporting?

I guess the question is, how many did you have before that you collapsed into one, and what does having one ERP as opposed to multiple ERPs mean in terms of your ability to drive more business and drive more profit?

Okay, fair enough. Yes, so, with the acquisitions that we did, everybody had kind of their own ERP. The primary one that urban-gro had developed and acquired to really handle the business going forward is the one that we are using on a consolidated basis going forward. But with the three acquisitions that we did, two of them had the same ERP and the other one had a different one. So that was three different ERP systems. Combining those into our existing ERP system going forward, which is conducive to handling the construction design build business that we're doing, it's just been a matter of taking their existing projects, making sure we get them into our new ERP system, but that we get the reporting out to all of the project managers and division managers so that they understand how their business is trending, how profitable it is, and then the things that they have in their pipeline coming into the business so that they can schedule their people and projects accordingly. So, it's been -- not been an easy effort from that standpoint because we had to keep the business running, but now we've finally gotten that to where all the businesses are in the urban-gro existing ERP and making it so that we're just frankly more efficient with regard to doing the work going forward. That did result in some of the headcount savings that we were able to reduce our headcount by, not as much as in some of the areas where we did have some reductions, but there were some savings with regard to those aspect of things.

Our next question comes from Eric Des Lauriers with Craig-Hallam Capital Group.

Thanks for taking my questions and congrats on the cost cuts made on the G&A side of things. It's impressive to see. My first question is just kind of getting a status quo on the cannabis projects. It sounds like there was one that was paused in the quarter and then, in the prepared remarks, I think I may be picked up on some that maybe have resumed. So just wondering if you could kind of give us a status quo of your current cannabis projects? Maybe how many you have active? And then just in terms of the guidance, what's implied in terms of new cannabis projects starting up in the second half? Thank you.

Thanks Eric. Yes, as far as that one project, that was a design build project that launched late in Q1. And we had anticipated to recognize about three-quarters of it or close to $15 million this year. It's paused right now. But there is a chance it'll resume, but we've assumed for now that that's why we took it off. It was the prudent thing to do. I've mentioned on past calls that we have over 20 projects that have -- in the cannabis space that are at the design build stage, but for a variety of reasons, typically tied to either legal states expanding and the regulatory delays that are surrounding that, or new states that have legalized, but they haven't awarded their licenses yet, or they did and pulled them back like in Alabama for example. That's what's holding our projects up right now. And so as those issues -- regulatory issues get worked through, we expect them to release. And when they release, we feel we have a very good shot at moving to the build side and moving on to the supply in the equipment as well. In the cannabis space, there's -- further than that, the single state multi-state operators are, they're really watching their CapEx expenditures. The projects that did open up for us were just in two states being Mass and also Georgia. But we'd started working on those projects in the middle of '22. Overall, look, I think there has to be some sort of banking, SAFE Banking movement, which unfortunately I don't see happening this year getting rid of 280E and getting at the rescheduling, allowing the operators to list on a major exchange and to take in strong capital. That's what it's going to take, but we -- some of the contracts that we had signed in Q4 and Q1 that are picking up are going to result in a strong sequential lift for us entering Q3. And so it's -- as we have revised the guidance due to that contract, it's not, hey, it's all going to happen in fourth quarter. It is sequential, but it's going to increase strong in Q3 as well. We'll be ready, Eric. Like, that's the nice thing about our model. We'll be ready to take advantage of the opportunities when they present themselves. Because of our diversification, we're able to generate profits, margins in other segments. So, it's working out fine for us, but it's taken about a year to get here.

Yes. So, it sounds like with those two projects that resumed, that's going to be driving some of the sequential inquiries from Q2 to Q3. Does the guidance assume that any other cannabis projects release or that there's some regulatory change that's going to cause more revenue to be recognized from new cannabis projects either in Q3 or Q4? Is there anything like that implied in the guidance?

