Q4 2023 urban-gro Inc Earnings Call
Participants
Christian Monson; Executive Vice President and General Counsel; urban-gro Inc
Bradley Nattrass; Chairman of the Board, Chief Executive Officer; urban-gro Inc
Richard Akright; Chief Financial Officer; urban-gro Inc
Eric Des Lauriers; Analyst; Craig-Hallum Capital Group LLC
Scott Fortune; Analyst; ROTH Capital Partners, LLC
Presentation
Operator
Greetings, welcome to the urban-gro Inc's 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. (Operator Instructions) Please note this conference is being recorded. At this time, I'd like to turn the conference call over to Christian Monson, urban-gro's Executive Vice President and General Counsel. Sir, please go ahead.
Christian Monson
Good afternoon and thank you for joining us. Today's call will be led by Bradley 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 GROW 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 ir dot urban dash agro.com. With that, I will now turn the call over to Brett.
Bradley Nattrass
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 live. All are currently active in the first quarter, and we expect 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 at an average equivalent 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 enter 2024, we have done just that.
That being said, there are some significant regulatory changes that could serve as a catalyst 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, horticulture and others, has focused on serving clients in multiple sectors, including CEA commercial. A combination of this team's expertise, our integrated solutions and our focus on sector diversification differentiates us as a company that continued 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. 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, 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 and 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, almost all of the related business that we currently engage and utilizes our professional services for continuing to interface with a variety of new clients for which urban grows a perfect fit for fulfilling for 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. It pertains to our outlook on the cannabis sector. We believe the 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 few catalysts which could result and a significant and positive change in momentum for our business within this sector.
First, on the federal level of potential rescheduling of cannabis from schedule. One to three would provide operators with significant working capital increases resulting from the removal of the two ADE. related tax burdens. We believe operators will use the 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 for successfully passing the safer banking bill continue to be discuss and would potentially include a Capital Markets clause that allows plant-touching businesses, Sinovel and list on the larger exchanges, but moreover, provide more efficient access to capital and third, at the state level for 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 states 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 with just 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 believe we're in the strongest position that we've 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 and anticipate seeing a resurgence in our related base business later this year. Today, urban-gro 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. Dick?
Richard Akright
Thanks, Brad, and good afternoon, everyone. revenue was $15.0 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 as 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 safer bank.
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 projects, 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 and 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 $1.0 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 two WR acquisition. Net loss was $4.7 million or a negative $0.4 per diluted share in the fourth quarter of 2023 as compared to net loss of $4.2 million or a negative $0.39 per diluted share in the prior year period.
Adjusted EBITDA was negative $3.0 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 $67.0 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 system 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 AR and paying down our AP and the ABL provides 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 contract.
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 around the same ERP system improve tactical reporting on a weekly basis, we'll 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, Secca drive cost reductions and 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.
Question and Answer Session
Operator
Thank you. At this time, we will be conducting a question-and-answer session. (Operator Instructions)
Eric Des Lauriers, Craig Hallum. Please proceed.
Eric Des Lauriers
Great. Thank you for taking my questions. And the first one for me just hoping you could expand a bit on the project delays and especially the cost revisions in the quarter. And we've seen a few or a couple 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. Thanks.
Bradley Nattrass
Sure, Eric. Thanks for the thanks for the question. So in Q4, we had three projects that pushed two of them. It was on their kickoff date, which we expect it to be in December. We still held hope at the start of December that would kick off. We procured started procuring materials to deliver to the site, and both clients ask the pushback those kickoff date until the first two weeks in January.
So we did that. The third was an existing project, a recreation project that we had announced early in the year and in Q4, we had expected significant revenues from the project, but it also pushed and there was no business completed in Q4. So those three contracts, they're all active recording revenue in Q1, and we expect them now to finish probably a quarter longer. So as I said, the majority would be complete in 2024, but they'll go about a quarter longer than they were before. And overall, we're with projects, I feel that we're working on an increasing amount of larger projects.
