Safe & Green Holdings Corp.
Q4 2018 Earnings Call Transcript

Published: 29 Mar 2019

[Operator:]

Good day, and welcome to the SG Blocks Fourth Quarter and Full Year 2018 Conference Call and Webcast. Today's conference call is being recorded. At this time, I'd like to turn the conference over to Mr. Chris Tyson, Managing Director of MZ North America. Sir, please go ahead.

[Chris Tyson:]

Thank you, and good afternoon. I'd like to thank you all for taking time to join us for the SG Blocks' Fourth Quarter and Full Year 2018 Conference Call. Your host today are Mr. Paul Galvin, Chief Executive officers; 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 across the wire this afternoon at 4

[Paul Galvin:]

Thank you, Chris, and welcome to the SG Blocks' fourth quarter and full year 2018 financial results conference call. During this call, we want to first address the four main items that we believe are of interest to our shareholders. One, legacy project in Los Angeles. The delivery of the school project has been negatively impacted by several factors that have delayed the completion and increased our costs. Conditions at the site did not allow for SGB to complete our scope of work. We worked diligently with our customer to solve this problem, though each passing month added its cost overruns. And in abundance of caution, we have chosen to recognize a loss of approximately $850,000 on the contract and also reserve $779,000 for amounts owed to us by the client. In parallel, we have taken actions to recover our losses and will keep you informed as we receive notice on that front. This is our last legacy project, a project that we signed when we first emerged from bankruptcy over three years ago. We made accommodations for the customers and systems on purpose-built structures, when a container-friendly design would have been economical and faster. And we did not drew a line, understand quickly enough when it was obvious the delays caused escalations in costs. While this has been painful, it has also been an enormous learning experience for the Company. The skills and the knowledge we gained during the process has helped shortened the technological edge we have in the marketplace and we look forward to resolution with our clients in the near future. Two, pace of revenue recognition on large contracts and backlog. Our larger projects are predominantly multistory, multifamily and elevated construction of a substantial size and scope. The pre-development of these projects by the customers has taken longer than anticipated and partly caused the entitlement and the approval processes have their own life cycle. We now have been more skeptical of the time lines provided to us before we can tell to you, our shareholders, the revenue conversion timelines last year. The process has allowed us to educate lenders and investors and while painful, we believe it has helped solidify our role as market leader in socializing the adoption of our technology. Keeping in line with our pragmatic approach to larger deals, we have taken a site contract for $27.5 million out of our backlog and have moved it into our pipeline subject to the developer completing a highest and best use analysis on the subject property. We will keep you informed as we get clarity on the type of project this becomes. Our going-forward solution in expediting revenue conversion is to establish a debt and equity platform for our clients. We have been working on this for some time and we will have an update on that issue later in the call. Three, current share price. As indicated in our filing, sales of a substantial number of our common stock in the public market, while the perception that, that might occur, could cause the price of our common stock to decline. Recently, we are seeing an abnormal increase in our trading volume, and we believe that, that selling is behind us. Four, cash position and possible capital raise. We have consistently heard concerns from our loyal shareholders about their fear of an excessively dilutive round of capital. We also hear concerns from our customers about cash on our books and our ability to perform contractual obligations, in particular on large projects. We believe our operating model gives us the ability to operate with negative working capital. However, we are sensitive to these concerns and we will be careful and structure any potential raise mindful of dilution, 2018 progress. Next I would like to report on the progress we made in 2018. Our gross revenue of $8.2 million represents a 62% increase year-over-year. Our gross margins, including the loss on the large legacy contract was 6.6%, as the normalizing the margins for the loss recognized on our large contract, our annual gross margins on other contracts were approximately 27%. While we are not projecting that going forward, the progress in our value engineering and supply chain has been solid. We ended 2018 with 14 projects totaling 718,336 square feet and $97.7 million in backlog, our business model. In 2018, we made great strides in deepening and widening our platform. We have developed relationships with national general contractors with bonding capacity, new architect and engineering firms to add to design capacity and assist in new product ideation and new manufacturing partners to expand our manufacturing capacity and to develop a vertically integrated platform. Initiate a new quality control measures with key supply chain and manufacturing partners to expedite backlog conversion, identify product development initiatives that we believe will further enhance the speed and quality of our modular solutions and allow us to provide a better price for our customers. And finally, working with potential credit and equity partners to fund projects in our pipeline and our backlog that will enable our customers to fund their projects from one source, our platform, and reduce the time from project announcement to project commencement. Our customers. We have organically densified our customer base around core markets and they are as follows

