At urban-gro, the Future is Built on Turnkey and IP (Its People)

Lafayette, Colorado-based urban-gro (Nasdaq: UGRO) has been providing ancillary services to large indoor commercial grows since 2014, when it was launched by CEO Brad Nattrass and Chief Development Officer Tavo Gutierrez. The idea for the company, as CBE reported in 2016, was to “become a value-added reseller of Tier 1 product solutions. Early on, some U.S. companies were skeptical, or even downright negative. Over time, though, [urban-gro’s] vendor mix included suppliers from the U.S., Canada, Holland, and Belgium who needed a U.S.-based distributor to serve the rapidly developing cannabis Industry. This approach bypassed the traditional retail hydroponic store channel and put urban-gro in a unique market position as a value-added reseller of grow light solutions, integrated pest management systems, and fertigation supplies and systems.”

Over the years, the company gained invaluable experience working on over 450 projects of various sizes and ambition. In its eighth year, urban-gro also recently uplisted to the Nasdaq Composite, setting the stage for its rebirth, so to speak, as the only full-service company of its kind in the industry to provide what it calls a true turnkey service. As explained by CEO Nattrass during a recent interview with CBE, the company’s ability to offer complete, end-to-end services to indoor cultivators, from conception to construction and beyond, is the result of its acquisition in August of MJ12 Design Studio, which was founded as 2WR + Partners by Sam Andras in Georgia in 2001. 2WR did mostly military and government work over the years, but in 2013 it designed its first cannabis projects, and according to Andras, who spoke to CBE for this article, the die was cast.

“We decided we really liked the cannabis space,” said Andras, who grew up working in his family’s construction and design business. “We did three jobs in 2013, and we liked that it was a new emerging industry. We also had a lot of medical experience, and we thought that medical cannabis was a great spin on what we were doing.”

In 2014, MJ12 Design Studio was created to serve the cannabis industry. “The name is kind of a spin,” explained Andras. “It sounds like MJ, Mary Jane, but it’s actually named for the Majestic 12, which was a group created under Harry Truman to study alien activity. It was composed of military leaders, scientists, and government officials, and the abbreviation for it was MJ12. It was a secret society, so for us, it was like MJ12 Design Studio will be our secret cannabis firm, our little spin off company.”

Far from a secret today, MJ12 worked with urban-gro on several projects before the partnership was codified. According to Nattrass, it is a perfect fit. “We had worked with Sam and his team before and it’s just a marriage made in heaven really,” he said. “There are so many synergies, especially being able to bolster our support services again and get back to what I believe really put our name on the map when we first started, and that was elite customer service.”

In fact, integrating MJ12 into the urban-gro family was only part of a grand strategy to expand the company’s services to meet the demands of an increasingly sophisticated industry. “We had to catch up to do a complete offering; we were halfway there,” said Nattrass. “When we acquired [Impact Engineering, aka Grow2Guys] three years ago, it added a lot of momentum, because we were then touching clients three months earlier than we had been, because the industry started to mature, and the engineers started touching clients before the cultivation designers – what we were doing originally. Then, with the acquisition of 2WR/MJ12, we were touching the clients three months earlier than the engineers! We observed last year that we were losing potential clients to engineers that were being referred in from architects, so it’s really been the evolution of architectural lead design that has emerged over the last 12 months. We did a lot of research, and we bought the [firm] that we think is the best.”

Aligned with especially good performance by the company, the acquisition was nothing short of a shot in the arm for all involved. “In the third quarter, we were profitable for the fourth quarter in a row in Q2, which had net income of $1.3 million,” said Nattrass. “A million of that [income] was forgiveness of PPP, so still net profit of over $300,000 for the first time in the company’s history, but fourth quarter in a row of positive adjusted EBITDA, so we’re not burning cash, we paid off all of our debt, and we had $50 million in cash entering the quarter. We closed on the acquisition of 2WR/MJ12 in July – that was a combination of cash, stock and earnout as well – and I’ll tell you that the whole team came in wired, not tired. They truly wanted to be part of a larger vehicle that could expand their reach globally, and we’re definitely doing that together right now.”

