What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2021-04-15 compared with 2020-03-30 · 537 added, 300 removed, 771 unchanged (52% of the section changed)

2 unchanged sentences

Our management, 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 Exchange Act Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this Annual Report (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 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 SEC 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.

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 SEC 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 consolidated financial statements and other information contained in this Annual Report present fairly, in all material respects, our business, financial condition and results of operations.

4 unchanged sentences

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

The Company does not have sufficient internal controls related to the timely closing of their accounting records, caused by insufficient accounting resources and a lack of formal review procedures.

In addition, the Company does not have sufficient internal controls related to the application of technical accounting guidance to complex and/or new transactions.

To assist in internal control over financial reporting two resources have been hired.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020.

In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013) .

Based on our assessment, we concluded that, as of December 31, 2019, our internal control over financial reporting was effective based on those criteria.

Based on our assessment, we concluded that, as of December 31, 2020, our internal control over financial reporting was not effective based on those criteria.

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.

1 unchanged sentence

There was no change in our internal control over financial reporting that occurred during the fourth quarter of 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

There was no change in our internal control over financial reporting that occurred during the fourth quarter of 2020.

OTHER INFORMATION.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The information required by this item will be contained in the “Proposal 1 – Election of Directors,” “Information About Our Executive Officers,” “The Board and its Committees – Director Independence,” “Delinquent Section 16(a) Reports,” “Code of Ethics,” and “The Board and its Committees – Board and Committee Responsibilities – Audit Committee” sections of our definitive proxy statement for our 2020 annual meeting of stockholders (the “2020 Proxy Statement”) that we expect to file with the SEC no later than April 29, 2020 (120 days after December 31, 2019), and is incorporated herein by reference in response to this Item 10.

The information required by this item will be contained in the “Proposal 1 – Election of Directors,” “Information About Our Executive Officers,” “The Board and its Committees – Director Independence,” “Delinquent Section 16(a) Reports,” “Code of Ethics,” and “The Board and its Committees – Board and Committee Responsibilities – Audit Committee” sections of the 2021 Proxy Statement that we expect to file with the SEC no later than April 30, 2021 (120 days after December 31, 2020), and is incorporated herein by reference in response to this Item 10.

EXECUTIVE COMPENSATION.

8 unchanged sentences

(a)(1) INDEX TO 2020 CONSOLIDATED FINANCIAL STATEMENTS:

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 Annual Report.

Our financial statements and the notes thereto, together with the report thereon of Whitley Penn LLP, our registered public accounting firm, dated April 15, 2021, appear beginning on page F-1 of this Annual Report.

See Table of Contents of the Consolidated Financial Statements included in this Annual Report.

6 unchanged sentences

Exhibit Index

Form of Underwriting Agreement (incorporated herein by reference to Exhibit 1.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on December 13, 2019 (File No.

Underwriting Agreement, dated April 1, 2020, by and between SG Blocks, Inc.

and ThinkEquity, a division of Fordham Financial Management, Inc.

(Incorporated herein by reference to Exhibit 1.1 to the Current Report on Form 8-K as filed by SG Blocks , Inc.

with the Securities and Exchange Commission on April 3, 2020 (File No.

Underwriting Agreement, dated May 6, 2020, by and between SG Blocks, Inc.

and ThinkEquity, a division of Fordham Financial Management, Inc.

(incorporated herein by reference to Exhibit 1.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 11, 2020 (File No.

Order Confirming Debtors’ Amended Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc.

8 unchanged sentences

with the Securities and Exchange Commission on July 7, 2016 (File No.

Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (incorporated herein by reference to Exhibit 3.2 to the Current Report on Form 8-K as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on July 7, 2016 (File No.

Certificate of Amendment to the Amended and Restated Certificate of Incorporation of SG Blocks, Inc.

1 unchanged sentence

with the Securities and Exchange Commission on February 28, 2017 (File No.

with the Securities and Exchange Commission on July 7, 2016 (File No.

Certificate of Amendment to Certificate of Designation, dated May 11, 2017 (incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc.

13 unchanged sentences

with the Securities and Exchange Commission on July 7, 2016 (File No.

Senior Security Agreement, dated as of October 15, 2015, by and among SG Blocks, Inc., SG Building Blocks, Inc., and Endaxi Infrastructure Group, Inc., as Grantors, and Hillair Capital Management LLC, as Grantee (incorporated herein by reference to Exhibit 4.2 to the Current Report on Form 8-K as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on July 7, 2016 (File No.

Original Issue Discount Senior Secured Convertible Debenture due June 30, 2018, dated as of June 30, 2016, by and between Hillair Capital Investments, L.P.

and SG Blocks, Inc.

(incorporated herein by reference to Exhibit 4.3 to the Current Report on Form 8-K/A as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on August 8, 2016 (File No.

Original Issue Discount Senior Secured Convertible Debenture due June 30, 2018, dated as of November 17, 2016, by and between Hillair Capital Investments, L.P.

and SG Blocks, Inc.

(incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on November 22, 2016 (File No.

Form of Warrant to Purchase Common Stock (incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc.

15 unchanged sentences

with the Securities and Exchange Commission on February 6, 2020 (File No.

Form of Representative’s Warrant (incorporated herein by reference to Exhibit 4.14 to the Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on May 5, 2020 (File No.

333-237682)).

Form of Pre-Funded Warrant ( incorporated herein by reference to Exhibit 4.15 to the Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on May 5, 2020 (File No.

333-237682)).

Description of Capital Stock

Form of Director Indemnification Agreement (incorporated herein by reference to Exhibit 10.1 to the Registration Statement on Form S-1 (File No.

333-215922) as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on February 6, 2017).

Executive Employment Agreement, effective as of January 1, 2017, between Paul M.

Galvin and SG Blocks, Inc.

(incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on March 14, 2017 (File No.

Executive Employment Agreement, effective as of January 1, 2017, between Mahesh S.

Shetty and SG Blocks, Inc.

(incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on March 14, 2017 (File No.

Executive Employment Agreement, effective as of January 1, 2017, between Stevan Armstrong and SG Blocks, Inc.

(incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on March 14, 2017 (File No.

Collaboration and Supply Agreement, dated July 23, 2007, by and between SG Building, Inc.

3 unchanged sentences

000-22563 )).

Amendment to collaboration and Supply Agreement, dated May 14, 2014, between SG Blocks, Inc.

(fka SG Blocks LLC) and ConGlobal Industries, LLC (fka ConGlobal Industries, Inc.) (incorportated herein by reference to Exhibit 10.6 to the Registration Statement on Form S-10/A (File No.

333-215922) as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on March 15, 2017).

Securities Purchase Agreement, dated as of June 30, 2016, by and between SG Blocks, Inc.

9 unchanged sentences

with the Securities and Exchange Commission on August 8, 2016 (File No.

Form of SG Blocks, Inc.

Incentive Stock Option Agreement (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on November 1, 2016 (File No.

Form of SG Blocks, Inc.

Nonqualified Stock Option Agreement (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on November 1, 2016 (File No.

Securities Purchase Agreement, dated as of November 17, 2016, by and between SG Blocks, Inc.

2 unchanged sentences

with the Securities and Exchange Commission on November 22, 2016 (File No.

Form of Director Indemnification Agreement (incorporated herein by reference to Exhibit 10.1 to the Registration Statement on Form S-1 (File No.

333-215922) as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on February 6, 2017).

SG Blocks, Inc.

2 unchanged sentences

with the Securities and Exchange Commission on February 6, 2017).

Executive Employment Agreement, effective as of January 1, 2017, between Paul M.

Galvin and SG Blocks, Inc.

(incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on March 14, 2017 (File No.

Executive Employment Agreement, effective as of January 1, 2017, between Mahesh S.

Shetty and SG Blocks, Inc.

(incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on March 14, 2017 (File No.

Executive Employment Agreement, effective as of January 1, 2017, between Stevan Armstrong and SG Blocks, Inc.

(incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on March 14, 2017 (File No.

Amendment to collaboration and Supply Agreement, dated May 14, 2014, between SG Blocks, Inc.

(fka SG Blocks LLC) and ConGlobal Industries, LLC (fka ConGlobal Industries, Inc.) (incorportated herein by reference to Exhibit 10.6 to the Registration Statement on Form S-10/A (File No.

333-215922) as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on March 15, 2017).

Amendment No.

3 unchanged sentences

Form of SG Blocks, Inc.

Incentive Stock Option Agreement (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on November 1, 2016 (File No.

Form of SG Blocks, Inc.

Nonqualified Stock Option Agreement (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on November 1, 2016 (File No.

Form of SG Blocks, Inc.

Restricted Share Unit Agreement (Non-Employee Directors) (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc.

43 unchanged sentences

with the Securities and Exchange Commission on January 23, 2020 (File No.

Fo rm of Securities Purchase Agreement (incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K as filed by SG Blocks, Inc.

Form of Securities Purchase Agreement (incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on February 6, 2020 (File No.

1 unchanged sentence

with the Securities and Exchange Commission on February 6, 2020 (File No.

Distributorship Agreement between Osang Healthcare Co., Ltd.

and SG Blocks, Inc., effective as of April 28, 2020 (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 2020 (File No.

