Business context and reporting period
The supplied filing is SG Blocks, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2013—not a filing identified as Olenox Industries Inc. SG Blocks sells engineered, repurposed shipping containers for construction and provides related engineering and project-management services. SG Brazil was inactive.
Financial results and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $956,168 | $524,015; up 82% |
| Gross profit (margin) | $55,254 (about 6%) | $94,109 (about 18%) |
| Operating loss | $(477,225) | $(495,151) |
| Net loss | $(407,466) | $(463,569) |
| Interest expense | $149,770 | $2,044 |
| Operating cash flow | $(678,322) | $(539,215) |
| Cash at period end | $510,695 | $868,067 at Dec. 31, 2012 |
| Current assets / current liabilities | $1,241,993 / $1,130,938 | Working capital: $111,055 |
| Total liabilities / stockholders’ deficiency | $2,167,469 / $(805,818) | At March 31, 2013 |
Project-management revenue rose to $535,474 from $31,270, while SG Block sales were essentially flat at $420,694. Engineering-services revenue was zero, compared with $70,795 a year earlier. Project-management costs exceeded its revenue; the company cited losses on three jobs totaling about $80,000 and recorded $58,433 in anticipated losses on uncompleted contracts. The reported net loss benefited from a $219,495 fair-value gain on financial instruments. Convertible-debt discount and issuance-cost amortization contributed to the sharp increase in interest expense.
Debt, liquidity and financing
At March 31, the balance sheet included $1,036,531 of net convertible debentures and $73,500 of related-party notes payable. The company raised $350,000 from convertible debentures during the quarter. In April, it raised a further $500,000 subscription amount by issuing $560,000 in 8% original-issue-discount secured convertible debentures, with warrants. The company said cash was approximately $500,000 on May 14.
Management stated that operating cash flows and expected gross profit would not cover anticipated operating costs and growth spending over the next 10–16 months. Additional debt or equity financing is needed, but no new financing commitments were in place at the filing date. Management disclosed substantial doubt about the company’s ability to continue as a going concern.
Outlook, risks and other notable items
- No quantified revenue or earnings guidance was provided. Management planned to seek additional equity and convertible-debt financing during 2013; if financing were unavailable, possible cash-conservation actions included headcount, salary and other cost reductions.
- Convertible debentures carry 8% interest, conversion features and scheduled redemptions of $756,000 on each of April 1 and July 1, 2014. Share settlement may be permitted subject to contractual conditions; default may trigger accelerated cash obligations, a 30% premium and a higher default interest rate.
- Customer concentration was significant: three customers generated about 81% of Q1 2013 revenue, and three customers accounted for 81% of receivables at March 31. A minority stockholder’s company supplied containers and labor; its services represented $354,427 of Q1 cost of goods sold.
- Management reported disclosure controls were ineffective and identified an unremediated material weakness relating to financial-reporting processes, complex accounting rules and limited segregation of duties.
- The filing reported no legal proceedings and no material off-balance-sheet arrangements other than operating leases. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the issuer: the supplied filing names SG Blocks, Inc., despite the request metadata naming Olenox Industries Inc.
- Assess liquidity and going-concern risk, including the ability to raise capital and meet the 2014 debenture redemptions.
- Review project-level margins, loss estimates on unfinished contracts and customer concentration.
- Evaluate potential dilution from convertible debentures, warrants and options; the filing describes conversion terms that may increase shares issuable if the stock price falls.
- Reconcile share-count disclosures: the statements report 35,843,839 weighted-average shares for Q1 2012, while a note reports 39,843,839 for the same period.