No, there isn't. On our backlog, about 70% of it is in CEA, the majority of that is cannabis, 30% non-CEA. And the projects that have released right now. There's a couple of small $5 million to $8 million ones that we're expecting to release in the next four weeks or so. We proportionately added some of those into the guidance. But guidance is really dependent on continuing with the non-CEA projects and executing, as you saw in Q2 about two-thirds of our revenues were from the non-CEA side of the business.

So, if I heard you correctly, you're saying 30% of the backlog is non-CEA. About two-thirds of the recognized revenue in Q2 was non-CEA. Could you maybe -- I guess just final kind of question or two for me here. Can you give us a sense of the sort of pipeline of non CEA projects, understanding that you guys have a difference in your very prudent and strict definition of backlog? Just in terms of the pipeline of new projects, can you just kind of give us a sense of how those are going with non-CEA projects and just how that momentum of kind of combining these various businesses together to be that one-stop solution. Just kind of talk about how that momentum has carried over into some of these discussions. And then just as a final one for me, can you just give us sort of a sense of the revenue mix of like a typical non CEA project? I know that -- for example, for the cannabis or CEA projects, I know you have a high mix of equipment systems. I don't think that's the same for non-CEA projects, but if you could just kind of give us a rough overview of what a typical non-CEA project looks like, that would be great? Thank you.

Thanks Eric. Well, first of all, right in non-CEA, there's a huge potential client list for us to go after in that side of the marketplace. For our non-CEA business, now we're doing a lot of repeat business and this repeat business -- I'd mentioned in the prepared remarks that we have more contracts out for signature right now than -- more than we need to cover the decrease in our backlog. And there's a lot of verbal commitments from the clients, but we don't put it onto our backlog until it's signed. So we're confident in those projects. We're sitting at the table, we're planning with our clients, their strategic plans for CapEx expenditures for the remainder of the year and looking into 2024. So we have a pretty good solid indication of where we're going. Now with the non-CEA accounts, they're typically not signing contracts six months or giving us deals six months in advance. So it's a lot of verbal and then we're able to move forward quickly when we get that appeal from the client. In terms of equipment, yes, there is equipment in the CEA side of the business and there's mechanical lights, airflow, environmental control systems, et cetera. But we have been able to cross over into selling equipment in the non-CEA side with the acquisition of DVO. Their President, Jason Dawson, he has a long-term working relationship with some of the largest mechanical manufacturers in the country, in the world. And so we have successfully closed our first deal. It's mixed in with construction costs. And not only are we looking at equipment like mechanical, but we're also starting down the path and looking at materials, so like, IMP insulated metal panels, for example. So we're looking at -- well, I do believe that we'll have a very strong uplift in the equipment side, and right now that will be baked in with the construction. We won't separate it at this point. A project example in non-CEA, it could be -- and this is -- the other nice thing about having all of the services under one roof, it could just be an architect design opportunity for a few hundred thousand dollars. But then we're able to integrate our engineering in and we're able to integrate the construction in. With one of the Fortune 50 clients that we deal with, that was -- the contract was brought through the acquisition of the construction management firm. When we made that acquisition, it was just construction. And now on those projects with that large CPG company, we're handling the architecture and we're handling the engineering as well. And we hope to handle some equipment or reselling, or value-added reselling into that client as well. There's a lot of some of the larger design build firms, companies, firms that are doing $5 billion, $10 billion, $20 billion per year, they operate under $250 million as a minimum. We've found that under the $50 million project ceiling, so $10 million to $30 million on average, there's a great opportunity. There's not a lot of turnkey design build firms in the market. There's individual architecture, engineering and construction firms or general contracting firms. But to have that all with one single point of responsibility like an urban-gro, we're bringing a value add to the marketplace. Otherwise, the client has to add the construction, add the project management individuals onto their -- into company and employ them. And we're able to handle all of that for them. But to summarize, a lot of repeat business on the non-CEA side for us right now, and there's absolutely opportunities to add equipment into that type of the business and look forward to talking about it more in future quarters.

