OLENOX INDUSTRIES INC. 10-Q

ITEM 1A. Risk Factors Investing in our common stock involves a high degree of risk. You should consider carefully the following risks, together with all other information in this Quarterly Report on Form 10-Q, including our unaudited condensed consolidated financial statements and notes thereto. If any of the following risks actually materializes, our operating results, financial condition and liquidity could be materially adversely affected. As a result, the trading price of our common stock could decline and you could lose part or all of your investment. The following information updates, and should be read in conjunction with, the information disclosed in Part I, Item 1A, "Risk Factors," contained in the Annual Report on Form 10-K for the year ended December 31, 2020 as amended by the Amendment No. 1 thereto (the “2020 Form 10-K”). There have been no material changes from the risk factors disclosed in “Part I—Item 1A. Risk Factors” in our 2020 Form 10-K, except as follows: If we are not successful in our efforts to increase sales or raise capital, we could experience a shortfall in cash over the next twelve months, and our ability to obtain additional financing on acceptable terms, if at all, may be limited. At September 30, 2021 and December 31, 2020, we had cash and cash equivalents, collectively, of $3,290,702 and $13,010,356, respectively. However, during the nine months ended September 30, 2021 and year ended December 31, 2020, we reported a net loss of $3,744,582 and $4,508,162, respectively, and used $1,032,417 and $2,887,950 of cash for operations, respectively. If we are not successful with our efforts to increase revenue, we could experience a shortfall in cash over the next twelve months. If there is a shortfall, we may be forced to reduce operating expenses, among other steps, all of which would have a material adverse effect on our operations going forward. Subsequent to the end of the third quarter 2021, we had a private placement offering that provided net proceeds of approximately $10,520,000 in additional cash, see Note 17 for additional information on this private placement. We may also seek to obtain debt or additional equity financing to meet any cash shortfalls. The type, timing and terms of any financing we may select will depend on, among other things, our cash needs, the availability of other financing sources and prevailing conditions in the financial markets. However, there can be no assurance that we will be able to secure additional funds if needed and that, if such funds are available, the terms or conditions would be acceptable to us. If we are unable to secure additional financing, further reduction in operating expenses might need to be substantial in order for us to ensure enough liquidity to sustain our operations. Any equity financing would be dilutive to our stockholders. If we incur debt, we will likely be subject to restrictive covenants that significantly limit our operating flexibility and require us to encumber our assets. If we fail to raise sufficient funds and continue to incur losses, our ability to fund our operations, take advantage of strategic opportunities, or otherwise respond to competitive pressures will be significantly limited. Any of the above limitations could force us to significantly curtail or cease our operations, and you could lose all of your investment in our common stock. These circumstances have raise substantial doubt about our ability to continue as a going concern, and continued cash losses may risk our status as a going concern. Our consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern. In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. Since then, the COVID-19 coronavirus has spread to multiple countries, including the United States. The impact of the COVID-19 coronavirus outbreak, or similar global health concerns, has negatively impacted our ability to source certain materials and product pricing, could impact our customers’ ability or that of our licensee to obtain financing and may continue to have a negative impact on our business. In March 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and the related adverse public health developments, have adversely affected work forces, economies and financial markets globally . Our ability to obtain and source certain materials, especially lumber, from third-party suppliers has been negatively impacted by the COVID-19 coronavirus outbreak. In addition, any outbreak of COVID at our Echo facility could result in closures of the facility and negatively impact our ability to meet timelines. To date, we have experienced some delays and cost-overruns in projects due to COVID-19. Any quarantines, the timing and length of containment and eradication solutions, travel restrictions, absenteeism by infected workers, labor shortages or other disruptions to our suppliers and their contract manufacturers or our customers would likely adversely impact our sales and operating results and result in further project delays. In addition, the pandemic could result in an economic downturn that could affect the ability of our customers and licensees to obtain financing and therefore impact demand for our products. Order lead times could be extended or delayed and pricing could continue to increase. Some products or services may become unavailable if the regional or global spread were significant enough to prevent alternative sourcing. Accordingly, we are considering alternative product sourcing in the event that product supply becomes problematic. We expect this global pandemic to have a negative impact on our revenue and our results of operations, the size and duration of which we are currently unable to predict. 