Business context and reporting period
This is SG Blocks, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The request metadata names OLENOX INDUSTRIES INC., but the filing identifies the registrant as SG Blocks, Inc. (Nasdaq: SGBX); verify the intended company.
SG Blocks designs and supplies repurposed shipping-container and purpose-built modular structures, with related engineering and project-management services. It shifted U.S. residential activity toward a royalty-based licensing model in October 2019, acquired substantially all operating assets of modular manufacturer Echo DCL in September 2020, and expanded into medical testing products and facilities.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $576,560 | $184,526 | $1,404,265 | $2,647,558 |
| Gross profit (loss) | $194,606 | $(182,257) | $614,820 | $629,166 |
| Operating loss | $(1,525,330) | $(1,273,430) | $(3,115,563) | $(2,735,874) |
| Net loss | $(1,478,273) | $(1,325,469) | $(3,063,673) | $(2,787,913) |
| Net loss per share, diluted | $(0.17) | $(4.66) | $(0.60) | $(11.29) |
- Q3 revenue increased about 212% year over year; nine-month revenue fell about 47%. The filing attributes the nine-month decline principally to lower retail and office project revenue. Q3 gross margin was about 34%, versus a gross loss in the prior-year quarter; nine-month gross margin was about 44% versus 24%, helped by a $300,000 construction fee with no cost of revenue.
- Nine-month operating cash outflow was $4.45 million, compared with $2.50 million in 2019. Investing activities used $1.44 million; financing provided $17.32 million, largely from equity offerings. Cash increased $11.42 million to $13.05 million.
- At September 30, cash was $13.05 million, current assets $18.62 million, current liabilities $5.94 million, and stockholders’ equity $19.09 million. The company reported a $24.87 million construction backlog, which it expected to recognize by September 30, 2022, subject to project execution and cancellation risks.
- Total liabilities were $7.23 million, including $1.62 million of lease liabilities and a $753,000 acquisition earnout liability. The $200,000 secured note and accrued interest were converted into common shares during the period. The Echo acquisition also carries transaction-related obligations, including debt-service and line-of-credit commitments described in the filing.
Material changes versus the prior comparable period
- Revenue rose sharply in Q3 but remained substantially lower for the first nine months, reflecting a different project mix and the residential licensing-model transition. No ELA royalty revenue was recognized in the nine-month period.
- Operating expenses rose to $3.73 million for the first nine months from $3.37 million. Management cited higher legal and advisory fees, among other increases; lower payroll costs partly offset these increases.
- Cash and equity increased substantially following April and May 2020 public offerings, which together generated approximately $17.12 million in net proceeds. Common shares outstanding increased from 1,157,890 at December 31, 2019 to 8,596,189 at September 30, 2020.
- The September Echo asset acquisition expanded manufacturing capacity and added property, equipment, inventory, lease liabilities, and contingent consideration. Its purchase-price allocation remained provisional at quarter-end.
Outlook, risks, contingencies, and unusual items
- Management said available cash and backlog were expected to cover obligations for at least 12 months from November 19, 2020, while also warning that continued losses and operating cash use could require additional financing. No future funding source was secured; unavailable or unfavorable financing could force spending cuts or changes to the business plan.
- COVID-19 had caused project delays. The filing warns of possible further disruption to customers, suppliers, labor, sourcing, pricing, demand, and project schedules, with effects not reliably predictable.
- Backlog is not guaranteed revenue: contracts may be cancelled, delayed, or changed, and backlog does not assure profitability. Two Q3 contracts contributed approximately $4.0 million and $2.95 million to backlog.
- Subsequent to quarter-end, Osang agreed to consign two million COVID-19 test units, with payment due only upon sale and unsold product remaining Osang’s responsibility, subject to storage fees. Later announcements included a planned LAX testing laboratory and a Wayne County, Michigan mobile-lab program; these were not Q3-period results and their revenue impact was uncertain.
- Material litigation includes disputes related to the HOLA project, Pizzarotti, EDI International, and a former executive’s claims. The company recorded no provision for several matters because outcomes or loss ranges could not be estimated; HOLA also asserts claims exceeding $4 million, while SG Blocks seeks recovery in its related action.
- Management reported disclosure controls and procedures were effective at quarter-end. It noted accounting personnel changes and use of outside vendors, but no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the filing’s registrant: the source is SG Blocks, Inc., not the company named in the request metadata.
- Assess cash burn against management’s liquidity statement, and verify the Echo-related debt-service and line-of-credit obligations and their treatment in reported liabilities.
- Test the quality, timing, cancellation exposure, and expected margins of the $24.87 million backlog; confirm whether new medical and licensing initiatives convert into revenue.
- Review dilution from the 2020 offerings and outstanding options, warrants, and restricted stock units, including potential Echo earnout shares.
- Monitor the provisional Echo acquisition valuation, customer and vendor concentration, COVID-19 effects, and the status and potential financial exposure of the disclosed litigation.