SG Blocks, Inc. (NASDAQ:SGBX) Q2 2019 Earnings Conference Call August 14, 2019 4:30 PM ET
Jeff Stanlis - Hayden IR
Paul Galvin - CEO
Mahesh Shetty - President and CFO
Conference Call Participants
Ashok Kumar - ThinkEquity
Ian Hunter - Hunter Value Capital
Thank you for standing by. This is the conference operator. Welcome to the SG Blocks Second Quarter Results Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
I’d now like to turn the conference over to Jeff Stanlis with Hayden IR. Please go ahead, sir.
Thank you, Ben and good afternoon. Thank you all for joining us for the SG Blocks’ second quarter 2019 earnings conference call. Your host 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 pm Eastern Time and 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 timelines are dependent on other parties in terms of zoning, permitting, financing, and other variable. Experience has allowed us to adjust our processes and 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 projects in Sullivan County, New York, known as the Monticello project.
As we have previously discussed, multifamily projects go through a series of pre development 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 reputable 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 list entity is the managing member of CPF MF, a Delaware limited liability company, which we anticipate will own the 302 unit multifamily projects 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 of 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 $5.0 [ph] 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 costs 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 capabilities in the areas of manufacturing, procurement 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 believe 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 made meaningful progress towards this goal as well, as we announced a three year strategic alliance with Geis Companies. One of the North America's premier design build company headquartered in Streetsboro, Ohio. Geis will provide construction related services, perform all 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 requirement 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 definitely 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 MBAs Training Academy in Senegal [ph], several projects for the U.S. Navy, a major football in Orlando, ongoing installation of a food park in Greenville, South Carolina, and a New York notable The Terrace, a pop up bar and restaurant, which was delivered and installed on August 10th on PRA 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 engage 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's been no material update on our legacy project 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 school and the 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 cost on contracts in this quarter. We continue to believe that overtime, our gross margins will revert back to a 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 remain 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 or 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 our discussion of adjusted EBITDA and reconciliation on this measure to net loss, the most comparable measure calculator under US 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 or increasing [ph] by decrease in other operating expenses.
Our net loss is 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 cents per basic and diluted share in the first half of 2018. Adjusted EBITDA improved -- adjusted EBITDA loss improved 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 equivalent at June 30, 2019 approximated $174,000 as compared to approximately $1.4 million at December 31, 2018. As of August 5, 2019, we had approximately 6,707,000 shares -- 66,707,791 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 has 9 projects or approximately 205,000,536 square feet in backlog.
Construction backlog at June 30, 2019 included two large contracts, and the amounts of approximately $55 million and $15 million. We believe that barring any delays and 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 quarter of 2019 with no debt, a backlog of approximately $70.8 million, and a promising project pipeline, which we believe positioned SG Blocks for 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 month of Monticello project over the next four quarters through June 30, 2020, we will expect to recognize approximately $13 million in revenue related specifically to the first phase of the Monticello project. For perspective, there is more revenue than we have recognized in any 12-month period in our history and all of that from the first three phases of a single project.
As it relates to 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 approval and building perfect. Subsequently, we will move to procurement and ultimately fabrication and delivery of phase one.
We believe the key challenges are behind us and that's the project appears appear as 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, painful products and services only after we have been paid by our customers. Our model created significant leverage and reduces working capital constraints to growth.
Our focus continues to become cash flow positive, growing our backlog in our pipeline, converting our existing backlog to revenue with consistent and predictable margin and building out the platform to create a one stop shop for our clients. We continue to believe we have a superior product in the marketplace. And the marketplace for our product is enormous.
Mackenzie's 2019 June report indicated that the modular new builds market in the US 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 Block is one of the companies at the forefront of this disruption.
I will now turn the call back to the operator for question.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Ashok Kumar with ThinkEquity. Please go ahead, sir.
Thank you, Paul and Mahesh. The first one is there's a model interest in the $15 million forecasts on your Monticello project? Or should we be looking at for the next six months and then the second half or the second half of the three month period? And can we be modeling the 20% in the model that you are able to take earlier as a normalized rate? Thank you.
Yes, sure. So I 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. But the $13.5 million approximately, from the Monticello project.
And then 20%, would that be the right number on an aggregate basis Mahesh?
We feel comfortable about a 20% margin. Yes, thank you.
