Safe & Green Holdings Corp (SGBX) 2019 Q2 法說會逐字稿

Welcome to the SG Blocks' second quarter results conference call. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Jeff Stanlis with Hayden IR.

Thank you, Ben. Good afternoon. Thank you all for joining us for the SG Blocks Second Quarter 2019 Earnings Conference Call. Your hosts today are Mr. Paul Galvin, Chief Executive Officer; and Mr. Mahesh Shetty, President and Chief Financial Officer.

A press release detailing these results was issued this afternoon just after 4:00 p.m. Eastern Time, and it is available on the company's website, sgblocks.com.

Following management's prepared remarks, we will open the conference call for questions.

Before I turn the call over to management, please remember that certain statements made during this conference call 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 the company's 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 and uncertainties and assumptions, including those set forth in the company's filings with the Securities and Exchange Commission, 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 operations. Reference to these non-GAAP financial measures should be considered in addition to GAAP financial measures but should not be considered as a 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 the company's website at www.sgblocks.com.

With that, I will now turn the call over to Chief Executive Officer, Paul Galvin, for his prepared comments. Paul, go ahead.

Thank you, James, and welcome to the SG Blocks Second Quarter 2019 Financial Results Conference Call. We had a productive quarter and achieved several noteworthy accomplishments. Specifically, we believe we have eliminated most of the remaining hurdles to move the Monticello project forward. As most of you know, these large projects have proven challenging because project time lines are dependent on other parties in terms of zoning, permitting, financing and other variables. Experience has allowed us to adjust our processes, add timing contingencies and put in place partnerships to help us bring these projects to fruition. The first project that will benefit from this new approach is the 302-unit multifamily housing project in Sullivan County, New York known as the Monticello project. As we have previously discussed, multifamily projects go through a series of predevelopment steps prior to construction including, but not limited to, site acquisition, environmental testing, geotechnical testing, entitlements and approvals, 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.

In July 2019, we executed a governing agreement, along with another investor, to create a repeatable financial structure for the Monticello project. As a part of this, we created CPF GP, a Texas limited liability company, which I will refer to as CPF GP. We hold a 50% membership interest in CPF GP, and this entity is the managing member of CPF MF, a Delaware limited liability company, which we anticipate will own the 302-unit multifamily project and will oversee the development, leasing and management of the project. CPF GP, the governing company, is expected to contribute approximately 10% of the total equity capital in the project with the remaining 90% of equity capital to be contributed by outside investors. SG Blocks' contribution is capped at $1.3 million from cash collected in the first phase of the Monticello project.

In late July 2019, CPF MF completed their $5 million equity financing with the money raised from outside investors and simultaneously consummated the land acquisition for the Monticello project. This means that third-party investors have now completed the equity financing for the first phase of construction for Monticello, and the capital structure is accretive to SG Blocks' shareholders.

With the completion of the equity financing, we believe we have created a repeatable and scalable model that will give us more control, and once completed, more returns on future projects.

Projected construction costs in the first phase of the project are approximately $22 million, and the total construction cost of the project are approximately $55 million. We expect that SG Blocks will recognize revenue of approximately $13 million in the first phase with targeted gross profit margin of approximately $2.6 million.

We are excited about additional projects that are working their way through our pipeline and backlog, which could potentially translate to incremental revenue over the next 12 months.

As I specifically discussed in our first quarter 2019 call, we have been investing time and resources to build out and broaden our capability in the areas of manufacturing, procurement and logistics, project-based finance and design services. Our goal has been to eventually result in SG Blocks' offering a full turnkey solution for our clients who are looking for a single source of contact to their projects and believes the benefits of modular construction will significantly improve their return on investment and give them a product that is faster to construct, stronger and will save them time and money.

We've made meaningful progress towards this goal as well as we announced a 3-year strategic alliance with Geis Companies, one of North America's premier design/build companies headquartered in Streetsboro, Ohio. Geis will provide construction-related services, perform off-site and civil work and installation services. In addition, Geis has bonding capacity up to $50 million per project. This bonding capability potentially reduces required loan guarantees and cash requirements, which previously were necessary for certain projects. We view this as eliminating a key hurdle for many customers. Geis will help us maintain both control and quality of the manufacturing process and will also help us expedite the civil work, which has slowed down the completion of certain projects in the past.

