What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-16 compared with 2021-05-20 · 167 added, 108 removed, 179 unchanged (61% of the section changed)

6 unchanged sentences

This discussion, particularly information with respect to our future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Special note regarding forward-looking statements" in this Quarterly Report on Form10-Q.

You should review the disclosure under the heading "Risk Factors" in this Quarterly Report on Form 10-Q for a discussion for important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.

You should review the disclosure under the heading "Risk Factors" in this Quarterly Report on Form 10-Q and under Part I, Item IA of the 2020 Form 10-K for a discussion for important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.

Special note regarding forward-looking statements

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All statements other than statements of historical facts are statements that could potentially be forward-looking.

The Company cautions that forward-looking statements involve risks and uncertainties and actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate or prediction is realized.

We caution that forward-looking statements involve risks and uncertainties and actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate or prediction is realized.

Factors that could cause or contribute to such differences include, but are not limited to:

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our ability to adapt our products and services to industry standards and consumer preferences and obtain general market acceptance of our products;

product shortages and the availability of raw materials, and potential loss of relationships with key vendors, suppliers or subcontractors;

supply chain problems, including product shortages and the availability of raw materials, and potential loss of relationships with key vendors, suppliers or subcontractors;

the seasonality of the construction industry in general, and the commercial and residential construction markets in particular;

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fluctuations in the price of our common stock, including decreases in price due to sales of significant amounts of stock;

potential dilution of the ownership of our current stockholders due to, among other things, public offerings or private placements by the Company or issuances upon the exercise of outstanding options or warrants and the vesting of restricted stock units;

potential dilution of the ownership of our current stockholders due to, among other things, public offerings or private placements by us or issuances upon the exercise of outstanding options or warrants and the vesting of restricted stock units;

the ability of our principal stockholders, management and directors to potentially exert control due to their ownership interest;

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Delaware law provisions discouraging, delaying or preventing a merger or acquisition at a premium price;

our ability to remain listed on the Nasdaq Capital Market and the possibility that our stock will be subject to penny stock rules;

our ability to remain listed on the Nasdaq Capital Market;

our classification as a smaller reporting company resulting in, among other things, a potential reduction in active trading of our common stock or increased volatility in our stock price;

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Rather than consuming new steel and lumber, our proprietary technology and design and engineering expertise allows for the redesign, repurpose and conversion of heavy-gauge steel cargo shipping containers into SGBlocks™, which are safe green building blocks for commercial, industrial, and residential building construction.

Prior to October 2019, our business model was solely a project-based construction model pursuant to which we were responsible for the design and construction of finished products that incorporated our technology primarily to customers in the multi-family housing, restaurant, military and education industries throughout the United States.

In October 2019, we changed our business model for our residential building construction to a royalty fee model when we entered into a five year exclusive license with CPF pursuant to which CPF licensed on an exclusive basis our proprietary technology, intellectual property, any improvements thereto, and any related permits, with the right to develop and commercialize products in the United States and its territories within the field of design and project management platforms for residential use, including, without limitation, single-family residences and multi-family residences, but specifically excluding military housing.

The Ridge Avenue Project, a residential housing project in Atlanta has also been excluded from the CPF license.

Now, in the United States with respect to residential construction (other than the excluded residential structures) we are not permitted to and are no longer responsible for constructing the Modules that are based on our technology or the related costs and instead that service (including with respect to agreement that were in existence as of the effective date of the license with CPF) is performed by CPF and its subcontractors and any revenue for such residential construction will no longer generated from sales of products directly to the end customer but instead will be generated from royalties received from CPF based on the gross revenue that CPF receives from sales of products that are based upon our technology.

Depending upon the success of this new business model, we may expand the licensing business model to commercial and industrial construction.

We also are continuing to seek opportunities and potential projects in other target markets, which may develop into licensing opportunities in the future.

Our business model originally was a project-based construction model pursuant to which we were responsible for the design, construction and sale of finished products that incorporated our technology to customers throughout the United States primarily in the multi-family housing, restaurant, military and education industries.

From October 2019 to June 2021, our business model for residential building construction became a royalty-fee model established under a five-year exclusive license with CPF MF 2019-1 LLC (“CPF”) pursuant to which CPF received an exclusive license for our proprietary technology for residential use, including, without limitation, single-family residences and multi-family residences, but specifically excluding military housing.

Our Ridge Avenue Project, a residential housing project in Atlanta, was also excluded from the license to CPF.

In June 2021, we terminated the license to CPF and recommenced our original project-based business model pursuant to which we design, construct and sell finished products to customers throughout the United States.

In April 2020, we expanded our product offerings and began focusing on the medical projects when we entered into the COVID-19 diagnostic market through the distribution of COVID-19 diagnostic tests .

We have subsequently entered into additional collaborations for the distribution of diagnostic tests as well as collaborations for the use of our modular technology for the building of medical test centers that will include COVID-19 testing.

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

In addition, in January 2021, the Company and other third parties formed Airport Testing LLC (“CAT”).

is in the business of marketing, selling, distributing leasing and otherwise commercially exploiting certain products and services in the COVID-19 testing and other medical industry.

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

During 2020, we entered into a joint venture, and have begun, to provide clinical lab testing, as well as test kit sales related to a separate distributer agreement.

In addition, in January 2021, we together with other third parties formed Chicago Airport Testing LLC (“CAT”).

