Business context and reporting period
The supplied filing is SG Blocks, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2019—not a filing identified as Olenox Industries Inc. SG Blocks designs and constructs modular buildings using repurposed shipping containers and purpose-built steel modules, and provides related engineering and project-management services.
Financial performance and position
- Revenue: $1.735 million, up 12% from $1.544 million in Q1 2018. Construction services generated $1.658 million; engineering services generated $77,050.
- Gross profit and margin: $544,105 and approximately 31%, versus $163,596 and 11% a year earlier. The filing attributes the improvement largely to lower container purchasing and modification costs and unusually low margins on a legacy contract in Q1 2018.
- Operating expenses and loss: Operating expenses were $1.035 million versus $918,000. Operating and net loss were both $490,735, compared with operating loss of $754,108 and net loss of $754,104 in Q1 2018. Basic and diluted loss per share was $0.12 versus $0.18.
- Cash flow: Operating activities used $1.118 million, compared with $385,000 used in Q1 2018. Investing and financing cash flows were zero in Q1 2019. Cash declined by $1.118 million to $250,464 from $1.368 million at year-end.
- Liquidity and equity: Current assets were $4.001 million and current liabilities $3.832 million at March 31. Stockholders’ equity was $6.806 million, down from $7.080 million at year-end. The balance sheet presents no separate debt balance.
- Backlog: $95.84 million at March 31, compared with $97.66 million at December 31, 2018. Management expected all of this backlog to be realized by June 30, 2021; approximately $20.85 million was expected within one year.
Material changes versus the prior comparable period
Revenue increased by $191,598, principally as growth in office and retail work more than offset lower school and special-use revenue. Cost of revenue fell by $188,911, lifting gross profit by $380,509. Payroll and related expenses rose by $233,132, including higher salaries, additional headcount, and stock compensation. Other operating expenses declined overall, partly due to lower marketing costs and reduced amortization after customer contracts were fully amortized at the end of 2018.
Outlook, risks and unusual items
- Going concern: The company reported recurring losses and negative operating cash flows, which management said raise substantial doubt about its ability to continue as a going concern. Management expected positive operating cash flow for 2019 based on backlog conversion, but cautioned that conversion and timing were uncertain and that additional funding might be needed.
- Subsequent financing: The company closed an April 2019 offering of 847,750 shares at $1.10 per share and warrants for up to 847,750 additional shares. Gross proceeds were approximately $932,525; estimated net proceeds were approximately $692,248. The warrants are initially exercisable after six months at $1.375 per share, subject to their terms. This financing is after the reporting date and does not change March 31 cash.
- Customer, contract and collection risks: Two customers accounted for 89% of Q1 2019 revenue, and two customers represented 72% of receivables at quarter-end. Net receivables included an $839,895 allowance, primarily tied to unpaid billings on a disputed contract. The company also cautioned that project costs and backlog may change, and contracts may be cancelled or deferred.
- Legal matters: The company is defending a Pizzarotti suit seeking unspecified damages; it recorded no provision because it could not estimate a possible loss. It sued supplier Teton seeking approximately $2.1 million plus attorneys’ fees in connection with the HOLA project. The company and HOLA Community Partners also disputed amounts and performance under that project and were in settlement discussions.
- Dilution and execution: The company may require further capital, which could dilute existing holders or impose debt obligations. It also identified risks involving customer financing, suppliers, project execution, competition, regulation, litigation and Nasdaq listing requirements.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for SG Blocks, Inc., not Olenox Industries Inc.
- Check subsequent cash use, operating cash flow, and whether management’s 2019 positive-cash-flow expectation was achieved.
- Verify actual backlog conversion, project status and any cancellations, deferrals or cost revisions.
- Review collection status of the disputed receivable and developments in the Pizzarotti, Teton and HOLA matters.
- Confirm the final proceeds, share count and potential dilution from the April offering and warrants.