Amendment to Distributorship Agreement between Osang Healthcare Co., Ltd.

and SG Blocks, Inc., dated April 30, 2020 (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 2020 (File No.

Agreement between Osang Group Co.

and SG Blocks, Inc., dated May 1, 2020 (incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 2020 (File No.

Amendment No.

2 to the SG Blocks, Inc.

Stock Incentive Plan (incorporated by reference to Appendix A to the Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on June 25, 2020)

Asset Purchase Agreement by and between SG Echo, LLC and Echo DCL, LLC, dated September 17, 2020 (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 22, 2020 (File No.

Offer Letter dated November 11, 202 between SG Blocks, Inc.

and William Rogers (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc.

with the Securities and Exchange Commission on December 10, 2020 (File No.

List of Subsidiaries*

14 unchanged sentences

SG BLOCKS, INC.

March 30, 2020

April 15, 2021

Chief Executive Offic er and Chairman of the Board (Principal Executive Officer)

5 unchanged sentences

Chief Executive Officer and Chairman of the Board ( Principal Executive Officer)

March 30, 2020

April 15, 2021

/s/ Gerald A.

Acting Chief Financial Officer ( Principal Financial Officer and Principal Accounting Officer)

March 30, 2020

April 15, 2021

/s/ Yaniv Blumenfeld

March 30, 2020

April 15, 2021

Yaniv Blumenfeld

/s/ Christopher Melton

March 30, 2020

April 15, 2021

Christopher Melton

March 30, 2020

/s/ Margaret Coleman

April 15, 2021

Margaret Coleman

SG BLOCKS, INC.

17 unchanged sentences

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company, as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Emphasis of Matter

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.

As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has negative operating cash flows and has stated that substantial doubt exists about its ability to continue as a going concern.

Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 2.

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Our opinion is not modified with respect to this matter.

Basis for Opinion

12 unchanged sentences

We believe that our audits provide a reasonable basis for our opinion.

/s/ Whitley Penn LLP

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments.

The communication of the critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition – Determination of Estimated Costs to Complete for Contracts Recognized Over Time

Description of the Matter

The Company’s construction and engineering contracts generally recognize revenue over time as there is a continuous transfer of control to the customer.

Approximately 54% of the Company’s revenue during the year ended December 31, 2020 was for construction and engineering contracts whereby revenue was recorded over time.

The Company uses the amount of cost incurred under the contract as a measure of progress towards completion, and revenue recognized is measured principally by the costs incurred and accrued to date for each contract as a percentage of the estimated total cost for each contract at completion.

Contract costs include all direct material, labor, and indirect costs related to contract performance.

Changes in job performance, job conditions, estimated contract costs and profitability and final contract settlements may result in revisions to costs and income, and the effects of these revisions are recognized prospectively in the period in which the revisions are determined.

This measurement and comparison process requires updates to the estimate of total costs to complete the contract, and these updates include subjective assessments and judgments.

We identified the Company’s estimation of the costs to complete each contract as a critical audit matter due to the high degree of auditor judgment and the increased extent of effort that was required when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the estimate of costs to complete contracts recognized over time.

How We Addressed the Matter in Our Audit

Our audit procedures related to forecasts of estimated costs to complete contracts recognized over time included the following, among others:

• We selected a sample of contracts and obtained and inspected the executed contract and change orders to validate existence and understand the scope of each contract.

• We performed a site visit near the end of the reporting period.

We observed and inspected the projects in process and inquired of project managers to gain an understanding of the progress on significant projects in process.

• We evaluated and tested management’s process to estimate future costs to complete contracts recognized over time.

This evaluation included the consistency of management’s process and policies regarding change orders and timely costs revisions.

• We evaluated management’s ability to accurately estimate future costs to complete contracts recognized over time by performing a retrospective review of prior estimates to actual results.

Acquisition of Echo DCL, LLC – Fair Value of Net Assets Acquired and Contingent Consideration

Description of the Matter

As discussed in Note 9 to the financial statements, the Company acquired substantially all of the assets of Echo DCL, LLC (Echo) for a purchase price cash and contingent consideration, which resulted in the acquisition of property, plant and equipment and a tradename intangible asset.

Management estimated the fair value of the tradename using the relief from royalty method which required management to estimate discounted cash flows with subjective assumptions of the appropriate discount rate, an appropriate royalty rate, and future revenues.

The property, plant and equipment is largely comprised of equipment and buildings held for lease.

The equipment was valued using a market approach, which estimates value using third-party transactions.

The buildings held for lease were valued using the cost to replicate adjusted for the condition of each building.

The contingent consideration was valued using a Monte Carlo Simulation, which required management to estimate future revenues, expenses, and net income.

We identified the fair value of net assets acquired and contingent consideration in the Echo business combination to be a critical audit matter due to the significant judgments made by management to estimate the fair value of intangible assets, property, plant and equipment, and contingent consideration.

This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the selection of discount and royalty rates, forecasts of future revenues and cash flows, as well as estimates of the cost to replicate buildings acquired.

How We Addressed the Matter in Our Audit

Our audit procedures related to the assumptions and forecasts used by management to estimate the fair value of intangible assets, property, plant and equipment, and contingent consideration acquired in the Echo business combination included the following, among others:

• We read the executed purchase agreement and reviewed historical financial data of Echo to verify that management had identified all acquired assets and liabilities, as well as any contingent consideration.

• With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology, (2) discount rates, (3) the royalty rate, and (4) future revenue, expenses, and growth rates, including testing the source information underlying the determination of the discount rates and the royalty rate and testing the mathematical accuracy of the calculations.

• We evaluated management’s ability to accurately forecast future revenues and cash flows by considering the past financial performance of Echo and current economic factors.

• We visited the Echo plant and inspected the property, plant and equipment acquired to validate existence and working condition.

We reviewed online sales and auction prices to independently validate the reasonableness of the fair values assigned to acquired equipment.

We performed an independent calculation to estimate the cost to replicate the buildings held for lease and compared our calculation to management’s fair value.

We have served as the Company’s auditor since 2016.

/s/ Whitley Penn LLP

Dallas, Texas

March 30, 2020

April 15, 2021

SG BLOCKS, INC.

8 unchanged sentences

Property, plant and equipment, net

Right-of-use asset

Long-term notes receivable

Intangible assets, net

4 unchanged sentences

Contract liabilities

Lease liability, current maturities

Due to affiliates

Assumed liability

Other current liabilities

Total current liabilities

Commitments and contingencies

Lease liability, net of current maturities

Total liabilities

Stockholders’ equity:

5 unchanged sentences

Accumulated deficit

Total SG Blocks, Inc.

stockholders’ equity

Non-controlling interests

Total Stockholders' equity

2 unchanged sentences

SG BLOCKS, INC.

AND SUBSIDIARIES

AND SUBSIDIAR IES

Consolidated Statements of Operations

For the Years Ended December 31,

Construction services

Engineering services

Medical revenue

Cost of revenue:

1 unchanged sentence

Engineering services

Medical revenue

Operating expenses:

9 unchanged sentences

Loss on asset disposal

Loss from equity affiliates

Loss before income taxes

( 6,920,540 )

Income tax expense

Net loss per share - basic and diluted:

net profit attributable to noncontrolling interests

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

Net loss per share attributable to SG Blocks, Inc.

- basic and diluted:

Basic and diluted

Weighted average shares outstanding:

7 unchanged sentences

Stockholders’

Balance at December 31, 2016

Noncontrolling

Total Stockholders'

Balance at January 1, 2019

Stock-based compensation

Exercise of stock options

Conversion preferred to common

Issuance of common stock, net of issuance costs

Issuance of common stock of services

Conversion of convertible debentures

Balance at December 31, 2019

1 unchanged sentence

Stock-based compensation

Balance at December 31, 2018

Stock-based compensation

Conversion of restricted stock units to common stock

Reverse stock split settlement

Conversion of debt exchange to common stock

Issuance of common stock, net of issuance costs

7 unchanged sentences

Cash flows from operating activities:

( 4,508,162 )

Adjustments to reconcile net loss to net cash used in operating activities:

6 unchanged sentences

Bad debt expense and recoveries

Interest income on short-term investment

Interest income on notes receivable

Stock-based compensation

Loss on asset disposal

Loss on equity affiliates

Changes in operating assets and liabilities:

2 unchanged sentences

Prepaid expenses and other current assets

Right of use asset

Accounts payable and accrued expenses

Contract liabilities

Due to affiliates

Other current liability

Long term lease liability

Deferred long-term asset charge

Net cash used in operating activities

Cash flows provided by investing activities:

Proceeds from short-term investment

Cash flows used in investing activities:

Purchase of property, plant and equipment

Purchase of intangible asset

Investment in and advances to equity affiliates

Purchase of Echo DCL, LLC, net of cash acquired

Advances in notes receivable

Payment on assumed liability of acquired assets

Net cash used in investing activities

Cash flows from financing activities:

Cash flows provided by financing activities:

Proceeds from public stock offering and other private placements, net of issuance costs

Proceeds from short-term note payable

Payments on short-term note payable

Proceeds from long term debt

Settlement of common stock from reverse stock split

Payments on short-term note debt

Payments on debt issuance costs

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents

Cash and cash equivalents - beginning of period

3 unchanged sentences

Supplemental disclosure of non-cash operating activities:

Non-cash conversion of long term debt

Non-cash conversion of interest expense of long term debt

Non-cash conversion of accrued salary to restricted stock units

22 unchanged sentences

The Company also provides engineering and project management services related to the use and modification of Modules in construction.

