OLENOX INDUSTRIES INC. 10-Q

ITEM 1. Financial Statements SG BLOCKS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets June 30, 2022 December 31, 2021 (Unaudited) Assets Current assets: Cash and cash equivalents $ 2,428,211 $ 13,024,381 Escrow - bond 4,000,000 — Accounts receivable, net 2,510,192 2,917,646 Contract assets — 41,916 Held for sale assets 4,392,541 — Inventories 928,120 1,273,825 Prepaid expenses and other current assets 933,036 656,279 Total current assets 15,192,100 17,914,047 Property, plant and equipment, net 4,806,650 6,839,943 Project development costs and other non-current assets 808,761 923,172 Goodwill 1,309,330 1,309,330 Right-of-use asset 2,779,191 1,210,053 Long-term note receivable 838,733 720,137 Intangible assets, net 2,013,028 2,095,232 Deferred contract costs, net 91,767 112,159 Investment in non-marketable securities 700,000 200,000 Investment in and advances to equity affiliates 3,599,943 3,599,945 Total Assets $ 32,139,503 $ 34,924,018 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable and accrued expenses $ 4,462,673 $ 7,568,851 Contract liabilities 1,769,604 1,437,579 Lease liability, current maturities 479,488 337,469 Due to affiliates — 264,451 Assumed liability 5,795 5,795 Short term note payable, net 1,997,843 1,971,960 Total current liabilities 8,715,403 11,586,105 Long-term note payable 750,000 750,000 Lease liability, net of current maturities 2,310,017 872,124 Total liabilities 11,775,420 13,208,229 Stockholders’ equity: Preferred stock, $ 1.00 par value, 5,405,010 shares authorized; none issued or outstanding — — Common stock, $ 0.01 par value, 25,000,000 shares authorized; 12,050,206 issued and outstanding as of June 30, 2022 and 11,986,873 issued and outstanding as of December 31, 2021 120,502 119,869 Additional paid-in capital 54,660,934 53,341,405 Accumulated deficit ( 35,241,757 ) ( 33,109,220 ) Total SG Blocks, Inc. stockholders’ equity 19,539,679 20,352,054 Non-controlling interest 824,404 1,363,735 Total stockholders’ equity 20,364,083 21,715,789 Total Liabilities and Stockholders’ Equity $ 32,139,503 $ 34,924,018 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 SG BLOCKS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations For the Three Months Ended June 30, For the Three Months Ended June 30, For the Six Months Ended June 30, For the Six Months Ended June 30, 2022 2021 2022 2021 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue: Construction services $ 4,213,264 $ 2,064,438 $ 5,881,648 $ 5,202,153 Engineering services 24,320 4,059 74,706 98,008 Medical revenue 3,317,387 9,785,490 10,203,215 15,741,453 Total 7,554,971 11,853,987 16,159,569 21,041,614 Cost of revenue: Construction services 4,265,021 3,164,695 5,942,581 7,258,235 Engineering services 10,739 32,197 53,892 41,967 Medical revenue 2,507,251 6,645,714 6,904,701 11,323,405 Total 6,783,011 9,842,606 12,901,174 18,623,607 Gross profit 771,960 2,011,381 3,258,395 2,418,007 Operating expenses: Payroll and related expenses 1,211,509 801,664 2,355,696 1,629,186 General and administrative expenses 796,812 1,060,499 1,576,833 1,720,300 Marketing and business development expense 91,495 72,438 234,830 143,065 Pre-project expenses — 847 - 10,980 Total 2,099,816 1,935,448 4,167,359 3,503,531 Operating income (loss) ( 1,327,856 ) 75,933 ( 908,964 ) ( 1,085,524 ) Other income (expense): Interest expense ( 73,126 ) ( 329 ) ( 121,975 ) ( 692 ) Interest income 10,979 13,797 23,762 31,267 Other income 372,407 61,024 491,309 61,024 Total 310,260 74,492 393,096 91,599 Income (loss) before income taxes ( 1,017,596 ) 150,425 ( 515,868 ) ( 993,925 ) Income tax expense — — - — Net income (loss) ( 1,017,596 ) 150,425 ( 515,868 ) ( 993,925 ) Add: net income attributable to noncontrolling interests 397,764 1,691,684 1,616,669 2,581,211 Net loss attributable to common stockholders of SG Blocks, Inc. $ ( 1,415,360 ) $ ( 1,541,259 ) $ ( 2,132,537 ) $ ( 3,575,136 ) Net loss per share attributable to SG Blocks, Inc. Basic and diluted $ ( 0.11 ) $ ( 0.17 ) $ ( 0.16 ) $ ( 0.41 ) Weighted average shares outstanding: Basic and diluted 13,226,451 8,822,278 13,110,821 8,783,806 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 SG BLOCKS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaud ited) $ 0.01 Par Value Common Stock Additional Paid-in Accumulated SG Blocks Stockholders' Noncontrolling Total Stockholders’ Shares Amount Capital Deficit Equity Interests Equity Balance at March 31, 2022 12,006,873 $ 120,069 $ 54,030,291 $ ( 33,826,397 ) $ 20,323,963 $ 1,308,640 $ 21,632,603 Stock-based compensation — — 631,076 — 631,076 — 631,076 I ssuance of restricted stock units 43,333 433 ( 433 ) — — — — N oncontrolling interest distribution — — — — — ( 882,000 ) ( 882,000 ) Net income (loss) — — — ( 1,415,360 ) ( 1,415,360 ) 397,764 ( 1,017,596 ) Balance at June 30, 2022 12,050,206 $ 120,502 $ 54,660,934 $ ( 35,241,757 ) $ 19,539,679 $ 824,404 $ 20,364,083 Balance at December 31, 2021 11,986,873 $ 119,869 $ 53,341,405 $ ( 33,109,220 ) $ 20,352,054 $ 1,363,735 $ 21,715,789 Stock-based compensation 20,000 200 1,319,962 — 1,320,162 — 1,320,162 Issuance of restricted stock units 43,333 433 ( 433 ) — — — — Noncontrolling interest distribution — — — — — ( 2,156,000 ) ( 2,156,000 ) Net income (loss) — — — ( 2,132,537 ) ( 2,132,537 ) 1,616,669 ( 515,868 ) Balance at June 30, 2022 12,050,206 $ 120,502 $ 54,660,934 $ ( 35,241,757 ) $ 19,539,679 $ 824,404 $ 20,364,083 $ 0.01 Par Value Common Stock Additional Paid-in Accumulated SG Blocks Stockholders' Noncontrolling Total Stockholders’ Shares Amount Capital Deficit Equity Interests Equity Balance at March 31, 2021 8,821,289 $ 88,213 $ 41,431,213 $ ( 24,310,423 ) $ 17,209,003 $ 1,074,094 $ 18,283,097 Stock-based compensation — — 246,236 — 246,236 — 246,236 Conversion of warrants to common stock 1,200 12 3,737 — 3,749 — 3,749 Noncontrolling interest distribution — — — — — ( 1,842,784 ) ( 1,842,784 ) Net income (loss) — — — ( 1,541,259 ) ( 1,541,259 ) 1,691,684 150,425 Balance at June 30, 2021 8,822,489 $ 88,225 $ 41,681,186 $ ( 25,851,682 ) $ 15,917,729 $ 922,994 $ 16,840,723 Balance at December 31, 2020 8,596,189 $ 85,962 $ 40,443,840 $ ( 22,276,546 ) $ 18,253,256 $ 184,567 $ 18,437,823 Stock-based compensation — — 532,422 — 532,422 — 532,422 Conversion of warrants to common stock 226,300 2,263 704,924 — 707,187 — 707,187 Noncontrolling interest distribution — — — — — ( 1,842,784 ) ( 1,842,784 ) Net income (loss) — — — ( 3,575,136 ) ( 3,575,136 ) 2,581,211 ( 993,925 ) Balance at June 30, 2021 8,822,489 $ 88,225 $ 41,681,186 $ ( 25,851,682 ) $ 15,917,729 $ 922,994 $ 16,840,723 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 SG BLOCKS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2022 For the Six Months Ended June 30, 2021 (Unaudited) (Unaudited) Cash flows from operating activities: Net loss $ ( 515,868 ) $ ( 993,925 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation expense 210,977 198,398 Amortization of intangible assets 82,204 82,230 Amortization of deferred license costs 20,392 20,392 Amortization of debt issuance costs 21,569 — Bad debt expense 7,024 161,202 Interest income on long-term note receivable ( 18,596 ) ( 18,596 ) Stock-based compensation 1,280,162 532,422 Loss on asset disposal 241 — Changes in operating assets and liabilities: Accounts receivable 400,430 ( 245,307 ) Escrow - bond ( 4,000,000 ) — Contract assets 41,916 ( 819,095 ) Inventories 345,705 ( 631,771 ) Prepaid expenses and other current assets ( 276,757 ) 16,800 Right of use asset 232,401 204,840 Accounts payable and accrued expenses ( 3,040,292 ) 1,958,175 Contract liabilities 332,025 ( 985,672 ) Due to affiliates ( 264,451 ) ( 583,791 ) Lease liability ( 221,627 ) ( 204,246 ) Net cash used in operating activities ( 5,362,545 ) ( 1,307,944 ) Cash flows from investing activities: Purchase of property, plant and equipment ( 1,751,999 ) ( 4,693,008 ) Purchase of intangible asset — ( 42,500 ) Proceeds from sale of equipment 760 — Repayment of promissory note ( 100,000 ) — Payment on assumed liability of acquired assets — ( 157,469 ) Project development costs and other non-current assets ( 726,386 ) — Investment in and advances to equity affiliates — ( 3,350,239 ) Investment in non-marketable securities ( 500,000 ) — Net cash used in investing activities ( 3,077,625 ) ( 8,243,216 ) Cash flows from financing activities: Proceeds from conversion of warrants to common stock — 707,187 Distribution paid to non-controlling interest ( 2,156,000 ) ( 1,842,784 ) Net cash used in financing activities ( 2,156,000 ) ( 1,135,597 ) Net decrease in cash and cash equivalents ( 10,596,170 ) ( 10,686,757 ) Cash and cash equivalents - beginning of period 13,024,381 13,010,356 Cash and cash equivalents - end of period $ 2,428,211 $ 2,323,599 Supplemental disclosure of non-cash investing and financing activities: Initial value of lease liability $ 1,801,584 $ — The accompanying notes are an integral part of these condensed consolidated financial statements. 