What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-04-15 compared with 2020-03-30 · 92 added, 43 removed, 178 unchanged (43% of the section changed)

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We have the right to prepay the Note, in whole or in part, at any time and from time to time, without premium or penalty.

In March 2020, we began increasing our focus on providing our Modules as health care facilities for deployable medical response solutions.

In May, we entered into a partnership with Grimshaw and Osang for deployment of our D-Tec suite of prefabricated health facilities for on-site immediate COVID-19 testing.

In September we entered the U.S.

test lab market by forming a joint venture with Clarity Labs, a manufacturer and market leader of rapid diagnostic tests, to launch CLIA-certified laboratories.

Our joint venture with Clarity has allowed us to not only supply our D-Tec suite of prefabricated health facilities but also allows us to provide testing services at such facilities.

We have supplied our building modular coronavirus testing centers and provide testing services for Los Angeles International Airport (LAX), Memorial in Wayne County, Michigan and have been selected as a Trusted Testing Partner (TTP) for Hawaii’s COVID-19 travel testing program.

In September 2020, we acquired substantially all the assets of Echo, except for Echo’s real estate holdings for which we obtained a right of first refusal.

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.

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.

In November 2020, Clarity Mobile Venture, our joint venture partnership, entered into a contract with the City of Los Angeles for the operations of a COVID-19 PCR test laboratory at Los Angeles International Airport ("LAWA") to provide a full-service modular laboratory and testing facility onsite at the airport .

The facility is located across from LAWA Terminal 6 and opened in December 2020.

The facility administers PCR tests with results available within three hours for passengers and airline crew, and no later than 24 hours for LAWA airport employees.

Additionally, other rapid coronavirus tests including antigen tests have been provided.

Clarity Mobile Venture will be the primary operator of the facility.

In November 2020, we and Memorial Hospital, of Michigan (“Memorial”), entered into a Professional Services and Capital Support Contract (“PSCSC”) with Wayne County, Michigan which engages the Company as a sub-contractor to render services and support to support Memorial, as the primary contractor, in connection with the fulfillment of statements of work submitted from Wayne County to Memorial to construct portable on-site laboratory facilities for COVID-19 testing.

The program deploys the D-Tec Product Series designed by Grimshaw Architects and developed by SG Block s.

The D-Tec 1 Units are expected to be deployed throughout Wayne County and will provide sample extraction.

Clarity Mobile Venture will be the primary operator of the facility.

Results of Operations

As a result of our new licensing model that commenced in October 2019, our operations for the years ended December 31, 2019 and 2018 may not be indicative of our future operations.

Our operations for the years ended December 31, 2020 and 2019 may not be indicative of our future operations.

Years Ended December 31, 2020 and 2019:

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December 31, 2020

For the Year Ended

December 31, 2018

For the Year Ended December 31, 2019

Total Revenue

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Total Other income (expense)

Net profit attributable non-controlling interests

Net loss attributable to common stockholders of SG Blocks, Inc.

During the year ended December 31, 2020, we derived revenue from the following three categories of sources:

construction services, engineering services and medical revenue.

The medical revenue segment is a new segment for the year ended December 31, 2020 that commenced when we began sales of COVID tests and includes revenue from our sales of COVID tests, revenue related to COVID-19 samples collected from our Clarity Mobile joint venture and other laboratory testing equipment sold.

Total revenue for the year ended December 31, 2020 was $8,755,623 compared to $2,984,835 for the year ended December 31, 2019.

This decrease of $5,205,877 or 64% was mainly driven by a decline in revenue resulting from our school, retail, office and special use contracts that were in progress for the year ended December 31, 2019 as compared to December 31, 2018.

In addition, we recognized no revenue during the year ended December 31, 2019 compared to approximately $2,700,000 during the year ended December 31, 2018 on a legacy contract in the amount of approximately $6,100,000.

We recognized no royalty revenue from our licensee during the year ended December 31, 2019 and 2018, respectively.

This increase of $5,770,788 or 193% was primarily due to our growth in medical related projects of approximately $5,020,000 which included an increase in medical revenue of $4,241,500 from the collection of COVID-19 tests samples, the sale of COVID-19 test kits, and an increase in construction sales of $778,500 from sales of construction of laboratory and collection units.

Revenue from construction services increased by a total $1,295,936 which included the increase of $778,500 discussed in the previous sentence for medical related projects and revenue increases in government projects of approximately of $750,000, special use projects of approximately $1,410,000, hospitality project of approximately $485,000, and another project of approximately $300,000.

We had a decrease of approximately ($2,260,000) related to our retail and office customer types.

Cost of Revenue and Gross Profit

Cost of revenue was $6,535,444 for the year ended December 31, 2020, compared to $2,307,488 for the year ended December 31, 2019.

