Filing summary
Entity mismatch: The request identifies Olenox Industries Inc., but the supplied filing is for SG Blocks, Inc. This summary reflects the supplied SG Blocks filing and should not be attributed to Olenox without verification.
Business context and reporting period
Unaudited Form 10-Q for the three months ended March 31, 2016, comparing results with the first quarter of 2015. SG Blocks modifies and supplies engineered cargo containers for construction and provides related engineering and project-management services. The company filed for Chapter 11 on October 15, 2015; it remained a debtor-in-possession during the reported quarter and emerged from bankruptcy on June 30, 2016.
Key financial metrics
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior balance |
|---|---|---|
| Revenue | $227,746 | $402,039 in Q1 2015 |
| Gross profit and margin | $54,517; 24% | $42,116; 11% in Q1 2015 |
| Operating loss | $251,269 | $554,595 in Q1 2015 |
| Net loss | $506,684 | $357,045 in Q1 2015 |
| Operating cash flow | Used $150,254 | Used $305,596 in Q1 2015 |
| Cash | $319,443 | $466,997 at December 31, 2015 |
| Current assets / current liabilities | $928,905 / $6,675,907 | $741,216 / $6,037,186 at December 31, 2015 |
| Total liabilities | $7,275,907 | $6,637,186 at December 31, 2015 |
| Stockholders’ deficit | $6,339,423 | $5,879,637 at December 31, 2015 |
At March 31, convertible debentures were reported at $5,175,605 net of discounts and debtor-in-possession financing was $600,000. Interest expense was $163,764. No cash interest was paid in either comparative quarter.
Material changes and unusual items
- Revenue fell $174,293 year over year, principally because the prior-year period included a nonrecurring $159,217 “green steel” job. Costs of revenue fell $186,694, so gross profit and margin improved despite lower sales.
- Payroll and related expense declined to $166,936 from $311,223, attributed to reduced headcount and salaries. Other operating expenses also declined, principally reflecting lower professional fees.
- Q1 2016 included $91,654 in bankruptcy reorganization legal and professional fees. The prior-year period included a $385,891 favorable change in fair value of financial instruments; there was no comparable gain in Q1 2016. These items help explain why the net loss increased even as the operating loss narrowed.
- After quarter-end, the confirmed reorganization plan took effect June 30. The company repaid the $600,000 DIP facility and issued HCI a $2.5 million, 12% original-issue-discount senior secured convertible debenture for $2.0 million, maturing June 30, 2018. It is convertible at HCI’s option at one share per $1.25 of debt and secured by first-priority liens on company and subsidiary assets.
- Pre-bankruptcy common shares were cancelled and replaced with 491,365 new common shares, representing 7.5% of the post-plan capitalization on the stated assumptions. HCI received 5,405,010 convertible preferred shares and has voting control equivalent to 51.17% on an as-converted basis. Management options for approximately 655,153 shares were expected to be issued in Q3 2016. Full conversion of the exit debenture could issue another 2 million common shares.
- Unsecured claims were to receive 100% of allowed claims plus post-petition interest, in installments: 50% on the effective date and 25% at the end of each of the next two full fiscal quarters.
Outlook, risks and controls
Management said existing cash and operating margins were insufficient to cover fixed and variable obligations. It expected growth-related capital needs over the next 18 months to absorb operating cash flows and anticipated proceeds from further senior convertible debt, and said additional external funding was necessary. No financing commitments were in place; management warned that funding might not be available on acceptable terms or at all. The filing states these conditions raise substantial doubt about the company’s ability to continue as a going concern. Management reported approximately $772,000 of cash at August 10, 2016, after the quarter-end financing and restructuring.
Customer and supplier concentration is significant: two customers generated approximately 83% of Q1 2016 revenue, and one related-party vendor represented approximately 60% of cost of revenue. Management also identified estimation risk on costs to complete contracts. Disclosure controls and procedures were deemed ineffective, with a material weakness involving timely financial reporting, complex accounting and limited segregation of duties; remediation was not complete. The company stated there were no material changes to previously disclosed risk factors and no material litigation as of March 31.
Most important facts for investors to verify
- Whether this SG Blocks filing is the intended filing; it does not identify Olenox Industries Inc.
- Post-emergence cash, debt service, secured liens, scheduled payments to unsecured creditors, and the company’s ability to obtain additional funding.
- Actual issuance and terms of management options, preferred-stock conversion and any conversion of the exit debenture, including resulting dilution and HCI’s control.
- Whether revenue recovery, gross margins and customer concentration changed after Q1, and whether related-party supplier dependence persists.
- Whether the disclosed material weakness and ineffective disclosure controls were remediated, and whether the company’s SEC filing status was current.