OLENOX INDUSTRIES INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Introduction and Certain Cautionary Statements The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with our consolidated financial statements and related notes and schedules included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, intensified competition and operating problems in our operating business projects and their impact on revenues and profit margins or additional factors, and those discussed in the section entitled “Risk Factors” in Part I, Item 1A of this Annual Report. In addition, certain information presented below is based on unaudited financial information. Results of Operations Our operations for the years ended December 31, 2022 and 2021 may not be indicative of our future operations. Years Ended December 31, 2022 and 2021: For the Year Ended December 31, 2022 For the Year Ended December 31, 2021 Revenue Construction services (includes engineering) $ 12,752,219 $ 6,793,690 Medical revenue 11,641,727 31,548,012 Total 24,393,946 38,341,702 Year over year % growth: Construction services 88 % 50 % Medical revenue (63 ) % 644 % Consolidated (36 ) % 388 % Net revenue % mix: Construction services 52 % 18 % Medical revenue 48 % 82 % Consolidated 100 % 100 % Operating Income (Loss) Construction services (472,039 ) (7,041,313 ) Medical 2,588,830 8,405,332 Development (2,137,866 ) (203,078 ) Corporate and Support (7,208,895 ) (7,143,791 ) Consolidated (7,229,970 ) (5,982,850 ) Other Income (Expenses) 140,728 74,478 Add: Net profit attributable to common stockholders of Safe & Green Holdings Corp. 1,229,806 4,924,302 Net loss attributable to common stockholders of Safe & Green Holdings Corp. (8,319,048 ) (10,832,674 ) 43 Revenue During the year ended December 31, 2022, we derived revenue substantially all of our revenue from the following two segments: construction services and medical revenue. Total revenue for the year ended December 31, 2022 was $ 24,393,946 compared to $ 38,341,702 for the year ended December 31, 2021 . Revenue decreased 36 % in 2022 , compared to the prior year. Medical revenue decreased 63% in 2022 compared to the prior year. The revenue decline primarily resulted from the decline in COVID-19 testing requirements during the year ended December 31, 2022. The majority of the medical revenue came from operations of our Clarity Mobile joint venture. Construction services revenue increased 88% in 2022 compared to the prior year. The revenue growth primarily is due to the acquisition of Echo DCL, LLC in September 2020. The revenue growth reflects increased modular revenue from SG Echo's manufacturing facility. Operating Income (Loss) Operating loss was $7,229,970 for the year ended December 31, 2022, compared to $5,982,850 for the year ended December 31, 2021, representing an increase of $1,247,120 or 21% in 2022 compared to the prior year. Construction services operating loss in 2022 was $472,039 as compared to the prior year's operating loss of $7,041,313, primarily due to an increase of jobs and deliver of modular units. The costs of materials such as lumber, plumbing, roofing, and other supplies to modify and build these units were increased due in part to COVID-19 supply chain issues. We purchased Echo in 2020 and assumed their current projects that had lower gross margins due to the increase in materials prices. In addition, we incurred higher than expected material and labor costs on several prototype modules projects in 2021 in order to win future revenue orders. Medical revenue operating income in 2022 was $2,588,830, as compared to the prior year's operating income of $8,405,332, primarily due to decreased testing samples being collected at our COVID-19 laboratory at LAX airport, partially offset by increased labor costs and lower than anticipated testing volume with our COVID-19 testing program with Memorial Healthcare in Wayne County, Michigan. We have ceased operations with Memorial Healthcare in Q4 2021. Development operating loss in 2022 is related to operating expenses incurred for certain development projects that were started in 2021 and currently being developed for future use. No revenue has been generated by our development segment in 2022 to offset these operating expenses. Corporate and support operating loss increased in 2022, as compared to the prior year, and such increase is primarily due to increased overhead costs in public expenses related to SEC compliance and legal costs, increased payroll due to additional head count in SG Echo and stock compensation in order to retain key employees, increases in IT support and increase in insurance expenses to support our various operations. 44 Other Income (Expense) Interest income for the year ended December 31, 2022 was $73,821 mainly derived from bank interest and interest associated with an outstanding note receivable. There was $57,266 of interest income for the year ended December 31, 2021. Other income for the year ended December 31, 2022 and 2021 was $403,146 and $62,602, respectively. Other income during 2022 primarily related to a return of escrow from the SG Echo acquisition in the amount of $406,438, legal settlement income of $150,000 and the write off of accounts payable in the amount of $177,965. Interest expense for the year ended December 31, 2022 and 2021 was $336,239 and $1,254, respectively. The increase in interest expense resulted from the notes payable entered into during July 2021. Loss on asset disposal for the year ended December 31, 2021 was $44,081. Income Tax Provision A 