The Company is now focusing on entering into licensing agreements across the Company’s construction opportunity verticals and will be able to further its sales and marketing efforts on qualified lead generation for its licensees.

The Company is now focusing on entering into licensing agreements across the Company’s construction opportunity verticals.

During 2020, the Company formed, SG Echo, LLC, a wholly owned subsidiary of the Company.

SG Echo, LLC was formed to complete the business acquisition as disclosed in Note 9 , and to become the manufacturer of the Company's core container and modular product offerings.

Also during 2020, the Company entered into a joint venture, as described below and has begun to provide clinical lab testing, as well as test kit sales related to a separate distributer agreement.

Reverse Stock Split

7 unchanged sentences

For the Years Ended December 31, 2020 and 2019

T he Company ha s prepar ed its consolidated financial statements on a going concern basis, which assumes that the Company will realize its assets and satisfy its liabilities in the normal course of business.

However, the Company has incurred net losses since its inception and has negative operating cash flows, which raise substantial doubt about its ability to continue as a going concern.

The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty concerning the Company’s ability to continue as a going concern.

As of December 31, 2019, the Company had cash and cash equivalents of $ 1,625,671 and a backlog of $ 17.6 million.

As of December 31, 2020, the Company had cash and cash equivalents of $ 13,010,356 and a backlog of approximately $25.1 million.

See note 14 for a discussion of construction backlog.

2 unchanged sentences

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 recently 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 an equity offering in April 2019 and in August 2019, which resulted in net proceeds of approximately $ 1,136,015 .

3 unchanged sentences

The Company completed a public offering in December 2019 , which resulted in net proceeds of approximately $ 2,117,948 .

The Company completed a public offering in April and May 2020, which resulted in net proceeds of approximately $ 1,522,339 , and $ 15,596,141 , respectively.

S ee Note 15 for a discussion on this public offering.

2 unchanged sentences

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.

With the global spread of the ongoing novel coronavirus ("COVID-19") pandemic during 2020, the Company has implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on its employees and business.

The Company is experiencing delays in projects due to the 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 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.

SG BLOCKS, INC.

3 unchanged sentences

Summary of Significant Accounting Policies

Basis of presentation and principals of consolidation – The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the applicable rules and regulations of the United States Securities and Exchange Commission (“SEC”) and include the accounts of the Company and its wholly owned subsidiaries, SG Building Blocks, Inc., SG Residential, Inc., and SG Blocks Puerto Rico, Inc.

All intercompany balances and transactions are eliminated.

1 unchanged sentence

Recently adopted accounting pronouncements - New accounting pronouncements implemented by the Company are discussed below or in the related notes, where appropriate.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2016-02, “Leases (Topic 842)” (“ASU 2016-02”).

The update’s principal objective is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet.

ASU 2016-02 continues to retain a distinction between finance and operating leases but requires lessees to recognize a right-of-use asset representing their right to use the underlying asset for the lease term and a corresponding lease liability on the balance sheet for all leases with terms greater than twelve months.

The update is effective for fiscal years beginning after December 15, 2018.

In July 2018, the FASB issued ASU No.

2018-11, “Leases (Topic 842):

Targeted Improvements” (“ASU 2018-11”), which provides entities with an additional transition method.

Under ASU 2018-11, entities have the option of recognizing the cumulative effect of applying the new standard as an adjustment to beginning retained earnings in the year of adoption while continuing to present all prior periods under previous lease accounting guidance.

In July 2018, the FASB also issued ASU No.

2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”), which clarifies how to apply certain aspects of ASU 2016-02.

The Company adopted ASU 2016-02, ASU 2018-10 and ASU 2018-11 beginning January 1, 2019.

The Company had no operating or finance lease agreements as of December 31, 2019.

The adoption of ASU 2016-02 did not have a material impact on the Company's financial statements and disclosures.

In June 2018, the FASB issued ASU No.

2 018 - 07 , “Compensation — Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”), which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees.

ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards.

Under ASC 718, the measurement date for equity-classified, share-based awards is generally the grant date of the award.

ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606.

The Company adopted ASU 2018-07 effective January 1, 2019.

The adoption provides administrative relief by fixing the remaining unamortized expense of the award and eliminating the requirement to quarterly re-measure the Company’s nonemployee awards.

The adoption of ASU No.

2018-07 did not have a material impact on the Company’s financial statements and disclosures.

In January 2017, the FASB issued ASU No.

2017 - 04 , “Simplifying the Test for Goodwill Impairment” (“ASU 2017 - 04 ”), to simplify the test for goodwill impairment by removing Step 2 .

An entity will, therefore, perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

An entity still has the option to perform a qualitative assessment to determine if the quantitative impairment test is necessary.

The Company adopted ASU 2017-04 effective December 1, 2019.

Based on current evaluation, the Company does not expect that ASU No.

2017 - 04 will have a material impact on the Company’s financial statements.

Recently issued accounting pronouncements not yet adopted - New accounting pronouncements requiring implementation in future periods are discussed below.

In August 2018, the FASB issued ASU No.

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.

2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”).

This ASU amends ASC 820 to add, remove and modify certain disclosure requirements for fair value measurements.

For example, public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.

ASU 2018 - 13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted.

Management does not expect the adoption of ASU 2018 - 13 to have a material impact on the Company’s financial position, results of operations or cash flow.

SG BLOCKS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

Summary of Significant Accounting Policies (continued)

For example, public companies will be required to disclose the range and weighted average of significant unobservable inputs used to develop for Level 3 fair value measurements.

The Company adopted ASU 2018-13 effective January 1, 2020.

The adoption of this guidance did not have a material impact on the Company's financial position, results of operations or cash flow.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.” This update will require the measurement of all expected credit losses for financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts.

The guidance was initially effective for the Company for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years.

In November 2019, the FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842):

Effective Dates,” which, among other things, defers the effective date of ASU 2016-13 for public filers that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those years.

Early adoption is permitted.

The Company adopted ASU 2016-13 effective January 1, 2020.

The adoption of this guidance did not have a material impact on the Company's financial position, results of operations or cash flow.

Accounting estimates – The preparation of 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.

4 unchanged sentences

Assets and liabilities relating to current and long-term 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 one year .

Revenue recognition – 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).

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.

SG BLOCKS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2020 and 2019

Summary of Significant Accounting Policies (continued)

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.

5 unchanged sentences

( 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.

1 unchanged sentence

When the current estimate of total costs for a performance obligation indicate a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident.

For product or equipment sales, the Company applies recognition of revenue when the customer obtains control over such goods, which is at a point in time.

On October 3, 2019, 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.

9 unchanged sentences

The 2,500 shares of restricted stock of the Company's common stock has yet to be issued to CMC.

The Agreement also provides that CMC has 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 cost of the project is $16,900,000.

The project is a residential project but not subject to the Company’s Exclusive License Agreement, dated October 3, 2019.

SG BLOCKS, INC.

3 unchanged sentences

Summary of Significant Accounting Policies (continued)

The project is a residential project but not subject to the Company’s Exclusive License Agreement, dated October 3, 2019.

In May 2020, the Company 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.

Pursuant to the terms of the Distributorship Agreement, the Company is required to make payment for 100 % of any purchase order prior to shipment of the product from Osang, though it does not expect to make any cash outlays with respect to any product that it distributes and expects instead to require any third-party purchasers to make the necessary cash outlays as part of a purchase order entered into with the Company.

The Distributorship Agreement does not guarantee the Company a specific quantity of kits to sell or a customer list, and may be terminated by either party at any time on thirty (30) days' notice.

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, the Company recognized $ 250,000 in revenue related to such products, which is included in medical revenue on the accompanying consolidated statements of operations.

As described below, the Company 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 bene 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 year ending December 31, 2020, the Company 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.

Disaggregation of Revenues

The Company’s revenues are principally derived from construction and engineering contracts related to Modules.

The Company’s revenues are principally derived from construction and engineering contracts related to Modules, and medical revenue derived from lab testing and test kit sales.

Our contracts are with customers in various industries.

Revenue recognized at a point in time and recognized over time were $ 4,057,086 and $ 4,698,537 , respectively, for the year ending December 31, 2020.

All revenue recognized for the year ending December 31, 2019 was over time.

SG BLOCKS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2020 and 2019

Summary of Significant Accounting Policies (continued)

The following tables provide further disaggregation of the Company’s revenues by categories:

1 unchanged sentence

Revenue by Customer Type

Medical (lab testing, test kit sales and equipment)

Medical (construction services)

Total revenue by customer type

(1) Construction fee of $ 300,000 with no cost of revenue during 2020.

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 in the period when the Company’s right to consideration is unconditional and billed to the customer.

Accounts receivable are recognized net of an allowance for doubtful accounts.

21 unchanged sentences

The Company considered this amount an incremental cost of obtaining that ELA, because the Company expects to recover those costs through future royalty payments.

