Safe & Green Holdings Corp (SGBX) 2017 Q4 法說會逐字稿

Good day and welcome to the SG Blocks fourth-quarter and full-year 2017 conference call and webcast.

Today's conference call is being recorded.

At this time, I would now like to turn the conference over to Chris Tyson, Managing Director of MZ North America.

Sir, please go ahead.

Thank you and good afternoon.

I'd like to thank you all for taking time to join us for SG Blocks' fourth-quarter and full-year 2017 conference call.

Your hosts today are Mr. Paul Galvin, Chief Executive Officer, and Mr. Mahesh Shetty, the Company's Chief Financial Officer.

Paul will provide a business update which will cover partner announcements and customer updates, while Mahesh will discuss the financial results.

A press release detailing these results crossed the wires this afternoon at 4 p.m.

Eastern and is available on the Company's website, sgblocks.com.

Following management's prepared comments, we will open the floor for questions.

Before I turn the call over to management, please remember that certain statements contained in this release are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All statements other than statements of historical fact contained in this presentation, including statements regarding our future operations and financial position, business strategy, and plans and objectives of management for future operations are forward-looking statements.

In some cases, forward-looking statements can be identified by terminology such as believe, may, estimate, continue, anticipate, intend, should, plan, expect, predict, potential, or the negative of these terms or other similar expressions.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, and financial needs.

These forward-looking statements are subject to a number of risks, uncertainties, and assumptions described, including those set forth in our various filings with the Securities and Exchange Commission, SEC, which is available at www.sec.gov.

You should not rely upon forward-looking statements as predictions of future events.

We cannot assure that the events and circumstances reflected in the forward-looking statements will be achieved or occur.

This presentation also includes non-GAAP financial measures.

SG Blocks uses certain non-GAAP financial measures in assessing its business and operations.

Reference to these non-GAAP financial measures should be considered in addition to GAAP financial measures, but should not be considered a substitute for results that are presented in accordance with GAAP.

Finally, this conference call is being recorded via webcast.

The webcast link is available in the investor relations section of our website at www.sgblocks.com.

At this time, I'd like to turn the call over to Paul Galvin.

Paul, the floor is yours.

Thank you, Chris, and welcome to the SG Blocks fourth-quarter and full-year 2017 earnings conference call.

As many of you know, SG Blocks recently became public in June of 2017 on the heels of an exclusive new ESR rating from the International Code Council, including financial performance and exponential growth of our backlog year over year with, among others, the U.S. Navy, Fortune 1000 companies, infrastructure companies, and low-income and workforce housing developments.

In short, we achieved new Company milestones and positioned SG Blocks for significant growth in 2018 and beyond.

Before I dive deeper into all of the exciting operational milestones achieved during the fourth quarter and full year of 2017, I want to provide a quick overview on SG Blocks to some of our new attendees on this call.

Mahesh and I have been spending quite some time on the road post-IPO meeting with new institutional investors, introducing them to the new operating system for construction.

As many of you know, our story has been well received.

But at the end of the day, investors want to know how and when we are going to be cash flow positive and profitable.

Mahesh, our newly appointed President, and I are confident we have the tools to assist investors with framing the financial picture of our story in 2018 and beyond.

I trust today's call will add more clarity, as we have been diligently working with our customers to assess the trajectories for revenue recognition within our backlog.

As you all know, in October of 2017, SG Blocks was commissioned to design and build a 310,000-square-foot low-rise workforce housing development in New York City and an 80,000-square-foot midrise workforce housing development in New York City.

Both multistory, multifamily projects will be fully modular, prefabricated, and installed at a site that already complies with applicable zoning regulations.

We estimated 36 months from October of 2017 to realize all revenues from these contracts.

Based upon conversations with our customers for these two specific projects, we now have a better light into the revenue recognition of our backlog in 2018 and beyond.

On the $15 million contract, management expects to realize approximately 30% to 40% in 2018 and the balance in 2019.

And on the $55 million contract, management expects to realize approximately 10% this year and the balance equally in 2019 and 2020.

These two projects, both signed in October 2017, together represent approximately $10 million in revenue in 2018.

The balance of our backlog, conversion of current pipeline opportunities, and new sales we believe will yield approximately $10 million to $15 million in additional revenue during 2018.

Our pipeline continues to grow and currently exceeds $250 million and represents more than one vertical.

Now let's speak to the fundamentals that have established SG Blocks as a true innovator in today's construction industry.