100% valuation allowance was provided against the deferred tax asset consisting of available net operating loss carryforwards and, accordingly, no income tax benefit was provided. Impact of Inflation The impact of inflation upon our revenue and income (loss) from continuing operations during each of the past two fiscal years has not been material to its financial position or results of operations for those years because we do not maintain any inventories whose costs are affected by inflation. Liquidity and Capital Resources As of December 31, 2022 and December 31, 2021, we had an aggregate of $582,776 and $ 13,024,381 , respectively, of cash and cash equivalents. T o date, we have financed our operations from revenue generated from operations and sales of our equity and to a lesser extent debt financing. In October 2021, we completed a registered direct offering and concurrent private offering pursuant to which we sold an aggregate of 975,000 shares of common stock and pre-funded warrants to purchase up to 2,189,384 shares of Common Stock and warrants to purchase 1,898,630 shares of Common Stock which resulted in net proceeds of approximately $ 10,488,000 after deducting underwriting commission and other expenses related to the offering . On February 7, 2023, we closed a private placement offering (the “Offering”) of One Million One Hundred Thousand Dollars ($1,100,000.00) in principal amount of the Company’s 8% convertible debenture (the “Debenture”) and a warrant (the “Warrant”) to purchase up to Five Hundred Thousand (500,000) shares of our common stock, to Peak One Opportunity Fund, L.P. (“Peak One”). Pursuant to a Securities Purchase Agreement, dated February 7, 2023 (the “Purchase Agreement”), the Debenture was sold to Peak One for a purchase price of $1,000,000, representing an original issue discount of ten percent (10%). In connection with the offering the Company paid $15,000 as a non-accountable fee to Peak One to cover its accounting fees, legal fees and other transactional costs incurred in connection with the transactions contemplated by the Purchase Agreement and issued 50,000 shares of its restricted common stock (the “Commitment Shares”) to Peak One Investments, LLC (“Investments”), the general partner of Peak One. The Debenture matures twelve months from its date of issuance and bear interest at a rate of 8% per annum payable on the maturity date. The Debenture is convertible, at the option of the holder, at any time, into such number of shares of common stock of the Company equal to the principal amount of the Debenture plus all accrued and unpaid interest at a conversion price equal to $1.50 (the “Conversion Price”), subject to adjustment for any stock splits, stock dividends, recapitalizations and similar events and in the event the Company, at any time while the Debenture is outstanding, issues, sells or grants any option to purchase, or sells or grants any right to reprice, or otherwise disposes of, or issues common stock or other securities convertible into, exercisable for, or otherwise entitle any person the right to acquire, shares of common stock, other than with respect to an Exempt Issuance (as defined in the Debenture), at an effective price per share that is lower than the then Conversion Price. In the event of any such anti-dilutive event, the Conversion Price will be reduced at the option of the holder to such lower effective price of the dilutive event, subject to a floor price of $0.40 per share, unless and until the Company obtains shareholder approval for any issuance below such floor price. As of December 31, 2022, our stockholders’ equity was $14,439,562 compared to $21,715,789 as of December 31, 2021. Our net loss for the years ended December 31, 2022 and 2021 was $7,089,242 and $5,908,372, respectively. Net cash used in operating activities was $5,630,614 and $662,759 for the years ended December 31, 2022 and 2021, respectively. The increase resulted mainly from a decrease of approximately $5,500,000 in working capital, an increase of approximately $1,150,000 in non-cash stock compensation expense offset by an increase in the overall net loss of approximately $1,180,000 in the year ended December 31, 2022 compared to year ended December 31, 2021. 45 We may ne ed to generate additional revenues or secure additional financing sources, such as debt or equity capital, to fund future growth, which financing may not be available on favorable terms or at all. We do not have any additional sources secured for future funding, and if we are unable to raise the necessary capital at the times we require such funding, we may need to materially change our business plan, including delaying implementation of aspects of such business plan or curtailing or abandoning such business plan altogether. Cash Flow Summary For The Year Ended December 31, 2022 2021 Net cash provided by (used in): Operating activities $ (5,630,614 ) $ (662,759 ) Investing activities (3,853,298 ) (9,471,257 ) Financing activities (2,957,693 ) 10,148,041 Net increase (decrease) in cash and cash equivalents $ (12,441,605 ) $ 14,025 Operating activities used net cash of $5,630,614 during the year ended December 31, 2022, and $662,759 during the year ended December 31, 2021. Generally, our net operating cash flows fluctuate primarily based on changes in our profitability and working capital. Cash used in operating activities increased by approximately $5,000,000 primarily due to a decrease in working capital due in part to decreases in accounts payable with the additions of