Our next question comes from Brian Wright with ROTH MKM.

Thanks. Good afternoon. And to the team, I sure wish a lot of companies that I cover, they go through bumpy periods, would do what you have all done as far as the stock buying and salary deferral. So I really want to applaud you, applaud the team for that and for their commitment. My question though is when I look at the guidance for the year in terms of revenue and EBITDA -- and I -- just from a modeling perspective, is the right way to think about it on the cadence a modest sequential increase in the third quarter and then a more meaningful in the fourth quarter on the revenue side?

Thanks, Brian. And I appreciate the accolades, will definitely pass those on. It’s great to appreciate it. No, we have a strong -- we're forecasting a strong sequential lift going into Q3 and then continuing to grow from there into Q4, and as indicated both on the top end and on the adjusted EBITDA side as well. I'm sure your next question may be about margin and sort of that's one that's flashing. So I'd like to address that, because it's all about the bottom-line, right? And that's what I tell the team as well. We could have all the revenues in the world, but if we're not positive adjusted EBITDA and then generating cash in subsequent quarters, we're not going to get the respect and the attention that I feel we deserve. And so we're laser focused right now on getting those margins back in line. I do feel that Q2 margins in a couple of the years were outliers. As we grow and the construction becomes a much more larger revenue portion of the business, that is going to tug down on the overall company's gross margin percentage. But just asking -- sorry, answering Eric's question, if we can move equipment at strong margins into the construction side or materials like inflated panels, that'll really help us average out. In addition, we're not acquiring right now, but we do have plans in 2024 to resume the acquisition of profitable services companies. Doesn't have to be architecture or engineering, it can be energy efficiency or just other margin companies where they have good, strong contracts that we can bring our other service offerings into. So margin is a focus, laser focus for us. Dick, is there anything else you want to add to that, because he's all over the team when it comes to margin.

Yes, I would echo Brad's comments with regard to margin. And then in addition to that, Brian, I'd just say from the standpoint of our operating expenses. For Q3, we'll see some additional savings reflected that were part of the reductions that occurred part way during the second quarter. So, we're going to see improvement there in the third quarter, then a little bit more of a stabilization going forward. But as Brad commented on the overall call, we have a business that leverages very nicely as we look to grow and have the cannabis customers start purchasing equipment again. We're well staffed on the construction design build side from the standpoint of being able to support growth on that side of the business. So, anyway, we really feel we've got ourselves well positioned so that we'll be able to handle or manage really the growth in the business without having an increase on the operating expenses.

Can you -- I just want to go on the EBITDA side now, kind of given where we are year-to-date and with the guidance, how to think about that? Is it again flattish in the third quarter or is it more another slight down and then we get positive in the fourth quarter? Just understand kind of how to model that cadence a little bit better. And I know the mix is an issue, but just anything you could help out on that front would be great?

Yes. Yes. And I would say -- and to your point, it's all a little bit dependent on mix. There's no doubt about it. But with the way we see things right now from the standpoint of where we think the adjusted EBITDA is going to be, I'd say it goes to the latter that you said there, which is probably still slight negative Q3 and then the improvement seeing in the fourth quarter. But it will depend a little bit on the mix. But that's the way we kind of see the growth going through the rest of this year.

No, that's super helpful. And just one more, just more of a like a theoretical question. And based on where you've told us they it may not be relevant for this quarter, but is -- like does backlog age matter? Like, is that something that you've ever considered like talking about externally as far as just what the age of the backlog is relative to -- you know what I mean?

I understand your question. Brad usually handles the theoretical questions, but I'm happy to answer this. So we -- to the extent if we ever felt that there was something in backlog that all of a sudden it started to look like, hey, it's just something that the customer signed and there's no intent to move forward here, we would be looking to pull that out of backlog. So, for the most part, everything in our backlog is really pretty recently signed projects. And then some of it on the construction build side, they are the remaining amounts left under the contracts that haven't been recognized yet. So, the ongoing projects from the standpoint of construction design build are all good from our perspective, because those are all ongoing projects. But we don't have anything that we see in backlog that we have a concern about that, a customer signed and we feel that they don't have any intent on going forward with it.