For Andras, working in cannabis has been an educating process from the get-go. “We’re licensed architects and interior designers,” he explained. “We now work in cannabis in 21 states and four countries. There are a lot of folks that will advertise [themselves] as design consultants. But they are not architects, and they aren’t licensed to do work in states; they generally don’t understand building codes. life safety codes, or accessibility codes. We have that knowledge, and one of the things I think really was a catalyst for us in the cannabis industry was that knowledge.”

Another catalyst in the early days was having worked in K through 12, higher education, and in medical. “That’s where we developed processes that were basically extracting information from owners in order to design facilities, what we called client-driven solutions,” he said. “Facilities that were designed specifically to meet their needs; not cookie-cutter but understanding the client’s goals and designing to meet that. We brought that process to the cannabis industry, and that’s how we serve our clients today.”

What was missing in the industry was all to apparent to Andras. “We had our first opportunity to work with urban-gro three years ago, and one of the things we felt was missing in this industry was integrated design solutions,” he added. “What I mean is that in a traditional cultivation facility, you have an architect, a fertigation designer, someone who is doing the benching, and someone who is doing the lighting – because typical electrical engineers won’t do the cultivation lightning layout, so the ownership will get a lighting vendor to do layouts – and water treatment by another group, maybe the one that’s doing fertigation. When we did our first job with urban-gro, we were able to integrate their full cultivation system design into our process, and for the first time all of our drawings were completed at the same time. They understood what was required in order to get drawings done to meet a deadline, and it was like, wow, this is exactly what we have not been seeing in the industry.”

The integration of processes translates into improved efficiencies across the board. “We have our processes for our cultivation space planning, and what urban-gro does is take it to the next level, really looking at further defining their cultivation methodology,” said Andras. “We wouldn’t do zones in a flower room, or in a veg-row, and determine the number of nutrient blends that you’re going to put into those cultivation areas. That would be left up to the fertigation designer, and the natural evolution of the industry is to have integrated services where all of that is provided under one roof. So, when we first started working with urban-gro, one of the cool things we and urban-gro realized very quickly is that we basically sing from the same sheet of music. In other words, the way that we talk to clients about cultivation methodologies, because there’s a lot of them, and you know, put 10 growers in a room and ask them what the best way to grow is and you’re going to get 14 different answers. But we utilize the same techniques to understand the client, how they want to grow, and then explore to see if that approach is the right approach to marry up to the corporate vision and direction of the company.”

The collab came to fruition in 2019, at MJBizCon, where Andras said he launched “what we termed turnkey solutions. When we started working with urban-gro, it was like, man, that’s the icing on the cake.”

The deal extended urban-gro’s services into what a company press release called “early stage conceptual design and planning.” I asked Andras to elaborate on the “early stage” aspect of the deal. “When you look back seven, or eight years,” he said, “we were an illegal industry coming out of garages, and all of a sudden starting to attract investors, Wall Street execs, hedge-funders seeing an opportunity to jump in and invest money. And really, the understanding of development, construction, and how to go from vision to operations, was very different seven years ago from what it is today, especially when you look at the larger MSOs and the individuals who now serve in the leadership roles within those companies, and their stronger understanding of our industry. With the knowledge of construction and project development, architects are now one of the first calls. ‘Hey, we’re getting ready to do a building, not ‘we’re doing a building,’ or ‘we’ve already bought a building.’ If somebody is going to build on an existing building, we’ll get a call before they even buy, and then we will go down and look at the building and tell them if, structurally, the thing is going to carry the ceilings and lighting, the duct work, the sprinkler system, all the components that are going to put load on the structure, or if they will have to spend half a million dollars beefing it up in order for it to work. So, we will get called very early on, even if it’s a new build. Things like that are now bringing us into the projects at a much earlier stage, and I think that urban-gro understands that, as a cultivation design group that basically serves the industry on a multitude of different levels, with the acquisition [of MJ12] we are now turnkey and get involved very early on.”

For Nattrass, bringing Andras onboard also was an essential part of the decision. “Part of the reason behind the acquisition was to acquire Sam’s insight and leadership and skill set,” he said. “He is now VP of professional services and leads all of not only the architects and interior designers, but all of our engineers, horticulturists, and plant scientists.”

