Safe & Green Holdings Corp (SGBX) 2019 Q1 法說會逐字稿

Good day, and welcome to the SG Blocks' First Quarter 2019 Conference Call and Webcast.

Today's conference is being recorded.

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

Please go ahead, sir.

Thank you, and good afternoon.

I'd like to thank you all for taking time to join us for the SG Blocks' First Quarter 2019 Conference Call.

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

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

A press release detailing these results crossed the wires this afternoon at 4:00 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 facts 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 terminologies 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 are available at www.sec.gov.

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

We cannot assure you 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 operation.

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

Finally, this conference call is being 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' First Quarter 2019 Financial Results Conference Call.

The first quarter of 2019 was highlighted by continued operational execution as defined by our continued revenue growth and gross margin expansion.

We continue to attract innovative new clients ranging from mobile hospitality units in New York to affordable housing for those displaced by Hurricane Maria in Puerto Rico, while making progress in realizing our long-term operational goals.

Due to the close proximity from our year-end conference call late in March, today's call will be brief, but full of exciting updates.

So now let's first discuss the 3 main housekeeping items discussed last call.

One, legacy project in Los Angeles.

There is no material update since our last earnings call.

We continue to negotiate in good faith to come to an amicable resolution for both parties.

Two, pace of revenue recognition on large contracts in backlog.

Our larger projects continue to advance through our backlog.

Multifamily projects go through a series of predevelopment steps prior to construction including, but not limited to site acquisition, environmental testing, geotechnical testing, entitlement and approval, traffic studies and market feasibility report.

When these are completed, projects then can move to a closing on funding and commence the design/build process.

We will discuss the projects and the progress in our backlog later in the call.

Three, cash position and recent capital raise.

We supported our cash position with a small equity offering in April 2019.

We engaged ROTH Capital for the transaction and on a going-forward basis.

The monies raised will satisfy immediate concerns from our clients on our ability to perform.

The company believes these funds will allow us to execute on our backlog and convert our pipeline of opportunities.

While the offering was dilutive to our common stockholders, it was modestly sized and the company still has a relatively small number of shares outstanding on a fully diluted basis and still no debt.

2019 progress.

Next, I will report on the progress we made in the first quarter of 2019.

Our gross revenue of $1.7 million represents a 12% increase compared to the first quarter of 2018.

The revenue number is consistent with the company's anticipation of 2019 revenue of $18 million to $20 million as construction revenue is expected to increase in the second half of the year, barring any unexpected site delays.

Gross margin as a percentage of revenue increased to 31.4% in Q1 2019 as compared to 10.6% in Q1 2018.

We continue to target margins at 18% to 20% on a going-forward basis, but were able to garner better overall margins this quarter.

We ended the first quarter of 2019 with 11 projects, totaling 677,536 square feet and a $95.8 million backlog.

Our business model.

We continued to invest time and resources in building out and broadening our platform.

Areas we are focusing in on include manufacturing, procurement, logistics, project-based finance and design services.

We anticipate that these efforts will eventually result in SG Blocks offering a full turnkey solution for our clients, who are looking for a single source of contact for their projects and believe the benefits of modular construction will make them more profitable.

On the governance front, we kicked off the first quarter with the integration of James Potts on our Board of Directors.

Jim is a 25-year commercial REIT veteran with extensive C-level public company experience and the founder and President of State SteelWorks based in Atlanta, Georgia.

Jim's appointment as an independent Board member in late December 2018 increased the total number of board members to 7 with 5 independent members.

Jim brings an incredible breadth and depth of operating experience to SG Blocks, which we believe will not only prove invaluable in strategic decision-making, but also in helping the company further develop its commercial presence with multifamily REIT customers as well.

I look forward to working closely with Jim to drive long-term shareholder value creation.

Lastly, our partnership with Grimshaw continues to flourish.

And we are excited to be completing our initial commercial product catalog with Grimshaw, launching towards the end of Q2 2019.

We look forward to sharing the catalog on our website.

Our customers.

We have organically densified our customer base on our core market and they are as follows: food, beverage, food halls and hospitality.

The most notable win in this sector is the $25 million purchase order for unique hospitality units across the U.S. The initial 2 sites are in full design for 2 West Coast sites.

We have delivered and are designing many variations relating to these markets.

To date, we have delivered 1 complete food hall and have another 1 under construction.

We also have a West Coast food park in the design stage and an additional 2 sites working their way through our pipeline.

Subsequent to the closing of the first quarter, we signed a contract to build a unique hotel prototype for a waterfront development in Hudson Valley, New York.

