Filing identity and reporting period
Important identity mismatch: The request identifies OLENOX INDUSTRIES INC., but the supplied Form 10-Q is for SG Blocks, Inc. This summary describes the filing provided, not an Olenox filing. It covers the quarter and six months ended June 30, 2012; the interim financial statements are unaudited.
SG Blocks provides repurposed cargo-container building products, engineering services, and project management. Its Brazilian subsidiary began operating in 2012.
Financial performance and condition
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | 2012: $1.083 million; 2011: $770,368 | 2012: $1.607 million; 2011: $2.593 million |
| Gross profit | 2012: $225,083; 2011: $229,493 | 2012: $319,192; 2011: $375,370 |
| Gross margin | About 21%; 2011: about 30% | About 20%; 2011: about 14% |
| Operating loss | 2012: $487,017; 2011: $349,427 | 2012: $1.007 million; 2011: $615,529 |
| Net loss | 2012: $467,198; 2011: $335,488 | 2012: $930,767; 2011: $585,109 |
| Basic and diluted loss per share | 2012 and 2011: $0.01 | 2012 and 2011: $0.02 |
For the six months, operating cash flow was negative $801,548, investing cash flow was zero, and financing cash flow was positive $642,183. Cash fell from $561,759 at year-end 2011 to $401,760 at June 30, 2012; the company reported approximately $386,000 at August 20, 2012.
At June 30, current assets were $744,978 versus current liabilities of $773,607. Total assets were $751,775, and stockholders’ deficiency was $21,832. Related-party notes payable were $73,500, with $16,306 accrued interest; the note bears 11% interest and was extended after quarter-end to mature December 31, 2013. The balance sheet also included $184,537 of warrant liabilities.
Material changes and notable items
- Six-month revenue declined $985,613 year over year, mainly because a $1.425 million container-block sale recognized in the 2011 period did not recur. A large engineering project partly offset the decline.
- Second-quarter revenue rose $312,687, largely from engineering work, but gross profit was slightly lower and gross margin declined. Management attributed the lower quarterly margin in part to engineering revenue recognized at a 5% margin.
- Six-month gross margin improved from about 14% to 20%, partly because the prior-year large block sale had a 5% margin. Payroll expense increased $246,293 year over year, principally due to stock-based compensation; bad-debt expense was $53,111.
- Other income included $33,064 from the change in fair value of warrant liabilities, $31,447 from cancellation of trade liabilities and unpaid interest, and $25,000 of insurance proceeds relating to a previously damaged container home.
- The company issued 2,166,444 shares in the 2012 private placement and reported $642,183 of net proceeds for the six-month period. It also recorded $249,385 of stock-based compensation and issued 40,000 shares to settle $67,782 of related-party payables.
Outlook, liquidity, and risks
Management said anticipated growth and public-company costs over the next 10 to 16 months would consume substantially all expected operating cash flows and financing proceeds, and that gross profit was not expected to cover anticipated operating costs. Additional external funding is required; there were no commitments for new financing, and management gave no assurance it could raise funds on acceptable terms. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern. If financing is unavailable, planned cash-preservation measures include headcount and salary reductions and other cost cuts. The company also identified intended private-placement fundraising during 2012 and 2013; this is a financing plan, not earnings guidance.
Key risks include customer and vendor concentration, dependence on ConGlobal for containers and labor, execution and margin risks in construction projects, collection risk, competition, and the need for financing. Two customers accounted for approximately 69% of second-quarter and 74% of six-month 2012 revenue; SG Brazil generated 30% of six-month revenue. A related-party vendor accounted for 44% of six-month cost of revenue.
Management concluded that disclosure controls and procedures were not effective at quarter-end. Previously identified deficiencies included financial-reporting processes, application of complex accounting rules, and limited segregation of duties; remediation was ongoing. No material change in internal control over financial reporting was reported during the second quarter. The filing reported no legal proceedings.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is SG Blocks, Inc., not OLENOX INDUSTRIES INC.
- Check current cash, financing availability, and subsequent developments relevant to the going-concern warning; the filing reported no committed new financing.
- Review customer concentration, receivable collectability, and the $103,126 allowance for doubtful accounts against gross receivables of $396,972.
- Verify project economics and margin sustainability, particularly for engineering work and contracts recognized using percentage-of-completion estimates.
- Assess dilution and potential share overhang: 41,985,950 common shares were outstanding at June 30, alongside 8,032,500 options and 1,160,607 warrants.
- Track progress in remediating the disclosed material weakness and ineffective disclosure controls.