Company History and Evolution
urban-gro, Inc. (NASDAQ:UGRO) is an integrated professional services and Design-Build firm offering solutions to the Controlled Environment Agriculture (CEA) and commercial sectors. The company's expertise spans architectural, engineering, and construction management, enabling it to deliver high-performance indoor cultivation facilities for its clients.
urban-gro was originally formed on March 20, 2014 as a Colorado limited liability company. On March 10, 2017, the company converted to a Colorado corporation and exchanged shares of its common stock for every member's interest issued and outstanding on the date of conversion. The company then reincorporated as a Delaware corporation on October 29, 2020.
urban-gro is an integrated professional services and Design-Build firm offering value-added architectural, engineering, and construction management solutions to the Controlled Environment Agriculture (CEA), industrial, healthcare, and other sectors. The company engineers, designs and manages the construction of indoor CEA facilities and then integrates complex environmental equipment systems into those facilities. Through this work, urban-gro creates high-performance indoor cultivation facilities for its clients to grow specialty crops, including leafy greens, vegetables, herbs, and plant-based medicines.
In February 2021, the company completed an uplisting to the Nasdaq Capital Market under the ticker symbol "UGRO". This milestone allowed urban-gro to access a broader pool of investors and enhance its visibility in the market.
Over the years, urban-gro has faced some challenges. The company produced multiple consecutive years of net losses and negative cash flows, raising substantial doubt about its ability to continue as a going concern. To address this, the company took actions to strengthen its liquidity, including decreasing headcount and operating expenses to expedite the path to cash flow positive results. Additionally, the company dealt with the impact of inflation on costs of labor, raw materials and other critical items, which negatively impacted its results of operations. Despite these challenges, urban-gro has remained focused on delivering its integrated professional services and Design-Build solutions to clients across its target sectors.
In 2022, the company acquired 2WR Partners, a leading architectural and engineering firm, and Emerald Construction Management, a construction management company. These acquisitions allowed urban-gro to enhance its integrated Design-Build capabilities and better serve its clients across the CEA and commercial sectors.
Financial Performance and Liquidity
Financials
urban-gro's financial performance has seen both successes and challenges in recent years. For the fiscal year ended December 31, 2023, the company reported total revenue of $71.54 million, a decrease from $67.03 million in the prior year. However, the company's gross profit margin remained relatively stable at 14.4% in 2023, compared to 21.2% in 2022.
The company's net income for the fiscal year 2023 was a loss of $18.68 million, compared to a loss of $15.28 million in 2022. This decline was primarily driven by increased operating expenses, which rose from $79.67 million in 2022 to $88.22 million in 2023. The company's adjusted EBITDA, a non-GAAP metric, was a loss of $15.07 million in 2023, compared to a loss of $10.96 million in the prior year.
For the most recent quarter ended June 30, 2024, urban-gro reported total revenue of $17.95 million, a slight decrease of 2.7% compared to $18.45 million in the same period of 2023. The company's gross profit margin during the quarter was 13.0%, down from 14.0% in the prior year quarter, primarily due to reduced margins in the Construction Design-Build business. The net loss for the quarter was $2.96 million, an improvement from the $5.76 million net loss in the prior year quarter, which was impacted by a $1.50 million legal settlement.
The company's annual operating cash flow for 2023 was negative $11.19 million, and the annual free cash flow was negative $11.81 million.
Liquidity
As of December 31, 2023, urban-gro had a working capital deficit of $1.16 million, a significant decline from the positive working capital of $10.30 million at the end of 2022. This was mainly due to an increase in current liabilities, particularly accounts payable and accrued expenses. The company's cash position also decreased from $12.01 million at the end of 2022 to $1.11 million at the end of 2023.
To address its liquidity needs, urban-gro entered into a $10 million asset-based revolving loan agreement with Gemini Finance Corp. in December 2023. As of June 30, 2024, the company had drawn $4.50 million on this line of credit.
As of the most recent quarter, urban-gro had $384,800 in cash and an available $10 million credit line. The credit line has an interest rate of 1.75% and is secured by the company's assets. The debt-to-equity ratio stood at 2.69, while the current ratio was 0.74 and the quick ratio was 0.73.
Operational Highlights and Diversification Efforts
Despite the financial challenges, urban-gro has continued to execute on its strategic initiatives to diversify its service offerings and client base.
In 2024, the company launched its new Processing and Extraction Division, which addresses the growing demand for advanced post-harvest services and high-quality processing equipment in the cannabis industry. This expansion aligns with the company's goal of becoming a comprehensive solutions provider for its CEA clients.