Our pipeline continues to grow. We continue to attract innovative new projects -- prospects, ranging from affordable housing for those displaced by Hurricane Maria in Puerto Rico to a mixed-use development in an opportunity zone. As of June 30, 2019, our backlog stood at $70,768,733, and the quality and quantity of our pipeline continues to expand.

We expect our catalog of commercial products created jointly with Grimshaw with whom we have a strategic alliance to be available after Labor Day. We believe the catalog will result in demand for off-the-shelf product. Year-to-date, SG Blocks has successfully delivered, among others, the NBA's training academy in Senegal, several projects for the U.S. Navy, a major food hall in Orlando, ongoing installation of a food park in Greenville, South Carolina and the New York notable, the Terrace, a pop-up bar and restaurant, which was delivered and installed on August 10 on Pier A in lower Manhattan.

Also subsequent to the quarter, we took further steps to bolster our balance sheet, completing an underwritten public offering of 900,000 shares of common stock at an offering price of $0.85 per common share for aggregate net proceeds of just over $587,000.

We engaged ThinkEquity for this transaction. 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 remains without debt.

While we made significant progress across our business and in particular in New York, I'd note that there has been no material update on our legacy projects in Los Angeles. We continue to negotiate in good faith and hope to come to an amicable resolution for both parties.

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 afternoon. Revenue in the second quarter of 2019 was approximately $728,000 as compared to approximately $2.3 million in the second quarter of 2018. This decrease in revenue was primarily the result of a decline in the company's school and special use projects as compared to the second quarter of 2018.

Gross profit totaled approximately $267,000 in the second quarter of 2019 as compared to $32,000 in the second quarter of 2018. Gross profit margin as a percentage of revenue increased to 36.7% in the second quarter of 2019 as compared to 1.4% in the second quarter of 2018. Gross profit margins were positively impacted by lower-than-anticipated costs on contracts in this quarter. We continue to believe that, over time, our gross margins will revert back to our previous guidance of 20% on contracts. On larger contracts that can potentially lead to recurring revenue, the company may take lower margins.

Our operating expenses remained largely unchanged at approximately $1.2 million in the second quarter of 2019 compared to approximately $1.3 million in the second quarter of 2018. This modest decrease is a net result of decreases in general and administrative, marketing and business development, and pre-project expenses, which are partially offset by an increase in payroll and related expenses.

Our net loss was approximately $972,000 or $0.20 per basic and diluted share in the second quarter of 2019 compared to a net loss of approximately $1.2 million or $0.29 per basic and diluted share in the second quarter of 2018.

Adjusted EBITDA loss improved to approximately $755,000 in the second quarter of 2019 compared to a loss of $999,000 in the second quarter of 2018. Please see today's press release under the Use of non-GAAP Financial Information heading for a discussion of adjusted EBITDA and a reconciliation of this measure to net loss, the most comparable measure calculated under U.S. generally accepted accounting principles, or GAAP.

And now turning to our year-to-date results. Revenue in the first half of 2019 was approximately $2.5 million as compared to approximately $3.8 million in the first half of 2018. This decrease in revenue was primarily the result of a decline in the company's school and special use projects as compared to 2018.

Gross profit totaled approximately $811,000 for the first half of 2019 as compared to approximately $195,000 for the first half of 2018. Gross profit margin as a percentage of revenue increased to 32.9% in the first half of 2019 as compared to 5.1% in the first half of 2018.

Operating expenses increased slightly to approximately $2.3 million in the first half of 2019 compared to approximately $2.2 million in the first half of 2018. This modest increase is a net result of an increase in payroll and related expenses just partially offset by increase -- by a decrease in other operating expenses.

Our net loss was approximately $1.5 million or $0.32 per basic and diluted share first half of 2019 compared to a net loss of approximately $2 million or $0.47 per basic and diluted share in the first half of 2018.

Adjusted EBITDA loss improved to approximately $1 million in the first half of 2019 compared to a loss of approximately $1.5 million in the first half of 2018.

Cash and cash equivalents at June 30, 2019, approximated $174,000 as compared to approximately $1.4 million at December 31, 2018.

