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EG NewswireCannabisIn PlayTechnologySocial Detention, Inc. (OTC Pink: SODE), An Infrastructure Play No One Saw Coming

If SODE scales quickly they could be an acquisition target of AECOM (NYSE: ACM)

July 31, 2018

Miami, FL – July 31, 2018 (EmergingGrowth.com NewsWire) — EmergingGrowth.com, a leading independent small cap media portal with an extensive history of providing unparalleled content for the Emerging Growth markets and companies, reports on Social Detention, Inc. (OTC Pink: SODE).

Spending Starts at State LevelSODE Blockchain to provide construction industry payment processing solutionsAcquisition of TADRC Inc. to add $3-5M in revenues for 2018Participating in Cannabis Trade Show; Rubbing Shoulders with industry Decision Makers

The enormity of Trump’s infrastructure plan has failed to register with investors of Social Detention Corp (OTC Pink: SODE).  Trump’s plan calls for $200 billion in federal funding that is designed to spur $1.5 Trillion in investments to rebuild failing infrastructure and develop innovative projects.  The question is how much of this will trickle over to the California market where SODE is based.  The California Highway of Transportation (Caltrans) has $13.6 billion set aside for 2019.  State and local governments know a plan of this magnitude takes time and when it starts going is going to tie up resources for years.  Since state and local governments are nimbler than the Federal government they have to act immediately and accelerate their plans.  The past 3 slowdowns in the economy all had some sort of stimulus package to push growth.  The history lesson with these stimulus packages was that the Federal government had a difficult time putting projects up for bid fast enough but once they started hitting they soaked up the large and small contractors.  These underlying forces are causing the frenzy at state and local levels which is the heart of SODE’s rapid growth trajectory.  SODE is a contracting company that makes money, has rapid growth, works in the hottest sectors of the market, and is using technological innovation to drive efficiencies in the contracting process.

Social Detention – Niche Markets

InfrastructureSecurity

Social Detention specializes in infrastructure and security.  The infrastructure part of the business refers to roads, utilities, power, and water supply.  The reason for the focus in infrastructure is that these jobs are plentiful, easy to bid and have to get done quickly because if they don’t, traffic and congestion could get even worse.  The genius of this plan can be illustrated with a simple example.  A road project might cost $3 million, but only take 2 months to complete.  Utilizing simple math, SODE would have $18 million in sales, and not have to worry about any cost overruns because it’s covered by the government contract. On the other hand, building a $10 million office building might have overruns and tie the cash up for a year.  Contracting is all about cash flow and these smaller projects turnover quickly and don’t tie up as much capital.  In fact, there is no retention on Caltrans’s projects which makes sense because once cars can drive on the road, the project is complete, and the government is obligated to pay.

On the security side of the business certain infrastructure assets need to be protected with assets like CCTV, perimeter fencing, bulletproof glass, and jail grade metal.  Because these jobs have specialty trades that are required, they have higher margins, and there is also less competition in the bidding process.  Detention jobs fall into two categories, new construction and remodel.  A typical detention remodel job might involve increasing the capacity of a jailer’s facility. Types of work performed are:

Security Metal and Door/FramesSecurity HardwareSecurity Glazing – bulletproof glass or resistant glassDetention Equipment – Benches, Grab Bars, Stools, Desks and MirrorsSecurity Electronics – CCTV, Touch Screens and Door Position Switches

Another element of the security business is envelope security.  This secures the perimeter of the facility such as a water plant or an electrical substation.  Similar security technology can be used in the cannabis space and school systems.

With all this infrastructure work coming there is going to be a scarcity in building materials, skilled labor, and equipment.  For example, in California the going rate for cement is $300/ CY (cubic yard), but in an environment of few bidders for each project, prices can float much higher.  The bidders will eventually be able to effectively control pricing and profit because they can afford to be selective and wait for favorable jobs with the highest profit margins, ultimately walking prices higher.

Unlike other contractors SODE has been able to retain its labor very effectively.  Labor Issues are a non-event because SODE has relationships that date back as far as 20 years.  Robert Legg, CEO of SODE has a network of skilled Hispanic workers.  His standing in the community gets him ready access to a qualified labor force.  Anecdotally, every government job has a mandated prevailing wage.  This prevailing wage corresponds with the union wage.  The way it works is that if the SODE crew is available they will get the work first, if not then SODE has the option of employing union labor at the same wage level without effecting profitability.  The central point is that SODE bids for the worst scenario giving them the flexibility to get jobs without having to check with the availability of a crew.  This flexibility is one of SODE’s competitive advantages and allows them to scale quickly.  Competitors that only have one crew cannot bid as many projects for fear that they won’t be able to honor their commitment’s.

Equipment is also in short supply because rental companies tie up a portion of their equipment inventory for government agencies that pay them for the right of first refusal for governmental use.  So, should a natural disaster like a fire happen, the government gets the equipment first. In times of crisis, diligent planning by the contractor ensures profitability because mobilizing equipment out of state to meet the contract requirements eats into the profit margin.  Shortages could affect SODE’s ability to bid on contracts so planning ahead is crucial.  The alternative is purchase equipment and that sucks up capital.