CAT, is in the business of marketing, selling, distributing leasing and otherwise commercially exploiting certain products and services in the medical industry, including COVID-19 testing.

In September 2020, we acquired substantially all the assets of Echo, a Texas limited liability company, except for Echo's real estate holdings for which we obtained a right of first refusal, which we subsequently exercised on February 24, 2021.

Echo is a container/modular manufacturer based in Durant, Oklahoma specializing in the design and construction of permanent modular and temporary modular buildings and was one of our key supply chain partners.

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This acquisition has allowed us to expand our reach for our Modules and offers us an opportunity to vertically integrate a large portion of our cost of goods sold, as well as increase margins, productivity and efficiency in the areas of design, estimating, manufacturing and delivery.

On February 24, 2021, we announced the execution of our option to acquire Echo's real estate holdings.

We decided not to pursue the option to acquire Echo's real estate holdings in the second quarter of 2021.

R ecent Business Developments

In January 2021, the Company and other third parties formed Chicago Airport Testing LLC (“CAT”).

CAT is in the business of marketing, selling, distributing leasing and otherwise commercially exploiting certain products and services in the COVID-19 testing and other medical industry.

Additionally, during February 2021, the Company formed SGB Development Corp.

(“SGB”), which was formed for the purpose of real property development utilizing our technologies.

Subsequent to March 31, 2021, we acquired an approximately .50-acre site in Lago Vista, Texas which we plan to build approximately 270,000 square feet of one and two-bedroom condominium units manufactured at our factory in Durant, Oklahoma.

SGB will manage the development of this site.

On May 10, 2021, we acquired a 50+ acre site in Lago Vista, Texas (the “Lago Vista Site”) for $3,500,000, paid in cash, pursuant to an Unimproved Property Contract, dated February 25, 2021, with Northport Harbor LLC.

The acquired parcel sits on Lake Travis on the Colorado River in central Texas and we plan to build upscale condominiums, a health club, marina and other amenities.

Our current plan is to develop 277,000 square feet at the Lago Vista site and build 225 units on the Lago Vista Site with the first units estimated to be delivered in the second and third quarter of 2022 and completion of all units estimated to be fourth quarter of 2022, subject to adequate supply chain and personnel.

On May 31, 2021, our subsidiary SGB Development Corp.

(“SG DevCorp”), acquired a 50% membership interest in a limited liability company that is building affordable housing in the Atlanta, Georgia metropolitan area to be known as “Norman Berry Village”.

SGB DevCorp has partnered with CMC, a New York City-based real estate development firm with national expertise, with ZT Architecture & Land Development and Community Development Consortium providing design build services.

CMC has previously engaged SG Blocks to complete a design build project known as Ridge Avenue, also in Atlanta.

We expect the project to develop 125,000 square feet and build 138 units at Norman Berry Village with the first units estimated to be delivered in the second quarter of 2022 and completion of all units estimated to be fourth quarter of 2022, subject to adequate supply chain and personnel.

On June 15, 2021, we terminated the Exclusive License Agreement with CPF that we had entered into on October 3, 2019.

In connection with the termination we entered into a Settlement and Mutual Release Agreement (the “Settlement Agreement”) with CPF, the general partner (the “Licensee”) of CPF MF 2019-1 LLC (“CPF MF”), and Capital Plus Financial, LLC, a limited partner of the Licensee (“Capital Plus”) and an Assignment of Limited Rights Under Membership Interest Redemption Agreement, dated June 15, 2021, with Capital Plus and the Licensee in connection with the termination of that certain Exclusive License Agreement, dated as of October 3, 2019 (the “License Agreement”), with the Licensee Pursuant to the Settlement Agreement with CPF and Capital Plus, the License Agreement was terminated, we released CPF and CPF MF for any claims in exchange for releases from CPF and Capital Plus and we receiving an assignment of CPF’s right under certain circumstances to a $1.25 million redemption distribution from CPF MF under its Operating Agreement.

On June 24, 2021, SG DevCorp, as member, entered into an Operating Agreement, with Jacoby Development, Inc., a Georgia corporation (“JDI”), as manager, dated June 24, 2021 (the “Operating Agreement”), for JDI-Cumberland Inlet, LLC, a Georgia limited liability company (“JDI-Cumberland”), pursuant to which SG DevCorp acquired a 10% non-dilutable equity interest (“LLC Interest”) in JDI-Cumberland and contributed $3,000,000 in capital for the development of a 1,286 acre waterfront parcel in downtown historic St.

Marys, Georgia (the “Project”).

SG DevCorp in conjunction with Jacoby Development of Atlanta, Georgia expects to develop a mixed-use destination community.

The 1,286-acre waterfront parcel of land closed on June 30, 2021.

We expect that JDI-Cumberland Inlet, LLC will build 1,280 units of approximately 1,000 square feet per home for this Project with the first units estimated to be delivered in the third quarter of 2022 and completion of all units estimated to be completed over a three year period, subject to adequate supply chain and personnel.

The Operating Agreement provides JDI with the right, at its option, to purchase the LLC Interest from SG DevCorp on or before June 24, 2023 for $3,000,000, plus an amount equal to an annual internal rate of return (IRR) on such funds of forty (40%) percent (i.e., $1,200,000 annualized).