The Company plans to amortize the asset over sixty months, which is the initial term of the ELA because the asset relates to the services transferred to the customer during the contract term.

The Company amortizes the asset over sixty months, which is the initial term of the ELA because the asset relates to the services transferred to the customer during the contract term.

As of December 31, 2020 , accumulated amortization related to deferred contract costs amounted to $ 50,981 .

During the year ended December 31, 2019 , amortization expense relating to the deferred contract costs amounted to $ 10,196 and is included in general and administrative expenses on the accompanying consolidated statement of operations.

During the year ended December 31, 2020 , amortization expense relating to the deferred contract costs amounted to $ 40,786 and is included in general and administrative expenses on the accompanying consolidated statements of operations.

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.

14 unchanged sentences

Summary of Significant Accounting Policies (continued)

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.

V ariable 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.

On August 27, 2020 the Company entered into a joint venture agreement with Clarity Labs.

In consideration and subject to Clarity Lab’s services and commitments and provided the agreement remains valid and in force, and is not terminated, SGB shall issue 200,000 restricted shares of SGB common stock to be earned over a defined vesting period starting in December 1, 2020.

As of December 31, 2020, no shares were issued.

Clarity Labs is a licensed clinical laboratory that uses specialized molecular testing equipment and that focuses on the diagnosis and treatment of critical diseases, including COVID-19.

Clarity Labs is also engaged in the business of manufacturing, importing and distributions various medical tests.

Under the JV, the Company and Clarity Labs will jointly market, sell, and distributed certain products and services (“Clarity Mobile Venture”).

As of December 31, 2020, $ 965,561 was due to Clarity Labs for expenses paid on behalf of Clarity Mobile Venture, and is included in Due to Affiliates on the accompanying consolidated balance sheets.

In addition, during the year ended December 31, 2020, the Company recognized revenue of $ 641,178 to Clarity Labs, of which $ 420,773 is included in accounts receivable as of December 31, 2020.

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.

1 unchanged sentence

Short-term investment – The Company classifies its investment 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 no short-term investment as of December 31, 2019 and 2018, respectively.

The Company had no short-term investment as of December 31, 2020 or 2019, respectively.

Accounts receivable and allowance for doubtful accounts – Accounts receivable are receivables generated from sales to customers and progress billings on performance type contracts.

6 unchanged sentences

Actual collection losses may differ from our estimates and could be material to our consolidated financial position, results of operations, and cash flows.

Inventory – Raw construction materials (primarily shipping containers) are valued at the lower of cost (first-in, first-out method) or net realizable value.

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.

There was no inventory as of December 31, 2019 or 2018.

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.

The Company’s evaluation of goodwill completed during the year ended December 31, 2019 resulted in impairment loss of $2,938,653 which represents the total goodwill impairment loss to date.

The impairment loss was due to a deterioration in the Company's estimated future cash flows.

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 December 31, 2020 there was inventory of $ 4,429 for construction materials, and $ 773,715 of medical equipment and COVID-19 test and testing supplies.

There was no inventory for December 31, 2019.

SG BLOCKS, INC.

3 unchanged sentences

Summary of Significant Accounting Policies (continued)

Intangible assets – Intangible assets consist of $ 2,766,000 of proprietary knowledge and technology, which is being amortized over 20 years and $ 1,113,000 of customer contracts, which is being amortized over 2.5 years.

The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss.

The Company's evaluation of goodwill completed during the year ended December 31, 2019 resulted in impairment loss of $ 2,938,653 , which represents the total goodwill impairment loss to date.

The impairment loss was due to a deterioration in the Company's estimated future cash flows.

There were no impairments during the year ended December 31, 2020 .

The Company has taken the recent COVID-19 pandemic into consideration when determining impairment.

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.

7 unchanged sentences

Estimated useful lives for significant classes of assets are as follows:

computer and software 3 to 5 years and equipment 5 t o 7 years.

computer and software 3 to 5 years, furniture and other equipment 5 to 7 years, automobiles 2 to 5 years, buildings held for lease 5 to 7 years, and equipment 5 to 29 years.

Repairs and maintenance are charged to expense when incurred.

16 unchanged sentences

Inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).

Conversion option liabilities:

Conversion option liabilities are measured at fair value using the Black-Scholes model and are classified within Level 3 of the valuation hierarchy.

For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s Chief Financial Officer, who reports to the Chief Executive Officer, determines the Company's valuation policies and procedures.

The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s Chief Financial Officer and are approved by the Chief Executive Officer.

The Company presented conversion option liabilities at fair value on its consolidated balance sheets, with the corresponding changes in fair value recorded in the Company’s consolidated statements of operations for the applicable reporting periods.

The Company had no conversion open liabilities as of December 31, 2019.

The earnout liability represents the only financial liability measured at fair value on a recurring basis as of December 31, 2020 and was a level 3 asset.

As of December 31, 2020, the estimated value of the earnout liability was zero.

Transfer into and transfers out of the hierarchy levels are recognized as if they had taken place at the end of the reporting period.

There were no transfers into or out of the hierarchy levels during the year ended December 31, 2020 or 2019, besides the transfer in of the earnout liability.

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.

4 unchanged sentences

Stock-based compensation expense to non-employees is reported within marketing and business development expense in the consolidated statements of operations.

SG BLOCKS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

Summary of Significant Accounting Policies (continued)

Income taxes – The Company accounts for income taxes utilizing the asset and liability approach.

6 unchanged sentences

If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.

SG BLOCKS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2020 and 2019

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.

4 unchanged sentences

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 December 31, 2019 and 2018, 92 % and 76 %, respectively, of the Company’s gross accounts receivable were due from one and two customers.

Revenue relating to two and three customers represented approximately 78 % and 66 % of the Company’s total revenue for the years ended December 31, 2019 and 2018, respectively.

Cost of revenue relating to three and two vendors represented approximately 74 % and 55 % of the Company’s total cost of revenue for the years ended December 31, 2019 and 2018, respectively.

The Company believes it has access to alternative suppliers, with limited disruption to the business, should circumstances change with its existing suppliers.

SG BLOCKS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

At December 31, 2020 and 2019, 79 % and 92 %, respectively, of the Company’s gross accounts receivable were due from three and one customers.

Revenue relating to three and two customers represented approximately 61 % and 78 % of the Company’s total revenue for the years ended December 31, 2020 and 2019, respectively.

For the year ended December 31, 2020, there were no vendors which represented 10 % or more of our cost of revenue.

For the year ended December 31, 2019, 74 % of our cost of revenue related to three vendors .

The Company believes it has access to alternative suppliers, with limited disruption to the business, should circ umstances change with its existing suppliers.

Accounts Receivable

2 unchanged sentences

Engineering services

Medical revenue

Retainage receivable

5 unchanged sentences

The allowance for doubtful accounts was $ 795,914 as of December 31, 2020.

There was no provision for doubtful accounts, $ 54,000 in recoveries collected for doubtful accounts and no write offs for the year ended December 31, 2019.

The provision for doubtful accounts was $ 810,580 and write offs were $ 4,920 for the year ended December 31, 2018.

There was a provision for doubtful accounts of $ 10,018 , and no write offs for the year ended December 31, 2020.

There was no provision for doubtful accounts and write offs were $ 54,000 for the year ended December 31, 2019.

SG BLOCKS, INC.

9 unchanged sentences

Net contract assets (liabilities)

The above amounts are included in the accompanying consolidated balance sheets under the following captions at December 31, 2019 and 2018.

The above amounts are included in the accompanying condensed consolidated balance sheets under the following captions at December 31, 2020 and 2019.

Contract assets

8 unchanged sentences

Furniture and other equipment

Leasehold improvements

Equipment and machinery

Building held for lease

Laboratory and temporary units

Property, plant and equipment

6 unchanged sentences

For the Years Ended December 31, 2020 and 2019

Convertible Debentures

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 $ 400,000 (the “Company Note”) and issued to Paul Galvin, the Company’s Chairman and CEO, a promissory note in the principal amount of $ 100,000 (the “Galvin Note”).

The transaction closed on January 22, 2020, on which date the Company loaned CPF GP 2019-1 LLC $ 400,000 and Mr.

Galvin personally loaned CPF GP $ 100,000 on behalf of the Company.

The Company Note and Galvin Note were issued pursuant to that certain Loan Agreement and Promissory Note, dated October 3, 2019 (the “Loan Agreement”), as amended on October 15, 2019 and November 7, 2019 by and between the CPF GP and the Company, and bear interest at five percent ( 5 %) per annum, payable, together with the unpaid principal amount of the promissory notes, on the earlier of the July 31, 2023 maturity date or upon the liquidation, redemption sale or issuance of a dividend upon the LLC interests in CPF MF 2019-1 LLC, a Texas limited liability company of which CPF GP is the general partner;

provided, that the terms of the Galvin Note provide that all interest payments due to Mr.

Galvin under the Galvin Note shall be paid directly to, and for the benefit of, the Company.

In April 2020, CPF GP issued to the Company a promissory note in the principal amount of $ 250,000 (the “Company Note 2”).

The transaction closed on April 15, 2020, on which date the Company loaned CPF GP 2019-1 LLC $ 250,000 .