[Mahesh Shetty:]

Thank you, Paul. Revenue in the fourth quarter of 2019 increased 9.6% to $2.3 million compared to $2.1 million in the fourth quarter of 2017. The revenue for the full year 2018 totaled $8.2 million, an increase of 61.8% compared to $5.1 million in the full year of 2017. 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, 2018 as compared to the prior year. The Company completed or are at under construction 27 different projects in 2018. Revenue in 2018 included $2.7 million from a work-in-progress on our legacy contract in the amount of approximately $6.1 million. Gross profit totaled approximately $123,000 in the fourth quarter of 2018 as compared to $237,000 in the fourth quarter of 2017. Gross profit as a margin of -- as a percentage of revenue decreased to 5.4% in the fourth quarter of 2018 as compared to 11.5% in the fourth quarter of 2017. Gross profit for the full year of 2018 totaled $543,000, a decrease of 14.4% compared to $634,000 in 2017. Gross profit margin as a percentage of revenue totaled 6.6% in the full year of 2018 as compared to an approximately 12.5% in 2017. Gross profit margin for the 3 and 12 months ended December 31 of 2018 was negatively impacted by increased cost of $800,000 on a contract of approximately $6.1 million, which resulted in a negative 31% gross margin on that contract. Gross profit margin when normalized for the loss on the $6.1 million contract, increased to 27% in Q4 of 2018 and 25% for the entire calendar year of 2018. We believe that margins will revert back to our previous guidance of 20% on most contracts. On larger contracts, it can potentially result in recurring revenue the Company may like to take lower margins. Operating expenses increased to $2.3 million in Q4 of 2018 from $1.3 million in Q4 of 2017. Operating expenses in the full year of 2018 totaled $5.4 million, an increase of $1.5 million or 38% as compared to $3.9 million in 2017. The increase in operating expenses for 3 and 12 months ended December 31, 2018, was primarily due to increase in personnel costs, increased marketing and business development expense and a bad debt expense of $779,000 related to the write-down of receivable on a legacy contract of $6.1 million. Net loss totaled $1.8 million or $0.43 per basic and diluted share in Q4 of 2018 compared to a net loss of $1.1 million or $0.46 per basic and diluted share in Q4 of 2017. Net loss for the full year of 2018 totaled $4.8 million or $1.14 per basic and diluted share, an increase of 7% as compared to a loss of $4.5 million or $1.95 per basic and diluted share for 2017. Adjusted EBITDA loss increased to $1.6 million in Q4 of 2018 from $0.6 million in Q4 of 2017. Adjusted EBITDA loss for the full year 2018 totaled $3.9 million as compared to $1.7 million for 2017. Please see today's press release 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. Cash at December 31, 2018 totaled $1.4 million as compared to $2.9 million at September 30, 2018 and $4.9 million at December 31, 2017. The Company believes there is sufficient cash balance and accounts receivable to meet its current obligations. As Paul discussed earlier, we are sensitive to shareholder concerns about dilution as well as customer concerns about our liquidity. In tandem, the Company has made progress on developing a debt equity platform that allows deals in our pipeline to get funded within the platform and potentially result in accretive earnings to our shareholders. We expect to provide a comprehensive update during our first quarter 2019 conference call on this potentially transformative development. As of March 20, 2019, we had approximately 4.26 million shares, basic and diluted shares outstanding. The Company also has approximately $10 million in carryforward operating losses, which will reduce our tax burden in future years. The net operating loss expires in 2037. The Company's net operating loss carry forward maybe subject to annual limitations. As Paul mentioned earlier, construction backlog totaled $97.7 million at December 31, 2018 compared to $76.7 million at December 31, 2017. As of December 31, 2018, the Company had 14 projects or approximately 718,000 square feet in backlog. Construction backlog at December 31, 2018 included three large contracts in the amounts of $55 million, $15 million and $25 million, respectively. The $25 million contract is spread over 20-plus locations. The Company believes that these projects are fully funded, and barring any delays and site approvals and site-related construction, should all convert to revenue by June 30, 2021. We believe that given the asset-light nature of our business model, we can handle incremental revenue with a relatively modest increase in general and administrative expenses. We leveraged both inventory and labor on our supplier's balance sheet, and in most cases, pay for products and services only after we have been paid by the customer. Our model creates significant lever and it reduces working capital constraints to growth. We ended the year 2018 with no debt, backlog of $97.7 million and a promising project of pipeline of over $200 million, positioning SG Blocks for significant financial performance in 2019 and beyond. I'll now turn the call back over to Paul. Paul?