After June 24, 2023, the Operating Agreement provides JDI with the right, at its option, to purchase the LLC Interest from SG DevCorp for $3,000,000, plus an amount equal to an IRR of thirty-two and one-half (32.5%) percent (i.e., $975,000 annualized).

The Operating Agreement also provides that if JDI receives a good faith, bona fide written offer from an unaffiliated third party to purchase all or any portion of the Project, JDI shall first offer the Project to SG DevCorp at the same price and upon substantially the same terms as are contained in the third party offer.

In connection with our acquisition of the LLC Interest, our subsidiary, SG Echo, LLC (“SG Echo”), entered into a Fabrication and Building Services Agreement (“Building Services Agreement”) with JDI-Cumberland to design, fabricate and install various improvements for the Project using modular structures, pursuant to budgets prepared by SG Echo submitted for approval to JDI-Cumberland, including a marina, town center, apartments and single family units, townhomes, commercial, retail and lodging buildings/structures, eco-tourism park, camping yurts, cabins and cottages,.

The Building Services Agreement has an initial term of three years, with two-year automatic renewal provisions.

On July 14, 2021, SG DevCorp entered into a Real Estate Lien Note, dated July 14, 2021, in the principal amount of $2,000,000 (the “Note”), secured by a Deed of Trust, dated July 14, 2021, on its 50+ acre Lake Travis project site in Lago Vista, Texas and a related Assignment of Leases and Rents, dated July 8, 2021, for net loan proceeds of $1,958,233 after fees.

The Note has a term of one (1) year, provides for payments of interest only at a rate of twelve percent (12%) per annum and may be prepaid without penalty commencing nine (9) months after its issuance date.

If the Note is prepaid prior to nine (9) months after its issuance date, a 0.5% prepayment penalty is due.

SG DevCorp intends to use the proceeds of the Note for its development projects.

Results of Operations

Our operations for the three months ended March 31, 2021 and 2020 may not be indicative of our future operations.

Three Months Ended March 31, 2021 and 2020:

For the Three Months Ended

March 31, 2021

For the Three Months Ended

March 31, 2020

Our operations for the six months ended June 30, 2021 and 2020 may not be indicative of our future operations.

Our operations for the three and six months ended June 30,2021 includes the operations of SG Echo which was acquired in September 2020, Clarity Mobile Venture and Chicago Airport Testing and accordingly the operations for the three and six months ended June 30, 2020 do not include any revenue or costs associated with SG Echo, Clarity Mobile Venture and Chicago Airport Testing.

Impact of Coronavirus (COVID- 19 )

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

The worldwide spread of the COVID- 19 virus has resulted in, and may continue to result in, a global slowdown of certain economic activity which is likely to decrease demand for a broad variety of goods and services, including from our customers, while also resulting in delays in projects due to labor shortages and supplier disruptions for an unknown period of time until the disease is contained.

To date, we have experienced some delays and increased costs for materials, especially lumber, in projects due to COVID- 19 which we expect to continue to have an impact on our revenue and our results of operations, the size and duration of which we are currently unable to predict.

Any quarantines, the timing and length of containment and eradication solutions, travel restrictions, absenteeism by infected workers, labor shortages or other disruptions to the suppliers and contract manufacturers or customers would likely adversely impact our sales, and operating results and result in further project delays.

In addition, the pandemic could result in an economic downturn that could affect the ability of our customers and licensees to obtain financing and therefore impact demand for our products.

Order lead times could be extended or delayed and increases we have experienced in pricing could continue to increase.

Some products or services may become unavailable if the regional or global spread were significant enough to prevent alternative sourcing.

Accordingly, we are considering alternative product sourcing in the event that product supply becomes problematic.

We expect this global pandemic to have an impact on the Company's revenue and results of operations, the size and duration of which we are currently unable to predict.

In addition, to the extent the ongoing COVID- 19 pandemic adversely affects our business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties which we face.

Six Months Ended June 30, 2021 and 2020:

For the Six Months Ended

June 30, 2021

For the Six Months Ended

June 30, 2020

Total Revenue

Total Cost of revenue

Total Operating expenses

Total Payroll and related expenses

Total Other Operating expenses

Total Operating loss

Total Other income (expense)

Net profit attributable non-controlling interests

Total Other income

Total Loss before income tax

Net income attributable non-controlling interest

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

During the quarter ended March 31, 2021, we derived revenue from the following three categories of sources:

During the six months ended June 30, 2021, we derived revenue from the following three categories of sources:

construction services, engineering services and medical revenue.

The medical revenue source was a new source that commenced operations in the fourth quarter of 2020 and continued with strong revenue related to COVID-19 samples collected from our Clarity Mobile joint venture in the first quarter 2021.

Total revenue for the three months ended March 31, 2021 was $9,187,627 compared to $198,756 for the three months ended March 31, 2020.

This increase of $8,988,871 or approximately 4523% was mainly driven by an increase in revenue of approximately $5,896,000 in medical revenue (lab testing, test kit sales and equipment) from mainly the collection of COVID-19 test samples with additional medical revenue from the opening and subletting of the Chicago Area Testing facility, an increase in revenue of approximately $1,460,000 in special use projects which includes one legacy contract commitment related to the SG Echo acquisition, an increase in revenue of approximately $1,085,000 in government projects, an increase in revenue of approximately of $312,000 in medical related construction projects and a moderate increase in construction revenue related to office and hotel projects for approximately $131,000 and $166,000, respectively, for the three months ended March 31, 2021, as compared to March 31, 2020.