The Company Note was issued pursuant to that certain Loan Agreement and Promissory Note, dated October 3, 2019 (the “Loan Agreement 2”), as amended on October 15, 2019 and November 7, 2019 by and between the CPF GP and the Company, and bear interest at five percent ( 5 %) per annum, payable, together with the unpaid principal amount of the promissory notes, on the earlier of the July 31, 2023 maturity date or upon the liquidation, redemption sale or issuance of a dividend upon the LLC interests in CPF MF 2019-1 LLC, a Texas limited liability company of which CPF GP is the general partner.

Notes Payable

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 $ 200,000 (“Note”) that bears interest at a rate of nine percent ( 9 %) per annum, due on July 31, 2023 , that is secured under a Pledge Agreement, dated February 4, 2020, entered into with the investor by a security interest in the royalty payable to the Company under that certain Exclusive License Agreement, dated October 3, 2019, with CPF GP 2019-1 LLC.

The Company had the right to prepay the Note, in whole or in part, at any time and from time to time, without premium or penalty.

During the year ended December 31, 2020, the Note to investor of $ 200,000 and unpaid accrued interest of $ 6,263 was converted into 73,665 shares of the Company's common stock.

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 $ 1,059,600 in cash (the “Echo Acquisition”), except for ECHO DCL's real estate holdings.

The Echo Acquisition closed on September 23, 2020.

In addition, the sellers of Echo have the potential of additional consideration based upon the APA.

In accordance with ASC 805, the Echo Acquisition is accounted for as a business combination.

The Echo Acquisition was made for the purpose of expanding the Company’s footprint into the modular manufacturing business.

The purchase consideration amounted to:

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 preliminary allocation of the purchase price to the assets acquired and liabilities assumed for the Echo Acquisition:

SG BLOCKS, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the Years Ended December 31, 2020 and 2019

Business Combination (continued)

Cash and cash equivalents

Accounts receivable

Prepaid expenses and other current assets

Property, plant and equipment

Right-of-use assets

Intangible assets

Accounts payable and accrued expenses

Assumed liability

Contract liabilities

Lease liability

As part of the Echo Acquisition, the Company recorded an earnout 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 initial earnout liability of $ 0 was based on the fair value of the earnout liability at the acquisition date, and would be payable in cash and shares of restricted common stock of the Company.

The Company leases an office, a plant and certain equipment under non-cancelable operating lease agreements.

The leases have remaining lease terms of two and a half years to five years.

The plant lease includes an option to extend the lease for up to five years.

Supplemental balance sheet information related to leases is as follows:

Balance Sheet Location

December 31, 2020

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

SG BLOCKS, INC.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the Years Ended December 31, 2020 and 2019

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,

Total lease payments

Imputed interest

Present value of lease liabilities

Operating leases for office space and the plant, with total lease payments of $ 1,683,000 , has been leased from an affiliate of the sellers of Echo.

Co nvertible Debentur es

On November 12, 2019, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an investor, pursuant to which the Company issued to the investor a senior secured convertible debenture in the principal amount of $ 480,770 (the “Debenture”) for proceeds of $ 375,000 (representing an original issue discount of 22 %).

The Company received net proceeds of approximately $ 326,250 after deducting certain fees due to the placement agent and certain transaction expenses.

The Debenture is due 110 days after issuance and is secured under a Security Agreement, dated November 12, 2019, entered into with the investor (the “Security Agreement”) by a security interest in all of the Company’s existing and future assets, subject to existing security interests and exceptions.

The Company has the right to redeem all or a portion of the outstanding principal of the Debenture (i) prior to the maturity date without interest and with no conversion by the investor and (ii) after the maturity date at a premium of 120%, and with interest accruing at 24% from the maturity date.

The Debenture was convertible into shares of the Company’s common stock only upon (i) the occurrence of an Event of Default (as defined in the Debenture) or (ii) at maturity in the event any principal remains outstanding, at a conversion price equal to the lower of (x) 67.5 % of the lowest daily VWAPs of the common stock during the five consecutive trading days immediately preceding the Event of Default or date of maturity or (y) if the Debenture is not fully paid as of the Maturity, the lowest daily VWAP during the ten ( 10 ) consecutive trading days immediately preceding the date of the applicable Conversion, and based on a conversion amount determined by the product of (x) the portion of the principal and accrued interest to be converted and (y) 120 % or (y) if the Debenture is not fully paid as of the Maturity Date and no conversions have been effected under the Debenture, the lowest daily VWAP during the ten ( 10 ) consecutive Trading Days immediately preceding the date of the applicable Conversion;

The Debenture was due 110 days after issuance and was secured under a Security Agreement, dated November 12, 2019, entered into with the investor (the “Security Agreement”) by a security interest in all of the Company’s existing and future assets, subject to existing security interests and exceptions.

The Company had the right to redeem all or a portion of the outstanding principal of the Debenture (i) prior to the maturity date without interest and with no conversion by the investor and (ii) after the maturity date at a premium of 120 %, and with interest accruing at 24 % from the maturity date.

As of December 13, 2019 the Debenture was paid back in full to the investor.

SG BLOCKS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2020 and 2019

The Debenture was convertible into shares of the Company’s common stock only upon (i) the occurrence of an Event of Default (as defined in the Debenture) or (ii) at maturity in the event any principal remains outstanding, at a conversion price equal to the lower of (x) 67.5% of the lowest daily VWAPs of the common stock during the five consecutive trading days immediately preceding the Event of Default or date of maturity or (y) if the Debenture was not fully paid as of the Maturity, the lowest daily VWAP during the ten (10) consecutive trading days immediately preceding the date of the applicable Conversion, and based on a conversion amount determined by the product of (x) the portion of the principal and accrued interest to be converted and (y) 120% or (y) if the Debenture was not fully paid as of the Maturity Date and no conversions have been effected under the Debenture, the lowest daily VWAP during the ten (10) consecutive Trading Days immediately preceding the date of the applicable Conversion;

provided, however, that the Company will not issue any shares of common stock upon conversion of the Debenture if the investor would exceed the aggregate number of shares of common stock which the Company may issue upon conversion or exercise (as the case may be) of the Debenture without breaching the Company’s obligations under the rules or regulations of the Nasdaq Stock Market, including rules related to the aggregate of offerings under NASDAQ Listing Rule 5635(d) (which currently limit such issuance to 60,048 shares, which is 19.99% of the Company’s outstanding shares as of the date hereof).

In addition, subject to limited exceptions, the investor will not have the right to convert any portion of the Debenture if the investor, together with its affiliates, would beneficially own in excess of 4.99 % of the number of shares of the Company’s common stock outstanding immediately after giving effect to its conversion and under no circumstances may convert the Debenture if the investor, together with its affiliates, would beneficially own in excess of 9.99 % of the number of shares of the Company’s common stock outstanding immediately after giving effect to its conversion.

In addition, subject to limited exceptions, the investor did not have the right to convert any portion of the Debenture if the investor, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to its conversion and under no circumstances could convert the Debenture if the investor, together with its affiliates, would beneficially own in excess of 9.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to its conversion.

In connection with this transaction, 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 has agreed to pay 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 $ 15,000 for aggregate out-of-pocket expenses incurred collectively in this transaction.

(the “ Placement Agent ”), pursuant to which the Company agreed to pay 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 $ 15,000 for aggregate out-of-pocket expenses incurred collectively in this transaction.

Pursuant to the Placement Agency Agreement, the Company also agreed to grant to the Placement Agent or its designees warrants to purchase up to 9 % of the aggregate number of shares of common stock underlying the Debenture, which equals 5,404 shares of common stock, at an exercise price of 110 % of the closing price of the Company’s common stock on the closing date (the “ Placement Agent Warrants ”).

The Placement Agent Warrants are exercisable, in whole or in part, commencing on the issuance date and have an exercise period of five years.

In the event that there is not an effective registration statement permitting for the resale of the shares underlying the Placement Agent Warrants, the Placement Agent Warrant’s shall be exercisable on a cashless basis.

There are significant restrictions pursuant to FINRA Rule 5110 against transferring the Placement Agent’s Warrants and the shares issuable upon exercise of the Placement Agent Warrants during the one hundred eighty (180) days after the closing date.

The Placement Agent Warrants wereexercisable, in whole or in part, commencing on the issuance date and have an exercise period of five years.

In the event that there was not an effective registration statement permitting for the resale of the shares underlying the Placement Agent Warrants, the Placement Agent Warrant’s were exercisable on a cashless basis.

There were significant restrictions pursuant to FINRA Rule 5110 against transferring the Placement Agent’s Warrants and the shares issuable upon exercise of the Placement Agent Warrants during the one hundred eighty (180) days after the closing date.

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 5,404 shares of the Company’s common stock as compensation for acting as placement agent for the private placement of the Debenture.

As of December 13, 2019 the Debenture was paid back in full to the investor.

The Company’s provision (benefit) for income taxes consists of the following for the year ended December 31, 2020 and 2019:

27 unchanged sentences

During 2020 certain adjustments were made to the Company’s net operating loss carryforward tax asset for IRC Section 382 limitations.

The valuation allowance increased (decreased) by $ 264,109 and $( 355,765 ) during 2019 and 2018, respectively.

The valuation allowance increased by $ 1,541,948 and $ 264,109 during 2020 and 2019, respectively.

