SG Blocks, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. The supplied filing is for SG Blocks, Inc. (Nasdaq: SGBX), not Olenox Industries Inc.
Business context
SG Blocks sells and builds structures using modified shipping containers and purpose-built modular units, and provides related engineering and project-management services. On October 3, 2019, it entered an exclusive U.S. residential technology license, shifting residential construction toward royalties rather than direct project construction.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $184,526 | $2,082,825 | $2,647,558 | $5,932,150 |
| Gross profit (loss) | $(182,257) | $224,840 | $629,166 | $420,010 |
| Operating loss | $(1,273,430) | $(1,077,522) | $(2,735,874) | $(3,070,295) |
| Net loss attributable to common stockholders | $(1,325,469) | $(1,026,037) | $(2,787,913) | $(3,013,042) |
- Nine-month revenue fell 55%; management attributed the decline primarily to lower school, multifamily, retail and special-use contract revenue. Q3 revenue fell 91% year over year.
- Nine-month gross margin improved to approximately 24% from 7%, principally because of a low-margin legacy contract in 2018. Q3 gross margin was negative, with management citing higher site-installation costs on a retail contract.
- Cash used in operations was $2,500,387 for the nine months, versus $1,905,411 in 2018. Investing used $2,070; financing provided $1,136,015, mainly from stock offerings. Cash declined to $1,953 from $1,368,395 at year-end 2018.
- At September 30, current assets were $1,611,866 and current liabilities were $2,048,547. Total liabilities were current; the balance sheet reported no long-term debt. Stockholders’ equity was $6,073,249, down from $7,080,067 at December 31, 2018.
- Shares outstanding increased to 6,007,791 from 4,260,041 at year-end 2018. The filing also reports substantial outstanding options, warrants and unvested restricted stock units.
Backlog, outlook and material events
- Backlog was $17.8 million at September 30, 2019, down from $97.7 million at December 31, 2018. The filing attributes the decrease to a $25 million customer cancellation and moving two contracts totaling about $70 million into the new license arrangement. Backlog is subject to cancellation, deferral and scope changes.
- The company reported recurring losses and negative operating cash flows and stated that these conditions raise substantial doubt about its ability to continue as a going concern. Management said it expected losses to continue and may need additional financing; no assurance was given that financing would be available.
- The residential license provides tiered royalties of 4.5%–5% of qualifying gross revenue, with cumulative minimum royalties over its initial five-year term. It also transfers residential project delivery to the licensee and may materially reduce construction backlog. No license revenue had been recognized through September 30.
- Under a related agreement, SG Blocks agreed to lend CPF GP $750,000 at 5%, secured by the licensee’s membership interests. The installment deadlines were later extended to January 31, 2020 and April 15, 2020. Failure to fund could trigger defaults under both the loan and license agreements.
- In November 2019, the company received approximately $326,250 net proceeds from a senior secured convertible debenture with $480,770 principal, due in 110 days. It is secured by company assets and carries potential conversion and dilution risk.
- Nasdaq had notified the company of a minimum-bid-price deficiency, with a compliance deadline of December 30, 2019. The filing gives no formal revenue or earnings guidance.
- Legal matters include disputes involving Pizzarotti, Teton Buildings, HOLA Community Partners and EDI International. The company said outcomes and potential losses are uncertain; Teton’s bankruptcy stayed the company’s litigation against it.
Key investor verification points
- Confirm subsequent cash, financing availability and the company’s ability to meet obligations, including the CPF loan installments and debenture maturity.
- Track whether the licensee meets minimum royalty requirements and whether expected royalties materialize; verify the associated effect on backlog and construction revenue.
- Assess the status and collectability of receivables, including the $785,895 doubtful-account allowance primarily tied to a disputed contract.
- Review project execution, gross margins and backlog cancellations, as customer and vendor concentration is high.
- Verify Nasdaq listing compliance and quantify potential dilution from offerings, warrants, options, restricted stock units and convertible debt.
- Monitor the identified legal disputes and any resulting cash, earnings or disclosure impact.