The decrease of $5,340,491 or a decrease of approximately 70%, is primarily related to lower revenues and the lower procurement and manufacturing costs of modifying containers.

The $ 5,340,491 decrease in cost of revenue includes decreased costs of approximately $ 3,650,000 on a legacy contract in the amount of approximately $ 6,100,000 .

The increase of $4,227,956 or 183%, is primarily related to higher procurement of COVID-19 testing supplies and medical equipment surrounding our medical customer 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.

Gross profit was $ 2,220,179 and $ 677,347 for the years ended December 31, 2020 and 2019, respectively.

Gross profit percentage increased to 23% for the year ended December 31, 2019 compared to 7% for the year ended December 31, 2018 primarily due to lower margins on revenue realized from a legacy contract of approximately $6,100,000 during 2018.

Gross profit percentage increased to 25% for the year ended December 31, 2020 compared to 23% for the year ended December 31, 2019, primarily due to higher margins on revenue derived from our lab testing and other medical related construction contracts.

We also had a single contract in the amount of $300,000 with no estimated costs in 2020.

Payroll and Related Expenses

Payroll and related expenses for the year ended December 31, 2020 were $2,992,207 compared to $2,392,587 for the year ended December 31, 2019.

This increase was primarily caused by an increase of $319,690 in stock-based compensation expense, partially offset by a decrease in salaries and additional head count of $140,090 recognized during the year ended December 31, 2019 compared to the year ended December 31, 2018.

This increase was primarily caused by an increase of approximately $488,000 in stock-based compensation expense and increase in non-chargeable production salaries of approximately of $102,000 during the year ended December 31, 2020 compared to the year ended December 31, 2019.

We recognized $1,204,095 in stock-based compensation expense related to payroll and related expenses for the year ended December 31, 2020, compared to $ 715,904 for December 31, 2019.

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Other operating expenses (general and administrative expenses, marketing and business development expenses, pre-project expenses and goodwill impairment) for the year ended December 31, 2020 were $3,810,804 compared to $4,988,722 for the year ended December 31, 2019.

The increase resulted primarily from an impairment loss of approximately $ 2,938,653 offset by decrease in marketing and business development costs of approximately $146,842, a decrease in pre-project expenses of approximately $53,342, a decrease of approximately $864,580 in bad debt expense from two legacy contract and a decrease of approximately $444,493 in amortization expense caused by customer contracts being fully amortized at the end of 2018 ‚ offset by an increase of approximately $205,052 in legal fees, an increase of approximately $32,259 in professional fees and an increase of approximately $26,569 in contract labor.

Interest Expense

Interest expense for the year en ded December 31, 2019 was $ 178,995 and related to the RedDiamond Partners LLC Securities Purchase Agreement that was executed in November 2019.

There was n o interest expense for the year ended December 31, 2018.

The decrease was primarily due to no impairment loss recognized in 2020 compared to an impairment loss of approximately $2,938,000 in 2019, a decrease in marketing and business development costs of approximately $10,000, offset by an increase in pre-project expenses of approximately $109,000, and an increase in general and administrative expenses of $1,661,573 that included an increase in rent expenses of approximately $140,000, an increase of approximately $41,000 in depreciation expense, an increase of approximately $504,000 in legal fees, an increase of approximately $78,000 in insurance fees, an increase of approximately $96,000 in building and shop supplies, an increase in information technology expenses of approximately $52,000 and an increase of approximately $519,000 in consulting and advisory services.

We recognized $57,120 in stock-based compensation expense related to legal expenses for the year ended December 31, 2020.

We recognized $13,500 in stock-based compensation expense related to marketing expenses for the year ended December 31, 2019.

Other Income (Expense)

Interest expense for the year en ded December 31, 2020 was $ 9,275 mainly related to a 9% secured note in the principal amount of $200,000 issued on February 4, 2020 to an accredited investor .

For the year ended December 31, 2019, we recognized $178,995 in interest expense related to the RedDiamond Partners LLC Securities Purchase Agreement that was executed in November 2019 and repaid in full in December 2019.

Interest income for the year ended December 31, 2020 was $61,675 mainly derived from bank interest and interest associated with an outstanding note receivable and there was no interest income for the year ended December 31, 2019.

For the year ended December 31, 2020, we recognized $23,282 in other income compared to $14,506 during the year ended December 31, 2019.

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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.

The impact of inflation upon our revenue and income (loss) from continuing operations during each of the past two fiscal years has not been material to its financial position or results of operations for those years because we do not maintain any inventories whose costs are affected by inflation.

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.

T he worldwide spread of the COVID-19 virus is expected to result in a global slowdown of 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 in projects due to COVID-19 which we expect 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 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.