The total order, expected to be approximately 15 proprietary hospitality units, will be delivered to an initial location in Hudson Valley, New York, where Arizona Investissements recently acquired the Twin Lakes Resort through one of its subsidiaries.

This 55-acre estate is currently under renovation and is poised to become a leading eco-resort in Upstate New York.

When complete, we anticipate it will represent a revenue opportunity of approximately $4 million.

These unique guest suites will be mobile and travel season only for their target market.

We have other hotel projects in our ecosystem, both multistory structures as well as stand-alone unit.

We continue to receive a steady stream of inquiries for units that provide food, coffee, beverages as well as public bathrooms.

Second vertical, equipment enclosures.

Our business has always included projects that secure and transport equipment of various types and uses, both for private and military sector.

For example, we delivered over 500 electrical rooms for Square D in modified containers that were deployed in Walmarts all over the country.

We have now expanded this opportunity into a related base.

We recently signed a master service agreement with Blockchain Holdings Capital Ventures, BHCV, as the firm sole partner in designing and fabricating its single- and multi-container data center.

These low-cost, decentralized, innovative data centers will offer secure and affordable solutions for BHCV's customers, including built-in disaster recovery option.

The first prototype units are expected to commence fabrication in the second quarter 2019.

BHCV will then establish a sales distribution channel to scale production of data centers with an anticipated volume of 160 to 200 units by 2020.

BHCV plans to roll out mobile data centers, which can be launched faster and at much lower prices and often in modular fashion, allowing for additional capacities to be easily added on-demand.

The robust nature of such mobile centers will allow BHCV to offer a full solution of static data centers, ensuring competitive pricing level capacities and added value services.

We received steady inquiries for equipment storage of all clones, including electrical, commercial kitchen, agribusiness, water purification and computer servers to name a few.

SG Residential.

We launched SG Residential in late 2018 to help provide sustainable single-family homes to the many people that contact us.

We are working towards completion of our design/build platform and anticipate we will have news to share on that front in the near term.

Subsequent to the closing of the first quarter, we announced further progress on this front with our partnership with Capital Plus Financial, a certified community development financial institution to complete 55 affordable houses for families displaced by Hurricane Maria in Guayama, Puerto Rico, by executing the finish out and site work of existing concrete shells.

These homes will be sold to families displaced by Hurricane Maria, who will have the opportunity to utilize Housing and Urban Development, HUD vouchers, for their purchase.

Puerto Rico is still in dire need of new housing and we now have in excess of 2,000 homes in our pipeline.

We are in the process of completing all of the necessary steps to do business in Puerto Rico.

We expect to eventually locate a local manufacturing facility to cater to the local market opportunity on 1 of several identified locations.

SG Residential is also currently analyzing a channel strategy for the single-family house market in the United States.

And four, multifamily residential.

The majority of our backlog and inquiries are from multifamily developers looking to use our buildings sustained for better quality, better return on investment and a significant reduction in time.

The thing that would help developers most would be to provide them with easy access to the equity and debt needed to develop a project beyond the land acquisition.

We have spent an enormous amount of time in developing this solution.

We believe it to be close at hand and look forward to announcing this platform solution when it is firmly in place.

Once in place, we anticipate that all creditworthy projects in our backlog would have immediate access to capital and accelerate the development of the project.

We believe this will greatly expedite revenue recognition and reduce investment of management resources on the attainment of pipeline opportunity.

We are pleased to report the financial progress on the $55 million project in our current backlog.

The project is fully entitled at 305 units.

And the market study and all environmental tests are completed and satisfactory.

We anticipate the financial closing for the project before June 30 and in keeping with our plan for 2019 revenue recognition.

Our Bronx mid-rise project is advancing, and the next step is for the developer to select a capital partner and begin that process.

There are multiple similar mid-rise products in our pipeline currently undergoing preconstruction survey.

2019 and beyond.

Barring any site or other unanticipated delays, we believe we can achieve our previously stated revenue target of $18 million to $20 million in 2019 as compared to approximately $8.1 million in 2018.

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

Mahesh?

Thank you, Paul, and good afternoon.

The revenue on the first quarter increased 12% to $1.7 million in the first quarter of 2019 as compared to $1.5 million in the first quarter of 2018.

This increase in revenue was mainly driven by growth of the company's retail and office contracts that we do in progress and completed during the 3 months ended March 31, '19, compared to March 31, 2018.

Gross profit totaled approximately $542,000 in the first quarter of 2019 as compared to $164,000 in the first quarter of 2018.

Gross profit margin as a percentage of revenue increased to 31.4% in the first quarter of 2019 as compared to 10.6% in the first quarter 2018.

