Filing summary: quarter ended September 30, 2018
Entity discrepancy: The request identifies OLENOX INDUSTRIES INC., but the supplied Form 10-Q is for SG Blocks, Inc. This summary covers SG Blocks, Inc. and its subsidiaries.
Business context and reporting period
SG Blocks provides construction and project-management services using modified cargo shipping containers and purpose-built steel modular units for commercial, industrial, and residential construction. The filing reports unaudited results for the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $2.083 million | $1.395 million | $5.932 million | $3.001 million |
| Gross profit | $224,840 | $97,897 | $420,010 | $396,913 |
| Gross margin | Approximately 11% | Approximately 7% | Approximately 7% | Approximately 13% |
| Operating loss | $(1.078) million | $(1.044) million | $(3.070) million | $(2.188) million |
| Net loss attributable to SG Blocks common stockholders | $(1.026) million | $(1.043) million | $(3.013) million | $(3.439) million |
| Loss per share, basic and diluted | $(0.24) | $(0.25) | $(0.71) | $(2.09) |
For the nine-month period, operating cash flow was negative $1.905 million, investing cash flow was negative $52,016, and financing cash flow was zero. Cash and cash equivalents were $2.913 million at September 30, 2018, down from $4.871 million at December 31, 2017. Current assets were $5.981 million and current liabilities were $4.069 million. The balance sheet reports no debt; the company had no interest expense in 2018 and had repaid its remaining convertible debenture balance using 2017 offering proceeds.
Total assets were $12.814 million, including $4.162 million of goodwill and $2.591 million of net intangible assets. Stockholders’ equity was $8.745 million, including a $52,445 non-controlling interest deficit. The company had 4,260,041 common shares outstanding as of November 13, 2018.
Material changes versus the prior comparable period
- Third-quarter revenue rose approximately 49% year over year; nine-month revenue rose approximately 98%, reflecting additional projects in progress or completed.
- Nine-month gross profit increased only modestly despite revenue growth, and gross margin fell to approximately 7% from 13%. Management attributed the decline mainly to unanticipated site-related costs on a contract of approximately $5.6 million.
- Third-quarter gross margin improved to approximately 11% from 7%, which management attributed to higher-margin projects.
- Nine-month operating expenses increased to $3.490 million from $2.585 million, including higher professional, marketing, and business-development costs. Nine-month operating loss widened, while net loss narrowed largely because the 2017 comparison included a $1.018 million loss on conversion of convertible debentures.
- Operating cash use increased to $1.905 million from $8,766 in the prior-year period. The company had no financing cash inflow in 2018, compared with $5.562 million in 2017.
Outlook, risks, contingencies, and unusual items
- At September 30, 2018, the company reported 15 projects and remaining unsatisfied performance obligations/backlog of $102.840 million. It expected to recognize this revenue by December 31, 2020, including $19.303 million within one year. Management cautioned that cancellations, deferrals, scope changes, and customers’ ability or willingness to proceed could affect realization.
- Management said it did not believe additional funds would be needed for operating expenditures, but also disclosed sustained losses, negative operating cash flow, no secured additional financing, and the possibility that financing may be unavailable or unfavorable. It warned that a funding shortfall could require changes to or curtailment of its plans.
- A lawsuit filed by Pizzarotti, LLC alleges breach of contract and seeks unspecified damages, including return of a $500,000 payment made to another party. SG Blocks says the agreement was terminated and the claims lack merit; it intends to defend the case. The company could not estimate a possible loss and recorded no provision.
- Customer and supplier concentration is material: two customers accounted for 67% of accounts receivable at quarter-end, and one customer represented 41% of nine-month revenue. Four vendors accounted for 85% of third-quarter cost of revenue.
- SG Blocks established SG Residential during the quarter as a platform for container-based modular homes. This business initiative and its results are subject to execution and market risks; the filing provides no quantified financial outlook.
- The company adopted ASC 606 revenue guidance on January 1, 2018 and reported no material impact from adoption. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is SG Blocks, Inc., not OLENOX INDUSTRIES INC.
- Assess whether the $102.840 million backlog can be converted into completed work, revenue, and cash on the expected schedule, and whether project cost overruns persist.
- Review the company’s cash-burn rate, liquidity needs, and access to financing, notwithstanding management’s statement that additional funds were not expected to be needed for operations.
- Monitor customer and supplier concentration and collection of receivables, including the concentration of 67% of receivables with two customers.
- Track the Pizzarotti litigation, including any developments in potential exposure, which the company could not estimate at filing.