I'll go a little bit deeper here. I'll add onto the back end there. We have a backlog review team internally. It's made up of Dick; our COO, JT Archer; and then two of our EVPs, Sam and Dan Droller. And they meet every two weeks and they go through the backlog on both sides, making sure -- that's a representative from biz dev, finance, ops, and then corp dev on there. So they're looking at making sure we're in regular communication with all clients. They're progressing, they're being invoiced. And that's how we made the decision through that team to pull out the one project that we did in Q2. But backlog is -- I want it to continue to be a good strong indicator for future business for urban-gro. People should look at the backlog and investors should say, hey, look, they have $79 million of 80% plus confidence revenue coming in the future. And that's what we intend it to be, so we have to maintain the integrity of it as well.

[Operator Instructions] Our next question comes from Thomas McGovern with Maxim Group.

So firstly, I just want to see if you guys can provide an update on your planned expansion in Europe. Last time we spoke, you discussed that you were monitoring, but there was not quite as much visibility as we were hoping for at that time. Just wondering if you guys have a little bit more visibility going into the third quarter on that front?

Thomas in Europe, the market on the horticulture side, it's very tight, very tough right now, still since one year later after the war broke out in Eastern Europe. On the cannabis side, it's a little bit looser. But it's similar to the issues we have at the state level here in the U.S. Germany, for example, they had regulations that went against the EU. And so they're trying to figure out their path. And until those regulations are defined, we won't invest aggressively in Germany, but we'll make sure we're in regular contact with the existing growers and the potential operators in the country. So we are operating right now in the Netherlands from a business standpoint. The other two that are active and increasing in terms of momentum for us, Portugal and even South Africa. So there's, there's progress there. If there is any progress on the vertical farming side, well, still quarters away, there's is discussions, ongoing discussions in the industry in the Middle East. And Sonia Lo, our Board member, who has been the CEO of other vertical farming companies in the past, she's involved in playing a nice role for us there. But that's more biz dev, early stage, but definitely an opportunity in the future. So, hey, look, overall Thomas, I would've hoped, we would've hoped that we would be breakeven in Europe by now, we would've been stronger. As far as top line Q2 of this year, was the best quarter that Europe's experienced thus far. But it's still in the hundreds of thousands of dollars of revenue and hasn't pierced $1 million. Mostly all design, no build at all at this point. But as it becomes material, we will absolutely talk more about it and we review it. Every Board meeting and every month as a leadership team internally, great opportunity cheering them on and hoping they can sign contracts and we can get those released.

Awesome. I appreciate that, that insight. And then finally, just on the backlog you mentioned in your prepared remarks that there were a number of contracts were up for signing. Just wondering if you could provide any additional color on when we might start to see some of those deals signed? Is that something we could expect to kind of pick up in the third quarter, or is it something that maybe will have more impact in the fourth and maybe early 2024? Thanks.

So I would definitely expect the ones that are out for signing would be signed this quarter. They're [AIA] contracts. So a lot of work goes into them -- into the contracts. Some of them have MOUs tied to them, but we don't announce them publicly or count them as backlogged until we A, have an AI contract or a purchase order from the client. And on the CEA side, we have confidence and proof of funding. So we will -- as we progress down the path in Q3 and sign those contracts, we are going to announce them. We're -- in the past, we've been very selective on what we announced, and in Q3, we're going to be a little more better communicators with our investors on what's going on, what region, what market, CEA, non-CEA, and the dollar value of the contract and the period of time over which we expect the revenue to be recognized.

That is all the questions we have for today. Please reach out to investors at urban-gro.com with any additional questions. Thank you and have a nice evening.