urban-gro, Inc. (NASDAQ:UGRO) Q3 2023 Earnings Conference Call November 9, 2023 4:30 PM ET
Dan Droller – IR
Brad Nattrass – Chairman and CEO
Dick Akright – CFO
Conference Call Participants
Eric Des Lauriers – Craig-Hallum
Brian Wright – ROTH Capital Partners
Thomas McGovern – Maxim Group
Eric Beder – SCC Research
Ellis Acklin – First Berlin
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. [Operator Instructions] 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 Droller, Investor Relations at Urban-gro. Sir, please go ahead.
Good afternoon, and thank you for joining us. Today’s call will be led by Brad Nattrass, Chairman and Chief Executive Officer; and Richard Akright, 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-gro’s financial results prepared in accordance with GAAP. A 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.urban-gro.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 Urban Growth’s current expectations. Actual results could differ materially. 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-gro files with the Securities and Exchange Commission. 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.
With that, I’ll now turn the call over to Brad.
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 tend 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 Urban-gro has evolved 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 team. We have successfully expanded our operating focus beyond our core controlled environment ag practice to include clients across multiple centers, including industrial, commercial, hospitality, recreation, education and health care.
In regards to our third quarter performance and consistent with expectations, we marked another sequential improvement in both revenues and adjusted EBITDA. Revenue of $20.9 million, a sequential improvement of $2.1 million or 11% came very close to exceeding our all-time quarterly high of $21.1 million reached in Q1 ’22. The adjusted EBITDA loss was $1.3 million, a sequential improvement of $0.7 million. And while our significant revenues this quarter resulted in retiring 27% of our Q3 beginning backlog, we signed enough new contracts to drive our backlog entering the fourth quarter to $84 million, a 6% sequential increase.
Despite the ongoing headwinds within the CEA sectors, our diversification strategy has served as a source of strength to 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.
Now turning to current sector trends. Sector diversification is 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 second quarter, more than two-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.
In the CEA sector, our equipment revenues continue to be compressed by the weak cannabis market. During the first nine months of ’23, we have experienced a period-over-period decline of more than $20 million of 18% margin business.
While it’s impossible to ignore the negative impact that this has had on our financial performance. Our diversification has enabled us to keep our experienced 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.
This 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-gro 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 have 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, but we’re confident the move forward of the construction build stage where these delays are resolved and licenses are received. This is evidenced in the third period where we had two 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 it’s been since opening the entity since June of ’22. While the cannabis markets abroad continue to show green shoots in multiple countries, our European business will 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.
Now shifting to our guidance through the fourth quarter ’23, demonstrating our ongoing commitment to deliver sequential growth on both the top and bottom line, we anticipate revenues to be approximately $30 million, 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 our 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, totaling about 1.5% of shares outstanding.
My leadership team demonstrated their commitment as well, led with a 50% commitment for 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 third quarter.
The key takeaways here. First, our Board as well as our leadership team and their teams continue to strongly believe in the future of the company. Second, 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 power to maintain this positive momentum.
Thank you. And with that, I will now turn the call over to Dick.
In the third quarter of 2023, we generated revenue of $20.9 million, which represents a sequential improvement of $2.1 million or 11% over the $18.8 million of revenue generated in the second quarter of 2023 and an $8.6 million or 69% improvement over the $12.4 million of revenue generated in the prior year period.
The increase in revenue over the prior year period was driven by a $9.4 million 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 $2.9 million or 14% of revenue in the third quarter of 2023 compared to $2.9 million or 15% of revenue in the second quarter of 2023 and $2.6 million or 21% of revenue in the prior year period.
The decrease in gross profit margin for both of these comparative periods was driven by the impact of revenue mix where we experienced a substantial increase in lower margin construction design build revenue as well as a decrease in higher-margin equipment systems revenue.
Operating expenses were $6 million in the third quarter of 2023, which, on a sequential basis, is a decrease of $0.8 million. Operating expenses in the third quarter of 2023 are $3.5 million less than operating expenses of $9.5 million in the third quarter of 2022. The prior year quarter included a onetime business development expense of $3.3 million.