Since this is our third conference call as a public company, we believe it's prudent to give a quick primer on our business so new investors can get a better sense of the immense opportunity our scalable solution delivers to customers.

As I walk you through our overview, keep in mind that the construction sector has seen little disruption in the last century.

And according to a recent McKinsey report titled Housing Affordability, a Supply Side Toolkit for Cities in October of 2017, on-site construction productivity has actually decreased by about 1% per year over the last decade.

Keeping that in mind, and this year's increasing interest rate environment, let's look at why SG Blocks, based in Brooklyn, New York, has been successful in earning business from some of the best consumer brands in the country, low-income housing development projects, and now, in 2018, a workforce housing development that has driven our backlog to a record in the Company history at $77 million as of December 31, 2017.

And as of today, $104 million.

SG Blocks is the premier innovator in providing industry-approved code-engineered cargo shipping containers to meet the growing demand for safe and green construction.

Rather than consuming new steel and lumber, SG Blocks capitalizes on the structural engineering and design parameters a shipping container must meet and repurposes them for use in construction.

This disruptive methodology represents a new operating system for construction and delivers to our customers a safe, sustainable, green, and scalable solution that lowers their cost and decreases lead time to market while exceeding many standard building code requirements, including seismic and hurricane.

SG Blocks is an asset-light platform company that has a proprietary ESR, or evaluation service report, certification and exclusive relationship with ConGlobal Industries, North America's full-service supplier to the intermodal industry.

In April 2017, we were awarded an ESR from the International Code Council and it is the first ever awarded to a recycled building material and we believe will be a key differentiator as we scale our business to disrupt the conventional construction sector.

For the number-crunchers on today's call, backlog without the ESR was $0.5 million and backlog with the ESR after 7 months is $77 million.

At a macro level, the global construction industry is projected to grow by 70% over the next 8 years to become a $14 trillion industry.

I don't think there is any argument about the sheer size and growth prospects of this industry.

However, inflation in building materials and labor shortage trend favorably in our direction.

Case in point is lumber.

I am sure you have all seen the effect of Hurricanes Irma, Harvey, and Maria across the country and the Caribbean.

What is less known and was highlighted by a recent Barron's issue was that lumber prices, one of the key raw materials for construction, is at a 13-year high and projected to increase further by year-end.

During hurricanes, lumber-built structures are prone to failure.

Containers are strong, resilient, maritime-grade structures.

They can be stacked nine stories high with the bottom container withstanding weight of over 0.5 million pounds.

At sea, they withstand lateral and vertical forces that far exceed seismic and hurricane-borne wind sources.

Our product would be a perfect replacement for many of the commercial and residential structures destroyed in the hurricanes.

And as those regions recover and rebuild, we hope to win our fair share of the new construction market.

The final theme I want to address is on-site construction productivity, or the lack thereof.

According to the McKinsey report that we mentioned earlier, productivity in construction has actually declined 1% a year since 1996.

Prevailing wages, union labor, immigration policies, and price escalation have increased both the time and the investments required to build anything in our country.

Well, in today's digital economy, standing still is a death sentence.

Furthermore, as many of you noticed, our recent wins have been with some very large project developers.

These projects in most cases are financed with outside capital and are sensitive to interest rates.

A year or two ago, nobody thought that the Fed funds rate would move 25 basis points in a year.

But today, with rising employment and the United States' stable economic growth engine, that scenario is now escalating to 100 basis points per year.

And this dramatically increases the cost of carry on existing and new construction loans.

So what if these large project developers could find a solution that reduces their cost of carry by 40% or 50%, is safer, more sustainable, and quicker to market?

What if was something echoed in our hallway six months ago.

And today, it is can you and how long, as reflected in our backlog and $250 million of pipeline opportunities on the horizon.

We believe our solution is starting to disrupt the status quo with a quicker, stronger, more efficient, sustainable, and cost-effective solution.

It reduces cost, accelerates revenue, and increases the life of the asset.

This is why in states like New York and California for building projects in urban areas, we are a natural fit.

Mahesh will elaborate more on our scalable platform later on in this call, but I wanted to highlight why our solution is quickly gaining momentum, as is reflected in our backlog.

Now moving on to SG Blocks' operational performance in 2017.

The fourth quarter of 2017 saw increased top-line revenue performance and continued project awards, driving our construction backlog as of December 31 to $77 million or approximately 552,000 square feet across 18 projects.

So far, through the end of February, we secured a high-margin building workforce housing development project in New York State totaling an additional 183,000 square feet.

This represents the second-largest single project award in Company history.