As of August 5, 2019, we have approximately 6,007,791 shares outstanding. Construction backlog totaled approximately $70.8 million at June 30, 2019, compared to approximately $97.7 million at December 31, 2018.

As of June 30, 2019, the company had 9 projects or approximately 405,536 square feet in backlog. Construction backlog at June 30, 2019, included 2 large contracts in the amounts of approximately $55 million and $15 million. We believe that barring any delays in site approvals or site-related constructions, these projects should convert to revenue by June 30, 2022.

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

Thanks, Mahesh. We ended the second quarter of 2019 with no debt, a backlog of approximately $70.8 million and a promising project pipeline, which we believe positions SG Blocks for a significant financial performance in 2019 and beyond.

Since our last earnings call, we advanced our business model and expanded our capabilities, which we anticipate will give us more control over our projects and reduce our execution risk. This hard work took time. And based on the updated timing for the Monticello project, over the next 4 quarters through June 30, 2020, we will expect to recognize approximately $13 million in revenues related specifically for the first phase of the Monticello project. For perspective, that is more revenue than we have recognized in any 12-month period in our history, and all of that from the first of 3 phases of a single project.

As it relates of Monticello, the largest container construction project in the history of the United States and one of the largest in the world, we are now in the design phase of this project. During the third quarter of 2019, we anticipate progress in our next steps, which includes securing loan approvals and building permits.

Subsequently, we will move to procurement and ultimately fabrication and delivery of Phase 1. We believe the key challenges are behind us and that the project appears well positioned for success.

We believe that our business model allows us to handle incremental revenue with a relatively modest increase in general and administrative expenses, 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 become cash flow positive, growing our backlog and our pipeline, converting our existing backlog to revenue with consistent and predictable margins and building out the platform to create a one-stop shop for our clients. We continue to believe we have a superior product in the marketplace, and the marketplace for our products is enormous.

McKinsey's 2019 June report indicated that the modular new-build market in the U.S. and Europe could exceed $100 billion by 2030. There is a growing movement to challenge traditional construction to save time and money. We believe SG Blocks is one of the companies at the forefront of this disruption.

I'll now hand the call back to the operator for questions.

(Operator Instructions) The first question comes from Ashok Kumar with ThinkEquity.

The first one is just a modeling question. The $13 million forecast on the Monticello project, how should we be looking at for the next 6 months and in the second half -- or the second half of the 12-month period? And should we be modeling the 20% margins that you alluded to earlier as you normalize the run rate?

Mahesh?

Yes. Sure. So Ashok, over the next 12 months, we're looking at the revenues in the range of -- including Monticello, which we already talked about during this call, we expect the revenue range to be somewhere between $15 million to $20 million with the $13.5 million approximately from the Monticello project.

Okay. And the 20%, would that be the right number on an aggregate basis, Mahesh?

We feel comfortable about the 20% margin. Yes, thank you.

Okay. And then the bigger picture is in terms of the platform -- the financing platform in place to support exploratory projects as opposed to commercial projects, if you could provide us any update there, please.

The Monticello project is the template for how certain projects will evolve in our pipeline, meaning there will be a contribution from the landowner of the land and then our platform will leverage that to provide the debt and equity. The benefits to SG Blocks and its shareholders is that we will get the manufacturing and delivery business and the design business for all of those projects and will have a carried interest of some sort in most instances. It's going to reduce the time that projects are in our pipeline and shorten the time for revenue recognition. So we think it will have several benefits, and it will work for multiple types of asset classes.

And Paul -- so again, this will end up being a template or a calling card to accelerate both projects that you can put in the pipeline as well as the conversion into revenues, right? This will be potentially a template and (inaudible) in terms of your performance next year and beyond?

Yes. You're correct, Ashok. We've -- one of the larger -- maybe the largest barrier for developers and entrepreneurs is to find the capital stack to finish their projects. And this meticulously created a path for that to occur at Monticello and beyond. And so while it's been slightly delayed at Monticello, we've ended up with a nice carried interest. The project is on a good path to success. And we know that we have other opportunities that would fit into that vertical.

(Operator Instructions) The next question comes from Ian Hunter who's with Hunter Value Capital.

