Safe & Green Holdings Corp.
Q4 2017 Earnings Call Transcript

Published: 4 Mar 2018

[Operator:]

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.

[Chris Tyson:]

Thank you and good afternoon. I would 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 PM 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 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 base these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial conditions, 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 would like to turn the call over to Paul Galvin. Paul, the floor is yours.

[Paul Galvin:]

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 company, infrastructure companies and low income and workforce housing development. 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’re 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 planning the financial picture of our story in 2018 and beyond. I trust that this call will add more clarity as we have been diligently working with our customers to accept to assess the trajectories per 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 State 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 regulation. We estimate it 36 months from October of 2017 to realize all revenues from these contracts. Based upon conversations with our customers with 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 represents approximately $10 million in revenue in 2018. The balance of our backlog conversion of current pipeline opportunities and new sales will yield approximately $10 million to $15 million in additional revenues during 2018. Our pipeline continues to grow and currently excludes $250 million and represents more than one vertical. Now let’s speak to the fundamentals that have established SG Blocks as a true innovator into this construction industry. Since this is our third conference call as a public company, we believe it’s prudent to give a quick climber 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 been seen little disruption in the last century and according to a recent McKinsey report titled housing affordability, supply side toolkits 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 Block based in Brooklyn, New York has been successfully 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’s history at $77 million as of December 31, 2017 and as of today $104 million up. 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 lows 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, an exclusive relationship with Con Global industry, North America’s largest full-service supplier to the intermodal industry. In April 2017, we were awarded an ESR from the International Code Council and it was the first ever awarded to a recycled building materials and we believe will be a key differentiator as we scale our business to disrupt the conventional construction sector. But the number crunches on today’s call, backlog without the ESR was $0.5 million and backlog with the EFR after seven 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’s 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’m sure, you’ve all seen the effects of Hurricanes, Irma, Harvey and Maria across the country and the Caribbean. What is less known and was highlighted by a recent warrant 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. Baring hurricane, lumber built structures are prone to failure. Containers are strong, resilient, marathon grade structure. It can be stacked nine stories high with the bottom container withstanding weight of over half a million pound. At sea, they withstand lateral and vertical forces that far exceed seismic and hurricane borne wind forces. Our product will be a perfect replacement for many of the commercial and residential structures destroyed in the hurricane and that those regions recover and rebuilt, we hope to win our fare share of the new construction work. 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 escalations that increased over the time and the investments required to build anything in our country. Well in today’s digital economy, standing still is a death sentence. Even more as many of you noticed, how recent wins have been with some very large project developer. 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 in 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 loan. So whether these large project developers could find a solution that reduces their cost of carry by 40% or 50%, a safer, more sustainable and quicker to market. What was something echoed in our hallways six months ago and today it is, can you and how long has reflected in our backlog in $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 Block’s operational performance in 2017, the fourth quarter of 2017 saw increased top line revenue performance and continued project rewards 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 4 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 hope 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 cost in June of 2017 and as part of the public offering, we converted all preferred stock to common stock and a major portion of the debt into the common stock. Our company has no debt. With our new capital and in six short months since our public offering, we partnered with Qur [ph] to develop the premium uniquely tailored seeping experience in a knockout space. We completed a rooftop venue project with a leading national supermarket chain. Installed a container-based green [indiscernible] California-based restructuring facility to install multiple new container-based drop-off location 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 first container-based [indiscernible] movie 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 multimodal building. On the operational front, in 2017, our management team has initiated a PR and optimization to streamline all sales inquiries and business development initiative. Standardized all contracts for proposals and marketing and legal documents and commenced manufacturing capacity expansion discussions with new potential partner. We have also has two notable projects previously announced that are currently wrapping up in the fabrication process and about to be delivered. The whole [ph] of school is approximately 25,000 square feet over three stories in Downtown Los Angeles. The delivery date to the whole [ph] of 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 up office modules for a global leader in the manufacturing of lighting and reading 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 redeployable security station and glass containment system utilizing our container-based structures. It’s premature to go into additional detail at this juncture but suffice us to say, we believe that this product has application in public areas like airport, concerts, cruise terminals, military schools or anywhere law enforcement would want to be [indiscernible] an environment. In summary, the progress made in 2017 on the new backlog, our sales infrastructure and operational improvement coupled with the successful public offering has driven the company to an inflection point. We believe that the investment need 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?

