SG Blocks, Inc. (NASDAQ:SGBX) Q4 2022 Earnings Call Transcript March 29, 2023
Operator: Greetings, welcome to the Fourth Quarter and Year-End 2022 Conference Call. At this time, all participants are in a listen-only mode. Please note this conference is being recorded. I will now turn the conference over to your host, David Waldman. You may begin.
David Waldman: Good afternoon, and thank you, for joining Safe & Green’s fourth quarter 2022 conference call and business update. On the call with us today is Paul Galvin, Chairman and Chief Executive Officer of Safe & Green and Christopher Gagliardi, Senior Accounting Consultant. Earlier today, the Company announced its operating results for the quarter ended December 31, 2022. The press release is posted on the Company’s website www.safeandgreenholdings.com. In addition, the Company plans to file its Annual Report on Form 10-K with U.S. Securities and Exchange Commission, which will be accessible on the Company’s website as well as the SEC’s website at www.sec.gov. If you have any questions after the call, I would like to arrange a one-on-one discussion with Mr. Galvin.
Following the call, please contact Crescendo Communications at (212) 671-1020. Before I turn the call over to Paul, please remember that various remarks about future expectations, plans, and prospects made on today’s call constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Safe & Green cautions that these forward-looking statements are subject to risks and uncertainties that may cause their actual results to differ materially from those indicated including risks described in the Company’s filings with the SEC. These forward-looking statements are subject to a number of risks and uncertainties, which are described in the Company’s filings with the SEC.
Any forward-looking statements made on this conference call speak only as of today’s date, Wednesday, March 29, 2023. Safe & Green does not intend to update any of these forward-looking statements to reflect events or circumstances that occur after today. With that being said, I am now pleased to introduce Paul Galvin, Chairman and CEO of Safe & Green. Paul, please go ahead.
Paul Galvin: Thank you, David. Good afternoon, and thank you, to everyone for joining us today. On behalf of the Safe & Green team, I would like to take a moment to thank our investors for your tremendous support and confidence on our vision. We are committed to realizing our objectives and driving sustainable long-term value for our shareholders. The company underwent a transformation in 2022 that led to an almost five-fold rise in construction services revenue during the fourth quarter as compared to the fourth quarter of 2021. Initially, the company’s main focus was on creating and delivering advanced and eco-friendly structures crafted from sophisticated cargo shipping containers. However, in response to the COVID-19 pandemic, we efficiently pivoted our business model to offer modular labs.
Our decision to pivot during the pandemic proved to be the correct one, generating significant revenue and affirming the effectiveness of our business model. With the pandemic now waning, we have successfully transitioned back to our core competencies and have evolved into a vertically integrated developer and manufacturer of modular structures. Additionally, we are focusing on four key verticals, including a nimble medical sector, each of which we believe will drive our long-term revenue growth and profitability. Our construction pipeline grows surpassing $800 million. We are more confident than ever that there is vast untapped potential in the multi-billion dollar industry in which we operate. We believe that our distinct competitive advantage in terms of pricing and speed-to-market stems from the vertical integration of our business where in-house manufacturing allows us to fill our factories with our own work.
Furthermore, we are confident that this approach will lead to significant margin expansion given the proprietary technologies and processes we have developed. The progress in each of our four key verticals has been rapid and substantial. In particular, our manufacturing segment, SG Echo is experiencing robust demand from a wide range of customers, as well as internal development projects. With our recent acquisition and subsequent investment into our Durant, Oklahoma manufacturing headquarters plans to open the Waldron manufacturing facility in Q2 2023, as well as our planned St. Marys manufacturing facility, we expect to have total capacity of over $150 million of revenue on an annualized basis. Additionally, we are leveraging this capacity by manufacturing 800 residential units for SG DevCo’s Magnolia Gardens project, which alone is expected to generate $130 million in additional manufacturing revenue.
SG Echo has also received a series of purchase orders, which expand upon our relationship with a large private client providing one of the most meaningful contracts to date for SG Echo. Most recently, the client, which operates within the logistics and infrastructure sector, has signed additional purchase orders for 90 trailers. This is the fourth order in a series of orders with this client with more anticipated to follow for the coming year 2023. The expected total price from the units from the purchase orders received than expected from this client currently sits at approximately $11.5 million. Given the fixed-cost nature of this business, we anticipate gross margins exceeding 15% and its significant operating profits as we optimize throughput and utilization of our factories.
In fact, this segment is on track to achieve positive cash flow in 2023, marking an important inflection point within a relatively short timeframe. Safe & Green Medical, our medical vertical is focused on establishing a sustainable and long-term business model by capitalizing on the rising demand for local point-of-care medical services, particularly in underserved communities. As the COVID-19 pandemic wanes, we intend to create a national footprint of various clinics and labs, designed to fit local needs. The point-of-care diagnostics market is projected to grow to over $51 billion by 2029 from $36 billion in 2022, providing ample opportunities for growth. We believe we can generate $5 million in annual gross revenue from each distinct medical site, not including the value of assets and data collection.
