urban-gro, Inc. Q4 FY2023 Earnings Call

Greetings. Welcome to the Urban-gro, Inc. Fourth Quarter and Full Year 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference call is being recorded. At this time, I'd like to turn the conference call over to Christian Monson, Urban-gro Executive Vice President and General Counsel. 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 Dick 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. Reconciliations of our GAAP net loss to adjusted EBITDA are available in our press release and in our Form 10-K 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-gro'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 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 will now turn the call over to Brad.

Thank you, Christian. And good afternoon, everyone, and thank you for joining us today. After delivering sequential improvements to both the top and bottom line in the first three quarters of 2023, we were met with the confluence of delays across multiple projects in the fourth quarter, which resulted in a disappointing performance. Although we are frustrated by these circumstances, fortunately, none of the delayed contracts were lost. All are currently active in the first quarter and we expect that the majority of these delayed revenues will be recognized over the course of 2024, beginning in the first quarter. Our model is working. Our diversification strategy is continuing to broaden our presence across multiple industries, which is visible in our expanding backlog. And further, the significant efforts made to optimize and align our SG&A expenses in 2023 positions us well for 2024. All considered, we are confident that 2024 will prove to be a step-up year for Urban-gro where we expect to deliver positive adjusted EBITDA, a goal that we have consistently identified as our top near-term priority. 2023 was a successful year of evolution for the company. Although we faced ongoing headwinds within the cannabis sector, our team continued to execute on our sector diversification strategy and we finished the year with revenues of $72 million, representing growth of 7%. Of this, $50 million or 70% of our revenues are from the commercial markets that we serve and $22 million or 30% are from CEA. Further, while our year-over-year CEA revenues decreased by $22 million or 36%, this was offset with our revenue growth in commercial, which increased by $27 million or 36%. These numbers demonstrate a reversal from trends we experienced in 2022 and highlight the value of our diversification. The prolonged multiyear compression of our equipment revenues, resulting from continued softness within the CEA sector remains the most material headwind to our financial performance given the advantageous margins that this category represents. In 2023, our equipment revenues decreased to a three-year low of $13 million, which represents a $21 million or 62% decrease from 2022, and moreover, a $43 million or 77% decrease from 2021. And an average equipment margin of approximately 14% replacing this margin with gross profit from our other areas of business has been a large hurdle to overcome. But as we entered 2024, we have done just this. That being said, there are some significant regulatory changes that could serve as catalysts to reignite the cannabis market and therefore provide a material and sustained lift to our future financial performance. As a result of these persistent headwinds across the CEA sector, we have optimized the size of the company to align with the current performance levels and reduced our SG&A expenses by more than $8 million on an annualized basis, all of which we expect to realize in 2024. We have an in-house team of experts who include architects, interior designers, engineers, construction managers, project managers, horticulturists and others that are focused on serving clients in multiple sectors, including CEA and commercial. A combination of this team's expertise, our integrated solutions and our focus on sector diversification differentiates us as a company that continues to deliver growth in a turbulent environment. Now looking at trends in the markets in which we operate. First, in regards to the strategic investments we have made in our European entity over the last two years. The suppressed demand in their CEA markets continues as well. And as a result, we have downsized the workforce and reduced general expenses to better align our costs with near-term demand levels. Looking forward, the European cannabis market is continuing to open up, most notably with the early