50 In addition, the outbreak of the COVID-19 coronavirus could disrupt our operations due to absenteeism by infected or ill members of management or other employees, or absenteeism by members of management and other employees who elect not to come to work due to the illness affecting others in our office or other workplace, or due to quarantines. COVID-19 illness could also impact members of our Board of Directors resulting in absenteeism from meetings of the directors or committees of directors, and making it more difficult to convene the quorums of the full Board of Directors or its committees needed to conduct meetings for the management of our affairs. The global outbreak of the COVID-19 coronavirus continues to rapidly evolve. The extent to which the COVID-19 coronavirus may impact our business and clinical trials will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease. Our failure to have the registration statement that we filed to register the resale of the shares of Common Stock within certain time limits could result in a breach of the Purchase Agreement. The Purchase Agreement provides that we are required within 30 days of the closing of the Offering to file a registration statement providing for the resale of the shares of Common Stock issued and issuable upon the exercise of the Common Stock Warrants, which registration statement was filed on November 12, 2021. We are required to use commercially reasonable efforts to cause such registration to become effective within 45 days of the closing of the Offering (or 60 days in the event of a full review by the Commission) and to keep such registration statement effective at all times until no investor owns any Common Stock Warrants or Common Stock Warrant Shares. Our failure to comply with such requirements would result in a breach of the Purchase Agreement and subject us to liquidated damages of equal to the product of 2.0% multiplied by the aggregate subscription amount paid by each purchaser under the Purchase Agreement. We may be unable to successfully integrate the Echo business with its current management and structure and the acquisition of Echo may not result in the benefits anticipated. Our failure to successfully complete the integration of Echo could have an adverse effect on our prospects, business activities, cash flow, financial condition, results of operations and stock price. Integration challenges may include the following: assimilating Echo’s technology and retaining personnel; estimating the capital, personnel and equipment required for Echo based on the historical experience of management with the businesses; managing cost overruns on fixed-price legacy Echo projects as a result of delays in deliveries of, and increased costs for, materials for projects, especially lumber, due to COVID-19; minimizing potential adverse effects on existing business relationships; and successfully developing new products and services. There can be no assurance that the anticipated benefits of the Echo acquisition will materialize or that if they materialize will result in increased stockholder value or revenue stream to the combined company. An unsuccessful determination in the litigation related to Echo DCL, could result in incurrence of significant liabilities or loss of assets . ICON Construction Inc. (“ICON”) is alleging that Echo DCL breached the terms of the asset purchase agreement Echo DCL entered into with ICON pursuant to which Echo DCL had acquired the assets of ICON. ICON claims that we have agreed to assume certain liabilities of Echo DCL under the asset purchase agreement and accept a security interest in the assets conveyed to us by Echo DCL. If we should be unsuccessful in the litigation we could incur significant liabilities and/or loss of the assets we acquired from Echo DCL. Litigation is subject to many uncertainties, and the outcome of this action is not predicted with assurance. We are unable to predict the possible loss or range of loss, if any, associated with the resolution of this litigation, and, accordingly, we have made no provision related to this matter in the condensed consolidated financial statements. The loss of one or a few customers could have a material adverse effect on us. A few customers have in the past, and may in the future, account for a significant portion of our revenues in any one year or over a period of several consecutive years. For example, for the nine months ended September 30, 2021 approximately 90% of our revenue was generated from one customer and for the year ended December 31, 2020, approximately 61% of our revenue was generated from three customers. Although we have contractual relationships with many of our significant customers, our customers may unilaterally reduce or discontinue their contracts with us at any time. The loss of business from a significant customer could have a material adverse effect on our business, financial condition, results of operations and cash flows. 