And as we come into 2024 and continue to sign new projects, one moving or two moving will have less of an effect on the organization. But now when one or two moves that has a material effect when three move unexpectedly, it has the disappointing effect that we saw. In addition to that, our services are we at the time it takes about a month after quarter end to reconcile all of the services revenue and it was a surprising disappointment actually from the CEA sector, there was no work done by engineering in the fourth quarter. That's resumed with momentum in Q1.
The actions we took for that in the last couple of months, we now have an active line of sight on what's happening at all times with our services and what's been invoiced. We did get everyone on the same ERP in the middle of 2023. And so as we give guidance for Q1 today with only two days left, we have a solid our grasp on exactly where that is.
And then finally, on equipment, about a couple of million dollars in projects we had hoped it would be even higher than that just disappeared. They didn't push. They just disappeared right at the tail end of 2023. So you know, it's very disappointing, of course, but it's also the strong news is with the construction contracts they weren't lost. It's a timing issue and it doesn't hurt the long-term fundamentals of the company. It's just a timing issue and they moved into Q1.
In terms of project costing, Dick, do you want to take that one, please?
Richard Akright
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. And we we are working with the customer in order to negotiate a revision of that contract. But and the construction industry with the way things go high 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 and as part of our calculations for contract revenue and the contract costs.
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'll 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 in the quarter.
Eric Des Lauriers
I appreciate that color there. And then just thinking about fiscal '24 guidance. Obviously, Q1 were largely done right now, but in terms of just the overall guidance for $84 million in revs and then positive EBITDA, I suppose for the sequential improvement in both of those from Q1 levels. I'm just kind of wondering what what visibility you have on those and what visibility you have on potential project delays and cost revisions impacting future quarters.
Is this something that with the ERP system now being on all every entities now on the same ERP system that you'll have better visibility into some of these delays and cost revisions as well. I'm just kind of wondering if you have how to think about that, that guidance, both overall and this sort of cadence? And then just the follow-up to that is if the guidance includes any of these potential legislative catalysts with it. Thank you.
Bradley Nattrass
All right. I'll start with the last one the guidance does not include any of the potential catalysts in the cannabis space. We do have active design-build projects in this space, Eric, and when even even existing legal states that have regulatory delays and have an awarded licenses like New York when they award licenses. We have clients multiple clients in that state alone that have designs have spent considerable considerable amount of money, some of them beginning to see these for until their licenses awarded, they cannot access their funds and therefore go to the bill.
So we do have that ongoing business and we're doing a lot of work right now more and more work on dispensaries for our clients, both multistate operators and single-state operators across the country, some just design and some design build. So as it relates to line of sight as of right now, we don't anticipate any additional delays. However, look, those those three came up with weeks' notice at the end of the year. We don't anticipate any now, but you never know what could happen.
Of course, I as I had started early with that, the answer, as we have many more projects that we're working on. At the same time, it won't have as material of an impact you have from if one of them pushes as for attacking the delays and the EDRP. That's really the delays will come through our Project Management Office.
And then we have a online portal project management portal that but we build time both viewable from the client and then from our team, and we'll see it through their first on the ERP. That's mostly tied to timely tabulation of results. And we have taken actions since. So we had that disappointment in the services coming in under where we had forecast even as late as the middle of December.
And so I do not anticipate us to be off on the services, again with a guide. When I talk about sequential, we have contracts that that really our executed over the next two to four months from a construction standpoint there and the project management portal, and we know exactly when they will be exiting.
So we're very confident, of course, in Q1 with two days left. And then as we go forward into Q2 and beyond. It's not completely baked, but with the contracts we have as long as everything proceeds like it should, then we don't anticipate issues sequentially improving the top and bottom line. And we definitely realize that we've got it walk the talk and earn confidence back in our ability to predict quarters.
Eric Des Lauriers
Thanks for taking my question.