stages of adult use legislation and legalization in Germany, and we continue to anticipate that there will be increasing demand for the services that we provide. In the domestic market, our business in the commercial sectors continues to generate strong organic growth. In addition to signed contracts upon which we're executing, we have a qualified pipeline of projects with both existing and new clients as demonstrated by our growing backlog. Looking forward in the year, we intend to continue building out our business development focus in commercial by adding to our roster of sector experienced individuals and integrating other innovative initiatives. In the CEA sector, we continue to expand our vertical farming focus, albeit at a slower pace than anticipated due to ongoing sector capital challenges. While almost all of the related business that we currently engage in utilizes our professional services, we're continuing to interface with a variety of new clients for which Urban-gro is a perfect fit for fulfilling their urban vertical farming design build needs. As it relates to our business in the cannabis segment, we've remained active in delivering design build solutions as well as architecture, interior design and engineering services, both individually and also combined for both dispensaries and cultivation facilities. As it pertains to our outlook on the cannabis sector, we believe that current market sentiment is more positive than it has been for a couple of years, fueled by heightened awareness and anticipated progress around potential regulatory changes. There are a few catalysts which could result in a significant and positive change in momentum for our business within this sector. First, on the federal level, the potential rescheduling of cannabis from Schedule 1 to 3 would provide operators with significant working capital increases resulting from the removal of the 280E related tax burden. We believe operators will use this significant incremental capital to fund future CapEx growth, including refreshing existing facilities and building out new ones. Second, and again on the federal level, the prospects of successfully passing the SAFER Banking Bill continue to be discussed and would potentially include a capital markets clause that allows plant touching businesses to not only list on the larger exchanges but moreover provide more efficient access to capital. And third, at the state level, while progress continues to be made on legalization in multiple states, we believe the most impactful change would be in Florida. A successful vote to allow adult use recreational sales in the state would have a profound and sustained impact for the state's operators. Now turning to our full year 2024 outlook and associated cadence. We anticipate consolidated revenues to be greater than $84 million, a 17% increase over 2023 and we expect to generate positive adjusted EBITDA. While achieving these results are still heavily dependent on category revenue mix, the actions we took to reduce our SG&A expenses in 2023 have significantly reduced our revenue breakeven point for generating positive adjusted EBITDA relative to what we've previously communicated. For the first quarter of 2024, we're providing some guidance on our expected results given we are approaching the end of the quarter, which has two days remaining. We expect revenues to be greater than $15 million and adjusted EBITDA to be greater than negative $0.5 million. Looking at the quarterly cadence for the year, we expect to deliver sequential quarterly growth of both revenues and adjusted EBITDA building to our entire full year guidance. In closing, as we look more broadly to 2024 and backed by both our closed contract backlog of $110 million and the $8 million reduction in annualized SG&A, we believe we are in the strongest position that we have been in over 18 months. Further and supported by a qualified pipeline that continues to grow, we see increasing demand for our solutions in multiple sectors. With the right regulatory progress in the cannabis sector, we anticipate seeing a resurgence in our related business later this year. To date, Urban-gro's model is stronger, more durable and more efficient than it has ever been. Our business is fundamentally secure. And with the support of the working capital line of credit that we put in place in December, we do not see the need to bring new capital into the company at this time. Thank you. And with that, I will now turn the call over to Dick to discuss further details of the fourth quarter as well as full year 2023 results.

