SG Blocks, Inc. — Form 10-Q Summary
Entity note: The request identifies Olenox Industries Inc., but the supplied filing is for SG Blocks, Inc. This summary reflects the filing provided. It covers the unaudited quarter and nine months ended September 30, 2015; it was signed July 21, 2016.
Business context and reporting period
SG Blocks modified engineered shipping containers for construction and provided related engineering and project-management services. The filing reports results before the company’s October 15, 2015 Chapter 11 filing. The company later emerged from bankruptcy on June 30, 2016, under a confirmed reorganization plan.
Financial results and liquidity
| Metric | Three months ended September 30, 2015 | Nine months ended September 30, 2015 |
|---|---|---|
| Revenue | $289,581 | $2,160,455 |
| Gross profit | $42,208 | $451,984 |
| Gross margin | About 15% | About 21% |
| Operating loss | $350,940 | $1,080,380 |
| Net loss | $1,661,993 | $2,254,115 |
| Net cash used in operations | Not separately presented | $1,020,061 |
- Third-quarter revenue fell from $3,647,058 in 2014; nine-month revenue fell from $5,321,891. Management attributed the declines mainly to a large “green steel” project recognized in 2014.
- Nine-month gross margin declined from 25% to about 21%. Interest expense for the nine months was $1,820,419, including a $1,247,310 default penalty after a missed debenture interest payment.
- At September 30, 2015, cash was $26,127, total current assets were $253,068, current liabilities were $5,713,099, and total liabilities were $5,713,099. Convertible debentures, net, were $4,911,837, all classified as current. Stockholders’ deficiency was $5,437,569.
- Cash declined from $884,188 at December 31, 2014. The company reported a $12,991,508 accumulated deficiency and substantial doubt about its ability to continue as a going concern.
Material changes, risks and subsequent events
- On September 11, 2015, the company failed to pay debenture interest; the default increased the debenture principal by $1,247,310 to $5,405,010. A related-party revolving note was also in default at quarter-end.
- After the reporting period, the company and subsidiaries filed Chapter 11 petitions, obtained a DIP facility with a maximum principal amount of $600,000 at 12% interest, and later repaid it upon emergence.
- Under the reorganization, pre-existing common shares were cancelled and replaced with 491,365 new common shares for former holders. Debt holders received convertible preferred stock; the plan described this as 82.5% of new common stock upon conversion, after specified adjustments. Management options were planned for a 10% stake on a fully diluted basis.
- At emergence, HCI provided a $2.5 million principal secured convertible debenture for a $2.0 million subscription price, due June 30, 2018, convertible at one share per $1.25 of debt. The filing says conversion could give HCI a controlling interest and dilute other holders.
- Management later reported approximately $889,000 cash at July 20, 2016, but expected growth needs to consume operating cash and stated that further external financing was necessary. It warned there were no commitments for additional financing and no assurance it could be obtained.
- Disclosure controls and procedures were deemed ineffective, with material weaknesses involving timely financial reporting, complex accounting and limited segregation of duties. The company said remediation was incomplete.
- Customer and supplier concentration was significant: 85% of receivables at quarter-end were due from one customer; one customer represented 68% of nine-month revenue across four customers, and a related-party vendor represented 45% of nine-month cost of revenue.
Investor verification priorities
- Confirm the issuer identity: the supplied filing is SG Blocks, Inc., not Olenox Industries Inc.
- Reconcile the third-quarter comparative results: the financial statements show 2014 net income of $920,452 and operating income of $198,143, while MD&A gives different 2014 figures, including a net loss of $2,130,595 and operating loss of $255,821.
- Review the bankruptcy plan, conversion terms, new capitalization and dilution from the preferred stock, management options and HCI exit debenture.
- Assess the going-concern warning, financing needs, debt defaults, and ability to secure adequate capital.
- Evaluate the concentration risks and the disclosed material weaknesses in disclosure controls.