operations of new entities, SG DevCorp. and SG Echo, from the corresponding period of the prior years. In addition, we had an increase of approximately $1,085,000 in stock-based compensation and an increase in the overall net loss of approximately $1,181,000, during the year ended December 31, 2022 compared to the year ended December 31, 2021. Investing activities used net cash of $3,853,298 during the year ended December 31, 2022, and $9,451,257 during the year ended December 31, 2021. Cash used in investing activities decreased from the corresponding period of the prior year primarily due to the purchase of property, plant and equipment of approximately $4,820,000 which includes the land purchase for the Lago Vista - Austin project and investments in two SG DevCorp. entities totaling approximately $3,600,000 during 2021. Financing activities used net cash of $2,957,693 during the year ended December 31, 2022, and provided net cash of $10,148,041 during the year ended December 31, 2021. Cash provided by financing activities decreased by approximately $13,106,000 due to approximately $10,488,000 received in proceeds from a public stock offering and proceeds of $2,000,000 from the proceeds of a short-term notes payable during the year ended December 31, 2021. We provide services to our construction customers in three separate phases: the design phase, the architectural and engineering phase and the construction phase. Each phase is independent of the other, but builds through a progression of concept through delivery of a completed structure. These phases may be embodied in a single contract or in separate contracts, which is typical of a design build process model. As of December 31, 2022, we had 11 projects tota ling $6,810,762 under contract, which , if they all proceed to construction, will result in us constructing approximately 68,000 square feet of modular space. Of these contracts, all eleven (11) projects combine all three phases or parts thereof and including construction. We expect that all of this revenue will be realized by December 31, 2023. 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. The increase in backlog at December 31, 2022 is primarily attributable to one new contract we entered into during the fourth quarter of 2022 for approximately $5,771,000.We expect that all of this revenue will be realized by December 31, 2023. There can be no assurance that our customers will decide to and/or be able to proceed with these construction projects, or that we will ultimately recognize revenue from these projects in a timely manner or at all. 46 Off-Balance Sheet Arrangements As of December 31, 2022 and 2021, we had no material off-balance sheet arrangements to which we are a party. In the ordinary course of business, we enter into agreements with third parties that include indemnification provisions which, in our judgment, are normal and customary for companies in our industry sector. These agreements are typically with consultants and certain vendors. Pursuant to these agreements, we generally agree to indemnify, hold harmless, and reimburse indemnified parties for losses suffered or incurred by the indemnified parties with respect to actions taken or omitted by us. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of liabilities relating to these provisions is minimal. Accordingly, we have no liabilities recorded for these provisions as of December 31, 2022 . Critical Accounting Estimates and New Accounting Pronouncements Critical Accounting Estimates Our financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). In connection with the preparation of the financial statements, we are required to make assumptions and estimates and apply judgments that affect the reported amounts of assets, liabilities, revenue, and expenses, and the related disclosures. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors that we believe to be relevant at the time the consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates, and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Our significant accounting policies are discussed in “Note 3—Summary of Significant Accounting Policies” of the notes to our consolidated financial statements included elsewhere in this Annual Report. We believe that the following accounting policies are the most critical in fully understanding and evaluating our reported financial results. Share-based payments . We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, including non-employee directors, the fair value of the award is measured on the grant date. For non-employees, the fair value of the award is generally re-measured on interim financial reporting dates and vesting dates until the service period is complete. The fair value amount is then recognized over the period services are required to be provided in exchange for the award, usually the vesting period. We recognize stock-based compensation expense on a graded-vesting basis over the requisite service period for each separately vesting tranche of each award. Stock-based compensation expense to employees and all directors is reported within payroll and related expenses in the consolidated statements of operations. Stock-based compensation expense to non-employees is reported within marketing and business development expense in the consolidated statements of operations. Convertible instruments . SGB bifurcates conversion options from their host instruments and accounts for them as free-standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (i) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract; (ii) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable GAAP measures with changes in fair value reported in earnings as they occur; and (iii) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. 