5 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 1. Description of Business SG Blocks, Inc. (collectively with its subsidiaries, the “Company,” “we”, “us” or “our”) was previously known as CDSI Holdings, Inc., a Delaware corporation incorporated on December 29, 1993. On November 4, 2011, CDSI Merger Sub, Inc., the Company’s wholly-owned subsidiary, was merged with and into SG Building Blocks, Inc. (“SG Building,” formerly SG Blocks Inc.) (the “Merger”), with SG Building surviving the Merger and becoming a wholly-owned subsidiary of the Company. The Merger was a reverse merger that was accounted for as a recapitalization of SG Building, as SG Building was the accounting acquirer. Accordingly, the historical financial statements presented are the financial statements of SG Building. The building products developed with the Company's proprietary technology and design and engineering expertise are generally stronger, more durable, environmentally sensitive, and erected in less time than traditional construction methods. The use of the SGBlocks building structure typically provides between four to six points towards the Leadership in Energy and Environmental Design (“LEED”) certification levels, including reduced site disturbance, resource reuse, recycled content, innovation in design and use of local and regional materials. Due to the ability of SGBlocks to satisfy such requirements, the Company believes the products produced utilizing its technology and expertise is a leader in environmentally sustainable construction. There are three core product offerings that utilize the Company's technology and engineering expertise. The first product offering involves GreenSteel™ modules, which are the structural core and shell of an SGBlocks building. The Company procures the containers, engineer required openings with structural steel enforcements, paint the SGBlocks and then deliver them on-site, where the customer or a customer’s general contractor will complete the entire finish out and installation. The second product offering involves replicating the process to create the GreenSteel product and, in addition, installing selected materials, finishes and systems (including, but not limited to floors, windows, doors, interior painting, electrical wiring and fixtures, plumbing outlets and bathrooms, roofing system) and delivering SGBlocks pre-fabricated containers to the site for a third party licensed general contractor to complete the final finish out and installation. Finally, the third product offering is the completely fabricated and finished SGBlocks building (including but not limited to floors, windows, doors, interior painting, electrical wiring and fixtures, plumbing outlets and bathrooms, roofing systems), including erecting the final unit on site and completing any other final steps. The building is ready for occupancy and/or use as soon as installation is completed. Construction administration and/or project management services are typically included in the Company's product offerings. The Company also provides engineering and project management services related to the use and modification of Modules in construction. During 2020, the Company formed, SG Echo, LLC, a wholly owned subsidiary of the Company. SG Echo, LLC was formed to complete the business acquisition. The Company acquired substantially all the assets of Echo DCL, a Texas limited liability company, except for Echo's real estate holdings for which the Company 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 the Company's key supply chain partners. Echo caters to the military, education, administration facilities, healthcare, government, commercial and residential customers. This acquisition has allowed the Company to expand its reach for the Modules and offer an opportunity to vertically integrate a large portion of the Company's cost of goods sold, as well as increase margins, productivity and efficiency in the areas of design, estimating, manufacturing and delivery and to become the manufacturer of the Company's core container and modular product offerings. T he Company also entered into a joint venture with Clarity Lab Solutions LLC., to provide clinical lab testing related to COVID- 19 . As of January 2021 through the fourth quarter of 2021, the Company’s consolidated financial statements include the accounts of Chicago Airport Testing LLC (“CAT”). The Company had a variable interest in CAT as described further below. CAT is in the business of marketing, selling, distributing, leasing and otherwise commercially exploiting certain products and services in the COVID-19 testing and other medical industry. In addition, during 2021, the Company formed SGB Development Corp. (“SG DevCorp”), which is wholly-owned by the Company. SG DevCorp was formed with the purpose of real property development utilizing the Company's technologies. SG DevCorp has a minority interest in Norman Berry II Owners LLC and JDI-Cumberland Inlet LLC as described further below. 6 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six months ended June 30, 2022 and 2021 (Unaudited) Reverse Stock Split On February 5, 2020, the Company effected a 1-for-20 reverse stock split of its then-outstanding common stock, which has since been converted. All share and per share amounts set forth in the condensed consolidated financial statements of the Company have been retroactively restated to reflect the 1-for-20 reverse stock split as if it had occurred as of the earliest period presented and unless otherwise stated, all other share and per share amounts for all periods presented in these condensed consolidated financial statements have been adjusted to reflect the reverse stock split effected in February 2020. As of June 30, 2022, the Compa ny had 12,050,026 share s of common stock issued and outstanding . 2. Liquidity As of June 30, 2022, the Company had cash and cash equivalents of $ 2,428,211 and a backlog of approximately $ 4,183,116 . See Note 11 for a discussion of constructi on backlog. Based on our conversations with key customers, the Company anticipates its backlog to convert to revenue over the following period: 2022 Within 1 year $ 4,183,116 Total Backlog $ 4,183,116 The Company has incurred losses since its inception and has negative operating cash flows. Management has taken several actions to ensure that the Company will continue as a going concern. As described below, the Company has recently been able to raise substantial cash through equity offerings. In addition, as further described in these consolidated financial statements, the Company has begun to recognize revenue from new revenue streams. Management believes that these actions will enable the Company to continue as a going concern. The Company completed a public and concurrent private offering in October 2021, which resulted in net proceeds of approximately $ 10,488,000 . See Note 12 for a discussion on the public and concurrent private offering. The Company believes that it has adequate cash balances to meet obligations coming due in the next twelve months and further intends to meet its capital needs from revenue generated from operations and by containing costs, entering into strategic alliances, as well as exploring other options, including the possibility of raising additional debt or equity capital as necessary. There is, however, no assurance the Company will be successful in meeting its capital requirements prior to becoming cash flow positive. The Company does not have any additional sources secured for future funding, and if it is unable to raise the necessary capital at the times it requires such funding, it may need to materially change its business plan, including delaying implementation of aspects of such business plan or curtailing or abandoning such business plan altogether. With the global spread of the ongoing novel coronavirus ("COVID-19") pandemic during 2020, the Company implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on its employees and business. Any quarantines, the timing and length of containment and eradication solutions, travel restrictions, absenteeism by infected workers, labor shortages or other disruptions to the Company's suppliers and contract manufacturers or customers would likely adversely impact the Company's sales and operating results and result in further project delays. In addition, the pandemic could result in an economic downturn that could affect the demand for the Company's products. Order lead times could be extended or delayed and pricing could increase. Some products or services may become unavailable if the regional or global spread were significant enough to prevent alternative sourcing. Accordingly, the Company is considering alternative product sourcing in the event that product supply becomes problematic. The Company expects this global pandemic to have an impact on the Company's revenue and results of operations, the size and duration of which the Company is currently unable to predict. In addition, to the extent the ongoing COVID-19 pandemic adversely affects the Company's business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties which the Company faces. The Company has been impacted by COVID-19 with supply chain distributions, absenteeism by infected workers and skilled labor shortages which has caused delays in projects and the Company could be further impacted if the COVID-19 pandemic continues. 