Being the only container-based construction company with an ESR rating we believe dramatically shortens the project approval process and helps to close on the deals that are currently in the backlog.

2017 was a very busy year for SG Blocks and I wanted to quickly highlight some notable milestone achievements made during the year for those of you new to our exciting story.

First and foremost, we completed our public offering of common stock with the exercise of an overallotment option and generated $7.1 million in proceeds net of issuance costs in June 2017.

And as part of the public offering, we converted all the preferred stock to common stock and a major portion of the debt into common stock.

Our Company has no debt.

With our new capital and in six short months since our public offering, we partnered with [Cure] to develop a premium, uniquely tailored [sleeping] experience in a knockout state; completed a rooftop venue project with a leading national supermarket chain; installed a container-based green shop in Pennsylvania to benefit a local charity; [started a creating it] with a California-based recycling facility to install multiple new container-based drop-off locations; secured two low-income housing development projects totaling 390,000 square feet, representing the largest project award in Company history.

Now let's wrap up the other notable achievements in 2017.

In the second half of 2017, we contracted with the largest quick-serve restaurant operator in the Middle East and Africa to deploy the first container-based Planet Smoothie store; partnered with one of the US's largest wireless retailers for a prototype retail store in Colorado; contracted with a major professional sports league to design and fabricate an athletic facility in West Africa; and expanded our partnership with the U.S. Navy and selected to design and construct two new multi-module buildings.

On the operational front, in 2017, our management team has initiated a CRM optimization to streamline all sales inquiries and business development initiatives; standardize all contracts for proposals and marketing and legal documents; and commenced manufacturing capacity expansion discussions with new potential partners.

We have also had two notable projects previously announced that are currently wrapping up in the fabrication process and about to be delivered.

The HOLA school is approximately 25,000 square feet over 3 stories in downtown Los Angeles.

The delivery date for the HOLA school project, originally scheduled for November 2017, is now confirmed for mid-March 2018.

We also completed 90% of the fabrication and delivery of 40 office modules for a global leader in the manufacturing of lighting and rigging technology in Middleton, Wisconsin, one of the largest container projects in the state.

On the IP front, we recently secured a provisional patent for a re-deployable security station and blast containment system utilizing our container-based structures.

It's premature to go into additional detail at this juncture, but suffice it to say we believe that this product has applications in public areas like airports, concerts, cruise terminals, military, schools, or anywhere law enforcement would want to be weaponized in an environment.

In summary, the progress made in 2017 on the new backlog, our sales infrastructure, and operational improvements, coupled with the successful public offering, has driven the Company to an inflection point.

We believe that the investment made over the last few quarters will drive substantial growth in the years ahead.

I will now turn the call over to our President and Chief Financial Officer, Mahesh Shetty, for his financial summary.

Mahesh?

Thank you, Paul, and good morning -- good afternoon to everybody.

Since the Company emerged from bankruptcy in September 2016, it must be noted that the numbers for the predecessor entity are not comparable to the quarter or year ended December 31, 2017.

I will therefore limit our prior-period comparisons to revenue, cost of revenue, and gross profit.

Revenue in the fourth quarter of 2017 totaled $2.1 million, up 173% compared to $0.6 million in the fourth quarter of 2016.

The revenue totaled $5.1 million in fiscal 2017, an increase of 163% as compared to $1.9 million in fiscal year 2016.

This increase in revenue was primarily a result of revenue being recognized on additional projects that were in progress for the year ended December 31, 2017, as compared to December 31, 2016.

As Paul mentioned earlier, construction backlog totaled $77 million at December 31, 2017, as compared to $77.1 million at September 30, 2017, and $500,000 at December 31, 2016.

The increase in backlog at the end of fiscal year 2017 as compared to the end of fiscal year 2016 was largely attributable to the commissioning of two low-income housing development projects in New York State, representing the largest project awards in Company history in the amount of $55 million and $15 million.

The two projects total 319,000 square feet of multistory, multifamily projects and be fully modular, prefabricated, and installed.

As of December 31, 2017, we had 18 projects or approximately 552,000 square feet in the backlog.

Gross profit totaled $237,000 in the fourth quarter of 2017 as compared to $60,000 in the fourth quarter of 2016.

Gross profit totaled $633,807 in fiscal year 2017 as compared to $313,929 in fiscal year 2016.

Gross profit margin as a percentage of revenue decreased to 12% in fiscal year 2017 as compared to 16% in fiscal year 2016.

Gross profit margin in 2017 was negatively affected by lower contractor margins on revenue realized from a large contract.

