What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-15 compared with 2021-08-16 · 111 added, 125 removed, 221 unchanged (52% of the section changed)

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and any factors discussed in "Part II - Item 1A .

Risk Factors" to this Quarterly Report on Form 10-Q as well as our 2020 Form 10-K as amended by the Amendment No.

Risk Factors" to this Quarterly Report on Form 10-Q as well as the Risk Factors set forth in Part I, Item 1A of our 2020 Form 10-K as amended by the Amendment No.

1 thereto, and other filings with the Securities Exchange Commission.

In addition, certain information presented below is based on unaudited financial information.

There can be no assurance that there will be no changes to this information once audited financial information is available.

As a result, readers are cautioned not to place undue reliance on forward-looking statements.

Readers are cautioned not to place undue reliance on forward-looking statements.

Forward-looking statements speak only as of the date of this report.

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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.

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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.

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

R ecent Business Developments

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.

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

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

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

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

On October 27, 2021, pursuant to the terms of a Securities Purchase Agreement (the “Purchase Agreement”) that we entered into on October 25, 2021 with an institutional investor (the “Purchaser”),we received approximately $11.55 million in gross proceeds and we sold to the Purchaser (A) in a registered direct offering (i) 975,000 shares (the “Public Shares”) of its Common Stock, par value $0.01 per share (the “Common Stock”), and (ii) pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to 2,189,384 shares (the “Pre-Funded Warrant Shares”) of Common Stock and (B) in a concurrent private placement, Series A warrants to purchase up to 1,898,630 shares (the “Common Stock Warrant Shares”) of Common Stock (the “Common Stock Warrants,” and together with the Public Shares and the Pre-Funded Warrants, the “Securities”) (the “Offering The Pre-Funded Warrants were immediately exercisable at a nominal exercise price of $0.001 and all Pre-Funded Warrants sold have been exercised.

The Common Stock Warrants have an exercise price of $4.80 per share, are exercisable upon issuance and will expire five years from the date of issuance.

On October 28, 2021, SG Echo LLC (“SG Echo”), a subsidiary of ours entered into a ten year Lease Agreement (the “Lease”) with May Properties, LLC, to lease an approximately 56,775 square foot facility located at 101 Waldron Road in Durant Oklahoma (the “Premises”)initially at a monthly base rent for the Premises will start at $15,991.63 which will increase at the rate of two percent (2%) on an annual basis up to a maximum monthly base rent of $19,111.47 .

The date on which SG Echo will become responsible for paying rent under the Lease (the “Lease Commencement Date”) will be the earlier of (i) the date SG Echo begins to operate its business on the Premises or (ii) ninety (90) days after October 28, 2021.

The Lease also grants SG Echo an option to purchase the Premises.

Pursuant to a Guaranty Agreement, dated October 28, 2021 (the “Guaranty”), SG Echo’s obligations under the Lease have been guaranteed by us.

In connection with the Lease, SG Echo entered into a Loan Agreement (“Loan Agreement”) with the Durant Industrial Authority (the “Authority”) pursuant to which it received $750,000 to be used for improvements on the Premises and issued to the Authority a non-interest bearing Forgivable Promissory Note in the principal amount of $750,000 (the “ Forgivable Note”).

The Forgivable Note is due on April 29, 2029 and guaranteed by us, provided, if no event of default has occurred under the Forgivable Note or Loan Agreement, one-third (1/3) of the balance of the Forgivable Note will be forgiven on April 29, 2027, one-half (1/2) of the balance of the Forgivable Note will be forgiven on April 29, 2028, and the remainder of the balance of the Forgivable Note will be forgiven on April 29, 2029.

The Loan Agreement includes a covenant by SG Echo to employ a minimum of 75 full-time employees in Durant Oklahoma and pay them no less than 1.5 times the federal minimum wage, and provides SG Echo 24 months to comply with the provision.

Results of Operations

Our operations for the 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.

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

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

Impact of Coronavirus (COVID- 19 )

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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.

