SG Blocks, Inc. — Form 10-Q Summary
Issuer and period: The filing identifies the registrant as SG Blocks, Inc., not Olenox Industries Inc. It covers the unaudited quarter and six months ended June 30, 2015; the balance sheet compares June 30, 2015 with December 31, 2014.
Business and financial performance
SG Blocks modifies code-engineered cargo shipping containers for construction and provides related engineering and project-management services. Its Brazilian subsidiary and a subsidiary formed in May 2015 were inactive.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $1.469 million | $0.641 million | $1.871 million | $1.675 million |
| Gross profit | $367,660 | $190,182 | $409,776 | $424,314 |
| Gross margin | 25% | 29% | 22% | 25% |
| Operating loss | $(174,845) | $(255,821) | $(729,440) | $(510,229) |
| Net loss | $(235,077) | $(2.131) million | $(592,122) | $(2.649) million |
| Net loss per share | $(0.01) | $(0.05) | $(0.01) | $(0.06) |
Six-month operating cash use was $727,744, versus $932,912 in 2014. Investing activities provided $12,000; financing activities provided no cash. Cash fell to $168,444 from $884,188 at year-end. At June 30, current assets were $374,666 and current liabilities were $4.228 million, implying a working-capital deficit of approximately $3.853 million. Total liabilities were $4.228 million and stockholders’ deficiency was $3.824 million.
Changes versus comparable periods
- Q2 revenue rose $828,272, primarily from more and larger “green steel” container projects. Six-month revenue increased $196,041, with block sales up and project-management revenue down.
- Gross margin declined in both comparisons: 25% versus 29% in Q2 and 22% versus 25% for the first half. Management attributed Q2 compression partly to a large project earned at a 24% gross margin.
- First-half operating loss increased by $219,211 as payroll and other operating expenses rose; management cited executive salary increases and higher professional fees.
- Net losses were substantially lower than in 2014, largely because 2014 included a $1.104 million loss on debt extinguishment and less favorable fair-value movements. These non-operating items make net-loss comparisons less indicative of operating performance.
Debt, outlook, risks, and unusual items
- Convertible debentures had a carrying amount of $3.405 million at June 30 and were classified as current. The filing says $3,995,700 of debentures would mature between October 1, 2015 and April 1, 2016, with required scheduled redemptions and 8% stated interest. Holders postponed interest payments due from July 1 until September 1, 2015.
- A $73,500 related-party revolving note matured in June 2015 and was in default; accrued related-party interest was $40,898. Convertible-debenture holders waived the cross-default provision.
- After quarter-end, on August 5, the company issued Hillair a $162,000 original-issue-discount secured convertible debenture for $150,000, due November 3, 2015, convertible initially at $0.10 per share. Proceeds were intended to fund operations. The filing reports cash of approximately $57,800 as of August 13.
- Management said operating cash and margins were insufficient to meet obligations, expected growth requirements to consume cash generated over the next 10–16 months, and required further external funding. No new financing commitments were in place. The filing states these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- A 15-year license to Red Cardinal was expected to produce royalties of 10% of collected licensed-product revenue and required a manufacturing contract of at least $10 million. No such contract had been entered into by the filing date. Red Cardinal sent a termination letter on June 24; SG Blocks responded July 22 that it believed the agreement remained in force. Red Cardinal had also agreed to satisfy debenture amounts as due.
- Potential dilution is significant: 15.425 million options, 25.572 million warrants and debt initially convertible into 15.983 million shares were outstanding at June 30. Anti-dilution provisions may increase dilution following qualifying transactions.
- Revenue and receivables were concentrated among a small number of customers. Three customers accounted for 66% of receivables at June 30. Related-party vendor ConGlobal supplied containers and labor and accounted for 37% of first-half cost of revenue.
- Management concluded disclosure controls were ineffective. Existing deficiencies, including limitations in reporting processes, complex accounting expertise and segregation of duties, together constituted a material weakness; remediation was incomplete.
- The filing reports no material litigation as of June 30 and no material off-balance-sheet arrangements other than operating leases and ordinary-course indemnities.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for SG Blocks, Inc., despite the request metadata naming Olenox Industries Inc.
- Verify the reported gross profit: the financial statements show first-half 2015 gross profit of $409,776, while MD&A states $409,477.
- Check the status, conversion terms, repayment schedule and any subsequent amendments or defaults relating to the debentures and August bridge financing.
- Track cash balances, financing availability and the company’s ability to meet near-term obligations and address the disclosed going-concern uncertainty.
- Determine whether the Red Cardinal license dispute was resolved and whether the required manufacturing contract or royalties materialized.
- Assess progress in remediating the material weakness and the potential share dilution from convertible debt, warrants and options.