The medical revenue source was a new source and we commenced receipt of revenue from this source in the fourth quarter of 2020 when Clarity Mobile Venture LLC commenced operations and we continued to derive revenue from this source during the quarter ended June 30, 2021 with strong revenue related to COVID-19 samples collected from our Clarity Mobile joint venture in the first six months of 2021.

Total revenue for the six months ended June 30, 2021 was $21,041,614 compared to $827,705 for the six months ended June 30, 2020.

This increase of $20,213,909 or approximately 2442% was mainly driven by an increase in medical revenue of approximately $15,740,000 (lab testing, test kit sales and equipment but excluding revenue generated from construction of medical related projects) from mainly the collection of COVID-19 test samples with additional medical revenue from the opening and subletting of a testing facility in the Chicago area, an increase in revenue of approximately $1,665,000 in special use projects which includes one legacy contract commitment related to the SG Echo acquisition, an increase in revenue of approximately $2,180,000 in government projects, an increase in revenue of approximately of $435,000 in medical related construction projects and a moderate increase in construction revenue related to office and hotel/hospitality projects for approximately $385,000 and $410,000, respectively, offset by a decrease in revenue related to our retail and other projects for approximately $275,000 and $300,000 , respectively, for the six months ended June 30, 2021, as compared to June 30, 2020.

Cost of Revenue and Gross Profit

Cost of revenue was $7,979,446 for the three months ended March 31, 2021, compared to $152,775 for the three months ended March 31, 2020.

Cost of revenue was $16,994,389 for the six months ended June 30, 2021, compared to $407,491 for the six months ended June 30, 2020.

The increase of $16,586,898 or a increase of approximately 4070%, is primarily related to higher testing volumes which required an increase in procurement of COVID-19 tests and testing supplies and higher procurement and manufacturing costs of modifying containers and wood modular units.

Due to capabilities of Echo, we have now increased our sales of wood modular units to our customer base.

Gross profit was $ 1,208,181 and $ 45,981 for the three months ended March 31, 2021 and 2020, respectively.

Gross profit margin percentage decreased to approximately 13.2% for the three months ended March 31, 2021 compared to approximately 23.1% for the three months ended March 31, 2020.

The decrease in gross profit margin percentage was primarily due to a single legacy contract commitment from the acquisition of SG Echo that incurred a loss of approximately $1.0 million due to escalations in material pricing related to COVID-19 and labor overages.

As previously stated our costs of revenue for the six months ended June 30, 2021 include costs and expenses associated with the operations of SG Echo, Clarity Mobile Venture and Chicago Airport Testing and our costs of revenue for the six months ended June 30, 2020 do not include such costs or expenses.

Gross profit was $ 4,047,225 and $ 420,214 for the six months ended June 30, 2021 and 2020, respectively.

Gross profit margin percentage decreased to approximately 19% for the six months ended June 30, 2021 compared to approximately 51% for the six months ended June 30, 2020.

The decrease in gross profit margin percentage was primarily due to a non-recurring single legacy contract recognized in 2020 in the amount of $300,000 with no estimated costs and due to legacy contract commitments from the acquisition of SG Echo that were recognized in the six months ended June 30, 2021 that incurred losses of approximately $2,400,000 due to escalations in material pricing related to COVID-19 and labor overages.

Payroll and Related Expenses

Payroll and related expenses for the three months ended March 31, 2021 were $827,522 compared to $271,808 for the three months ended March 31, 2020.

This increase was primarily caused by an increase in salaries and additional head count to help manage the growth of SG Echo and other recently launched subsidiaries such as Chicago Airport Testing, Clarity Mobile Ventures, and SGB Development Corp.

of approximately $305,000, and an increase of approximately $247,000 in stock-based compensation expense, recognized for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

We recognized $286,186 in stock-based compensation expense related to payroll and related expenses for the three months ended March 31, 2021, compared to $38,764 for March 31, 2020.

Payroll and related expenses for the six months ended June 30, 2021 were $1,629,186 compared to $664,146 for the six months ended June 30, 2020.

This increase was primarily caused by an increase in salaries and additional head count hired to help manage the growth of SG Echo and other recently launched subsidiaries such as Chicago Airport Testing, Clarity Mobile Venture, and SGB Development Corp.

of approximately $543,000 and an increase of approximately $420,000 in stock-based compensation expense, recognized for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

We recognized $532,422 in stock-based compensation expense related to payroll and related expenses for the six months ended June 30, 2021, compared to $111,394 for June 30, 2020.

Other Operating Expenses (General and administrative expenses, Marketing and business development expense, and Pre-project expenses)

Other operating expenses (general and administrative expenses, marketing and business development expenses, pre-project expenses) for the three months ended March 31, 2021 were $1,542,116 compared to $523,652 for the three months ended March 31, 2020.

The increase resulted primarily from an increase in rent expense of approximately $46,000 related to COVID-19 cold storage charges and rental expense for the Chicago Airport Testing facility, an increase in information technology expense of approximately $83,000, an increase in insurance expense of approximately $17,500 for additional insurance coverage for Clarity Mobile Venture, an increase in contract labor expense of approximately $184,500 with the majority related to Clarity Mobile Venture call center support and Chicago Airport Testing for the start-up of operations.