Thanks, Brad. And good afternoon, everyone. Revenue was $15 million in the fourth quarter of 2023 compared to $17.3 million in the prior year period. This decrease was the result of reductions in all revenue categories, including construction design build revenue of $1.3 million, professional services revenue of $0.8 million and equipment systems revenue of $0.2 million. Construction design build revenue decreased due to several projects being pushed into 2024. The reduction in equipment systems and services revenue is a result of continued soft demand in the US cannabis market, because of ongoing state-level regulatory delays in the license awarding process as well as the lack of movement by key industry financial support models, such as rescheduling and the SAFER Banking Act. Gross profit was $1.7 million or 11% of revenue in the fourth quarter of 2023 compared to $3.2 million or 19% of revenue in the prior year period. The decrease in gross profit of $1.5 million correlates to the decrease in revenue as well as a shift in mix toward lower margin construction design build revenue. This was further impacted by a project cost revision in the fourth quarter that negatively impacted project profitability. Operating expenses were $6.4 million in the fourth quarter of 2023 compared to $6.2 million in the prior year period, representing an increase of $0.2 million. The increase in operating expenses was the net effect of an increase in general and administrative expenses of $3.8 million and a $3.3 million reduction in a one-time business development expense. The increase in general and administrative expense was the result of increased professional fees associated with legal defense costs and increased personnel costs associated with an increase in the average number of employees. As Brad mentioned, we've been able to reduce our annual general and administrative expense spending by over $8 million, which will favorably impact our results in 2024. I'll provide some more context on this a little later. Non-operating expenses of $0.1 million in the fourth quarter of 2023 related primarily to interest expense and were down significantly from $1.3 million incurred in the fourth quarter of 2022, which included an impairment loss of $1 million related to settlement of a litigation receivable and $0.4 million in expenses recognized from fully guaranteeing the remaining contingent consideration associated with the 2WR acquisition. Net loss was $4.7 million or a negative $0.40 per diluted share in the fourth quarter of 2023 as compared to a net loss of $4.2 million or a negative $0.39 per diluted share in the prior year period. Adjusted EBITDA was negative $3 million in the fourth quarter of 2023 compared to negative $1.7 million in the prior year period. The decrease in adjusted EBITDA was driven by lower revenues and gross profit as well as an increase in general and administrative expenses. On a full-year basis, we reported total revenue of $71.5 million compared to $67 million in the prior year, representing an increase of 6.7%. This increase in revenue was predominantly driven by the increasing momentum that the company has in the commercial sectors in which it operates outside of the CEA market. Further, significant increases in construction design build revenues were offset by continued decreases in equipment systems revenues related to the sustained softness in demand in the US cannabis market. Net loss was $18.7 million compared to a net loss of $15.3 million and adjusted EBITDA was negative $9.7 million compared to negative $3.9 million in the prior year comparable period. Now turning to the balance sheet. We entered 2024 with $1.1 million of cash and a total of $2.5 million drawn on our $10 million working capital ABL that we put in place in December 2023. The line is serving its purpose and is providing us the necessary flexibility to manage our working capital needs, which are tied directly to our clients' projects. In fact, the drawn balance at year-end is tied to $8 million of anticipated collections that moved from late December 2023 to mid-January 2024. We are consistently collecting on our accounts receivable and paying down our accounts payable and the ABL provides the flexibility needed to support our growth as we return to positive adjusted EBITDA in 2024. As was expected, increased construction design build revenue drove increases to receivable and payable balances on a year-over-year basis. Moving to reported backlog. Our total backlog as of December 31, 2023 was approximately $110 million, a $26 million or 40% sequential increase over the third quarter of 2023. Approximately half of this increase is attributed to the delayed project delivery that we experienced in the fourth quarter and detailed earlier. This backlog is comprised of $102 million in construction design build, $7 million of professional services and $1 million of equipment systems contracts. As previously mentioned, in 2024, we have identified more than $8 million of general and administrative expense reductions as compared to 2023 to ensure that we will be able to achieve positive adjusted EBITDA based on our projected revenue in 2024. Those expense savings will correspond to reductions in personnel-related expenses, professional fees, marketing expenses and a variety of other expenses across all departments. Additionally, in 2024, the financial services division of the company has set three primary strategic goals that I feel will assist the company in delivering more consistent results on a sequential basis. First, now that all entities are on the same ERP system, improved tactical reporting on a weekly basis will provide our business development and operations teams with better line of sight on projected performance, so they can both plan accordingly and adjust operating targets on a real-time basis, including accelerated billing on construction design build projects to improve cash flow. Second, drive cost reductions in insurance and facilities costs. And third, strategic utilization of the line of credit, which will enable us to better manage our vendor relationships in order to maximize our purchasing opportunities and reduce overall costs, primarily on construction design build projects, which will in turn aid in increasing margins on projects. That concludes our prepared remarks. Operator, please open the call for questions.