That investment is not just a one-off for Nattrass but is an inherent element of urban-gro’s core identity. “It’s so exciting, but we have approximately 80 employees, and about two thirds, or a little over 60 of those individuals, are our experts,” he explained. “It’s the people Sam leads, it’s professional agricultural controls engineers, MEP engineers, architects, interior designers, and then it’s the horticulturist or plant scientists that have 10-plus years each of growing experience of a multiple multitude of crops, including cannabis. That’s urban-gro’s IP right there. It’s that IP and the fact that we’ve worked now as a combined company on over 450 facilities around the world. So, that right there, our IP, that’s what separates us, and what I’m learning as I’ve been spending a lot of time traveling – I go back to Europe in a week, my third trip in the last two months, we opened an entity there – is that IP travels so well. We are not manufacturers, so we don’t have to worry about investing a lot of money in inventory and equipment systems to build or manufacturer. Our IP is the brains of these individuals, and we’ve really found a phenomenal niche in controlled environment AG. There is still a long way to go here in North America, but in Europe, and I’ve said it many times, it’s like where the U.S. was four or five years ago. The cannabis movement got paused during COVID, but there is a huge demand for this knowledge base, and what better knowledge to engage than a group that has collectively worked on 450 facilities.”

To meet the opportunity, urban-gro is stepping up its international footprint in the EMEA (Europe, Middle East, Africa) regions but is also investing in companies like MJ12 that complement it going forward, and in human capital. “I’m investing in people,” said Nattrass. “Today, I think we have 10 reps out right now, six of whom are architects and engineers, four of whom are sales. And we have formulas; if we have X number of projects, and we need another designer, we need another architect, we need another engineer, those are signs of a strong company. When you’re investing in really talented individuals, you may have to eat the salary for three, four months until they get going, but that’s not the case right now; they’re coming in to help fulfill the demand we have.

“In terms of spending money,” he added, “I’m looking at additional service-focused companies, which is our niche; creative synergistic companies that will help us either bring in new projects or leads, like with 2WR, which had 70 open projects at the architectural stage that we got to bring in and have a good chance of cross-selling on engineering services, design, cultivation, design services, and then equipment.

“In Europe,” he continued, “we’ve opened urban-gro European Holdings in the Netherlands. We hired a VP of Horticulture for that marketplace, someone with a strong background in vertical farming. We’re also attending trade shows. I was in Berlin two weeks ago at a large international cannabis show, and I’m going to be speaking at GreenTech in two weeks. These acquisitions will allow us to, for instance, enter the European market quicker and take advantage of relationships that a service organization would have both with both vendors and clients. We also have been diversifying over the last six months to include food-focused vertical farming. These are indoor vertical farms, and not greenhouses. What we determined after studying it internally in 2020 is that regardless of the crop, an indoor facility – whether a cannabis facility or a vertical farm – is the same architecture, engineering, and cultivation design skill sets, and pretty much the same equipment systems that were all born in horticulture anyway. It’s really the logistics systems or the benching systems, how you’re moving around the facility, that make the big difference, and so we’ve had a lot of successful so far entering vertical farming. We haven’t announced a great deal yet, but we have a lot of momentum there. So, to answer where we spend our capital, it’s on service-focused companies that cater to controlled environment Ag, both cannabis and food.”

I asked about the pace of technological advances as the industry gets larger and demand increases. “When it comes to technologies, they are changing all the time – new environmental controls, more efficient lighting,” said Nattrass. “If we talk about airflow through a whole facility and when we do airflow plans ensuring that we’re using the best air and fan equipment systems, our same experts are constantly vetting new technologies online or at shows that we attend around the world. And the clients trust that the solution we’re bringing them has been vetted to be the best in the marketplace. I have one more example on that: In Europe, for cannabis facilities the perfect mechanical or HVAC-type systems do not exist now, so we’ve been working with a partner in the U.S. to get all of the CE designations up to the right voltage, so it operates in Europe, and then we’ll have that solution to bring to our European clients.

