OLENOX INDUSTRIES INC. quarterly report, Q1 FY2024

Business context and reporting period

Safe & Green Holdings Corp. (Nasdaq: SGBX) filed this unaudited Form 10-Q for the three months ended March 31, 2024. The request metadata names Olenox Industries Inc., but the filing itself identifies Safe & Green Holdings Corp.; verify that this is the intended filing.

The company operates in modular construction, medical, real estate development and environmental services. Its majority-owned subsidiary SG DevCorp is included in the consolidated results.

Financial performance and position

Revenue fell approximately 82%, mainly because of lower construction activity. Construction services provided $968,000 of revenue; real estate commissions contributed $50,000. Gross margin improved from a loss-making quarter, while higher payroll and interest costs contributed to a larger operating and net loss. Interest expense rose to $1.283 million from $287,000.

Cash and cash equivalents were $740,000 at quarter-end, versus $17,000 at December 31, 2023. Investing activities used $257,000; financing activities provided $1.903 million, leaving a quarterly cash increase of $722,000. Current assets were $6.117 million and current liabilities $22.717 million. Their difference implies negative working capital of approximately $16.600 million; the filing elsewhere reports $15.496 million, so the stated amount is inconsistent.

Notes payable were $11.704 million net of discounts and issuance costs, including $9.249 million classified as current and $2.455 million long-term. Lease liabilities totaled approximately $1.128 million. Total liabilities were $26.593 million. The balance sheet reports stockholders’ deficit of $6.637 million; MD&A instead describes stockholders’ equity as positive $6.637 million, another apparent inconsistency.

Material changes and notable transactions

• Q1 revenue declined $4.486 million year over year. Operating loss worsened by approximately $772,000, while cash used in operations improved by approximately $455,000.
• SG DevCorp acquired Majestic World Holdings in February for stated consideration of $1.880 million, including $500,000 cash, $435,000 equity consideration and $945,000 of contingent consideration. The preliminary allocation includes $1.811 million of goodwill; purchase accounting remains provisional.
• The company raised funding through convertible debentures, warrants, receivables advances and other borrowing. A $300,000 Peak One debenture conversion reduced debt but issued 57,627 shares before the subsequent reverse split adjustment.
• On May 2, 2024, the company effected a 1-for-20 reverse stock split. The filing reports 1,344,668 common shares outstanding as of May 15, 2024.

Outlook, risks and contingencies

Management states that continued losses, negative working capital and negative operating cash flows raise substantial doubt about the company’s ability to continue as a going concern. It plans to rely on operating revenue, cost containment, strategic alliances and potential additional debt or equity financing; it says no additional future funding source is secured. Management expressed a belief that it could become cash-flow positive in the first half of 2024, but cautioned that financing or operating targets may not be achieved and gave no assurance of success.

After quarter-end, the company closed a private placement on May 7, 2024, receiving approximately $4.0 million gross before fees, intended for general corporate purposes and possible debt repayment. This subsequent funding does not remove the filing’s stated liquidity uncertainty.

Key risks include concentrated customer revenue (approximately 86% from one customer in Q1), backlog of only $964,000 that may be cancelled or deferred, project cost-estimation risk, inflation, financing availability, dilution, and high-cost secured or receivables-based borrowing. The filing describes several litigation matters; for some, potential loss or recovery cannot be estimated. It also reports ineffective disclosure controls and procedures as of March 31, 2024.

Nasdaq listing compliance requires attention. The company reported that it regained compliance with minimum bid-price and timely-filing rules after the quarter, but received a May 16, 2024 notice of noncompliance with the stockholders’ equity requirement. It intended to submit a compliance plan by June 30, 2024. The filing’s equity figures and descriptions are inconsistent, so the underlying listing status and applicable threshold warrant verification.

Most important facts to verify

• Confirm that this Safe & Green Holdings filing, rather than an Olenox Industries filing, is the intended subject.
• Reconcile reported stockholders’ deficit/equity and the conflicting negative-working-capital amounts; confirm the figures relevant to Nasdaq listing compliance.
• Assess near-term liquidity, cash burn, debt maturities, weekly receivables-advance withdrawals and the proceeds actually available from the May financing.
• Verify the status, timing and collectability of the $964,000 construction backlog and the concentration and credit quality of major customers.
• Review dilution exposure from convertible debt, warrants, equity facilities and post-quarter share issuances, accounting for the 1-for-20 reverse split.
• Track the going-concern outlook, progress toward cash-flow-positive operations, Nasdaq compliance plan and material litigation developments.