OLOX 10-Q
Olenox Industries Inc. (OLOX)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification No.) |
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(Address of principal executive offices) |
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(Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on which Registered | ||
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ |
Accelerated filer ☐ |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No
As of November 12, 2021 the issuer had a total of
SG BLOCKS, INC.
FORM 10-Q
TABLE OF CONTENTS
| 1 |
SG BLOCKS, INC. AND SUBSIDIARIES
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September 30, 2021 |
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December 31, |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Contract assets |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Goodwill |
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| Long-term note receivable |
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Intangible assets, net |
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| Deferred contract costs, net | ||||||||
| Investment in and advances to equity affiliates | ||||||||
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Total Assets |
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$ |
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$ |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
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$ |
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Contract liabilities |
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| Lease liability, current maturities | ||||||||
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Total current liabilities |
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| Lease liability, net of current maturities | ||||||||
| Total liabilities |
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Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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Non-controlling interest |
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| Total stockholders’ equity | ||||||||
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Total Liabilities and Stockholders’ Equity |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
| 2 |
SG BLOCKS, INC. AND SUBSIDIARIES
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For the Three Months Ended September 30, |
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
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For the Nine Months Ended September 30, |
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2021 | 2020 |
2021 |
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2020 |
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(Unaudited) | (Unaudited) |
(Unaudited) |
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(Unaudited) |
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Revenue: |
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| Construction services | $ | $ | $ | $ | ||||||||
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Engineering services |
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Medical revenue |
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Total |
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Cost of revenue: |
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Construction services |
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Engineering services |
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Total |
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Gross profit |
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Operating expenses: |
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Payroll and related expenses |
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General and administrative expenses |
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Marketing and business development expense |
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Pre-project expenses |
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Total |
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Operating loss |
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Other income (expense): |
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| Loss on asset disposal | ( |
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Interest expense |
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Interest income |
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Total |
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Loss before income taxes |
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Income tax expense |
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Net loss |
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| Less: net income attributable to noncontrolling interests | ||||||||||||
| Net loss attributable to common stockholders of SG Blocks, Inc. | $ | ( |
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Net loss per share attributable to SG Blocks, Inc. - basic and diluted: |
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Basic and diluted |
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$ |
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$ |
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Weighted average shares outstanding: |
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Basic and diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
SG BLOCKS, INC. AND SUBSIDIARIES
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$0.01 Par Value |
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Additional |
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Accumulated |
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SG Blocks Stockholders' | Noncontrolling |
Total Stockholders’ |
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Shares |
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Amount |
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Capital |
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Deficit |
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Equity |
Interests |
Equity |
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Balance at June 30, 2021 |
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$ |
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$ |
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Stock-based compensation |
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— |
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| Noncontrolling interest distribution | — | ( |
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Net income (loss) |
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— |
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| Balance at September 30, 2021 | $ | $ | $ | ( |
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Balance at December 31, 2020 |
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$ |
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$ |
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$ |
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| Stock-based compensation | — | |||||||||||||||||||||||||||
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Conversion of warrants to common stock |
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| Noncontrolling interest distribution | — | ( |
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Net income (loss) |
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— |
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Balance at September 30, 2021 |
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$ |
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$ |
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$ |
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$0.01 Par Value |
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Additional |
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Accumulated |
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SG Blocks Stockholders' | Noncontrolling |
Total Stockholders’ |
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Shares |
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Amount |
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Capital |
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Deficit |
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Equity |
Interests |
Equity |
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Balance at June 30, 2020 |
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$ |
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Stock-based compensation |
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— |
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Net loss |
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| Balance at September 30, 2020 | $ | $ | $ | ( |
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Balance at December 31, 2019 |
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$ |
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$ |
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| Stock-based compensation | — | |||||||||||||||||||||||||||
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Conversion of restricted stock units to common stock |
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| Conversion of debt exchange to common stock | ||||||||||||||||||||||||||||
| Issuance of common stock, net of issuance costs | ||||||||||||||||||||||||||||
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Net loss |
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Balance at September 30, 2020 |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
SG BLOCKS, INC. AND SUBSIDIARIES
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For the Nine Months Ended |
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For the Nine Months Ended |
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(Unaudited) |
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(Unaudited) |
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Cash flows from operating activities: |
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Net loss |
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$ |
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$ |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation expense |
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Amortization of intangible assets |
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| Amortization of deferred license costs | ||||||||
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Bad debt expense |
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Interest income on long-term note receivable |
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Stock-based compensation |
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| Loss on asset disposal | ||||||||
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Contract assets |
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Prepaid expenses and other current assets |
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| Right of use asset | ||||||||
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Accounts payable and accrued expenses |
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Contract liabilities |
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| Due to affiliates | ( |
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Net cash used in operating activities |
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Cash flows from investing activities: |
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| Advances in note receivable | ( |
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| Purchase of Echo DCL, LLC, net of cash acquired | ( |
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| Purchase of property, plant and equipment | ( |
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| Purchase of intangible asset | ( |
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| Proceeds from sale of equipment | ||||||||
| Payment on assumed liability of acquired assets | ( |
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| Investment in and advances to equity affiliates | ( |
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Net cash used in investing activities |
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Cash flows from financing activities: |
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| Proceeds from conversion of warrants to common stock | ||||||||
| Proceeds from public stock offering, net of issuance costs | ||||||||
| Proceeds from short-term note payable | ||||||||
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| Distribution paid to noncontrolling interest | ( |
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| Settlement of common stock from reverse stock split | ( |
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Net cash (used in) provided by financing activities |
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| Net increase (decrease) in cash and cash equivalents | ( |
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| Cash and cash equivalents - end of period | $ | $ | ||||||
| Supplemental disclosure of non-cash operating activities: | ||||||||
| Non-cash conversion of long-term note payable to common stock | $ | $ | ||||||
| Non-cash conversion of accrued interest of long-term note payable to common stock | ||||||||
| Total non-cash operating activities | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
SG BLOCKS, INC. AND SUBSIDIARIES
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
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1. |
Description of Business |
SG Blocks, Inc. (collectively with its subsidiaries, the “Company,” “we”, “us” or “our”) was previously known as CDSI Holdings, Inc., a Delaware corporation incorporated on December 29, 1993. On November 4, 2011, CDSI Merger Sub, Inc., the Company’s wholly-owned subsidiary, was merged with and into SG Building Blocks, Inc. (“SG Building,” formerly SG Blocks Inc.) (the “Merger”), with SG Building surviving the Merger and becoming a wholly-owned subsidiary of the Company. The Merger was a reverse merger that was accounted for as a recapitalization of SG Building, as SG Building was the accounting acquirer. Accordingly, the historical financial statements presented are the financial statements of SG Building.
The building products developed with our proprietary technology and design and engineering expertise are generally stronger, more durable, environmentally sensitive, and erected in less time than traditional construction methods. The use of the SGBlocks building structure typically provides between four to six points towards the Leadership in Energy and Environmental Design (“LEED”) certification levels, including reduced site disturbance, resource reuse, recycled content, innovation in design and use of local and regional materials. Due to the ability of SGBlocks to satisfy such requirements, we believe the products produced utilizing our technology and expertise is a leader in environmentally sustainable construction.
There are three core product offerings that utilize our technology and engineering expertise. The first product offering involves GreenSteel™ modules, which are the structural core and shell of an SGBlocks building. We procure the containers, engineer required openings with structural steel enforcements, paint the SGBlocks and then deliver them on-site, where the customer or a customer’s general contractor will complete the entire finish out and installation. The second product offering involves replicating the process to create the GreenSteel product and, in addition, installing selected materials, finishes and systems (including, but not limited to floors, windows, doors, interior painting, electrical wiring and fixtures, plumbing outlets and bathrooms, roofing system) and delivering SGBlocks pre-fabricated containers to the site for a third party licensed general contractor to complete the final finish out and installation. Finally, the third product offering is the completely fabricated and finished SGBlocks building (including but not limited to floors, windows, doors, interior painting, electrical wiring and fixtures, plumbing outlets and bathrooms, roofing systems), including erecting the final unit on site and completing any other final steps. The building is ready for occupancy and/or use as soon as installation is completed. Construction administration and/or project management services are typically included in our product offerings.
The Company also provides engineering and project management services related to the use and modification of Modules in construction.
| 6 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine months ended September 30, 2021 and 2020 (Unaudited)
Reverse Stock Split
On February 5, 2020, the Company effected a
As of September 30, 2021, the Company had
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2. |
Liquidity |
As of September 30, 2021, the Company had cash and cash equivalents of $
| 2021 |
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| Within 1 year | $ | ||||
| 1 to 2 years |
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| Total Backlog | $ | ||||
The Company has incurred losses since its inception and has negative operating cash flows. Management has taken several actions to ensure that the Company will continue as a going concern. As described below, the Company has been able to raise substantial cash through equity offerings. In addition, as further described in these consolidated financial statements, the Company has begun to recognize revenue from new revenue streams. Management believes that these actions will enable the Company to continue as a going concern.
The Company completed a public offering in April and May 2020, which resulted in net proceeds of approximately $
With the global spread of the ongoing novel coronavirus ("COVID-19") pandemic during 2020, the Company implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on its employees and business. Any quarantines, the timing and length of containment and eradication solutions, travel restrictions, absenteeism by infected workers, labor shortages or other disruptions to the Company's suppliers and contract manufacturers or customers would likely adversely impact the Company's sales and operating results and result in further project delays. In addition, the pandemic could result in an economic downturn that could affect the demand for the Company's products. Order lead times could be extended or delayed and pricing could increase. Some products or services may become unavailable if the regional or global spread were significant enough to prevent alternative sourcing. Accordingly, the Company is considering alternative product sourcing in the event that product supply becomes problematic. The Company expects this global pandemic to have an impact on the Company's revenue and results of operations, the size and duration of which the Company is currently unable to predict. In addition, to the extent the ongoing COVID-19 pandemic adversely affects the Company's business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties which the Company faces. The Company has been impacted by COVID-19 with supply chain distributions, absenteeism by infected workers and skilled labor shortages which has caused delays in projects and the Company could be further impacted if the COVID-19 pandemic continues.
| 7 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
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3. |
Summary of Significant Accounting Policies |
Basis of presentation and principals of consolidation – The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to the Current Report on Form 10-Q and Article 8 Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. The condensed financial statements and notes should be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2020 included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission on April 15, 2021. In the opinion of management, all adjustments, consisting of normal accruals, considered necessary for a fair presentation of the interim financial statements have been included. Results for the nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
Recently adopted accounting pronouncements - New accounting pronouncements implemented by the Company are discussed below or in the related notes, where appropriate.
Accounting estimates – The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Significant areas that require the Company to make estimates include revenue recognition, stock-based compensation, stock warrants liabilities and allowance for credit losses. Actual results could differ from those estimates.
Operating cycle – The length of the Company’s contracts varies, but is typically between six to twelve months. In some instances, the length of the contract may exceed twelve months. Assets and liabilities relating to contracts are included in current assets and current liabilities, respectively, in the accompanying balance sheets as they will be liquidated in the normal course of contract completion, which at times could exceed
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.
| 8 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
3. |
Summary of Significant Accounting Policies (continued) |
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, the Company entered into an Exclusive License Agreement (“ELA” ) pursuant to which it granted an exclusive license for its technology as outlined in the ELA. The ELA is described below. Under the ELA, the Company was 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. The Company has determined that the ELA granted the licensee a right to access the Company’s intellectual property throughout the license period (or its remaining economic life, if shorter), and thus recognizes revenue over time as the licensee recognized revenue and the Company has the right to payment of royalties. No revenue has been recognized under the ELA for the nine months ended September 30, 2021 and 2020. On June 15, 2021, the Company terminated the ELA that was executed on October 3, 2019 which is discussed below.