As of December 31, 2020, the Company had a net operating loss carryforward of approximately $ 16.6 million for Federal and State tax purposes.

30 unchanged sentences

Balance - end of period

Backlog at December 31, 2019 included one large contract entered into by the Company during the third quarter of 2019 in the amount of approximately $ 17 million.

Backlog at December 31, 2020 included one large contract entered into by the Company during the third quarter of 2019 in the amount of approximately $ 17 million, and entered into two contracts during the third quarter of 2020 in the amount of approximately $ 4 million and approximately $ 2.95 million.

The Company expects that all of this revenue will be realized by September 30, 2022.

During the fourth quarter of 2018 , the Company moved a contract of $ 27.5 million out of backlog and into its pipeline until the customer completes a highest and best use analysis of the land.

During the second quarter of 2019 , the Company moved a $ 25 .0 million contract out of backlog after receiving a cancellation notice from the customer.

During the third quarter of 2019 , the Company removed two contracts in the amount of $ 55 million and $ 15 million out of backlog due to the fact that these projects fall under the exclusive license agreement (“ELA”) executed during the fourth quarter of 2019 .

Under the ELA, the Company can not guarantee, but expects to receive, approximately $ 2.4 million in royalties for one such project.

Under the ELA, the Company cannot guarantee, but expects to receive, approximately $ 2.4 million in royalties for one such project.

The Company expects to receive these royalties for this one such project through June 30, 2022.

Backlog does not include expected royalty fees to the Company under the ELA from projects to be delivered by our licensee.

The Company entered into three contracts during the fourth quarter of 2020 in the amount of approximately $ 2.7 million, $ 0.80 million, and $ 0.70 million.

The Company’s remaining backlog as of December 31, 2020 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 December 31, 2020 over the following period:

Within 1 year

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.

SG BLOCKS, INC.

2 unchanged sentences

For the Years Ended December 31, 2020 and 2019

Within 1 year

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.

Stockholders’ Equity

8 unchanged sentences

The Company incurred $ 454,552 in issuance costs from the Public Offering and no warrants to purchase were issued to the underwriters.

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 440,000 shares of common stock at a public offering price of $ 4.25 per share, resulting in aggregate net proceeds of approximately $ 1,522,339 after deducting underwriting discounts and commissions and other expenses related to the offering.

The Company incurred a total of approximately $ 347,661 in issuance costs in connection with the offering and no warrants to purchase were issued to the underwriters.

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 6,000,000 shares of common stock at a public offering price of $ 2.50 per share.

Pursuant to the terms of the related Underwriting Agreement dated May 6, 2020 by and among the Company 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 the Company's common stock, par value $ 0.01 per share (the "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 the Company's Common Stock (the "Option Shares").

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

The Company 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 underwriters.

Securities Purchase Agreement – In April 2019 , the Company issued 42,388 shares of its common stock at $ 22.00 per share through a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional investors and accredited investors.

2 unchanged sentences

The warrants are further discussed in Note 16 .

SG BLOCKS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2020 and 2019

Decrease in Authorized Shares – On June 5, 2019 , at the Company’s annual meeting of stockholders, the stockholders approved an amendment to the Company’s amended and restated certificate of incorporation to decrease the number of authorized shares of common stock from 300,000,000 to 25,000,000 shares.

14 unchanged sentences

The warrants are exercisable at the option of the holder on or after February 1, 2020 and expire August 29, 2024 .

In conjunction with the Underwriting Agreement in May 2020, the Company issued to the underwriter, as compensation, warrants to purchase an aggregate of 300,000 shares of common stock at an initial exercise price of $ 3.14 per share.

The warrants are exercisable at the option of the holder on or after November 6, 2020 and expire May 5, 2025 .

SG BLOCKS, INC.

3 unchanged sentences

Share-based Compensation

On October 26, 2016, the Company’s Board of Directors approved the issuance of up to 25,000 shares of the Company’s common stock in the form of restricted stock or options (“ 2016 Stock Plan”).

On October 26, 2016, the Company’s Board of Directors approved the Company’s 2016 Stock Incentive Plan which authorized the issuance of up to 25,000 shares of the Company’s common stock in the form of restricted stock or options (“ 2016 Stock Plan”).

Effective January 20, 2017, the 2016 Stock Plan was amended and restated as the SG Blocks, Inc .

Stock Incentive Plan, as further amended eff ective June 1, 2018 (the “Incentive Plan”).

Stock Incentive Plan, as further amended eff ective June 1, 2018 and further amended July 30, 2020 (the “Incentive Plan”).

The Incentive Plan authorizes the issuance of up to 1,000,000 shares of common stock.

3 unchanged sentences

As of December 31, 2020, there were 179,547 shares of common stock available for issuance under the Incentive Plan.

Stock-Based Compensation Expense

Stock-based compensation expense is included in the consolidated statements of operations as follows:

5 unchanged sentences

Stock options

Stock-Based Option Awards

The Company issued no stock-based options during the year ended December 31, 2019.

The fair value of the stock-based option awards granted during the year ended December 31, 2018, were estimated at the date of grant using the Black-Scholes option valuation model with the following assumptions:

Exp ected dividend yiel d

Expected stock volatility

Risk-free interest rate

Expected life

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.

SG BLOCKS, INC.

3 unchanged sentences

Share-based Compensation (continued)

The simplified method is calculated by averaging the vesting period and contractual term of the options.

The following table summarizes stock-based option activities and changes during the years ended December 31, 2019 and 2018.

The table includes options granted to employees and directors of the Company and does not include 50,000 options granted to a consultant during 2017, as described below:

The following table summarizes stock-based option activities and changes during the years ended December 31, 2020 and 2019, as described below:

Weighted Average Fair Value Per Share

9 unchanged sentences

This expense is included in payroll and related expenses in the accompanying consolidated statements of operations.

As of December 31, 2019, there was $ 13,334 of total unrecognized compensation costs related to non-vested stock options, which will be expensed over a weighted average period of 1.25 years.

As of December 31, 2020, there was $ 2,667 of total unrecognized compensation costs related to non-vested stock options, which will be expensed over a weighted average period of less than 1 year.

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 December 31, 2020 was $ 6.10 per share.

SG BLOCKS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

Share-based Compensation (continued)

In March 2018, the Company granted Mr.

Shetty and six employees of the Company options to purchase 4,108 , 4,067 and an aggregate of 4,325 , respectively, shares of the Company’s common stock with an exercise price of $ 92.20 per share.

These options vest in equal quarterly installments over either a two -year and three -year period and will fully vest by the end of March 31, 2021.

The options with a two-year period, which includes those granted to Mr.

Galvin and Mr.

Shetty, will vest in full by December 31, 2019;

the options with a three-year vesting period will vest in full by March 31, 2021.

The fair value of these options upon issuance amounted to $ 320,000 .

Non-Employee Stock Options

In September 2017, in connection with an advisory agreement entered into by the Company (the “Advisory Agreement”), a consultant was granted options to purchase 2,500 shares of the Company’s common stock, with an exercise price of $ 125.00 .

The options vest when certain performance conditions are met.

These performance conditions consist of the purchase of fifty modular units from the Company by qualified customers.

As of March 31, 2019, the required performance conditions were not met, and the options expired.

Restricted Stock Units

Effective July 26, 2018, a total of 1,398 of restricted stock units were granted to the Company’s non-employee directors, under the Company’s stock-based compensation plan, at the calculated fair value of $ 107.20 per share, which represents the average closing price of the Company’s common stock for the ten trading days immediately preceding and including the grant date.

Restricted stock units granted to directors in 2018 vest on the earlier of (A) the first anniversary of the date of the grant or (B) the date of the annual meeting of the Company’s stockholders that occurs in the year immediately following the date of the grant;

and are payable six months after the termination of the director from the Board or death or disability.

On March 22, 2019, a total of 15,703 of restricted stock units were granted to Mr.

8 unchanged sentences

The restricted stock units granted on February 26, 2019 vest on the earlier of (A) the first anniversary of the date of the grant or (B) the date of the 2019 annual meeting of the Company’s stockholders subject to each individual’s continued service as a director of the Company through such date, and are payable six months after the termination of the director from the Board of Directors or death or disability.

SG BLOCKS, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2020 and 2019

Share-based Compensation (continued)

Effective June 5, 2019, a total of 9,189 of restricted stock units were granted to the Company’s non-employee directors, under the Company’s stock-based compensation plan, at the calculated fair value of $ 16.40 per share, which represents the average closing price of the Company’s common stock for the ten trading days immediately preceding and including the grant date.

1 unchanged sentence

and are payable six months after the termination of the director from the Board or death or disability.

On April 14, 2020, a total of 35,331 of restricted stock units were granted to Mr.

Armstrong, Mr.

Sheeran , five employees and two consultants of the Company, under the Company's stock-based compensation plan, at the fair value of $ 4.76 per share, which represents the closing price of the Company's common stock on April 14, 2020.

Restricted stock units granted to Mr.

Armstrong, Mr.

Sheeran, and an aggregate of five employees and one consultant of 11,331, 1,000, 3,000 and an aggregate of 8,000, respectively, will vest in full on the first anniversary of the vesting commencement date and one consultant received 12,000 restricted stock units that vested immediately on April 15, 2020.