Richard Akright
Yeah. And Erik, just commenting on it as evidence that the backlog for construction design builds really and 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 Eric, just wanted to add that comment.
Eric Des Lauriers
Appreciate the color.
Operator
Scott Fortune, Roth MKM. Please proceed.
Scott Fortune
Yes, good afternoon and thanks for the questions. Just a little bit follow-up on Eric on kind of provide a little more color on the backlog here and ongoing discussions or opportunities kind of outside the CA and those different industries, just kind of highlight some of the different industries. And then even within this year, because of how much is the backlog coming from CEA versus non-CEA that $110 million? And then just unpack a little bit more of the color or the strength of the end markets you're seeing anything kind of on industries or categories of the projects you're seeing the strength in? Just a little more color on that would be great. Thanks.
Bradley Nattrass
Thanks, Scott. Dick, you want to start on the backlog?
Richard Akright
Yes. So from a backlog perspective, for what we have is on the and I'm sorry, I'm getting into it now, but the of the $110 million. A substantial amount is coming in from the CEA sector. We do have some large we do have some large construction design build projects that are in a matter in the backlog as of December 31st, 70% is from CEA, a large portion of the construction and R. is now comprised of some CEA. project and so that makes that makes up the biggest part of the backlog for the year.
On the commercial side, it's tended to be the existing contracts that are the existing customers that were in place with the company that when we acquired it, which was a large CPG customer. But we're expanding that out into health care and additionally into some secondary education customers that are part of that backlog.
And just a quick follow-up. You see the backlogs which will be going up more diversified to the CPG health care. As you build out this kind of will the color on those opportunities?
I'll take them through that. So on the CTA side, Scott, when we're building a cultivation facility that can take 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. But what we had underestimated in the 1st year in commercial is when we were verbally awarded a project to when the contract is officially signed or appeal event. That period is not a week for example, like it could be in the CEA. space like we are used to, it can be up to months. And so those projects once they do start were ready. They verbally told us what exactly to do in the steps. So we can immediately hit the ground running, recognize cost recognized revenue and get going quickly. So they're done relatively quickly once they're signed. So the time frames a lot less. So in terms of these end markets, I just mentioned the post-secondary that we have multiple architecture and engineering contracts, right now between 400,800 thousand CAD high margin projects that we're working on in health care, we work on both sometimes the design of hospitals, all design, no build there, but then on some smaller health care facilities like an MRI facility or something like that. So that would be done relatively over quickly over three quarters as well. So there's the strength there. Laboratories, we're seeing strength on laboratories and then also on retail and nothing nothing to talk about right now, any further on that. But but some good strong retail opportunities as well for us. And when you when you take a step back and you think that over the last six quarters, we have secured 50 million 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, hoped is quicker rather than longer. We're not going to stop on the other side, we're going to invest in continuing to build out because what we've learned is we can utilize all of our professional services experts and our sites to present project managers in all areas. So we have that big pool of talent and expertise that can be used on the build around that design regardless of what sector, both exciting for the future, but bringing it back to today. We have to execute and quarter by quarter and are credibility back.
Okay.
And then one quick follow-up for me. Then on the C side, obviously kind of depended on rescheduling when that happens. But moving forward, this is still state led growth story for a lot of the cannabis industry. And like you mentioned, our New York, you're seeing a ramp there. Potential deal, Ohio comes on board in the fall of 24, but the big uptick in Florida. We're seeing or we're here and why the canvas MSOs are looking to actually own build out. They need to build our production capacity at our Florida facility flipping to that, just kind of your sense of color in the pipeline discussion of capacity built in the key states as we see regulation kind of play out here in the second half to kind of discussions you're having on our capacity adds from our standpoint, New Jersey, New York, Ohio, Pennsylvania and Florida.