Gross profit margins are positively impacted by lower-than-anticipated cost on contracts in this quarter.

We believe that the margins will revert back to our previous guidance of 20% on most contracts.

On larger contracts that can potentially result in recurring revenue, the company may elect to take local -- lower margins.

Our operating expenses increased to $1 million in Q1 of 2019 from $0.9 million in Q1 of 2018.

The increase in operating expenses for the 3 months ended March 31, 2019, was primarily due to increases in salaries and additional head count of approximately 129,000 and increases in stock-based compensation expense of $82,500, offset by decreases in marketing and business development cost of approximately $33,000, a decrease of approximately $111,000 in amortization expense and amortization expense caused by customer contracts being fully amortized at the end of 2018 and an increase of approximately $40,000 in Board of Director fees.

Our net loss totaled $0.5 million or $0.12 per basic and diluted share in Q1 of 2019 compared to a net loss of $0.8 million or $0.18 per basic and diluted share for Q1 of 2018.

Adjusted EBITDA loss increased to $0.3 million in Q1 of 2019 from $0.5 million in Q1 of 2018.

See today's press release under the use of -- under the heading Use of Non-GAAP Financial Information for a discussion of adjusted EBITDA and a reconciliation of such measure to the most comparable measure calculated under U.S. generally accepted accounting principles, or GAAP.

Cash at March 31, 2019, totaled $0.3 million as compared to $1.4 million by December 31, 2018.

Subsequent to the close of the first quarter of 2019, we raised approximately $0.7 million in net proceeds from a follow-on equity offering of the company's common stock to be used for working capital and for general corporate purposes.

The company has made progress in developing our debt equity platform that will allow our deals in the pipeline to be funded within the platform and potentially result in accretive earnings to our shareholders.

We expect to provide a comprehensive update during our second quarter 2019 conference call on this potentially transformative development.

As of May 6, 2019, we had approximately 5.1 million basic and diluted shares outstanding.

The company also has approximately $10 million in carryforward operating losses, which will reduce the tax burden in future years.

The net operating loss expires through 2037.

The company's net operating loss carryforward may be subject to annual limitations.

As Paul mentioned earlier, construction backlog totaled $95.8 million at March 31, 2019, compared to $97.7 million at December 31, 2018.

As of March 31, 2019, the company had 11 projects or approximately 677,536 square foot -- square feet in backlog.

Construction backlog at March 31, 2019, included 3 large contracts in the amounts of approximately $55 million, $15 million and $25 million approximately.

The $25 million contract is spread over 20-plus cost locations.

The company believes that barring any delays and site approvals and site-related construction, these projects should all convert to revenue by June 30, 2021.

I'll now turn the call back over to Paul.

Paul?

Thanks, Mahesh.

We ended the first quarter of 2019 with no debt, a backlog of $95.8 million and a promising project pipeline of over $200 million, positioning SG Blocks for significant financial performance in 2019 and beyond.

We believe that our business model allows us to handle incremental revenue with a relatively modest increase in general and administrative expenses to leverage both inventory and labor on our suppliers' balance sheet and in most cases, pay for products and services only after we have been paid by our customers.

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

Our focus continues to be: becoming cash flow positive; growing our backlog and our pipeline; converting our existing backlog to revenue with consistent and predictable margin; and building out the platform to create a one-stop shop for our clients.

We are pleased to be working with ROTH Capital as we look to grow and execute on our business plan.

We continue to believe we have a superior product in the marketplace and that the marketplace for our product is enormous.

There is a growing movement to challenge traditional construction and its expensive cost and time.

We believe SG Blocks is one of the companies at the forefront of this disruption.

I will now hand the call back to the operator.

(Operator Instructions) And we'll take our first question from Gerry Sweeney with ROTH Capital.

I was wondering, could you -- I apologize.

There was a lot that you went through in terms of projects.

And what I wanted to see was on your guidance of $18 million to $20 million in revenue for this year, could you maybe highlight some of the projects you think are going to sort of drive that revenue for the remainder of the year?

Sure, Mahesh, you just want to walk through the outline of that structure?

Sure.

We had -- Gerry, so we have 3 large projects in our backlog, one for $55 million, another one for $15 million and other one for $25 million.

We feel the progress that we've had on primarily the $55 million contract and the $25 million contract will translate into revenue before the end of the year -- the anticipated revenue.

I'm sorry.

Okay, by the end of the year.

And the $55 million one, that is a project in the Hudson Valley as well.

It's different than the $4 million one, correct?

Correct.

I'm sorry, yes.

That's from the Catskills?

Correct.

Yes, and the other one's the Hudson Valley.