[Paul Galvin:]

Thanks, Mahesh. During 2019, our focus will be laser-like on, a, becoming and maintaining cash flow positive; continuing to grow our backlog; and converting our pipeline into backlog and to convert our backlog to revenue with consistent margins. We believe the combined impact of our initiatives begun in 2018 will further our ability to deliver better quality and economical product compared to conventional construction. We anticipate we will be able to deliver notable revenue growth in the quarters to come as our pipeline of opportunities that spans at over $200 million, with multifamily residential, humanitarian residential, education and hospitality, both in the U.S. and abroad. We have realigned our operational structure to focus resources on quicker conversion of opportunities in the food and beverage and single-family house residential sectors. I look forward to sharing more on our developing story at upcoming institutional investor conferences to be announced in the month of May. At this time, I'd like to open up the call to questions from our listeners. Operator?

[Operator:]

[Operator Instructions] Our first question comes from the line of Gerry Sweeney with Roth Capital. Please proceed with your question.

[Gerry Sweeney:]

So I apologize I got some noise in the background, but just a couple of questions from the backlog. You mentioned the $55 million, $15 million and a $25 million project. Is that $25 million, is that the hospitality project? And if that is, how does that sort of shape out between '19, '20, and 21? Any -- can you give a little bit more detail on how that's going to work through?

[Mahesh Shetty:]

Sure. So that project of $25 million is spread over 20 locations. We expect between 5 and 8 locations this year and the balance to be next year in 2020.

[Gerry Sweeney:]

And then I believe the $55 million project, that's the larger one. I don't know if worker housing is the right term for it? But I think, it's somewhere in the state of New York. But what are the next sort of steps to moving that forward? It sounded like you got the environmental and feasibility studies, maybe some -- the path forward with that business and maybe talk about that a little bit?

[Mahesh Shetty:]

Sure. We completed our market study, which is essentially is a validation of the rental rates used in the model. The next step is completing the -- we are expecting to get a term sheet on the financing over the next 15 to 30 days, at which point of time, we'll be able to officially start the second stage of the design process. And then shortly thereafter, about 90 days thereafter you'd be able to actually start construction or that site work in that -- of the project.

[Gerry Sweeney:]

And then just a final one for me. Obviously, there's two projects that are kind of moving along. But earlier this year, you announced your collaboration with Grimshaw, a big global architectural firm. Any movement on that front? And maybe what we can look forward to coming from them?

[Paul Galvin:]

Yes, Mahesh, I can answer that one. So we are -- our relationship with Grimshaw has three components to it. They've introduced us to some of their pipeline of opportunities for developments that can be contemplated that hadn't done modular. The second is, we've introduced some of our pipeline and our backlog and they are going to be able to provide schematic design brand of buildings with SG Blocks. And third, we are creating a repository of plug-and-play boxes, such as bathrooms and server rooms and electrical discharge rooms that the Grimshaw design team can plug-and-play into any of their traditional projects. So that's the effort with Grimshaw to date.