So no contracts, but lots of discussion, lots of planning and the planning could be the design of the facilities or design of the dispensaries. But from a build standpoint, I believe that to the state, the operators in the states will want to get a little further down the road. First hurdle in Florida is having the Florida Supreme Court, not say anything before April first, right? And fingers crossed that that doesn't happen, then it'll be on the ballot, then they have to finish with proposal over 60%, and I'm pulling above that right now. So lots of eyes on Florida, that's sort of the exciting rallying cry right now, I'd say in the industry for sure. And second is Pennsylvania, getting it on the ballot there, but the working capital, so getting rid of with rescheduling and abolishing the two e. that's going to get some of the larger multistate operators, 120, 180 million per year in working capital and these leaders have said publicly that they're going to put those those funds back into to expand their footprint. And that's what urban road does. We designed facilities and dispensaries and we built them. So I feel that it will be it will be very positive for the Company, should rescheduling happens the same for a banking that will bring money in And Scott, that's the biggest hurdle right now is there is positive optimism more than than I've seen in terms of sentiment for a couple of years for sure. But still the working capital is not there, and so everybody's positive, but we got to have some sort of catalysts.
Appreciate the color. I will jump back in the queue.
Thanks.
Thank you.
The next question is from Anthony Vendetti with Maxim Group. Please proceed.
Because Thomas McGovern on for Anthony. So you could comment just on the guidance, just to kind of touch back on some of the 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 this. You just mentioned its importance in terms of funding a lot of these deals. But with that on the horizon, I just wanted to see that, you know, ignoring any potential statewide legalization is at work you guys have potential projects that are maybe not yet considered backlog that are that are more pipe projects for us once funding frees up or just kind of tell us it's a catalyst?
Well, I think obviously it for the answers for sure, right to be in our backlog. We have to have a signed contract that's equipment. There's deposit receipts and we're actively working on it, and we treat backlog very serious. We've taken items out of backlog a couple of times actually in early 2023. So we really truly want that to be a barometer of how we're going to perform in the next one to six quarters. And so when that when it finally becomes backlog right now, that that would be in pipeline. We have a strong growing qualified pipeline. We don't we don't announce the size of the pipeline, but we absolutely have a lot of projects that would fit in there. Once was one of those catalysts. And so it's safe banking or safer banking that would potentially allow the operators to list on the larger exchanges and then access hub easier more efficient access to capital and an institutional investors as well. So that would be it will be phenomenal for the industry.
Now you did mention also state or federal legalization or state rights. We don't see interstate commerce or legal or interstate commerce for maybe a decade legalization still three to five years. And I think this will be a state game for the foreseeable future for us.
Appreciate that color. Another thing you touched on on the call was the international markets. Are you specifically called out Germany where I know you guys have done a lot of work there pulling back some of the expenses associated with that subsidiary are reducing headcount and the like. And I just wanted to comment because I saw an article that was published six hours ago saying that Germany or I want to build the law that it would take effect on Monday. And I haven't really had a chance to move into that further. But I just wanted to know with that news, the recent news kind of hitting the hitting the headlines now hitting, how does that shape? I know again, I know that you guys sorry, see yourselves becoming more aggressive or maybe accelerating some of the conversations you were having with potential clients in Germany?
Well, color on whether or not that would play into REVENUES maybe for 24.
It's sure that the issue in Germany is going to be social licenses. So sort of like Maine in the U.S., some social clubs where people can grow their own cannabis. And so it's going to take a while for that market to build out and to develop. So I don't see a lot of near term opportunity. There's three existing operators in the country now. I think they will be the first probably to grow into it. So we'll watch them closely.