In addition, these contracts were signed at lower margins by the Company to establish its competence in the school and the office vertical and an important reference client for the future.

The Company typically targets gross margins of 20% on newer projects.

In tandem, SG Blocks is also working aggressively with suppliers on cost-saving measures to further improve margins.

With the current environment of higher interest rates and increasing construction costs, management expects to leverage the speed of construction and the lower cost of modular construction to negotiate better pricing and thereby improve margins.

Our operating expenses increased to $1.3 million in the fourth quarter of 2017 from $700,000 in the fourth quarter of 2016.

Operating expenses increased to $3.9 million in fiscal year 2017 from $2.1 million in fiscal year 2016.

The increase in operating expenses was primarily due to an increase in payroll and general and administrative expenses.

Net loss totaled $1.1 million or $0.46 per basic and diluted share in the fourth quarter of 2017 compared to a net loss of $700,000 in the fourth quarter of 2016.

Net loss totaled $4.5 million or $1.95 per basic and diluted share in fiscal year 2017 compared to a net loss of $2 million in fiscal year 2016.

The increase in net loss was primarily due to an increase in operating expenses.

Adjusted EBITDA loss in fiscal year 2017 totaled $1.7 million versus $1.5 million in fiscal year 2016.

A full reconciliation of GAAP to non-GAAP financials can be found in the financial tables at the end of our fourth-quarter and full-year 2017 press release issued today as well as in the annual report filed today on Form 10-K with the SEC.

Cash at December 31, 2017, totaled $4.9 million as compared to $0.5 million at December 31, 2016.

The increase in cash balance is primarily due to the Company's successful initial public offering in June of 2017.

As of December 31, 2017, we had approximately 4.3 million basic and diluted shares outstanding.

In summary, we expect subsequent quarters to transition from low-margin projects to a targeted margin of approximately 20% as we commence projects that are fully modular and encompass design, architectural engineering, construction, and delivery phases.

Based upon progress to date, including our new revenue visibility Paul provided earlier, we expect the Company to reach cash flow breakeven in 2018.

We had provided guidance earlier of being cash flow positive this quarter, but based on customer delays and site work, we expect revenue from a large contract to push into the next quarter and we are being cautious in our guidance.

We believe that given the asset-light nature of our business, we can handle incremental revenue with a relatively modest increase in SG&A expense.

We'll leverage both the inventory and labor on a supplier's balance sheet and in most cases pay for products and services only after we have been paid by the customers.

Our model creates significant leverage and reduces working capital constraints to growth.

The Company also has approximately $13 million in carryforward operating losses, which will reduce the tax burden in future years.

The net operating loss carryforward expires through -- in 2037 and may be subject to annual limitations.

We ended the fourth quarter of 2017 with a stable balance sheet, no debt, a record backlog of $77 million, and a project pipeline in excess of $250 million, positioning SG Blocks for significant financial performance in 2018 and beyond.

I will now turn the call back over to Paul.

Paul?

Thanks, Mahesh.

The momentum has continued into the first quarter of 2018, where we secured a contract to design and construct a four-building, 183,000-square-foot workforce housing development in New York State.

The development will target low- to middle-income employees for a newly built $1.2 billion destination resort, representing an estimated revenue opportunity of $29 million.

SG Blocks can provide the services of a turnkey development manager for this project, including architectural engineering and design, project administration, and building systems work.

These turnkey projects allow us to manage the entire construction process and yield better margin.

We expect to clarify the revenue waterfall from this project during our first-quarter 2018 conference call.

As of March 1, 2018, our construction backlog now stands at $104 million for approximately 738,000 square feet across 18 individual projects.

We are also seeing momentum on the restaurant and office front in the current quarter.

Recently we announced a contract to design and manufacture 8,000 square feet of office space for IronTech, a co-working space provider, which we expect to deliver in the second quarter of 2018.

Additionally, on the restaurant front, we were selected to design and construct a container-based seasonal cocktail bar in New York City, which will utilize four of our GreenSteel products, the structural core and shell of an SG Blocks building.

I could not be more confident about our ability to deliver significant revenue growth in the quarters to come, as our pipeline of opportunity now stands at over $250 million, with multifamily residential, humanitarian residential, schools, and hospitality in the United States and abroad.

The SG Blocks 2018 financial picture looks very strong with $10 million in revenue expected from our 2 major projects signed in 2017 and another $10 million in revenue expected from the conversion of 2017 backlog and our current pipeline of opportunities.