CMC Right of First Refusal Agreement – On October 9, 2019, the Company entered into a Right of First Refusal Agreement (the “Agreement”) with CMC Development LLC (“CMC”), which had a term of two (
The Agreement also provided that CMC engaged the Company 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 expected gross revenue to the Company for the project to be derived by CMC is approximately $
The Company entered into a joint venture agreement with Clarity Lab Solutions, LLC (“Clarity Labs”) (the “JV”) in the fourth quarter of 2020. 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. Included in the consideration the Company expected to be entitled to receive, the Company estimates its contractual allowances, payer denials and price concessions. During the nine months ended September 30, 2021, the Company recognized approximately $
Disaggregation of Revenues
The Company’s revenues are derived from construction and engineering contracts related to Modules, and medical revenue derived from lab testing and test kit sales. The Company's contracts are with customers in various industries. Revenue recognized at a point in time and recognized over time were $
| 9 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
3. |
Summary of Significant Accounting Policies (continued) |
The following tables provide further disaggregation of the Company’s revenues by categories:
| Three Months Ended September 30, |
|||||||||||||||
|
Revenue by Customer Type |
2021 |
2020 |
|||||||||||||
| Construction and Engineering Services: |
|||||||||||||||
| Government |
$ | % | $ | % | |||||||||||
| Hotel/Hospitality | % | % | |||||||||||||
| Medical - Construction |
|
( |
) |
|
% |
|
|
|
% | ||||||
| Multi-Family (includes Single Family) |
|
|
% |
|
|
% |
|||||||||
| Office |
|
|
% |
|
|
% |
|||||||||
|
Retail |
% | % | |||||||||||||
| School | % | % | |||||||||||||
| Special Use | % | % | |||||||||||||
| Subtotal | % | % | |||||||||||||
| Medical Revenue: | |||||||||||||||
|
Medical (lab testing, kit sales and equipment) |
|
|
% |
|
|
% |
|||||||||
|
Total revenue by customer type |
$ |
|
|
% |
$ |
|
|
% |
|||||||
| Nine Months Ended September 30, |
|||||||||||||||
|
Revenue by Customer Type |
2021 |
2020 |
|||||||||||||
| Construction and Engineering Services: | |||||||||||||||
| Government | $ | % | $ | % | |||||||||||
| Hotel/Hospitality | % | % | |||||||||||||
|
Medical - Construction |
|
|
% |
|
|
% |
|||||||||
| Multi-Family (includes Single Family) | % | % | |||||||||||||
|
Office |
|
|
% |
|
|
% | |||||||||
|
Other (1) |
|
|
% |
|
|
% | |||||||||
|
Retail |
|
|
% |
|
|
% |
|||||||||
| School | % | % | |||||||||||||
| Special Use | % | % | |||||||||||||
| Subtotal | % | % | |||||||||||||
| Medical Revenue: | |||||||||||||||
| Medical (lab testing, kit sales and equipment) | % | % | |||||||||||||
|
Total revenue by customer type |
$ |
|
|
% |
$ |
|
|
% |
|||||||
(1) Construction fee of $300,000 with no cost of revenue.
| 10 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
3. |
Summary of Significant Accounting Policies (continued) |
Contract Assets and Contract Liabilities
Accounts receivable are recognized in the period when the Company’s right to consideration is unconditional. Accounts receivable are recognized net of an allowance for credit losses. A considerable amount of judgment is required in assessing the likelihood of realization of receivables.
The timing of revenue recognition may differ from the timing of invoicing to customers.
Contract assets include unbilled amounts from long-term construction services when revenue recognized under the cost-to-cost measure of progress exceeds the amounts invoiced to customers, as the amounts cannot be billed under the terms of our contracts. Such amounts are recoverable from customers based upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract. Contract assets are generally classified as current within the condensed consolidated balance sheets.
Contract liabilities from construction and engineering contracts occur when amounts invoiced to customers exceed revenues recognized under the cost-to-cost measure of progress. Contract liabilities additionally include advanced payments from customers on certain contracts. Contract liabilities decrease as the Company recognizes revenue from the satisfaction of the related performance obligation. Contract liabilities are generally classified as current within the condensed consolidated balance sheet.
Although the Company believes it has established adequate procedures for estimating costs to complete on open contracts, it is at least reasonably possible that additional significant costs could occur on contracts prior to completion. The Company periodically evaluates and revises its estimates and makes adjustments when they are considered necessary.
Deferred Contract Costs - Prior to entering into the ELA, the Company was subject to an agreement to construct and develop a certain property (“Original Agreement”), which now was subject to the ELA. Because of this, the Company is no longer obliged to its Original Agreement. Upon entering the ELA, the Company had an outstanding accounts receivable balance of $
Exclusive License Agreement – On October 3, 2019, as amended on October 17, 2019, the Company entered into the ELA with CPF GP 2019-1 LLC (the “Licensee”), pursuant to which the Company granted the Licensee an exclusive license (the “License”) solely within the United States and its legal territories to the Company’s technology, intellectual property, any improvements thereto, and any related permits, in order to develop and commercialize 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. The Ridge Avenue Project has also been excluded from the License. The ELA had an initial term of five (5) years and was to automatically renew for subsequent five (5) year periods. The ELA provided for customary terminating provisions, including the right by the Company to terminate if the Licensee failed to make minimum royalty payments (as described below).
| 11 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
3. |
Summary of Significant Accounting Policies (continued) |
The ELA provided for customary indemnification obligations between the parties and further provides that the Licensee will indemnify the Company for any claims arising out of the commercialization of the License by the Licensee or any of its subsidiaries, contractors, or sublicensees.
On June 15, 2021, the Company terminated the ELA. In connection with the termination, the Company entered into a Settlement and Mutual Release Agreement (the “Settlement Agreement”) with CPF, the general partner (the “Licensee”) of CPF MF 2019-1 LLC (“CPF MF”), and Capital Plus Financial, LLC, a limited partner of the Licensee (“Capital Plus”) and an Assignment of Limited Rights Under Membership Interest Redemption Agreement, dated June 15, 2021, with Capital Plus and the Licensee. Pursuant to the Settlement Agreement with CPF and Capital Plus, the ELA was terminated, the Company released CPF and CPF MF for any claims in exchange for releases from CPF and Capital Plus and the Company received an assignment of CPF’s right under certain circumstances to a $
Business Combinations - The Company accounts for business acquisitions using the acquisition method of accounting in accordance with ASC 805 “Business Combinations”, which requires recognition and measurement of all identifiable assets acquired and liabilities assumed at their fair value as of the date control is obtained. The Company determines the fair value of assets acquired and liabilities assumed based upon its best estimates of the acquisition-date fair value of assets acquired and liabilities assumed in the acquisition. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired. Subsequent adjustments to fair value of any contingent consideration are recorded to the Company’s condensed consolidated statements of operations. Costs that the Company incurs to complete the business combination are charged to general and administrative expenses as they are incurred.
Variable Interest Entities – The Company accounts for certain legal entities as variable interest entities (“VIE"). When evaluating a VIE for consolidation, the Company must determine whether or not there is a variable interest in the entity. Variable interests are investments or other interests that absorb portions of an entity’s expected losses or receive portions of the entity’s expected returns. If it is determined that the Company does not have a variable interest in the VIE, no further analysis is required and the VIE is not consolidated. If the Company holds a variable interest in a VIE, the Company consolidates the VIE when there is a controlling financial interest in the VIE and therefore are deemed to be the primary beneficiary. The Company is determined to have a controlling financial interest in a VIE when it has both the power to direct the activities of the VIE that most significantly impact the VIE economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to that VIE. This determination is evaluated periodically as facts and circumstances change.
| 12 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
3. |
Summary of Significant Accounting Policies (continued) |
On August 27, 2020 the Company entered into a joint venture agreement with Clarity Lab Solutions, LLC (“Clarity Labs”) (the “JV”). In consideration and subject to Clarity Lab’s services and commitments and provided the agreement remains valid and in force, and is not terminated, the Company agreed to issue
On January 18, 2021 the Company entered into an operating agreement to form CAT. The purpose of CAT is to market, sell, distribute, lease and otherwise commercially exploit certain products and services in the COVID-19 testing industry. The Company has determined it is the primary beneficiary of CAT and has thus consolidated the activities in its condensed consolidated financial statements.
Investment Entities – On May 31, 2021, the Company's subsidiary SG DevCorp agreed to contribute $
On June 24, 2021, the Company's subsidiary, SG DevCorp, entered into an operating agreement with Jacoby Development for a
| 13 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
3. |
Summary of Significant Accounting Policies (continued) |
Cash and cash equivalents – The Company considers cash and cash equivalents to include all short-term, highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less upon acquisition. Cash and cash equivalents totaled $
Short-term investment – The Company classifies investments consisting of a certificate of deposit with a maturity greater than three months but less than one year as short-term investment. The Company had
Accounts receivable and allowance for credit losses – Accounts receivable are receivables generated from sales to customers and progress billings on performance type contracts. Amounts included in accounts receivable are deemed to be collectible within the Company’s operating cycle. The Company recognizes accounts receivable at invoiced amounts.
The allowance for credit losses reflects the Company's best estimate of expected losses inherent in the accounts receivable balances. Management provides an allowance for credit losses based on the Company’s historical losses, specific customer circumstances, and general economic conditions. Periodically, management reviews accounts receivable and adjusts the allowance based on current circumstances and charges off uncollectible receivables when all attempts to collect have been exhausted and the prospects for recovery are remote. Recoveries are recognized when they are received. Actual collection losses may differ from our estimates and could be material to our condensed consolidated financial position, results of operations, and cash flows.
| 14 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
3. |
Summary of Significant Accounting Policies (continued) |
Inventory – Raw construction materials (primarily shipping containers and fabrication materials) are valued at the lower of cost (first-in, first-out method) or net realizable value. Finished goods and work-in-process inventories are valued at the lower of cost or net realizable value, using the specific identification method. Medical equipment and COVID-19 test and testing supplies are valued at the lower of cost, (first-in, first-out method) or net realizable value. As of September 30, 2021 there was no inventory related to construction materials, and $
Goodwill – The Company 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 values. The Company performs a goodwill impairment test by comparing the fair value of the reporting unit with its carrying value and recognizes an impairment charge for the amount by which the carrying value exceeds the fair value, not to exceed the total amount of goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. There were no impairments during the year ended December 31, 2020 or the nine months ended September 30, 2021 and 2020. The Company has taken the recent COVID-19 pandemic into consideration when determining impairment.
Intangible assets –
|
For the year ending December 31,: |
|
|
|
||
|
2021 |
|
$ |
|
|
|
|
2022 |
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
2024 |
|
|
|
|
|
|
2025 |
|
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
$ |
|
|
|
Property, plant and equipment – Property, plant and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated lives of each asset. Estimated useful lives for significant classes of assets are as follows: computer and software
Convertible instruments – The Company 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 (a) 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, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
| 15 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
3. |
Summary of Significant Accounting Policies (continued) |
Common stock purchase warrants and other derivative financial instruments – The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provides a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company’s own stock. The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if any event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement shares (physical settlement or net-cash settlement). The Company assesses classification of common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities or equity is required.