“But there are two types of technology,” he continued. “There are the technology and equipment systems, which are constantly changing, and are why we don’t want to be a manufacturer, but have access to all the manufacturers, so we can continually upgrade and make improvements for our clients. But then there is post-facility startup technology. Once the facility is operating, we don’t want to be a group that is just gone. We were engaged before the facility was designed on documents, and we want to be there afterwards to make sure that the environment is perfectly controlled so the client can focus on growing plants and growing profits. And so, whether it’s for ongoing training support or maintenance of those asset, or for monitoring that facility as well, there are more than 100 companies working right now on having that perfect solution to improve track performance and ensure that the facility is optimizing yield regardless of crop. We did go down that path in the past with an Ag-tech solution we had, but after investing millions of dollars in it, it was still years away from being market ready at the level it needed to be. So instead, now that we have cash and are profitable and are on the NASDAQ, keeping our eyes out for a great technology investment in a company that – just like how I put my blood, sweat, and tears into urban-gro for so many years – has done the same thing in tech, I think would be a phenomenal recurring revenue type solution for us.”

For Andras, advances in automation make a big difference in outcome. “The cool thing with this industry is every day 20 new technologies hit the street, and you got to figure out what’s real and what’s not,” he said. “I think the challenge going forward is that you don’t see much automation in cannabis, which is still a very hands-on, eyes-on process. If you look at the leafy green [industry], there’s an abundance of automation, I think the technologies we’re starting to see more of – the automation, moving plants, things that we’re incorporating into some of our designs, the use of drones in cannabis cultivation, for basically eyes on plants and scanning – those will really start to shape and define changes in the industry over the next couple of years. I think we’ll also start to see stronger ideas in relation to how to design facilities to lower operational costs and energy consumption. You’ll see more use of multi-tier LED grows. Five years ago, LEDs were maybe 10 percent of the market. Now, I would say 50 to 60 percent of what we do is LED and multi-tiered, so there are a lot of trends to get more out of set square footage, reduce energy consumption, be more efficient in operations, and I think the companies willing to explore that will have a competitive edge.”

For a company like urban-gro, timely access to supplies is imperative if projects are to stay on schedule. It raises the question of supply side consistency and global interruptions. “Most of our manufacturing right now is either within the U.S. or in Asia but through U.S. manufacturers, and also in Canada and the Netherlands,” said Nattrass. “So, I would say Netherlands, Canada, and the US, but if it includes Asia, it’s through one of the existing manufacturers; for example, all environmental control systems take parts from Asia.”

Asked if chips are a part of the equation, Nattrass replied, “Not for us, but it is for the supply chain of our manufacturers of products. We are selling more and more equipment systems. Our services are where we make our money. The equipment systems – we can’t get greedy on pricing there – but that’s the bonus, the icing on the cake, and then it leads into the recurring revenue model in terms of maintenance of those assets. So, our purchasing power is getting very strong, but it’s not just about getting lower prices; with that purchasing power, we can ensure that we’re forecasting with our manufacturers six months out on our needs, and that we have the funds to make deposits on those forecasts, so that when it comes time to ship, neither we nor our clients who buy through us are impacted with supply chain issues at all.”

I also asked if technological advances in cultivation systems benefit smaller grows, or even craft grows, as much as they do the large commercial ones, and if urban-gro is configured to service a small-batch clientele. “We are built to service large facilities, but our average facility is about 30,000 square feet of canopy, while our largest facility is 800,000 square feet,” replied Nattrass. “But as we enter new states, like in the Northeast, where there are a lot of micro grow licenses, we’re working on a turnkey micro grow facility where we have pre-certified construction documents, and a client could order that size facility. Don’t call it cookie cutter, but we can build that facility in X amount of time, ready to go.”

How small can they go? “2000 square feet of canopy at a micro level, but what’s really important is on smaller facilities, it’s not the same equipment solutions that are used in the large facilities,” he said. “It’s the same fans, the same lights, and the same benching systems, but when it comes to environmental controls, there’s no use putting a system in a 2000-square foot facility that could be used to run a 100,000, 200,000, or 400,000 square foot facility. There are a lot of new entrants into the space, and we don’t necessarily resell or represent some of the smaller ones, but we’ll design around anything. If a client wants a system that we don’t sell, we’ll still design their facility for them, and they can buy that. They’re still great systems, but not as robust as the major systems.”