Right. Okay. And then the bigger picture is, in terms of the platform, the financing platform in place to support exploratory -- this is of course, a commercial project. And if you could provide us any update their please?
The Monticello project is the template for how certain projects will evolve in our pipeline, meaning there'll be a contribution from the land owner of the land, and then our platform will leverage that to provide the debt and equity. The benefit to SG Blocks and his 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 time for revenue recognition. So, we think it will have several benefits. And it'll work for multiple types of asset classes.
And, again, this will end up being a template calling time to accelerate both projects that we've been putting in the pipeline as well as in a conversion into revenues. Right, this could be potentially have templates Monticello and beyond, getting us extra performance next gen beyond.
Yes, you're correct Ashok. We've -- that's one of the larger maybe the largest barrier for our developers and entrepreneurs is to find the capital stack to finish their projects. And these meticulously created a path for that to occur at Monticello and beyond. And so while it's been slightly delayed at Monticello, we have ended up with a nice carried interest. The project is on a good path for success. And we know that we have other opportunities that would fit into that vertical.
Thank you, Paul and Mahesh. Appreciate it.
Thank you, Ashok.
[Operator instructions] The next question comes from Ian Hunter, who's with Hunter Value Capital. Please go ahead, sir.
Yes, I have two questions, if that's okay. The first one is on the first quarter call of 2019 you discussed some expectation of guidance $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 that $25 million project to leave the backlog? And could you discuss the pipeline and what your guidance is for revenues?
Sure. So it's -- our revenue recognition and projections were obviously highly correlated with Monticello. And so the delay at 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 zone from 220 units to 302 units, which greatly increased the manufacturing opportunity. So that's the explanation for Q1 belief Monticello would have occurred sooner.
As far as $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 pipelines and backlogs. 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 is spread across projects that are zero to $5 million and then projects as big as $200 million or opportunities that were 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 interest from other developers who were glad to see that occur.
Thank you. And it sounded like you didn't offer guidance for 2019 to be updated on this call right?
No, I think to clarify what I have said is that in the next four quarters, we anticipate recognizing revenue in the $15 million to $20 million.
Okay. Thank you. And my last question is just about the cash position. I know you have had few securities raises in the past few quarters. There were few equity raises so far this year. And in December I think there was a security issuance that had some kind of conversion options 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 and a lot of investors who've been along for this ride so far curious to know who is that investor in the securities issued in December that have that conversion? And is there -- presume there shorting a stock, but 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 turn that over to you?
Sure. So Ian thanks for your questions. I'm not exactly sure, which issuance you run rate speaking to in December because we did not have any stock issuances in December of last year or conversion there. We have zero debt as of the end of last year and have zero debt today. We got two security offerings, one was in April, late April and another one in late July.
So specific to the question of what we have actually raised in the marketplace. So the question of people shorting the stock, been diligent about checking on what the short incuses on the stock and we don’t see a lot of activity in that regard. So it is 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 [indiscernible] for the board as well as employees, everybody's options are significantly higher than the market price of the stock right now.
Okay. Thanks Mahesh. I was referring to the prospectus dated December 18 that was for preferred stock and warrants that has conversion options in it that were pretty unattractive for the other shareholders?
So I think what we might be referring to is the ex-shelf registration statement of these file. And when you file a shelf registration statement you have to list every conceivable formatation [ph] and combination of security you have to offer. So they are not actually have been offered yet, it just -- that is just the legal way of providing all the options that is available to any organization, but it's not actually a document that shows any securities that have been actually issued. I just want to make a distinction and just a placeholder out there from a registration perspective.
Okay. Well, I appreciate it.
Yeah, that wasn't -- that wasn't finance that was a filing that included several different variations of what could occur. And so there wasn't raise in December last year.
I appreciate the clarification. I think a lot of investors would appreciate not having any kind of so called debt spiral provisions that can enable a converted -- conversion at a more beneficial rain [ph] the lower the stock goes, but we're waiting for you and we hope that you're able to execute on your projects. Thank you.
Thank you again. And our interests are 100% aligned on that.
Thank you, Ian.
There are no more questions at this time. I'd 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 forward to further communications on our current and future projects. Thank you, operator.
This concludes today's conference call. You may disconnect your lines. Thanks for participating, and have a pleasant day.