Urban-gro, Inc. (NASDAQ:UGRO) is an integrated professional services and design-build firm that offers value-added architectural, engineering, and construction management solutions to the Controlled Environment Agriculture (CEA), industrial, healthcare, and other commercial sectors. The company's diversified revenue streams and focused efforts to reduce operating expenses have resulted in improved financial performance, positioning it well to capitalize on the recent rescheduling of cannabis.
Financials
In the first quarter of 2024, Urban-gro generated revenue of $15.5 million, a slight decrease of 7% compared to the prior year period. This decrease was driven by a $0.4 million decline in Equipment Systems revenue, a $0.3 million decline in Services revenue, and a $0.4 million decline in Construction design-build revenue. The company attributed these decreases to continued negative market conditions in the CEA sector and a reduction in capital equipment spending by customers.
Despite the revenue decline, Urban-gro's gross profit increased to $3.1 million, or 20% of revenue, compared to $2.8 million, or 17% of revenue, in the prior year period. This improvement in gross profit and margin was primarily due to increased productivity from the company's professional services providers, as well as strengthening returns from its construction business.
Operating expenses decreased by 34% to $5.2 million, driven by a $2.8 million reduction in general and administrative expenses as a result of the optimization efforts made in 2023. This, combined with the improved gross profit, led to a net loss of $2.1 million, or $0.18 per share, a significant improvement from the $5.1 million, or $0.48 per share, net loss in the prior year period.
Urban-gro's adjusted EBITDA, a non-GAAP metric, improved by $3.1 million to a loss of $0.3 million, reflecting the company's focus on cost optimization and operational efficiency. For the full year 2024, the company is maintaining its guidance to recognize more than $84 million in revenue and to generate positive adjusted EBITDA.
The company's backlog remained strong at $99 million as of March 31, 2024, with 76% of the backlog coming from the CEA sector and 24% from the commercial sector. This backlog, along with the company's qualified pipeline and the recognition of last year's $8 million reduction in general and administrative expenses, positions Urban-gro well to continue building momentum through the end of the year and beyond.
Recent Developments
The recent rescheduling of cannabis from Schedule I to Schedule III by the U.S. Drug Enforcement Agency (DEA) is a significant catalyst for Urban-gro's future. As the leading professional services firm in the cannabis industry, the company has completed over 1,000 projects in the cannabis market over the last 8 years and has a team of 120 employees, including architects, engineers, construction managers, and horticulture experts.
The successful rescheduling of cannabis is expected to reinvigorate the industry, which has faced strong headwinds over the last couple of years. The removal of the 280E tax burden, which can save multi-state operators between $130 million to $180 million annually, is anticipated to provide significant capital that can be reinvested into refreshing existing facilities and building new ones.
Urban-gro is already seeing increased discussions and interest from clients, with some new contracts signed on the same day as the rescheduling announcement. The company believes that the early indicators of this positive momentum will be seen in its services and equipment backlog, which it plans to closely monitor in the coming quarters.
Outlook
In addition to the rescheduling catalyst, Urban-gro is also anticipating potential upside from the prospects of successful federal banking legislation, which could include a Capital Markets clause allowing plant-touching businesses to list on larger public exchanges. This would provide a more efficient path for these businesses to access capital and create greater liquidity, potentially attracting institutional investors.
At the state level, the company is also closely watching the progress of legalization efforts, particularly in Florida, the nation's third most populous state and one of the fastest growing. A successful vote to allow adult-use recreational sales in Florida would have a profound and sustained impact for the state's operators and for Urban-gro's business.
Business Overview
Urban-gro's diversification strategy has helped insulate its business from the headwinds faced in the cannabis and vertical farming sectors over the last couple of years. In the first quarter of 2024, approximately 72% of the company's revenue came from the commercial sectors it serves, with the remaining 28% from the CEA sector.
The company's client base in the commercial sector continues to be comprised of top-tier companies, including Fortune 50 and 500 firms, with revenues recognized 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 the rescheduling announcement, Urban-gro remains cautiously optimistic as operators continue to navigate persistent state-level regulatory and legal delays.
Liquidity
Urban-gro's liquidity position is supported by its $99 million backlog, qualified pipeline, and the $10 million line of credit it secured in December 2023. The company's cash position of $0.7 million as of March 31, 2024, combined with the availability under the line of credit, provides the necessary flexibility to manage through various macroeconomic scenarios.
For the full year 2024, Urban-gro is maintaining its guidance to recognize more than $84 million in revenue and to generate positive adjusted EBITDA. This guidance does not yet take into consideration the potential impact of the cannabis rescheduling, as there are still some unknowns, including the timing, that need to be clarified.
Conclusion
In conclusion, Urban-gro is well-positioned to capitalize on the significant catalyst provided by the rescheduling of cannabis. The company's diversified revenue streams, focused cost optimization efforts, strong backlog, and liquidity position, combined with the anticipated positive impact of the rescheduling, suggest a promising outlook for Urban-gro's future performance.