The fair value of these units upon issuance amounted to $168,176.

On April 14, 2020, a total of 12,000 of restricted stock units were granted to three of the Company’s non-employee directors, under the Incentive Plan, at the calculated fair value of $ 4.76 per share, which represents the closing price of the Company’s common stock on April 14, 2020.

The restricted stock units granted on April 14, 2020 will fully vest on April 14, 2021, subject to each individual’s continued service as a director of the Company through such date, and are payable six months after the termination of the director from the Company’s Board of Directors or death or disability.

The fair value of these units upon issuance amounted to $ 57,120 .

On September 23, 2020, a total of 425,000 of restricted stock units were granted to Mr.

Armstrong, Mr.

Sheeran, seven employees and one consultant of the Company, under the Company's stock-based compensation plan, at the fair value of $ 1.81 per share, which represents the closing price of the Company's common stock on September 23, 2020.

Restricted stock units granted to Mr.

Armstrong, Mr.

Sheeran, and an aggregate of seven employees and one consultant of 50,000, 75,000 and an aggregate of 300,000, respectively, and 1/3 will vest on September 23, 2020, 1/3 on the one year anniversary of the grant date and 1/3 on the two year anniversary of the grant date.

The fair value of these units upon issuance amounted to $769,250.

On November 11, 2020, a total of 46,826 of restricted stock units were granted to three of the Company’s non-employee directors, under the Incentive Plan, at the calculated fair value of $ 2.39 per share, which represents the closing price of the Company’s common stock on November 11, 2020.

The restricted stock units granted on November 11, 2020 will vest 1/2 on November 11, 2020 and 1/2 on the one year anniversary of the grant date, subject to each individual’s continued service as a director of the Company through such date, and are payable six months after the termination of the director from the Company’s Board of Directors or death or disability.

The fair value of these units upon issuance amounted to $111,920.

On December 9, 2020, a total of 372,000 of restricted stock units were granted to Mr.

Galvin, under the Company's stock-based compensation plan, at the fair value of $ 3.28 per share, which represents the closing price of the Company's common stock on December 9, 2020.

Restricted stock units granted to Mr.

Galvin will vest 1/2 on December 9, 2020 and 1/2 on the first year anniversary of the grant date.

The fair value of these units upon issuance amounted to $1,220,160.

For the year ended December 31, 2020 and 2019 , the Company recognized stock-based compensation of $ 1,250,548 and $ 578,824 related to restricted stock units.

12 unchanged sentences

Legal Proceedings

We are subject to certain claims and lawsuits arising in the normal course of business.

We assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available.

Where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial statements.

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, we do not record an accrual, consistent with applicable accounting guidance.

Based on information currently available to us, advice of counsel, and available insurance coverage, we believe that our established accruals are adequate and the liabilities arising from the legal proceedings will not have a material adverse effect on our consolidated financial condition.

We note, 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 our results of operations for a particular period, depending upon the size of the loss or our income for that particular period.

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.

7 unchanged sentences

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 an Assignment Agreement, dated as of May 30, 2018, between Pizzarotti, Phipps and the Company (the “Assignment Agreement”), pursuant to which the Company purportedly provided 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 has moved to dismiss the case on those grounds.

The Company’s motion to dismiss was scheduled to be argued on March 25, 2020, but was adjourned by the court due to the social distancing requirements imposed as a result of the COVID-19 virus.

In the event that the court determines that the Assignment Agreement is a valid agreement, the Company nonetheless believes that the same was properly terminated and/or there are no damages, and, consequently, that the claims brought against the Company are without merit.

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 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 has opposed both motions and the Court has yet to rule on the same.

Pending the Court’s ruling on said motions discovery in the matter has been temporarily stayed.

Litigation is subject to many uncertainties, and the outcome of this action is not predicted with assurance.

5 unchanged sentences

Commitm ents and Contingencies (continued)

Vendor Litigation - On January 1, 2019, SG Blocks filed a suit against Teton Buildings, LLC (“Teton”) to recover breach of contract damages of approximately $ 2,100,000 plus attorneys’ fees related to the HOLA Community Partners construction project in Los Angeles, California (the “HOLA Project”), for which Teton was engaged by the Company to supply modular units in early 2017.

The Company’s complaint alleged that Teton failed to comply with specific product requirements with respect to the modular units for the HOLA Project and that Teton’s delay and product quality resulted in damages.

The Company’s claims include breach of contract, negligence, and breach of express warranty.

The lawsuit was filed as SG Blocks, Inc.

Teton Buildings, LLC

Case Number 2019-02827 in the United States District Court for the Southern District of Texas.

Teton filed for Chapter 11 bankruptcy on October 16, 2019, and filed a Suggestion of Bankruptcy in the Harris County Court on October 29, 2019.

The bankruptcy is currently pending in the United States Bankruptcy Court for Southern District of Texas, Houston Division styled In re:

(i) On January 1, 2019, SG Blocks commenced an action against Teton Buildings, LLC (“Teton”) in Harris County, Texas (“Teton Action”) to recover approximately $ 2,100,000 arising from defendant’s breach of the operative contract related to Heart of Los Angeles construction project in Los Angeles (the “HOLA Project”).

The Petition brought claims of breach of contract, negligence, and breach of express warranty.

The Firm did not represent the Company in connection with the Teton Action.

(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 $ 761,401.66 in actual and consequential damages, excluding attorney’s fees.

On October 16, 2019, Teton filed for Chapter 11 in the United States Bankruptcy Court for Southern District of Texas, Houston Division styled In re:

Teton Buildings, LLC and bearing the case number 19-35811.

Pursuant to the Suggestion of Bankruptcy, the state-court litigation has been stayed.

The Firm was engaged to file a proof of claim in the Teton Bankruptcy.

On February 11, 2020, the Company filed a proof of claim again Teton in the amount of $ 2,861,401.66 arising from the HOLA Project and the GVL Contract.

On or about March 16, 2020, the Bankruptcy Court converted Teton’s Chapter 11 reorganization case to a Chapter 7 liquidation case.

As such, notwithstanding the Company’s belief that its claims are meritorious and that it would have prevailed in the state court action, the Chapter 11 bankruptcy filing, and subsequent conversion to Chapter 7, make recovery against Teton much less likely.

Litigation is subject to many uncertainties, and the outcome of this action is not predicted with assurance.

On July 18, 2019, Ronald Sommers, the Chapter 7 Trustee, filed a Report of No Distribution stating that there is no property available for distribution to creditors.

On August 20, 2019, the Bankruptcy Court closed the Teton bankruptcy case.

As such, there is no prospect of any recovery against Teton.

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 (“Teton Action”), 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.

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.

HOLA Community Partners Matter - There is an ongoing dispute between the Company and HOLA Community Partners (“HOLA”), a California non-profit corporation, in connection with the parties’ Construction and Delivery Agreement, dated June 1, 2017, pursuant to which HOLA Community Partners hired the Company for design, engineering, fabrication, and installation services for the construction of the HOLA Project.

The Company claims that HOLA Community Partners owes the Company certain amounts due for work performed on the HOLA Project and extra costs incurred due to delays and impacts caused by HOLA Community Partners.

HOLA Community Partners disputes the amounts owed, and claims that the Company failed to meet its contractual obligations.

Neither party has commenced litigation as of the date of this Form 10-K.

HOLA, the Company, and EDI International, P.C.

(see below summary of litigation) have agreed to a three party mediation of their respective disputes.

Mediation was scheduled for March 27, 2020, but has been postponed due to the social distancing requirements imposed as a result of the COVID-19 virus.

SG Blocks, Inc.

EDI International, PC .- On June 21, 2019, SG Blocks filed a lawsuit against EDI International, PC, a New Jersey corporation, 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 Project.

v HOLA Community Partners, et.

On April 13, 2020, Plaintiff SG Blocks, Inc.

(“SG Blocks”) 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.

and (6) intentional interference with contractual relations.

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.

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.

The case is currently entering the discovery stage and a trial date has been set for March 22, 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.

SG Blocks, Inc.

claims that EDI International, PC, tortuously interfered with SG Blocks, Inc's economic relationship with HOLA Community Partners and Heart of Los Angeles Youth, Inc.

The complaint seeks in excess of $ 1,275,754 in damages.

EDI International, PC .-

On June 21, 2019, SG Blocks filed a lawsuit against EDI International, PC, a New Jersey corporation, 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 $ 30,428.71 in damages.

Litigation is pending.

The parties have agreed to mediate their dispute.

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.

Litigation is subject to many uncertainties, and the outcome of this action is not predicted with assurance.

Other Litigation

3 unchanged sentences

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) $ 372,638 in unpaid wages and bonuses and (ii) $ 300,000 due in severance (hereafter the “Action”).

The Former Employee has also named the Company’s third party payroll processing company Staff-One as a co-defendant.

The Company maintains that the Former Employee agreed to accept (and did receive) restricted stock units of the Company’s common stock in full satisfaction and payment of all alleged unpaid wages and bonuses that are claimed in the Action, and/or has otherwise been paid in full for all amounts claimed.

The Company further maintains that the Former Employee’s employment agreement precludes any entitlement to or liability for severance.