Fair value measurements – Financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are carried at cost, which the Company believes approximates fair value due to the short-term nature of these instruments.
The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.
The Company uses three levels of inputs that may be used to measure fair value:
|
|
Level 1 |
Quoted prices in active markets for identical assets or liabilities. |
|
|
Level 2 |
Quoted prices for similar assets and liabilities in active markets or inputs that are observable. |
|
|
Level 3 |
Inputs that are unobservable (for example, cash flow modeling inputs based on assumptions). |
Transfer into and transfers out of the hierarchy levels are recognized as if they had taken place at the end of the reporting period.
Share-based payments – The Company measures 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 a stock option award is measured on the grant date. 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. The Company recognizes 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 are 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 condensed consolidated statements of operations.
Income taxes – The Company accounts for income taxes utilizing the asset and liability approach. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes generally represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from the differences between the financial and tax bases of the Company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted.
The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for anticipated tax audit issues based on the Company’s estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when the liabilities are no longer determined to be necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.
| 16 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
3. |
Summary of Significant Accounting Policies (continued) |
Concentrations of credit risk – Financial instruments, that potentially subject the Company to concentration of credit risk, consist principally of cash and cash equivalents. The Company places its cash with high credit quality institutions. At times, such amounts may be in excess of the FDIC insurance limits. The Company has not experienced any losses in such account and believes that it is not exposed to any significant credit risk on the account.
With respect to receivables, concentrations of credit risk are limited to a few customers in the construction industry. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers other than normal lien rights. At September 30, 2021 and December 31, 2020,
Revenue in excess of
Cost of revenue in excess of
|
4. |
Accounts Receivable |
At September 30, 2021 and December 31, 2020, the Company’s accounts receivable consisted of the following:
|
|
|
2021 |
|
|
2020 |
|
|||
|
Billed: |
|
|
|
|
|
|
|||
| Construction services |
$ | $ | |||||||
|
Engineering services |
|
|
|
|
|
|
|
|
|
| Medical revenue | |||||||||
|
Retainage receivable |
|
|
|
|
|
|
|
|
|
| Other receivable |
|||||||||
|
Total gross receivables |
|
|
|
|
|
|
|
|
|
|
Less: allowance for credit losses |
|
|
( |
) |
|
|
( |
) |
|
|
Total net receivables |
|
$ |
|
|
|
$ |
|
|
|
| 17 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
5. |
Contract Assets and Contract Liabilities |
Costs and estimated earnings on uncompleted contracts, which represent contract assets and contract liabilities, consisted of the following at September 30, 2021 and December 31, 2020:
|
|
|
|
2021 |
|
|
2020 |
|
||
|
|
Costs incurred on uncompleted contracts |
|
$ |
|
|
|
$ |
|
|
| Provision for loss on uncompleted contracts | |||||||||
|
Estimated earnings (losses) to date on uncompleted contracts |
|
|
( |
) |
|
|
|
|
|
|
Gross contract assets |
|
|
|
|
|
|
|
|
|
|
Less: billings to date |
|
|
( |
) |
|
|
( |
) |
|
|
Net contract liabilities on uncompleted contracts |
|
$ |
( |
) |
|
$ |
( |
) |
|
The above amounts are included in the accompanying condensed consolidated balance sheets under the following captions at September 30, 2021 and December 31, 2020.
|
|
|
|
2021 |
|
|
2020 |
|
||
|
|
Contract assets |
|
$ |
|
|
|
$ |
|
|
|
|
Contract liabilities |
|
|
( |
) |
|
|
( |
) |
|
|
Net contract liabilities |
|
$ |
( |
) |
|
$ |
( |
) |
Although management believes it has established adequate procedures for estimating costs to complete on open contracts, it is at least reasonably possible that additional significant costs could occur on contracts prior to completion. The Company periodically evaluates and revises its estimates and makes adjustments when they are considered necessary. The Company has experienced accrued losses on legacy contract commitments from the acquisition of SG ECHO due to escalations in material pricing related to COVID-19 and labor overages.
|
6. |
Property, plant and equipment |
Property, plant and equipment are stated at cost less accumulated depreciation and amortization and depreciated using the straight-line method over their useful lives. At September 30, 2021 and December 31, 2020, the Company’s property, plant and equipment, net consisted of the following:
|
|
|
|
2021 |
|
|
2020 |
|
||
|
|
Computer equipment and software |
|
$ |
|
|
|
$ |
|
|
|
|
Furniture and other equipment |
|
|
|
|
|
|
|
|
| Leasehold improvements |
|||||||||
| Equipment and machinery | |||||||||
| Automobiles | |||||||||
| Building held for leases | |||||||||
| Laboratory and temporary units | |||||||||
| Land | |||||||||
| Construction in progress | |||||||||
|
|
Property, plant and equipment |
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
|
Property, plant and equipment, net |
|
$ |
|
|
|
$ |
|
|
Depreciation expense for the three months ended September 30, 2021 and 2020 amounted to $
| 18 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
7. |
Notes Receivable |
On January 21, 2020, CPF GP 2019-1 LLC (“CPF GP”) issued to the Company a promissory note in the principal amount of $
In April 2020, CPF GP issued to the Company a promissory note in the principal amount of $
The promissory notes are unaffected by the Settlement and Mutual Release Agreement and remain in effect and outstanding in accordance with the terms of the notes evidencing such loans. See Note 3 for a discussion on the Settlement and Mutual Release Agreement and termination of the ELA with CPF.
|
8. |
Notes Payable |
On July 14, 2021, SG DevCorp, a subsidiary of the Company, issued a Real Estate Lien Note, in the principal amount of $
On February 4, 2020, the Company entered into a Securities Purchase Agreement with an accredited investor, pursuant to which the Company issued to the investor a secured note in the aggregate principal amount of $
| 19 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
9. |
Business Combination |
On September 17, 2020, the Company, through SG Echo, LLC (its wholly owned subsidiary), entered into an Asset Purchase Agreement (“APA") to acquire substantially all of the assets of Echo DCL, LLC (“Echo”) for $
The purchase consideration amounted to:
| Cash | $ | |||
| Earnout liability | ||||
| Settlement of accounts receivable and net contract liabilities | ( |
) | ||
| $ |
The settlement of accounts receivable and net contract liabilities represents amounts effectively settled upon the purchase of Echo, which originated from contacts between the Company and Echo prior to the purchase date.
The following table summarizes the allocation of the purchase price to the assets acquired and liabilities assumed for the Echo Acquisition:
|
Cash and cash equivalents |
$ |
|
||
|
Accounts receivable |
|
|
||
|
Inventories |
|
|
||
|
Prepaid expenses and other current assets |
|
|
||
|
Property, plant and equipment |
|
|
||
|
Right-of-use assets |
|
|
||
| Goodwill | ||||
|
Intangible assets |
|
|
||
|
Accounts payable and accrued expenses |
|
( |
) | |
| Assumed liabilities | ( |
) | ||
|
Contract liabilities |
|
( |
) | |
|
Lease liability |
|
( |
) | |
|
|
$ |
|
| 20 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
9. |
Business Combination (continued) |
As part of the Echo Acquisition, the Company recorded a contingent consideration liability for additional payments due to the sellers of Echo. These payments are due in accordance with the APA and are based upon the net income obtained from the Echo business during certain earnout periods. The earnout periods concluded as of September 30, 2021. The initial contingent consideration liability of $
|
10. |
Leases |
The Company leases an office, a manufacturing plant and certain equipment under non-cancelable operating lease agreements.
Supplemental balance sheet information related to leases is as follows:
| Balance Sheet Location |
September 30, 2021 |
||||
| Operating Leases | |||||
| Right-of-use assets, net | $ | ||||
| Current liabilities | Lease liability, current maturities |
( |
) | ||
| Non-current liabilities | Lease liability, net of current maturities | ( |
) | ||
| Total operating lease liabilities | $ | ( |
) | ||
| Finance Leases | |||||
| Right-of-use assets | $ | ||||
| Current liabilities | Lease liability, current maturities | ( |
) | ||
| Non-current liabilities | Lease liability, net of current maturities | ( |
) | ||
| Total finance lease liabilities | $ | ( |
) | ||
|
Weighted Average Remaining Lease Term |
|||||
| Operating leases | |||||
| Finance leases | |||||
| Weighted Average Discount Rate |
|||||
| Operating leases | % | ||||
| Finance leases | % | ||||
| 21 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
10. |
Leases (continued) |
As the leases do not provide an implicit rate, the Company used an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments, which is reflective of the specific term of the leases and economic environment of each geographic region.
Anticipated future lease costs, which are based in part on certain assumptions to approximate minimum annual rental commitments under non-cancelable leases, are as follows:
| Year Ending December 31, | Operating | Financing | Total | ||||||||
| 2021 | $ | $ | $ | ||||||||
| 2022 | |||||||||||
| 2023 | |||||||||||
| 2024 | |||||||||||
| 2025 | |||||||||||
| Total lease payments | |||||||||||
| Less: Imputed interest | |||||||||||
| Present value of lease liabilities | $ | $ | $ |
Chicago Airport Testing has subleased its leased vacant area for a period of
|
11. |
Net Income (Loss) Per Share |
Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of the common shares issuable upon the exercise of stock options and warrants. Potentially dilutive common shares are excluded from the calculation if their effect is antidilutive.
At September 30, 2021, there were options, including options granted to non-employees and non-directors, restricted stock units and warrants to purchase
| 22 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
12. |
Construction Backlog |
The following represents the backlog of signed construction and engineering contracts in existence at September 30, 2021 and December 31, 2020, which represents the amount of revenue the Company expects to realize from work to be performed on uncompleted contracts in progress and from contractual agreements in effect at September 30, 2021 and December 31, 2020, respectively, on which work has not yet begun:
|
|
|
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2021 |
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|
2020 |
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||
|
|
Balance - beginning of period |
|
$ |
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|
|
$ |
|
|
|
|
New contracts and change orders during the period |
|
|
|
|
|
|
|
|
| Adjustments and cancellations, net | ( |
) | ( |
) | |||||
|
|
Subtotal |
|
|
|
|
|
|
|
|
|
|
Less: contract revenue earned during the period |
|
|
( |
) |
|
|
( |
) |
|
|
Balance - end of period |
|
$ |
|
|
|
$ |
|
|
Backlog at September 30, 2021 included
The Company’s remaining backlog as of September 30, 2021 represents the remaining transaction price of firm contracts for which work has not been performed and excludes unexercised contract options.