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

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

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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

Nine Months Ended September 30, 2021 and 2020:

For the Nine Months Ended September 30, 2021

For the Nine Months Ended September 30, 2020

Total Revenue

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Total Other income

Total Loss before income tax

Net loss before income tax

Net income attributable non-controlling interest

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

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

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

construction services, engineering services and medical revenue.

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.

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

Total revenue for the nine months ended September 30, 2021 was $29,889,104 compared to $1,404,265 for the nine months ended September 30, 2020.

This increase of $28,484,839 or approximately 2028% was mainly driven by an increase in medical revenue of approximately $23,906,000 (lab testing, test kit sales and equipment but excluding revenue generated from construction of medical related projects) from mainly the collection of COVID-19 test samples with additional medical revenue from the opening and subletting of a testing facility in the Chicago area, an increase in revenue of approximately $1,747,000 in special use projects which includes one legacy contract commitment related to the SG Echo acquisition, an increase in revenue of approximately $2,257,000 in government projects, an increase in revenue of approximately of $400,000 in medical related construction projects and a moderate increase in construction revenue related to office and hotel/hospitality projects for approximately $412,000 and $330,000, respectively, offset by a decrease in revenue related to our retail and other projects for approximately $277,000 and $300,000 , respectively, for the nine months ended September 30, 2021, as compared to September 30, 2020.

Cost of Revenue and Gross Profit

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

Cost of revenue was $25,736,809 for the nine months ended September 30, 2021, compared to $789,445 for the nine months ended September 30, 2020.

The increase of $24,947,364 or a increase of approximately 3160%, is primarily related to higher testing volumes which required an increase in procurement of COVID-19 tests and testing supplies and higher procurement and manufacturing costs of modifying containers and wood modular units.

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

As previously stated our costs of revenue for the 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.

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

Gross profit was $ 4,152,295 and $ 614,820 for the nine months ended September 30, 2021 and 2020, respectively.

Gross profit margin as a percentage of revenue decreased to approximately 13.9% for the nine months ended September 30, 2021 compared to approximately 44% for the nine months ended September 30, 2020.

The decrease in gross profit margin percentage was primarily due to a non-recurring single legacy contract recognized in 2020 in the amount of $300,000 with no estimated costs and due to legacy contract commitments from the acquisition of SG Echo that were recognized in the nine months ended September 30, 2021 that incurred losses of approximately $4,600,000 due to escalations in material pricing related to COVID-19 and labor overages.

Payroll and Related Expenses

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

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.

Payroll and related expenses for the nine months ended September 30, 2021 were $2,865,606 compared to $1,344,009 for the nine months ended September 30, 2020.

This increase was primarily caused by an increase in salaries and additional head count hired to help manage the growth of SG Echo and other recently launched subsidiaries such as Chicago Airport Testing, Clarity Mobile Venture, and SG DevCorp of approximately $878,000, an increase of approximately $364,000 in stock-based compensation expense, and an increase of approximately $278,000 for a non-recurring employee pay-out expense recognized for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

We recognized $778,657 in stock-based compensation expense related to payroll and related expenses for the nine months ended September 30, 2021, compared to $414,563 for September 30, 2020.

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 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 operating expenses (general and administrative expenses, marketing and business development expenses, pre-project expenses) for the nine months ended September 30, 2021 were $5,098,821 compared to $2,386,374 for the nine months ended September 30, 2020.

The increase resulted primarily from an increase in rent expense of approximately $91,000 related to COVID-19 cold storage charges and rental expense for the Chicago Airport Testing facility, an increase in expenses associated with being a public company of approximately $157,000, an increase in information technology expense of approximately $196,000, an increase in insurance expense of approximately $193,000 for additional insurance coverage for COVID-19 medical operations and premium increases on existing policies, an increase in contract labor expense of approximately $296,000 with the majority related to the start-up and ongoing operations of the COVID-19 medical and SGB DevCorp projects.

