Sign in

You're signed outSign in or to get full access.

UI

urban-gro, Inc. (UGRO)·Q3 2023 Earnings Summary

Executive Summary

  • Q3 2023 delivered revenue of $20.9M (+69% YoY; +11% QoQ), gross margin of 14% (mix-driven decline), and adjusted EBITDA of $(1.3)M (improved $0.7M QoQ); project backlog rose to $84M (+$5M QoQ) as design-build momentum continued outside CEA .
  • Management guided Q4 2023 revenue to approximately $30M and breakeven to slightly positive adjusted EBITDA, citing signed backlog plus near-term funnel conversion as drivers; this would mark a return to positive cash flow if achieved .
  • Operating expenses fell to $6.0M (from $6.8M in Q2; $9.5M in Q3’22) on cost optimization, with CFO noting 2023 retention incentives will not recur in 2024; a new $8M undrawn ABL backed by receivables provides working capital flexibility .
  • Diversification remains the key offset to U.S. cannabis weakness: >2/3 of Q3 revenue came from non-CEA sectors, though backlog remains majority CEA and lumpy; management highlighted a >$11M hospitality/recreation design-build award in September .
  • Stock reaction catalysts: execution against Q4 breakeven EBITDA guidance, conversion of late-stage funnel into construction revenues, and regulatory progress easing CEA project delays (e.g., state licensing/rescheduling) .

What Went Well and What Went Wrong

  • What Went Well

    • Sequential improvements: revenue +11% QoQ to $20.9M and adjusted EBITDA loss narrowed to $(1.3)M; backlog up to $84M (+6% QoQ) with rising non-CEA contribution .
    • Diversification traction: “more than 2/3 of our revenue this quarter was generated in the sectors outside of CEA,” including wins with Fortune 50 clients; >$11M hospitality/recreation design-build contract award underscores momentum .
    • Cost discipline and liquidity: operating expenses fell to $6.0M; $8M receivables-based ABL (undrawn) enhances working capital for construction ramp; 2023 retention incentive won’t repeat in 2024 .

  • What Went Wrong

    • Mix pressure on margins: gross margin was 14% (vs 15% in Q2 and 21% in Q3’22) due to lower-margin design-build mix and continued softness in higher-margin equipment revenue tied to cannabis market headwinds .
    • Equipment weakness persists: equipment systems revenue fell YoY (and was only $3.0M in Q3) amid state-level licensing delays and lack of progress on federal legislation; nine-month period saw >$20M decline in 18% margin equipment sales vs prior year, per CEO .
    • Cash declined QoQ: cash ended Q3 at $4.8M (from $8.6M in Q2), reflecting working capital needs as construction ramps; adjusted EBITDA YTD remains negative $(6.8)M .

Financial Results

MetricQ1 2023Q2 2023Q3 2023
Revenue ($M)$16.77 $18.84 $20.93
Gross Profit ($M)$2.84 $2.87 $2.86
Gross Margin %17.0% 15.4% 13.6%
Operating Expenses ($M)$7.89 $6.76 $5.97
Net Loss ($M)$(5.14) $(5.44) $(3.37)
Diluted EPS ($)$(0.48) $(0.50) $(0.29)
Adjusted EBITDA ($M)$(3.42) $(2.04) $(1.32)

Segment revenue breakdown

Segment Revenue ($M)Q1 2023Q2 2023Q3 2023
Equipment Systems$2.91 $4.62 $3.04
Services$3.47 $3.03 $2.90
Construction Design-Build$10.21 $11.05 $14.81
Other$0.18 $0.13 $0.18

KPIs and balance sheet highlights

KPIQ1 2023Q2 2023Q3 2023
Backlog – Total ($M)$105 $79 $84
Backlog – Construction ($M)$96 $70 $77
Backlog – Services ($M)$4 $4 $5
Backlog – Equipment ($M)$5 $5 $2
Cash & Equivalents ($M)$7.33 $8.56 $4.77
ABL Facility Capacity ($M)——$8.0

Notes:

  • Q3 YoY revenue +69% was driven by higher construction design-build activity; gross margin compression came from mix shift (lower equipment, higher design-build) .
  • Q3 operating expenses decreased vs Q2 and prior year; non-GAAP adjustments reflect legal/retention/impairment and other items per reconciliation .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueFY 2023$100–$120M (May 10) $90–$95M (Aug 14) Lowered
Adjusted EBITDAFY 2023$(3)M to slightly positive (May 10) $(6)M to $(5)M (Aug 14) Lowered
RevenueQ4 2023Not providedApproximately $30M (Nov 9) New
Adjusted EBITDAQ4 2023H2 “neutral” implied (Aug 14) Breakeven to slightly positive (Nov 9) Clarified higher in Q4 vs H2 neutral

