Business context and reporting period
This summary is of SG Blocks, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2016. The request metadata names Olenox Industries Inc., but the filing identifies SG Blocks, Inc. as the registrant. SG Blocks modifies shipping containers for commercial, industrial and residential construction and provides related engineering and project-management services.
The company emerged from Chapter 11 on June 30, 2016 and adopted fresh-start accounting. Accordingly, post-emergence “Successor” results and pre-emergence “Predecessor” results are not directly comparable.
Key financial metrics
| Metric | 2016 | Comparable period |
|---|---|---|
| Q3 revenue | $315,710 | $289,581 in Q3 2015 |
| Q3 gross profit and margin | $57,767; 19% | $42,208; 15% in Q3 2015 |
| Q3 operating loss | $373,321 | $350,940 in Q3 2015 |
| Q3 net loss | $543,206 | $1,661,993 in Q3 2015 |
| Nine-month revenue | $1,371,933 | $2,160,455 in 2015 |
| Nine-month gross profit and margin | $254,016; 19% | $451,984; 21% in 2015 |
| Nine-month net loss | $1,207,943 | $2,254,115 in 2015 |
The nine-month 2016 figures combine six Predecessor months and three Successor months. The reduced comparative net loss largely reflects the prior-year $1,247,310 default penalty on convertible debt; it does not indicate operating profitability.
- Cash flow: Net cash used in operating activities was $1,393,781 for the combined first nine months of 2016, per MD&A. The Q3 Successor cash-flow statement reports $560,886 used in operating activities.
- Liquidity: September 30 cash was $346,417; current assets were $853,967 and current liabilities $1,029,721, implying a $175,754 working-capital deficit. Cash was approximately $241,000 on November 7.
- Debt and other liabilities: Convertible debentures were carried at $1,717,348, net of discounts; the balance sheet also reports $25,000 of related-party notes payable and $376,115 of conversion-option liabilities. Total liabilities were $2,747,069.
- Margins and costs: Q3 operating expenses were $431,088, exceeding gross profit. Nine-month operating expenses were $1,404,551.
Material changes and capital structure
- Revenue for the first nine months fell $788,522 year over year, mainly because fewer container construction jobs were completed. SG Block sales were $1,242,997 in the 2016 combined period versus $2,095,341 in 2015; engineering-services revenue increased.
- Payroll expense declined, attributed to lower headcount and salaries. Other operating costs rose, driven mainly by pre-project expenses and amortization of newly recognized intangible assets.
- At emergence, the prior common shares were cancelled and 491,357 new common shares issued. HCI received 5,405,010 convertible preferred shares; the filing says these carry voting rights on an as-converted basis and give HCI effective control of 51.17%. Preferred shares are convertible 1:1, subject to the plan’s capitalization terms.
- The new senior secured convertible debenture has $2.5 million principal, was issued for $2.0 million, bears a 12% original issue discount and matures June 30, 2018. HCI may convert at $1.25 per common share; full principal conversion would issue 2 million shares. The debt is secured by first-priority liens on company and subsidiary assets.
- The plan provides for full payment of allowed general unsecured claims plus post-petition interest. The filing reports 75% paid by September 30 and states the remaining 25% is due; confirm the status and amount of remaining distributions.
Outlook, risks and unusual items
- Going concern: Management says cash and operating margins are insufficient to meet obligations and growth needs. It expects funding needs over the next 18 months to exceed operating cash generation and says additional external financing is required. No commitment for further financing was in place; the filing identifies substantial doubt about the company’s ability to continue as a going concern.
- Concentration: Two customers generated approximately 73% and 12% of Q3 2016 revenue; two customers accounted for 68% of receivables at September 30. A related-party vendor represented 53% of Q3 cost of revenue.
- Execution and estimates: Contract costs and completion estimates may change, and management says additional significant costs on open contracts are reasonably possible. Goodwill and intangible asset values were established using preliminary fresh-start estimates; goodwill is subject to impairment testing.
- Controls and reporting: Management concluded disclosure controls were ineffective and identified a material weakness involving timely financial reporting, complex accounting and limited segregation of duties. Remediation was ongoing.
- Bankruptcy accounting: Fresh-start accounting recorded $4.16 million of goodwill and approximately $3.73 million of net intangible assets at September 30. The company recognized $64,821 of Q3 bankruptcy-related legal and professional fees and a $18,345 gain from fair-value changes in financial instruments.
- No material litigation was reported, and management disclosed no material change in the previously reported risk factors. The filing provides no specific revenue or earnings guidance.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for SG Blocks, Inc., notwithstanding the Olenox Industries Inc. request metadata.
- Verify current cash, operating cash burn, financing availability and the company’s ability to meet obligations; the filing states no additional financing was committed.
- Review the debenture’s secured status, 12% original issue discount, conversion terms and potential dilution, alongside HCI’s voting control through preferred stock.
- Confirm the amount and payment status of the remaining unsecured bankruptcy claims and associated interest.
- Assess customer and supplier concentration, contract completion estimates, and the valuation and impairment risk of fresh-start goodwill and intangible assets.
- Check remediation progress for the disclosed material weakness and ineffective disclosure controls, and resolve filing inconsistencies, including the stated preferred-share authorization versus issued amount.