We also had an increase of approximately $566,000 in laboratory medical expenses mainly from the start-up and continued operations in Wayne County, Michigan and LAX COVID-19 testing locations and an increase of $40,000 for real estate commissions related for Chicago Airport Testing, an increase in accounting fees of approximately $77,000, an increase of approximately $175,000 due to building maintenance and equipment rental expense for both LAX COVID-19 and Chicago Airport Testing facilities, an increase of approximately $523,500 for manager’s oversight fees related to Clarity Mobile Venture, an increase in depreciation expense of approximately $195,000, an increase in travel expense by approximately $68,000, an increase in bad debt expense of approximately $161,000 due from one legacy customer from the acquisition of SG Echo with a slight decrease in legal fees of approximately $211,000.

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

Other Income (Expense)

Interest income for the 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.

Interest income for the nine months ended September 30, 2021 was $41,240 mainly derived from bank interest and interest associated with an outstanding note receivable.

There was $38,497 of interest income for the nine months ended September 30, 2020.

Other income for the nine months ended September 30, 2021 and 2020 was $61,477 and $23,282, respectively.

Interest expense for the nine months ended September 30, 2021 and 2020 was $985 and $8,877, respectively.

The interest expense for 2020 w as mainly related to the Securities Purchase Agreement entered into on February 4, 2020 with an accredited investor.

Loss on asset disposal for the nine months ended September 30, 2021 and 2020 was $34,182 and $1,012, respectively.

Income Tax Provision

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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.

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

Three Months Ended September 30, 2021 and 2020 :

For the Three Months Ended September 30, 2021

For the Three Months Ended September 30, 2020

Total Revenue

Total Cost of revenue

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Total Other Operating expenses

Total Operating income (loss)

Total Other income

Total Income (Loss) before income tax

Total Operating loss

Total Other income (expense)

Net 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:

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

construction services, engineering services and medical revenue.

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.

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

Total revenue for the three months ended September 30, 2021 was $8,847,490 compared to $576,560 for the three months ended September 30, 2020.

This increase of $8,270,930 or approximately 1435% was mainly driven by an increase in medical revenue of approximately $8,164,000 (lab testing, test kit sales and equipment but excluding revenue generated from construction of medical related projects) from mainly the collection of COVID- 19 test samples with additional medical revenue from the opening and subletting of a testing facility in the Chicago area, an increase in revenue of approximately $80,000 in special use projects which includes one legacy contract commitment related to the SG Echo acquisition, an increase in revenue of approximately $74,000 in government projects, an increase in revenue of approximately $74,500 in multi-family projects offset by a moderate decrease in revenue of approximately $35,000 in medical related construction projects and approximately $81,000 for hotel/hospitality projects, respectively for the three months ended September 30, 2021, as compared to September 30, 2020.

Cost of Revenue and Gross Profit

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

Cost of revenue was $8,742,420 for the three months ended September 30, 2021, compared to $381,954 for the three months ended September 30, 2020 .

The increase of $8,360,466 or an increase of approximately 2189%, is primarily related to higher testing volumes which required an increase in procurement of COVID- 19 tests and testing supplies and higher procurement and manufacturing costs of modifying containers and wood modular units.

Gross profit was $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

Gross profit was $105,070 and $194,606 for the three months ended September 30, 2021 and 2020 , respectively.

Gross profit as a percentage of revenue decreased to approximately 1% for the three months ended September 30, 2021 compared to approximately 34% for the three months ended September 30, 2020.

The decrease in gross profit margin percentage was primarily due to a non-recurring single legacy contract recognized in 2020 in the amount of $ 300,000 with no estimated costs and due to legacy contract commitments from the acquisition of SG Echo that were recognized in 2021 that incurred losses of approximately $2,250,000 due to escalations in material pricing related to COVID-19 and labor overages

Payroll and Related Expenses

Payroll and related expenses for the three months ended 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 .

Payroll and related expenses for the three months ended September 30, 2021 were $1,236,420 compared to $679,863 for the three months ended September 30, 2020.