Liquidity and Capital Resources

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We have the right to prepay the Note, in whole or in part, at any time and from time to time, without premium or penalty.

In April 2020, we completed a public offering where we pursuant to which we issued 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.

We incurred a total of approximately $347,661 in issuance costs in connection with the offering and issued no warrants to purchase shares of common stock to the underwriter.

In May 2020, we sold 6,000,000 shares of our common stock at a public offering price of $ 2.50 per share and on May 15, 2020, pursuant to the terms of the Underwriting Agreement dated May 6, 2020 by and among us and ThinkEquity, a division of Fordham Financial Management, Inc., as representatives of several underwriters named therein ("ThinkEquity"), ThinkEquity was granted an over-allotment option to purchase up to an additional 900,000 shares of our common stock, in connection with the previously announced public offering.

On May 15, 2020, ThinkEquity exercised in full such option with respect to all 900,000 shares of our common stock.

After giving effect to the full exercise of the over-allotment option, the total number of shares of common stock sold by us in the public offering was 6,900,000 shares of common stock and total net proceeds to us, after deducting underwriting discounts and commissions and other offering expenses payable by us, were approximately $15,596,141.

We incurred a total of approximately $1,653,859 in issuance costs in connection with the offering and issued warrants to purchase 300,000 shares of common stock to the underwriter.

We anticipate that we will continue to generate losses from operations for the foreseeable future.

At December 31, 2019 and December 31, 2018, we had a cash balance and short-term investment of $1,625,671 and $1,368,395, respectively.

At December 31, 2020, we had a cash balance and short-term investment of $13,010,356.

As of December 31, 2020, our stockholders’ equity was $18,253,256, compared to $4,360,149 as of December 31, 2019.

Our net loss from operations for the years ended December 31, 2019 and 2018 was $6,920,540 and $4,844,021, respectively.

This increase was primarily due to an increase in operating expenses of $1,992,463 and an increase in interest expense of $178,995 related to the Securities Purchase Agreement in 2019.

Our net loss for the years ended December 31, 2020 and 2019 was $4,508,162 and $6,920,540, respectively.

This decrease was primarily due to an increase in revenue and a decrease in operating expenses of $578,348, an increase of other income of $70,451 and a decrease of $169,720 in interest expenses in 2020.

Net cash used in operating activities was $2,887,950 and $2,815,621 for the years ended December 31, 2020 and 2019, respectively.

The decrease resulted mainly from a decrease in bad debt expense of $864,580, decrease of non-cash amortization expense of $434,299, increase of non-cash goodwill impairment loss of $2,938,653 and interest expense of $178,995 in 2019, increase of $333,190 in non-cash stock compensation expense, an increase of $736,668 in net loss and an increase of $509,899 in working capital in the year ended December 31, 2019 compared to year ended December 31, 2018.

The increase resulted mainly from an increase of approximately $45,000 in working capital, an increase of approximately $531,000 in non-cash stock compensation expense, a decrease of non-cash goodwill impairment loss of approximately $2,938,00 that was recognized in 2019, offset by a decrease in the overall net loss of approximately $2,410,000 in the year ended December 31, 2020 compared to year ended December 31, 2019.

We may ne ed to generate additional revenues or secure additional financing sources, such as debt or equity capital, to fund future growth, which financing may not be available on favorable terms or at all.

We do not have any additional sources secured for future funding, and if we are unable to raise the necessary capital at the times we require such funding, we may need to materially change our business plan, including delaying implementation of aspects of such business plan or curtailing or abandoning such business plan altogether.

We provide services to our customers in three separate phases:

We provide services to our construction customers in three separate phases:

the design phase, the architectural and engineering phase and the construction phase.

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These phases may be embodied in a single contract or in separate contracts, which is typical of a design build process model.

As of December 31, 2019, we had 10 projects tota ling $17,634,261 under contract, w hich, if they all proceed to construction, will result in our constructing approximately 123,450 square feet of container space.

Of these contracts, all ten projects combine all three phases or parts thereof and including construction.

As of December 31, 2020, we had 21 projects tota ling $25,117,461 under contract, which , if they all proceed to construction, will result in us constructing approximately 232,812 square feet of modular space.

Of these contracts, all twenty one (21) projects combine all three phases or parts thereof and including construction.

We expect that all of this revenue will be realized by September 30, 2022.

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 at December 31, 2019 from the prior year is primarily attributable to us moving a contract of approximately $25,000,000 out of backlog after receiving a cancellation notice from the customer and moving two contracts of approximately $ 70,000,000 out of backlog due to the exclusive license agreement.

We had work in progress or completed contracts during the year ended 2019 for approximately $2,984 ,000 .