With a solid revenue foundation and no upside assumed from our most recent $29 million project award, we believe SG Blocks is positioned for an exciting 2018.

We look forward to sharing more on our developing story at the upcoming 30th annual ROTH conference on March 13, 2018, in Orange County, California.

At this time, I'd like to open up the call to questions from our listeners.

Operator?

(Operator Instructions) Eric Landry, BMO Capital.

Thank you.

So if my numbers are correct here, I get that G&A expense was roughly $700,000 in the fourth quarter, Mahesh?

That is approximately right, yes.

Okay.

So that is more than double what it was the quarter before that.

Are there any one-timers in there or is that sort of the new run rate for G&A?

The previous quarter, if you look at it on a pure cash basis, that's about $555,000.

So it's not actually double.

Our run rate, what we expect going forward, is going to be approximately between $700,000 to $800,000, depending on our additional staff, etc., but that is a good number to use as a run rate.

Okay.

And then the line below that, marketing and business development expense, tripled to $148,000 or $149,000 from $56,000 in the prior quarter.

Is that a decent estimate of what it's going to be --

Eric, yes, I was actually answering that question in total for SG&A expense as opposed to breaking it out into individual components.

So in totality, for all the operating expense, you are looking at a run rate of $700,000 to $800,000 going forward.

Okay, so that's the three line items.

That's G&A, marketing, and preproject or just the two line items?

No, the three line items.

So that includes preproject expenses?

Yes, sir.

Okay.

So then payroll and related expenses was $428,000.

Is that a decent proxy for next year or does that have to go up as you hire more people?

It will go up slightly, but we are hoping to keep to the same run rate.

Between the three line items, between payroll, SG&A, as well as preproject or marketing expense, we expect the total run rate to be between $700,000 and $800,000 per quarter.

Okay.

What does that -- so I am looking at four line items.

Which one are you not including in that $700,000 to, $800,000 per quarter?

I am including all the operating expenses, Eric.

I am not sure what you are looking at, but I am looking at all the operating expenses.

Okay.

So $1.3 million in the fourth quarter, right?

Correct.

So that is not a good number for next year if I just annualize that?

You are saying that is actually a little bit too high?

So I am talking on an adjusted basis.

If you carve out the amortization expense and if you carve out the stock option expense, that is the run rate I am referring to.

Okay.

There was stock option expense in the third and the fourth quarter, correct, that are sort of one-time in nature?

In the fourth quarter, we had one-time in nature of $254,000, which related to a consulting contract.

That was one-time in nature.

But the other stock comp expense is pretty much in the line of ordinary course of business.

I don't expect that to be alleviated, but certainly the one-time stock option expense will not be a recurring item going forward.

Okay.

I thought, Mahesh, in the third quarter you had $370,000 in some sort of stock comp from the IPO expense.

Yes, it was actually $440,000 from the stock comp option expense in the third quarter.

All right.

I think you -- I thought I had in my head that you had two more fabrication facilities lined up for this year to incorporate into your model.

Is that the case?

Do I have that right?

I will let Paul address the question.

Paul?

Yes, so we currently have the 15 locations from ConGlobal to procure containers and do hot work.

We currently fabricate out of Houston with Teton and a facility in Pennsylvania called NRB.

We currently have the ability to produce plus or minus 1 million square feet a year through that system (technical difficulty) within six months of going public.

And having $250 million of pending bids, we are just getting out in front of we are going to need more than that amount of manufacturing capacity.

So we are doing two things.

One, we are looking to expand the number of facilities where we could use our proprietary ESR number.

And two, we are going through a complete value engineering process and to [strengthen] our manufacturing process because we believe there is more margin for the Company at the end of that process.

Okay.

So if I hear correctly, you are saying that you can deliver the current backlog -- not the pipeline, but the backlog -- with the facilities that you have in place now, correct?

Correct.

Is there any more sales staff that you are going to need to hire and engineering staff?

I will answer that in two pieces.

A lot of the folks that we've signed projects with and a lot of the people in our pipeline are professional entrepreneurial real estate developers or companies that develop real estate.

So in our estimation, making sure we have good delivery people is a way to keep that business coming in.

Obviously if they have chosen us to do some large projects, they are baking us into their pipeline, we believe.

So all we should bid on those cases is deliver.

We are opportunistically looking for the right personality fits and the right entrepreneurial spirit on the sales side.

But with the team we have now, we've not -- the revenue doesn't seem to be an issue.

We are handling an enormous volume of incoming inquiries on a daily basis.

And so execution people, and some of them are the new salespeople for us.