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2)Current Period (Q3 2023)Trend
Sector diversificationEmphasized diversification; reiterated FY23 guidance in Q1; Q2: non-CEA growth offset CEA weakness, SG&A reduced ~“almost $3M annualized” “More than 2/3” of Q3 revenue from non-CEA; multiple Fortune 50 clients Strengthening diversification
CEA/regulatory delaysQ1: equipment decline tied to state licensing/federal inaction; Q2: backlog drop from paused cannabis project Continues to weigh on equipment; backlog majority CEA; progress as some clients advance post-license Headwinds persist but pockets progressing
Backlog/pipelineRecord $105M backlog in Q1; Q2 backlog $79M after removal of at-risk project Backlog up to $84M; retired 27% of beginning backlog in Q3; confidence in funnel for Q4 Improving sequentially
Cost optimizationInitiated ~$2M annualized savings (Q2 start); Q2 implied H2 neutral adjusted EBITDA Opex down to $6.0M; retention incentive won’t recur in 2024; partial salary-for-stock (~$200k) benefits Q3 G&A Operating leverage building
Working capital/liquidityCash $8.6M Q2; no bank debt $8M undrawn ABL backed by receivables; cash $4.8M; facility supports construction growth Added flexibility
Europe/InternationalQ2 noted Germany/regulatory timing, ME interest Strongest European pipeline since entity launch; focus NL/UK/DE; VF interest (berries) Gradual progress
M&AContemplated resuming in 2024 (prior call) Not near-term; focus on organic growth and cash generation Deprioritized near term

Management Commentary

  • “We anticipate revenues to be approximately $30 million… and expect to realize breakeven to slightly positive adjusted EBITDA,” positioning for a “return to positive cash flow” in Q4 .
  • “More than 2/3 of our revenue this quarter was generated in the sectors outside of CEA,” reflecting the diversification initiative’s momentum .
  • On liquidity: “The facility we entered into is for up to $8 million… really based on receivables,” and remains undrawn .
  • On operating leverage: “We can get up to at least $40 million of quarterly revenue without having substantial increases from a personnel standpoint” .
  • On mix and equipment: equipment revenues remain compressed by cannabis softness; still pursuing equipment integration opportunities including non-CEA clients .

Q&A Highlights

  • ABL details: $8M revolving, receivables-backed (primarily construction), borrow-as-needed; intended to support growth in construction operations .
  • G&A trajectory: 2023 retention incentive will not recur in 2024; ~$200k of Q3 salary-for-stock will lift Q4 G&A slightly, offset by other savings; Opex should not grow proportionally with revenue .
  • Backlog composition: despite >2/3 of Q3 revenue from non-CEA, backlog remains majority CEA; non-CEA contracts are shorter in duration, CEA projects span 6–8 quarters .
  • Confidence in Q4 ramp: visibility comes from late-stage funnel and ability to execute substantial upfront work on newly signed construction projects; also cites 27% backlog burn in Q3 and $84M starting backlog .
  • Break-even scale: with current mix (low equipment), breakeven at ~“$30 million” quarterly revenue; higher equipment contribution would lower the breakeven threshold .

Estimates Context

  • Wall Street consensus (S&P Global) for Q3’23 EPS and revenue was unavailable at time of analysis due to data access limitations; therefore, no consensus beat/miss comparison is provided. Values would normally be retrieved from S&P Global.

Key Takeaways for Investors

  • Execution risk now centers on converting the late-stage funnel to meet Q4 guidance (≈$30M revenue, breakeven+ adj. EBITDA); success would mark an important cash flow inflection .
  • Mix matters: continued design-build strength can sustain revenue growth but caps margins; any recovery in equipment (higher margin) or CEA releases could accelerate EBITDA leverage .
  • Backlog quality improving: sequential increase to $84M with a notable >$11M non-CEA award supports diversification and multi-quarter visibility, though CEA-heavy backlog remains longer-tailed .
  • Cost actions are taking hold: Q3 opex down QoQ/YoY; 2023-only items (retention incentive, salary-for-stock) suggest cleaner G&A run-rate into 2024 .
  • Liquidity flexibility: undrawn $8M ABL addresses working capital needs of larger construction jobs, mitigating cash volatility as backlog converts .
  • Macro/regulatory watch: state licensing progress (e.g., NY/NJ) and potential federal rescheduling could unlock equipment demand; management expects they don’t need a full industry rebound to grow .
  • Medium-term: with senior leadership “top-end loaded,” management believes the platform can scale to ~$40M–$45M quarterly revenue with limited incremental SG&A, enhancing operating leverage .

Other Relevant Press Releases (Q3 2023 Window)

  • Awarded contract >$11M for hospitality/recreation design-build (Southeast U.S.), to be realized over next six quarters—supports diversification and backlog .
  • Sale of investment in XS Financial note for $2.3M cash; proceeds plus interest monetized prior investment, consistent with capital management focus .