47 SGB determined that the embedded conversion options that were included in the previously outstanding convertible debentures should be bifurcated from their host and a portion of the proceeds received upon the issuance of the hybrid contract has been allocated to the fair value of the derivative. The derivative was subsequently marked to market at each reporting date based on current fair value, with the changes in fair value reported in results of operations. Revenue recognition – The Company determines, at contract inception, whether it will transfer control of a promised good or service over time or at a point in time, regardless of the length of contract or other factors. The recognition of revenue aligns with the timing of when promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. To achieve this core principle, the Company applies the following five steps in accordance with its revenue policy: (1) Identify the contract with a customer (2) Identify the performance obligations in the contract (3) Determine the transaction price (4) Allocate the transaction price to performance obligations in the contract (5) Recognize revenue as performance obligations are satisfied On certain contracts, the Company applies recognition of revenue over time, which is similar to the method the Company applied under previous guidance (i.e. percentage of completion). Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress toward complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs for a performance obligation indicate a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident. For product or equipment sales, the Company applies recognition of revenue when the customer obtains control over such goods, which is at a point in time. On October 3, 2019, we entered into an Exclusive License Agreement (“ELA” ) pursuant to which we granted an exclusive license for our technology as outlined in the ELA. The ELA is described below. Under the ELA, we were to receive royalty payments based upon gross revenues earned by the licensee for commercialized products within the field of design and project management platforms for residential use, including single-family residences and multi-family residences, but excluding military housing. We have determined that the ELA granted the licensee a right to access our intellectual property throughout the license period (or its remaining economic life, if shorter), and thus recognizes revenue over time as the licensee recognizes revenue and we have the right to payment of royalties. On June 15, 2021 we terminated the Exclusive License Agreement with CPF that we had entered into on October 3, 2019. No revenue has been recognized under the ELA for the years ended December 31, 2022 and 2021. 48 On October 9, 2019, we entered into a Right of First Refusal Agreement (the “ Agreement ”) with CMC Development LLC (“ CMC ”). See Note 3 for a discussion on the Right of First Refusal Agreement. Under the agreement, we have a right of first refusal with respect to being engaged as a designer and builder of any real estate projects for which CMC has secured the rights to develop and in which CMC has a greater than fifty percent (50%) interest in the owner or developer entity and has the right to select the builder for such real estate project (the “ ROFR Rights ”). In exchange for such ROFR Rights, we agreed to issue to CMC 2,500 shares of restricted stock of our common stock, of which 1,250 shares will vest and be issued on September 30, 2020 and the remaining 1,250 shares will vest and be issued on September 30, 2021, unless the Agreement is earlier terminated. In the event that the Agreement is earlier terminated, CMC will still be entitled to receive the entire amount of such restricted stock that has vested as of such earlier termination date, but in no event less than 1,250 shares of such restricted stock. The Agreement also provides for customary indemnification and confidentiality obligations between the parties. The 2,500 shares of restricted stock of our common stock have yet to be issued to CMC. The Agreement also provides that CMC has engaged us to build and design, in the aggregate, approximately 100 residential and commercial units at 1100 Ridge Avenue, Atlanta, Georgia, which is known as the “Ridge Avenue, Atlanta Project.” The total cost of the project is $ 16,900,000 . The project is a residential project but it was not subject to the recently terminated ELA. The planning stage of the project was initially delayed due to COVID-19. We are no longer participating in Ridge Avenue as CMC has decided to proceed with this project as a traditional construction build. We reported this as a cancellation within our backlog footnote, see Note 13 on this discussion. No revenue has been recognized under the Agreement during the years ended December 31, 2022 and 2021. We entered into a joint venture agreement with Clarity Lab Solutions, LLC (“Clarity Labs”) (the “JV”). Revenue from the activities of the JV is related to clinical testing services and is recognized when services have been rendered, which is at a point in time. In addition, we formed Chicago Airport Testing, LLC which collects rental revenue. For the years ended December 31, 2022 and 2021, the Company recognized approximately $11.6 million and $31.5 