Although we are constantly looking at individuals and companies, both in the sales space, business development space, the architectural and engineering space, we have not ruled out any possible way to secure revenue, secure margin, and increase shareholder value.

Okay.

Here is my last one.

So the Company has been around for a while in one form or another.

Historically, and I know the backlog has been much, much smaller, but historically, is there any type of number that you could quote as to backlog that has not actually gotten to the finish line?

In other words, backlog that you had in backlog but fell out?

Right now, we have -- our backlog has been cohesive for the time we have been speaking to the public markets and nothing has fallen out of that.

And we don't anticipate anything falling out of that.

Having said that, we have had slippage due to the constraints of traditional construction, which is the premise of our Company.

We are delayed in delivering these projects out of no means of our own.

As always, the fabrication is out in front of us.

So the way to deal with that is the way we are going about it, which is to just get a massive amount of business under contract in different stages, in different sizes.

And just sign and deliver and get the backlog in the pipeline to be massively busy.

And so that includes converting some of the $250 million, that pipeline.

I think it is important for the shareholders to realize that that bucket of pending opportunities, some of which can be delivered in one quarter, some in two quarters, some in three quarters, and some over five, six, and seven quarters.

So in addition to the very big projects, which on paper look like two projects, but to us it looks like an A&E phase at 5% of that $77 million number, which will be earned.

So that's kind of how we are looking at the conversion of the pipeline, reaching out, developing new resources to deliver our product, and to focus in on increasing margins.

Our business model continues to work.

We don't finance our customers' orders.

We do not anticipate needing to raise money to get to cash flow positive.

We don't anticipate needing to raise money to execute on the backlog or to convert the pipeline.

And I think Mahesh has done a good job of explaining the relationship between the expenses and the revenue.

So thanks for your questions.

Yes, thanks.

Charles Danca, Joseph Gunnar.

Hey guys.

It's actually Paul Cooney.

I am on Charlie's line over here.

Very pleased with you guys so far as an investor.

Do appreciate the way that you break down the revenue expectations.

I have just a couple of questions.

If I am reading this right, with the percentages that you are expecting this year on the backlog revenue, it looks like your kind of guidance is in the $21 million to $25 million range.

Is that pretty accurate?

Based on the percentages we have given out today and as of March 1, that would be the range, yes.

Okay.

And that is pretty much what we kind of have on the books already.

I guess the question I have is based on your pipeline.

Historically, what would you say like the percentage of -- I guess it's not that much history, but like in the last year, maybe, what percentage of bids that you guys put out there that you get that you win?

You know, it depends on asset class.

It is not a representation that I can make on a percentage basis.

What I would tell you is that when we bid on projects, it's because people have requested us to because of what we do.

If we bid on an RFP, which we routinely do, it's because someone at the RFP level has contacted us because of our product and our process.

So these are not cold bids.

These are people that have sought us out in one way, shape, or form and/or are working with us on other things.

So we are comfortable in the relationships and that what we look at is the probability of people doing business with us and adopting our system over time.

We have only been public five or six months.

And we are feeling really good that the pipeline people that may or may not come with us are going to be SG Blocks' clients at some point.

Because in order to get involved in our system, even to evaluate a bid (technical difficulty), there is an amount of commitment and intellectual capital.

And I will just leave that as the context for the bids that we submit.

Okay, I appreciate that.

And I like to see obviously the margins going up.

How far off do you think we are as far as getting up to that 20% margin?

I know you had some legacy projects that you worked on with lower margins for the last couple quarters.

But how close are we to getting to the 20% or higher margins?

Mahesh, if I'm misguided here, jump in.

But I would assume the majority of our backlog and the majority of our pipeline is at the full margin business for SG Blocks.

And that if and when we find program partners, people that will engage us for multiple sites, big projects, or programs, at that point we would consider discount pricing for clear guaranteed visibility.

But that is my understanding of what we have out there now and what is pending.

Mahesh, can you just verify that?

That is accurate, Paul.

That is exactly what we do.

All our bids that we go out is review it before it goes out and all of them are at a minimum of 20%.

Okay, thanks again, guys.

Good job.

Daniel Carlson, Tailwinds Research.

Hey guys, thanks for taking my question.

Just wanted to touch base on what you mentioned a little bit earlier, which is the opportunity where there has been a large natural disaster to go in and do a large program.

So I'm wondering if you can talk about that opportunity.

Are there any RFPs out there?

And what's sort of the timeline is and the process is to winning something that's a major systemwide rebuild?