[Mahesh Shetty:]

Thank you, Paul and 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 of 2017. I will therefore limit our prior period comparisons to revenue, cost of revenue and gross profit. The revenue in the fourth quarter of 2017 totaled $2.1 million up 173% compared to $0.6 million in the fourth 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 of 2017 as compared to December 31, 2016. As Paul mentioned earlier, construction backlog totaled $77 million at December 31 of 2017 as compared to $77.1 million at September 30 of 2017 and 500,000 at December 31 of 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 totaled 390,000 square feet of multistory multifamily projects and we fully modular prefabricated and installed. As of December 31, 2017, we had 18 projects for approximately 552,000 square seat in the backlog. Gross profit totaled $237,000 in the fourth quarter of 2017 compared to $60,000 in the fourth 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 and revenue realized from a large contract. In addition this contract was signed at lower margins by the company to establish its competencies in the school and the office verticals and an important reference point for the future. The company typically targets gross margins at 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 increase in construction cost, management expects to leverage the speed of construction and the low cost of modular construction to negotiate better pricing and thereby improve margins. Our operating expenses increased to $1.3 million in the fourth of 2017 from $700,000 in the fourth 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 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 10K through the SEC. Cash at December 31 of 2017 totaled $4.9 million as compared to $0.5 million at December 31 of 2016. The increase in cash balance is primary due to the company successful initial public offering in June of 2017. As of December 31 of 2017, we had approximately 4.3 million basic and diluted shares outstanding. In summary, we expect subsequent quarters to transition from low margin project to a targeted margin of approximately 20%, as we’ve commenced projects that are fully modular and encompass design, architectural engineering, construction and delivery phases. Based upon progress today including a new revenue visibility Paul provided earlier, we expect the company to reach cash flow breakeven in 2018. We have 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 caution in our guidance. We believe that given the asset like nature of our business, we can handle incremental revenue with the relatively modest increase in SG&A expense. We will leverage both 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 create significant leverage and reduces working capital constraints to growth. The company also has approximately $13 million in carry forward operating losses which will reduce the tax burden in future years. The net operating loss carry forwards 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?

[Paul Galvin:]

Thanks Mahesh. The momentum has continued into the first quarter of 2018 where we secured a contract to design and construct a 4 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 will 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 waterfalls on this project during our first quarter 2018 conference call as of March 1, 2018, our construction backlog now stands at $104 million or approximately 738,000 square feet across 18 individual project. We are also seeing momentum on the restaurant and office front in the current quarter. Recently, we announced the contract to design and manufacture 8,000 square feet of office space for Irontek, 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 Green Steel product, the structural corn 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 two 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 reward, 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 would like to open up the call to questions from our listeners. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question is with [indiscernible] with BMO Capital. Please proceed with your question.

[Unidentified Analyst:]

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

[Mahesh Shetty:]

That is the approximately, right. Yes.

[Unidentified Analyst:]

Okay so that’s 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?

[Mahesh Shetty:]

The previous quarter if you look at on a pure cash basis that’s about $555,000, so it’s not actually double, the run-rate that we expect going forward is going to be approximately between $700,000 to $800,000 depending on addition of cap etcetera but that’s a good number to use as a run rate.

[Unidentified Analyst:]

Okay. And then the line below that marketing and business development expense tripled to $148,000 or $149,000 from 56 in the prior quarter. Is that a decent estimate of what they are going to be?

[Mahesh Shetty:]

I was actually answering your 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.

[Unidentified Analyst:]

So that’s the three line items that’s G&A, marketing and three projects or just the two line items.

