OLENOX INDUSTRIES INC. quarterly report, Q1 FY2021

Business context and reporting period

This summary covers the unaudited Form 10-Q for the three months ended March 31, 2021. The request identifies OLENOX INDUSTRIES INC., but the supplied filing is for SG Blocks, Inc. (Nasdaq: SGBX); confirm the intended issuer.

SG Blocks develops and manufactures modular buildings using repurposed shipping containers and provides related engineering and construction services. Its activities also include COVID-19 testing and medical products through joint ventures and subsidiaries. The company acquired Echo’s modular manufacturing assets in 2020 and is pursuing real estate development.

Financial results and liquidity

Medical revenue was $5.96 million, about 65% of quarterly revenue; construction and engineering revenue was $3.23 million. The company attributed the medical increase primarily to COVID-19 testing activity. The difference between consolidated net loss and the larger loss attributable to SG Blocks common stockholders reflects $889,527 of income attributable to non-controlling interests.

At March 31, 2021, cash was $10.54 million, down from $13.01 million at year-end. Current assets were $17.84 million and current liabilities $7.81 million. Total liabilities were $8.97 million; the balance sheet shows lease liabilities, but no outstanding funded borrowing balance. Net cash used in investing was $990,388, including $862,090 of property and equipment purchases. Financing provided $703,438 from warrant exercises. Stockholders’ equity was $18.28 million.

Changes versus the prior comparable period

• Revenue rose by $8.99 million, principally from the new medical business, which had no revenue in Q1 2020.
• Gross margin fell from 23.1% to 13.2%. Management attributed this mainly to an approximately $1.0 million loss on a legacy Echo contract, driven by material-price escalation and labor overruns.
• Operating expenses increased to $2.37 million from $795,460, reflecting higher staffing, stock-based compensation, and costs of new and expanded operations.
• Backlog declined to $22.87 million from $25.12 million at December 31, 2020. The filing attributes the decline largely to approximately $3.3 million of work performed, partly offset by a new contract of about $1.3 million.

Outlook, risks, contingencies, and unusual items

• Management expects operating losses to continue until the fourth quarter of 2021 and stated cash should fund operations for at least 12 months from May 20, 2021. The filing also notes ongoing losses and negative operating cash flow, no secured future funding sources, and the risk that additional capital may not be available on acceptable terms.
• Backlog was approximately $22.9 million, with $10.0 million expected within one year and $12.9 million in one to two years. Management expects the reported backlog to be realized by March 31, 2023, but contracts may be cancelled, deferred, or changed, and backlog does not ensure profitable work.
• Two customers represented approximately 80% of Q1 revenue; four customers accounted for 84% of gross receivables. Two vendors represented 28% of cost of revenue. Customer concentration and collection risk are significant.
• COVID-19 has contributed to project delays, labor and supply-chain disruption, and higher input costs. Management says the effects on revenue and results remain uncertain.
• Disclosure controls and procedures were deemed ineffective. Management reported a material weakness involving timely closing of accounting records and accounting for complex or new transactions; remediation efforts were underway, with no completion date estimated.
• Several lawsuits remain unresolved, including disputes related to the HOLA project, a former employee, and vendors. The company recorded no provision for these matters because possible losses or ranges of loss could not be estimated; outcomes remain uncertain.
• After quarter-end, the company reported acquiring a Lago Vista, Texas site for $3.5 million in cash and planning a condominium development. The filing gives inconsistent site size: approximately 50 acres in the notes versus approximately 0.50 acre in MD&A. It also disclosed a lawsuit against Osang Healthcare concerning a COVID-19 test supply agreement.
• The company reported no royalties under its exclusive residential technology license during the quarter. Its stated expectation of approximately $2.4 million of royalties on one project is not guaranteed.

Key facts for investors to verify

1. Confirm the intended issuer: the supplied 10-Q is for SG Blocks, Inc., not OLENOX INDUSTRIES INC.
2. Reconcile the Lago Vista site acreage discrepancy and assess the $3.5 million cash outlay and development plan.
3. Assess whether cash generation, customer collections, and available financing can support operations given the $2.18 million quarterly operating cash outflow and management’s loss outlook.
4. Evaluate the quality, timing, cancellation exposure, and expected margins of the $22.9 million backlog, including the loss-making Echo legacy contract.
5. Review the concentration and collectability of revenue and receivables, and the dependence on medical testing activity and a small number of customers.
6. Monitor remediation of the disclosed material weakness and developments in the litigation and Osang dispute.