OLENOX INDUSTRIES INC. annual report, FY2015

Business context and reporting period

The supplied filing is SG Blocks, Inc.’s Form 10-K for the fiscal year ended December 31, 2015—not a filing for Olenox Industries Inc. or a standalone 2015 fourth quarter. SG Blocks modifies and supplies engineered shipping containers for construction and provides related engineering and project-management services. The financial statements are audited and compare fiscal 2015 with fiscal 2014.

Financial performance and condition

Year-end 2015 current assets were $741,000 against current liabilities of $6.037 million, indicating severe liquidity pressure. Convertible debentures were reported at $5.017 million and debtor-in-possession financing at $600,000. The filing reports accumulated deficiency of $13.481 million. No income tax benefit was recognized because a full valuation allowance offset deferred tax assets.

Changes versus the prior comparable period

• Revenue fell 60%, mainly because a $3.260 million block-construction project recognized in 2014 did not recur. Costs of revenue also declined, but less than revenue; gross profit fell 65% and gross margin declined to 21% from 24%.
• Operating loss widened to $1.445 million from $753,000, and net loss increased to $2.743 million from $1.537 million.
• Interest expense rose to $1.944 million from $1.067 million. A $1.247 million default penalty on convertible debentures was a major 2015 charge. Favorable changes in fair value of financial instruments were $647,000 in 2015, versus $1.386 million in 2014; 2014 also included a $1.104 million loss on debt extinguishment.
• Operating cash use increased to $1.189 million from $1.054 million; cash declined by $417,000 during 2015.

Outlook, bankruptcy, risks, and unusual items

• The company filed for Chapter 11 on October 15, 2015, and emerged on June 30, 2016. The confirmed plan and emergence financing occurred after the 2015 balance-sheet date and should not be confused with year-end 2015 liquidity.
• At emergence, HCI provided a $2.5 million principal, 12% original-issue-discount senior secured convertible debenture for a $2.0 million subscription price, maturing June 30, 2018. It is secured by first-priority liens on company and subsidiary assets and is convertible at $1.25 per share. The filing says the DIP facility was repaid and prepetition debt was cancelled under the plan in exchange for preferred stock.
• Former common shares were cancelled; holders received 491,365 new common shares, representing 7.5% on the stated fully diluted basis before conversion of the exit facility. Management options were expected to represent 10%, and the new preferred stock was convertible 1:1 and would represent 82.5% on the stated basis. HCI could obtain a controlling interest through the plan securities and conversion rights.
• Management projected that growth and public-company costs would consume expected operating cash flows over the next 10–16 months and stated that additional external funding was needed. The auditor highlighted substantial doubt about the company’s ability to continue as a going concern. No assurance was given that further financing would be available on acceptable terms.
• Key risks include continued losses, customer financing constraints, construction-cycle and project risks, pricing pressure, dependence on subcontractors and suppliers, and reliance on ConGlobal. The ConGlobal supply agreement was being renegotiated; ConGlobal was also a related party and accounted for about 49% of 2015 cost of revenue. Two customers represented about 70% of 2015 revenue.
• Disclosure controls and internal control over financial reporting were reported ineffective, with material weaknesses involving timely financial data, complex accounting and limited segregation of duties. The filing also reports that the company was not current on required SEC filings in its cover-page certifications.

Important facts for investors to verify

• Confirm the intended issuer: this source identifies SG Blocks, Inc., although the request metadata names Olenox Industries Inc.
• Review the full audited statements and notes, bankruptcy plan, and subsequent filings to verify post-emergence liquidity, debt terms, use of exit proceeds, and current going-concern status.
• Verify the current capitalization and voting control after preferred-stock conversion, management-option issuance, and any exit-debenture conversion; the filing’s ownership disclosures include securities issuable on conversion.
• Assess whether revenue recovery and margins are supported by signed contracts and whether customer and supplier concentration, including the ConGlobal agreement, has changed.
• Check remediation of the reported control weaknesses and the company’s SEC filing compliance.