You're correct overall, who when we entered and built our entity up two years ago, we had a signed contract to build out 20 vertical farms in urban centers like in foodservice distribution centers or near hotel groups, for example. And then we built out that team and ensure enough about a month later, the war in Eastern Europe broke out and that just wreak havoc on the on the horticulture marketplace, energy prices, skyrocketed and manufacturers in Europe and all of the ancillary companies to that horticulture industry really suffered for a couple of years. So we fortunately had freaks products in the cannabis space, right? So we've designed in Israel and Switzerland, Portugal, we're actively working on projects right now in the Netherlands. Portugal, I think will be a strong, strong year, but we just couldn't wait around anymore where we had burned considerable funds over there. And we have the we have to show that we can run a profitable company and that is absolutely what we're going to do. And so the managing director is phenomenal individual who presents a great leader, but the business wasn't there. So we released a managing director and a couple of others, but we've kept some key experts that deliver the design horticulture, s that have experience in hundreds of facilities over here because I do believe we won a line into Europe. There's not a lot of Pure Leaf, the most outspoken group, of course, that is aggressively growing on an international level, Brad, we want to be there's going to be facilities built and we have that expertise. So we're just slowing it down a little bit and keeping our lines of communication with multiple groups open similar to the U.S. It's the same story. It's all about capital and being able to raise their funds. So we have some struggles. You asked earlier about the pipeline. We've got some strong design builds in our pipeline for Europe as well, but they won't materialize until they can access those funds.
Operator
No, yes, thanks.
Bumped up.
Next is Eric Beder with SCC Research. Please proceed.
Eric Good afternoon.
Hey, Eric.
Most of my questions have already been answered, but I want to talk about some other things here on the commercial space, what you'd look at. So why people are hiring new and what is the niche? What is the pitch to the commercial client for your business and your how are you winning businesses forward?
Because there's a lot of design-build firms that operate on half a billion billion plus or infrastructure jobs around the world like the AECOM.s or Stantec large barge companies like that, Jacob, solutions, among others. We the niche for us is the all under one roof, one single point of responsibility on projects we say under 50 million, the largest so far for us is around 30 million. Clients have not in the commercial space, been able to access all one single point of responsibility in the space. They've had to hire their own project managers and go to an architect and find them engineer then hire those GCs themselves and procure the equipment either directly or through the contractors. We realize that having it all provides a big service. It allows us to complete their facility quicker than they would have before. And for the large Fortune 50 clients that we have right now, we're able to really turn projects quickly and we can do a good job at it and we can make money at the larger 1 billion type project companies. They don't want to operate at these smaller levels. So right now, it's a perfect size for us in the future as we continue expansion. So we would look at increasing the size. But right now, we've got a great niche and it's working.
Great.
And then I know the equipment business has been tough for a number of years now on the what are you seeing on the other side of that when you go to buying these equipment manufacturers, are they more likely to give you a deal a better deal? Are there less equipment players out there on how should we be thinking about that in terms of the potential when that potentially comes back to be able to generate margins that used to be or even better than a controlled environment?
Ag side of cannabis and and horticulture, it's been tough for manufacturers over the last two years, a lot of large reductions of force and some are no longer in operation. So I feel that we have the ability now to had some really strong strategic partnerships with these manufacturers. They don't have to go out and hire or build out their sales team when they're just selling one product line and with us with good, strong relationships to the end client. And we had a chance to build that relationship and trust early from working from the design stages forward, we're able to take them in and therefore, that can be an easier path to success for them.
Moreover, from a purchasing power standpoint, of course, purchasing and procuring for a lot of facilities that gives us a nice advantage of right now. There's a phenomenal opportunity in the U.S. cannabis market as it relates to rebates, energy rebates and were really focusing on that area to help go to our clients and provide a value to them where they could refresh or relight, for example, their facilities with more energy-efficient LED lighting, as one example, with relatively low amounts of working capital out of their pocket. So and when times get tough and it's been tough on equipment to find a way to for everyone to win. And so that's what we've definitely been doing more over. We have successfully been able to integrate equipment systems into our first large mechanical retrofit by adding mechanical systems or air conditioning to a super large distribution center, and we were able to integrate that equipment in. So important to note, when we stepped that equipment's part of a larger project. So equipment to the commercial side will not show up. And our financials as a separate as part of the equipment line that is that is really equipment to the Controlled Environment, ag marketplace, our equipment is built into the construction. So that gives us the confidence, as Dick mentioned earlier, that we can increase our margins in the construction side in 2024. Now, unfortunately, we had in Q4 one project that went the other way. So it looks like we're underperforming on that initiative to increase margins in Q three in sorry, in Q4. But as Dick explained, that just was a point in time 90 days. Now we go to the project that was decreased and we work to get a change order to get it back into place ourselves. So we are really focused on increasing our margins in all categories this year.
