Business context and reporting period
This is SG Blocks, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2018; the filing does not identify Olenox Industries Inc. as the registrant, so the company name in the request should be verified. SG Blocks designs and delivers repurposed shipping-container building modules and purpose-built steel modules, along with related construction services.
Financial results and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $2.31 million | $1.00 million | $3.85 million | $1.61 million |
| Gross profit / margin | $31,572 / 1% | $145,787 / 15% | $195,170 / 5% | $299,016 / 19% |
| Operating loss | ($1.24 million) | ($522,007) | ($1.99 million) | ($1.14 million) |
| Net loss | ($1.23 million) | ($1.71 million) | ($1.99 million) | ($2.40 million) |
| Basic and diluted loss per share | ($0.29) | ($3.15) | ($0.47) | ($6.75) |
- Revenue grew 130% in Q2 and 140% for the six-month period year over year, reflecting additional projects in progress or completed.
- Management attributed the sharp gross-margin decline to unanticipated site-related costs on an approximately $5.6 million contract; revenue from that contract was $1.1 million in Q2 and $1.8 million for the first half.
- Cash and cash equivalents were $3.02 million at June 30, down from $4.87 million at year-end 2017. Current assets were $5.62 million and current liabilities $2.81 million. Total assets were $12.52 million; stockholders’ equity was $9.71 million.
- Operating cash use was $1.88 million in the first half, versus $243,195 in the prior-year period. Investing activities provided $26,253; financing activities provided no cash. No interest expense or convertible debentures were reported for the 2018 period.
- Adjusted EBITDA, a non-GAAP measure, was a loss of $1.53 million for the first half, compared with a loss of $639,513 in 2017.
Changes, outlook and risks
- Operating expenses increased: payroll and related expenses rose to $978,029 for the first half, and other operating expenses increased, including professional fees, marketing, insurance and pre-project costs. Operating loss therefore widened despite higher revenue.
- Net loss improved versus 2017 largely because the prior-year period included $1.02 million of debt-conversion loss and $330,388 of interest expense; these items were absent in 2018.
- Signed construction backlog and remaining unsatisfied performance obligations were $102.87 million at June 30, 2018, across 16 projects. The company expected recognition by December 31, 2020: $29.64 million within one year, $63.79 million in one to two years, and $9.44 million thereafter. Management cautioned that projects may be cancelled, deferred or changed and backlog may not convert to revenue as expected.
- Management said it did not believe additional funds would be needed to meet operating expenditures, but noted continuing losses and warned that further financing might be required for growth and might not be available on acceptable terms or at all. The filing provides no specific earnings or revenue guidance.
- Customer and supplier concentration is material: two customers accounted for 69% of receivables at June 30; one customer generated 48% of first-half revenue. Two vendors represented 73% of Q2 cost of revenue.
- Other disclosed risks include cost estimates on contracts, customer credit, supplier availability, construction-market seasonality, competition, growth execution, financing access, regulatory compliance and potential goodwill impairment. The company reported no legal proceedings and no material changes to previously disclosed risk factors.
- Subsequent events included retroactive increases in executive salaries and director cash compensation, director RSU awards, a board member’s resignation, and an S-3 registration statement for resale of 622,726 shares by HCI; the registration statement was under SEC review.
- SG Blocks adopted ASC 606 on January 1, 2018 and reported no material impact on balances. Management concluded disclosure controls were effective; no material change in internal control was reported.
Key facts for investors to verify
- Confirm the intended issuer: this filing is for SG Blocks, Inc., not Olenox Industries Inc.
- Review the $5.6 million contract’s cost overruns and the company’s updated cost-to-complete estimates and margins.
- Assess backlog quality, customer commitments, timing, cancellations and the capacity to convert the $102.87 million backlog into cash-generating revenue.
- Monitor cash burn, working-capital needs and whether additional financing will be required.
- Evaluate customer and vendor concentration, and the potential dilution from outstanding options, warrants and registered resale shares.