7 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 3. Summary of Significant Accounting Policies Basis of presentation and principals of consolidation – The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to the Current Report on Form 10-Q and Article 8 Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. The condensed financial statements and notes should be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2021 included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission on April 18, 2022. In the opinion of management, all adjustments, consisting of normal accruals, considered necessary for a fair presentation of the interim financial statements have been included. Results for the six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. Recently adopted accounting pronouncements - New accounting pronouncements implemented by the Company are discussed below or in the related notes, where appropriate. Accounting estimates – The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Significant areas that require the Company to make estimates include revenue recognition, stock-based compensation, stock warrants liabilities and allowance for credit losses. Actual results could differ from those estimates. Operating cycle – The length of the Company’s contracts varies, but is typically between six to twelve months. In some instances, the length of the contract may exceed twelve months. Assets and liabilities relating to contracts are included in current assets and current liabilities, respectively, in the accompanying balance sheets as they will be liquidated in the normal course of contract completion, which at times could exceed one year . Reclassification – Certain prior year balances were reclassed to conform to current period presentation. There was no impact to income (loss) or cash flows as a result of these reclassifications . Revenue recognition – The Company determines, at contract inception, whether it will transfer control of a promised good or service over time or at a point in time, regardless of the length of contract or other factors. The recognition of revenue aligns with the timing of when promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. To achieve this core principle, the Company applies the following five steps in accordance with its revenue policy: ( 1 ) Identify the contract with a customer ( 2 ) Identify the performance obligations in the contract ( 3 ) Determine the transaction price ( 4 ) Allocate the transaction price to performance obligations in the contract ( 5 ) Recognize revenue as performance obligations are satisfied On certain contracts, the Company applies recognition of revenue over time, which is similar to the method the Company applied under previous guidance (i.e. percentage of completion). Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress toward complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. 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. 8 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 3. Summary of Significant Accounting Policies (continued) For product or equipment sales, the Company applies recognition of revenue when the customer obtains control over such goods, which is at a point in time. On October 3, 2019, the Company entered into an Exclusive License Agreement (“ELA” ) pursuant to which it granted an exclusive license for its technology as outlined in the ELA. The ELA is described below. Under the ELA, the Company was 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. The Company has determined that the ELA granted the licensee a right to access the Company’s intellectual property throughout the license period (or its remaining economic life, if shorter), and thus recognizes revenue over time as the licensee recognized revenue and the Company has the right to payment of royalties. On June 15, 2021, the Company terminated the ELA that was executed on October 3, 2019 which is discussed below. CMC Right of First Refusal Agreement – On October 9, 2019, the Company entered into a Right of First Refusal Agreement (the “ Agreement ”) with CMC Development LLC (“ CMC ”), which had a term of two ( 2 ) years. Under the Agreement, the Company had a right of first refusal with respect to being engaged as a designer and builder of any real estate projects for which CMC has secured the rights to develop and in which CMC has a greater than fifty percent ( 50 %) interest in the owner or developer entity and has the right to select the builder for such real estate project (the “ROFR Rights”). In exchange for such ROFR Rights, the Company agreed to issue to CMC 2,500 shares of restricted stock of the Company’s common stock, of which 1,250 shares vested on March 31, 2021 and the remaining 1,250 shares was to vest and be issued on September 30, 2021 unless the Agreement is earlier terminated. In the event that the Agreement was earlier terminated, CMC was entitled to receive the entire amount of such restricted stock that had vested as of such earlier termination date, but in no event less than 1,250 shares of such restricted stock. The Agreement also provided for customary indemnification and confidentiality obligations between the parties. The 2,500 shares of restricted stock of the Company's common stock has yet to be issued to CMC. The Agreement also provided that CMC has engaged the Company to build and design, in the aggregate, approximately 100 residential and commercial units at 1100 Ridge Avenue, Atlanta, Georgia, which is known as the “Ridge Avenue, Atlanta Project.” The total expected gross revenue to the Company for the project to be derived by CMC is approximately $ 16,900,000 . The project is a residential project but it was not subject to the recently terminated ELA. The planning stage of the project was initially delayed due to COVID-19. The Company is no longer participating on Ridge Avenue as CMC has decided to proceed with this project as a traditional construction build. The Company previously reported this as a cancellation within the Company's backlog footnote, see Note 11 on this discussion. No revenue has been recognized under the Agreement during the six months ended June 30, 2022 and 2021. The Company 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. Included in the consideration the Company expected to be entitled to receive, the Company estimates its contractual allowances, payer denials and price concessions. In addition, the Company formed Chicago Airport Testing, LLC which collected rental revenue from subleasing to a consortium of government entities assisting in COVID-19 testing. For the six months ended June 30, 2022 and 2021, the Company recognized approximately $ 10,200,000 and $ 15,600,000 related to activities through these two joint ventures, which is included in medical revenue on the accompanying consolidated statements of operations. Disaggregation of Revenues The Company’s revenues are principally derived from construction and engineering contracts related to Modules, and medical revenue derived from lab testing and test kit sales . The Company's contracts are with customers in various industries. Revenue recognized at a point in time and recognized over time were $ 10,203,215 and $ 5,956,354 , respectively, for the six months ending June 30, 2022. Revenue recognized at a point in time and recognized over time were $ 15,750,903 and $ 5,290,711 , respectively, for the six months ending June 30, 2021 . Revenue recognized at a point in time and recognized over time were $ 3,317,387 and $ 4,237,584 , respectively, for the three months ending June 30, 2022 . Revenue recognized at a point in time and recognized over time were $ 9,785,490 and $ 2,068,497 , respectively, for the three months ending June 30, 2021 . 9 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 3. Summary of Significant Accounting Policies (continued) The following tables provide further disaggregation of the Company’s revenues by categories: Three Months Ended June 30, Revenue by Customer Type 2022 2021 Construction and Engineering Services: Government $ — — % $ 1,097,660 9 % Hotel 240,302 3 % 283,355 2 % Medical - C onstruction — — % 242,533 2 % Multi-Family (includes Single Family) — — % ( 22,398 ) — % Office 3,988,875 53 % 258,069 2 % Retail 8,407 — % 2,688 — % Special Use — — % 206,590 2 % Subtotal 4,237,584 56 % 2,068,497 17 % Medical Revenue: Medical (lab testing, kit sales and equipment) 3,317,387 44 % 9,785,490 83 % Total revenue by customer type $ 7,554,971 100 % $ 11,853,987 100 % Six Months Ended June 30, Revenue by Customer Type 2022 2021 Construction and Engineering Services: Government $ 39 — % $ 2,183,142 11 % Hotel 1,137,547 7 % 453,781 2 % Medical - C onstruction — — % 494,093 2 % Multi-Family (includes Single Family) 86,034 1 % 22,348 — % Office 4,717,750 29 % 435,461 2 % Retail 5,344 — % 44,701 — % Special Use 9,640 — % 1,666,635 8 % Subtotal 5,956,354 37 % 5,300,161 25 % Medical Revenue: Medical (lab testing, kit sales and equipment) 10,203,215 63 % 15,741,453 75 % Total revenue by customer type $ 16,159,569 100 % $ 21,041,614 100 % Contract Assets and Contract Liabilities Accounts receivable are recognized in the period when the Company’s right to consideration is unconditional. Accounts receivable are recognized net of an allowance for credit losses. A considerable amount of judgment is required in assessing the likelihood of realization of receivables. The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from long-term construction services when revenue recognized under the cost-to-cost measure of progress exceeds the amounts invoiced to customers, as the amounts cannot be billed under the terms of our contracts. Such amounts are recoverable from customers based upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract. Contract assets are generally classified as current within the condensed consolidated balance sheets. Contract liabilities from construction and engineering contracts occur when amounts invoiced to customers exceed revenues recognized under the cost-to-cost measure of progress. Contract liabilities additionally include advanced payments from customers on certain contracts. Contract liabilities decrease as the Company recognizes revenue from the satisfaction of the related performance obligation. Contract liabilities are generally classified as current within the condensed consolidated balance sheet. 