The Company expects to satisfy its backlog which represents the remaining unsatisfied performance obligation on contracts as of September 30, 2021 over the following period:
| 2021 |
|||||
| Within 1 year | $ | ||||
| 1 to 2 years |
|||||
| Total Backlog | $ | ||||
Although backlog reflects business that is considered to be firm, cancellations, deferrals or scope adjustments may occur. Backlog is adjusted to reflect any known project cancellations, revisions to project scope and cost and project deferrals, as appropriate.
| 23 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
13. |
Stockholders’ Equity |
Public Offerings –
In April 2020, the Company also completed a public offering of its common stock (the "April Public Offering"). In connection with the April Public Offering, the Company sold
In May 2020, the Company completed a public offering of its common stock (the "May Public Offering"). In connection with the May Public Offering, the Company sold
| 24 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
14. |
Warrants |
In conjunction with the June 2017 Public Offering, the Company issued to certain affiliates of the underwriters, as compensation, warrants to purchase an aggregate of
In conjunction with a Purchase Agreement in April 2019, the Company also sold warrants to purchase up to an aggregate of
In conjunction with the Underwriting Agreement in August 2019, the Company issued to the underwriter, as compensation, warrants to purchase an aggregate of
In conjunction with the Underwriting Agreement entered into May 2020, the Company issued to the underwriter, as compensation, warrants to purchase an aggregate of
In connection with a convertible debenture issued on November 12, 2019, the Company entered into a Placement Agency Agreement (the “Placement Agency Agreement”) with ThinkEquity, a division of Fordham Financial Management, Inc. (the “Placement Agent”), pursuant to which the Company paid the Placement Agent a cash fee equal to 9% of the gross proceeds received by the Company from the investor in this transaction, as well as a one-time expense fee of $
On December 10, 2019, the Company and ThinkEquity entered into a waiver agreement (“Waiver of Warrant”) pursuant to which ThinkEquity surrendered its rights to a warrant previously issued to ThinkEquity on November 12, 2019 to purchase
| 25 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
15. |
Share-based Compensation |
On October 26, 2016, the Company’s Board of Directors approved the issuance of up to
Stock-Based Compensation Expense
Stock-based compensation expense is included in the condensed consolidated statements of operations as follows:
|
Three Months Ended |
Nine Months Ended September 30, |
||||||||||||||||
| 2021 |
2020 |
2021 | 2020 | ||||||||||||||
|
|
Payroll and related expenses |
$ | $ |
$ |
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$ |
|
||||||||||
| General and administrative expenses | |||||||||||||||||
|
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Total |
$ | $ |
$ |
|
$ |
|
||||||||||
The following table presents total stock-based compensation expense by security type included in the condensed consolidated statements of operations:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||||
| 2021 |
2020 |
2021 | 2020 | ||||||||||||||
|
|
Stock options |
$ | $ |
|
$ |
|
|
|
$ |
|
|
||||||
|
|
Restricted Stock Units |
|
|
|
|
|
|
|
|
||||||||
| Total | $ | $ | $ | $ | |||||||||||||
Stock-Based Option Awards
The Company has issued no stock-based options during the months ended September 30, 2021 and 2020.
Because the Company does not have significant historical data on employee exercise behavior, the Company uses the “Simplified Method” to calculate the expected life of the stock-based option awards granted to employees. The simplified method is calculated by averaging the vesting period and contractual term of the options.
| 26 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
| 15. |
Share-based Compensation (continued) |
The following table summarizes stock-based option activities and changes during the nine months ended September 30, 2021 as described below:
|
|
|
Shares |
|
|
Weighted Average Fair Value Per Share |
|
|
Weighted |
|
|
Weighted Average Remaining Terms (in years) |
|
|
Aggregate Intrinsic Value |
|
||||||
|
Outstanding – December 31, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
Exercised |
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|
|
|
|
|
|
|
|
|
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— |
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— |
|
||
|
Cancelled |
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|
|
|
|
|
|
|
|
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— |
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— |
|
||
|
Outstanding – September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
Exercisable – December 31, 2020 |
|
|
|
|
|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
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Exercisable – September 30, 2021 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
For the three months ended September 30, 2021 and 2020, the Company recognized stock-based compensation expense of $
As of September 30, 2021, there was no unrecognized compensation costs related to non-vested stock options and all options have been expensed. The intrinsic value is calculated as the difference between the fair value of the stock price at year end and the exercise price of each of the outstanding stock options. The fair value of the stock price at September 30, 2021 was $
Restricted Stock Units
On March 22, 2019, a total of
On January 15, 2019 and February 26, 2019,
Effective June 5, 2019, a total of
| 27 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
| 15. |
Share-based Compensation (continued) |
On April 14, 2020,
On April 14, 2020,
On September 23, 2020, a total of
On November 11, 2020, a total of
On December 9, 2020, a total of
For the three months ended September 30, 2021 and 2020, the Company recognized stock-based compensation of $
The following table summarized restricted stock unit activities during the nine months ended September 30, 2021:
| Number of Shares |
|||||
|
|
Non-vested balance at January 1, 2021 |
|
|||
|
|
Granted |
|
|||
| Vested | ( |
) | |||
| Forfeited/Expired | |||||
| Non-vested balance at September 30, 2021 | |||||
| 28 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
16. |
Commitments and Contingencies |
Legal Proceedings
The Company is subject to certain claims and lawsuits arising in the normal course of business. The Company assesses liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that the Company will incur a loss and the amount of the loss can be reasonably estimated, the Company records a liability in our consolidated financial statements. These legal accruals may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, the Company does not record an accrual, consistent with applicable accounting guidance. Based on information currently available, advice of counsel, and available insurance coverage, the Company believes that the established accruals are adequate and the liabilities arising from the legal proceedings will not have a material adverse effect on the consolidated financial condition. However, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution of a matter will not exceed established accruals. As a result, the outcome of a particular matter or a combination of matters may be material to the results of operations for a particular period, depending upon the size of the loss or the income for that particular period.
Pizzarotti Litigation - On or about August 10, 2018 Pizzarotti, LLC filed a complaint against the Company and Mahesh Shetty, the Company’s former President and CFO, and others, seeking unspecified damages for an alleged breach of contract by the Company and another entity named Phipps & Co. (“Phipps”). The lawsuit was filed as Pizzarotti, LLC. v. Phipps & Co., et al., Index No. 653996/2018 and commenced in the Supreme Court of the State of New York for the County of New York. On or about April 1, 2019, Phipps filed cross-claims against the Company and Mr. Shetty asserting claims for indemnification, contribution, fraud, negligence, negligent misrepresentation, and breach of contract. SG Blocks has likewise cross claimed against Phipps for indemnification and contribution, claiming that any damages to the Plaintiff were the result of the acts or omissions of Phipps and its principals. Pizzarotti’s suit arose from a contract dated April 3, 2018 that it executed with Phipps whereby Pizzarotti, a construction manager, engaged Phipps to perform stone procuring and tile work at a construction project located at 161 Maiden Lane, New York 10038. Pizzarotti’s claims against the Company arise from a purported assignment agreement dated August 10, 2018, whereby Pizzarotti claims that the Company agreed to assume certain obligations of Phipps under a certain trade contract between Pizzarotti and Phipps & Co. Phipps’ claims against the Company arise from a purported Assignment Agreement, dated as of May 30, 2018, between Pizzarotti, Phipps and the Company (the “Assignment Agreement”), pursuant to which, it is alleged, that the Company agreed to provide a letter of credit in connection with the sub-contracted work to be provided by Phipps to Pizzarotti. The Company believes that the Assignment Agreement was void for lack of consideration and moved to dismiss the case on those and other grounds. On June 17, 2020, the New York Supreme Court entered an order dismissing certain claims against the Company brought by cross claimant Phipps & Co. Specifically, the court dismissed Phipps’ claims for indemnification, contribution, fraud, negligence and negligent misrepresentation. The court did not dismiss Phipps’ claim for breach of the Assignment Agreement. The issue of the validity of the Assignment Agreement, and the Company’s defenses to the claims brought by the plaintiff Pizzarotti, and cross claimant Phipps, are being litigated. The Company maintains that the Assignment Agreement, to the extent valid and enforceable, was properly terminated and/or there are no damages, and, consequently, that the claims brought against the Company are without merit. The Company intends to continue to vigorously defend the litigation. The parties have engaged in written discovery but no depositions have been conducted as of yet. By motion dated February 24, 2021, Pizzarotti moved to stay the entire action pending the outcome of a separate litigation captioned Pizzarotti, LLC v. FPG Maiden Lane, LLC et. al., Index No. 651697/2019, involving some of the same parties (but excluding the Company). Phipps cross moved to consolidate the two actions. The Company opposed both motions. On April 26, 2021, the court denied both motions and directed the parties to meet and confer concerning the scheduling of depositions. On May 10, 2021, the parties jointly filed with the court a proposed order providing the completion of depositions of all parties and nonparties by September 30, 2021. The court has not entered the proposed discovery order and no action has been taken by the plaintiff Pizzarotti nor the defendant-cross claimant Phipps since the proposed order was submitted. There are no scheduled hearings or conferences before the court at this time.
Litigation is subject to many uncertainties, and the outcome of this action is not predicted with assurance. The Company is currently unable to predict the possible loss or range of loss, if any, associated with the resolution of this litigation, and, accordingly, the Company has made no provision related to this matter in the condensed consolidated financial statements.
| 29 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
16. |
Commitments and Contingencies (continued) |
ICON Construction Inc. v. SG Blocks, Inc. et. al. - On or about June 8, 2021 ICON Construction Inc. (“ICON”) filed a complaint against the Company and Echo DCL LLC (“Echo DCL”), seeking unspecified damages, arising out of a certain asset purchase agreement entered into between ICON and Echo DCL on or about February 20, 2020 (the “ICON-Echo Asset Agreement”) whereby, inter alia, Echo DCL acquired all of the assets of ICON. On or about September 17, 2020, Echo DCL and SG Echo LLC entered into a certain asset purchase agreement (the “Echo Asset Agreement”) whereby, inter alia, SG Echo acquired all of the assets of Echo DCL. In the Echo Asset Agreement Echo DCL represented and warranted to SG Echo that it had good and marketable title to the assets, had full right and power to transfer same, and that the same were free and clear of any encumbrances except for a certain permitted lien held by BTH Bank.
ICON alleges that ECHO DCL breached the terms of the ICON-Echo Asset Agreement and that the Company agreed to assume Echo DCL’s liabilities obligations under the ICON-Echo Asset Agreement. Icon also claims a security interest in the assets conveyed to SG Echo by Echo DCL. The Company has filed an answer to the ICON complaint denying the allegations and raised eleven affirmative defenses and that it is entitled to indemnification and/or contribution from Echo DCL and its principal Michael Ames.
Litigation is subject to many uncertainties, and the outcome of this action is not predicted with assurance. The Company is currently unable to predict the possible loss or range of loss, if any, associated with the resolution of this litigation, and, accordingly, the Company has made no provision related to this matter in the condensed consolidated financial statements.
Vendor Litigation –
1. Teton Buildings, LLC
(i) On January 1, 2019, SG Blocks commenced an action against Teton Buildings, LLC (“Teton”) in Harris County, Texas (“Teton Action”) to recover approximately $
(ii) On or about September 12, 2018, the Company entered into a Firm Price Quote and Purchase (the “GVL Contract”) with Teton to govern the manufacture and provision of 23 shipping containers and modular units (the “Teton GVL Modules”) for the Four Oaks Gather GVL project in South Carolina (the “GVL Project.”). The Company maintains that Teton breached the GVL Contract by (i) failing to timely deliver the Teton GVL Modules, (ii) delivering Teton GVL Modules that were defective in their design and manufacture, (iii) otherwise failed to meet South Carolina Building Code regulations and (iv) breached applicable warranties. As a result of the breach and defects in performance, design and manufacture by Teton, Company asserts that it has sustained approximately $
On January 22, 2021, the Company filed a third-party complaint against Teton in the United States District Court for the Central District of California, Case No. 2:20−cv−03432 in the HOLA Action (described below), seeking to determine Teton’s liability in its capacity as a bankruptcy debtor in order to collect any damages payable from Teton’s liability insurance carrier or carriers. On July 23, 2021, the Company filed a First Amended Third-Party Complaint against Teton and other named third party defendants (see #2 below). Teton has been served with the First Amended Third-Party Complaint and has been granted an extension of time to answer through November 2021.