51 The inability to secure materials and products from our suppliers in a timely manner or at competitive prices could adversely affect our business. We have relationships with key materials vendors, and we rely on suppliers for our purchases of products from them. The worldwide spread of the COVID-19 has, among other things resulted in delays in deliveries of, and increased costs for, materials, especially lumber, in projects which we expect to continue to have an impact on our revenue and our results of operations. Any inability to obtain materials or services in the volumes required and at competitive prices from our major trading partners, the loss of any major trading partner or the discontinuation of vendor financing (if any) may seriously harm our business because we may not be able to meet the demands of our customers on a timely basis in sufficient quantities or at all. In addition, we have experienced cost overruns on fixed-price legacy Echo projects as a result of delays in deliveries of, and increased costs for, materials for projects, especially lumber. Other factors, including reduced access to credit by our vendors resulting from economic conditions, may impair our vendors’ ability to provide products in a timely manner or at competitive prices. We also rely on other vendors for critical services such as transportation, supply chain and professional services. Any negative impacts to our business or liquidity could adversely impact our ability to establish or maintain these relationships. For the nine months ended September 30, 2021 68 % of our costs of revenue related to three vendors. For the year ended December 31, 2020, there were no vendors which represented 10% or more of our cost of revenue. Our clients may adjust, cancel or suspend the contracts in our backlog; as such, our backlog is not necessarily indicative of our future revenues or earnings. In addition, even if fully performed, our backlog is not a good indicator of our future gross margins. Backlog represents the total dollar amount of revenues we expect to record in the future as a result of performing work under contracts we have been awarded. Backlog may fluctuate significantly due to the timing of orders or awards for large projects and is not necessarily indicative of future backlog levels or the rate at which backlog will be recognized as revenue. We include in backlog only those contracts for which we have reasonable assurance that the customer can obtain the permits for construction and can fund the construction. As of December 31, 2020, our backlog totaled approximately $25.1 million and as of September 30, 2021, our backlog totaled approximately $20.1 million. The decrease in backlog at September 30, 2021 from December 31, 2020 is primarily attributable to work in progress or completed contracts during the first nine months of 2021 for approximately $6 million and executing one contract during the first quarter of 2021 in the amount of approximately $1.3 million, an one contract during the third quarter of 2021 in the amount of approximately $857,000 and one partial contract cancellation to an existing contract of approximately ($1.3) million. Our backlog is described more in detail in “Note 12—Construction Backlog” of the notes to our consolidated financial statements included elsewhere in this Quarterly Report. We cannot provide assurance that our backlog will be realized as revenues in the amounts reported or, if realized, will result in profits. In accordance with industry practice, substantially all of our contracts are subject to cancellation, termination or suspension at our customer’s discretion. In the event of a project cancellation, we generally would not have a contractual right to the total revenue reflected in our backlog. Projects can remain in backlog for extended periods of time because of the nature of the project and the timing of the particular services required by the project. In addition, the risk of contracts in backlog being cancelled or suspended generally increases during periods of widespread economic slowdowns or in response to changes in commodity prices. The contracts in our backlog are subject to changes in the scope of services to be provided and adjustments to the costs relating to the contracts. The revenue for certain contracts included in backlog is based on estimates. Additionally, our performance of our individual contracts can affect greatly our gross margins and, therefore, our future profitability. We can provide no assurance that the contracts in backlog, assuming they produce revenues in the amounts currently estimated, will generate gross margins at the rates we have realized in the past. The issuance of shares of our common stock upon the exercise of outstanding options, warrants and restricted stock units may dilute the percentage ownership of the then-existing stockholders and may make it more difficult to raise additional equity capital. At September 30, 2021, there were options, including options granted to non-employees and non-directors, restricted stock units and warrants to purchase 36,436 , 884,344 and 126,890 shares of common stock, respectively, outstanding that could potentially dilute future net income per share. Because we had a net loss as of September 30, 2021, it is prohibited from including potential common shares in the computation of diluted per share amounts. Accordingly, we used the same number of shares outstanding to calculate both the basic and diluted loss per share. At September 30, 2020 , there were options , including options to non-employees and non-directors, restricted stock units and warrants to purchase 52,337 , 465,518 and 353,190 shares of common stock, respectively, outstanding that could potentially dilute future net income per share. 