SG Blocks, Inc. — Q1 2020 Form 10-Q
Entity note: The supplied filing is for SG Blocks, Inc. (Nasdaq: SGBX), not Olenox Industries Inc. It reports the unaudited quarter ended March 31, 2020, with comparison to Q1 2019.
Business context and reporting period
SG Blocks designs, engineers and delivers modular building products using repurposed shipping containers and purpose-built modules. In October 2019, it shifted residential construction (excluding military housing) toward an exclusive licensing and royalty model with CPF GP 2019-1 LLC; it reported no revenue under that license in Q1 2020. The company also provides construction and engineering services.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $198,756 | $1,735,124 |
| Gross profit / margin | $45,981 / approximately 23% | $544,105 / approximately 31% |
| Operating expenses | $795,460 | $1,034,840 |
| Operating loss | $(749,479) | $(490,735) |
| Net loss | $(747,427) | $(490,735) |
| Net loss per share | $(0.64) | $(2.30) |
| Net cash used in operating activities | $(1,026,812) | $(1,117,931) |
- Revenue fell approximately 89%, reflecting lower activity across customer types and the business-model shift. Gross margin also declined, which management attributed primarily to limited Q1 activity.
- Cash and cash equivalents were $398,737 at March 31, versus $1,625,671 at December 31, 2019. Current assets were $1.65 million and current liabilities $1.89 million, implying negative working capital of approximately $234,000.
- Assets totaled $5.74 million; liabilities $2.09 million; stockholders’ equity $3.65 million. The balance sheet included a $400,000 long-term note receivable (plus accrued interest) and a $200,000 long-term note payable bearing 9% interest, secured by royalties under the CPF license.
- Operating cash use was supplemented by $400,000 advanced on the CPF note receivable and $200,000 in note proceeds; cash declined by $1.23 million during the quarter.
- SG Blocks disclosed substantial doubt about its ability to continue as a going concern, citing recurring losses and negative operating cash flows. It said it believed available resources and planned measures could meet obligations, but funding was not assured.
Material changes and business developments
- Backlog was approximately $17.48 million at quarter-end, down slightly from $17.63 million at year-end 2019. One contract of approximately $17 million accounted for most of the backlog; the company expected realization by September 30, 2022. Backlog is subject to cancellation, delay and scope changes.
- Customer and supplier concentration remained high: one customer accounted for 93% of gross receivables; four customers generated 73% of Q1 revenue, and three vendors represented 90% of cost of revenue.
- After quarter-end, the company reported public offerings in April and May 2020. The financial-statement note reports net proceeds of $1.509 million and $13.475 million, respectively; the MD&A instead gives $13.745 million for the May offering. The discrepancy requires verification. The offerings substantially increased shares outstanding; the filing reports 7,610,524 common shares outstanding as of May 12, versus 1,170,524 at March 31.
- Other subsequent developments included a non-binding collaboration with Transcend for modular medical/testing units and a one-year, non-exclusive agreement to distribute Osang COVID-19 test kits. Neither arrangement guarantees sales or material revenue; the kit agreement requires prepayment to the supplier, though the company said it expected customers to fund purchases.
Outlook, risks and contingencies
- Management anticipated continued operating losses and said future funding could require additional capital, cost containment or changes to its business plan. No further funding source was secured as of the filing’s discussion of liquidity.
- COVID-19 had already delayed projects. Further labor, supplier, customer-financing and demand disruptions could affect revenue, costs and project timing; the scale and duration were not predictable.
- Significant litigation remained unresolved, including disputes involving Pizzarotti, Teton Buildings, HOLA Community Partners/City of Los Angeles, EDI International and a former executive. The company recorded no provision for several matters because potential outcomes or losses could not be estimated. Teton’s Chapter 11 case had converted to Chapter 7, making recovery on SG Blocks’ claim less likely.
- The company recorded no income tax benefit, citing a full valuation allowance against deferred tax assets. It reported no material off-balance-sheet arrangements and said disclosure controls were effective.
Important facts for investors to verify
- Confirm the issuer identity: the filing is SG Blocks, Inc., not Olenox Industries Inc.
- Reconcile the May 2020 offering’s reported net proceeds: $13.475 million in the notes versus $13.745 million in MD&A.
- Assess actual cash runway after the April and May offerings, ongoing operating cash burn, and the company’s going-concern disclosure.
- Monitor conversion of the approximately $17.48 million backlog into recognized revenue and cash, including the large CPF-related project and cancellation or delay risk.
- Track the impact of the licensing-model transition and whether CPF royalties, Transcend projects or Osang kit distribution produce material revenue.
- Review dilution from the offerings and outstanding options, warrants and restricted stock units, and developments in the disclosed legal disputes.