The Company is currently unable to predict the possible loss or range of loss, if any, associated with the resolution of this litigation, and, accordingly, the Company has made no provision related to this matter in the condensed consolidated financial statements.
| 30 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
16. |
Commitments and Contingencies (continued) |
2. SG Blocks, Inc. v HOLA Community Partners, et. al.
On April 13, 2020, the Company, as plaintiff filed a Complaint against HOLA Community Partners (“HCP”), Heart of Los Angeles Youth, Inc. (“HOLA”) (HCP and HOLA are collectively referred to as the “HOLA Defendants”), and the City of Los Angeles (“City”) in the United States District Court for the Central District of California, Case No. 2:20-cv-03432-ODW (“HOLA Action”). The Company asserted seven claims against HOLA Defendants arising out of and related to the HOLA Project, to wit, for: (1) breach of contract; (2) conversion; (3) default and judicial foreclosure under the Agreement as a security agreement; (4) misappropriation of trade secrets under California Civil Code section 3426; (5) misappropriation of trade secrets under 18 U.S.C. § 1836; and (6) intentional interference with contractual relations. 29 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Three Months Ended March 31, 2021 and 2020 (Unaudited) 16. Commitments and Contingencies (continued) On April 20, 2020, HOLA filed a separate action against the Company in the Los Angeles Superior Court arising out of the HOLA Project, asserting claims of (1) negligence; (2) strict products liability; (3) strict products liability, (4) breach of contract; (5) breach of express warranty; (6) violation of Business and Professions Code § 7031(b); and (7) violation of California’s unfair competition law, Business and Professions Code section 17200 (“UCL”) (“HOLA State Court Action”). The HOLA State Court Action was removed to the Central District of California and consolidated with the HOLA Action.
On January 22, 2021, the Company filed a Third-Party Complaint in the HOLA Action against Third-Party Defendants Teton Buildings, LLC, Avesi Construction, LLC, and American Home Building and Masonry Corp (“AHB”) for indemnity and contribution with respect to HOLA’s claims. The Company has also notified its general liability carrier Sompo International regarding coverage concerning HOLA’s claims On February 25, 2021, the Court entered an order dismissing the Company’s claims for (1) breach of contract; (2) conversion; (3) default and judicial foreclosure under the Agreement as a security agreement; (4) misappropriation of trade secrets under California Civil Code section 3426; (5) misappropriation of trade secrets under 18 U.S.C. § 1836; but denied dismissal of the Company’s claims for intentional interference with contractual relations. The Court also denied the Company’s motion to dismiss HOLA’s claims.
On March 12, 2021, the HOLA Defendants filed an answer to the Company’s complaint against it denying liability and asserting affirmative defenses. On March 12, 2021, the Company filed an answer to the HOLA Defendants’ First Amended Consolidated Complaint against it, denying liability and asserting affirmative defenses.
On April 26, 2021, the Company and the HOLA Defendants filed a Joint Stipulation to Dismiss HOLA Community Partners’ Sixth Claim for Relief (violation of California Business and Professions Code §7031(b)), with prejudice, pursuant to Fed. R. Civ. P. 41(a)(1)(A)(ii).
On July 23, 2021, the Company filed a First Amended Third-Party Complaint adding the following additional third party defendants seeking, inter alia, contractual indemnity, equitable indemnity; and contribution: American Home Building and Masonry Corp. (“American Home”), Anderson Air Conditioning, L.P. (“Anderson”). Broadway Glass and Mirror, Inc. (“Broadway”), Marne Construction, Inc. (“Marne”), The McIntyre Company (“McIntrye”), Dowell & Bradley Construction, Inc. dba J R Construction (“JR Construction”) Junior Steel Co. (“Junior Steel”) Saddleback Roofing, Inc. (“Saddleback”) Schindler Elevator Corporation (“Schindler”) U.S. Smoke & Fire Corp. (“U.S. Smoke”) and FirstForm, Inc. (“FirstForm”) (collectively the “Additional Third Party Defendants”). The case is currently in the discovery stage the parties are in the process of stipulating to new dates for the completion of discovery and fixing of a trial date for the latter part of 2022 or 2023.
On September 2, 2021, Schindler Elevator Corp. filed its answer to the First Amended Third-Party Complaint. On September 3, 2021, Junior Steel Co. filed its answer to the First Amended Third-Party Complaint. On September 7, 2021, Anderson Air Conditioning, L.P. filed its answer to the First Amended Third-Party Complaint. On October 6, 2021, the McIntyre Group filed its answer to the First Amended Third-Party Complaint.
With the recent entry into and appearance into the case by the various third-party defendants, with certain defendants having yet to appear and answer, the parties are in the process of collectively stipulating to a new discovery schedule that will extend the discovery period through September or October 2022, with a trial to be held in November or December 2022.
Litigation is subject to many uncertainties, and the outcome of this action is not predicted with assurance. The Company is currently unable to predict the outcome or possible recovery or loss or range of loss, if any, associated with the resolution of this litigation, and, accordingly, the Company has made no provision related to this matter in the condensed consolidated financial statements.
| 31 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
16. |
Commitments and Contingencies (continued) |
3. SG Blocks, Inc. v. EDI International, PC.
On June 21, 2019, SG Blocks filed a lawsuit against EDI International, PC, a New Jersey corporation, in the Superior Court of the State of California, County of Los Angeles, Central District, in connection with the parties' consulting agreement, dated June 29, 2016, pursuant to which EDI International, PC, was to provide, for a fee, certain architectural and design services for the HOLA Project. SG Blocks, Inc. claims that EDI International, PC, tortiously interfered with SG Blocks, Inc's economic relationship with HOLA Community Partners and Heart of Los Angeles Youth, Inc. EDI International, PC, filed a cross-complaint for alleged unpaid fees and tortious interference with EDI International, PC's contractual relationship with HOLA Community Partners and Heart of Los Angeles Youth, Inc. EDI International, PC's cross-complaint seeks in excess of $
On July 8, 2020, SG Blocks, Inc. added PVE LLC as a defendant in the lawsuit, claiming PVE LLC is liable to the same extent as EDI International, PC. The case is currently in the discovery stage and a trial date has been set for May 2, 2022.
On May 14, 2021, EDI accepted the Company’s Statutory Offer of Compromise, pursuant to California Code of Civil Procedures §998, to settle EDI’s cross-claims. On July 26, 2021, the Company and EDI entered into a certain General Release agreement whereby in exchange for payment by the Company in the amount of $
Litigation is subject to many uncertainties, and the outcome of this action is not predicted with assurance. The Company is currently unable to predict the outcome or possible recovery or loss or range of loss, if any, associated with the resolution of this litigation, and, accordingly, the Company has made no provision related to this matter in the condensed consolidated financial statements.
Other Litigation
1. Shetty v. SG Blocks, Inc. et. al. - Case No. 20-CV-00550, United States District Court, Eastern District of New York
On January 31, 2020, Mahesh Shetty, the Company’s former President and Chief Financial Officer (“Former Employee”), filed suit against the Company and its Chairman and Chief Executive Officer, Paul Galvin, claiming (i) $
On or about September 14, 2021, the Company and Former Employee entered into a settlement and release agreement resolving their respective claims. On September 14, 2021, the parties filed a joint motion seeking court approval of the settlement. The motion to approve the settlement remains pending before the court.
Litigation is subject to many uncertainties, and the outcome of this action is not predicted with assurance. Although the Company expects that the Action will be dismissed upon the execution of a settlement and release agreement, failing same the Company is unable to predict the outcome or possible recovery or loss or range of loss, if any, associated with the resolution of this litigation, and, accordingly, the Company has made a provision related to this matter in the condensed consolidated financial statements for approximately $
| 32 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
16. |
Commitments and Contingencies (continued) |
2. SG Blocks, Inc. v. Osang Healthcare Company, Ltd., Case No. 21-01990
On April 14, 2021, the Company commenced an action against Osang Healthcare Company, Ltd. (“Osang”) in the United States District Court, Eastern District of New York, Case No. 21-01990 (“Osang Action”). The Company has asserted that Osang materially breached a certain Managed Supply Agreement (“MSA”) entered into between the parties on October 12, 2020, pursuant to which the Company received on consignment two million (
On June 18, 2021, Osang served a motion to dismiss the Osang Action pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. On July 30, 2021, the Company served its opposition to the motion to dismiss. The motion has been fully briefed and submitted to the court and the parties are awaiting a ruling thereon.
Litigation is subject to many uncertainties, and the outcome of this action is not predicted with assurance. The Company is currently unable to predict the outcome or possible recovery, if any, associated with the resolution of this litigation, and, accordingly, the Company has made no provision related to this matter in the condensed consolidated financial statements.
|
17. |
Subsequent Events |
On October 1, 2021, the Compensation Committee (the “Committee”) of the Board of Directors of the Company granted the following awards of restricted stock units (RSUs) under the Company’s Stock Incentive Plan (the “Plan”): (i) Paul Galvin, the Company’s Chairman and CEO,
| 33 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
17. |
Subsequent Events (continued) |
On October 27, 2021,pursuant to the terms of a Securities Purchase Agreement (the “Purchase Agreement”) that the Company entered into on October 25, 2021 with an institutional investor (the “Purchaser”),the Company received approximately $
| 34 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2021 and 2020 (Unaudited)
|
17. |
Subsequent Events (continued) |
On October 28, 2021, SG Echo LLC (“SG Echo”), a subsidiary of SG Blocks, Inc., a Delaware corporation (the “Company”), entered into a Lease Agreement (the “Lease”) with May Properties, LLC, to lease an approximately
| 35 |
Introduction and Certain Cautionary Statements
As used in this Quarterly Report, unless the context requires otherwise, references to the "Company," "we," "us," and "our" refer to SG Blocks, Inc. and its subsidiaries. The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and schedules included elsewhere in this Quarterly Report on Form 10-Q and with our audited condensed consolidated financial statements and notes for the year ended December 31, 2020, which were included in our Annual Report on Form 10-K for the year then ended December 31, 2020, as filed with the Securities and Exchange Commission (the "SEC") on April 15, 2021 and Amendment No. 1 thereto filed with the SEC on April 30, 2021 (the "2020 Form 10-K"). This discussion, particularly information with respect to our future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Special note regarding forward-looking statements" in this Quarterly Report on Form10-Q. You should review the disclosure under the heading "Risk Factors" in this Quarterly Report on Form 10-Q and under Part I, Item IA of the 2020 Form 10-K for a discussion for important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Special note regarding forward-looking statements
This Quarterly Report on Form-10Q contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Statements contained in this Quarterly Report on Form 10-Q may use forward-looking terminology, such as "anticipates," "believes," "could," "would," "estimates," "may," "might," "plan," "expect," "intend," "should," "will," or other variations on these terms or their negatives. All statements other than statements of historical facts are statements that could potentially be forward-looking. We caution that forward-looking statements involve risks and uncertainties and actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate or prediction is realized. Factors that could cause or contribute to such differences include, but are not limited to: general economic, political and financial conditions, both in the United States and internationally; our ability to obtain additional financing on acceptable terms, if at all, or to obtain additional capital in other ways; our ability to increase sales, generate income, effectively manage our growth and realize our backlog; competition in the markets in which we operate, including the consolidation of our industry, our ability to expand into and compete in new geographic markets and our ability to compete by protecting our proprietary manufacturing process; a disruption or cybersecurity breach in our or third-party suppliers' information technology systems; our ability to adapt our products and services to industry standards and consumer preferences and obtain general market acceptance of our products; supply chain problems, including product shortages and the availability of raw materials, and potential loss of relationships with key vendors, suppliers or subcontractors; the seasonality of the construction industry in general, and the commercial and residential construction markets in particular; a disruption or limited availability with our third party transportation vendors; the loss or potential loss of any significant customers; exposure to product liability, including the possibility that our liability for estimated warranties may be inadequate, and various other claims and litigation; our ability to attract and retain key employees; our ability to attract private investment for sales of product; the credit risk from our customers and our customers' ability to obtaining third-party financing if and as needed; an impairment of goodwill; the impact of federal, state and local regulations, including changes to international trade and tariff policies, and the impact of any failure of any person acting on our behalf to comply with applicable regulations and guidelines; costs incurred relating to current and future legal proceedings or investigations; the cost of compliance with environmental, health and safety laws and other local building regulations; our ability to utilize our net operating loss carryforwards and the impact of changes in the United States' tax rules and regulations; dangers inherent in our operations, such as natural or man-made disruptions to our facilities and project sites, the impact of COVID-19, and related government “shelter-in-place” mandates and other restrictions on business and commercial activity and the adequacy of our insurance coverage; our ability to comply with the requirements of being a public company; fluctuations in the price of our common stock, including decreases in price due to sales of significant amounts of stock; potential dilution of the ownership of our current stockholders due to, among other things, public offerings or private placements by us or issuances upon the exercise of outstanding options or warrants and the vesting of restricted stock units; the ability of our principal stockholders, management and directors to potentially exert control due to their ownership interest; any ability to pay dividends in the future; potential negative reports by securities or industry analysts regarding our business or the construction industry in general; Delaware law provisions discouraging, delaying or preventing a merger or acquisition at a premium price; our ability to remain listed on the Nasdaq Capital Market; our classification as a smaller reporting company resulting in, among other things, a potential reduction in active trading of our common stock or increased volatility in our stock price; and any factors discussed in "Part II - Item 1A. Risk Factors" to this Quarterly Report on Form 10-Q as well as the Risk Factors set forth in Part I, Item 1A of our 2020 Form 10-K as amended by the Amendment No. 1 thereto, and other filings with the Securities Exchange Commission. Readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date of this report. The Company will not undertake to update any forward-looking statement herein or that may be made from time to time on behalf of the Company.