The first question comes from Eric Des Lauriers with Craig-Hallum.

First one from me, just hoping you could expand a bit on the project delays and especially the cost revisions in the quarter. We've seen a few or a couple of project delays in the past. Obviously, these things can happen with large projects. Cost revision is newer, I think. So just any more color on kind of what happened in the quarter would be very helpful.

In Q4, we experienced delays with three projects. Two of them were originally scheduled to start in December, and we initially anticipated that they would kick off by then. We began acquiring materials for the site, but both clients requested to postpone those kickoff dates to the first two weeks of January, which we accommodated. The third project was an existing recreation project we had announced earlier in the year. We had expected to generate significant revenue from it in Q4, but it also faced delays, resulting in no business being completed during that quarter. All three contracts are still active and will record revenue in Q1. We now expect them to take about a quarter longer to finish than initially planned, which is why I mentioned that most will be completed in 2024. Overall, we are seeing an increase in larger projects, and as we move into 2024 and continue to secure new projects, the impact of one or two moving will be less significant. Currently, however, when one or two projects are delayed, it has a considerable effect, and when three are unexpectedly delayed, it leads to disappointment. Additionally, our services revenue takes about a month after the end of the quarter to reconcile, and we were surprised by the disappointing performance from the CEA sector, as there was no engineering work done in Q4. That has picked up momentum in Q1. The steps we took over the last couple of months have allowed us to maintain an active overview of all services and invoicing. By implementing a unified ERP system in mid-2023, we now have a clear understanding of our standing as we provide Q1 guidance with only two days remaining in the quarter. Lastly, we anticipated a couple of million dollars in projects that ultimately did not materialize; they didn’t just push back, they entirely disappeared at the end of 2023. This is disappointing, but on a positive note, the construction contracts weren’t lost—it's purely a timing issue. It doesn't affect the long-term fundamentals of the company, just a shift into Q1. Dick, would you like to address the project costing?

Yes, let me comment on that, Eric. We certainly did have a project that we had a cost revision, increased cost on that occurred during the quarter. We are working with the customer in order to negotiate a revision of that contract. But in the construction industry with the way things go in terms of the way we have to account for that, because we didn't get those negotiations finalized by the end of the year, we couldn't include a contract revision as part of our calculations for contract revenue and the contract cost, so we needed to have that flow through our financials with the way it is, which is the increased project costs right now. We are highly confident that we're going to be able to negotiate an increase in the contract revenue for that project and that that will come through in the first half of 2024. But like I say, not too atypical in the construction industry when you have a situation like this, you just need to account, let the accounting happen as it does. And we just felt we needed to show that contract that cost revision for the quarter.

Regarding our fiscal '24 guidance, we've largely completed Q1. We're projecting $84 million in revenues along with positive EBITDA, and we expect sequential improvements in both from Q1 levels. I'm curious about your visibility on potential project delays and cost revisions that might affect future quarters. Given that our ERP system is now implemented across all entities, will this provide better visibility into these delays and cost changes? I'd like to understand how to approach this guidance overall and its cadence. Additionally, does the guidance take into account any potential legislative catalysts?

I'll start with the last one. The guidance does not include any potential catalysts in the cannabis space. We currently have active design build projects in this area. Even in existing legal states that are experiencing regulatory delays and haven't issued licenses, like New York, we have multiple clients who have completed designs and invested a significant amount of money, some of them reaching construction documents. However, until they receive their licenses, they cannot access their funds to proceed with construction. We continue to have ongoing business and are increasingly involved in dispensary projects for clients, which include both multi-state and single-state operators across the country, offering services that range from design to design build. Regarding potential delays, we currently do not expect any additional issues. However, we did experience unexpected delays at the end of the year with just weeks of notice. While we are optimistic about the current situation, unforeseen events can occur. As I mentioned earlier, since we are handling many projects simultaneously, if one faces a delay, it will not have a significant impact overall. Delays will be monitored through our project management office, and we have an online project management portal for visibility from both clients and our team. The ERP system is primarily connected to the timely tabulation of results. We have taken steps to address the issues that caused disappointment, and services are currently falling short of our forecasts, even as recently as mid-December. I do not expect further service delays with our guidance. Regarding sequential performance, we have contracts that are set to be executed over the next two to four months, and these are detailed in our project management portal, allowing us to track them closely. We are very confident in our Q1 results with just two days remaining. Looking ahead into Q2 and beyond, while things are not entirely finalized, we do not foresee problems as long as everything proceeds as planned, and we expect improvements in both our top and bottom lines. We recognize the importance of rebuilding trust in our forecasting abilities.

Thanks for taking my questions.

And Eric, just commenting on it, as evidenced, the backlog for construction design build is really quite large and we are getting much better insight and visibility into how those projects, costs on those projects are starting to come into site over the course of 2024. So that's just really improving with the new ERP system that we've put in place, much improvement on that even just over the last six weeks. So anyway, just wanted to add that comment.

Next question comes from Scott Fortune with ROTH MKM.

I’d like to follow up on Eric's remarks to provide more details on the backlog and the ongoing discussions or opportunities beyond the CEA and various industries. It would be helpful to highlight some of these different industries. Additionally, how much of the $110 million backlog is attributed to CEA versus non-CEA? I would appreciate a deeper analysis of the strength in the end markets you are experiencing, particularly regarding the industries or project categories that are showing strong performance. More insight on this would be beneficial.

