SG Blocks, Inc. — 2017 Form 10-K Summary
Entity note: The supplied filing is for SG Blocks, Inc. (Nasdaq: SGBX), not Olenox Industries Inc.
Business context and reporting period
The filing covers the fiscal year ended December 31, 2017. SG Blocks designs, engineers and manages construction projects using modified shipping containers and purpose-built steel modular units, with fabrication and installation substantially outsourced. The filing reports annual results, not a standalone fourth-quarter income statement. Comparisons with 2016 require caution: 2016 spans predecessor and successor periods separated by the June 2016 bankruptcy emergence and fresh-start accounting, so the periods are not fully comparable.
Financial performance and position
| Metric | 2017 | 2016 reported |
|---|---|---|
| Revenue | $5.06 million | $1.92 million |
| Gross profit / margin | $0.63 million / approximately 13% | $0.31 million / approximately 16% |
| Operating loss | $3.26 million | $1.82 million |
| Net loss | $4.51 million | $1.97 million |
| Cash used in operating activities | $1.24 million | $1.87 million |
| EBITDA / Adjusted EBITDA (non-GAAP) | $(3.59) million / $(1.71) million | $(0.97) million / $(1.50) million |
- Revenue rose about 163%, primarily from progress recognized on additional projects, including approximately $3.0 million recognized on one contract.
- Gross margin declined, which management attributed mainly to lower contracted margins on a project. Operating expenses increased to $3.89 million, including higher payroll, stock compensation, professional fees, marketing and intangible-asset amortization.
- Net loss included a $1.02 million loss on conversion of convertible debentures. Interest expense was $0.33 million, down from $0.70 million in 2016.
- At year-end, cash and cash equivalents were $4.87 million and short-term investments were $0.03 million. Current assets were $8.15 million against current liabilities of $3.82 million; stockholders’ equity was $11.53 million.
- Year-end accounts receivable were $3.01 million, up from $0.23 million. Two customers accounted for 81% of receivables and approximately 80% of annual revenue.
- The company had no convertible debentures outstanding at year-end. It converted part of its debt to shares and repaid the remaining approximately $1.5 million using offering proceeds. Financing cash flow included $7.06 million of net public-offering proceeds after issuance costs.
Material changes, outlook and risks
- Backlog increased to $76.66 million from $0.54 million, including two third-quarter contracts of approximately $55 million and $15 million. Management expected the backlog to be realized by August 31, 2020; realization is uncertain, and contracts may be cancelled, suspended or changed.
- Management said it did not believe additional funding was needed for operating expenditures, but expected operating losses to continue for the foreseeable future. It identified growth, expansion and revenue generation as important to liquidity; future financing may be unavailable or unfavorable.
- The risk section warns that insufficient sales or financing could create a cash shortfall over the next twelve months and that continued losses could threaten the company’s ability to continue as a going concern. The filing says past cash losses had raised substantial doubt; the financial statements include no going-concern adjustments.
- Customer and supplier concentration, subcontractor availability and performance, project execution, contract-margin estimates, customer financing, construction cyclicality, and the ability to convert backlog to revenue are key operating risks. The company had seven full-time and one part-time employee at year-end and relied on outside firms and subcontractors.
- The ICC Evaluation Service granted an Evaluation Service Report for SG Blocks structural materials in April 2017. Six of the company’s 18 sourcing or fabrication facilities had approval to use the mark at the time of the filing; the report did not cover purpose-built modules.
- The company reported approximately $13.1 million of federal net operating loss carryforwards, subject to potential limitations, and a full valuation allowance against deferred tax assets. The 2017 Tax Act reduced the federal corporate tax rate and changed NOL rules.
- No cash dividends are anticipated. Outstanding options and warrants may dilute shareholders. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an attestation on internal controls. The financial-statement audit opinion was unqualified.
Most important facts for investors to verify
- Whether the $70 million in two major contracts proceeds as planned, and how much backlog converts to recognized revenue, cash collections and profitable work.
- Whether gross margins improve after declining to approximately 13%, and whether expense growth and operating cash use can be contained.
- Customer concentration and collection risk, particularly the concentration of revenue and receivables in a small number of customers.
- Liquidity and financing needs against continued expected losses, including the status of management’s stated funding outlook.
- Potential share dilution from options, warrants and other equity awards, and the effect of the company’s low outstanding share base and recent public offering.
- The impact of fresh-start accounting on comparisons with 2016 and the company’s adoption of the new revenue-recognition standard in 2018.