| 36 |
Overview
Using our proprietary technology and design and engineering expertise, we modify code-engineered cargo shipping containers and purpose-built modules for use for safe and sustainable commercial, industrial and residential building construction. Rather than consuming new steel and lumber, our proprietary technology and design and engineering expertise allows for the redesign, repurpose and conversion of heavy-gauge steel cargo shipping containers into SGBlocks™, which are safe green building blocks for commercial, industrial, and residential building construction.
Our business model originally was a project-based construction model pursuant to which we were responsible for the design, construction and sale of finished products that incorporated our technology to customers throughout the United States primarily in the multi-family housing, restaurant, military and education industries. From October 2019 to June 2021, our business model for residential building construction became a royalty-fee model established under a five-year exclusive license with CPF MF 2019-1 LLC (“CPF”) pursuant to which CPF received an exclusive license for our proprietary technology for residential use, including, without limitation, single-family residences and multi-family residences, but specifically excluding military housing. Our Ridge Avenue Project, a residential housing project in Atlanta, was also excluded from the license to CPF. In June 2021, we terminated the license to CPF and recommenced our original project-based business model pursuant to which we design, construct and sell finished products to customers throughout the United States.
In April 2020, we expanded our product offerings and began focusing on the medical projects when we entered into the COVID-19 diagnostic market through the distribution of COVID-19 diagnostic tests. We have subsequently entered into additional collaborations for the distribution of diagnostic tests as well as collaborations for the use of our modular technology for the building of medical test centers that include COVID-19 testing. During 2020, we entered into a joint venture, and have begun, to provide clinical lab testing, as well as test kit sales related to a separate distributer agreement.
In September 2020, we acquired substantially all the assets of Echo, a Texas limited liability company, except for Echo's real estate holdings for which we obtained a right of first refusal, which we subsequently exercised on February 24, 2021. Echo is a container/modular manufacturer based in Durant, Oklahoma specializing in the design and construction of permanent modular and temporary modular buildings and was one of our key supply chain partners. Echo catered to the military, education, administration facilities, healthcare, government, commercial and residential customers. This acquisition has allowed us to expand our reach for our Modules and offers us an opportunity to vertically integrate a large portion of our cost of goods sold, as well as increase margins, productivity and efficiency in the areas of design, estimating, manufacturing and delivery.
Recent Business Developments
On July 14, 2021, SG DevCorp entered into a Real Estate Lien Note, dated July 14, 2021, in the principal amount of $2,000,000 (the “Short-Term Note”), secured by a Deed of Trust, dated July 14, 2021, on its 50+ acre Lake Travis project site in Lago Vista, Texas and a related Assignment of Leases and Rents, dated July 8, 2021, for net loan proceeds of $1,958,233 after fees. The Short-Term Note has a term of one (1) year, provides for payments of interest only at a rate of twelve percent (12%) per annum and may be prepaid without penalty commencing nine (9) months after its issuance date. If the Short-Term Note is prepaid prior to nine (9) months after its issuance date, a 0.5% prepayment penalty is due. SG DevCorp intends to use the proceeds of the Short-Term Note for its development projects.
On October 27, 2021, pursuant to the terms of a Securities Purchase Agreement (the “Purchase Agreement”) that we entered into on October 25, 2021 with an institutional investor (the “Purchaser”),we received approximately $11.55 million in gross proceeds and we sold to the Purchaser (A) in a registered direct offering (i) 975,000 shares (the “Public Shares”) of its Common Stock, par value $0.01 per share (the “Common Stock”), and (ii) pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to 2,189,384 shares (the “Pre-Funded Warrant Shares”) of Common Stock and (B) in a concurrent private placement, Series A warrants to purchase up to 1,898,630 shares (the “Common Stock Warrant Shares”) of Common Stock (the “Common Stock Warrants,” and together with the Public Shares and the Pre-Funded Warrants, the “Securities”) (the “Offering The Pre-Funded Warrants were immediately exercisable at a nominal exercise price of $0.001 and all Pre-Funded Warrants sold have been exercised. The Common Stock Warrants have an exercise price of $4.80 per share, are exercisable upon issuance and will expire five years from the date of issuance.
| 37 |
On October 28, 2021, SG Echo LLC (“SG Echo”), a subsidiary of ours entered into a ten year Lease Agreement (the “Lease”) with May Properties, LLC, to lease an approximately 56,775 square foot facility located at 101 Waldron Road in Durant Oklahoma (the “Premises”)initially at a monthly base rent for the Premises will start at $15,991.63 which will increase at the rate of two percent (2%) on an annual basis up to a maximum monthly base rent of $19,111.47 . The date on which SG Echo will become responsible for paying rent under the Lease (the “Lease Commencement Date”) will be the earlier of (i) the date SG Echo begins to operate its business on the Premises or (ii) ninety (90) days after October 28, 2021. The Lease also grants SG Echo an option to purchase the Premises. Pursuant to a Guaranty Agreement, dated October 28, 2021 (the “Guaranty”), SG Echo’s obligations under the Lease have been guaranteed by us. In connection with the Lease, SG Echo entered into a Loan Agreement (“Loan Agreement”) with the Durant Industrial Authority (the “Authority”) pursuant to which it received $750,000 to be used for improvements on the Premises and issued to the Authority a non-interest bearing Forgivable Promissory Note in the principal amount of $750,000 (the “ Forgivable Note”). The Forgivable Note is due on April 29, 2029 and guaranteed by us, provided, if no event of default has occurred under the Forgivable Note or Loan Agreement, one-third (1/3) of the balance of the Forgivable Note will be forgiven on April 29, 2027, one-half (1/2) of the balance of the Forgivable Note will be forgiven on April 29, 2028, and the remainder of the balance of the Forgivable Note will be forgiven on April 29, 2029. The Loan Agreement includes a covenant by SG Echo to employ a minimum of 75 full-time employees in Durant Oklahoma and pay them no less than 1.5 times the federal minimum wage, and provides SG Echo 24 months to comply with the provision.
Results of Operations
Our operations for the nine months ended September 30, 2021 and 2020 may not be indicative of our future operations. Our operations for the three and nine months ended September 30,2021 includes the operations of SG Echo which was acquired in September 2020, Clarity Mobile Venture and Chicago Airport Testing and accordingly the operations for the three and nine months ended September 30, 2020 do not include any revenue or costs associated with Clarity Mobile Venture and Chicago Airport Testing and include a limited amount of revenue and costs from SG Echo.
Impact of Coronavirus (COVID-19)
With the global spread of the ongoing novel coronavirus ("COVID-19") pandemic during 2020, we have implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on its employees and business. The worldwide spread of the COVID-19 virus has resulted in, and may continue to result in, a global slowdown of certain economic activity which is likely to decrease demand for a broad variety of goods and services, including from our customers, while also resulting in delays in projects due to labor shortages and supplier disruptions for an unknown period of time until the disease is contained. To date, we have experienced some delays and increased costs for materials, especially lumber, in projects due to COVID-19 which we expect to continue to have an impact on our revenue and our results of operations, the size and duration of which we are currently unable to predict. Any quarantines, the timing and length of containment and eradication solutions, travel restrictions, absenteeism by infected workers, labor shortages or other disruptions to the suppliers and contract manufacturers or customers has had and 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 increases we have experienced in 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 an impact on the Company's revenue and results of operations, the size and duration of which we are currently unable to predict. In addition, to the extent the ongoing COVID-19 pandemic adversely affects our business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties which we face.
Nine Months Ended September 30, 2021 and 2020:
|
|
|
For the Nine Months Ended September 30, 2021 |
|
|
For the Nine Months Ended September 30, 2020 |
|
||
|
Total Revenue |
|
$ |
29,889,104 |
|
|
$ |
1,404,265 |
|
|
Total Cost of revenue |
|
|
(25,736,809 |
) |
|
|
(789,445 |
) |
| Total Payroll and related expenses | (2,865,606 | ) | (1,344,009 | ) | ||||
|
Total Other Operating expenses |
|
|
(5,098,821 |
) |
|
|
(2,386,374 |
) |
|
Total Operating loss |
|
|
(3,812,132 |
) |
|
|
(3,115,563 |
) |
|
Total Other income |
|
|
67,550 |
|
|
51,890 |
||
| Net loss before income tax | (3,744,582 | ) | (3,063,673 | ) | ||||
| Less: Net income attributable non-controlling interest | 3,661,459 | — | ||||||
| Net loss attributable to common stockholders of SG Blocks, Inc. | $ | (7,406,041 | ) | $ | (3,063,673 | ) | ||
| 38 |
Revenue
During the nine months ended September 30, 2021, we derived revenue from the following three categories of sources: construction services, engineering services and medical revenue. We commenced receipt of revenue from this source in the fourth quarter of 2020 when Clarity Mobile Venture LLC commenced operations and we continued to derive revenue from this source during the quarter ended September 30, 2021 with strong revenue related to COVID-19 samples collected from our Clarity Mobile joint venture in the first nine months of 2021. Total revenue for the nine months ended September 30, 2021 was $29,889,104 compared to $1,404,265 for the nine months ended September 30, 2020. This increase of $28,484,839 or approximately 2028% was mainly driven by an increase in medical revenue of approximately $23,906,000 (lab testing, test kit sales and equipment but excluding revenue generated from construction of medical related projects) from mainly the collection of COVID-19 test samples with additional medical revenue from the opening and subletting of a testing facility in the Chicago area, an increase in revenue of approximately $1,747,000 in special use projects which includes one legacy contract commitment related to the SG Echo acquisition, an increase in revenue of approximately $2,257,000 in government projects, an increase in revenue of approximately of $400,000 in medical related construction projects and a moderate increase in construction revenue related to office and hotel/hospitality projects for approximately $412,000 and $330,000, respectively, offset by a decrease in revenue related to our retail and other projects for approximately $277,000 and $300,000, respectively, for the nine months ended September 30, 2021, as compared to September 30, 2020.