[Gerry Sweeney:]

Okay. I mean, that plug-and-play, that's -- that sounds pretty interesting, I mean, just from our work with some other construction companies, like the modular network and that is, I think, evolving. Any sort of hits on that? Or how does that sort of move from the design process to getting maybe integrated into some actual work?

[Paul Galvin:]

Yes, it's a good question. Concretely within 45 days, we plan on having a whole catalog of priced products available for the marketplace so that Grimshaw, who has approximately 500 industrial designers. Whenever they're doing their large infrastructure projects, these boxes can agnostically be plugged and played, shifting high-wage environment construction to offsite, so we can help bring down in green traditional construction this catalog of infrastructure boxes.

[Operator:]

Our next question comes from the line of David Levine with Triple Research [ph]. Please proceed with your question.

[Unidentified Analyst:]

Paul, did you say -- sometimes we have a hard time riding when -- I don't like to ask them. So did you say that you're expecting 2019, provided some guidance of $18 million to $20 million. Is that right?

[Paul Galvin:]

Correct.

[Unidentified Analyst:]

Okay. But as I'm reading the release, it says that you expect the backlog to realize $22.6 million of the backlog in '19. So is that -- is the latter -- I'm trying to reconcile the 2, I guess.

[Paul Galvin:]

It's a range that could be extended upward slightly based upon commitments from clients and underwriting of projects. That's the anticipated range for 2019.

[Unidentified Analyst:]

Okay. So as you move forward, you have the products -- the projects in the pipeline, obviously, that are going to rollout as they're going to rollout. But as you add new projects to the pipeline, are there projects that you will add to the pipeline, let's just say, maybe on the residential side, where those projects will be realized even before a project that's in the pipeline right now? Or is it everything sort of go in first in, first out or is it -- because if you're going to recognize $20 million, hypothetically $22 million of the backlog in 2019, is it conceivable though that you could add new projects that would contribute additional revenue to 2019 because they get finished before others?

[Paul Galvin:]

That's a fair statement. The revenue number we gave is connected to existing contracts in our backlog and doesn't contemplate the conversion of any pipeline into new business. We announced the three kind of organic verticals we find ourselves in, which would be the hospitality and food business, military business and single-family house-type business. Those are traditionally much faster in turnaround time than the $55 million project sits on over 16 acres and will be 6 or 7 structures. That's just a more complex process. But when it's achieved, it will bring great revenue and margins to the Company. The other business has the potential to be signed and delivered within periods or between quarters and that's happened in the past. And we anticipate no reason why that would stop. But in the absence of having it in hand right now, we're just not going to put it out there.

[Operator:]

[Operator Instructions] Our next question comes from the line of Ashok Kumar with ThinkEquity. Please proceed with your question.

[Ashok Kumar:]

Just first question is on the backlog. So the sequential decline in backlog from September level to $103 million, so you added $25 million in contract in December. Would that imply $30 million of drawdown from backlog to revenue in the fourth quarter. Is that the right math?

[Mahesh Shetty:]

Go ahead, Paul.

[Paul Galvin:]

No. Go ahead Mahesh.

[Mahesh Shetty:]

Ashok, it is very simple. We had a contract of $27.5 million. We are working with a developer to determine the highest and best use. And we didn't have visibility into the timing of that process. Therefore, we pulled that into our pipeline. The contract we still have the signed contract. We're just waiting for visibility before we put that back in the backlog.

[Ashok Kumar:]

Okay. But overall, basically, in terms of conversion of some of the backlog to revenue was one of the reasons why you had a sequential decline in backlog, right, December over September?

[Paul Galvin:]

Yes. With earned revenue and the return of one project whose scope and size may change back into the pipeline until we have some clarity on that and can reassert it.