[Mahesh Shetty:]

No the three line items.

[Unidentified Analyst:]

So that includes three project expenses.

[Mahesh Shetty:]

Yes sir.

[Unidentified Analyst:]

So then payroll and related expenses was $428,000. Is that a decent proxy for next year or that have to go up as you hire more people?

[Mahesh Shetty:]

It will grow 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 and marketing expense, we expect the total run rate to be between $700,000 and $800,000 per quarter.

[Unidentified Analyst:]

Okay. I am looking at four line items, which one are you not including in that $700,000 to $800,000 per quarter

[Mahesh Shetty:]

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.

[Unidentified Analyst:]

Okay, so they are $1.3 million in the fourth quarter, right.

[Mahesh Shetty:]

Correct.

[Unidentified Analyst:]

So that’s not a good number for next year if I just annualize that. Are you saying that’s actually a little bit too high?

[Mahesh Shetty:]

I am talking on an adjusted basis if you carve out the amortization expense and if you carve out the stock option expense that’s the run rate I am referring to.

[Unidentified Analyst:]

Okay, there were stock option expenses in the third and the fourth quarter, correct that are sort of one-time in nature?

[Mahesh Shetty:]

In the fourth quarter, we had onetime in nature of $254,000 was related to our 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 with the one-time stock option expense, it may not be a recovering item going forward.

[Unidentified Analyst:]

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

[Mahesh Shetty:]

It is actually $440,000 from the stock comp option expense in the third quarter.

[Unidentified Analyst:]

I think, 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?

[Mahesh Shetty:]

I will let Paul address the question. Paul?

[Paul Galvin:]

So we currently have the 15 locations from Con Global to procure containers into hard 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. As it is the key within six months of going public and having $250 million of pending bid, 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 streamline our manufacturing process because we believe there is more margin for the company at the end of that process.

[Unidentified Analyst:]

Okay. So what if I hear you 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?

[Paul Galvin:]

Correct.

[Unidentified Analyst:]

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

[Paul Galvin:]

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 who accompanies that developed real estate. So in our estimation, we can show we have good delivery people is a way to keep that business coming in obviously as we have chosen us to do some large projects, they are taking us into their pipeline we believe. So all we should do on those cases is deliver. We are opportunistically looking for the right personality fix and the right entrepreneurial spirit on the sales side. But with the keen we have now, we – 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 in some way are the new sales people 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 now moved out any possible way to secure revenue, secure margins and increase shareholder value.

[Unidentified Analyst:]

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 report as to backlog that has not actually got to the finish line. In other words, backlog that you – you had a backlog but fell off.

[Paul Galvin:]

Right now, our backlog has been cohesive for the time we have been speaking to the public markets and nothing has falling 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 brave in delivering these projects that have 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 big. And so that includes converting some of the $250 million of that pipeline. I think it’s 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 fees at 5% of that $77 million which will be earned and 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 focusing on increasing margins. Our business model continues to work. We don’t finance our customer’s 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 to your question.

[Operator:]

Our next question is with Charles Danca with Joseph Gunnar. Please proceed with your question

[Unidentified Analyst:]

Hi guys. It’s [indiscernible] I am on Charlie’s line over here. How is everything?

[Paul Galvin:]

Very good.

[Unidentified Analyst:]

Very pleased with you guys so far as an investor. I do appreciate the way that you break down the revenue expectations. Just a couple of questions. But 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?

[Paul Galvin:]

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

[Unidentified Analyst:]

Okay. And that’s pretty much what we kind of have on the books already, okay. I guess, the question I have is based on your pipeline. Historically, what would you say like the percentage of in the – 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.

[Paul Galvin:]

It depends on asset class. It’s 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 5 or 6 months and we are feeling really good that the pipeline people that may or may not come with us are going to be SG Block’s clients at some point because in order to get involved in our system even to a value bid, this is an amount of commitment and intellectual capital and I will just leave that as a context of the bids that we submit.