Can you talk about that?

Sure.

And so we were building our response for natural disasters as we came out of going public in August because it's a little slow in August.

And lo and behold, this season got to be really one of the worst.

It's a very vibrant sector for us.

We're routinely contacted by governmental agencies, developers, prime contractors, subcontractors.

Some of that type of work is reflected in our pipeline and bids inside that pipeline and we'll make no representation as to how much of that will close.

The energy needs on some of the islands, the cleanup needs on some of the islands, sanitation and sewage on some of the islands are the precursor to the award.

But there seems to be some movement in Washington and I would imagine that decisions on some of these types of projects will be made over the next quarter or two.

And we are going to be out there fighting for our share of the work.

Okay, thanks.

And then I'm also just curious about acceptance of what you are doing in terms of container modular design in the marketplace.

Is there -- the projects you are seeing, are they sort of one-offs?

Or is there starting to be a tipping point where what you are doing becomes more mainstream and gets just rapid acceptance in the market?

We are in the middle of that now, so that is the inflection point we referenced in the pre-recorded script, which is without the ESR number, which was the literal mainstreaming of the technology, our backlog was $500,000.

And all the time and effort we put into securing it, we are now at as of the call today at $104 million.

We have $0.25 billion in offers pending.

We have pages of people to get back to on a regular basis.

Modular construction is growing.

Container-based modular construction is exceptional because I think it is 90%, 95% of modular construction is wood.

Our buildings are stronger and better.

Ours always ship on flatbed and are intermodal and go nine high in seismic environments because they are rated to meet or exceed those codes.

So when you look at disaster relief opportunities, these are usually maritime or seismic areas.

And our product can get in there on flatbeds, set with cranes, and be moved around as disaster solutions are implemented or phased.

All right.

Look, thanks, guys.

Keep up the good work.

Appreciate it.

[Mitch Swergles], private investor.

Thanks for such a good and detailed call.

Couple questions, just to make sure I understood you correctly.

You mentioned 1 million square feet of capacity today.

Is that correct?

You have 1 million square feet of manufacturing capacity right now?

Correct.

Okay.

And so the backlog deals represent 700 -- I'm sorry.

What does it represent in total square feet?

I think the number is 738,000 square feet.

Okay, that's what I had my notes.

But that's going to be over the course of three years, so you have no capacity constraint anytime soon, if I'm not mistaken.

And you are just building incremental capacity because you see a lot of deals coming your way.

Correct.

The $250 million in pending bids represent significant square footage as well, a number we are not quantifying because the plans aren't firm.

So it's our job to make sure we can effectively deliver this wave of projects.

But based on the velocity with which leads are coming in, based on the program nature of these new developers who are looking to do scalable repeatable projects, we feel it's very conscientious to get out in front of any kind of manufacturing issues.

And that's what we are doing.

Yes, that makes a lot of sense.

So we are in a situation -- yes, some of that pipeline closes real quick.

We don't want to be caught standing still.

So speaking of pipeline closing quick, how long is it usually taking from a bid hitting your desk to -- I'm sorry, a deal hitting your des -- you said they are coming to you -- to actually getting a bid out and then -- or a response on that RFP?

That is a great question.

I can contextualize it in that usually we will know one way or another if we are going to have a client, I would say, in 90 to 120 days.

That doesn't necessarily mean we will be in contract.

It means we are working towards those things.

What's important to recognize is that our pipeline and even the projects that we are going to deliver in 2018, many of them will start and end in 2018.

Some will start and end in 45 days; some will start and end in 60 days.

So that's the nature of our pipeline.

And it is just our strategy to continue to sign up a combination of near-term opportunities and the larger opportunities.

It is important to note on the larger opportunity (technical difficulty) and this industry knowledge that the A&E phase, the design phase of a project, is anywhere from 5% to 6%.

So if you look at our pipeline and our backlog, that 5%, even though it is not as much money as actually building the structures when we get to the fabrication phase, that is a significant revenue center for the Company.

Mahesh and I have prided ourselves on speaking to a lot of investors some multiple times.

And every week we try to incorporate the feedback that we are getting into how we communicate information and how we explain our business model as we grow our market share and our business.

So we appreciate your attendance on the call and we appreciate your question.

Is there anything else?

Yes, I have a couple more, if that's okay.

Sure.

Go ahead.

Great, thanks.

Since you mentioned the designing phase, I'm wondering when you are billing to your clients, is there a way that you are able to do -- if not percentage of completion, at least is there a way you are able to bill for certain services that are towards the front end so you can get some cash flow in terms of [financing]?