10 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 3. Summary of Significant Accounting Policies (continued) A lthough the Company believes it has established adequate procedures for estimating costs to complete on open contracts, it is at least reasonably possible that additional significant costs could occur on contracts prior to completion. The Company periodically evaluates and revises its estimates and makes adjustments when they are considered necessary. Deferred Contract Costs - Prior to entering into the ELA, the Company was subject to an agreement to construct and develop a certain property (“Original Agreement”), which now is subject to the ELA. Upon entering into the ELA, the Company is no longer obliged to its Original Agreement. Upon entering the ELA, the Company had an outstanding accounts receivable balance of $ 306,143 , which was forfeited and recognized this amount as deferred contract costs. This amount was offset by $ 102,217 , which was reimbursement from the licensee for project costs on this project. The Company incurred total deferred contract costs of $ 203,926 . The Company considered this amount an incremental cost of obtaining that ELA, because the Company expects to recover those costs through future royalty payments. The Company plans to amortize the asset over sixty months , which is the initial term of the ELA because the asset relates to the services transferred to the customer during the contract term. As of June 30, 2022, accumulated amortization related to deferred contract costs amounted to $ 112,159 . During the six months ended June 30, 2022 and 2021, amortization expense relating to the deferred contract costs amounted to $ 20,393 and $ 20,392 , respectively, and is included in general and administrative expenses on the accompanying condensed consolidated statement of operations. As previously mentioned, the ELA was terminated on June 15, 2021 but the Company expects to recover the deferred contract costs from the Assignment of Limited Rights Under Membership Interest Redemption Agreement, dated June 15, 2021 as described below. Exclusive License Agreement – On Oc tober 3, 2019, as amen ded on October 17, 2019, the Company entered into the ELA with CPF GP 2019-1 LLC (the “Licensee”), pursuant to which the Company granted the Licensee an exclusive license (the “License”) solely within the United States and its legal territories to the Company’s technology, intellectual property, any improvements thereto, and any related permits, in order to develop and commercialize products within the field of design and project management platforms for residential use, including single-family residences and multi-family residences, but excluding military housing. The Ridge Avenue Project has also been excluded from the License. The License Agreement has an initial term of five (5) years and will automatically renew for subsequent five (5) year periods. The License Agreement provides for customary terminating provisions, including the right by the Company to terminate if the Licensee fails to make minimum royalty payments (as described below). In consideration for the License, during the initial term, the Licensee agreed to pay the Company a royalty of (x) five percent (5%) on the first $20,000,000 of gross revenues derived from the Licensee’s commercialization of the License (net of customary discounts, sales taxes, delivery charges, and amounts for returns) (the “Gross Revenues”), (y) four and one-half percent (4.5%) on the next $30,000,000 of Gross Revenues, and (z) five percent (5%) on all Gross Revenues thereafter (collectively, the “Royalty”) , subject to the following minimum royalty payments determined on a cumulative basis during the initial term: $ 500,000 in year 1, $ 750,000 in year 2, $ 1,500,000 in year 3, $ 2,000,000 in year 4, and $ 2,500,000 in year 5. In addition, to the extent the Licensee sublicensed any aspect of the License to a sub-licensee, the Licensee was obligated to pay to the Company fifty percent ( 50 %) of all payments received by the Licensee from such sublicensee. The ELA provided for customary indemnification obligations between the parties and further provides that the Licensee will indemnify the Company for any claims arising out of the commercialization of the License by the Licensee or any of its subsidiaries, contractors, or sublicensees. On June 15, 2021, the Company terminated the ELA. In connection with the termination, the Company 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. Pursuant to the Settlement Agreement with CPF and Capital Plus, the ELA was terminated, the Company released CPF and CPF MF for any claims in exchange for releases from CPF and Capital Plus and the Company received an assignment of CPF’s right under certain circumstances to a $ 1.25 million redemption distribution from CPF MF under its Operating Agreement. 11 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 3. Summary of Significant Accounting Policies (continued) Bu siness Combinations - The Company accounts for business acquisitions using the acquisition method of accounting in accordance with ASC 805 “Business Combinations”, which requires recognition and measurement of all identifiable assets acquired and liabilities assumed at their fair value as of the date control is obtained. The Company determines the fair value of assets acquired and liabilities assumed based upon its best estimates of the acquisition-date fair value of assets acquired and liabilities assumed in the acquisition. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired. Subsequent adjustments to fair value of any contingent consideration are recorded to the Company’s consolidated statements of operations. Costs that the Company incurs to complete the business combination are charged to general and administrative expenses as they are incurred. Variable Interest Entities – The Company accounts for certain legal entities as variable interest entities (“VIE"). When evaluating a VIE for consolidation, the Company must determine whether or not there is a variable interest in the entity. Variable interests are investments or other interests that absorb portions of an entity’s expected losses or receive portions of the entity’s expected returns. If it is determined that the Company does not have a variable interest in the VIE, no further analysis is required and the VIE is not consolidated. If the Company holds a variable interest in a VIE, the Company consolidates the VIE when there is a controlling financial interest in the VIE and therefore are deemed to be the primary beneficiary. The Company is determined to have a controlling financial interest in a VIE when it has both the power to direct the activities of the VIE that most significantly impact the VIE economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to that VIE. This determination is evaluated periodically as facts and circumstances change. On August 27, 2020 the Company entered into a joint venture agreement with Clarity Lab Solutions, LLC (“Clarity Labs”) (the “JV”). In consideration and subject to Clarity Lab’s services and commitments and provided the agreement remains valid and in force, and is not terminated, the Company agreed to issue 200,000 restricted shares of SGB common stock over a defined vesting period starting in December 1, 2020. The restricted shares of SGB common stock were not issued to Clarity Labs as certain capital commitments were not met. Clarity Labs is a licensed clinical laboratory that uses specialized molecular testing equipment and that focuses on the diagnosis and treatment of critical diseases, including COVID-19. Clarity Labs is also engaged in the business of manufacturing, importing and distributing various medical tests. Under the JV, the Company and Clarity Labs will jointly market, sell, and distribute certain products and services (“Clarity Mobile Venture”). As of December 31, 2021, $ 502,958 was due to Clarity Labs for expenses paid on behalf of Clarity Mobile Venture, and is included in Due to Affiliates, Accounts Payable and Accrued Expenses on the accompanying consolidated balance sheets. In addition, during the year ended December 31, 2021 , the Company recognized revenue of $ 60,110 and other income of $ 60,000 to Clarity Labs, of which none is included in accounts receivable as of December 31, 2021. The Company has determined it is the primary beneficiary of Clarity Mobile Venture and has thus consolidated the activities in its consolidated financial statements. On January 18, 2021 the Company entered into an operating agreement to form CAT. The purpose of CAT was to market , sell, distribute, lease and otherwise commercially exploit certain products and services in the COVID- 19 testing industry. The Company has determined it is the primary beneficiary of CAT and has thus consolidated the activities in its consolidated financial statements. Investment Entities – On May 31, 2021, the Company's subsidiary SG DevCorp agreed to contribute $ 600,000 to acquire a 50 % membership interest in Norman Berry II Owner LLC. The Company contributed $ 350,329 and $ 114,433 of the initial $ 600,000 in the second quarter and third quarter of 2021 respectively, with the remaining $ 135,238 funded in the fourth quarter of 2021. The purpose of Norman Berry II Owner LLC is to develop and provide affordable housing in the Atlanta, Georgia metropolitan area. The Company has determined it is not the primary beneficiary of "Norman Berry" and thus will not consolidate the activities in its consolidated financial statements. The Company will use the equity method to report the activities as an investment in its consolidated financial statements. On June 24, 2021, the Company's subsidiary, SG DevCorp, entered into an operating agreement with Jacoby Development for a 10 % non-dilutable equity interest for JDI-Cumberland Inlet, LLC. The Company contributed $ 3,000,000 for its 10 % equity interest. The purpose of JDI-Cumberland Inlet, LLC is to develop a waterfront parcel in a mixed-use destination community. The Company has determined it is not the primary beneficiary of JDI-Cumberland Inlet, LLC and thus will not consolidate the activities in its consolidated financial statements. The Company will use the equity method to report the activities as an investment in its consolidated financial statements. 12 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 3. Summary of Significant Accounting Policies (continued) On February 24, 2022 the Company made a $ 500,000 capital investment for a 1.2 % ownership in Moliving, a nomadic hospitality solution company, which included in investment in non-marketable securities on the accompanying condensed consolidated balance sheets. The Company also executed a side agreement to build the first sixty Moliving units and an additional ninety units after the first sixty units are manufactured. Cash and cash equivalents – The Company considers cash and cash equivalents to include all short-term, highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less upon acquisition. Cash and cash equivalents totaled $ 2,428,211 and $ 13,024,381 as of June 30, 2022 and December 31, 2021, respectively. Short-term investment – The Company classifies investments consisting of a certificate of deposit with a maturity greater than three months but less than one year as short-term investment. The Company had no short-term investment as of June 30, 2022 or December 31, 2021 , respectively. Escrow - bond – Escrow – bond represents monies held by a third party surety for the performance of a project which will be remitted to the Company upon criteria as described in the underlying agreements. $ 2,000,000 was returned to the Company during July 2022 and the remaining amount is expected to be returned during the three months ending September 30, 2022. Accounts receivable and allowance for credit losses – Accounts receivable are receivables generated from sales to customers and progress billings on performance type contracts. Amounts included in accounts receivable are deemed to be collectible within the Company’s operating cycle. The Company recognizes accounts receivable at invoiced amounts. The allowance for credit losses reflects the Company's best estimate of expected losses inherent in the accounts receivable balances. Management provides an allowance for credit losses based on the Company’s historical losses, specific customer circumstances, and general economic conditions. Periodically, management reviews accounts receivable and adjusts the allowance based on current circumstances and charges off uncollectible receivables when all attempts to collect have been exhausted and the prospects for recovery are remote. Recoveries are recognized when they are received. Actual collection losses may differ from our estimates and could be material to our consolidated financial position, results of operations, and cash flows. Inventory – Raw construction materials (primarily shipping containers and fabrication materials) are valued at the lower of cost (first-in, first-out method) or net realizable value. Finished goods and work-in-process inventories are valued at the lower of cost or net realizable value, using the specific identification method. Medical equipment and COVID- 19 test and testing supplies are valued at the lower of cost, (first-in, first-out method) or net realizable value. As of June 30, 2022 there was inventory of $ 352,905 for construction materials, and $ 575,215 of medical equipment and COVID- 19 test and testing supplies. As of December 31, 2021 there was inventory of $ 516,731 for construction materials, and $ 757,094 of medical equipment and COVID-19 test and testing supplies. Goodwill – The Company performs its impairment test of goodwill at the reporting unit level each fiscal year, or more frequently if events or circumstances change that would more likely tha n not reduce the fair value of its reporting unit below its carrying values. The Company performs a goodwill impairment test by comparing the fair value of the reporting unit with its carrying value and recognizes an impairment charge for the amount by which the carrying value exceeds the fair value, not to exceed the total amount of goodwill . The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. There were no impairments during the six months ended June 30, 2022 or 2021. The Company has taken the recent COVID-19 pandemic into consideration when determining impairment. Intangible assets – Intangible assets consist of $ 2,766,000 of proprietary knowledge and technology, which is being amortized over 20 years. In addition, $ 97,164 of trademarks, and $ 47,800 of website costs are being amortized over 5 years. The Company evaluated intangible assets for impairment during the year ended December 31, 2021 and determined that there were no impairment losses. There was no impairment during the six months ended June 30, 2022. The accumulated amortization as of June 30, 2022 and 2021 was $ 897,937 and $ 732,085 , respectively. The amortization expense for the six months ended June 30, 2022 and 2021 was $ 82,204 and $ 82,230 , respectively. The amortization expense for the three months ended June 30, 2022 and 2021 was $ 40,382 and $ 41,823 , respectively. The estimated amortization expense for the successive five years is as follows: 13 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 3. Summary of Significant Accounting Policies (continued) For the year ending December 31,: 2022 $ 80,764 2023 161,176 2024 160,469 2025 157,052 2026 139,717 Thereafter 1,313,850 $ 2,013,028 Property, plant and equipment – Property, plant and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated lives of each asset. Estimated useful lives for significant classes of assets are as follows: computer and software 3 to 5 years, furniture and other equipment 5 to 7 years, automobiles 2 to 5 years, buildings held for lease 5 to 7 years, and equipment 5 t o 29 years. Repairs and maintenance are charged to expense when incurred. Held For Sale Assets – On May 10, 2021 the Company's subsidiary, SG DevCo acquired the Lago Vista, Texas property for $ 3,576,130 . Management has implemented a plan to sell this property, which meets all of the criteria required to classify it as Held for Sale. Including the project development costs associated with Lago Vista of $ 816,410 , the book value is now $ 4,392,541 . Convertible instruments – The Company bifurcates conversion options from their host instruments and accounts for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Common stock purchase warrants and other derivative financial instruments – The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provides a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company’s own stock. The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if any event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement shares (physical settlement or net-cash settlement). The Company assesses classification of common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities or equity is required. Fair value measurements – Financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are carried at cost, which the Company believes approximates fair value due to the short-term nature of these instruments. The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. 14 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 3. Summary of Significant Accounting Policies (continued) The Company uses three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities. Level 2 Quoted prices for similar assets and liabilities in active markets or inputs that are observable. Level 3 Inputs that are unobservable (for example, cash flow modeling inputs based on assumptions). Transfer into and transfers out of the hierarchy levels are recognized as if they had taken place at the end of the reporting period. Share-based payments – The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, including non-employee directors, the fair value of a stock option award is measured on the grant date. The fair value amount is then recognized over the period services are required to be provided in exchange for the award, usually the vesting period. The Company recognizes stock-based compensation expense on a graded-vesting basis over the requisite service period for each separately vesting tranche of each award. Stock-based compensation expense to employees and all directors are reported within payroll and related expenses in the consolidated statements of operations. Stock-based compensation expense to non-employees is reported within marketing and business development expense in the condensed consolidated statements of operations. Other income – Included in other income for the three and six months ended June 30, 2022 is amounts in escrow resulting from the SG Echo acquisition which were remitted to the Company. At the time of acquisition and previously, the Company did not believe such amount was recognizable. Income taxes – The Company accounts for income taxes utilizing the asset and liability approach. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes generally represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from the differences between the financial and tax bases of the Company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for anticipated tax audit issues based on the Company’s estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when the liabilities are no longer determined to be necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. Concentrations of credit risk – Financial instruments, that potentially subject the Company to concentration of credit risk, consist principally of cash and cash equivalents. The Company places its cash with high credit quality institutions. At times, such amounts may be in excess of the FDIC insurance limits. The Company has not experienced any losses in such account and believes that it is not exposed to any significant credit risk on the account. With respect to receivables, concentrations of credit risk are limited to a few customers in the construction industry. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers other than normal lien rights. At June 30, 2022 and December 31, 2021, 79 % and 78 %, respectively, of the Company’s gross accounts receivable were due from two and four customers. Revenue relating to two and one customers represented approximately 97 % and 77 % of the Company's total revenue for the three months ended June 30, 2022 and 2021 , respectively. Revenue relating to two and one customers represented approximately 90 % and 71 % of the Company's total revenue for the six months ended June 30, 2022 and 2021, respectively. Cost of revenue relating to one and two vendors represented approximately 12 % and 52 % of the Company’s total cost of revenue for the three months ended June 30, 2022 and 2021 , respectively Cost of revenue relating to one and three vendors represented approximately 10 % and 48 % of the Company’s total cost of revenue for the six months ended June 30, 2022 and 2021, respectively. The Company believes it has access to alternative suppliers, with limited disruption to the business, should circumstances change with its existing suppliers. 15 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 4. Accounts Receivable At June 30, 2022 and December 31, 2021 , the Company’s accounts receivable consisted of the following: 2022 2021 Billed: Construction services $ 2,549,010 $ 2,293,187 Engineering services 20,919 86,388 Medical revenue 61,393 679,446 Retainage receivable 697,382 635,049 Other receivable 144,604 186,692 Total gross receivables 3,473,308 3,880,762 Less: allowance for credit losses ( 963,116 ) ( 963,116 ) Total net receivables $ 2,510,192 $ 2,917,646 Receivables are evaluated for collectability and allowances for potential losses are established or maintained on applicable receivables. The allowance for credit losses was $ 963,116 as of June 30, 2022 and December 31, 2021. There was a provision for credit losses of $ 7,024 in during the six months ended June 30, 2022. There was a provision of $ 167,202 for credit losses, no recoveries collected for credit losses and no write offs during the year ended December 31, 2021. 5. Contract Assets and Contract Liabilities Costs and estimated earnings on uncompleted contracts, which represent contract assets and contract liabilities, consisted of the following at June 30, 2022 and December 31, 2021 : 2022 2021 Costs incurred on uncompleted contracts $ 11,848,306 $ 4,272,425 Provision for loss on uncompleted contracts — 2,238,578 Estimated earnings to date on uncompleted contracts ( 3,969,959 ) ( 3,156,377 ) Gross contract assets 7,878,347 3,354,626 Less: billings to date ( 9,647,951 ) ( 4,750,289 ) Net contract liabilities on uncompleted contracts $ ( 1,769,604 ) $ ( 1,395,663 ) The above amounts are included in the accompanying condensed consolidated balance sheets under the f ollowing captions at June 30, 2022 and December 31, 2021 . 2022 2021 Contract assets $ — $ 41,916 Contract liabilities ( 1,769,604 ) ( 1,437,579 ) Net contract liabilities $ ( 1,769,604 ) $ ( 1,395,663 ) Although management believes it has established adequate procedures for estimating costs to complete on open contracts, it is at least reasonably possible that additional significant costs could occur on contracts prior to completion. The Company peri odically evaluates and revises its estimates and makes adjustments when they are considered necessary. 16 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 6. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and amortization and depreciated using the straight-line method over their useful lives. At June 30, 2022 and December 31, 2021, the Company’s property, plant and equipment, net consisted of the following: 2022 2021 Computer equipment and software $ 166,036 $ 156,701 Furniture and other equipment 276,703 275,606 Leasehold improvements 17,280 15,400 Equipment and machinery 1,237,173 1,219,056 Automobiles 4,638 4,638 Building held for leases 196,416 196,416 Laboratory and temporary units 1,364,748 1,362,760 Land 893,785 3,576,130 Construction in progress 1,269,608 442,515 Property, plant and equipment 5,426,387 7,249,222 Less: accumulated depreciation ( 619,737 ) ( 409,279 ) Property, plant and equipment, net $ 4,806,650 $ 6,839,943 Depreciation expense for the three months ended June 30, 2022 and 2021 amounted to $ 106,152 and $ 107,208 respectively. Depreciation expense for the six months ended June 30, 2022 and 2021 amounted to $ 210,977 and $ 198,398 respectively. 7. Notes Receivable On January 21, 2020, CPF GP 2019-1 LLC (“CPF GP”) issued to the Company a promissory note in the principal amount of $ 400,000 (the “Company Note”) and issued to Paul Galvin, the Company’s Chairman and CEO, a promissory note in the principal amount of $ 100,000 (the “Galvin Note”). The transaction closed on January 22, 2021, on which date the Company loaned CPF GP 2019-1 LLC $ 400,000 and Mr. Galvin personally loaned CPF GP $ 100,000 on behalf of the Company. The Company Note and Galvin Note were issued pursuant to that certain Loan Agreement and Promissory Note, dated October 3, 2019 (the “Loan Agreement”), as amended on October 15, 2019 and November 7, 2019 by and between the CPF GP and the Company, and bear interest at five percent ( 5 %) per annum, payable, together with the unpaid principal amount of the promissory notes, on the earlier of the July 31, 2023 maturity date or upon the liquidation, redemption sale or issuance of a dividend upon the LLC interests in CPF MF 2019-1 LLC, a Texas limited liability company of which CPF GP is the general partner; provided, that the terms of the Galvin Note provide that all interest payments due to Mr. Galvin under the Galvin Note shall be paid directly to, and for the benefit of, the Company. In April 2020, CPF GP issued to the Company a promissory note in the principal amount of $ 250,000 (the “Company Note 2”). The transaction closed on April 15, 2021, on which date the Company loaned CPF GP 2019-1 LLC $ 250,000 . The Company Note was issued pursuant to that certain Loan Agreement and Promissory Note, dated October 3, 2019 (the “Loan Agreement 2”), as amended on October 15, 2019 and November 7, 2019 by and between the CPF GP and the Company, and bear interest at five percent ( 5 %) per annum, payable, together with the unpaid principal amount of the promissory notes, on the earlier of the July 31, 2023 maturity date or upon the liquidation, redemption sale or issuance of a dividend upon the LLC interests in CPF MF 2019-1 LLC, a Texas limited liability company of which CPF GP is the general partner. During the six-month period ended June 30, 2022, the Galvin Note was assigned to the Company and the principal amount of $ 100,000 was returned to Mr. Galvin. The Company has a promissory note in the principal amount of $ 100,000 (the "Company Note 3") and the assignment occurred in January 2022. The promissory notes are unaffected by the Settlement and Mutual Release Agreement and remain in effect and outstanding in accordance with the terms of the notes evidencing such loans. See Note 3 for a discussion on the Settlement and Mutual Release Agreement and termination of the ELA with CPF. 17 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 8. Notes Payable On July 14, 2021, SG DevCorp, a subsidiary of the Company, issued a Real Estate Lien Note, in the principal amount of $ 2,000,000 (the “Short-Term Note”), secured by a Deed of Trust, dated July 14, 2021 (the “Deed of Trust”), on the Company's 50 + acre Lake Travis project site in Lago Vista, Texas and a related Assignment of Leases and Rents, dated July 8, 2021 (“Assignment of Rents”), for net loan proceeds of approximately $ 1,948,234 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. The Company capitalized $ 0 in interest charges and $ 0 in debt issuance costs during the three months ended June 30, 2022 related to the Lago Vista project in accordance with ASC 835-20. The Company capitalized $ 20,000 in interest charges and $ 4,314 in debt issuance costs during the six months ended June 30, 2022 related to the Lago Vista project in accordance with ASC 835-20. The Company capitalized $ 112,348 in interest charges and $ 23,727 in debt issuance costs as of December 31, 2021 related to the Lago Vista project in accordance with ASC 835-20. On October 29, 2021, SG Echo, a subsidiary of the Company, 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 renovation improvements related to the Company's second manufacturing facility 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 the Company, 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. 9. Leases The Company leases an office, a manufacturing plant and certain equipment under non-cancelable operating lease agreements. The leases have remaining lease terms ranging from one year to ten years . Supplemental balance sheet information related to leases is as follows: Balance Sheet Location June 30, 2022 Operating Leases Right-of-use assets, net $ 2,756,669 Current liabilities Lease liability, current maturities ( 459,701 ) Non-current liabilities Lease liability, net of current maturities ( 2,308,341 ) Total operating lease liabilities $ ( 2,768,042 ) Finance Leases Right-of-use assets $ 22,522 Current liabilities Lease liability, current maturities ( 19,787 ) Non-current liabilities Lease liability, net of current maturities ( 1,676 ) Total finance lease liabilities $ ( 21,463 ) Weighted Average Remaining Lease Term Operating leases 7.2 years Finance leases 1.11 years Weighted Average Discount Rate Operating leases 3 % Finance leases 3 % 18 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 9. Leases (continued) As the leases do not provide an implicit rate, the Company used an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments, which is reflective of the specific term of the leases and economic environment of each geographic region. Anticipated future lease costs, which are based in part on certain assumptions to approximate minimum annual rental commitments under non-cancelable leases, are as follows: Year Ending December 31: Operating Financing Total 2022 $ 270,550 $ 10,080 $ 280,630 2023 525,718 11,760 537,478 2024 523,722 — 523,722 2025 446,349 — 446,349 2026 207,379 — 207,379 Thereafter 1,119,903 — 1,119,903 Total lease payments 3,093,621 21,840 3,115,461 Less: Imputed interest 325,579 377 325,956 Present value of lease liabilities $ 2,768,042 $ 21,463 $ 2,789,505 Chicago Airport Testing has subleased its leased vacant area for a period of one year , the sublessee has the option to terminate at any time after the first six months. The sublessee elected to terminate the Agreement, effective as of July 31, 2021 and the Company has no remaining lease revenue from the sublessee. 