SG Blocks, Inc. — Form 10-Q Summary
Filing identity: The supplied filing is for SG Blocks, Inc., not Olenox Industries Inc. It covers the unaudited quarter and nine months ended September 30, 2014.
Business context and financial results
SG Blocks modifies cargo shipping containers for construction and provides related engineering and project-management services. SG Brazil, its wholly owned subsidiary, was inactive.
| Metric | Three months ended September 30, 2014 | Nine months ended September 30, 2014 |
|---|---|---|
| Revenue | $3.647 million, up from $1.732 million | $5.322 million, up from $4.310 million |
| Gross profit / margin | $825,000 / 23%, versus $217,000 / 13% | $1.249 million / 23% (MD&A states 25%), versus $227,000 / 5% |
| Operating income (loss) | $198,000, versus a loss of $304,000 | Loss of $312,000, versus a loss of $1.438 million |
| Net income (loss) | $920,000, versus a loss of $465,000 | Loss of $1.728 million, versus a loss of $1.653 million |
| Net cash used in operating activities | Not presented separately | $649,000, versus $1.152 million |
For the nine months, cash increased by $686,000 to $1.280 million, principally reflecting $1.338 million of financing cash flow. At September 30, current assets were $1.686 million and current liabilities were $2.345 million. Total liabilities were $5.389 million, including $3.044 million of long-term convertible debentures; stockholders’ deficiency was $3.648 million. The filing reports no material off-balance-sheet arrangements other than operating leases.
Changes, unusual items, outlook and risks
- Revenue growth chiefly reflected container/block sales, including two jobs for one customer during the nine-month period; project-management revenue fell. Management attributed the improved gross margin partly to losses on project-management jobs in 2013.
- Third-quarter net income included a $967,000 gain from changes in the fair value of warrant and conversion-option liabilities. For the nine months, the comparable gain was $509,000, while a $1.104 million loss on extinguishment of debt and $821,000 of interest expense weighed on results. The quarterly profit therefore included significant noncash fair-value effects.
- April 2014 financing included $1.825 million raised through new convertible debentures and an exchange of existing debt. The 2014 debentures carry 8% interest, are convertible initially at $0.25 per share, and include warrants and anti-dilution provisions. Scheduled redemptions total $998,925 each on October 1, 2015 and January 1, 2016, and $1.998 million on April 1, 2016, plus other amounts due. The debt is secured by company and subsidiary assets and carries restrictive covenants and default provisions.
- Management stated that expected growth spending over the next 10 to 16 months would consume operating cash flows and financing proceeds, and that additional external funding is required. No new financing commitments were in place. The filing says these conditions raise substantial doubt about the company’s ability to continue as a going concern. Cash was approximately $1.252 million on November 13, 2014.
- Customer concentration is high: two customers accounted for approximately 86% of nine-month revenue, and three customers represented 91% of receivables at September 30. Convertible debt, warrants and options present substantial potential dilution; 15.983 million shares were initially issuable on conversion of debt, subject to possible increases. Management reported ineffective disclosure controls and an unremediated material weakness involving reporting processes, complex accounting and limited segregation of duties.
- The filing provides no formal earnings or revenue guidance. Management noted the need for revenue growth and cost control, and described implemented cost-reduction measures. Results remain exposed to financing availability, project execution, construction-market competition, customer concentration and contract cost-estimation risk.
Most important facts for investors to verify
- Confirm the issuer identity: this document names SG Blocks, Inc., despite the request metadata naming Olenox Industries Inc.
- Assess near-term liquidity, cash burn, financing availability and the company’s going-concern disclosure.
- Review convertible-debt redemption terms, security interests, covenants, default remedies and potential share dilution.
- Evaluate the sustainability of sales and margins given customer concentration and reliance on a small number of projects.
- Reconcile the MD&A’s stated nine-month gross margin of 25% with the financial statements’ figures, which imply approximately 23%.
- Monitor remediation of the disclosed material weakness and the valuation assumptions for Level 3 warrant and conversion-option liabilities.