This increase was primarily caused by an increase in salaries and additional head count to help manage the growth of SG Echo and other recently launched subsidiaries such as Chicago Airport Testing, Clarity Mobile Ventures, and SG DevCorp of approximately $334,000, an increase of approximately $ 278,000 for a non-recurring employee pay-out expense and an decrease of approximately $57,000 in stock-based compensation expense, recognized for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

We recognized $246,236 in stock-based compensation expense related to payroll and related expenses for the three months ended September 30, 2021 , compared to $303,169 for September 30, 2020 .

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 operating expenses (general and administrative expenses, marketing and business development expenses, pre-project expenses) for the three months ended September 30, 2021 were $1,595,258 compared to $1,040,073 for the three months ended September 30, 2020.

The increase resulted primarily from an increase in expenses associated with being a public company of approximately $47,500, an increase in information technology expense of approximately $62,000 , an increase in insurance expense of approximately $94,000 for additional insurance coverage for COVID-19 medical operations and premium increases on existing policies , and an increase in accounting fees of $47,000 .

The Company had an increase of approximately $107,500 in laboratory medical expenses mainly from the start-up and continued operations in Wayne County, Michigan and LAX COVID-19 testing locations, an increase of approximately $171,000 for manager’s oversight fees related to Clarity Mobile Venture, an increase in depreciation expense of approximately $65,500, an increase of approximately $54,000 due to building maintenance and equipment rental expense for both LAX COVID-19 and Chicago Airport Testing facilities , an increase in travel expense by approximately $17,500.

The Company also had a decrease in contract labor and consulting expense of approximately $62,000 and a slight decrease in legal fees of approximately $107,000 .

Other Income (Expense)

Interest income for the three months ended 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.

Interest income for the three months ended September 30, 2021 and 2020 was $9,973 and $27,401 mainly derived from bank interest and interest associated with an outstanding note receivable.

Interest expense for the three months ended September 30, 2021 and 2020 was $293 and $2,614 and mainly related to the Securities Purchase Agreement entered into on February 4, 2020 with an accredited investor.

Other income for the three months ended September 30, 2021 and 2020 was $453 and $23,282 .

Loss on asset disposal for the three months ended September 30, 2021 and 2020 was $ 34,182 and $ 1,012 , respectively.

Liquidity and Capital Resources

As of 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.

As of September 30, 2021 and December 31, 2020, we had an aggregate of $3,290,702 and $13,010,356, respectively, of cash and cash equivalents.

To date, we have financed our operations from revenue generated from operations and sales of our equity and to a lesser extent debt financings.

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

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

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 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.

In October 2021, we completed a registered direct offering and concurrent private offering pursuant to which we sold an aggregate of 975,000 shares of common stock and and pre-funded warrants to purchase up to 2,189,384 shares of Common Stock and warrants to purchase 1,898,630 shares of Common Stock which resulted in net proceeds of approximately $ 10,520,000 after deducting underwriting commission and other expenses related to the offering .

At September 30, 2021 and December 31, 2020 we had a cash balance of $3,290,702 (which does not include the proceeds from the offering we consummated in October 2021) and $13,010,356, respectively.

As of September 30, 2021, our stockholders’ equity was $13,119,952, compared to $18,437,823 as of December 31, 2020.

Our net loss for the nine months ended September 30, 2021 was $3,744,582 and net cash used in operating activities was $1,032,417.

We anticipate our cash balance is sufficient to last at least twelve months from November 15, 2021.

We anticipate cost of revenue will increase once the Lease at 101 Waldon Road commences and SG Echo fulfills its obligations under the loan agreement to employ a minimum of 75 full time employees in Durant, Oklahoma and pay them no less than 1.5 times the federal minimum wages within a 24 month period.

We may 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

Six Months Ended

Nine Months Ended

September 30,

Net cash provided by (used in):

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Net increase (decrease) in cash and cash equivalents

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.