The Company had an increase of approximately $382,000 in laboratory medical expenses mainly from the start-up of operations in Wayne County, Michigan, an increase of $31,500 for manager’s oversight fees related to Clarity Mobile Venture, an increase in depreciation expense of $50,000 and increase in marketing expense by approximately $56,000, We recognized no stock-based compensation expense related to legal expenses and marketing expenses for the three months ended March 31, 2021 and 2020.

Other operating expenses (general and administrative expenses, marketing and business development expenses, pre-project expenses) for the six months ended June 30, 2021 were $3,503,563 compared to $1,346,301 for the six months ended June 30, 2020.

The increase resulted primarily from an increase in rent expense of approximately $100,000 related to COVID-19 cold storage charges and rental expense for the Chicago Airport Testing facility, an increase in public expenses of approximately $109,000, an increase in information technology expense of approximately $113,000, an increase in insurance expense of approximately $99,000 for additional insurance coverage for COVID-19 medical operations, an increase in contract labor expense of approximately $466,000 with the majority related to the start-up and ongoing operations of the COVID-19 medical projects.

The Company had an increase of approximately $458,000 in laboratory medical expenses mainly from the start-up and continued operations in Wayne County, Michigan and LAX COVID-19 testing locations, an increase of approximately $352,000 for manager’s oversight fees related to Clarity Mobile Venture, an increase in depreciation expense of approximately $114,000, an increase in travel expense by approximately $68,000, an increase in bad debt expense of approximately $161,000 due from one legacy customer from the acquisition of SG Echo with a slight decrease in legal fees of approximately $109,000.

We recognized no stock-based compensation expense related to legal expense and marketing expense for the six months ended June 30, 2021 and $57,120 for the six months ended June 30, 2020.

Other Income (Expense)

Interest income for the three months ended March 31, 2021 was $17,470 mainly derived from bank interest and interest associated with an outstanding note receivable.

There was $4,863 of interest income for the three months ended March 31, 2020.

Interest expense for the three months ended March 31, 2021 and 2020 was $ 363 and $2,811, respectively.

Interest income for the six months ended June 30, 2021 was $31,267 mainly derived from bank interest and interest associated with an outstanding note receivable.

There was $11,096 of interest income for the six months ended June 30, 2020.

Other income for the six months ended June 30, 2021 was $61,024 related to miscellaneous income.

T here was no other income for the six months ended June 30, 2020.

Interest expense for the six months ended June 30 2021 and 2020 was $692 and $6,263, respectively.

Income Tax Provision

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

Impact of Coronavirus (COVID-19)

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

The worldwide spread of the COVID-19 virus is expected to result in a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods and services, including from our customers, while also resulting in delays in projects due to labor shortages and supplier disruptions for an unknown period of time until the disease is contained.

To date, we have experienced some delays in projects due to COVID-19 which we expect to have an impact on our revenue and our results of operations, the size and duration of which we are currently unable to predict.

In addition, the pandemic could result in an economic downturn that could affect the ability of our customers and licensees to obtain financing and therefore impact demand for our products.

Order lead times could be extended or delayed and increases we have experienced in pricing could continue to increase.

Some products or services may become unavailable if the regional or global spread were significant enough to prevent alternative sourcing.

Accordingly, we are considering alternative product sourcing in the event that product supply becomes problematic.

We expect this global pandemic to have an impact on the Company's revenue and results of operations, the size and duration of which we are currently unable to predict.

In addition, to the extent the ongoing COVID-19 pandemic adversely affects our business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties which we face.

Three Months Ended June 30, 2021 and 2020 :

For the Three Months Ended

June 30, 2021

For the Three Months Ended

June 30, 2020

T otal Reve nue

Total Cost of revenue

Total Payroll and related expenses

Total Other Operating expenses

Total Operating income (loss)

Total Other income

Total Income (Loss) before income tax

Net income attributable non-controlling interest

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

During the three months ended June 30, 2021, we derived revenue from the following three categories of sources:

construction services, engineering services and medical revenue.

The medical revenue source was a new source and we commenced receipt of revenue from this source in the fourth quarter of 2020 when Clarity Mobile Venture LLC commenced operations and we continued to derive revenue from this source during the quarter ended June 30, 2021 with strong revenue related to COVID- 19 samples collected from our Clarity Mobile joint venture in the three months ended June 30, 2021 .

Total revenue for the three months ended June 30, 2021 was $11,853,987 compared to $628,949 for the three months ended June 30, 2020.

This increase of $11,225,038 or approximately 1785% was mainly driven by an increase in medical revenue of approximately $9,785,000 (lab testing, test kit sales and equipment but excluding revenue generated from construction of medical related projects) from mainly the collection of COVID- 19 test samples with additional medical revenue from the opening and subletting of a testing facility in the Chicago area, an increase in revenue of approximately $206,000 in special use projects which includes one legacy contract commitment related to the SG Echo acquisition, an increase in revenue of approximately $1,097,000 in government projects, an increase in revenue of approximately of $185,000 in medical related construction projects and a moderate increase in construction revenue related to office and hotel/hospitality projects for approximately $248 ,000 and $245 ,000 , respectively, offset by a decrease in revenue related to our retail and other projects for approximately $199 ,000 and $ 300,000 , respectively, for the six months ended June 30, 2021, as compared to June 30, 2020.