As evidence of our early success, we recently announced plans to deliver four full mobile medical modules, consisting of one testing module, one CLIA lab facility module and two primary care modules, to The Peoples Health Care, which will provide Teamsters Local 848 with point-of-care medicine and diagnostic testing utilizing our medical modules to the 10,000 members of the Local 848 and their families. The current plan includes repurposing the former lab at LAX Airport into an initial Teamsters unit. To ensure industry standards are met, each module will be designed with full ADA compliance and equipped with the necessary equipment for turnkey operation to provide medical services. The company is in discussions with several operators, service providers, and technology companies pertaining to the launch of the Port of Long Beach project.
Agreements such as these illustrate our unique position within the market as well as demand for decentralized medical and dental solutions. This partnership showcases our competitive edge in the market, enabling us to offer cutting-edge state-of-the-art medical centers that support a wider range of services from wellness exams to diagnostic lab testing. With over 1.2 million Teamsters across the United States as well as their families and retirees, we anticipate strengthening our relationship with them and announcing more such partnerships in the near future. Our real estate development segment, SG DevCo, is making tremendous strides and we anticipate that it will soon become an independent publicly traded company, which I’ll discuss further in a moment.
As mentioned earlier, SG DevCo plans to complete a purchase of the Waldron site, which was recently appraised for $5.2 million, which provides us access to additional low cost debt financing. The site is currently leased by SG Echo and expected to open April, 2023. SG DevCo also intends to construct and own over 3,500 units at our Cumberland and St. Marys sites alone. We have received a certificate of occupancy for the Monticello project in the Catskills region, and are looking forward to starting phase two of the project. In total, SG DevCo has a project pipeline of more than 4,000 units to be developed. In addition to building a substantial asset base within SG DevCo, this strategy should contribute significant cash flow to our SG Echo manufacturing operations.
Photo by Ammiel Jr on Unsplash
We also commence the auction for the Lago Vista site, which we expect to close in Q2 2023. The massive growth in the greater Austin, Texas area has greatly increased the value of the property. This site was originally acquired for approximately $3.5 million. We are confident that the sale price of the property will be significantly more than the purchase price, reflecting the substantial appreciation and the value of the property. As I mentioned, we are making progress with the planned spin-out and independent listing of SG DevCo with existing investors expected to receive 30% of SG DevCo and Safe & Green retaining the balance. Given the asset base and projections, we do not anticipate a need for a near-term equity financing or equity dilution to shareholders.
In turn, we believe this strategy will unlock significant value for shareholders. Separating the businesses will allow SG DevCo to focus intently on its core competencies and real estate development. The spin-out aims to support the future growth and profitability of both companies as well as provide much simpler and easier to understand business models when we are out marketing the respective companies to the investment community. According to third-party fairness opinion, SG DevCo’s estimated fair market value is approximately $74 million, which is about 7x Safe & Green Holdings current market cap. With an estimated $22 million of this asset value going directly to our shareholders and Safe & Green Holdings retaining the balance of the equity value at the parent company level, investors will immediately see accretive value of your holdings and now have two shots on goal.
Hopefully, you can understand why we felt this transaction was a no-brainer. In anticipation of the spin-out, we recently named David Villarreal as its President and CEO and Nicolai Brune to work alongside him as its Chief Financial Officer. David’s impressive and diverse background makes him an exceptional leader perfectly suited to lead this company. In connection with this announcement, Safe & Green Holdings is pleased to announce that Christopher Melton will assume the role of lead Independent Director of the Board replacing Mr. Villarreal given his new role. On one final note regarding SG DevCo, it’s important to point out that the planned spin-out of SG DevCo does not include our Denison property, which will remain with Safe & Green Holdings.
The current plan is to design and create an active senior living community with roughly 500 units and various amenities. The total development cost is expected to be approximately $150 million with projected profits of approximately $40 million over five years. Of the $115 million in development costs, approximately $80 million will feed directly to SG Echo for manufacturing, with an anticipated $15 million in margin to our manufacturing campus. Turning now to the environmental segment. We signed a 10-year exclusive distribution agreement with Sanitec Industries LLC. Our partnership seeks to utilize our mobile and modular units to deploy the Sanitec Microwave Healthcare Waste Disinfection System for the onsite disposal of biomedical waste initially within the state of New York.
The Sanitec Microwave Disinfection unit shreds and disinfects biomedical waste, making it indistinguishable from household waste including no greater health risk. This market is significantly underserved and we aim to offer an innovative, cost-effective, compliant and decentralized solution that will decrease healthcare systems transportation and landfill expenditures while meeting regulatory requirements in an environmentally friendly and sustainable way. We are in the process of building a national sales and service footprint for Sanitec. Furthermore, this segment is a perfect add-on at our manufacturing locations and we will provide services to all Safe & Green medical sites. One final note, John Shaw finally filed his Schedule 13D with the SEC that he was required to file a long time ago.