The increase in backlog at December 31, 2020 from the prior year is primarily attributable to two contracts during the third quarter of 2020 in the amount of approximately $4 million and approximately $2.95 million and three contracts during the fourth quarter of 2020 in the amount of approximately $2.7 million, $0.80 million and $.70 million offset by work in progress or completed contracts for the year ended 2020 for approximately $6,300,000.

We expect that all of this revenue will be realized by September 30, 2022.

Backlog does not include COVID tests or testing services provided through our joint venture, Clarity Mobile Venture.

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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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.

Convertible instruments .

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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 apply recognition of revenue over time, which is similar to the method we applied under previous guidance (i.e., percentage of completion).

We determine, at contract inception, whether we 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 our revenue policy:

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

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(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.

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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.

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.

See Note 3 for a discussion on the ELA.

Under the ELA, we will receive royalty payments based upon gross revenues earned by the licensee for 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.

We determined that the ELA grants 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.

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.

Prior to entering into the ELA, we were subject to an agreement to construct and develop a certain property (“Original Agreement”), which now is subject to the ELA.

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The project is a residential project but not subject to the ELA.

In May 2020, we and Osang Healthcare Co., Ltd.

("Osang"), a South Korea based global manufacturer and distributor of medical grade diagnostic tests and equipment, announced the signing of a one year, non-exclusive distributorship agreement for the United States, for OHC's "GeneFinder COVID-19 Plus RealAmp Kit." This is a test designed to detect SARS-CoV-2, the virus that causes COVID-19.

The Distributorship Agreement is Osang's standard form of distributorship agreement and provides the Company with the non-exclusive right to distribute Osang's GeneFinder COVID-19 Plus RealAmp Kit in the United States for a stated term of one (1) year.

An import license from the U.S.

government has been issued to import and distribute the Osang test kits.

There can be no assurance that the Distribution Agreement will continue and, it has not yielded the anticipated benefits or generated significant revenue, if any.

The revenue from these product sales is recognized upon the transfer of control, which is at a point in time, and is generally upon shipment, Provisions for any discounts, rebates, sales concessions and returns are provided for in the period the related sale is recorded.

During the year ending December 31, 2020, we recognized $250,000 in revenue related to such products, which is included in medical revenue on the accompanying consolidated statements of operations.

On April 14, 2021, we filed suit against Osang for breach of contract and fraud seeking damages in the amount of $12 to $15 million in U.S.

District Court in the Eastern District of New York (CV 21-1990).

Legal Proceedings.

We entered into a joint venture agreement with Clarity Lab Solutions, LLC (“Clarity Labs”) (the “JV”).

Revenue from the activities of the JV is related to clinical testing services and is recognized when services have been rendered, which is at a point in time.

Included in the consideration we expected to be entitled to receive, we estimate its contractual allowances, payer denials and price concessions.

During the year ending December 31, 2020, we recognized $2,150,323 in revenue related to activities through the JV, which is included in medical revenue on the accompanying consolidated statements of operations.

Goodwill represents the excess of reorganization value over the fair value of identified net assets upon emergence from bankruptcy.

In accordance with the accounting guidance on goodwill, SGB performs its impairment test of goodwill at the reporting unit level each fiscal year, or more frequently if events or circumstances change that would more likely than not reduce the fair value of its reporting unit below its carrying value.

Our evaluation of goodwill completed during the year ended December 31, 2019, resulted in an impairment loss of $2,938,653.

Intangible assets – Intangible assets consist of $2,766,000 of proprietary knowledge and technology which is being amortized over 20 years, $1,113,000 of customer contracts which is being amortized over 2.5 years, $28,820 of trademarks which is being amortized over 5 years and $5,300 of website fees which is being amortized over 5 years.

Our evaluation of intangible assets for impairment during the year ended December 31, 2019, and determined that there were no impairment losses.

Our evaluation of goodwill completed during the year ended December 31, 2020, resulted in no impairment loss.

Intangible assets – Intangible assets consist of $2,766,000 of proprietary knowledge and technology, which is being amortized over 20 years.

In addition, included in intangible assets is $97,164 of trademarks, and $5,300 of website costs that are being amortized over 5 years.

We evaluated intangible assets for impairment during the year ended December 31, 2020, and determined that there are no impairment losses.

New Accounting Pronouncements

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For the Year Ended December 31, 2019

Net loss attributable to common stockholders of SG Blocks, Inc.

Addback interest expense

Addback interest income

Addback depreciation and amortization

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Addback loss on asset disposal

Addback litigation expense

Addback stock-based compensation expense

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Not applicable.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our financial statements and the notes thereto, together with the report thereon of Whitley Penn LLP dated March 30, 2020, appear beginning on page F-1 of this report.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis