urban-gro Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

Key Takeaways

  • Diversification strategy accelerating: Over two thirds of Q3 revenue came from non-CEA sectors—industrial, commercial, hospitality, education, and healthcare—helping offset cannabis-market weakness.
  • Q3 sequential improvement with revenues of $20.9 M (+11%) and adjusted EBITDA loss narrowing by $0.7 M; Q4 guidance targets record ~$30 M revenue and breakeven to slightly positive adjusted EBITDA.
  • Weak cannabis market pressured equipment systems revenue, causing an 18% decline ($20 M) in higher-margin segments through the first nine months of 2023 and squeezing margins.
  • Strong backlog and liquidity with a 6% sequential (25% YoY) backlog increase to $84 M, $4.8 M cash, no bank debt, and a new $8 M asset-based lending facility to support growth.
  • Leadership signals confidence: insiders purchased roughly 1.5% of shares and senior management voluntarily deferred up to 50% of base salaries into equity in Q3.
AI Generated. May Contain Errors.
Earnings Conference Call
urban-gro Q3 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

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. Following the presentation, there will be a question and answer session For those on the telephone 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 Drohler, Investor Relations at Urban Gro. Sir, please go ahead.

Speaker 1

Good afternoon, and thank you for joining us. Today's call will be led by Brad Nattress, Chairman and Chief Executive Officer and Dick Ackright, 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 Growth 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.

Speaker 1

Urban grow.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 UrbanGrow's current expectations. Actual results could differ materially.

Speaker 1

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 Growth files 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.

Speaker 1

With that, I'll now turn the call over to Brad.

Speaker 2

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 count 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 Erwin grows evolve 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 We have successfully expanded our operating focus beyond our core controlled environment ag practice to include clients across multiple sectors, including industrial, commercial, hospitality, recreation, education and healthcare.

Speaker 2

In regards to our Q3 performance and consistent with expectations, we marked another sequential improvement in both revenues and adjusted EBITDA. Revenue of $20,900,000 a sequential improvement of $2,100,000 or 11% Came very close to exceeding our all time quarterly high of $21,100,000 reached in Q1, 2022. The adjusted EBITDA loss was $1,300,000 a sequential improvement of 700,000 And while our significant revenues this quarter resulted in retiring 27% of our Q3 beginning backlog, we signed enough new contracts Despite the ongoing headwinds within the CEA sectors, our diversification strategy has served as a source of strength for 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.

Speaker 2

Now turning to print sector trends. Sector diversification has 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 2nd quarter, More than 2 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.

Speaker 2

In the CEA sector, Our equipment revenues continue to be compressed by the weak cannabis market. During the 1st 9 months of 2023, We have experienced a period over period decline of more than $20,000,000 of 18% margin business. Well, it's impossible to ignore the negative impact that this has had on our financial performance. Our diversification has enabled us to keep our Experience 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.

Speaker 2

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 Growth 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 has 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.

Speaker 2

And we're confident they'll move forward at the construction build stage when these delays are resolved and licenses are received. This is evidenced in the Q3 where we had 2 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 that it's been since opening the entity of June Since June of 2022. While the cannabis markets abroad continue to show green shoots in multiple countries, our European business 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.

Speaker 2

Now shifting to our guidance for the Q4 'twenty three. Demonstrating our ongoing commitment to deliver sequential growth on both the top and bottom line, we anticipate revenues to be approximately 30 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 a 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 and Totaling about 1.5% of shares outstanding, my leadership team demonstrated their commitment as well.

Speaker 2

Led with a 50% commitment from 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 Q3. The key takeaways here, First, our Board as well as our leadership team and their teams continue to strongly believe in the future

Speaker 3

of the company. 2nd,

Speaker 2

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 path to maintain this positive momentum. Thank you. And with that, I will now turn the call over to Dick.

Speaker 3

Thanks, Brad. In the Q3 of 2023, we generated revenue of $20,900,000 which represents a sequential improvement of $2,100,000 or 11 percent over the $18,800,000 of revenue generated in the Q2 of 2023 and an $8,600,000 or 69 percent improvement over the $12,400,000 of revenue generated in the prior year period. The increase in revenue over the prior year period was driven by a $9,400,000 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 $2,900,000 or 14 percent of revenue in the Q3 of 2023 Compared to $2,900,000 or 15 percent of revenue in the Q2 of 2023 and $2,600,000 or 21 percent of revenue in the prior year period.

Speaker 3

The decrease in gross profit margin design build revenue as well as a decrease in higher margin equipment systems revenue. Operating expenses were $6,000,000 in the Q3 of 2023, which on a sequential basis is a decrease of $800,000 Operating expenses in the Q3 of 2023 are $3,500,000 less And operating expenses of $9,500,000 in the Q3 of 2022. The prior year quarter included a one time business development expense of $3,300,000 but even excluding this one time expense, Operating expenses decreased $200,000 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 $300,000 in the Q3 of 2023 compared to non operating expenses of $1,800,000 in the prior year quarter.

Speaker 3

Net loss Was $3,400,000 or a negative $0.29 per diluted share in the current quarter, compared to a net loss of $8,700,000 or a negative $0.81 per diluted share in the prior year period. Adjusted EBITDA improved by $700,000 sequentially to negative $1,300,000 In the Q3 of 2023, which is an improvement of $1,000,000 compared to the prior year period. The sequential improvement in our adjusted EBITDA was driven by lower operating expenses as previously discussed. For the 1st 9 months of 2023, we reported total revenue of $56,500,000 compared to $49,700,000 in the 1st 9 months of 2022, representing an increase of $6,800,000 Net loss was $14,000,000 compared to a net loss of $11,100,000 And adjusted EBITDA was negative $6,800,000 compared to negative $2,200,000 This decrease in adjusted EBITDA was predominantly due to the combined impact Have an increase in general and administrative expenses of $3,200,000 and a reduction in gross profit of $2,400,000 Turning to our balance sheet, we ended the 3rd quarter with $4,800,000 of cash and no bank debt. To support the strong performance of our construction operations, subsequent to September 30, we entered into a non dilutive Asset Based Lending Facility in order to better manage our working capital.

Speaker 3

To date, the facility remains undrawn. Our total backlog as of September 30, 2023 was approximately $84,000,000 reflecting an increase of $5,000,000 or 6% on a sequential basis and $17,000,000 or 25% versus the prior year. This backlog is comprised $77,000,000 in construction design build, dollars 5,000,000 of professional services and $2,000,000 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 non dilutive lending facility, will provide us the necessary flexibility We continue to remain focused on our execution and returning to positive adjusted EBITDA.

Speaker 3

That concludes our prepared remarks. Operator, please open the call for questions.

Operator

Thank you. The floor is now open for questions. Our first question is coming from Eric DelOriere of Craig Hallum. Please go ahead.

Speaker 4

Great. Thank you for taking my questions. The first one is on the non dilutive asset backed facility. Certainly great to hear 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?

Speaker 4

Just any more detail you can provide on that facility would be great. Thanks.

Speaker 2

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

Speaker 3

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 Vector has really grown for us. The facility we entered into is for up to $8,000,000 lending on that. And then like I say, it's really it's based on receivables based.

Speaker 4

And then is that a revolving facility where you're able to sort of Pay that down as needed or

Speaker 3

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.

Speaker 4

All right. Great.

Speaker 2

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

Speaker 4

Yes. No, yes, that's great to hear. And again, great to see the added flexibility. My next question is on G and A. It's very nice to see these costs coming down here.

Speaker 4

Obviously, you guys are Doing a good job kind of keeping a lid on that. Understood there's some deferrals Stock based compensation over cash. How should we think of that G and 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 and A sort of going up commensurate With revenues or with gross profit or is this 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 figure those going forward?

Speaker 4

Thanks.

Speaker 2

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.

Speaker 2

And so As we grow, as we start to deliver $30,000,000 $50,000,000 plus quarters, we don't we do not anticipate Meaning to add any more senior management EVP or higher. 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 were willing to make in order to maintain The brainpower for future quarters. Dick, do you want to jump in on the detail?

Speaker 3

Yes. And I'd add 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 and 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.

Speaker 3

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 be 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 and A will go up some, it won't be We're near proportionate to the growth in the revenue we're going to see.

Speaker 4

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

Speaker 3

Thank you. Thank you.

Operator

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

Speaker 3

Thanks. Good afternoon. I wanted to dive a little bit deeper on that detail because like for the quarter, there were some Schools where people were buying stock at the beginning of their regular salary. So I'm assuming in the Q4 that would refer Unless that's being extended. So I just wanted to like for that line item, kind of understand what's the incremental increase in the quarter and the Q4?

Speaker 3

Yes, Brian. As you've indicated, there was a reflective reduction in G and 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 and A in the Q4. I mean, just to kind of clarify, we're not talking 1,000,000 of dollars here or anything, because of what we're 1,000,000 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.

Speaker 3

So there is going to be an increase in G and A related to that, but we're also going to see some other savings taking place in the 4th Quarter to basically keep our G and A, although as projected right now slightly over where our Q3 is, not significantly Great. Thank you so much for the additional color on that. I just maybe the queue is out, but I just hadn't seen it yet. 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 In market perspective, between however you want to do it, healthcare versus CA versus You name it, but just some insights on how to think about the industries of the backlog.

Speaker 2

Sure, Brian. Brian, whereas our quarterly revenues more than 2 thirds were non CEA, Our backlog still for the majority of it more than 2 thirds is in the controlled environment ag space. We anticipate growth on both sides, but on the non CA side, these contracts are typically shorter in length. And when they sign, they immediately want us to start executing on 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.

Speaker 2

They're larger and they're more Extensive with design and build, those can spread out over 6 quarters, sometimes even as long as 8 quarters.

Speaker 3

Great. Okay. Thank you for that color. I'm kind of like Toren, because I hear your commentary about the $30,000,000 in quarterly revenue and even $50,000,000 to get into those levels. So I'm assuming there's you see things that we don't see, right, as As far as kind of that optimism, but then if I so that's great on the positive side, but then if I look at just like that Ramp sequentially 3rd quarter from the little $21,000,000 up to the around $30,000,000 for the 4th quarter.

Speaker 3

So you keep is there like How can we get comfort with that kind of ramp in the 4th 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 we there is a lot 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 Q4 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.

Speaker 3

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 But that revenue is going to be there.

Speaker 2

And Brian, I'll add to the back of it. In the Q3, We retired 27% of our beginning backlog. And so now looking at Entering the Q4 with $84,000,000 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 what Dick's discussing on what we're anticipating to top it off in order to hit the $30,000,000 mark.

Speaker 3

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

Speaker 2

Ohio, fantastic, right, for the industry, another state legalized. By the time they get the regulations in place, you're probably looking at Q3 of 2024. 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.

Speaker 2

But I would I touched on it a little bit earlier. For us, we don't need the entire industry To turn around, right. Of course, we're fully supportive in pulling for rescheduling and safe banking, etcetera 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 then they'd move forward to the construction side.

Speaker 2

So Very optimistic 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 3 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.

Speaker 3

Great, great. That sounds great.

Operator

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

Speaker 5

Hey, guys. This is Thomas McGovern on for Anthony. Thanks for taking my questions. So 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 Cannabis sector and you're seeing some positive signs in New York.

Speaker 5

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. Just maybe if you could provide your industry insight and just how the market is starting to shape up, I'd appreciate that.

Speaker 2

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 Canada's Roundtable and as most know, this probably something that would take In Q2 of next year, remain very optimistic.

Speaker 2

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 and expanding The word of licenses to additional groups that are tied into specific segments. On New Jersey, when it opened up, We have had great we've made great progress with certain clients, but there's also now the funding hurdle as well that these individual groups have to jump over to. So hopefully something like a safe banking passing. It was hopeful again like last year that that could happen by the end of the year.

Speaker 2

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 2 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.

Speaker 2

So it's a nice pleasant surprise when it happens for sure.

Speaker 5

Understood. I appreciate that color. My next question is on the international front. So last quarter, you guys mentioned you had the highest top Most of that have been driven by design. You also discussed how Germany was establishing some regulations, but it was taking some time and you were even looking at some opportunities in vertical farming in the Middle East.

Speaker 5

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 What to expect moving into 2024, that would be appreciated as well. Thanks.

Speaker 2

Yes. In the Middle East, That's not a focus for us right now. It was initially when we opened that office, but we quickly decided just to focus in our backyard In and around the Netherlands, our office is 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 indoors.

Speaker 2

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 2 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 4 or 5 quarters. So it's nice to see that start to move forward and would be A good strong accomplishment for Ermugrut to go to the next stage, past design with one of these entities.

Speaker 2

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.

Speaker 2

So Right now, the Netherlands, the UK and Germany are key, I'd say the top three countries we're focused on right now.

Speaker 5

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 and 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 Appreciate you guys taking the time to take my questions.

Speaker 2

Perfect. Thanks. Right now, we're just focused on getting back to Generating cash and growing within our own shell. As I mentioned at the start, we are top end loaded and so we have a lot of Room to grow within and really be able to register some good strong profitable quarters in the 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.

Speaker 2

But right now, it's not even on the near term plan for sure. It's just getting back and maintaining

Operator

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

Speaker 6

Good afternoon.

Speaker 2

Hi, Eric.

