10-Q: Urban-Gro Reports Q3 2024 Results: Revenue Declines Amid Market Headwinds

Sentiment:

Quarterly Report (Form 10-Q) 18 February 2025 5:27 PM

Urban-Gro's Q3 2024 revenue decreased by 50% compared to Q3 2023, primarily due to a slowdown in construction design-build revenue and market headwinds in the commercial segment.

Capital raiseOn October 1, 2024, urban-gro, Inc. (the Company) entered into an asset based term Loan Agreement (the Loan) with Grow Hill, LLC, a Washington limited liability company (the Lender) pursuant to which the Lender extended to the Company a secured loan of $2,100,000, to be used to assist the Company with cash management, including to support the Companys growth in the cannabis industry.In connection with entering in the Loan, the Company issued to Lender a warrant (the Warrant) to purchase up to an aggregate of 160,000 shares of the Companys common stock at an exercise price of $2.50 per share.

Worse than expectedThe company's revenue decreased by 50% compared to the same quarter last year.The company's net loss remained significant at $3.8 million.

Summary

Urban-Gro's Q3 2024 revenue was $9.9 million, a 50% decrease from $19.6 million in Q3 2023.
The decrease was primarily due to a $9.3 million decrease in construction design-build revenue and a $1.0 million decrease in services revenue.
Equipment systems revenue increased by $0.7 million.
Gross profit was $1.3 million (13% of revenues) in Q3 2024, compared to $2.4 million (12% of revenue) in Q3 2023.
Operating expenses decreased by 20% to $4.8 million.
The net loss for Q3 2024 was $3.8 million ($0.30 per share), compared to a net loss of $3.8 million ($0.33 per share) for Q3 2023.
For the nine months ended September 30, 2024, revenue was $43.2 million, a 21% decrease from $54.8 million in the same period in 2023.
The net loss for the nine months ended September 30, 2024, was $9.3 million ($0.76 per share), compared to a net loss of $14.8 million ($1.37 per share) for the nine months ended September 30, 2023.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to declining revenue, continued net losses, and identified material weaknesses in internal controls. While there are some positive aspects like reduced operating expenses, the overall tone suggests significant challenges.

Positives

Equipment systems revenue increased by $0.7 million in Q3 2024.
Operating expenses decreased by $1.2 million, or approximately 20%, to $4.8 million for the three months ended September 30, 2024 compared to $5.9 million for the three months ended September 30, 2023.
Non-operating expense was $0.7 million for the nine months ended September 30, 2024, compared to non-operating expense of $2.1 million for the nine months ended September 30, 2023.
Operating expenses decreased by $5.4 million, or 26%, to $15.3 million for the nine months ended September 30, 2024 compared to $20.7 million for the nine months ended September 30, 2023.

Negatives

Q3 2024 revenue decreased by 50% year-over-year.
Construction design-build revenue decreased by $9.3 million in Q3 2024.
Services revenue decreased by $1.0 million in Q3 2024.
The company incurred a net loss of $3.8 million in Q3 2024.
For the nine months ended September 30, 2024, revenue decreased by 21%.
The company incurred a net loss of $9.3 million for the nine months ended September 30, 2024.
As of September 30, 2024, the company had negative working capital of $11.9 million.

Risks

The company faces risks related to operating strategy, competition, and regulatory actions.
Delays in licenses and legislation could delay project funding.
Unfavorable economic conditions and rising interest rates may cause customers to cancel contracts.
The company's ability to manage its supply chain and retain key personnel are critical risks.
Concentration of business from a small number of key clients poses a risk.
Inflation on labor, raw materials, and other critical items could negatively impact the business.
The company acknowledges material weaknesses in internal control over financial reporting.

Future Outlook

The company faces uncertainty due to market conditions and the November presidential election, which has slowed down contract signings.

Industry Context

The report indicates challenges in both the CEA and commercial sectors, reflecting broader economic uncertainties and market headwinds.

Legal Proceedings

On Friday, January 31, 2025, the parties entered a settlement agreement, without any admission of liability or wrongdoing, to settle all claims associated with the litigation in exchange for a cash payment by the Company to Pullar of $250,000 and an issuance of a warrant to purchase up to 75,000 shares of common stock with an exercise price per share of $1.00.

Related Party Transactions

A director of the Company is an owner of Cloud 9 Support, LLC (Cloud 9) and Potco LLC (Potco).
Another director of the Company is working on a vertical farming innovation model with a group of CEA experts (the CEA Consortium).

Stakeholder Impact

Shareholders may be concerned about the declining revenue and continued net losses.
Employees may be affected by cost-cutting measures and potential restructuring.
Customers may experience delays or changes in project scope due to economic conditions.
Suppliers may face uncertainty due to the company's financial challenges.

Next Steps

The company is in the process of designing and implementing remediation plans to address the material weaknesses in internal control over financial reporting.
The company will continue to monitor and manage the impact of inflation on its business.

Key Dates

Date	Description
2021-05-24	The Company adopted the 2021 Omnibus Stock Incentive Plan.
2021-10-30	The Company participated in a convertible note offering of Xtraction Services, Inc. (XS Financial Inc.).
2022-05-05	Robert Pullar filed a lawsuit against urban-gro and Bradley Nattrass.
2022-11-01	A non-negotiable promissory note in the aggregate principal amount of $3,806,250, payable to DVO was issued effective November 1, 2022 (the 'DVO Promissory Note').
2023-08-30	The Company received $2.3 million in proceeds from the sale of its investment back to XSF.
2023-09-07	The Company paid $1,500,000 to Crest Ventures, LLC to settle all claims in the litigation.
2023-12-13	UG Construction, a wholly owned subsidiary of the Company, entered into an interest only asset based revolving Loan Agreement (the Line of Credit) with Gemini Finance Corp.
2024-09-30	End of the quarterly period.
2024-10-01	urban-gro, Inc. entered into an asset based term Loan Agreement (the Loan) with Grow Hill, LLC.
2024-10-02	The Company amended its agreement with the Placement Agent to modify the terms of the cash and warrant compensation associated with the Line of Credit.
2025-01-31	The parties entered a settlement agreement, without any admission of liability or wrongdoing, to settle all claims associated with the litigation in exchange for a cash payment by the Company to Pullar of $250,000 and an issuance of a warrant to purchase up to 75,000 shares of common stock with an exercise price per share of $1.00.
2025-02-18	Date of the report.

Keywords

revenue, urban-gro, construction design-build, equipment systems, services, CEA, financial results, Q3 2024, net loss, operating expenses

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