Initial Source of Demand

SODE has no real issues finding work.  They don’t need any marketing dollars because the bidding process is run through the builders exchange and Caltrans.  Every new infrastructure project is posted electronically on a daily basis.  SODE gets to see both county and city projects.  The current environment is such that very few bidders actually submit bids because they are so busy with existing projects.  SODE typically makes bids on government projects were there are as few as 2 bidders.  This essentially means SODE has as high as a 50% chance of winning the bid.  Another great metric investors can gauge SODE’s success is by their track record.  They completed 10 projects in the past 8 months.  As a rule of thumb, they return $1.30 for every dollar of work they expense.

Sources of Bids – Hottest sectors of Market

The cannabis business in CA is highly regulated and the buildings and infrastructure have to conform to very specific codes.  SODE has these down to a science and essentially has a checklist for each job making the task of bidding these facilities cookie cutter.  Each and every facility has to have water, power, roads, structures, bullet resistant products, CCTV, and perimeter fencing.  SODE recently attended the Cannabis Business Summitto promote their services and form strategic alliances.  Robert Legg, CEO of SODE said

“We will take full advantage of the industry players being in one location (San Jose, CA) to perform due diligence on potential acquisitions, promote our services and form strategic alliances.  We have completed in advance of the Trade Show a scouting report of who will be attending and have a hit list plan of attack prepared.“

It doesn’t take much to read into this that some sort of strategic acquisition or partnership is soon to be announced so that SODE can tap into the very lucrative trends stemming from the legalization of marijuana in California.  The gold rush in California ended in 1855 and when it ended all the pick and shovel makers were very wealthy along with a few select miners.  This time around California is seeing a green rush and SODE represents the pick and shovel maker.  The demand for new construction in the growing California marijuana market is finding fast money investors that realizes the first to market in a geographic location will enjoy a distinct competitive advantage.  SODE seems squarely positioned to capture this emerging market.

This cannabis market could triple in size in the next four years, according to Arcview Market Research and BDS Analytics new report, ‘The State of Legal Marijuana Markets’. Much of the current growth they’re seeing comes from California’s cannabis market, which is expected to exceed $5.1 billion market value in the next year after recently legalizing its recreational use.

Trump’s infrastructure plan is estimated to last for 5 years, but in the short run it has created a frenzied atmosphere in the local municipal markets of leaders fearful that key infrastructure projects will be put on indefinite hold as they struggle to find contractors willing to bid on their projects.  Municipalities are worried that Trump’s plan will suck available labor, materials and equipment from the regional supply as the contractor’s go after the more lucrative federal business.  The municipalities realize that material and labor costs are sure to rise once the federal bids start getting awarded and they might be in a position where they have to wait years to get a critical infrastructure project done.  This has forced the locals to prioritize their needs and accelerate their time tables creating bid calendars that are bulging at the seams with projects to bid on.  Since there is so much work in the area, contractors really don’t have the time to bid and if they do bid, it’s likely to be high and worth their time to do.  These are ideal condition for SODE.

Many have heard of the fires plaguing California and think the primary beneficiary would be the housing market and that is partially correct.  When a fire rips through a neighborhood people forget that the pipes in the ground are made of plastic these days and they have a tendency to melt.  Homes devastated in these areas are having insurance providers calling for the upgrade of the utilities to metal pipe in fire prone areas.  So insurance work is another lucrative business segment driving the sales at SODE.

Blockchain Connection

Blockchains are renowned throughout the world for their ability to create efficiencies in the way we do things.  Any person with limited construction experience knows that cash flow and getting paid are significant issues in the industry.  The key words people use with blockchain is “solving real world problems.”  The most relevant real world issue in construction is getting paid quickly and securely.  Construction work requires many signatures and inspections in order to get paid.  The process of tracking people and signature down is highly inefficient.  A better way to do things is to create a “smart contract.”  SODE made a “smart contract” and coined the phrase “SODE Blockchain.”  This contract has all the terms and conditions in one central place allowing all the stakeholders complete real-time transparency on the status of the project.  This contract would allow the flow of tokens from one party to the next upon the completion of a verified task.

Blockchain Goals

SODE Blockchain Smart Contract DevelopmentDevelopment of Cryptocurrency platform.Wallet Development to confirm proper platform and function.

With the coming avalanche of work from Trump’s infrastructure plan this new concept of blockchain construction could really get a foothold and facilitate eliminating the inefficiencies of the contracting payment process.

Expansion: Increased Workforce Through Acquisitions – ROLL UP play

SODE’s overall plan for growth is to capitalize on the abundance of infrastructure opportunities within California.  There are many contractors that lack the skill set to effectively bid on job and negotiate terms.  SODE’s recent acquisition of TADRC Inc., which is set to close within the next 30 days, increases the size of its workforce.  TADRC Inc. will bring in a seasoned management team, their own project backlog, field teams/equipment and key licensing, expanding SODE’s ability to take on a wider array of infrastructure related work. SODE anticipates the acquisition will add $3-5M to their revenue/backlog in 2018 beginning in this quarter. The terms of the deal are 100% equity based on revenue levels and profit margin TADRC Inc. must meet or exceed. With the combination of TADRC’s resources and Social Detention’s Inc. current backlog, they are well on their way to reaching their 2018 revenue goals of $5 million this year. Management also hinted they anticipate additional acquisition announcements in Quarter 2 of 2018. 