Small or large, the crucial elements remain the same. “The key to growing high-yielding product, whether it’s 500 square feet or 500,000 square feet, is properly controlling and maintaining the environment, and it all starts with the design,” said Nattrass. “When we design, we’re designing a facility throughout the entire architecture, engineering, cultivation design stage, but we’re holistically designing and thinking about how the equipment systems that we’re designing interact with each other. And the biggest issue people run into when they try and build their own facilities or piecemeal their facilities together is they buy direct from some manufacturers, they put it in to turn it on, but they don’t take into consideration how each [system] affects the other, which, combined, negatively affects the environment. But if you’re a strong grower of any crop type, you’re going to be able to have great results as long as you can control that environment, because your background is horticulture, so you know about the nutrients, and you know what it takes to properly grow a crop. But if you have the environment fighting you, regardless of the facility size, it will leads to IPM problems, and I’m sure you’ve heard all of the horror stories. That said, we have plant scientists we send out to solve pest management problems, and often that’s a way to get new clients by putting a preventative IPM plan into place for the future, and then when they’re ready to expand or build out that facility further, we’re here.”

For both Nattrass and Andras, the key element that separates urban-gro from the competition is its ability to bring everything in-house. Other companies offer turnkey solutions, said Andras, but no one offers it in-house but urban-gro. “The day we announced the acquisition, I personally received two emails from clients that are MSOs, that said, ‘Finely. Thank you,” he recounted. “The ability to provide turnkey in-house design solutions along with the equipment – and not just providing it but providing maintenance plans for the fertigation, water treatment, and mechanical systems in post construction, along with commissioning those systems at the end of construction – was a big plus for clients. In the same way that we saw this as something the industry needed, our client saw the same thing, and I think what we will begin to see is more of what we’re doing as architecture being fully turnkey. I would say that collectively maybe 10 to 15 percent of what we’re doing right now is total turnkey, where we’re doing cultivation systems design, mechanical, plumbing, electrical, architectural, and providing cultivation systems on some level, I think over the next year to three years, we’ll see that number increased to 40 to 45 percent.”

In-house services are not only cost-effective, but time efficient. “Having it all in-house allows one point of responsibility for the client,” noted Nattrass. “It also helps them get to market a lot quicker, because after we’ve gone through architecture, engineering, cultivation design, we’ve had ample time to show multiple equipment solutions to them as well and build confidence in our offering as the client moves forward. If we can get the client operating one, two, three months or more before the competition, especially in a new market, when the price of cannabis is typically the highest, they get to capitalize on that, so it’s certainly working.”

Clearly, Nattrass likes where urban-gro currently is positioned, and appreciates the effort it took to get here. “This is our eighth year, and I guess it’s a life-changing, company-changing event to raise $62 million and uplist to the NASDAQ,” he said, “but as an entrepreneur for 15 years, I’m very confident but very humble. This is what 15 years has contributed into, so how can you sit back and take a breath when there’s so much opportunity globally in the market for what we do, and we have the money to get it. Working capital has always been the problem, and now it’s not. Now my biggest frustration is faster, faster, why can’t we go faster?”

It is an impatience thankfully mitigated by the new reality that urban-gro is finally stable enough to allow for long-term strategizing. “I sit on a board with the National Cannabis Roundtable, and there are some other good, strong MSO leaders there – Charlie Bachtell, Kim Rivers, others; about 60 members in total,” said Nattrass.. “It’s a lobbyist group, but the NCR is setting the foundation of what a legalized U.S. looks like post-federal legalization, and what are the steps that need to be taken along the way. I joined the board about four months ago, and it’s been fantastic. From a personal standpoint, now that we have the funding to be a part of something like that and start to give back to the industry, it feels good. Instead of fighting because of working capital issues, and individuals having to take on three jobs within the company, we are now able to operate like a mature NASDAQ company. And that frees up time for me as the CEO to focus on the greater good, where we’re going to be not in two months, but in two years.”

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