Business context and reporting period
This is SG Blocks, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The request metadata names Olenox Industries Inc., but the filing identifies the registrant as SG Blocks, Inc. SG Blocks designs and provides modular building products and related construction and engineering services; it shifted U.S. residential activity toward a licensing and royalty model in October 2019.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $628,949 | $727,908 | $827,705 | $2,463,032 |
| Gross profit (margin) | $374,233 (about 60%) | $267,318 (about 37%) | $420,214 (about 51%) | $811,423 (about 33%) |
| Operating loss | $(840,754) | $(971,709) | $(1,590,233) | $(1,462,444) |
| Net loss | $(837,973) | $(971,709) | $(1,585,400) | $(1,462,444) |
| Operating cash flow | Not presented quarterly | $(2,181,122) | $(1,747,202) |
At June 30, cash was $16.1 million, versus $1.6 million at year-end 2019; current assets were $18.0 million and current liabilities $2.0 million. Stockholders’ equity was $20.3 million. The balance sheet reports no outstanding notes payable at quarter-end: a $200,000 note and $6,263 accrued interest were converted into shares during Q2. The company also reported a $661,096 long-term note receivable. Cash from financing was $17.3 million, principally from 2020 public offerings; investing used $650,000, primarily for advances on notes receivable.
Material changes versus prior periods
- Six-month revenue fell about 66%; management attributed the decline mainly to lower retail and office revenue and the change in the residential business model. Q2 revenue declined about 14% year over year.
- Gross margin improved, but management said a $300,000 construction fee with no cost of revenue materially boosted it; that item should not be treated as a recurring margin level without further evidence.
- Six-month net loss widened to $1.59 million from $1.46 million, despite lower payroll and related expenses; other operating expenses rose, including legal and consulting costs.
- April and May equity offerings generated approximately $17.1 million net in total. Shares outstanding increased from 1.16 million at December 31, 2019 to 8.60 million at June 30, 2020.
- Backlog was $17.3 million, down from $17.6 million at year-end. One contract of approximately $17 million accounts for most of the reported backlog.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expects operating losses to continue for the foreseeable future and said cash was expected to fund obligations for at least 12 months from August 13, 2020; it also disclosed substantial doubt about the company’s ability to continue as a going concern, given recurring losses and negative operating cash flow. No additional financing source was secured.
- COVID-19 had caused project delays; management cited potential further disruption to customers, suppliers, labor, delivery times, pricing and demand, with the ultimate financial impact not predictable.
- The company had not recognized revenue from its residential exclusive license or Osang COVID-19 test-kit distributorship during the six months. The license provides for royalties and minimum payments, but realization depends on licensee commercialization and other terms. The Osang arrangement is non-exclusive, terminable on 30 days’ notice, and carries no guaranteed sales.
- Legal matters include the HOLA project dispute (the company seeks more than $1 million; HOLA claims more than $4 million), the Pizzarotti case, and a former executive’s wage and retaliation claims. The company recorded no provision for the described matters where it could not estimate a loss or range of loss. Recovery of its approximately $2.1 million claim against bankrupt Teton is described as less likely.
- Customer and supplier concentration is significant: three customers represented about 69% of six-month revenue, and four vendors accounted for about 75% of six-month cost of revenue. Backlog may be canceled, deferred or changed and is not a guarantee of future revenue or profit.
- Subsequent developments include a July 2020 joint development agreement with Grimshaw for education facilities and stockholder approval of an additional 1 million shares available under the stock incentive plan.
Most important facts for investors to verify
- Confirm the issuer identity: the filing is for SG Blocks, Inc., not Olenox Industries Inc.
- Assess whether the $17.3 million backlog—largely concentrated in one contract—converts on schedule, particularly amid COVID-related delays and cancellation rights.
- Check cash burn and funding needs against management’s 12-month liquidity expectation and the filing’s going-concern warning.
- Evaluate the quality and repeatability of reported gross margins, excluding the $300,000 fee with no associated cost of revenue.
- Monitor potential dilution from the major share issuance, outstanding warrants and options, and approved incentive-plan capacity, as well as developments in material litigation.