What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-24 compared with 2021-11-15 · 120 added, 173 removed, 159 unchanged (65% of the section changed)

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and its subsidiaries.

The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and schedules included elsewhere in this Quarterly Report on Form 10-Q and with our audited condensed consolidated financial statements and notes for the year ended December 31, 2020, which were included in our Annual Report on Form 10-K for the year then ended December 31, 2020, as filed with the Securities and Exchange Commission (the "SEC") on April 15, 2021 and Amendment No.

1 thereto filed with the SEC on April 30, 2021 (the "2020 Form 10-K").

The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and schedules included elsewhere in this Quarterly Report on Form 10-Q and with our audited condensed consolidated financial statements and notes for the year ended December 31, 2021, which were included in our Annual Report on Form 10-K for the year then ended December 31, 2021, as filed with the Securities and Exchange Commission (the "SEC") on April 18, 2022 (the "2021 Form 10-K").

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

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

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.

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.

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.

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.

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;

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

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 us 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 the Company 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;

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

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

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

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

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

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

Risk Factors" to this Quarterly Report on Form 10-Q as well as our 2021 Form 10-K, 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.

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

The Company will not undertake to update any forward-looking statement herein or that may be made from time to time on behalf of the Company.

Using our proprietary technology and design and engineering expertise, we modify code-engineered cargo shipping containers and purpose-built modules for use for safe and sustainable commercial, industrial and residential building construction.

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

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

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

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

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

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

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

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

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

We are a provider of Modular (as defined below) facilities.

Prior to the COVID-19 pandemic, the Modules we supplied were primarily for retail, restaurant and military use and were manufactured by third party suppliers using our proprietary technology and design and engineering expertise, which modifies code-engineered cargo shipping containers and purpose-built modules for use for safe and sustainable commercial, industrial and residential building.

With our acquisition in September 2020 of Echo DCL, LLC (“Echo”), one of our key supply chain providers, we now have more control over the manufacturing process and have increased our product offerings to add Modules made out of wood.

In March 2020, in response to the COVID-19 pandemic we began increasing our focus on providing our Modules as health care facilities for deployable medical response solutions.

Our partnership with Clarity Lab Solutions, LLC (“Clarity Labs”) in Boca Raton, Florida, a CLIA-certified laboratory, has allowed us to provide laboratory testing in our Modules.

During 2021, we also began to focus on acquiring property to build multi-family housing communities that allows us to utilize the manufacturing services of Echo.

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 retail, 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 and entered into a five-year exclusive license with CPF GP 2019-1 LLC (“CPF”) under which CPF licensed on an exclusive basis our proprietary technology and intellectual property to develop and commercialize products in the United States (and its territories) for residential use, including, without limitation, single-family residences and multi-family residences, but excluding military housing.

On June 15, 2021, we terminated the exclusive license by mutual agreement and ceased our royalty fee model.‌

Prior to the COVID-19 pandemic, our core customer base was comprised of architects, landowners, builders and developers who use our Modules in commercial and residential structures.

Our cargo modified Modules allow 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, rather than consuming new steel and lumber.

Our technology and expertise is also used to purpose-build modules, or prefabricated steel modular units customized for use in modular construction (“SGPBMs” and, together with SGBlocks™, “Modules”), primarily to augment or complement an SGBlocks™ structure.

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

In May, we entered into a joint development agreement with Grimshaw Design to assist with the deployment of our D-Tec suite of prefabricated health facilities for on-site immediate COVID-19 testing.

In September 2020, we entered the U.S.

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

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

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

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

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

Echo catered to the military, education, administration facilities, healthcare, government, commercial and residential customers.

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

R ecent Business Developments

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

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

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

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

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

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

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.

This acquisition has allowed us to expand our reach for our Modules and has offered 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.

Results of Operations

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

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

Impact of Coronavirus (COVID- 19 )

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

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

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

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

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

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

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

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

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

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

Nine Months Ended September 30, 2021 and 2020:

For the Nine Months Ended September 30, 2021

For the Nine Months Ended September 30, 2020

Our operations for the three months ended March 31, 2022 and 2021 may not be indicative of our future operations.

Three Months Ended March 31, 2022 and 2021:

For the Three Months Ended

March 31, 2022

For the Three Months Ended

March 31, 2021

Total Revenue

Total Cost of revenue

Total Payroll and related expenses

Total Other Operating expenses

Total Operating loss

Total Other income

Net loss before income tax

Net income attributable non-controlling interest

Total Operating expenses

Total Operating profit (loss)

Total Other income (expense)

Net profit attributable non-controlling interests

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

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

During the quarter ended March 31, 2022, we derived revenue from the following three categories of sources:

construction services, engineering services and medical revenue .

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

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

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

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 2022.

Total revenue for the three months ended March 31, 2022 was $8,604,598 compared to $9,187,627 for the three months ended March 31, 2021.

This decrease of $583,029 or approximately 6 % was mainly driven by a decrease in revenue of approximately $ 1,512,894 in construction revenue partially offset by an increase in medical revenue of $ 929,865.

Cost of Revenue and Gross Profit

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

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

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

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

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

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

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

Cost of revenue was $6,118,163 for the three months ended March 31, 2022, compared to $8,631,002 for the three months ended March 31, 2021.

The decrease of $2,512,839 or a decrease of approximately 29%, was due to lower procurement and manufacturing costs of modifying containers and wood modular units, due to a decrease in the number of construction jobs in progress during the period.