Schedule 13D shows that he owns 26% of our common stock and that he is actively trading and put auctions in our stock. I’m pleased to report that after months of pressure from us, both private and public, our efforts have resulted in full transparency for our shareholders. We will continue to fight for fairness, prevent price manipulation, and protect the rights of each and every shareholder. So to wrap up, the outlook for our business has never been brighter. Our team is thrilled about the possibilities. Our business model is not only scalable, but is also expected to become highly profitable. In fact, heading into 2023, we have substantially reduced our SG&A as a percentage of revenue. As a result, we expect to generate positive cash flow within our manufacturing segment.
We believe we are operating in a time when the industry is ripe with opportunities and our management team has the experience and expertise to execute our plan. We are confident that with the leadership team we have in place, we will continue to thrive and achieve our goals. I would now like to turn the call over to Christopher Gagliardi, Senior Accounting Consultant to review the financial results for the three-month and full-year period ending December 31, 2022. Chris?
Christopher Gagliardi: Thanks, Paul. Looking at the fourth quarter results first. The company reported revenue of $4.1 million compared to $8.5 million for the fourth quarter of 2021. As Paul mentioned earlier, this reflects the discontinuation of COVID-19 testing facilities, offset by an increase in construction services revenue. The construction services segment generated $4.2 million in revenue, a 476% increase compared to the same period last year. Total gross profit for the fourth quarter of 2022 was $0.3 million compared to $0.2 million in the 2021 fourth quarter, reflecting the decline in medical revenue, offset by increased revenue and improved gross margin within the construction services segment. Operating expenses for the three months ended December 31, 2022 were $4 million compared to $2.4 million in the fourth quarter of 2021.
Due to increased payroll-related expenses, as well as increased general and administrative expenses, which reflect the company’s investments to support its anticipated growth. Operating expenses for the fourth quarter of 2022 included approximately $1.1 million of non-cash expenses, including $145,000 of depreciation and amortization, as well as $924,000 of stock-based compensation expense. This compares to approximately $1 million of non-cash expenses, including $156,000 of depreciation and amortization, as well as $869,000 of stock-based compensation expense for the same period last year. The fourth quarter of 2022 also included approximately $2.4 million of expenses allocated to SG DevCo that were not incurred for the same period last year.
The company expects its operating expense as a percentage of revenue will significantly decline in future quarters. The net loss attributable to common shareholders was approximately $3.3 million, or negative $0.24 per share in the fourth quarter of 2022, compared to a net loss of $3.4 million, or negative $0.32 per share, in the fourth quarter of 2021. The company’s EBITDA loss for the three months ended December 31, 2022 was approximately negative $3.5 million as compared to approximately negative $3.3 million for the same period in 2021. The company’s adjusted EBITDA loss for the three months ended December 31, 2022, which excludes a loss on asset disposal, litigation expense and stock-based compensation expense was approximately negative $2.3 million compared to negative $2.4 million for the same period last year.
Turning to the results for the year ended December 31, 2022. Total revenue was $24.4 million, compared to $38.3 million for the year ended December 31, 2021, reflecting a decrease in medical revenue due to the discontinuation of COVID-19 testing facilities, offset by a 94.8% increase in construction services revenue. Gross profit for 2022 was $3.3 million compared to $2.3 million for 2021, reflecting the increased revenue and improved gross margin within the construction services segment offset by the decline in medical revenue. Operating expenses for 2022 were $10.6 million, compared to $8.3 million for 2021, due to increased payroll-related expenses, as well as increased general and administrative expenses, which reflects the company’s investments to support its anticipated growth.
Operating expenses for 2022 included approximately $3.4 million of non-cash expenses, including $615,000 of depreciation and amortization, as well as $2.8 million of stock-based compensation expense. This compares to approximately $2.3 million of non-cash expenses, including $605,000 of depreciation and amortization, as well as $1.6 million of stock-based compensation expense for the same period last year. The company expects its operating expense as a percentage of revenue will significantly decline in future quarters. The net loss attributable to common shareholders was approximately $7.9 million, or negative $0.59 per share in 2022, compared to a loss of $10.8 million, or negative $1.16 per share for 2021. The company’s EBITDA loss for the 12 months ended December 31, 2022 was approximately negative $7.4 million as compared to approximately negative $10.3 million for the same period in 2021.
The company’s adjusted EBITDA loss for the 12 months ended December 31, 2022, which excludes a loss on asset disposal, litigation expense and stock-based compensation expense was approximately negative $4 million compared to negative $8 million for the same period last year. At December 31, 2022 and December 31, 2021, the company had a cash balance and short-term investments of $583,000 and $13 million, respectively. As of December 31, 2022, stockholders’ equity was $14.9 million compared to $21.7 million as of December 31, 2021. Importantly, we believe we have sufficient cash and borrowing capacity to support near-term operations. In addition, as Paul mentioned earlier, we in the process of auctioning our Lago Vista site, which should sell a significant premium to the purchase price given the appreciation in the property value.
This transaction should provide additional liquidity to support ongoing operations. I would now like to turn the call back over to Paul for closing remarks.
Paul Galvin: I would like to thank each of you once more for joining us today. We take pride in the progress that Safe & Green has achieved over the last year and are eagerly anticipating the opportunities that lie ahead, our commitment to executing our strategy remains unchanged, and we look forward to providing you with updates on our progress in the coming months. Thank you.
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Operator: This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.