Cost of Revenue and Gross Profit
Cost of revenue was $25,736,809 for the nine months ended September 30, 2021, compared to $789,445 for the nine months ended September 30, 2020. The increase of $24,947,364 or a increase of approximately 3160%, is primarily related to higher testing volumes which required an increase in procurement of COVID-19 tests and testing supplies and higher procurement and manufacturing costs of modifying containers and wood modular units. Due to capabilities of Echo, we have now increased our sales of wood modular units to our customer base. As previously stated our costs of revenue for the nine months ended September 30, 2021 include costs and expenses associated with the operations of SG Echo, Clarity Mobile Venture and Chicago Airport Testing and our costs of revenue for the nine months ended September 30, 2020 do not include such costs or expenses for Clarity Mobile Venture or Chicago Airport Testing.
Gross profit was $4,152,295 and $614,820 for the nine months ended September 30, 2021 and 2020, respectively.
Gross profit margin as a percentage of revenue decreased to approximately 13.9% for the nine months ended September 30, 2021 compared to approximately 44% for the nine months ended September 30, 2020. The decrease in gross profit margin percentage was primarily due to a non-recurring single legacy contract recognized in 2020 in the amount of $300,000 with no estimated costs and due to legacy contract commitments from the acquisition of SG Echo that were recognized in the nine months ended September 30, 2021 that incurred losses of approximately $4,600,000 due to escalations in material pricing related to COVID-19 and labor overages.
Payroll and Related Expenses
Payroll and related expenses for the nine months ended September 30, 2021 were $2,865,606 compared to $1,344,009 for the nine months ended September 30, 2020. This increase was primarily caused by an increase in salaries and additional head count hired to help manage the growth of SG Echo and other recently launched subsidiaries such as Chicago Airport Testing, Clarity Mobile Venture, and SG DevCorp of approximately $878,000, an increase of approximately $364,000 in stock-based compensation expense, and an increase of approximately $278,000 for a non-recurring employee pay-out expense recognized for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. We recognized $778,657 in stock-based compensation expense related to payroll and related expenses for the nine months ended September 30, 2021, compared to $414,563 for September 30, 2020.
| 39 |
Other Operating Expenses (General and administrative expenses, Marketing and business development expense, and Pre-project expenses)
Other operating expenses (general and administrative expenses, marketing and business development expenses, pre-project expenses) for the nine months ended September 30, 2021 were $5,098,821 compared to $2,386,374 for the nine months ended September 30, 2020. The increase resulted primarily from an increase in rent expense of approximately $91,000 related to COVID-19 cold storage charges and rental expense for the Chicago Airport Testing facility, an increase in expenses associated with being a public company of approximately $157,000, an increase in information technology expense of approximately $196,000, an increase in insurance expense of approximately $193,000 for additional insurance coverage for COVID-19 medical operations and premium increases on existing policies, an increase in contract labor expense of approximately $296,000 with the majority related to the start-up and ongoing operations of the COVID-19 medical and SGB DevCorp projects. We also had an increase of approximately $566,000 in laboratory medical expenses mainly from the start-up and continued operations in Wayne County, Michigan and LAX COVID-19 testing locations and an increase of $40,000 for real estate commissions related for Chicago Airport Testing, an increase in accounting fees of approximately $77,000, an increase of approximately $175,000 due to building maintenance and equipment rental expense for both LAX COVID-19 and Chicago Airport Testing facilities, an increase of approximately $523,500 for manager’s oversight fees related to Clarity Mobile Venture, an increase in depreciation expense of approximately $195,000, an increase in travel expense by approximately $68,000, an increase in bad debt expense of approximately $161,000 due from one legacy customer from the acquisition of SG Echo with a slight decrease in legal fees of approximately $211,000. We recognized no stock-based compensation expense related to legal expense and marketing expense for the nine months ended September 30, 2021 and $57,120 for the nine months ended September 30, 2020.
Other Income (Expense)
Interest income for the nine months ended September 30, 2021 was $41,240 mainly derived from bank interest and interest associated with an outstanding note receivable. There was $38,497 of interest income for the nine months ended September 30, 2020. Other income for the nine months ended September 30, 2021 and 2020 was $61,477 and $23,282, respectively. Interest expense for the nine months ended September 30, 2021 and 2020 was $985 and $8,877, respectively. The interest expense for 2020 was mainly related to the Securities Purchase Agreement entered into on February 4, 2020 with an accredited investor. Loss on asset disposal for the nine months ended September 30, 2021 and 2020 was $34,182 and $1,012, respectively.
Income Tax Provision
A 100% valuation allowance was provided against the deferred tax asset consisting of available net operating loss carry forwards and, accordingly, no income tax benefit was provided.
Impact of Inflation
The impact of inflation upon the Company’s 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 the Company does not maintain any inventories whose costs are affected by inflation.
| 40 |
Three Months Ended September 30, 2021 and 2020:
|
For the Three Months Ended September 30, 2021 |
For the Three Months Ended September 30, 2020 |
||||||
| Total Revenue | $ | 8,847,490 | $ | 576,560 |
|||
| Total Cost of revenue | (8,742,420 | ) | (381,954 |
) | |||
| Total Payroll and related expenses | (1,236,420 | ) | (679,863 | ) | |||
| Total Other Operating expenses | (1,595,258 | ) | (1,040,073 |
) | |||
| Total Operating loss | (2,726,608 | ) | (1,525,330 | ) | |||
| Total Other income (expense) | (24,049 | ) | 47,057 | ||||
| Net loss before income tax | (2,750,657 | ) | (1,478,273 | ) | |||
| Less: Net income attributable non-controlling interest | 1,080,248 | — | |||||
| Net loss attributable to common stockholders of SG Blocks, Inc.Net loss | $ | (3,830,905 | ) | $ | (1,478,273 | ) | |
Revenue
During the three months ended September 30, 2021, we derived revenue from the following three categories of sources: construction services, engineering services and medical revenue. We commenced receipt of revenue from this source in the fourth quarter of 2020 when Clarity Mobile Venture LLC commenced operations and we continued to derive revenue from this source during the quarter ended September 30, 2021 with strong revenue related to COVID-19 samples collected from our Clarity Mobile joint venture in the three months ended September 30, 2021. Total revenue for the three months ended September 30, 2021 was $8,847,490 compared to $576,560 for the three months ended September 30, 2020. This increase of $8,270,930 or approximately 1435% was mainly driven by an increase in medical revenue of approximately $8,164,000 (lab testing, test kit sales and equipment but excluding revenue generated from construction of medical related projects) from mainly the collection of COVID-19 test samples with additional medical revenue from the opening and subletting of a testing facility in the Chicago area, an increase in revenue of approximately $80,000 in special use projects which includes one legacy contract commitment related to the SG Echo acquisition, an increase in revenue of approximately $74,000 in government projects, an increase in revenue of approximately $74,500 in multi-family projects offset by a moderate decrease in revenue of approximately $35,000 in medical related construction projects and approximately $81,000 for hotel/hospitality projects, respectively for the three months ended September 30, 2021, as compared to September 30, 2020.
Cost of Revenue and Gross Profit
Cost of revenue was $8,742,420 for the three months ended September 30, 2021, compared to $381,954 for the three months ended September 30, 2020. The increase of $8,360,466 or an increase of approximately 2189%, is primarily related to higher testing volumes which required an increase in procurement of COVID-19 tests and testing supplies and higher procurement and manufacturing costs of modifying containers and wood modular units.
Gross profit was $105,070 and $194,606 for the three months ended September 30, 2021 and 2020, respectively.
Gross profit as a percentage of revenue decreased to approximately 1% for the three months ended September 30, 2021 compared to approximately 34% for the three months ended September 30, 2020. The decrease in gross profit margin percentage was primarily due to a non-recurring single legacy contract recognized in 2020 in the amount of $300,000 with no estimated costs and due to legacy contract commitments from the acquisition of SG Echo that were recognized in 2021 that incurred losses of approximately $2,250,000 due to escalations in material pricing related to COVID-19 and labor overages
Payroll and Related Expenses
Payroll and related expenses for the three months ended September 30, 2021 were $1,236,420 compared to $679,863 for the three months ended September 30, 2020. This increase was primarily caused by an increase in salaries and additional head count to help manage the growth of SG Echo and other recently launched subsidiaries such as Chicago Airport Testing, Clarity Mobile Ventures, and SG DevCorp of approximately $334,000, an increase of approximately $278,000 for a non-recurring employee pay-out expense and an decrease of approximately $57,000 in stock-based compensation expense, recognized for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. We recognized $246,236 in stock-based compensation expense related to payroll and related expenses for the three months ended September 30, 2021, compared to $303,169 for September 30, 2020.
| 41 |
Results of Operations (continued)
Other Operating Expenses (General and administrative expenses, Marketing and business development expense, and Pre-project expenses)
Other operating expenses (general and administrative expenses, marketing and business development expenses, pre-project expenses) for the three months ended September 30, 2021 were $1,595,258 compared to $1,040,073 for the three months ended September 30, 2020. The increase resulted primarily from an increase in expenses associated with being a public company of approximately $47,500, an increase in information technology expense of approximately $62,000, an increase in insurance expense of approximately $94,000 for additional insurance coverage for COVID-19 medical operations and premium increases on existing policies, and an increase in accounting fees of $47,000. The Company had an increase of approximately $107,500 in laboratory medical expenses mainly from the start-up and continued operations in Wayne County, Michigan and LAX COVID-19 testing locations, an increase of approximately $171,000 for manager’s oversight fees related to Clarity Mobile Venture, an increase in depreciation expense of approximately $65,500, an increase of approximately $54,000 due to building maintenance and equipment rental expense for both LAX COVID-19 and Chicago Airport Testing facilities, an increase in travel expense by approximately $17,500. The Company also had a decrease in contract labor and consulting expense of approximately $62,000 and a slight decrease in legal fees of approximately $107,000.
Other Income (Expense)
Interest income for the three months ended September 30, 2021 and 2020 was $9,973 and $27,401 mainly derived from bank interest and interest associated with an outstanding note receivable. Interest expense for the three months ended September 30, 2021 and 2020 was $293 and $2,614 and mainly related to the Securities Purchase Agreement entered into on February 4, 2020 with an accredited investor. Other income for the three months ended September 30, 2021 and 2020 was $453 and $23,282. Loss on asset disposal for the three months ended September 30, 2021 and 2020 was $34,182 and $1,012, respectively.
Liquidity and Capital Resources
As of September 30, 2021 and December 31, 2020, we had an aggregate of $3,290,702 and $13,010,356, respectively, of cash and cash equivalents. To date, we have financed our operations from revenue generated from operations and sales of our equity and to a lesser extent debt financings.
