SG Blocks, Inc. — Form 10-Q Summary
Filing identity: The supplied filing is for SG Blocks, Inc., although the request metadata names Olenox Industries Inc. Verify the issuer before relying on this summary. Reporting period: quarter and six months ended June 30, 2014; financial statements are unaudited.
Business context
SG Blocks modifies and supplies code-engineered cargo containers for construction and provides related engineering and project-management services. Its Brazilian subsidiary was inactive at June 30, 2014.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $640,563 | $1,621,620 | $1,674,833 | $2,577,788 |
| Gross profit (loss) | $190,182 | $(45,748) | $424,314 | $9,506 |
| Gross margin | 30% | (3%) | 25% | Approximately 0% |
| Operating loss | $(255,821) | $(657,347) | $(510,229) | $(1,134,572) |
| Net loss | $(2,130,595) | $(779,770) | $(2,648,809) | $(1,187,236) |
| Basic and diluted loss per share | $(0.05) | $(0.02) | $(0.06) | $(0.03) |
- Six-month operating cash use was $932,912, versus $1,138,963 in the prior-year period. Investing cash use was $1,804; financing provided $1,478,095. Cash increased to $1,137,627 from $594,248 at year-end 2013.
- At June 30, current assets were $2,241,649 and current liabilities $4,114,656, a working-capital deficit of approximately $1.87 million. Total liabilities were $7,000,439; stockholders’ deficiency was $4,698,777.
- Convertible debentures totaled $3,025,783 carrying value, including $2,885,783 long-term. The company also had $73,500 of related-party notes payable. Cash interest paid in the first half was reported as zero.
Changes versus prior comparable period
- First-half revenue fell $902,955, mainly because project-management revenue declined $1,512,625; container (“green steel”) revenue increased $548,200. Q2 revenue fell by about $981,000, primarily on lower project-management activity.
- Gross profit improved substantially in both periods, as prior-year project-management jobs included significant losses. First-half 2013 included $211,949 of gross losses on six such jobs.
- Operating losses narrowed, aided by lower payroll and other operating expenses. However, first-half net loss more than doubled, reflecting higher interest expense, a $1,104,179 debt-extinguishment loss, and adverse fair-value changes in derivative liabilities.
- Cash rose despite operating cash use, primarily because of April 2014 financing. Inventory increased to $814,014 from $34,052 at year-end 2013.
Financing, outlook, risks and unusual items
- In April, the company issued $1.825 million of new financing proceeds through 8% senior secured convertible debentures and exchanged existing debt. The new and exchange debentures have a stated maturity value of $3,995,700 combined, conversion price initially $0.25 per share, and final maturity in April 2016. The exchange generated the $1,104,179 extinguishment loss.
- The debentures are secured by company and subsidiary assets, carry covenants and anti-dilution provisions, and provide for scheduled redemptions in 2015–2016. Default may trigger accelerated repayment, a 30% premium and default interest. The related warrants and conversion options are fair-valued Level 3 liabilities.
- Management said cash and expected operating gross profit would not cover anticipated costs and growth needs over the next 10–16 months. Further external funding is required; no additional financing commitments were in place. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- Subsequent information: cash was approximately $1.579 million on August 13, 2014; a $140,000 debt payment was made in July; the Syracuse container-building contract was terminated in August. In July, the company also granted executives options on 3.75 million shares.
- Potential dilution is substantial: at June 30, outstanding warrants covered 25.6 million shares, options covered 10.3 million, and convertible debt was initially convertible into approximately 16.9 million shares, with possible additional shares under specified circumstances.
- Customer and supplier concentration is significant: four customers represented 81% of receivables, and three customers generated 79% of first-half revenue. A related-party supplier represented 36% of first-half cost of revenue.
- Disclosure controls and procedures were reported ineffective due to a material weakness involving financial-reporting data, complex accounting and limited segregation of duties. Management said remediation was ongoing.
- Related-party matters include an 11% Vector Group revolver with $73,500 outstanding, extended to June 2015, and purchases from minority-stockholder suppliers. The filing reported no legal proceedings and no material off-balance-sheet arrangements other than operating leases.
Important facts to verify
- Confirm the issuer identity: the filing names SG Blocks, Inc., not Olenox Industries Inc.
- Review current liquidity, subsequent financing, debt payments and any changes to the going-concern assessment.
- Examine the debenture terms, collateral, redemption schedule, covenant compliance and potential conversion or warrant dilution.
- Assess whether customer concentration, project estimates, inventory growth and related-party supplier dependence have changed.
- Check remediation of the disclosed material weakness and the status of executive employment agreements and the terminated Syracuse contract.