But even excluding this one-time expense, operating expenses decreased $0.2 million 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 $0.3 million in the third quarter of 2023 compared to nonoperating expenses of $1.8 million in the prior year quarter. Net loss was $3.4 million or a negative $0.29 per diluted share in the current quarter compared to a net loss of $8.7 million or a negative $0.081 per diluted share in the prior year period.
Adjusted EBITDA improved by $0.7 million sequentially to negative $1.3 million in the third quarter of 2023, which is an improvement of $1.0 million compared to the prior year period. The sequential improvement in our adjusted EBITDA was driven by lower operating expenses, as previously discussed.
For the first nine months of 2023, we reported total revenue of $56.5 million compared to $49.7 million in the first nine months of 2022, representing an increase of $6.8 million or 14%. Net loss was $14.0 million compared to a net loss of $11.1 million, and adjusted EBITDA was negative $6.8 million compared to negative $2.2 million in the prior year comparable period.
This decrease in adjusted EBITDA was predominantly due to the combined impact of an increase in general and administrative expenses of $3.2 million and a reduction in gross profit of $2.4 million.
Turning to our balance sheet. We ended the third quarter with $4.8 million of cash and no bank debt. To support the strong performance of our construction operations, subsequent to September 30, we entered into a nondilutive asset-based lending facility in order to better manage our working capital.
To date, the facility remains undrawn. Our total backlog as of September 30, 2023, was approximately $84 million, reflecting an increase of $5 million or 6% on a sequential basis and $17 million or 25% versus the prior year. This backlog is comprised of $77 million in construction design build, $5 million of professional services and $2 million 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 nondilutive lending facility, will provide us the necessary flexibility to manage through the macroeconomic market circumstances. We continue to remain focused on our execution and returning to positive adjusted EBITDA.
That concludes our prepared remarks. Operator, please open the call for questions.
[Operator Instructions]. Our first question is coming from Eric Des Lauriers of Craig-Hallum. Please go ahead.
Eric Des Lauriers
Great. Thank you for taking my questions. First one is on the nondilutive asset-backed facility. Certainly, great to hear that 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? Just any more detail you can provide on that facility would be great.
Thanks, Eric. Dick, do you want to take that, please?
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 sector has really grown for us. The facility we entered into is for up to $8 million lending on that. And then like I said, it’s really based on receivables based.
Eric Des Lauriers
And then is that a revolving facility? Were you able to sort of pay that down as needed or, yes.
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.
All right. We look at it to support the growth expected here in the quarters ahead.
Eric Des Lauriers
Yes, that’s great to hear. And again, great to see that added flexibility. My next question is on G&A. It’s very nice to see these costs coming down here. Obviously, you guys are doing a good job kind of keeping a lid on that. I understood there’s some deferrals to stock-based compensation over cash. How should we think of that G&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&A sort of going up commensurate with revenues or with gross profit? Or 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 think of those going forward?
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.
And so as we grow, as we start to deliver $30 million, $50 million-plus quarters, we do not anticipate needing to add any more senior management, EVP or hire. 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’re willing to make in order to maintain the brain power for future quarters. Dick, do you want to jump in on the detail.
Yes. And I’d add to 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&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.
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 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&A will go up some, it won’t be anywhere near proportionate to the growth in the revenue we’re going to see.
Eric Des Lauriers
All right. It’s great to hear. Thank you for taking my questions.
Thank you. The next question is coming from Brian Wright of ROTH Capital Partners. Please go ahead
Thanks. Good afternoon. I wanted to dive a little bit temper on that G&A reduction in place. I can tell you because like for the quarter, there were some deferrals where people were buying stock in either regular salary. So I’m seeing in the fourth quarter that refers unless that’s being extended. So I just wondered that like for that line, I kind of understand what’s the incremental increase in the quarter in the fourth quarter?
Yes, Brian. As you’ve indicated, there was a reflective reduction in G&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&A in the fourth quarter. I mean, just to kind of clarify, we’re not talking millions 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. So there is going to be an increase in G&A related to that, but we’re also going to see some other savings taking place in the fourth quarter to basically keep our G&A, although as projected right now slightly over where Q3 is not significantly over where Q3 is.