On February 4, 2020, we entered into a Securities Purchase Agreement with an accredited investor, pursuant to which we issued to the investor a secured note in the aggregate principal amount of $200,000 (the “Long-Term Note”), which bore interest at a rate of nine percent (9%) per annum and was due on July 31, 2023, and was secured by a security interest in the royalty payable to us under that certain Exclusive License Agreement, dated October 3, 2019, with CPF GP 2019-1 LLC. During the third quarter of 2020, the Long-Term Note to investor of $200,000 and unpaid accrued interest of $6,263 was converted into 73,665 shares of common stock.
| 42 |
In April 2020, we completed a public offering where we pursuant to which we sold 440,000 shares of common stock at a public offering price of $4.25 per share which resulted in net proceeds of approximately $1,522,339 after deducting underwriting discounts and commissions and other expenses related to the offering.
In May 2020, we completed a public offering pursuant to which we sold an aggregate of 6,900,000 shares of common stock at a public offering price of $2.50 per share which resulted in net proceeds of approximately $15,596,141 after deducting underwriting discounts and commissions and other expenses related to the offering.
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 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 $10,520,000 after deducting underwriting commission and other expenses related to the offering.
At September 30, 2021 and December 31, 2020 we had a cash balance of $3,290,702 (which does not include the proceeds from the offering we consummated in October 2021) and $13,010,356, respectively. As of September 30, 2021, our stockholders’ equity was $13,119,952, compared to $18,437,823 as of December 31, 2020. Our net loss for the nine months ended September 30, 2021 was $3,744,582 and net cash used in operating activities was $1,032,417. We anticipate our cash balance is sufficient to last at least twelve months from November 15, 2021. We anticipate cost of revenue will increase once the Lease at 101 Waldon Road commences and SG Echo fulfills its obligations under the loan agreement to employ a minimum of 75 full time employees in Durant, Oklahoma and pay them no less than 1.5 times the federal minimum wages within a 24 month period.
We may need 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
|
Nine Months Ended September 30, |
|||||||
|
|
2021 |
2020 |
|||||
|
Net cash provided by (used in): |
|||||||
|
Operating activities |
$ |
(1,032,417 |
) |
$ |
(4,453,862 |
) |
|
|
Investing activities |
(8,283,525 |
) |
(1,442,602 |
) | |||
|
Financing activities |
(403,712 |
) |
17,318,358 |
||||
|
Net increase (decrease) in cash and cash equivalents |
$ |
(9,719,654 |
) |
$ |
11,421,894 |
||
| 43 |
Operating activities used net cash of $1,032,417 during the nine months ended September 30, 2021, and $4,453,862 during the nine months ended September 30, 2020. Generally, our net operating cash flows fluctuate primarily based on changes in our profitability and working capital. Cash used in operating activities decreased by approximately $3,421,000 primarily due to an decrease in working capital of approximately $3,287,000 due in part to increases in accrued losses from the legacy SG Echo contracts we assumed and increases in accounts payable with the additions of operations of new entities, SG DevCorp, Chicago Airport Testing, and SG Echo, from the corresponding period of the prior year. In addition, we had an increase of approximately $307,000 in stock-based compensation, an increase of approximately $292,000 in depreciation expense, an increase of approximately $161,000 in bad debt expense and an increase in the overall net loss of approximately $681,000, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.
Investing activities used net cash of $8,283,525 during the nine months ended September 30, 2021, and $1,442,602 during the nine months ended September 30, 2020. Cash used in investing activities increased from the corresponding period of the prior year primarily due to the purchase of property, plant and equipment of approximately $4,756,000 which includes the land purchase for the Lago Vista - Austin project, purchase of intangible assets of $42,500, payments on assumed liabilities related to the Echo DCL, LLC acquisition of approximately $195,000, an investments in two SG DevCorp entities totaling approximately $3,464,000 and we received proceeds from the sale of equipment for $225,000.
Financing activities used net cash of $403,712 during the nine months ended September 30, 2021, and provided net cash of $17,318,358 during the nine months ended September 30, 2020. Cash provided by financing activities decreased by approximately $17,318,000 due to a decrease in proceeds from public stock offerings and proceeds from long-term note payable in the nine months ended September 30, 2021. Cash used by financing activities for the nine months ended September 30, 2021 increased by approximately $3,059,000 as compared to the nine months ended September 30, 2020 due to distributions paid to our non-controlling interest partner, offset by an increase of approximately $707,000 in proceeds from conversion of outstanding warrants to common stock and proceeds from short-term note payable of $1,948,000.
We provide services to our construction and engineering 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 September 30, 2021, we had 15 projects totaling $20,074,693 under contract, which, if they all proceed to construction, will result in our constructing approximately 232,898 square feet of container and modular space. Of these contracts, all fifteen projects combine all three phases or parts thereof and including construction. We expect that all of this revenue will be realized by September 30, 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 decrease in backlog of approximately $5,042,000 from December 31, 2020 is primarily attributable to one new contract we entered into during the first quarter of 2021 for approximately $1,325,000, one new contract in the third quarter of 2021 for approximately $857,000 and had one large partial contract cancellation of approximately ($1,300,000) and offset by work in progress or completed contracts during the first nine months of 2021 for approximately $5,983,000.
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.
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Off-Balance Sheet Arrangements
As of September 30, 2021 and December 31, 2020, 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 September 30, 2021.
Critical Accounting Policies and New Accounting Pronouncements
Critical Accounting Policies
Our condensed consolidated financial statements have been prepared using 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 condensed consolidated financial statements included elsewhere in this 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.
Other derivative financial instruments. SGB classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provide a choice of net-cash settlement or settlement in SGB’s own shares (physical settlement or net-share settlement), provided that such contracts are indexed to SGB’s own stock. SGB classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if any event occurs and if that event is outside SGB’s control) or (ii) give the counterparty a choice of net-cash settlement or settlement shares (physical settlement or net-cash settlement). SGB assesses classification of common stock purchase warrants and other free-standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities or equity is required.
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Critical Accounting Policies (continued)
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.
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 – we determine, 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 we expect to be entitled in exchange for those goods or services. To achieve this core principle, we apply 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, we apply recognition of revenue over time, which is similar to the method we 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.
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Critical Accounting Policies (continued)
For product or equipment sales, we apply 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. No revenue has been recognized under the ELA for the nine months ended September 30, 2021. On June 15, 2021 we terminated the Exclusive License Agreement with CPF that we had entered into on October 3, 2019.
We entered into a joint venture agreement with Clarity Lab Solutions, LLC (“Clarity Labs”) (the “JV”) in the fourth quarter of 2020. 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. During the nine months ended September 30, 2021, we recognized $23,757,962 in revenue related to activities through the two JV's, which are 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 consolidated the activities on the condensed consolidated financial statements. We will use the equity method to report the activities as an investment in on our condensed 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, we perform our 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, 2020, resulted in no impairment loss. There was no impairment during the nine months ended September 30, 2021.
Intangible assets – Intangible assets consist of $2,766,000 of proprietary knowledge and technology which is being amortized over 20 years, $97,164 of trademarks which is being amortized over 5 years, $47,800 of website fees which is being amortized over 5 years. Our evaluation of intangible assets for impairment during the year ended December 31, 2020, determined that there were no impairment losses. There was no impairment during the nine months ended September 30, 2021.
New Accounting Pronouncements
See Note 3 to the accompanying consolidated financial statements for all recently adopted and new accounting pronouncements.
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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, litigation expenses 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 or 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 Quarterly Report on Form 10-Q, 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.
Non-GAAP Financial Information (continued)
The following is a reconciliation of EBITDA and Adjusted EBITDA to the nearest GAAP measure, net loss:
|
Three Months Ended |
Three Months Ended |
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|||||||||
|
Net loss attributable to common stockholders of SG Blocks, Inc. |
$ | (3,830,905 | ) | $ | (1,478,273 | ) |
|
$ |
(7,406,041) |
) |
|
$ |
(3,063,673) |
) | ||
| Addback interest expense |
293 |
2,614 | 985 | 8,877 | ||||||||||||
| Subtract interest income | (9,973 | ) | (27,401 | ) |
(41,240 | ) | (38,497 | ) | ||||||||
| Addback depreciation and amortization | 148,482 | 47,488 |
449,502 | 142,290 | ||||||||||||
|
EBITDA (non-GAAP) |
(3,692,103 | ) | (1,455,572 | ) |
|
|
(6,996,794) |
) |
|
|
(2,951,003) |
) | ||||
| Addback loss on asset disposal | 34,182 | 1,012 |
34,182 | 1,012 | ||||||||||||
| Addback litigation expense | 413,796 | 127,205 | 555,068 | 395,045 | ||||||||||||
| Addback stock compensation expense | 246,236 | 303,169 |
778,657 | 471,683 | ||||||||||||
|
Adjusted EBITDA (non-GAAP) |
$ | (2,997,889 | ) | $ | (1,024,186 | ) |
|
$ |
(5,628,887) |
) |
|
$ |
(2,083,263) |
) | ||
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Not applicable.
Evaluation of Disclosure Controls and Procedures
Management of SG Blocks, Inc., with the participation of our Principal Executive Officer and Principal Financial Officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
The Principal Executive Officer and the Principal Financial Officer believe that the condensed consolidated financial statements and other information contained in this Quarterly Report on Form 10-Q present fairly, in all material respects, our business, financial condition and results of operations.
As previously reported, management had identified deficiencies in our internal control over financial reporting, which was related to the timely closing of the accounting records, caused by insufficient accounting resources and a lack of formal review procedures and technical accounting guidance to complex and/or new transactions. Our management had concluded that we do not maintain effective controls related to both deficiencies surrounding the timely closing of the accounting records and technical accounting guidance. Management had determined that the aggregate impact of this deficiency resulted in a material weakness. The material weakness did not result in any identified misstatements in the current period consolidated financial statements, nor in any restatements of consolidated financial statements previously reported by us, and there were no changes in previously released financial results.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
Remediation Steps to Address the Material Weakness
Since identifying the material weakness related to the timely closing of accounting records and technical accounting guidance to complex and/or new transactions, we have taken steps to strengthen the control function related to the financial closing process. These steps include retaining two additional senior accounting resources to help enhance the timeliness of the accounting close process and to have additional oversight for new and complex accounting transactions. We also engaged an outside consulting firm in the third quarter of 2021 to assist the Company with enhancing its accounting practices. We will continue to enhance controls to ensure the financial closing process is effectively implemented. Although we plan to complete this remediation process as quickly as possible, we cannot at this time estimate when the remediation will be completed.
Changes in Internal Control over Financial Reporting
Other than as described above, for the fiscal quarter ended September 30, 2021, there have been no changes in our internal control over financial reporting identified in connection with the evaluations required by Rule 13a-15(d) or Rule 15d-15(d) under the Exchange Act that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our CEO and our CFO, do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
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The information included in "Note 16 - Commitments and Contingencies" of the Company's condensed consolidated financial statements included elsewhere in this Form 10-Q is incorporated by reference into this Item.
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.
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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.
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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.
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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.
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None.
None.
Not applicable.
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| 31.1* | Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2* | Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1* | Certification by Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS+ | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File as the XBRL tags are embedded within the Inline XBRL document. | |
| 101.SCH+ | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL+ | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF+ | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB+ | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE+ | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| + | Filed herewith. |
| * | Furnished herewith. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SG BLOCKS, INC. | ||
| (Registrant) | ||
| Date: November 15, 2021 | By: | /s/ Paul M. Galvin |
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Paul M. Galvin Chief Executive Officer and Chairman of the Board (Principal Executive Officer) |
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| By: | /s/ Gerald A. Sheeran | |
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Gerald A. Sheeran Acting Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
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