Cost of Revenue and Gross Profit

Cost of revenue was $9,014,943 for the three months ended June 30, 2021, compared to $254,716 for the three months ended June 30, 2020 .

The increase of $8,760,227 or an increase of approximately 3439%, is primarily related to higher testing volumes which required an increase in procurement of COVID- 19 tests and testing supplies and higher procurement and manufacturing costs of modifying containers and wood modular units.

Gross profit was $2,839,044 and $ 374,233 for the three months ended June 30, 2021 and 2020 , respectively.

Gross profit percentage decreased to approximately 24% for the three months ended June 30, 2021 compared to approximately 60% for the three months ended June 30, 2020.

The decrease in gross profit margin percentage was primarily due to a non-recurring single legacy contract recognized in 2020 in the amount of $ 300,000 with no estimated costs and due to four legacy contract commitments from the acquisition of SG Echo that were recognized in 2021 that incurred losses of approximately $1,200,000 due to escalations in material pricing related to COVID-19 and labor overages

Payroll and Related Expenses

Payroll and related expenses for the three months ended June 30, 2021 were $801,664 compared to $392,338 for the three months ended June 30, 2020.

of approximately $253,000 and an increase of approximately $173,500 in stock-based compensation expense, recognized for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

We recognized $246,236 in stock-based compensation expense related to payroll and related expenses for the three months ended June 30, 2021 , compared to $72,630 for June 30, 2020 .

Results of Operations (continued)

Other Operating Expenses (General and administrative expenses, Marketing and business development expense, and Pre-project expenses)

Other operating expenses (general and administrative expenses, marketing and business development expenses, pre-project expenses) for the three months ended June 30, 2021 were $1,961,447 compared to $822,649 for the three months ended June 30, 2020.

The increase resulted primarily from an increase in rent expense of approximately $48,000 related to COVID- 19 cold storage charges and rental expense for the Chicago Airport Testing facility, an increase in public expenses of approximately $93,000, an increase in information technology expense of approximately $50,000 , an increase in insurance expense of approximately $ 81,000 for additional insurance coverage for COVID-19 medical operations, an increase in contract labor expense of approximately $281,000 with the majority related to the start-up and ongoing operations of the COVID-19 medical projects.

The Company had an increase of approximately $76,000 in laboratory medical expenses mainly from the start-up and continued operations in Wayne County, Michigan and LAX COVID-19 testing locations, an increase of approximately $321,000 for manager’s oversight fees related to Clarity Mobile Venture, an increase in depreciation expense of approximately $64,000, an increase in travel expense by approximately $34,500 , an increase in bad debt expense of $161,000 due from one legacy customer from the acquisition of SG Echo with a slight decrease in legal fees of $125,000 .

We recognized no stock-based compensation expense related to legal expense and marketing expense for the three months ended June 30, 2021 and $57,120 for the three months ended June 30, 2020.

Other Income (Expense)

Interest income for the three months ended June 30, 2021 and 2020 was $13,797 and $6,233 mainly derived from bank interest and interest associated with an outstanding note receivable.

Interest expense for the three months ended June 30, 2021 and 2020 was $329 and $3,452 and mainly related to the Securities Purchase Agreement entered into on February 4, 2020 with an accredited investor.

Other income for the three months ended June 30, 2021 was $ 61,024 related to miscellaneous income.

There was no other income for the three months ended June 30, 2020.

Liquidity and Capital Resources

As of March 31, 2021 and December 31, 2020, we had an aggregate of $10,540,290 and $13,010,356, respectively, of cash and cash equivalents and short-term investments.

Historically, our operations have primarily been funded through proceeds from equity and debt financings, as well as revenue from operations.

In June 2017, we completed a public offering, resulting in net proceeds of approximately $6,800,000 after deducting underwriting discounts and commissions and other expenses.

In July 2017, in connection with a public offering, the underwriters exercised their option to purchase 11,250 additional shares of common stock.

As a result of the exercise and closing of the option to purchase additional shares, total net proceeds from the public offering were approximately $7,900,000 after deducting underwriting discounts and commissions and related expenses.

In April 2019, we issued 42,388 shares of our common stock at a price of $22.00 per share through a Securities Purchase Agreement with certain institutional investors and accredited investors.

In August 2019, we issued 45,000 shares of our common stock at a price of $17.00 per share pursuant to the terms of an Underwriting Agreement to the public.

In December 2019, we completed the public offering where we issued 857,500 shares of common stock at a public offering price of $3.00 per share resulting in net proceeds of approximately $2,117,948 after deducting underwriting discounts and commissions and other expenses.

In our November 2019 debt financing, we received a cash payment in the aggregate amount of $375,000 pursuant to a Securities Purchase Agreement that we entered into with RedDiamond Partners LLC (the “Lender”), and we issued to the Lender a Debenture (the "Debenture") in the aggregate principal amount of $480,770 (representing an original issue discount of 22%), which Debenture was secured by a security interest in all of our existing and future assets, subject to existing security interests and exceptions.

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

The Debenture was repaid in full out of the proceeds of our December 2019 public offering.

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

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

As of June 30, 2021 and December 31, 2020, we had an aggregate of $2,323,599 and $13,010,356, respectively, of cash and cash equivalents.