million, respectively, related to activities through these two joint ventures, which is included in medical revenue on the accompanying consolidated statements of operations. We acquired a 10% non-dilutable equity interest for JDI-Cumberland Inlet, LLC and acquired a 50% membership interest in Norman Berry II Owner LLC in the second quarter of 2021. We have determined we are not the primary beneficiary and thus will not consolidate the activities on the consolidated financial statements. We will use the equity method to report the activities as an investment in on our consolidated financial statements. Goodwill . Goodwill represents the excess of reorganization value over the fair value of identified net assets upon emergence from bankruptcy. In accordance with the accounting guidance on goodwill, SGB performs its impairment test of goodwill at the reporting unit level each fiscal year, or more frequently if events or circumstances change that would more likely than not reduce the fair value of its reporting unit below its carrying value. Our evaluation of goodwill completed during the year ended December 31, 2022, resulted in no impairment loss. Intangible assets – Intangible assets consist of $ 2,766,000 of proprietary knowledge and technology, which is being amortized over 20 years. In addition, included in intangible assets is $97,164 of trademarks, and $ 115,632 of website costs that are being amortized over 5 years. We evaluated intangible assets for impairment during the year ended December 31, 2022, and determined that there are no impairment losses. 49 New Accounting Pronouncements See Note 3 to the accompanying consolidated financial statements for all recently adopted and new accounting pronouncements. Non-GAAP Financial Information In addition to our results under GAAP, we also present EBITDA and Adjusted EBITDA for historical periods. EBITDA and Adjusted EBITDA are non-GAAP financial measures and have been presented as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We calculate EBITDA as net income (loss) before interest expense, income tax benefit (expense), depreciation and amortization. We calculate Adjusted EBITDA as EBITDA before certain non-recurring adjustments such as loss on conversion of convertible debentures, change in fair value of financial instruments and stock compensation expense. EBITDA and Adjusted EBITDA are presented because they are important metrics used by management as one of the means by which it assesses our financial performance. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. These measures, when used in conjunction with related GAAP financial measures, provide investors with an additional financial analytical framework that may be useful in assessing us and our results of operations. EBITDA and Adjusted EBITDA have certain limitations. EBITDA and Adjusted EBITDA should not be considered as alternatives to net income (loss), or any other measures of financial performance derived in accordance with GAAP. These measures also should not be construed as an inference that our future results will be unaffected by unusual o r non-recurring items for which these non-GAAP measures make adjustments. Additionally, EBITDA and Adjusted EBITDA are not intended to be liquidity measures because of certain limitations, including, but not limited to: ● They do not reflect our cash outlays for capital expenditures; ● They do not reflect changes in, or cash requirements for, working capital; and ● Although depreciation and amortization are non-cash charges, the assets are being depreciated and amortized and may have to be replaced in the future, and these non-GAAP measures do not reflect cash requirements for such replacements. Other companies, including other companies in our industry, may not use such measures or may calculate one or more of the measures differently than as presented in this Annual Report, limiting their usefulness as a comparative measure. In evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same or similar to some of the adjustments made in our calculations, and our presentation of EBITDA and Adjusted EBITDA should not be construed to mean that our future results will be unaffected by such adjustment. Management compensates for these limitations by using EBITDA and Adjusted EBITDA as supplemental financial metrics and in conjunction with our results prepared in accordance with GAAP. The non-GAAP information should be read in conjunction with our consolidated financial statements and related notes. 50 The following is a reconciliation of EBITDA and Adjusted EBITDA to the nearest GAAP measure, net loss: For the Year Ended December 31, 2022 For the Year Ended December 31, 2021 Net loss attributable to common stockholders of Safe & Green Holdings Corp. $ (8,319,048 ) $ (10,832,674 ) Addback interest expense 336,239 1,254 Addback interest income (73,821 ) (57,266 ) Addback depreciation and amortization 615,191 605,405 EBITDA (non-GAAP) (7,441,439 ) (10,283,281 ) Addback loss on asset disposal 25,265 44,081 Addback litigation expense 664,724 570,934 Addback stock-based compensation expense 2,798,844 1,647,391 Adjusted EBITDA (non-GAAP) $ (3,952,606 ) $ (8,020,875 ) Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. Item 8. Financial Statements and Supplementary Data. Our financial statements and the notes thereto, together with the report thereon of Whitley Penn LLP, our registered public accounting firm, dated March 29, 2023 , appear beginning on page F-1 of this report. 51 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.