But on the $55 million one, I think you talked about getting your -- getting close to getting finance -- or the project itself was getting close to getting financing.

Any update on that front?

Yes, so we anticipate that, that financial closing will occur on or before June 30, 2019, by next month.

And then that project will be off to the races.

Got it.

And then switching gears a little bit towards the Grimshaw -- actually, product catalog, I think, is pretty interesting, especially -- I think one of the products within the catalog, are they going to be sort of utility rooms, bathrooms, things like that?

Just sort of a modular construction that you perform and they insert into the project?

Into the Grimshaw design project, I should say.

Is that how to look at it?

And I'll leave it there for now.

Yes.

So Grimshaw has 500 industrial designers, and they work on very large projects and a lot of infrastructure and transportation product -- projects.

So what we've done is we worked closely with them to come up with, to start, a dozen-or-so modular container product that could be plugged and played into any project, whether it was traditionally built or modularly built, such as bathrooms and server rooms, entranceways, mailroom, bicycle rack, things along that.

And then hopefully, the speed and quality and even the greening up of some of these high-rise projects that they work on can include these core components and help make it a win-win.

So we're very excited about that component of the Grimshaw partnership.

Got it.

And then just one other question on, I think, Puerto Rico, and I -- these are in no particular order, too.

Just curious as to how -- it sounded like you needed to get approval for it to sell, the modular homes for the -- in Puerto Rico, is that correct?

And maybe just a little bit of details -- or how long that may take.

It's just a registration process, which we've undertaken and are using local talent to help facilitate that process.

I don't know exactly how long the process itself takes, but it's not anticipated to be a gating item to doing business.

Okay.

And I mean would that be -- can we view that -- I mean obviously it prevents our camp for a night.

So could -- would that sort of be an entr�e into maybe, not emergency housing but housing post-catastrophic event type of opportunity that you can build upon in the future?

Yes, that's a natural market for us.

Our products are approved to do exceedingly well in these eco-disaster areas, and so we're looking forward to getting some products built on the island and showing that the technology can keep you and your family safe during a storm.

And we have a platform partner, who for a -- certain circumstances will provide a 50-year mortgage for those homes.

So when you factor in that you're living in steel and that you're protected and that you have a modestly priced home, eventually produced on the island and with that kind of a debt structure for certain people and for even folks on our domestic market, it's a very good value proposition.

And we think bringing our product to coastal areas and areas that are impacted severely by changing weather pattern, that's a natural constituency for us.

(Operator Instructions) We'll take our next question from Ashok Kumar with ThinkEquity.

The first question is the time line for sustainable cash flow positive.

And I think the original position was to give directional guidance of revenue that focused on gaining a cash flow positive on a sustainable basis.

So can you provide a concrete time line for that, please?

So Ashok, we anticipate getting and remaining cash flow positive by the end of 2019.

That hasn't changed.

Okay.

Now in terms of processes in place, so do you feel -- I'm quite amazed that you have the process in place where you'll be able to get any percentage of completion from the different projects on a real-time basis, so there would not be any repeat of what we witnessed in 2018.

Go ahead, Mahesh.

Yes.

So Ashok, I'm going to repeat your question just to make sure that I understand.

So your question is related to the percentage of completion on projects, is that the question?

Yes, Mahesh.

Yes.

Okay.

So I think the percentage of completion, we normally -- and we do this on a monthly basis.

We get data from all our ecosystem, our partners, if you will, and they provide us information on what actually has been completed.

And we use that to actually extrapolate the revenue because we use the cost incurred on a job to determine the revenue because that's the more conservative way of recognizing revenue.

On -- just on a different note and kind of a related note, the issue in '18 was not a function of the percentage of completion methodology.

It was more a question about us recognizing that the cost have been incurred, but we give more time than we should have, in hindsight, for the customer to come and pay us for those escalation in cost.

So it -- so the methodology was sound, but the collection was something that we could've done a better job on.

Suppose, Mahesh, on this large project in Upstate New York, the $55 million property that you have discussed, I think original time line was to be manufacturing date by third quarter of '19.

So are there any updates on that time line?

We'll be able to give you a better -- once we closed on the funding, if you will, which is expected to occur by the end of June, we'll be able to give you a more defined time line on that specific project.

At this point, we feel comfortable that the manufacturing or the fabrication will start in the third quarter.

But if it changes, we'll be able to give you a better guidance at the end of Q2.

All right.

And just some additional color on the debt equity platform.

The -- in terms of the transition of going from concept to financing of project, I think you discussed that this could be a quantum improvement from the existing situation.

So what would be the compression in time line given that there's no sales cycle there?