On March 25, 2020, the Former Employee filed an amended complaint raising additional claims of retaliation and indemnification.

The Company denies the merits of the claims set forth in the Former Employee’s amended complaint and/or asserts that valid defenses preclude any recovery, and intends to vigorously defend against the Action.

On March 25, 2020, the Former Employee filed an amended complaint raising additional claims of retaliation under the Fair Labor Standards Act, 29 U.S.C.

(“FLSA”), and contractual indemnification.

On April 27, 2020, the Company filed a motion to dismiss the Action.

The Company asserted that the Former Employee agreed to accept (and did receive) restricted stock units of the Company’s common stock in full satisfaction and payment of all alleged unpaid wages and bonuses that are claimed in the Action, and/or has otherwise been paid in full for all amounts claimed.

The Company further maintained that the Former Employee’s employment agreement precludes any entitlement to or liability for severance.

On June 15, 2020, the Court entered a decision granting in part and denying in part the Company’s motion to dismiss.

Specifically, the Court dismissed the Former Employee’s claim (i) for severance (in the amount of $ 300,000 ) and unpaid wages pursuant to the FLSA, but denied dismissal of the Former Employee’s claims for retaliation under the FLSA or unpaid wages allegedly due under the New York Labor Law.

The parties are in the middle of pre-trial discovery, having served discovery requests upon each other but have yet to respond to same or to schedule depositions of the parties (and/or third party witnesses).

No trial date has been set.

Litigation is subject to many uncertainties, and the outcome of this action is not predicted with assurance.

In addition, the Company is subject to other routine legal proceedings, claims, and litigation in the ordinary course of its business.

Defending lawsuits requires significant management attention and financial resources and the outcome of any litigation, including the matters described above, is inherently uncertain.

The Company does not, however, currently expect that the costs to resolve these routine matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.

SG Blocks, Inc.

Osang Healthcare Company, Ltd.

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 (2,000,000) units of Osang’s “Genefinder Plus RealAmp Covid-19 PCR Test” (the “Covid-19 Test”) for domestic and international distribution.

The Company has also asserted that Osang breached the covenant of good faith and fair dealing, fraudulently induced it to enter into the MSA, and violated §349 of the New York General Business Law’s prohibition of deceptive business practices.

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.

In April 2020, the Company entered into an amendment to its employment agreement, dated January 1, 2017, with Paul Gavin (the "Amendment"), to extend the term of employment to December 31, 2021, provide for an annual base salary of $400,000, provide for a performance bonus structure for a bonus of up to 50% of base salary upon the Company’s achievement of $2,000,000 EBITDA and additional performance bonus payments for the achievement of EBITDA in excess of $2,000,000 based on a percentage of the incremental increase in EBITDA (ranging from 10% of the incremental increase in EBITDA if the Company achieves over $2,000,000 and up to $7,000,000 in EBITDA, 8% of the incremental increase in EBITDA if the Company achieves over $7,000,000 and up to $12,000,000 in EBITDA and 3% of the incremental increase in EBITDA over $12,000,000), provide for a profits-based additional bonus of up to $250,000 in certain limited circumstances, and provide for one (1) year severance, plus a pro-rated amount of any unpaid bonus earned by him during the year as verified by the Company’s principal financial officer, if Mr.

Galvin is terminated without cause.

At the Company’s option, up to fifty (50%) percent of the EBITDA performance bonuses may be paid in restricted stock units if then available for grant under the Company’s Stock Incentive Plan.

All other terms of the employment agreement remain in full force and effect.

SG BLOCKS, INC.

AND SUBSIDIARIES

2 unchanged sentences

Subsequent Events

On January 2, 2020, the Company, received a written notice from the Listing Qualifications department of The Nasdaq Stock Market (“Nasdaq”) that the Company had been granted until June 29 , 2020 , to regain compliance with the minimum $ 1.00 bid price per share requirement of the Listing Rules of Nasdaq (the “Minimum Bid Price Requirement” ) as required by Nasdaq Listing Rule 5550(a)(2) for continued listing on Nasdaq.

On February 21, 2020, the Company received written notice from the Listing Qualifications department of Nasdaq notifying the Company that it has regained compliance with the Minimum Bid Price Requirement and stockholder’s equity rules.

On January 15, 2020, at the Special Meeting the Company’s stockholders approved (i) an amendment to the Company’s Certificate of Incorporation to effect a reverse stock split at a ratio to be determined in the discretion of the Board of Directors, the exact ratio within the range approved by the Company’s stockholders and (ii) an amendment to the Company’s Certificate of Incorporation to effect an increase in the authorized number of shares of common stock from 25,000,000 to 50,000,000 shares of common stock, subject to the discretion of the Board of Directors.

Thereafter, on February 4, 2020, the Company filed a Certificate of Amendment to its Certificate of Incorporation with the Secretary of State of the State of Delaware, to implement a 1-for-20 reverse split of its common stock, effective on February 5, 2020.

The transaction closed on January 22, 2019, on which date the Company loaned CPF GP 2019-1 LLC $ 400,000 and Mr.

Galvin personally loaned CPF GP $ 100,000 on behalf of the Company.

The Company Note and Galvin Note were issued pursuant to that certain Loan Agreement and Promissory Note, dated October 3, 2019 (the “Loan Agreement”), as amended on October 15, 2019 and November 7, 2019 by and between the CPF GP and the Company, and bear interest at five percent ( 5 %) per annum, payable, together with the unpaid principal amount of the promissory notes, on the earlier of the July 31, 2023 maturity date or upon the liquidation, redemption sale or issuance of a dividend upon the LLC interests in CPF MF 2019 -1 LLC, a Texas limited liability company of which CPF GP is the general partner;

provided, that the terms of the Galvin Note provide that all interest payments due to Mr.

Galvin under the Galvin Note shall be paid directly to, and for the benefit of, the Company.

In connection with the issuance of the Company Note and the Galvin Note, CPF GP, the Company and Mr.

Galvin entered into a Security Agreement, dated January 21, 2020, pursuant to which CPF GP granted a security interest in its LLC interests in CPF MF 2019-1 LLC to the Company and Mr.

Galvin to secure its obligations thereunder.

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 secured note in the aggregate principal amount of $ 200,000 (“Note”).

The Note is one of a series of up to $ 400,000 of notes that may be issued by the Company, bears interest at a rate of nine percent ( 9 %) per annum, due on July 31, 2023, and is secured under a Pledge Agreement, dated February 4, 2020, entered into with the investor by a security interest in the royalty payable to the Company under that certain Exclusive License Agreement, dated October 3, 2019, with CPF GP 2019 - 1 LLC.

The Company has the right to prepay the Note, in whole or in part, at any time and from time to time, without premium or penalty.

On February 24, 2020, the Company accepted service of process in connection with a suit filed by the Company’s former Chief Financial Officer, who resigned in August 2019, in United States District Court, Eastern District of New York (Case No.

20-CV-00550), alleging (i) $ 372,638 in unpaid wages and bonuses and (ii) $ 300,000 due in severance (hereafter the “Action”).

The Company believes the complaint lacks merit as by written agreement the employee agreed to accept restricted stock units of the Company’s common stock in full satisfaction and payment of substantially all alleged unpaid wages and bonuses that are claimed in the Action.

The Company further maintains that employee’s employment agreement expressly disclaims any entitlement to or liability for severance during the employee’s renewal term of employment.

Prior to the commencement of the Action, the employee had filed a wage claim against the Company with the Texas Workforce Commission claiming $ 397,638 in unpaid wages and bonuses (“Texas Wage Claim”).

The Texas Wage Claim was voluntarily dismissed by the employee upon the Company’s filing of a fraud complaint with the Labor Law Division of the Texas Workforce Commission.

On March 25, 2020, the Former Employee filed an amended complaint raising additional claims of retaliation and indemnification.

The Company denies the merits of the claims set forth in the Former Employee’s amended complaint and/or asserts that valid defenses preclude any recovery.

The Company intends to vigorously defend this action, and as appropriate, seek damages, attorneys’ fees, and litigation expenses from the employee .

In March 2020, the World Health Organization declared coronavirus (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 .

It has also disrupted the normal operations of many businesses.

The Company's use of third-party suppliers for production and shipping of certain products could be negatively impacted by the regional or global outbreak of illnesses, including the COVID- 19 coronavirus outbreak.

To date, the Company has experienced some delays in projects due to COVID-19.

In addition, the pandemic could result in an economic downturn that could affect the ability of the Company's customers and licensees to obtain financing and therefore impact 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.

Subsequent to December 31, 2020, the Company has received $ 703,437 in proceeds from the exercise of warrants to purchase an aggregate of 225,100 shares of its common stock.

In addition, subsequent to December 31, 2020, the Company has formed SGB Development Corp.

(“Development”).

Development will provide real property development to low and moderate income housing.

The projects for Development will be built by SG Echo.

In addition, Development has entered into a contract to acquire and develop an approximately 7-acre site in Austin, Texas, which is expected to yield a maximum of 225 condo units.

The Company executed our option to acquire Echo’s real estate holdings in Durant, OK, consisting of a 19 -acre site and all of its structures and we expect to close on the Echo site in the second quarter of 2021 .

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 9A. Controls and Procedures