Business context and reporting period
This is SG Blocks, Inc.’s Form 10-K for the fiscal year ended December 31, 2021 (ticker SGBX), not a filing identified in the document as Olenox Industries Inc. SG Blocks supplies modular building products and construction services, and operates COVID-19 testing activities through joint ventures. In 2021 it also began investing in real estate development and ended its residential technology-licensing arrangement with CPF, returning to a project-based construction model.
Key financial results
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Revenue | $38.34 million | $8.76 million |
| Gross profit | $2.33 million; 6.1% margin | $2.22 million; 25.4% margin |
| Operating loss | $5.98 million | $4.58 million |
| Consolidated net loss | $5.91 million | $4.51 million |
| Net loss attributable to SG Blocks common stockholders | $10.83 million; $1.16 per share | $4.69 million; $0.79 per share |
| Adjusted EBITDA (non-GAAP) | $(8.02) million | $(2.78) million |
| Cash used in operating activities | $0.66 million | $2.89 million |
Medical revenue was $31.55 million, about 82% of total revenue, up from $4.24 million. Construction and engineering revenue was $6.79 million, about 18% of total, versus $4.51 million. Total revenue rose 338%, largely reflecting a full year of LAX testing activity and the Echo manufacturing acquisition. Despite higher sales, gross profit increased only modestly as construction costs rose sharply.
Construction and engineering generated an operating loss of $7.04 million, versus operating income of $0.16 million in 2020. Management cited higher material and labor costs, COVID-related supply disruptions, and low-margin Echo legacy work; the company recorded a $2.24 million provision for losses on uncompleted contracts. Medical operations generated $8.41 million of segment operating income, compared with $1.00 million. Corporate and support operating costs increased to $7.14 million from $5.74 million. The common-stockholder loss exceeds consolidated net loss because $4.92 million of net income was attributed to non-controlling interests.
Liquidity, debt and cash flow
At year-end, cash and cash equivalents were $13.02 million, current assets were $17.91 million, current liabilities were $11.59 million, and total liabilities were $13.21 million. The company reported $20.35 million of SG Blocks stockholders’ equity and $21.72 million of total stockholders’ equity. Operating cash use improved year over year, but investing activities used $9.47 million, primarily for property and equipment, development and equity-affiliate investments. Financing activities provided $10.15 million, including approximately $10.49 million net proceeds from the October equity offering.
Debt included a $2.0 million real-estate-secured note bearing 12% interest, with a one-year term, and a $750,000 non-interest-bearing forgivable note for manufacturing-facility improvements, guaranteed by the company and subject to employment requirements. Operating and finance lease liabilities totaled approximately $1.21 million. Management stated that cash was expected to fund operations for at least 12 months from April 15, 2022, but said additional financing may be needed and no future funding source was secured. The filing identifies substantial doubt risk related to continued losses and the need to sustain or raise capital.
Material changes and outlook
- Construction backlog fell from $25.12 million at year-end 2020 to $3.22 million at year-end 2021, primarily following cancellations, including a roughly $16.9 million project. Management expected the remaining backlog to convert to revenue by December 31, 2022; backlog is cancellable and excludes medical testing.
- The company terminated CPF’s exclusive license in June 2021; it reported no royalties under the license in 2020 or 2021. The settlement assigned SG Blocks a conditional right to a $1.25 million redemption distribution. CPF loans remain outstanding.
- Management expected construction operating losses to remain pressured at least through the first quarter of 2022, but anticipated fewer prototype projects in 2022. The filing provides no quantified full-year revenue or earnings guidance.
- Development activity included a 50+ acre Lago Vista, Texas site, minority investments in Atlanta-area and Georgia projects, and a Durant, Oklahoma land acquisition that closed in the first quarter of 2022. The Lago Vista property was listed for sale after year-end. The company also disclosed a 2022 investment and manufacturing agreement related to Moliving.
- The October 2021 financing raised $11.55 million gross and approximately $10.49 million net, issuing common shares and pre-funded warrants and warrants exercisable at $4.80. The filing reports 11.99 million common shares outstanding at year-end and 12.01 million as of April 11, 2022; outstanding awards and warrants create potential dilution.
Risks, contingencies and unusual items
- Revenue and receivables are highly concentrated: one customer represented about 80% of 2021 revenue, and four customers represented 78% of year-end gross receivables. COVID-19 testing demand, test availability and the future of the testing ventures are uncertain; the Memorial/Wayne County program ceased in November 2021, and Chicago Airport Testing ceased operations.
- COVID-related supply-chain, labor and transportation disruptions may delay projects, raise costs and affect demand. Construction contracts require estimates of costs to complete; the independent auditor identified this estimation as a critical audit matter.
- Pending disputes include litigation involving the HOLA project, ICON Construction and Pizzarotti. The company stated it could not predict possible losses or ranges for several matters and recorded no provision for them. The former CFO’s action was settled and the court closed it in February 2022.
- The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective at year-end; the auditor did not attest to internal-control effectiveness.
- The company reported $26.1 million of tax net operating loss carryforwards, but maintained a full valuation allowance against deferred tax assets. Goodwill was $1.31 million and no impairment was recorded in 2021.
Important facts for investors to verify
- Confirm the issuer identity and ticker: this filing is for SG Blocks, Inc. (SGBX), not Olenox Industries Inc.
- Assess whether medical revenue and cash generation can be sustained as COVID testing programs wind down or change, and review joint-venture economics and non-controlling-interest allocations.
- Track construction margins, remaining legacy contracts, the $2.24 million estimated contract-loss provision, and conversion or cancellation of the $3.22 million backlog.
- Review cash runway, capital spending and development commitments, the maturity and repayment plan for the 12% secured note, and compliance with the Durant loan’s employment covenant.
- Evaluate potential dilution from warrants, pre-funded warrants, restricted stock units and future financing needs, alongside the status and potential exposure of material litigation.