Filing summary
Identity note: The filing provided is SG Blocks, Inc.’s Form 10-Q, not an Olenox Industries Inc. filing. It covers the quarter ended September 30, 2013; the financial statements are unaudited.
Business context and reporting period
SG Blocks modifies cargo-shipping containers for construction and provides related engineering and project-management services. Its Brazilian subsidiary was inactive at quarter-end. The company reported results for the three and nine months ended September 30, 2013, compared with the same periods in 2012.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1.732 million | $373,250 | $4.310 million | $1.980 million |
| Gross profit (margin) | $217,040 (about 13%) | $67,581 (about 18%) | $226,546 (about 5%) | $386,773 (about 20%) |
| Operating loss | $(303,756) | $(524,987) | $(1.438) million | $(1.516) million |
| Net loss | $(465,382) | $(525,857) | $(1.653) million | $(1.457) million |
| Interest expense | $184,277 | $2,067 | $505,378 | $6,154 |
At September 30, cash and cash equivalents were $524,580, versus $868,067 at December 31, 2012; management reported approximately $441,000 cash at November 13. Current assets were $1.785 million and current liabilities $3.513 million, implying negative working capital of about $1.727 million and a current ratio of about 0.51. Total liabilities were $3.742 million; convertible debentures, net, totaled $1.685 million, of which $1.456 million was current. Stockholders’ deficiency was $1.864 million.
For the first nine months, operating cash use was $1.152 million, investing cash use $8,785, and financing cash provided $822,000, including $850,000 of convertible-debenture proceeds. Cash declined by $343,487. No cash interest was paid during the period.
Material changes versus prior periods
- Nine-month revenue more than doubled, driven by project-management revenue ($2.422 million versus $142,573) and SG Block sales ($1.868 million versus $1.219 million); engineering revenue fell to $20,095 from $618,719.
- Despite higher revenue, nine-month gross profit fell $160,227 and gross margin contracted to about 5%. Management attributed this largely to project-management job losses: four jobs generated approximately $182,000 in losses.
- Q3 revenue rose to $1.732 million, including a $488,000 block sale to one customer. Q3 gross margin was about 13%, down from 18% a year earlier; four project-management jobs incurred about $48,000 in losses.
- Nine-month operating loss improved modestly, but net loss increased because interest expense rose sharply with the convertible financing. A $290,973 noncash gain from changes in fair value of financial instruments partly offset expenses.
- Payroll and other operating costs declined, which management attributed to voluntary salary reductions and overhead-control efforts.
Outlook, risks, contingencies and unusual items
- Going concern: Management stated that expected operating gross profit would not cover anticipated costs and that the company needs external funding. It expected growth and public-company costs to consume available operating cash flows and intended financing proceeds over the next 10–16 months. The filing says these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- Management intended to seek additional equity and convertible-debt financing in 2014; there were no financing commitments in place. If funding is unavailable, planned cash-conservation steps include headcount and salary reductions. The filing gives no formal revenue or earnings guidance.
- Debentures bear 8% interest and include scheduled redemptions in 2014 totaling $2.072 million, plus accrued amounts. Share settlement may be permitted subject to contractual conditions. Default provisions include potentially accelerated cash repayment, a 30% premium, and higher default interest, subject to the agreement’s terms.
- Potential dilution is substantial: at September 30, options and warrants covered approximately 10.3 million and 6.1 million shares, respectively, and convertible debt was initially convertible into approximately 4.8 million shares; the conversion share count could increase under specified price-related terms.
- Revenue, receivables and vendor costs were concentrated: three customers represented about 77% of nine-month revenue, and four customers represented 79% of receivables at quarter-end. A minority stockholder, ConGlobal Industries, supplied containers and labor; its services accounted for $1.216 million of nine-month cost of goods sold.
- Disclosure controls and procedures were deemed ineffective, with previously identified deficiencies including financial-reporting processes, complex accounting and limited segregation of duties. Management said remediation was ongoing.
- Other notable items: the prior office lease ended September 30, and $24,742 of the $49,742 balance due was to be settled with 83,334 shares; a new lease began October 1. Subsequent events included approval of a 2-million-share 2013 Stock Plan and a consulting arrangement involving up to 1 million shares plus cash payments.
- The filing reported no legal proceedings in the legal-proceedings section and no material changes to previously disclosed risk factors during the quarter. It also disclosed that a lawsuit against the CFO was dismissed on October 15, 2013.
Important facts for investors to verify
- Confirm the issuer identity: this document names SG Blocks, Inc., while the request metadata names Olenox Industries Inc.
- Assess near-term funding availability, cash runway, and the company’s ability to meet the 2014 debenture redemptions; no new financing was committed as of the filing.
- Review project-level margins, loss estimates and contract completion costs, particularly the four loss-making project-management jobs and the increase in unbilled contract assets.
- Evaluate customer and supplier concentration, related-party transactions, and the scale and terms of potential share dilution from debt, warrants, options and subsequent share awards.
- Review the stated material weakness and remediation progress. Also reconcile the filing’s per-share presentation: the statements show 2012 nine-month loss per share of $(0.04), while the EPS note shows $(0.03).