52 Our residential construction business is difficult to evaluate because we recently changed our business model. From October 2019 until September 2021, our residential construction business was operated under a licensing model. We recently terminated the licensing business model for our residential construction business in the United States. There is a risk that we will be unable to successfully generate revenue from this new business model or generate profit as we will not be responsible for supplying the capital, personnel and equipment for our residential construction projects. There can be no assurance that we will generate the income that we anticipate. We are subject to many risks associated with this business model such as our dependence upon suppliers and contractors to perform services. There is no assurance that our activities will be successful or will result in any revenues or profit. Even if we generate revenue, there can be no assurance that we will be profitable. Our projections of the number of units we anticipate building for each project and the timelines although based upon assumptions that we believe are reasonable, may not be realized . We have provided projections of our development plans that include the number of units we plan to develop for certain projects and the timelines for commencement and completion of such development activities which are based upon current contracts that we have entered into, anticipated timelines to complete such projections and current estimates of costs and expenses associated with such projects. For certain projects such as the JDI-Cumberland project, we must submit budgets that require approval in order for SG Echo to be awarded the fabrication and installation work anticipated to be awarded to SG Echo . Although we have based our projections upon assumptions that we believe are reasonable, our projections may not be realized. The projected and actual results will vary, and those variations may be material and likely to increase over time, and the inclusion of the projections in this Quarterly Report on Form 10-Q should not be regarded as a representation or guarantee by us that the projections will be achieved. These projections are only predictions and actual events or results may differ from those in the projections . The failure to comply with the terms of SG DevCorp’s Note could result in a default under the terms of the Short-Term Note and, if uncured, it could potentially result in action against our pledged assets. SG DevCorp’s Note in the principal amount of $2,000,000 is secured by a deed of trust on our Lake Travis project site in Lago Vista, Texas and a related assignment of leases and rents to the holder of the Note. The Short-Term Note is due in July 2022 and provides for payments of interest only at a rate of twelve percent (12%) per annum. If SG DevCorp were to fail to comply with the terms of the Short-Term Note, the holder of the Short-Term Note could declare a default and if the default were to remain uncured would have the right to proceed against any or all of the collateral securing the Short-Term Note. SG DevCorp’s failure to make such payments when due could result in our loss of its interest in the Lake Travis project site in Lago Vista, Texas. Any action to proceed against SG DevCorp’s assets would likely have a serious disruptive effect on its business operations, especially if the Lake Travis project site were foreclosed upon. The Short-Term Note requires that SG DevCorp pay a significant amount of cash to the lender. SG DevCorp’s ability to generate sufficient cash to make all required payments under the Note depends on many factors beyond its control. SG DevCorp’s ability to make payments on and to refinance the Short-Term Note, to fund planned capital expenditures and to maintain sufficient working capital depends on its and our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations or from other sources in an amount sufficient to enable us to service our debt, SG DevCorp’s debt or to fund our other liquidity needs. To date, we have continued to generate losses from operations and have financed a significant portion our capital needs from sales of our equity. There can be no assurance that financing options will be available to us when needed to make payments under the Short-Term Note or if available, that they will be on favorable terms. If our cash flow and capital resources are insufficient to allow us to make payments due under the Short-Term Note, we may need to seek additional capital or restructure or refinance all or a portion of the Short-Term Note on or before the maturity thereof, any of which could have a material adverse effect on our business, financial condition or results of operations. We cannot assure you that we will be able to refinance the Short-Term Note on commercially reasonable terms or at all. If we are unable to generate sufficient cash flow to repay or refinance our debt on favorable terms, it could significantly adversely affect our financial condition. Our ability to restructure or refinance the Short-Term Note will depend on the condition of the capital markets and our financial condition. Any refinancing of the Short-Term Note could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. There can be no assurance that we will be able to obtain any financing when needed. Our real estate investments may not maintain their value or appreciate in value . There can be no assurance that our investments in various real estate assets, such as SG DevCorp’s $3,500,000 investment in the 50+ acre Lake Travis project site in Lago Vista, Texas, will appreciate in value, maintain their present value, or be sold at a profit. If the real estate assets we have acquired decline in value or if we are unable to make any payments under any related indebtedness, including but not limited to any payments under SG DevCorp’s $2,000,000 secured Short-Term Note, as and when they become due, or otherwise fail to perform our obligations under such indebtedness, our financial condition and results of operations may be adversely affected. The marketability and value of the Lake Travis project site will depend upon many factors beyond our control. 53 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds None. ITEM 3. Defaults Upon Senior Securities None. ITEM 4. Mine Safety Disclosures Not applicable.