On February 4, 2020, we entered into a Securities Purchase Agreement with an accredited investor, pursuant to which we issued to the investor a secured note in the aggregate principal amount of $ 200,000 (the “Note”), which bore interest at a rate of nine percent ( 9 %) per annum and was due on July 31, 2023, and was secured by a security interest in the royalty payable to us under that certain Exclusive License Agreement, dated October 3, 2019, with CPF GP 2019 - 1 LLC.

During the third quarter of 2020 , the Note to investor of $ 200,000 and unpaid accrued interest of $ 6,263 was converted into 73,665 shares of common stock.

In April 2020, we completed a public offering where we pursuant to which we 440,000 shares of common stock at a public offering price of $4.25 per share which resulted in net proceeds of approximately $1,522,339 after deducting underwriting discounts and commissions and other expenses related to the offering.

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

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

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

Liquidity and Capital Resources (continued)

In April 2020, we completed a public offering where we pursuant to which we sold 440,000 shares of common stock at a public offering price of $4.25 per share which resulted in net proceeds of approximately $1,522,339 after deducting underwriting discounts and commissions and other expenses related to the offering.

In May 2020, we completed a public offering pursuant to which we sold an aggregate of 6,900,000 shares of common stock at a public offering price of $2.50 per share which resulted in net proceeds of approximately $15,596,141 after deducting underwriting discounts and commissions and other expenses related to the offering.

We anticipate that we will continue to generate losses from operations until the fourth quarter of 2021.

At March 31, 2021 and December 31, 2020 we had a cash balance and short-term investment of $10,540,290 and $13,010,356, respectively.

As of March 31, 2021, our stockholders’ equity was $18,283,097, compared to $18,437,823 as of December 31, 2020.

Our net loss for the three months ended March 31, 2021 was $1,144,350 and net cash used in operating activities was $2,183,116.

We anticipate our cash balance is sufficient to last at least twelve months from May 20, 2021.

At June 30, 2021 and December 31, 2020 we had a cash balance of $2,323,599 and $13,010,356, respectively.

As of June 30, 2021, our stockholders’ equity was $16,840,723, compared to $18,437,823 as of December 31, 2020.

Our net loss for the six months ended June 30, 2021 was $993,925 and net cash used in operating activities was $1,307,944.

We anticipate our cash balance is sufficient to last at least twelve months from August 13, 2021.

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

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Cash Flow Summary

Three Months Ended

Six Months Ended

Net cash provided by (used in):

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Net increase (decrease) in cash and cash equivalents

Operating activities used net cash of $2,183,116 during the three months ended March 31, 2021, and $1,026,812 during the three months ended March 31, 2020.

Operating activities used net cash of $1,307,944 during the six months ended June 30, 2021, and $2,181,122 during the six months ended June 30, 2020.

Generally, our net operating cash flows fluctuate primarily based on changes in our profitability and working capital.

Cash used in operating activities increased by approximately $1,156,000 primarily due to an decrease in working capital of approximately $1,097,000, an increase of approximately $247,000 in stock-based compensation, an increase of approximately $90,000 in depreciation expense, an increase in the overall net loss of approximately $397,000, in the three months ended March 31, 2021 compared to three months ended March 31, 2020.

Investing activities used net cash of $990,388 during the three months ended March 31, 2021, and $400,000 net cash the three months ended March 31, 2020.

Cash used in investing activities increase from the corresponding period of the prior year primarily due to the purchase of property, plant and equipment of approximately, $862,000, purchase of intangible assets of $42,500, and payments on assumed liabilities related to the Echo DCL, LLC acquisition of approximately $86,000.

Financing activities provided net cash of $703,438 during the three months ended March 31, 2021, and $199,878 net cash during the three months ended March 31, 2020.

Cash provided by financing activities increased by $503,560 due to an increase in proceeds from conversion of outstanding warrants to common stock.

Cash used in operating activities decreased by approximately $873,178 primarily due to an decrease in working capital of approximately $442,000, an increase of approximately $364,000 in stock-based compensation, an increase of approximately $196,500 in depreciation expense, an increase of approximately $161,000 in bad debt expense and a decrease in the overall net loss of approximately $591,000, in the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

Investing activities used net cash of $8,243,216 during the six months ended June 30, 2021, and $650,000 during the six months ended June 30, 2020.

Cash used in investing activities increase from the corresponding period of the prior year primarily due to the purchase of property, plant and equipment of approximately $4,692,000 which included the land purchase for the Austin project totaling approximately $3,575,000, purchase of intangible assets of $42,500, payments on assumed liabilities related to the Echo DCL, LLC acquisition of approximately $157,500, and investments in two SGB Development entities totaling approximately $3,350,000.

Financing activities used net cash of $1,135,597 during the six months ended June 30, 2021, and provided net cash of $17,318,358 during the six months ended June 30, 2020.

Cash provided by financing activities decreased by approximately $17,318,000 due to a decrease in proceeds from public stock offerings and proceeds from long-term note payable in the six months ended June 30, 2021.

C ash used by financing activities for the six months ended June 30, 2021 increased by approximately $ 1,842,784 due to distributions paid to our non-controlling interest partner , offset by an increase of approximately $ 707,000 in proceeds from conversion of outstanding warrants to common stock.

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

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

As of March 31, 2021, we had 16 projects totaling $22,871,480 under contract, which, if they all proceed to construction, will result in our constructing approximately 230,481 square feet of container and modular space.

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

We expect that all of this revenue will be realized by March 31, 2023.