Furthermore, urban-gro has made significant progress in expanding its presence in the commercial sector beyond the CEA industry. In 2023, the company signed a Master Services Agreement with the well-known Asian culinary restaurant chain, P.F. Chang's, and was subsequently awarded its first project under this agreement in the third quarter of 2024.
The company has also secured several notable contracts in the municipal and healthcare sectors, including a $4 million agreement to serve as the lead designer for a new hospital in the southeastern United States and a contract to provide architectural design services for a fire station project in Union City, Georgia.
These diversification efforts aim to reduce urban-gro's reliance on the volatile cannabis industry and build a more balanced and resilient client base across various commercial sectors.
Product Segments
urban-gro operates through three main product segments: Equipment Systems, Services, and Construction Design-Build.
The Equipment Systems segment includes the sale of complete equipment systems and packages to clients in the CEA and commercial sectors. This encompasses the design, engineering, and integration of cultivation equipment, environmental controls, and other critical infrastructure components required for indoor growing facilities. During the three months ended June 30, 2024, Equipment Systems revenue was $3.40 million, down from $4.69 million in the same period the prior year, a decrease of 27.5%. This decline was attributed to continued weak market conditions in the CEA sector, resulting in fewer projects available to bid on as urban-gro's clients faced tighter access to capital.
The Services segment provides architectural, engineering, and other consulting services to urban-gro's CEA and commercial clients. This includes facility design, mechanical systems planning, and other technical advisory services. In the three months ended June 30, 2024, Services revenue decreased to $2.36 million from $3.03 million in the prior year period, a drop of 22.1%. The decrease was due to headwinds in the CEA market limiting the initiation of new design contracts, as well as a reduction in commercial customer projects.
The Construction Design-Build segment focuses on providing integrated, full-service construction management for indoor cultivation and commercial facilities. This encompasses all aspects of project delivery, from design to final construction. In the three months ended June 30, 2024, Construction Design-Build revenue increased to $12.06 million from $10.59 million in the prior year period, a 13.9% increase. This growth was attributed to the execution of a limited notice to proceed on a new construction design-build contract in the CEA sector.
Regulatory and Compliance Challenges
Like many companies in the cannabis industry, urban-gro has faced regulatory and compliance challenges. In September 2024, the company received a notification from Nasdaq stating that it was not in compliance with the exchange's listing rule requiring timely filing of periodic financial reports.
In response, urban-gro received an extension from Nasdaq to regain compliance by February 18, 2025, allowing the company to file its outstanding quarterly reports and restate its previously issued financial statements. The company's management is working diligently to address these issues and regain full compliance with Nasdaq's listing requirements.
Risks and Uncertainties
urban-gro's business model and financial performance are subject to several risks and uncertainties, including:
1. Concentration risk: A significant portion of the company's revenue is derived from a limited number of large customers, particularly in the cannabis industry. 2. Regulatory and compliance challenges: The company's operations in the cannabis industry expose it to evolving regulatory environments, which could impact its ability to secure new contracts and maintain existing ones. 3. Liquidity and working capital challenges: urban-gro's recent working capital deficit and reliance on external financing raise concerns about its long-term financial stability. 4. Competitive landscape: The company operates in a highly competitive industry, facing pressure from both traditional architecture, engineering, and construction firms, as well as other specialized providers in the CEA and commercial sectors. 5. Dependence on key personnel: The company's success is heavily dependent on the expertise and experience of its senior management team and other key employees.
Outlook and Future Prospects
Despite the challenges, urban-gro remains optimistic about its future prospects. The company's diversification efforts, particularly in the commercial sector, are expected to reduce its reliance on the volatile cannabis industry and provide more stable revenue streams.
Furthermore, the growing demand for sustainable and efficient food production solutions, as well as the increasing need for specialized design and construction services in the commercial sector, present significant opportunities for urban-gro to capitalize on.
In the near term, the company's management is focused on addressing the outstanding regulatory and compliance issues, regaining Nasdaq's listing compliance, and improving its overall financial performance and liquidity position.
Conclusion
urban-gro, Inc. is a unique player in the Controlled Environment Agriculture and commercial design-build solutions market, offering a comprehensive suite of services to its clients. While the company has faced financial and regulatory challenges in recent years, its diversification efforts, innovative service offerings, and experienced management team position it well to navigate the evolving landscape and capitalize on the growing demand for sustainable and efficient building solutions. However, urban-gro's long-term success will depend on its ability to address its liquidity concerns, maintain regulatory compliance, and continue diversifying its client base across multiple commercial sectors.