Business context and reporting period
The supplied filing is SG Blocks, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2012—not a filing in the name of OLENOX INDUSTRIES INC. SG Blocks sells code-engineered repurposed shipping containers for construction and provides engineering and project-management services. It formed a Brazilian subsidiary in 2012. The company said Hurricane Sandy disrupted its New York headquarters and independent accountants, delaying the filing.
Financial results and liquidity
| Metric | Three months ended Sep. 30, 2012 | Nine months ended Sep. 30, 2012 |
|---|---|---|
| Revenue | $373,250 | $1,980,320 |
| Gross profit / margin | $67,581 / 18% | $386,773 / 20% |
| Operating loss | $(524,987) | $(1,532,155) |
| Net loss | $(525,857) | $(1,456,624) |
| Basic and diluted loss per share | $(0.01) | $(0.03) |
| Cash used in operating activities | Not separately stated | $(934,466) |
For the nine months, cash fell from $561,759 at year-end 2011 to $282,293; at November 26, 2012 it was approximately $245,674. At September 30, current assets were $675,957 and current liabilities $1,049,492, a working-capital deficit of approximately $373,535. Total assets were $682,637, and stockholders’ deficiency was $366,855. Current liabilities included $73,500 of related-party notes payable, $18,373 of related-party accrued interest and $183,377 of warrant liabilities. The related-party note bears 11% interest and was extended to December 31, 2013.
Changes versus prior comparable periods
Third-quarter revenue rose 63% from $228,930 in 2011, while gross profit increased from $29,161 and gross margin from 13% to 18%. Management attributed the improvement mainly to more completed container-building projects. The quarterly net loss narrowed from $551,442 to $525,857.
Nine-month revenue fell 30% from $2,821,613 in 2011, largely because the prior-year period included a $1.425 million block sale; 2012 included a $477,297 engineering project. Gross profit declined modestly from $404,531, but gross margin increased from 14% to 20%, which management attributed in part to the low margin on the prior-year sale. The nine-month net loss widened from $1,136,551 to $1,456,624, including higher payroll and related expense, notably $416,219 of stock-based compensation. Weighted-average shares rose to 41.1 million from 34.4 million.
Outlook, risks and unusual items
Management expected growth and public-company costs over the next 10 to 16 months to exceed operating cash generation and stated that external funding was required. It planned further equity fundraising for the remainder of 2012 and 2013, but had no financing commitments and gave no assurance funding would be available on acceptable terms. The filing states these conditions raise substantial doubt about the company’s ability to continue as a going concern. If funding were unavailable, management cited possible headcount, salary and other cost reductions. No quantified revenue or earnings guidance was provided.
During the nine months, the company reported $642,183 of net proceeds from a private placement and $14,000 for shares to be issued; it reported an additional $60,250 of share proceeds after quarter-end. The placement included a reset provision if qualifying securities were issued below $0.35 per share. Options and warrants outstanding at quarter-end covered 9,287,501 and 1,160,607 shares, respectively, creating potential dilution. The company also recognized $25,000 of insurance proceeds, $31,447 of income from cancellation of liabilities, and a $34,224 gain from the change in fair value of warrant liabilities for the nine-month period.
Customer and supplier concentration is material: one customer accounted for 86% of third-quarter revenue; two customers represented 76% of nine-month revenue. A related-party supplier accounted for approximately 50% of nine-month cost of revenue. The company disclosed a material weakness in disclosure controls and procedures and concluded those controls were ineffective at quarter-end; remediation was ongoing. It reported no legal proceedings.
Important facts for investors to verify
- Confirm the filing’s issuer identity: the document names SG Blocks, Inc., whereas the request identifies OLENOX INDUSTRIES INC.
- Assess cash runway, operating cash burn and whether additional financing was secured after the stated reporting date.
- Review the going-concern warning, working-capital deficit and related-party debt and accrued interest.
- Check customer concentration, receivable collectability and project completion estimates, including the allowance for doubtful accounts of $103,126.
- Evaluate potential dilution from options, warrants, the private-placement reset provision and subsequent share issuances.
- Track remediation of the disclosed material weakness and improvements to disclosure controls.