[Unidentified Analyst:]

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 it on with lower margins for the last couple of quarters but how close are we to getting to the 20% or higher margins?

[Paul Galvin:]

Mahesh if I 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 Block and that if and when we find program partners people that will engage us to a multiple sites with projects or programs, at that point, we would consider discount pricing for clear guaranteed visibility. But that’s my understanding of what we have out there now and what’s pending. Mahesh, can you just verify that.

[Mahesh Shetty:]

That is accurate, Paul. And that’s exactly what we do. All updates that we go out is reviewed before it goes out and all of them are at a minimum of 20%

[Unidentified Analyst:]

Okay, thanks again guys, good job.

[Mahesh Shetty:]

Thank you.

[Operator:]

Our next question is with Daniel Carlson with Tailwinds Research. Please proceed with your question

[Daniel Carlson:]

Hi guys, thanks for taking my questions. Just want to touch base on what you mentioned a little bit earlier which is the opportunity what has been a large natural disaster to go in and do a large program. So I am wondering if you can talk about that opportunity. Are there any RFPs out there and what sort of the timeline is the process is to you winning something that’s the major system wide rebuilt. Can you talk about that?

[Paul Galvin:]

Sure. And so we were building our response for our natural disasters as we can now go in public in August because it’s a little slow in August and low and behold this season got to be really one of the worst. It’s a very vibrant sector for us. We are routinely contacted by governmental agencies, developers, foreign contractors, subcontractors some of that type of work is reflected in our pipeline and bids inside that pipeline and will 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 island, sanitation and sewage on some of the islands are the precursor to the awards. 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.

[Daniel Carlson:]

Okay, thanks. And then I am also just curious about expectants of what you are doing in terms of container, modular design and 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.

[Paul Galvin:]

We are in the middle of that now. So that’s the inflection point you referenced in the pre-recorded script which is without the ERS number which was the little old 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 a quarter of a billion dollars 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’s 90%, 95% of modular construction is wood. Our buildings are stronger and better. Ours always ship on flatbed and our intermodal can 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, separate claims and be moved around, has disaster solutions are implemented are safe.

[Daniel Carlson:]

Thanks guys, keep up the good work. Appreciate it.

[Operator:]

Our next question is with [indiscernible], Private Investor. Please proceed with your question.

[Unidentified Analyst:]

Thanks for doing such a good and detailed call. Couple of questions just to make sure, do correct me. You mentioned 1 million square feet of capacity today. Is that correct? You have 1 million square feet of manufacturing capacity right now?

[Paul Galvin:]

Correct.

[Unidentified Analyst:]

And so the backlog deal represents – what did they represent in total square feet?

[Paul Galvin:]

It’s just the number is 738,000 square feet.

[Unidentified Analyst:]

Okay. That one I had in my note. That’s going to be over the course of three years, so you have no capacity constraint anytime soon if I am not mistaken and you are just building incremental capacity because you see a lot of deals coming your way.

[Mahesh Shetty:]

Correct. That – the $250 million in pending bids represent significant square footage as well. A number we are not quantifying because 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 the front of any kind of manufacturing issues and that’s what we are doing.

[Paul Galvin:]

Some of the quarter situation, yes some of that pipeline closes real quick what we don’t want to be quite standing still.

[Unidentified Analyst:]

So speaking of pipeline closing quick, how long does it usually taking from a bid hitting your desk to – I mean, sorry, a deal hitting your desk. You said they are coming to you to actually getting a bid out and then or a response on that RFP.

[Paul Galvin:]

That is a great question. I can contextualize it in that. Usually, we will know one way or another if we 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 maybe then 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. It’s – and that’s – it is just our strategy to continue to sign up a combination of near term opportunities and the larger opportunities. It’s important to note on the larger opportunity, this industry knowledge that the A&E fees, the design fees of a project is anywhere from 5% to 6%. So if you look at our pipeline and our backlog that 5% even though it’s not as much money as actually building the structures when we get to the fabrication fees that is a significant revenue incentive for the company. Mahesh and I have tried ourselves on speaking to a lot of investors on 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 in our business. So we appreciate your attendance on the call and we appreciate your question. Is there anything else?