[Ashok Kumar:]

The second question is a bigger picture, you talk about lessons learned in 2018. I was wondering what are the quality fixes you have put in place? I think one of the primary issues has been your customers have consistent been too optimistic on when the approvals will be completed. And so -- I mean you have taken to accepting your customers is a subject matter experts, right, when they aren't. And so what are the permanent fixes you have in place to not have a repeat of the project failure?

[Paul Galvin:]

Mahesh, why don't you address some of the platform delivery changes? And then we can discuss the financing element, which is going to be the biggest catalyst. But there have been some changes made on the delivery side. Now let Mahesh describe those.

[Mahesh Shetty:]

Yes. Ashok, so there's three different factors on each particular project. One is obviously related to the customer themselves and the preparation of the site depending on the project. Number two, the production schedule, which is dependent on the visibility to the construction schedule and because that -- it becomes a very sensitive schedule, we have to be in sync. And Number three, the actual install at the site itself. So what we had done, both on the manufacturing side, we have improved the level of quality. We have a person permanently on the manufacturing facility to monitor the product going out. And this is in addition to a third-party inspector, which is always inspecting our product before it is shipped out. So this is an additional layer of protection for the Company. On the site itself you get more involved in the site construction schedule, so we can sync up the delivery of our product into the site only after the site is completed and we have complete visibility to the install process. And then finally, we have in the middle Scott Hill here, we hired an architect who has -- probably has, in addition to the dense calendar that we have in the modular space, Scott Hill is one of the few guys in the country who has actually built a hotel in Manhattan, a modular hotel in Manhattan. So we have really increased the density of the skill on our side in order to make sure that we are questioning and challenging every project that comes in the way to ensure the customer is being held accountable for what they need to do before we start shipping out the product.

[Paul Galvin:]

Just to piggyback on Mahesh for one moment. The majority of our commercial clients are fully funded when they get to us, and it's just on some of these developments with our new technology that we've had to provide and assist in the capital markets. And the systemic cure is to become a closed business system by having on our platform the debt and equity that landowners need to finish their properties underwritten by the same people who are going to be working with us on all our projects. So that there is no learning curve and there is no getting local banks up to speed and that the gating item for permitting was eliminated with our ESR number, and then the last obstacle for our entrepreneurial developers were mainly financial support is to feed them from the platform. And I think that has a very potentially transformative event and will certainly reduce the time between announcement and movements.

[Ashok Kumar:]

So pardon, Mahesh, again, this equity development platform, right, is a transformative event for the Company as indicated. So this is going to be primarily targeted towards the entrepreneurial project as opposed to the commercial projects, right, and helping enable transition the pipeline quicker to backlog?

[Mahesh Shetty:]

Yes.

[Ashok Kumar:]

And one other housekeeping actually -- go ahead, please.

[Paul Galvin:]

Yes, that's -- we're working on that, and Mahesh and I hope to have news for that in the near future.

[Ashok Kumar:]

And one last question on the -- just the whole large project, just housekeeping, right, earlier you had mentioned about cost escalation in the first half of last year, 2018. Because you seem, at this point, to put this project behind, so that cost escalation will essentially be absorbed by the Company so that you can just move forward with the opportunities on hand?

[Mahesh Shetty:]

Ashok, that is correct. We've already taken the charge on it. So, we've taken it, so that's already reflected in the financials.

[Operator:]

Ladies and gentlemen, at this time, this concludes our question-and-answer session. And I'd like to turn the call back over to Mr. Paul Galvin for his closing remarks.

[Paul Galvin:]

Thank you, Devin, and thank you to everyone for joining us on our call today. We have many dedicated and hard-working people throughout the Company and its ecosystem, from our sales, marketing, international and business development folks to architects and engineers and manufacturing partners, who keep our container-based solution constantly evolving. It's a sincere thanks from all of us. We could not do it without you. Lastly, if we were not able to address all of your questions today, please feel free to contact us or our Investor Relations firm, MZ Group, we'd be happy to answer them or facilitate a call. We look forward to speaking with you on first quarter 2019 financial results at the appropriate time. So, thank you, and everybody have a nice evening.

[Operator:]

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.