Dick, do you want to start on the backlog?

From a backlog perspective, we currently have a significant amount, specifically $110 million, coming from the CEA sector. Within our backlog, we have several large construction design build projects. As of December 31st, 70% of the backlog is attributed to CEA. A substantial portion of our construction efforts now consists of CEA projects, which represent the largest segment of our backlog for the year. On the commercial side, we are mainly focused on existing contracts with customers that were already part of the company when we acquired it, notably a large CPG customer. However, we are also expanding our reach into healthcare and secondary education customers, which are included in the backlog.

And just kind of a quick follow-up. Do you see the backlog switching a little bit, going out more diversified to the CPG healthcare as you build out? Just kind of a little bit color on those opportunities.

I'll take that one. So in the CEA side, Scott, when we're building on the cultivation facility that can take us as long as six quarters. On the commercial side, if it's a manufacturing facility or some recreational buildings or a laboratory, those can be completed in as quick as two or three quarters. What we had underestimated in the first year in commercial is when we're verbally awarded a project to when the contract is officially signed or a PO is sent that period is not a week, for example, like it could be in the CEA space like we're used to. It can be up to months. And so those projects, once they do start, we’re ready. They've verbally told us what exactly to do and the steps so we can immediately hit the ground running, recognize cost, recognize revenue and get going quickly. So they're done relatively quickly once they're signed. So the time frame is a lot less. And in terms of these end markets, as Dick mentioned, post-secondary, we have multiple architecture and engineering contracts right now between $400,000 and $800,000 high-margin projects that we're working on. In healthcare, we work on both sometimes the design of hospitals, all design, no build there. But then on some smaller healthcare facilities like an MRI facility or something like that, so that would be done relatively quickly over three quarters as well. So there's strength there. Laboratories, we're seeing strength on laboratories. And then also on retail, nothing to talk about right now any further on that, but some good strong retail opportunities as well for us. And when you take a step back and you think that over the last six quarters, we have secured a little over $50 million of commercial business in sectors where we didn't set out to go down that path when we listed on the NASDAQ, but we've taken that path as a diversification strategy that really has paid off nicely for the company thus far, set us up nicely for the future. And when the cannabis industry does have its resurgence, which everyone, of course, hopes is quicker rather than longer, we're not going to stop on the other side. We're going to invest and continue to build out, because what we've learned is we can utilize all of our professional services experts and our site troopers and project managers in all areas. So we have that big pool of talent and expertise that can be used on the build or on the design regardless of what sector it's in. So exciting for the future. But bringing it back to today, we have to execute quarter-by-quarter and earn credibility back.

And then one quick follow-up for me then on the CEA side. Obviously, kind of dependent on rescheduling when that happens. But moving forward, is this still a state-led growth story for a lot of the cannabis industry? And like you mentioned down in New York, you're seeing a ramp there potentially, Ohio comes on board in the fall of '24. But the big opportunity is Florida. We're seeing or we're hearing a lot of the cannabis MSOs are looking to actually build out. They need to build out production capacity ahead of Florida potentially flipping. But just kind of your sense of color in the pipeline, the discussion of capacity builds in the key states as we see regulation kind of play out here in the second half? Just kind of discussions you're having on capacity adds from that standpoint?

There are ongoing discussions and planning in New Jersey, New York, Ohio, Pennsylvania, and Florida, but no contracts yet. The planning efforts could involve designing facilities or dispensaries. From a construction perspective, I believe that operators in these states will want to progress a bit further. The primary challenge in Florida is awaiting the Florida Supreme Court's decision before April 1st. If all goes well and it makes it to the ballot, there’s a need to secure over 60% approval, which current polling suggests is achievable. Florida is generating considerable anticipation in the industry. Similarly, Pennsylvania is working towards getting initiatives on the ballot. The potential rescheduling of cannabis and eliminating the 280E tax provision could provide larger multi-state operators with an additional $120 million to $180 million annually in working capital, which those companies have indicated they would reinvest to expand their operations. Urban-gro specializes in designing and building facilities and dispensaries, so this change would be beneficial for us if it occurs. Improved access to banking would also contribute to increased funding. The current sentiment is more positive than it has been in recent years, but there’s still a lack of working capital, so while everyone is optimistic, we need some form of catalyst to spur action.