As of June 30, 2021, we had 14 projects totaling $21,035,831 under contract, which, if they all proceed to construction, will result in our constructing approximately 224,026 square feet of container and modular space.

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

We expect that all of this revenue will be realized by June 30, 2023.

Backlog may fluctuate significantly due to the timing of orders or awards for large projects and is not necessarily indicative of future backlog levels or the rate at which backlog will be recognized as revenue.

The decrease in backlog of approximately $2,246,000 from December 31, 2020 is primarily attributable to one new contract we entered into during the first quarter of 2021 for approximately $1,325,000 and offset by work in progress or completed contracts during the first three months of 2021 for approximately $3,300,000.

The decrease in backlog of approximately $4,081,000 from December 31, 2020 is primarily attributable to one new contract we entered into during the first quarter of 2021 for approximately $1,325,000 and offset by work in progress or completed contracts during the first six months of 2021 for approximately $5,328,000.

There can be no assurance that our customers will decide to and/or be able to proceed with these construction projects, or that we will ultimately recognize revenue from these projects in a timely manner or at all.

Off-Balance Sheet Arrangements

As of March 31, 2021 and December 31, 2020, we had no material off-balance sheet arrangements to which we are a party.

As of June 30, 2021 and December 31, 2020, we had no material off-balance sheet arrangements to which we are a party.

In the ordinary course of business, we enter into agreements with third parties that include indemnification provisions which, in our judgment, are normal and customary for companies in our industry sector.

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As a result, the estimated fair value of liabilities relating to these provisions is minimal.

Accordingly, we have no liabilities recorded for these provisions as of March 31, 2021 .

Accordingly, we have no liabilities recorded for these provisions as of June 30, 2021 .

Critical Accounting Policies and New Accounting Pronouncements

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

Critical Accounting Policies (continued)

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

On October 3, 2019, we entered into an Exclusive License Agreement (“ELA” ) pursuant to which it granted an exclusive license for its technology as outlined in the ELA.

On October 3, 2019, we entered into an Exclusive License Agreement (“ELA” ) pursuant to which we granted an exclusive license for our technology as outlined in the ELA.

The ELA is described below.

Under the ELA, we will receive royalty payments based upon gross revenues earned by the licensee for commercialized products within the field of design and project management platforms for residential use, including single-family residences and multi-family residences, but excluding military housing.

We have determined that the ELA grants the licensee a right to access our intellectual property throughout the license period (or its remaining economic life, if shorter), and thus recognizes revenue over time as the licensee recognizes revenue and we have the right to payment of royalties.

No revenue has been recognized under the ELA for the three months ended March 31, 2021.

Under the ELA, we were to receive royalty payments based upon gross revenues earned by the licensee for commercialized products within the field of design and project management platforms for residential use, including single-family residences and multi-family residences, but excluding military housing.

We have determined that the ELA granted the licensee a right to access our intellectual property throughout the license period (or its remaining economic life, if shorter), and thus recognizes revenue over time as the licensee recognizes revenue and we have the right to payment of royalties.

No revenue has been recognized under the ELA for the six months ended June 30, 2021.

On June 15, 2021 we terminated the Exclusive License Agreement with CPF that we had entered into on October 3, 2019.

We entered into a joint venture agreement with Clarity Lab Solutions, LLC (“Clarity Labs”) (the “JV”) in the fourth quarter of 2020 .

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

In addition, we formed Chicago Airport Testing, LLC which collects rental revenue Included in the consideration we expected to be entitled to receive, we estimate its contractual allowances, payer denials and price concessions.

During the three months ending March 31, 2021, we recognized $5,955,963 in revenue related to activities through the JV, which is included in medical revenue on the accompanying consolidated statements of operations .

Critical Accounting Policies (continued)

In addition, we formed Chicago Airport Testing, LLC which collects rental revenue.

During the six months ending June 30, 2021, we recognized $15,621,142 in revenue related to activities through the two JV's, which are included in medical revenue on the accompanying consolidated statements of operations .

We acquired a 10% non-dilutable equity interest for JDI-Cumberland Inlet, LLC and acquired a 50% membership interest in Norman Berry II Owner LLC in the second quarter of 2021.

We have determined we are not the primary beneficiary and thus will not consolidated the activities on the condensed consolidated financial statements.

We will use the equity method to report the activities as an investment in on our condensed consolidated financial statements.

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

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

There was no impairment during the three months ended March 31, 2021.

There was no impairment during the six months ended June 30, 2021.

Intangible assets – Intangible assets consist of $2,766,000 of proprietary knowledge and technology which is being amortized over 20 years, $97,164 of trademarks which is being amortized over 5 years, $47,800 of website fees which is being amortized over 5 years.

Our evaluation of intangible assets for impairment during the year ended December 31, 2020, determined that there were no impairment losses.

There was no impairment during the three months ended March 31, 2021.

There was no impairment during the six months ended June 30, 2021.

New Accounting Pronouncements

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The following is a reconciliation of EBITDA and Adjusted EBITDA to the nearest GAAP measure, net loss:

Three Months Ended March 31, 2021

Three Months Ended March 31, 2020

Three Months Ended June 30, 2021

Three Months Ended June 30, 2020

Six Months Ended

June 30, 2021

Six Months Ended

June 30, 2020

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

Addback interest expense

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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-Q

Item 2. Management’s Discussion and Analysis