Great. Thank you so much for the additional color on that. I just — maybe the key out, but I just haven’t seen it yet. And 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 tremendous end market perspective between however you want to do a health care versus CEA versus, you name it, but just some insights on to how to think about the industries of the backlog.
Sure, Brian. Brian, whereas our quarterly revenues more than two-thirds were non-CEA. Our backlog still are the majority of it, more than two-thirds is in the controlled and farming space. We anticipate growth on both sides. But on the non-CEA side, these contracts are typically shorter in length. And when they sign, they immediately want us to start executing 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, they’re larger and they’re more extensive with design and build. Those can spread out over six quarters, sometimes even as long as eight quarters.
Great. Thank you for that color. I’m kind of like torn because I choose your commentary about the $30 million in quarterly revenue and even $50 million optionality to get into those levels. So I’m assuming you see things that we don’t see, right, as far as kind of that optimism. But then if I choose to that’s great on the positive side. But then if I look at just like that ramp sequentially third quarter from the little $21 million up to the around $30 million for the fourth quarter. So is there like, how can we get comfort with that kind of ramp in the fourth 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 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 fourth quarter 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. 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 confident that, that revenue is going to be there.
And Brian, I’ll add to the back of it. In the third quarter, we retired 27% of our beginning backlog. And so now looking at entering the fourth quarter with $84 million, 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 with Fix discussing on what we’re anticipating to top it off in order to hit the $30 million market.
Great. And then are there any other things that are part of that are just details like Ohio approval for adult use, things of that nature like that you could point to as well?
For Ohio, fantastic, right? For the industry, another state legalized by the time they get the regulations in place, you’re probably looking at third quarter of ’24. 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.
But I touched on it a little bit earlier. For us, we don’t need the entire industry to turn around, like, of course, we’re fully supportive in pulling for rescheduling and safe banking, et cetera, 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 they move forward to the construction side.
So very optimistic, the 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 three 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.
Great. That sounds great. I think that’ll – I think that’s it for me. Great. Thank you very much.
Appreciate it. See you next week.
Thank you. The next question is coming from Anthony Vendetti of Maxim Group. Please go ahead.
Hi, guys. This is Thomas McGovern on for Anthony. Thanks for taking my question. So to 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 the cannabis sector, and you’re seeing some positive signs in New York. 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. But just maybe if you could provide your industry insight and just how the market is starting to shape up. I’d appreciate that.
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 Cannabis Roundtable, and this is probably something that would take place in Q2 of next year. We remain very optimistic 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 in expanding the award of licenses to additional groups that aren’t tied into specific segments.
On New Jersey, when it opened up, we’ve made great progress with certain clients, but there’s also now their funding hurdle as well that these individual groups have to jump over to. So hopefully, something like, say, banking passing. It was hopeful again, like last year that could happen by the end of the year. 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 two 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. So it’s a nice pleasant surprise when it happens for sure.
Understood. I appreciate that color. My next question is on the international front. So last quarter, you guys mentioned you had the highest top line, and most of that have been driven by design. You also discussed how Germany was establishing some regulations, but it was taking some time that you were even looking at some opportunities in vertical farming in the Middle East. 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 kind of what to expect moving into ’24 that would be appreciated as well?
Yes. In the Middle East, that’s not a focus for us right now. It was interest when we opened that office, but we quickly decided just to focus in our backyard in and around the Netherlands, our offices 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 in doors.
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 two 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 four or five quarters. So it’s nice to see that start to move forward, and it would be a good strong accomplishment for Ingruto go to the next stage, past design with one of these entities.
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. So right now, the Netherlands, the U.K. and Germany are key, I’d say, the top three countries we’re focused on right now.
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&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 historically? I appreciate you guys taking the time to answer my questions.
Perfect. Thanks. Right now, we’re just focused on getting back to generating cash and growing within our own shelf. As I mentioned at the start, we are top and loaded, and so we have a lot of room to grow within and really be able to register good, strong, profitable quarters and 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. But right now, it’s not even on the near-term plan for sure. It’s just getting back and maintaining positive cash flow.
Great. Thanks again.