[Unidentified Analyst:]

Yes. I have a couple of more if that’s okay.

[Paul Galvin:]

Yes go ahead.

[Unidentified Analyst:]

Great, thanks. Since you mentioned the design phase, I am wondering when you are billing to your client, 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 towards the month end of it.

[Paul Galvin:]

So, the A&E fees 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 stop 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 by supplies and material phase and then there is type work and then assembly of the modules. So based on feedback that we have got consistently from our shareholders, we wanted to provide some clear visibility from pipeline [indiscernible]

[Mahesh Shetty:]

Hi, Paul. Can I jump in? Mitch to add to echo what Paul said, when we bill out to customers, we do it about 30% to 40% depending on the contract upfront and then we build them on a percentage of completion basis. Our payments 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’s exactly why our operating leverage is so great because we don’t extend working capital on actual projects. The working capital is supplied to us via customer.

[Unidentified Analyst:]

Got it. That’s great to hear. And I am sure I was going to ask you about that line on the balance sheet. So the – with regards to the – I think you call it backlog. I don’t have it in front of me right now. But the backlog number is $250 million, right.

[Paul Galvin:]

Pipeline.

[Unidentified Analyst:]

Pipeline, okay.

[Paul Galvin:]

I just want to explain the difference between backlog and pipeline, there is no deal [ph] outstanding.

[Mahesh Shetty:]

So the backlog is actual contract assigned, pipeline is deals that we are working on. We don’t call it a pipeline until it’s – 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 pursuit where the backlog is actual contracts that have already been signed.

[Unidentified Analyst:]

Great. So with regards to the pipeline, those are actually pending bids, right?

[Mahesh Shetty:]

Correct.

[Unidentified Analyst:]

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

[Mahesh Shetty:]

At the end of September, I don’t have a number right now. But I can’t give you an exact number, Mitch. But I can circle around with you and give you that number.

[Unidentified Analyst:]

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

[Mahesh Shetty:]

The $250 million was at the end of December. Our pipeline number is greater right now but we are guiding on $250 million.

[Unidentified Analyst:]

Got it, okay. And then just the last question. The way I read your guidance or 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 deal and then another into 2020 so called 15 at the midpoint from the – I would say, did you say 10 to 15. I think you said 10 to 15. So that will be $20.5 million to $25 million in revenue guidance for the year based solely on current business that you have visibility into as the person that might be signed and done later in the year.

[Mahesh Shetty:]

That is correct.

[Unidentified Analyst:]

Okay and then with the breakeven for the year, you expect to be cash flow positive for the year. Would you anticipate that as recurring in Q3, Q4?

[Mahesh Shetty:]

Mitch, I would like to give you specific guidance but part of our challenge which – what we had given our guidance at third quarter that we will be cash flow positive this year, and as we are finding out, our processes of manufacturing are always ahead of the site work being completed. So we have to be cognizant of what our 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.

[Unidentified Analyst:]

Great, thanks a lot. Good job.

[Operator:]

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. And now I would like to turn the call back over to Paul Galvin for closing remarks.

[Paul Galvin:]

Thank you. Thank you, Chris. We want to thank everybody for joining us on today’s call. We have many dedicated and hardworking people throughout our company from our sales and marketing staff and commercial business development folks to our architectural and engineering and manufacturing partners who keep our container-based solution constantly arising. A sincere thanks from management to all of you. We could not be doing this without you. Well actually if we were unable to address any of your question. If additional questions arise after the session, we are going to miss these. 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 working jointly with Chris and making sure you get the information that you need. So thank you very much, turn it back to the operator.

[Operator:]

This concludes today’s teleconference. You may disconnect the lines at this time. Thank you for your participation.