Operating activities used net cash of $1,032,417 during the nine months ended September 30, 2021, and $4,453,862 during the nine months ended September 30, 2020.

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

Cash used in operating activities decreased by approximately $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.

Cash used in operating activities decreased by approximately $3,421,000 primarily due to an decrease in working capital of approximately $3,287,000 due in part to increases in accrued losses from the legacy SG Echo contracts we assumed and increases in accounts payable with the additions of operations of new entities, SG DevCorp, Chicago Airport Testing, and SG Echo, from the corresponding period of the prior year.

In addition, we had an increase of approximately $307,000 in stock-based compensation, an increase of approximately $292,000 in depreciation expense, an increase of approximately $161,000 in bad debt expense and an increase in the overall net loss of approximately $681,000, in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Investing activities used net cash of $8,283,525 during the nine months ended September 30, 2021, and $1,442,602 during the nine months ended September 30, 2020.

Cash used in investing activities increased from the corresponding period of the prior year primarily due to the purchase of property, plant and equipment of approximately $4,756,000 which includes the land purchase for the Lago Vista - Austin project, purchase of intangible assets of $42,500, payments on assumed liabilities related to the Echo DCL, LLC acquisition of approximately $195,000, an investments in two SG DevCorp entities totaling approximately $3,464,000 and we received proceeds from the sale of equipment for $225,000.

Financing activities used net cash of $403,712 during the nine months ended September 30, 2021, and provided net cash of $17,318,358 during the nine months ended September 30, 2020.

C ash used by financing activities for the nine months ended September 30, 2021 increased by approximately $3,059,000 as compared to the nine months ended September 30, 2020 due to distributions paid to our non-controlling interest partner , offset by an increase of approximately $707,000 in proceeds from conversion of outstanding warrants to common stock and proceeds from short-term note payable of $1,948,000.

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

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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 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.

As of September 30, 2021, we had 15 projects totaling $20,074,693 under contract, which, if they all proceed to construction, will result in our constructing approximately 232,898 square feet of container and modular space.

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

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

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

The decrease in backlog of approximately $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.

The decrease in backlog of approximately $5,042,000 from December 31, 2020 is primarily attributable to one new contract we entered into during the first quarter of 2021 for approximately $1,325,000, one new contract in the third quarter of 2021 for approximately $857,000 and had one large partial contract cancellation of approximately ($1,300,000) and offset by work in progress or completed contracts during the first nine months of 2021 for approximately $5,983,000.

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

Off-Balance Sheet Arrangements

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

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

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

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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 June 30, 2021 .

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

Critical Accounting Policies and New Accounting Pronouncements

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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.

No revenue has been recognized under the ELA for the nine months ended September 30, 2021.

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

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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 .

During the nine months ended September 30, 2021, we recognized $23,757,962 in revenue related to activities through the two JV's, which are included in medical revenue on the accompanying consolidated statements of operations .

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

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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 six months ended June 30, 2021.

There was no impairment during the nine months ended September 30, 2021.

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

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

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

There was no impairment during the nine months ended September 30, 2021.

New Accounting Pronouncements

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We calculate EBITDA as net income (loss) before interest expense, income tax benefit (expense), depreciation and amortization.

We calculate Adjusted EBITDA as EBITDA before certain non-recurring adjustments such as loss on conversion of convertible debentures, change in fair value of financial instruments and stock compensation expense.

EBITDA and Adjusted EBITDA are presented because they are important metrics used by management as one of the means by which it assesses our financial performance.

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

Three Months Ended June 30, 2021

Three Months Ended June 30, 2020

Six Months Ended

June 30, 2021

Six Months Ended

June 30, 2020

Three Months Ended

September 30, 2021

Three Months Ended

September 30, 2020

Nine Months Ended

September 30, 2021

Nine Months Ended

September 30, 2020

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

Addback interest expense

Addback interest income

Subtract interest income

Addback depreciation and amortization

EBITDA (non-GAAP)

Addback loss on asset disposal

Addback litigation 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