Partially offset by higher medical related testing volumes which required an increase in procurement of COVID-19 tests and testing supplies.

Gross profit was $ 2,486,435 and $ 556,625 for the three months ended March 31, 2022 and 2021, respectively.

Gross profit margin percentage increased to approximately 29% for the three months ended March 31, 2022 compared to approximately 6% for the three months ended March 31, 2021.

Payroll and Related Expenses

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

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

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

Payroll and related expenses for the three months ended March 31, 2022 were $1,144,187 compared to $827,522 for the three months ended March 31, 2021.

This increase was primarily caused by an increase of approximately $362,904 in stock-based compensation expense partially offset by a $46,239 decrease in salaries.

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

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

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

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

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

Other operating expenses (general and administrative expenses, marketing and business development expenses, pre-project expenses) for the three months ended March 31, 2022 were 923,356compared to 890,560for the three months ended March 31, 2021 .

Other Income (Expense)

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

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

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

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

The interest expense for 2020 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.

Interest income for the three months ended March 31, 2022 was $12,783 mainly derived from bank interest and interest associated with an outstanding note receivable.

There was $17,470 of interest income for the three months ended March 31, 2021.

Interest expense for the three months ended March 31, 2022 and 2021 was $48,849 and $363, 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 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

Total Payroll and related expenses

Total Other Operating expenses

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

construction services, engineering services and medical revenue.

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

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

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

Cost of Revenue and Gross Profit

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

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

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

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

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

Payroll and Related Expenses

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

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

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

Results of Operations (continued)

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

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

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

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

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

Other Income (Expense)

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

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

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

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

Impact of Coronavirus (COVID-19)

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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.

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.

As of March 31, 2022 and December 31, 2021 , we had an aggregate of $13,146,418 and $13,024,381, 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.

Liquidity and Capital Resources (continued)

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.

During the third quarter of 2020, the Note to investor of $200,000 and unpaid accrued interest of $86,263 was converted into 73,665 shares of common stock.

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

In May 2020, we sold an aggregate of 6,900,000 shares of our common stock at a public offering price of $2.50 per share and on May 15, 2020, and received total net proceeds after deducting underwriting discounts and commissions and other offering expenses payable by us, were approximately $15,596,141.

In October 2021, we see we received aggregate gross proceeds of $11.55 million from our issuance to an investor (A) in a registered direct offering of (i) 975,000 shares of our common stock and (ii) pre-funded warrants to purchase an aggregate of 2,189,384 shares of common stock and (B) in a concurrent private placement Series A warrants to purchase up to 1,898,630 shares of Common Stock.

We continue to generate losses from operations.

At March 31, 2022 and December 31, 2021 we had a cash balance and short-term investment of $13,146,418 and $13,024,381, respectively.

As of March 31, 2022, our stockholders’ equity was $21,632,603, compared to $21,715,789 as of December 31, 2021.

Our net loss for the three months ended March 31, 2022 was $717,177 and net cash provided by operating activities was $3,257,027.

We anticipate our cash balance is sufficient to last at least twelve months from the date of this Quarterly Report on Form 10-Q.

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

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

Cash Flow Summary

Nine Months Ended

September 30,

Three 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 $1,032,417 during the nine months ended September 30, 2021, and $4,453,862 during the nine months ended September 30, 2020.

Operating activities provided net cash of $ 3,257,027 during the three months ended March 31, 2022, and used net cash of $2,183,116 during the three months ended March 31, 2021 .

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

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

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

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

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

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

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

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.

Cash used in operating activities increased by approximately $5,440,143.

Investing activities used net cash of $ 1,860,990 during the three months ended March 31, 2022 , and $990,388 net cash in the three months ended March 31, 2021 an increase in cash used of $870,602.

Financing activities used net cash of $1,274,000 during the three months ended March 31, 2022.

Financing activities provided $703,438 net cash during the three months ended March 31, 2021.

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 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.

As of March 31, 2022, we had ten projects totaling $7,591,863 under contract.

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

We expect that all of this revenue will be realized by December 31, 2022.

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

The decrease in backlog 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.

Our backlog increased by approximately $4,373,954 from December 31, 2021 to March 31, 2022.

We expect that all of this revenue will be realized by December 31, 2022.

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

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

Off-Balance Sheet Arrangements

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

As of March 31, 2022 and December 31, 2021 , 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 September 30, 2021 .

Accordingly, we have no liabilities recorded for these provisions as of March 31, 2022 .

Critical Accounting Policies and New Accounting Pronouncements

Critical Accounting Policies

Critical Accounting Estimates

Our condensed consolidated financial statements have been prepared using generally accepted accounting principles in the United States of America (“GAAP”).

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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 we granted an exclusive license for our technology as outlined in the ELA.

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.

The ELA is described below.

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

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

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

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

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, 2022.

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

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

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

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

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

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

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

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, 2022, we recognized $6,885,829 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)

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, 2021, resulted in no impairment loss.

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

There was no impairment during the three months ended March 31, 2022.

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, 2021, determined that there were no impairment losses.

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

There was no impairment during the three months ended March 31, 2022.

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, litigation expenses and stock compensation expense.

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

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Non-GAAP Financial Information (continued)

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

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

Three Months Ended

September 30, 2021

March 31, 2022

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.

March 31, 2021

Addback interest expense

Subtract interest income

Addback 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