Could Social Detention Be an Acquisition Target Themselves?

If SODE scales quickly they could be an acquisition target of AECOM (NYSE: ACM).  In 2017 ACM had approximately $18.2 billion in revenue.  The state of California’s top 75 contractors accumulated $36.55 billion in revenues in 2017, up 8% from the previous year and surely can continue to rise with Trump’s infrastructure plan and the California building boom.  AECOM is a vertically integrated construction and engineering firm tackling some of the nation’s largest projects.  The major groups within their organization as a percentage of net income include design and consulting services (49%), management services (27%), construction services (18%), and AECOM capital (6%).  They good news for SODE is that they are in acquisition mode and have been selling off some of their non-core oil asset to add to their war chest of over $3.5 billion in free cash they plan to spend in the next 5 years.  AECOM has a 6% gross margin and acquiring a growing business in the same sector with 30% gross margin seems like a good fit.  In a Bloomberg Interview last year, Mike Burke, chairman and CEO of ACM, said he plans to spend billions on acquisitions in anticipation of the Trump infrastructure plan to fund roads, rail, water, and energy projects.  It’s a longshot, but if a company like AECOM needs additional seasoned manpower, SODE could be ripe for the pickings.

AECOM is not afraid to pull the trigger. In 2014, they completed a $6 Billion acquisition of URS Corp. which then made ACM the largest publicly traded company in Los Angeles, California (SODE’s backyard). Even if SODE is not on their radar, ACM is a stellar company, whose approach CEO Robert Legg is trying to emulate. Their business model works, combining architect, design, planning, construction management, and contracting, even though SODE is doing it on a small scale.  . 

Financial Analysis/Risk

SODE has 183 million shares authorized and 159 million restricted shares with 97 million shares that could be retired.  If the shares were retired then 86 million shares would be outstanding putting the market cap at $8.6 million.  SODE, after completion of TADRC, they’ll currently have a backlog between $3-5 million in revenues for 2018.  The company has also indicated in its corporate update that they plan on uplisting to the OTCQB.  Additional “manpower” related acquisitions in Q2 (as hinted in recent press) will reflect the new company’s revenue along with the new ability to compete for more jobs and larger contracts. Although they have no official earning guidance, it seems reasonable that they could do $5 million in revenues simply by winning and snagging all the low bid, low hanging fruit infrastructure jobs in the existing backlog.  The biggest risk is tying up their working capital.  For any jobs over $1.0 million their bonding company requires a deposit held in escrow.  Taking on large projects could curtail their ability to grow should there be any overruns.

Investment Summary

SODE has a tremendous amount of potential and is at the forefront of the next wave of infrastructure spending.  Finding business and executing projects is not the constraining factor.  They seem to be currently limited by their bonding levels but it’s reasonable to expect bonding agency to eventually look to the balance sheet strength instead of having funds in escrow after they demonstrated sales growth.  Their target gross margin is running at 30%.  In comparison to a big conglomerate like ACM this is quite good and makes them attractive as takeover target, but they seem to have designs of their own of growing the business through acquisition.  Their ability to bid and win projects efficiently is an asset to most struggling construction companies that haven’t embraced the new way of bidding for business.  The projects they go after have very little downside risk which makes them even more appealing because many construction projects have cost overruns.  Revenue growth is the key driver at SODE and the recent acquisition highlights this.  It’s still too early to tell but SODE looks like it’s morphing into a roll up play and if they continue to make smart acquisitions that limit shareholder dilution an exciting story is unfolding.  Their sound formula to win bids and execute them profitably coupled with the targeting of the hottest and most well-funded sectors of growth position them for solid earnings growth in the coming months.  The short term catalysts are:

Definitive agreement with TADRC Inc.Uplisting to the OTCQBCompletion of SODE Blockchain contract developmentPotential acquisitionsRetirement of 97 million shares of common stock.Additional contract awards

The biggest risk for investors at this stage of the corporate development is that they win a huge contract and don’t have the funds to complete it.  Based on the potential o/s of 86 million shares at a share price of $.10, the stock is undervalued trading at 1.72X 2018 sales.  There is much more upside risk than downside risk that they fail.

About EmergingGrowth.com

EmergingGrowth.com is a leading independent small cap media portal with an extensive history of providing unparalleled content for the Emerging Growth markets and companies.  Through its evolution, EmergingGrowth.com found a niche in identifying companies that can be overlooked by the markets due to, among other reasons, trading price or market capitalization.  We look for strong management, innovation, strategy, execution, and the overall potential for long- term growth.  Aside from being a trusted resource for the Emerging Growth info-seekers, we are well known for discovering undervalued companies and bringing them to the attention of the investment community.  Through our parent Company, we also have the ability to facilitate road shows to present your products and services to the most influential investment banks in the space.

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