Okay.
Okay.
Good luck for 2020 for this.
Thank you.
Okay.
The next question comes from Ellis actually with First Berlin. Please proceed.
Afternoon, gentlemen. Tangoe or the Hello. Thanks for the insights and the Q4. I just got one topic to discuss with you guys. If we can circle back to your initial 2024 guidance, the last time on the Q3 call, I believe we were talking about and needing a the magic number of free guys to reach adjusted EBITDA breakeven was around $30 million in revenues. So I'm just trying to square those comments with your new guide of $80 million of revenue and a positive EBITDA.
Maybe you can help me out there for us. So it all depends. First of all, on the revenue mix, right? So if it's high in the lower margin construction, you would need that, that 30 million, but we've already sort of looked at 24, 26.
Now a couple of things have happened a year, it goes back to what I just talked about. We did not. So what were the progress we're really making on increasing margins in construction. We didn't show that in Q4 because of that one project that took us down to low single digits, but also in the professional services side in professional services, when we got everyone on the same ERP at the beginning of the third quarter, we realized that we weren't as productive as we thought we were. We were around when you look at billable hours, we were in the mid around 55% productivity. So in 2023, we actually had to put $1.2 million of COGS and down into salaries. And our goal is to have all of our professional service providers, all of there, their salary, what we pay them should be up in COGS because we're billing, we're billing. I'd have to adequately in Q. one were tracking above 90%. So that's one of the areas when we talk about the FG. and I'm going to have to chime in here shortly, but that's one of the areas where we're doing a lot better. But definitely you are you tagging onto the back then apart from increasing the margins that we focus on the SG&A side?
Yes, absolutely. And that was to your point, I mean, you're right when we talked before with that a larger revenue number on the initial guidance for Q4, certainly looked like it was going to take a lot of revenue for us to be breakeven on a go forward basis with the G&A reductions that were that we've made that are taking place right now in Q1 2024, it will be there for all of 2024. We are significantly reducing that breakeven point yet. And again, it goes back to depends a little bit on mix. But break-even for us now is looking more like it's around the at 16 to $19 million of revenue, even with still having a decent amount, a high percentage of our revenues being construction. But because of those G&A cuts, we have been able to really reduce that breakeven point for us. And you're just going to see that going forward into 2024. And it's going to it's going to show up immediately when we do report our Q1 numbers. When you see it year over year basis, it's going to be rather dramatic from the standpoint of the reductions, how they're flowing through the income statement.
Okay.
I just wanted to hear whether you guys were banking on any sort of pickup in equipment or anything that was going to improve the margins to get to that target. So that's very helpful.
I appreciate it.
Sure.
Thank you, Alice, and I hope everything else you're in Germany right now. I hope everything goes smoothly on Monday with the kickoff 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 and closing were the management team. We were disappointed in the quarter for sure, right, on the larger shareholder, I'm disappointed, but I'm also very confident our model's strong our company fundamentals are secure every negative. When you break down Q4 results, every negative is explainable is tactical. None of the issues are tied to longer term issues, and that's why we're confident extremely confident about the Company's ability to deliver strong positive adjusted EBITDA quarters this year and that's happened, can't change that. We're focused on the future. And we know that we have to earn the credibility and the confidence from the market and doing just that delivering So thank you for your time today and look forward to talking to you probably in a month for our Q1 earnings call. Have a nice day.
This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.
