Business context and reporting period
Issuer discrepancy: The supplied filing is SG Blocks, Inc. (Nasdaq: SGBX), not Olenox Industries Inc. It is a Form 10-Q for the quarter ended September 30, 2021; the financial statements are unaudited. SG Blocks makes modular and container-based buildings, and during 2021 also generated substantial COVID-19 testing and medical-product revenue. The company acquired Echo’s modular manufacturing assets in 2020 and consolidated its medical ventures in 2021.
Financial performance and position
| Metric | Three months ended Sept. 30, 2021 | Nine months ended Sept. 30, 2021 | Comparable 2020 period |
|---|---|---|---|
| Revenue | $8.85 million | $29.89 million | $0.58 million / $1.40 million |
| Gross profit | $0.11 million | $4.15 million | $0.19 million / $0.61 million |
| Gross margin | About 1% | About 13.9% | About 34% / 44% |
| Operating loss | $2.73 million | $3.81 million | $1.53 million / $3.12 million |
| Net loss attributable to SG Blocks common stockholders | $3.83 million; $0.43 per share | $7.41 million; $0.84 per share | $1.48 million; $0.17 per share / $3.06 million; $0.60 per share |
Medical revenue was $23.91 million, or 80% of nine-month revenue, and was principally related to COVID-19 testing. The filing says the 2021 results include SG Echo, Clarity Mobile Venture and Chicago Airport Testing, unlike the 2020 comparison. Nine-month net loss for the consolidated company was $3.74 million; the larger loss attributable to common stockholders reflects $3.66 million of net income attributable to noncontrolling interests.
At September 30, cash was $3.29 million, down from $13.01 million at December 31, 2020. Current assets were $8.95 million and current liabilities $10.84 million. Total assets were $24.92 million, total liabilities $11.80 million, and stockholders’ equity $13.12 million. Net cash used in operations was $1.03 million; investing activities used $8.28 million, including property and equipment purchases and $3.46 million invested in equity affiliates. Financing activities used $0.40 million, including a $3.06 million distribution to noncontrolling interests.
Debt included a $2.0 million secured, one-year note issued in July 2021, with a 12% interest rate and collateral tied to the Lake Travis project site; the balance sheet reports $1.96 million net of costs. Lease liabilities totaled approximately $1.29 million. The company reported no income tax expense and a full valuation allowance against deferred tax assets.
Material changes versus the prior comparable period
- Nine-month revenue rose by $28.48 million, driven mainly by newly consolidated medical activities and, to a lesser extent, construction growth. This is not a like-for-like comparison.
- Gross margins contracted sharply. Management attributed the decline partly to legacy fixed-price Echo contracts, which incurred approximately $4.6 million in losses during the first nine months due to material-price escalation and labor overruns. The third-quarter impact was approximately $2.25 million.
- Operating expenses increased with added staff, public-company costs, medical operations and Echo-related depreciation and other costs. Nine-month payroll and related expenses were $2.87 million versus $1.34 million.
- Construction backlog fell from $25.12 million at year-end 2020 to $20.07 million at September 30, 2021, reflecting work performed, contract additions and cancellations. The filing reports a partial cancellation of approximately $1.3 million.
- The company terminated its exclusive residential technology license in June 2021 and returned to a project-based construction model. It does not expect further royalties under that license.
Outlook, risks and unusual items
Management reported approximately $20.07 million of construction backlog, with $7.22 million expected within one year and $12.86 million in one to two years; it expects the backlog to be realized by September 30, 2023. Backlog is subject to cancellation, deferral and scope or cost changes, and is not a guarantee of revenue or profit. The company stated it believed cash, including subsequent financing, would fund at least the next 12 months, but also warned that it has incurred recurring losses and negative operating cash flows, has no other funding sources secured, and may need additional capital or to curtail plans.
After quarter-end, an October offering generated approximately $11.55 million gross and $10.52 million net proceeds, using common shares, pre-funded warrants and warrants. The pre-funded warrants were exercised; the Series A warrants have a $4.80 exercise price. The offering provides liquidity but may dilute existing holders. Management also disclosed a subsequent 10-year facility lease in Durant, Oklahoma, a company-guaranteed $750,000 forgivable note for improvements, and a requirement to employ at least 75 full-time workers there within 24 months.
COVID-19-related supply disruptions, labor shortages, project delays and increased materials costs remain risks. The filing also cites customer and supplier concentration, including a risk-factor statement that one customer generated approximately 90% of nine-month revenue; elsewhere, the financial-statement note reports approximately 77%. These disclosures are inconsistent. Legal matters include disputes associated with the HOLA project and Echo asset acquisition, among others; potential outcomes or loss ranges were generally not estimable. A settlement provision of approximately $278,800 was recorded for the former CFO’s claims, subject to court approval.
Management concluded disclosure controls and procedures were ineffective and reported a material weakness involving timely close procedures, accounting resources and technical accounting for complex transactions. Additional senior accounting resources and outside consultants were engaged, but remediation was not complete and no completion date was estimated.
Most important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for SG Blocks, Inc., despite the request naming Olenox Industries Inc.
- Reconcile the customer-concentration disclosure (77% versus 90% for the nine months) and assess dependence on medical/COVID-related revenue.
- Review the remaining exposure and estimated costs on Echo legacy contracts, and whether backlog can be completed profitably and on schedule.
- Assess liquidity after the October offering, the $2.0 million secured note’s July 2022 maturity, and the potential dilution from outstanding and newly issued warrants and equity awards.
- Track remediation of the material weakness and developments in the disclosed litigation, particularly the HOLA and Echo-related matters.