The next question is from Anthony Vendetti with Maxim Group.

This is Thomas McGovern on for Anthony. So yes, just to kind of touch back on some of this regulatory front, I know you've talked about it quite a bit on this call, but I wanted to hone in a little bit more on the SAFER Banking Act. You just mentioned its importance in terms of funding a lot of these deals. But with that on the horizon, I just want to see like ignoring any potential statewide legalizations, if this act were to be passed, do you guys have potential projects that are maybe not yet considered backlog that are more pipeline projects that you expect to kind of progress once funding frees up, or just kind of tell us how that would play out as a catalyst in '24?

The answer is definitely yes. For something to be in our backlog, we need a signed contract, a deposit received, and we're actively working on it. We take our backlog very seriously and have removed items from it a couple of times in early 2023. We truly see the backlog as an indicator of our performance over the next one to six quarters. Once something is signed, it becomes part of our backlog. Currently, those projects are in our pipeline, which is strong and growing with qualified opportunities. While we don’t disclose the size of our pipeline, we have numerous projects that could fit in once we have the right catalysts. The SAFE Banking or SAFER Banking measures could enable operators to list on larger exchanges, giving them easier and more efficient access to capital and institutional investors, which would be fantastic for the industry. You also mentioned state or federal legalization. We don't anticipate interstate commerce or legalization for possibly a decade; the timeline for broader legalization is still three to five years away. For now, we expect this to be a state-focused initiative for the foreseeable future.

The challenge in Germany lies in obtaining social licenses, similar to the situation in Maine, where social clubs allow individuals to cultivate their own cannabis. It will take time for that market to develop, so I don't foresee many short-term opportunities. Currently, there are three existing operators in the country, and they are likely to be the first to expand, so we'll closely monitor their progress. In Europe, when we launched our operations two years ago, we had a contract for 20 vertical farms in urban locations, such as food service distribution centers and near hotels. However, shortly after establishing our team, the war in Eastern Europe began, which severely disrupted the horticulture market and caused energy prices to soar, impacting manufacturers and ancillary companies in the industry for a couple of years. Fortunately, we had a foothold in the cannabis sector, designing projects in Israel, Switzerland, and Portugal, and we're currently focusing on initiatives in the Netherlands. Portugal looks promising this year, but we couldn't afford to delay any longer, having already invested significant funds there. We must demonstrate our ability to operate profitably, which is our priority. The managing director we had was an excellent leader, but the business conditions were not favorable. Consequently, we decided to let go of the managing director and a few others, while retaining key experts, including horticulturists who have vast experience with numerous facilities. I believe we should continue to engage with the European market. There's limited competition from Curaleaf, the most prominent group seeking international expansion, and we aspire to have a presence there. Facilities will be constructed, and we possess the necessary expertise. We're taking a more cautious approach and maintaining open communication with various groups. Like in the US, the key factors here are capital availability and the ability to secure funding.

Up next is Eric Beder with SCC Research.

Most of my questions have already been answered, but I want to discuss some additional points. Regarding the commercial sector, what factors lead clients to choose your services? What is your unique selling proposition for commercial clients, and how are you successfully advancing these business opportunities?

There are many design-build firms that operate at $0.5 billion to over $1 billion for infrastructure projects globally, such as AECOM and Stantec. Our niche is providing everything under one roof with a single point of responsibility for projects, particularly those under $50 million, with our largest project to date being around $30 million. In the commercial space, clients have struggled to find a single point of responsibility; they typically have to hire their own project managers, engage an architect, find engineers, and hire general contractors themselves, along with procuring equipment either directly or through contractors. We’ve recognized that offering integrated services allows us to complete facilities more quickly than clients could have on their own. For our large Fortune 50 clients, we can accelerate project timelines while delivering quality work that remains profitable for us. Companies handling larger projects worth over $1 billion typically do not want to work on smaller projects, which makes our current focus on this size ideal. As we expand, we may consider taking on larger projects, but for now, our niche is successful and effective.

