10-Q: Urban-Gro Reports Q2 2024 Results: Revenue Declines Slightly Amid Cost-Cutting Efforts

Sentiment:

Quarterly Report 18 February 2025 5:27 PM

Urban-Gro's Q2 2024 revenue decreased slightly, but net loss improved due to reduced operating expenses.

Capital raiseThe Company may seek to raise capital by issuing additional equity shares either through a private placement or on the open market.The Company may also seek to obtain additional debt financing for which there can be no guarantee.

Better than expectedThe net loss improved due to cost-cutting measures and reduced operating expenses.

Summary

Urban-Gro's revenue for the three months ended June 30, 2024, was $17.9 million, a 3% decrease compared to $18.5 million for the same period in 2023.
Equipment systems revenue decreased by $1.3 million due to weak market conditions in the CEA sector.
Services revenue decreased by $0.7 million due to headwinds in the CEA sector and a decrease in revenue from commercial customers.
Construction design-build revenue increased by $1.5 million due to the execution of a limited notice to proceed with a construction design-build contract in the CEA sector.
Cost of revenues decreased by 3% to $15.5 million for the three months ended June 30, 2024.
Gross profit was $2.4 million (13% of revenues) compared to $2.5 million (14% of revenue) for the same period in 2023.
Operating expenses decreased by 24% to $5.1 million due to a reduction in salary and personnel-related costs.
The net loss for the three months ended June 30, 2024, was $3.0 million, or $0.24 per share, compared to a net loss of $5.8 million, or $0.53 per share, for the same period in 2023.
For the six months ended June 30, 2024, revenue was $33.3 million, a 5% decrease compared to $35.2 million for the same period in 2023.
The net loss for the six months ended June 30, 2024, was $5.5 million, or $0.45 per share, compared to a net loss of $11.0 million, or $1.01 per share, for the same period in 2023.
As of June 30, 2024, the company had negative working capital of $8.7 million.
The company borrowed $4.5 million under a line of credit as of June 30, 2024.
As of June 30, 2024, the company had cash of $0.4 million.

Sentiment

Score: 6

Explanation: The sentiment is neutral to slightly positive. While revenue declined, the company significantly reduced its net loss through cost-cutting measures. The future outlook is cautiously optimistic, with potential capital raises to support growth.

Positives

The net loss decreased significantly due to cost-cutting measures and reduced operating expenses.
Construction design-build revenue increased, indicating strength in that segment.
The company secured a $2.1 million term loan to improve cash management.
The company settled a lawsuit, removing a potential liability.

Negatives

Overall revenue decreased by 3% for the three months ended June 30, 2024.
Equipment systems revenue decreased due to weak market conditions in the CEA sector.
Services revenue decreased due to headwinds in the CEA sector and a decrease in revenue from commercial customers.
The company had negative working capital of $8.7 million as of June 30, 2024.
Disclosure controls and procedures were not effective as of June 30, 2024 because of the material weaknesses in internal control over financial reporting.

Risks

Weak market conditions in the CEA sector could continue to negatively impact equipment systems revenue.
Fluctuations in foreign exchange rates could adversely affect the company's financial results.
Inflation on the costs of labor, raw materials and other items that are critical to the business has resulted in increased costs for customers.
The company's ability to continue as a going concern is dependent on strengthening its liquidity and achieving cash flow positive results.
The company's disclosure controls and procedures were not effective as of June 30, 2024 because of the material weaknesses in internal control over financial reporting.

Future Outlook

The company has recently taken actions to strengthen its liquidity, including decreasing headcount and operating expenses to expedite the Company's path to cash flow positive results. If necessary, the Company will seek to raise capital by issuing additional equity shares either through a private placement or on the open market. The Company may also seek to obtain additional debt financing for which there can be no guarantee.

Industry Context

The report indicates continued weak market conditions in the Controlled Environment Agriculture (CEA) sector, impacting equipment systems and services revenue. This suggests broader industry challenges related to access to capital and project delays.

Comparison to Industry Standards

It is difficult to compare Urban-Gro's results directly to industry standards without specific competitor data.
However, the challenges in the CEA sector align with reports of funding constraints and project delays affecting other companies in the space.
Companies like Hydrofarm and ScottsMiracle-Gro, which also serve the controlled environment agriculture market, have reported similar headwinds related to capital access and project timelines.
The company's shift towards commercial projects is a common strategy among CEA-focused companies seeking to diversify revenue streams and mitigate risks associated with the cannabis market.

Legal Proceedings

On August 11, 2023, the Company entered into a settlement agreement with Crest Ventures, LLC and Andrew Telsey to settle all claims in the litigation filed in the District Court for Arapahoe County, Colorado, Case No. 2021CV31301.
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: The improved net loss is a positive sign, but revenue decline and negative working capital remain concerns.
Employees: Cost-cutting measures, including a reduction in force, may impact employee morale.
Customers: Inflation and increased interest rates may lead to project delays or cancellations.
Suppliers: The company's financial performance could impact its ability to fulfill contracts.

Next Steps

The company intends to continue maintaining a full valuation allowance on the Company's deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.
The company is currently in the process of designing and implementing remediation plans and taking steps to address the root cause of the material weaknesses described in the Amendment No. 2 on Form 10-K/A for the fiscal year ended December 31, 2023.

Key Dates

Date	Description
2014-03-20	urban-gro, Inc. was originally formed as a Colorado limited liability company.
2017-03-10	The company converted to a Colorado corporation.
2020-10-29	The company reincorporated as a Delaware corporation.
2021-02-12	The company completed an uplisting to the Nasdaq Capital Market under the ticker symbol UGRO.
2021-05-24	The Board authorized a stock repurchase program to purchase up to $5.0 million of the currently outstanding shares of the Company's common stock.
2021-10-30	The Company participated in a convertible note offering of Xtraction Services, Inc., a/k/a XS Financial Inc.
2022-01-18	The Board authorized a $2.0 million increase to the stock repurchase program, to a total of $7.0 million.
2022-02-02	The Board authorized an additional $1.5 million increase to the stock repurchase, to a total of $8.5 million.
2022-05-05	Robert Pullar filed a lawsuit against urban-gro and Bradley Nattrass.
2022-09-12	The Board authorized an additional $2 million increase to the stock repurchase, to a total of $10.5 million.
2022-11-01	A non-negotiable promissory note in the aggregate principal amount of $3,806,250, payable to DVO was issued.
2023-08-11	The Company entered into a settlement agreement with Crest Ventures, LLC and Andrew Telsey.
2023-08-30	The Company received $2.3 million in proceeds from the sale of its investment in XSF.
2023-09-07	The Company paid $1,500,000 to Crest Ventures, LLC.
2023-12-13	UG Construction, a wholly owned subsidiary of the Company, entered into an interest only asset based revolving Loan Agreement with Gemini Finance Corp.
2024-06-30	End of the quarterly period.
2024-10-01	urban-gro, Inc. entered into an asset based term Loan Agreement 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

urban-gro, revenue, net loss, CEA, construction design-build, equipment systems, operating expenses, financial results, liquidity, term loan

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