And from contractor financing, the whole commercial cycle do you think would be compressed with this equity debt platform?

And do you see a material change in the mix in backlog between the entrepreneurial project, which could be susceptible to this kind of financing as opposed to commercial?

So Ashok, we do believe this will be transformational because the amount of time projects will stay in our backlog will be greatly reduced, and to a much larger degree, influenced by us.

Because by creating the project-based financing platform, we're going to be able to see which projects have the greatest intrinsic value and can go quickest from opportunity to pipeline and into a penned backlog project.

So that is something that we'll be able to talk more detail about in the near future and the benefits to the company and its shareholders, which at times will include some carried interest in particular projects that go through the platform, and occasionally, the ability to draw down some of the developers' fees when our work was required.

But most importantly, it's going to be a catalyst that helps people who own land that want to develop either track housing or multistory, multifamily projects and that we're going to be -- able to help lubricate and shorten the process so that revenue recognition process is both visible and is expedited.

And we've been working diligently on that.

So one last question related to this.

I mean do you see any potential risk with the fund being potentially the largest client?

And the outsourcing, the vetting to this fund, right, do you see any potential risk factor there?

No.

The fund will be just investing at the asset and the project level, so that won't afford them any ownership in SG Blocks.

The reason SG Blocks will help facilitate the platform is that we'll be guaranteed all of the manufacturing work for the projects that get investment from the platform.

So no, there's not that opportunity that the project investor becomes a big player at the manufacturing level.

No.

Got it.

So just to clarify that, you will still be responsible for vetting the client in your platform?

Oh, sure.

Oh, sure.

Yes.

(Operator Instructions) We'll take our next question from David Lavigne with Trickle Research.

Can you give me just sort of the specific characteristics of what constitutes a backlog then?

I mean what happens along the way in a project that you -- at what -- at the point where you say, okay, this is now backlog?

I'm just trying to get the vernacular straight, I guess.

A project to be in our backlog has to be a controlled site with a capable developer with a track record and a project that's financially viable and has an asset right yield on the site that makes financial sense.

And then we assess whether or not a project has certainty of permitting, certainty of financing outcome, any land use changes or any other gating items that could potentially act as a barrier to that actually happening.

And at the end of the day, what we're doing now is we're moving a little more judiciously with some of the projects in terms of making sure the developers have a handle on some of their own gating items so that we can reduce the amount of time projects spend in our backlog.

So the solution for the debt and the equity and kind of providing that, we're helping to facilitate that, is to eliminate what has historically been one of the largest gating items, which is just this providing the necessary debt or equity or managed financing at the project level.

Mahesh, would you add anything to that?

I think a signed contract is a backlog.

You put it to the pipeline, it's obviously not the time.

And within the -- so once it is signed and we have -- we know that the developer is working on permits, et cetera, they have -- we are comfortable in showing there's a backlog, [point in hand].

One example of our conservative approach has been when we relegated another contract to be signed back into a pipeline at the end of 2018 primarily because we didn't have visibility to the highest and best use of that particular project.

So despite having a signed contract, we've pushed it back in the pipeline.

And so the adoption of -- we have to review each contract on a case-by-case basis.

But when we feel comfortable the project has visibility, site control and the ability to close, we feel comfortable about leaving it on as a backlog.

But without question, everything in a backlog is a signed contract.

Okay.

So I missed the first part of that.

But is the Los Angeles project the only project that has -- sounds like it's not, but is it the only project that was, at one point, part of backlog that isn't anymore?

Or there have been other projects that were considered backlog that are not anymore?

There's been 2 projects in the past 2 years that have gone from backlog but back into pipeline.

And one was an Upstate New York project and one was a small, I think, [20 key] boutique hotel in the Southeast.

Both of those projects, one is still under contract but they need to provide us with greater certainty of what they're doing.

And the other is in our pipeline and our ecosystem.

But those would be the 2 projects, I think, that would have been in backlog that went back into the pipeline.

(Operator Instructions) At this time, this concludes our question-and-answer session.

I'd now like to turn the call back over to Mr. Paul Galvin for his closing remarks.

Thanks to everyone for joining us on the call today.

SG Blocks is the product of many hard-working people throughout the company and our supply chain and ecosystem.

Our sales and marketing and business development folks, architects, engineers, manufacturing partners who work every day to advance our sustainable solution in new and exciting ways, without them, we could not do this.

Lastly, if we have been unable to address all of your questions today, please feel free to contact the MZ Group and they'll either answer them or coordinate a call for us to answer them.

So thank you very much.

Once again, that does conclude today's conference.

Thank you for your participation.

You may now disconnect your phone lines.