Speaker 6

Hi. I want to step back and talk a little bit about Your ability to win contracts outside of CEJ, what you're competing against a lot larger people And people 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?

Speaker 2

Great question, Eric. In terms of winning additional contracts with 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 And the project size is 3 to 6 times larger. So we're delivering we're doing we're walking the talk.

Speaker 2

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 biz dev relationship team. So we've put a lot of work into building out that That go to market strategy, when J. T.

Speaker 2

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 When equipment is arriving and what's needed or outstanding items to complete. So we're giving a good service level. Now, Of course, there's a lot of large multi $1,000,000,000 construction management companies.

Speaker 2

We are subbed in To some of those companies, they do not they're not built to go after $10,000,000 $20,000,000 projects. They're focusing on infrastructure projects And other large $1,000,000,000 plus projects. We found a really nice sweet spot at around $10,000,000 to $30,000,000 Where the turnkey aspect doesn't really exist in the industry. We signed It was a golfer 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.

Speaker 2

Otherwise, they were going to bring on their own site superintendent. They were going to have to hire architecture and engineering on their own. So that was a really nice moment of awakening, which we're at least need to see that there's Definitely a value on what we're offering for sure at that level. We're also we're 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.

Speaker 2

So it's not always design build. Our engineers, it's a 20 year company that we've been based in Houston. They have a lot of relationships. They have a lot of skill sets. One is fire and safety, for example, That they're known for in that specific Southeast Southwest region.

Speaker 2

So we're building on our strengths And doing a good job in delivering on what we commit to.

Speaker 6

Great. A little more granular, when you look at Q4 revenues, do you still expect it to be about 2 thirds non CEA?

Speaker 2

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 have if we continue to have good strong CEA announcements this quarter, like we started to see in Q3,

Speaker 3

I would

Speaker 2

say you could see that begin to go more towards the fifty-fifty mark than Q1 and Q2 next year As the cannabis facilities or the vertical farm facilities ramp up.

Speaker 3

Great.

Speaker 6

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 purchaser of equipment here, and I'm assuming that a lot of people are having the same issues 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. Thank you.

Speaker 2

Yes, Eric, I would look at it as we can't get greedy. Like when you look at the 9 month performance, That's close to $4,000,000 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 the mine with services, we're then moving forward to construction and then it goes to equipment. We want to be equipment agnostic.

Speaker 2

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, but We're also in Europe as well.

Speaker 6

Great. Thank you,

Speaker 2

Matt. We definitely want to increase the equipment, Eric. And I think you asked on the last call, we have in Q3, we did successfully integrate mechanicals or closed a mechanical We haven't shipped it yet, but into a non CEA very large client. So it is a focus for us To spread our or cast a larger web and also sell into those other markets equipment systems too.

Speaker 6

Great. Thank you. Thank you.

Operator

Thank you. The next question is coming from Alastair Ackland of First

Speaker 7

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 and A cost structure.

Speaker 3

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 $40,000,000 of quarterly revenue without having substantial Increases from a personnel standpoint. And again, part of that is just we're just seeing Increase in the size of the jobs that we're doing, especially on the construction side.

Speaker 3

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 $40,000,000 of revenue, dollars 45,000,000 of revenue a quarter, it's just it's not going to require very many more, if any, people for us. And that was kind of the way we had built the business. It's just unfortunately with the fall off in cannabis and especially with the way it hurt equipment, Just kind of whacked us from the standpoint of our income statement with that downturn.

Speaker 3

But when it

Speaker 2

I'll add on the back there just a little bit, Ellis. 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 to that we continue to hire. Bringing operational expertise in certain areas, we'll bring those individuals as well. But as far as the senior Executive team, EVP and higher, we don't anticipate Much need for that in the very near future for sure.

Speaker 7

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's the point? Is it in revenues where you can breakeven consistently At the adjusted EBITDA level, is that $25,000,000 $30,000,000 $35,000,000 or like Dick was talking about $40,000,000 Is there a spot that you guys target? We're saying okay, we're breaking even here.

Speaker 2

With the it all depends on that mix, right? So with Assuming

Speaker 7

the mix stays about what it is Right now, it

Speaker 2

was depressed. It's where our guidance is at us right now, right, approximately $30,000,000 in revenue. $30,000,000 Yes, that's right. 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 $30,000,000 in revenues And breakeven to the positive EBITDA, we're there right now.

Speaker 7

Okay. 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 on, is that when that might stop idling or if you might be able to put it back in at some point?

Speaker 2

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.

Speaker 7

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

Speaker 2

Thank you very much, Allison. Thanks, Alex.

Operator

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

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