And the equipment business has been tough for a number of years now. So what are you seeing on the other side of that when you go to buy from these equipment manufacturers, are they more to give you a deal, a better deal? Are there less equipment players out there? How should we be thinking about that in terms of potential when that potentially comes back to be able to generate margins that used to be or even better?

On the controlled environment agriculture side for cannabis and horticulture, manufacturers have faced significant challenges over the past two years, resulting in substantial workforce reductions and some companies ceasing operations. We believe we are positioned well to form strong strategic partnerships with these manufacturers. They can avoid the need to hire or build their own sales teams if they are focused on just one product line. With our established relationships and trust with end clients, developed early in the design stages, we can guide them toward a smoother path to success. Additionally, when we purchase and procure for multiple facilities, we gain a notable advantage. Currently, there is a remarkable opportunity in the U.S. cannabis market concerning energy rebates. We are concentrating on this area to offer value to our clients, enabling them to upgrade their facilities with more energy-efficient LED lighting, for instance, with minimal upfront investment. In challenging times for equipment, we strive to create win-win situations. We have also successfully integrated equipment systems in a major mechanical retrofit project, adding air conditioning to a large distribution center. It’s worth noting that this equipment is part of a larger project, so it won't appear separately on our financials under the equipment line distinct from that of the controlled environment agriculture marketplace. Our equipment is incorporated into construction, boosting our confidence, as mentioned earlier, that we can enhance our construction margins in 2024. Unfortunately, we experienced a setback with a project in the fourth quarter that affected our initiative to increase margins in Q3. However, as explained earlier, this is a temporary situation. We are now working on obtaining a change order to rectify that project. Our focus this year is on increasing margins across all categories.

The next question comes from Ellis Acklin with First Berlin.

Thanks for the insights into Q4. I just have one topic to discuss. If we can revisit your initial 2024 guidance, during the Q3 call, I believe we mentioned that the breakeven point for adjusted EBITDA was around $30 million in revenues. I'm trying to reconcile those comments with your new guidance of $8 million in revenue and a positive EBITDA. Could you clarify that for me?

It all depends on the revenue mix. If it's heavily weighted towards lower margin construction, we would need that $30 million. However, we have been considering a range of $24 million to $26 million. A few things have changed. First, we haven't adequately demonstrated the progress we are making in increasing margins in construction, which wasn't reflected in Q4 due to one project impacting us significantly. Additionally, on the professional services side, when we centralized our ERP at the start of the third quarter, we discovered that our productivity was lower than expected, with billable hours around 55%. As a result, we had to account for $1.2 million of cost of goods sold as salaries. Our aim is to ensure that all salaries for professional service providers are included in COGS because we are billing properly. In Q1, we are performing above 90%. This is a significant improvement in SG&A, and I’ll have Dick expand on that, particularly regarding increasing margins and the SG&A aspect.

Ellis, you are correct that when we initially discussed the larger revenue projection for Q4, it appeared we would need a substantial amount of revenue to reach breakeven going forward. However, with the general and administrative reductions we've implemented, which are currently taking place in Q1 2024 and will continue throughout the year, we have significantly lowered our breakeven point. It still involves some mix considerations, but our breakeven is now estimated to be around $16 million to $19 million in revenue, despite a substantial portion of our income coming from construction. Thanks to these G&A cuts, we have effectively reduced our breakeven threshold. You will see the impact of this in our Q1 report, where the year-over-year comparison will reveal significant reductions flowing through the income statement.

Thank you, Ellis. I hope everything looks smooth on Monday with the kickoff. I look forward to seeing you soon.

Thank you. We have reached the end of the question-and-answer session. And I will now turn the call over to management for closing remarks.

Thanks, John. In closing, the management team is definitely disappointed with the quarter. As the largest shareholder, I share that disappointment. However, I’m also very confident; our model is strong and our company fundamentals are secure. Each negative in the Q4 results is explainable and tactical; none of the issues are tied to long-term concerns. This is why we feel extremely confident about the company's ability to generate strong positive adjusted EBITDA quarters this year. While we can't change the past, we are focused on the future and recognize the need to earn the market’s credibility and confidence by delivering results. Thank you for your time today, and I look forward to speaking with you again next month for our Q1 earnings call. Have a nice evening.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.