I have 2 questions, if that's okay. The first one is on the first quarter call of 2019, you discussed some expectations of guidance of $18 million to $20 million per -- during 2019 of revenues. And at that time, your pipeline was 200 -- I think $200 million and your backlog was $95 million. Could you discuss a little bit about what happened that caused $25 million project to leave the backlog? And could you discuss the pipeline and what your guidance is for revenues?

Sure. So the -- our revenue recognition and projections were obviously highly correlated with Monticello. And so the delay in Monticello's financing resulted in the delay of revenue recognition. Having said that, we used the time well. And while we were waiting, we were able to get the project up-zoned from 220 units to 302 units, which brings the increase to manufacturing opportunity. So that's the explanation for Q1, believed Monticello would have occurred sooner.

As far as the $25 million commercial kitchen contract, we have taken that out of our backlog due to the client's inability to perform and adhere to their terms under the contract. We have engaged counsel to begin the disengagement process. We have a very active and robust food and food-related pipeline and backlog. So we prefer not to be attached to a nonperformer. And that would speak to the reduction in the backlog.

And the last piece was the pipeline. And while we're not specifically speaking to the size of the pipeline, it is robust. It's spread across projects that are 0 to $5 million and then projects as big as $200 million or opportunities that we're currently looking at or exploring possible ways to collaborate on. The success in the Monticello closing and the financing of that and the acquisition of the land has generated a lot of interests from other developers who are glad to see that occur.

And it sounded like you didn't offer guidance for 2019 to be updated on this call, right?

No. I think -- to clarify what Mahesh said is that in the next 4 quarters, we anticipate recognizing revenue in the $15 million to $20 million range.

Okay. And my last question is just about the cash position. I know you've had a few securities raises in the past few quarters. There were 2 equity raises so far this year. And in December, I think there was a security issuance that had some kind of conversion option that enabled the investor to essentially achieve a bigger economic proportion of the securities to lower the stock falls. And the stock is down from $6 just 19 months ago down to $0.67. So I think I and a lot of investors who have been along for this ride so far are curious to know who is that investor in the securities issued in December that had that conversion. And is there -- we presume they are shorting stock. But could you or any of the other members of the executive team benefit in any way if that entity is shorting the stock?

Mahesh, can I hand that off to you?

Yes, sure. So Ian, thank you for your question. I'm not exactly sure which issuance you're speaking to in December because we did not have any stock issuances in December of last year or conversion thereof. We have 0 debt as of the end of last year and has 0 debt today. We have the 2 secondary offerings, one was in April -- late-April and another one in late July. So that -- specific to the question of the -- what were actually raised in the marketplace, so the question of people shorting the stock, we have been diligent about checking on what the short interest is on the stock, and we don't see a lot of activity in that regard. So it's harder for us to figure out what's going on. Obviously any short of any stock is not good for the shareholders or for the management team for that matter. All our stock options, this is generically for the Board as well employees, everybody's options are significantly higher than the market price of the stock right now.

Okay. I was referring to the prospectus dated December 18 that was for preferred stock and warrants that had conversion options in it that were pretty unattractive for the other shareholders.

So I think what you might be referring to is the shelf registration statement that we filed. And when you file a shelf registration statement, you have to list every conceivable permutation and combination of security you may have to offer. So they're not actually have been offered. They're just a legal way of providing all the options that is available to any organization but is not actually a document that shows any securities that have been actually issued. I just want to make a distinction. It's just a placeholder out there from a registration perspective.

Ian, that wasn't financed. That was a filing that included several different variations of what could occur, and so there wasn't a raise in December of that.

I appreciate the clarification. I think a lot of the investors would appreciate not having any kind of so-called death spiral provisions that can enable a conversion at a more beneficial rate the lower the stock goes. But we're rooting for you, and we hope that you're able to execute on your projects.

Thank you, Ian. And our interests are 100% aligned on that.

(Operator Instructions) There are no more questions at this time. I would like to turn the conference back over to management for any closing remarks.

We'd like to thank everybody for taking time out of their busy schedule to listen to our Q2 2019 earnings call. If there are any follow-up questions that are required, feel free to contact Hayden IR and James Carbonara and Jeff Stanlis, our competent team over at Hayden, and we'd be happy to work with you to provide you with any other information that's legally allowable. We wish everybody a nice end of summer, and we look further -- forward to further communication on our current and future projects. Thank you. Operator?

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.