SG Blocks, Inc. — Form 10-Q Summary
Entity note: The request metadata names Olenox Industries Inc., but the supplied filing identifies the registrant as SG Blocks, Inc. This summary reflects the supplied filing. The quarter and six-month period ended June 30, 2013; financial statements are unaudited.
Business context and reporting period
SG Blocks modifies and supplies cargo shipping containers for construction and provides related engineering and project management services. SG Brazil was inactive at June 30, 2013. The company recognizes long-term contract revenue using percentage of completion, based on costs incurred relative to estimated total costs.
Financial performance and position
| Metric | Three months ended June 30, 2013 | Six months ended June 30, 2013 | Comparable 2012 period |
|---|---|---|---|
| Revenue | $1.622 million | $2.578 million | $1.083 million and $1.607 million, respectively |
| Gross profit (loss) | $(45,748); approximately (3)% margin | $9,506; approximately 0% margin | $225,083 (21)% and $319,192 (20)% margins, respectively |
| Operating loss | $(657,347) | $(1.135) million | $(496,108) and $(991,259), respectively |
| Net loss | $(779,770) | $(1.187) million | $(467,198) and $(930,767), respectively |
| Basic and diluted loss per share | $(0.02) | $(0.03) | $(0.01) and $(0.02), respectively |
Six-month operating cash outflow was $1.139 million, versus $801,548 in 2012. Investing cash outflow was $2,086; financing provided $822,000, including $850,000 raised through convertible debentures and $28,000 of debt issuance costs. Cash declined $322,779 to $545,288. Cash at August 14, 2013 was approximately $548,000.
At June 30, 2013, current assets were $1.873 million and current liabilities $2.463 million, a working capital deficit of approximately $590,000. Total liabilities were $3.464 million, including convertible debentures with a carrying value of $1.567 million ($565,812 current and $1.001 million long term). Stockholders’ deficiency was $1.495 million. Accounts receivable were $892,556, including a $174,430 allowance; inventory was $256,769. No cash interest was paid during the six months.
Material changes versus prior comparable periods
- Six-month revenue rose 60%, primarily from project management work; project management revenue increased approximately $1.494 million while engineering revenue fell approximately $575,000.
- Higher project management costs and contract loss accruals drove cost of revenue up to $2.568 million. Five project management jobs generated approximately $218,000 of losses in the six-month discussion; management also reported significant project losses during the quarter.
- Six-month gross margin fell to approximately zero from 20%; second-quarter gross margin was negative, versus 21% a year earlier.
- Interest expense increased to $321,101 for six months from $4,087, reflecting debenture interest and amortization of debt discounts and issuance costs. A $268,357 noncash gain from changes in fair value of financial instruments partly offset expenses.
- Operating expenses declined, with payroll reductions attributed to voluntary salary cuts and lower overhead/professional fees. The company reported implementing cost-saving measures.
Outlook, risks, contingencies and unusual items
Management stated that growth and public-company costs over the next 10 to 16 months were expected to consume substantially all operating cash flows and intended financing proceeds; expected gross profit would not cover anticipated operating costs. The company said external funding was necessary and planned additional common-stock placements and convertible-debenture issuances, but had no financing commitments and gave no assurance it could raise capital on acceptable terms. Management disclosed substantial doubt about the company’s ability to continue as a going concern. If financing is unavailable, contemplated measures include headcount and salary reductions and other cost cuts. No numerical revenue or earnings guidance was provided.
Debentures bear 8% interest, are convertible initially at $0.43 per share subject to adjustments, and include scheduled redemptions in 2014. Default provisions can accelerate repayment and impose a premium; conversion and warrant terms could substantially dilute existing shareholders. Potentially dilutive instruments included options, warrants and debt initially convertible into approximately 4.8 million shares. The company also reported concentrated customer and vendor exposure: three customers accounted for 92% of second-quarter revenue and four customers for 88% of six-month revenue; three customers represented 74% of receivables. A minority shareholder, ConGlobal, supplied containers and labor, with $877,054 of six-month cost of goods sold and $143,840 payable at quarter end.
Management concluded disclosure controls were ineffective and cited an unremediated material weakness involving reporting processes, complex accounting requirements and limited segregation of duties. The filing reported no legal proceedings under that item, but disclosed that CFO Brian Wasserman was being sued by certain former employer lenders over alleged negligent misrepresentation; he disputed the allegations and intended to defend himself. Contract-cost estimates may change, and the company had accrued $38,604 for anticipated losses on uncompleted contracts. No material off-balance-sheet arrangements were reported other than operating leases.
Most important facts for investors to verify
- Confirm the issuer: the supplied filing is for SG Blocks, Inc., not Olenox Industries Inc.
- Assess the company’s cash runway, working-capital deficit, financing needs, and ability to refinance or meet scheduled debenture redemptions.
- Review project-level cost estimates and whether loss-making project management contracts can be completed without further margin deterioration.
- Evaluate customer concentration, receivable collectability, related-party purchasing, and potential dilution from convertible debt, options and warrants.
- Track remediation of the material weakness in disclosure controls and the status and potential impact of the disclosed lawsuit involving the CFO.