Yes.

So the A&E phase is 5% of the project and that's in the front side, obviously.

And then just think about this.

While you are in the A&E phase of a project, probably 90 days from approvals, let's say it takes four months to design a building and two or three months to get it approved, a few months before the approvals we have to start procuring the containers, which is revenue.

We have to buy the modules and start to procure the raw materials that are going to go inside the finished module.

So while projects can be large, they are made up of multiple buildings.

And these projects themselves have an A&E phase, a container procurement phase, the supplies and material phase and then there is site work and then assembly of the modules.

So based on feedback that we have gotten consistently from our shareholders, we wanted to provide some clearer visibility from (technical difficulty) pipeline (technical difficulty).

[And that involves] the big block of square footage.

Make it -- Paul, can I jump in?

Oh, sure.

To make sure the -- to add, to echo what Paul said, when we bill out the customers, we do it about 30% to 40%, depending on the contract, up front.

And then we bill them on a percentage of completion basis.

Our payment to our contractors or our suppliers or our partners also pretty much mirrors the same trend.

So we do get a deposit and you see that reflected on our balance sheet as either deferred revenue and/or billings in excess of work completed.

So you see that on the balance sheet.

So we do that.

And that is exactly why our operating leverage is so great because we don't expend working capital on actual projects.

The working capital is supplied to us by our customer.

That's great to hear.

And actually, I was going to ask you about that line on the balance sheet.

So the -- with regard to the -- I think you called it a backlog.

I don't have it in front of me right now, but the backlog number is $250 million, right?

Pipeline.

Pipeline.

Okay.

Mahesh, you want to explain the difference between backlog and pipeline, just so there is no misunderstanding?

Sure.

So backlog is actual contracts that are signed.

Pipeline is deals that we are working on.

We don't call it a pipeline until we have a greater than 60% probability.

Now again, we can't predict the timing and we are not giving guidance, but pipeline is deals that we have in various stages of sales pursued, where the backlog is actual contracts that have already been signed.

Great.

So with regard to the pipeline, those are actually pending bids, right?

Correct.

Okay.

What was that number at the end of, say, the last quarter, the end of September?

At the end of September, I don't have a number right off.

I can't give you an exact number, Mitch, but I can circle around with you and give you that number.

Okay, thanks.

So the $250 million is the current number or the number at the end of December?

The $250 million was at the end of December.

Our pipeline number is greater right now, but we are guiding on $250 million.

Got it.

Okay.

And then just the last question.

The way I read your guidance for revenue for the year is that as of now, you anticipate recognizing revenue of somewhere between -- somewhere around $10.5 million give or take from the two big deals.

And then another $10 million to $20 million, so call it $15 million, at the midpoint from -- sorry, did you say $10 million to $15 million?

I think you said $10 million to $15 million.

So that would be $20.5 million to $25 million in revenue guidance for the year based solely on current business that you have visibility into as opposed to any that might be signed and done later in the year?

That is correct.

Correct.

Okay.

So the breakeven for the year, you expect to be cash flow positive for the year.

Would you anticipate that actually occurring in Q3, Q4?

Mitch, I'd like to give you specific guidance, but part of our challenge, Mitch, would be our -- we had given a guidance at third quarter that we would be cash flow positive this quarter.

And as we are finding out, our processes for manufacturing are always ahead of the site work being completed.

So we have to be cognizant of what a customer is ready for.

So and therefore, we are saying that this particular quarter, we don't know what the revenue mix is going to be until the customer is ready.

So we do feel comfortable about saying that we are cash flow positive for the year.

We are not giving specific guidance on the quarter.

Great.

Thanks a lot.

Good job.

Ladies and gentlemen, we have reached the end of the question-and-answer session.

And I would like to turn the call back over to Paul Galvin for closing remarks.

Thank you, Chris, and welcome to the SG Blocks -- I'm sorry, guys.

We want to thank everybody for joining us on today's call.

We have many dedicated and hard-working people throughout our Company, from our sales and marketing staff, international and business development folk, to our architectural and engineering and manufacturing partners who keep our container-based solution constantly evolving.

A sincere thanks from management to all of you.

We could not be doing this without you.

Lastly, if we were unable to address any of your questions, if additional questions arise after the session or over the next days, please reach out to Chris Tyson from MZ.

And Chris is doing a great job of facilitating and getting information to and from our investor base.

And we are happy to work jointly with Chris in making sure you get the information that you need.

So thank you very much.

Back to the operator.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.