Thank you. The next question is coming from Eric Beder of SCC Research.
Good afternoon. Hi, I want to step back and talk a little bit about your ability to win contracts outside of CEA. What you’re competing against a lot larger people and people who 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?
Great question, Eric. In terms of winning additional contracts with the 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 portfolio and the project size is 3x to 6x larger. So we’re locking the tuck.
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 bizdev relationship team. So we’ve put a lot of work into building out that go-to-market strategy.
When JT 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 or when equipment is arriving and what’s needed or outstanding items to complete. So we’re giving a good service level. Of course, there’s a lot of large multibillion-dollar construction management companies. We are sub-in to some of those companies.
They’re not built to go after $10 million, $20 million projects, they’re focusing on infrastructure projects and other large $1 billion-plus projects. We found a really nice sweet spot at around $10 million to $30 million, where the turnkey aspect doesn’t really exist in the industry. We signed it was a Gulf or so 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. Otherwise, they were going to bring on their own site, superintendent that we’re going to have to hire architecture and engineering on their own. So that was a really nice moment of awakening, for at least me to see that there’s definitely a value in what we’re offering for sure at that level. We’re also 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. So it’s not always design build our engineers. It’s a 20-year company that we bought based in Houston.
We have a lot of relationships. They have a lot of skill sets, one is fire and safety, for example, that there are no one fell in that specific Southwest Region. So we’re building on our strengths and doing a good job in delivering on what we commit to do.
Great. A little more granular. When you look at Q4 revenues, do you still expect it to be about two-thirds non-CEA?
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 continue to have good strong CEA announcements this quarter, like we started to see in Q3, I would say you could see that begin to go more towards the 50-50 mark in Q1 and Q2 next year as the cannabis facilities or the vertical farm facilities ramp up.
Great. 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 purchase have equipment here, and I’m assuming that a lot of people are in the same issues as 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?
Yes. Thank you, Eric, I would look at it as we can’t agree. Like when you look at the 9-month performance, that’s close to $4 million, 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 them on is services, we’re then moving forward to construction and then it goes to equipment, we want to be equipment agnostic.
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., we’re also in Europe as well. We definitely want to increase the equipment, Eric. I think you asked on the last call, we have in Q3, we did successfully integrate mechanical or closed the mechanical contract. We haven’t shipped it yet, but into a non-CEA, very large clients. So it is a focus for us to spread our Acasta a larger web and also sell into those other markets equipment systems too.
Thank you. The next question is coming from Ellis Acklin of First Berlin. Please go ahead.
Hi, guys. How’s it going? 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&A cost structure?
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 million of quarterly revenue without having substantial increases from a personnel standpoint. And again, part of that is just we’re just seeing an increase in the size of the jobs that we’re doing, especially on the construction side.
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 million of revenue, even $45 million of revenue a quarter, it’s not going to require very many more, if any, people for us.
And that was kind of the way we’ve built the business. It’s just unfortunately with the falloff in cannabis and especially with the way it hurt equipment, just kind of lacked is from the standpoint of our income statement with that downturn. But when it comes back, we’ve really got the people in place to be able to handle things.
I’ll add on the back there, just a little bit, Acklin, 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 that we continue to hire and bringing operational expertise in certain areas, we’ll bring those individuals as well. But as far as the senior executive team, EVP and hire, we don’t anticipate much need for that in the very near future for sure.
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 is the point? Is it in revenues where you can break even consistently at the adjusted EBITDA level? Is that $25 million, $30 million, $35 million or like Dick was talking about $40 million. Is there a spot that you guys target? I was like okay, more breaking even here?
It all depends on that mix, right? So with —
Assuming the mix stays about what it is right now with depressed equipment sales.
Yes. That’s where our guidance is, Ellis, right now, right approximately $30 million in revenue. 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 million in revenues and breakeven to positive EBITDA, we’re there right now.
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? When that might stop idling or if you might be able to put it back in at some point?
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.
Okay. Great. All right, guys. Thanks a lot. Have a good day out there.
Thank you very much, Ellis.
Thank you. That is all the questions we have for today. Please reach out to investors.uban.gro.com with any additional questions. Thank you, and have a nice evening.