10. Net Income (Loss) Per Share Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of the common shares issuable upon the exercise of stock options and warrants. Potentially dilutive common shares are excluded from the calculation if their effect is antidilutive. At June 30, 2022, there were restricted stock units, options and warrants of 757,450 , 36,436 and 2,025,520 respectively, outstanding that could potentially dilute future net income per share . Because the Company had a net loss as of June 30, 2022, it is prohibited from including potential common shares in the computation of diluted per share amounts. Accordingly, the Company has used the same number of shares outstanding to calculate both the basic and diluted loss per share. At June 30, 2021 , there were options , including options to non-employees and non-directors, restricted stock units and warrants to purchase 36,436 , 884,344 and 126,890 shares of common stock, respectively, outstanding that could potentially dilute future net income per share. 19 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021(Unaudited) 11. Construction Backlog The following represents the backlog of signed construction and engineering contracts in existence at June 30, 2022 and December 31, 2021, which represents the amount of revenue the Company expects to realize from work to be performed on uncompleted contracts in progress and from contractual agreements in effect at June 30, 2022 and December 31, 2021, respectively, on which work has not yet begun: 2022 2021 Balance - beginning of period $ 3,217,909 $ 25,117,461 New contracts and change orders during the period 7,018,469 3,191,335 Adjustments and cancellations, net ( 96,908 ) ( 18,297,197 ) Subtotal 10,139,470 10,011,599 Less: contract revenue earned during the period ( 5,956,354 ) ( 6,793,690 ) Balance - end of period $ 4,183,116 $ 3,217,909 Backlog at December 31, 2021 included two contracts entered into during the third quarter of 2020 in the amount of approximately $4 million and approximately $2.95 million along with three contracts during the fourth quarter of 2020 in the amount of approximately $ 2.7 million, $ 0.80 million, and $ 0.70 million. The Company executed one large contract in the first quarter of 2021 in the amount of approximately $ 1.3 million, one large contract in the third quarter of 2021 of approximately of $ 0.87 million and had one large partial contract cancellation to an existing contract of approximately ($ 1.3 ) million. The Company executed one large contract in the fourth quarter of 2021 in the amount of approximately $ 0.78 million and had one contract cancellation in the amount of approximately $ 16.9 million. On March 29, 2022, the Company entered into a contract with ATCO Structures & Logistics (USA) Inc. for $ 5,954,950 that is reflected in the June 30, 2022 backlog. The Company expects that all of this revenue will be realized by December 31, 2022. The Company’s remaining backlog as of June 30, 2022 represents the remaining transaction price of firm contracts for which work has not been performed and excludes unexercised contract options. The Company expects to satisfy its backlog which represents the remaining unsatisfied performance obligation on contracts as of June 30, 2022 over the following period: 2022 Within 1 year $ 4,183,116 1 to 2 years — Total Backlog $ 4,183,116 Although backlog reflects business that is considered to be firm, cancellations, deferrals or scope adjustments may occur. Backlog is adjusted to reflect any known project cancellations, revisions to project scope and cost and project deferrals, as appropriate. 20 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021(Unaudited) 12. Stockholders’ Equity Public Offerings – In October 2021, the Company closed a registered direct offering and concurrent private placement of its common stock (the "October Offering") that the Company effected pursuant to the Securities Purchase Agreement that it entered into on October 25, 2021 with an institutional investor and received gross proceeds of $ 11.55 million. Pursuant to the terms of the Purchase Agreement, the Company issued to the investor (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. A.G.P./Alliance Global Partners (the “Placement Agent”) acted as the exclusive placement agent for the transaction pursuant to that certain Placement Agency Agreement, dated as of October 25, 2021, by and between the Company and the Placement Agent (the “Placement Agency Agreement”), the Placement Agent received (i) a cash fee equal to seven percent ( 7.0 %) of the gross proceeds from the placement of the Securities sold by the Placement Agent in the Offering and (ii) a non-accountable expense allowance of one half of one percent ( 0.5 %) of the gross proceeds from the placement of the Gross Proceeds Securities sold by the Placement Agent in the Offering. The Company also reimbursed the Placement Agent’s expenses up to $ 50,000 upon closing the Offering. The net proceeds to the Company after deducting the Placement Agent’s fees and the Company’s estimated offering expenses was approximately $ 10.5 million. Securities Purchase Agreement – In April 2019, the Company issued 42,388 shares of its common stock at $ 22.00 per share through a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional investors and accredited investors. Concurrently with the sale of the common stock, pursuant to the Purchase Agreement, the Company also sold common stock purchase warrants to such investors to purchase up to an aggregate of 42,388 shares of common stock. The Company incurred $ 379,816 in issuance costs from the offering and issued 4,239 warrants to the underwriters. The warrants are further discussed in Note 14. Decrease in Authorized Shares – On June 5, 2019, at the Company’s annual meeting of stockholders, the stockholders approved an amendment to the Company’s amended and restated certificate of incorporation to decrease the number of authorized shares of common stock from 300,000,000 to 25,000,000 shares. Following the meeting, on June 5, 2019, the Company filed a certificate of amendment to the amended and restated certificate of incorporation to decrease its authorized shares of common stock accordingly. There was no change to the number of authorized shares of preferred stock. Underwriting Agreement – In August 2019, the Company issued 45,000 shares of its common stock at $ 17.00 per share pursuant to the terms of an Underwriting Agreement (the “Underwriting Agreement”) to the public. The Company incurred $ 181,695 in issuance costs from the offering and issued warrants to purchase 2,250 shares of common stock to the underwriter. The warrants are further discussed in Note 14. 21 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 3. Segments and Disaggregated Revenue Construction Medical Development Corporate and support Consolidated Six Months Ended June 30, 2022 Revenue $ 5,956,354 $ 10,203,215 $ — $ — $ 16,159,569 Cost of revenue 5,996,473 6,904,701 — — 12,901,174 Operating expenses 207,646 27,065 597,856 3,334,792 4,167,359 Operating income (loss) ( 247,765 ) 3,271,449 ( 597,856 ) ( 3,334,792 ) ( 908,964 ) Other income (expense) 490,903 — ( 121,569 ) 23,762 393,096 Income (loss) before income taxes 243,138 3,271,449 ( 719,425 ) ( 3,311,030 ) ( 515,868 ) Net income attributable to non-controlling interest — 1,616,669 — — 1,616,669 Net income (loss) attributable to common stockholders of SG Blocks, Inc. $ 243,138 $ 1,654,780 $ ( 719,425 ) $ ( 3,311,030 ) $ ( 2,132,537 ) Total assets $ 10,907,679 $ 2,322,505 $ 8,902,271 $ 10,007,048 $ 32,139,503 Depreciation and amortization $ 286,755 $ 26,820 $ 21,569 $ — $ 335,144 Capital expenditures $ 821,400 $ 28,621 $ 893,785 $ 8,193 $ 1,751,999 Inter-segment revenue elimination $ — $ — $ — $ — $ — Construction Medical Development Corporate and support Consolidated Six Months Ended June 30, 2021 Revenue $ 5,300,161 $ 15,741,453 $ — $ — $ 21,041,614 Cost of revenue 7,300,202 11,323,405 — — 18,623,607 Operating expenses 214,135 370,067 53,902 2,865,427 3,503,531 Operating income (loss) ( 2,214,176 ) 4,047,981 ( 53,902 ) ( 2,865,427 ) ( 1,085,524 ) Other income (expense) 332 13 — 91,254 91,599 Income (loss) before income taxes ( 2,213,844 ) 4,047,994 ( 53,902 ) ( 2,774,173 ) ( 993,925 ) Net income attributable to non-controlling interest — 2,581,211 — — 2,581,211 Net income (loss) attributable to common stockholders of SG Blocks, Inc. $ ( 2,213,844 ) $ 1,466,782 $ ( 53,902 ) $ (2,774,173 ) $ (3,575,136 ) Total assets $ 8,147,331 $ 4,415,643 $ 6,988,424 $ 5,906,434 $ 25,457,832 Depreciation and amortization $ 274,415 $ 26,605 $ — $ — $ 301,020 Capital expenditures $ 1,052,637 $ 46,224 $ 3,576,130 $ 18,018 $ 4,693,009 22 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 13. Segments and Disaggregated Revenue (continued) Construction Medical Development Corporate and support Consolidated Three Month Ended June 30, 2022 Revenue $ 4,237,585 $ 3,317,386 $ — $ — $ 7,554,971 Cost of revenue 4,275,759 2,507,252 — — 6,783,011 Operating expenses 99,672 8,093 315,868 1,676,183 2,099,816 Operating income (loss) ( 137,846 ) 802,041 ( 315,868 ) ( 1,676,183 ) ( 1,327,856 ) Other income (expense) 372,223 — ( 72,942 ) 10,979 310,260 Income (loss) before income taxes 234,377 802,041 ( 388,810 ) ( 1,665,204 ) ( 1,017,596 ) Net income attributable to non-controlling interest — 397,764 — — 397,764 Net income (loss) attributable to common stockholders of SG Blocks, Inc. $ 234,377 $ 404,277 $ ( 388,810 ) $ ( 1,665,204 ) $ ( 1,415,360 ) Depreciation and amortization $ 143,320 $ 13,410 $ 12,941 $ — $ 169,671 Capital expenditures $ 797,300 $ 28,621 $ — $ 3,213 $ 829,134 Inter-segment revenue elimination $ — $ — $ — $ — $ — Construction Medical Development Corporate and support Consolidated Three Months Ended June 30, 2021 Revenue $ 2,068,498 $ 9,785,490 $ — $ — $ 11,853,988 Cost of revenue 3,196,892 6,645,714 — — 9,842,606 Operating expenses 207,986 210,813 53,902 1,462,748 1,935,448 Operating income (loss) ( 1,336,380 ) 2,928,963 ( 53,902 ) ( 1,462,748 ) 75,933 Other income (expense) 695 13 — 73,784 74,492 Income (loss) before income taxes ( 1,335,685 ) 2,928,976 ( 53,902 ) ( 1,388,964 ) 150,425 Net income attributable to non-controlling interest — 1,691,684 — — 1,691,684 Net income (loss) attributable to common stockholders of SG Blocks, Inc. $ ( 1,335,685 ) $ 1,237,292 $ ( 53,902 ) $ ( 1,388,964 ) $ ( 1,541,259 ) Depreciation and amortization $ 145,703 $ 13,524 $ — $ — $ 159,227 Capital expenditures $ 227,437 $ 9,334 $ 3,576,130 $ 18,018 $ 3,830,919 23 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 14. Warrants In conjunction with the June 2017 Public Offering, the Company issued to certain affiliates of the underwriters, as compensation, warrants to purchase an aggregate of 4,313 shares of common stock at an exercise price of $ 125.00 per share. The warrants are exercisable at the option of the holder on or after June 21, 2018 and expire June 21, 2023 . The fair value of warrants was calculated utilizing a Black-Scholes model and amounted to $ 63,796 . The fair market value of the warrants as of the date of issuance has been included in issuance costs in additional paid-in capital. In conjunction with the Purchase Agreement in April 2019, the Company also sold warrants to purchase up to an aggregate of 42,388 shares of common stock at an initial exercise price of $ 27.50 per share. The warrants are exercisable at the option of the holder on or after October 29, 2019 and expire October 29, 2024 . T he Company issued to certain affiliates of the underwriters, as compensation, warrants to purchase an aggregate of 4,239 shares of common stock at an initial exercise price of $ 27.50 per share. The warrants are exercisable at the option of the holder on or after October 29, 2019 and expire April 24, 2024 . In conjunction with the Underwriting Agreement in August 2019, the Company issued to the underwriter, as compensation, warrants to purchase an aggregate of 2,250 shares of common stock at an initial exercise price of $ 21.25 per share. The warrants are exercisable at the option of the holder on or after February 1, 2020 and expire August 29, 2024 . In conjunction with the Underwriting Agreement in May 2020 , the Company issued to the underwriter, as compensation, warrants to purchase an aggregate of 300,000 shares of common stock at an initial exercise price of $ 3.14 per share. The warrants are exercisable at the option of the holder on or after November 6, 2021 and expire May 5, 2025 . In conjunction with the Purchase Agreement in October 2021, the Company also issued Series A warrants to purchase up to 1,898,630 shares of Common Stock in a concurrent private placement. The warrants have an exercise price of $ 4.80 per share, exercisable at the option of the holder on or after October 26, 2021 and will expire five years from the date of issuance. 15 . Share-based Compensation On October 26, 2016, the Company’s Board of Directors approved the issuance of up to 25,000 shares of the Company’s common stock in the form of restricted stock or options (“ 2016 Stock Plan”). Effective January 20, 2017, the 2016 Stock Plan was amended and restated as the SG Blocks, Inc . Stock Incentive Plan, as further amended eff ective June 1, 2018 and as further amended on July 30, 2020 and as further amended on August 18, 2021, (the “Incentive Plan”). The Incentive Plan authorizes the issuance of up to 3,625,000 shares of common stock. It authorizes the issuance of equity-based awards in the form of stock options, stock appreciation rights, restricted shares, restricted share units, other share-based awards and cash-based awards to non-employee directors and to officers, employees and consultants of the Company and its subsidiary, except that incentive stock options may only be granted to the Company’s employees and its subsidiary’s employees. The Incentive Plan expires on October 26, 2026, and is administered by the Company’s Compensation Committee of the Boa rd of Directors. Each of the Company’s employees, directors, and consultants are eligible to participate in the Incentive Plan. As of June 30, 2022, there were 1,343,377 shares of common stock available for issuance under the Incentive Plan . Stock-Based Compensation Expense Stock-based compensation expense is included in the condensed consolidated statements of operations as follows: Six Months Ended June 30, 2022 2021 Payroll and related expenses $ 1,280,162 $ 532,422 Total $ 1,280,162 $ 532,422 Three Months Ended June 30, 2022 2021 Payroll and related expenses $ 631,076 $ 246,236 Total $ 631,076 $ 246,236 24 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 15 . Share-based Compensation (continued) The following table presents total stock-based compensation expense by security type included in the condensed consolidated statements of operations: Six Months Ended June 30, 2022 2021 Stock options $ — $ 2,666 Restricted Stock Units $ 1,280,162 $ 529,756 Total $ 1,280,162 $ 532,422 Three Months Ended June 30, 2022 2021 Stock options $ — $ — Restricted Stock Units $ 631,076 $ 246,236 Total $ 631,076 $ 246,236 Stock-Based Option Awards The Company has issued no stock-based options during the six months ended June 30, 2022 and 2021. Because the Company does not have significant historical data on employee exercise behavior, the Company uses the “Simplified Method” to calculate the expected life of the stock-based option awards granted to employees. The simplified method is calculated by averaging the vesting period and contractual term of the options. The following table summarizes stock-based option activities and changes during the six months ended June 30, 2022 as described below: Shares Weighted Average Fair Value Per Share Weighted Average Exercise Price Per Share Weighted Average Remaining Terms (in years) Aggregate Intrinsic Value Outstanding – December 31, 2021 36,436 24.80 78.71 5.34 — Granted — — — — — Exercised — — — — — Cancelled — — — — — Outstanding – June 30, 2022 36,436 24.80 78.71 4.84 — Exercisable – December 31, 2021 36,436 24.80 78.71 5.34 — Exercisable – June 30, 2022 36,436 24.80 78.71 4.84 — For the three months ended June 30, 2022 and 2021, the Company recognized stock-based compensation expense of $ 0 and $ 0 , respectively , related to stock options. For the six months ended June 30, 2022 and 2021 , the Company recognized stock-based compensation expense of $ 0 and $ 2,666 , respectively, related to stock options. This expense is included in payroll and related expenses in the accompanying condensed consolidated statements of operations. . As of June 30, 2022, there was no unrecognized compensation costs related to non-vested stock options and all options have been expensed. The intrinsic value is calculated as the difference between the fair value of the stock price at year end and the exercise price of each of the outstanding stock options. The fair value of the stock price at June 30, 2022 was $ 1.66 per share. 25 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 15 . Share-based Compensation (continued) Restricted Stock Units On March 22, 2019, a total of 15,703 of restricted stock units were granted to Mr. Galvin, Mr. Armstrong, Mr. Shetty, six employees and one consultant of the Company, under the Company's stock-based compensation plan, at the fair value of $ 54.00 per share, which represents the closing price of the Company's common stock on February 26, 2019 as adjusted for stock splits . Restricted stock units granted to Mr. Galvin, Mr. Armstrong, Mr. Shetty, and an aggregate of six employees and one consultant of 6,139, 772, 5,729 and an aggregate of 3,063, respectively, vest in installments over either a one-year, two-year, three-year and four-year period and will fully vest by the end of December 31, 2022. The fair value of these units upon issuance amounted to $847,957. On January 15, 2019 and February 26, 2019, a total of 526 of restricted stock units were granted to two of the Company’s non-employee directors, under the Incentive Plan, at the calculated fair value of $58.80 and $55.20 per share, respectively, which represents the average closing price of the Company’s common stock for the ten trading days immediately preceding and including the grant date as adjusted for stock splits. The restricted stock units granted on January 15, 2019 vested on January 15, 2020, subject to each individual’s continued service as a director of the Company through such date, and are payable six months after the termination of the director from the Company’s Board of Directors or death or disability. The restricted stock units granted on February 26, 2019 vested on the earlier of (A) the first anniversary of the date of the grant or (B) the date of the 2019 annual meeting of the Company’s stockholders subject to each individual’s continued service as a director of the Company through such date, and are payable six months after the termination of the director from the Board of Directors or death or disability. Effective June 5, 2019, a total of 9,189 of restricted stock units were granted to the Company’s non-employee directors, under the Company’s stock-based compensation plan, at the calculated fair value of $ 16.40 per share, which represents the average closing price of the Company’s common stock for the ten trading days immediately preceding and including the grant date. Restricted stock units granted to directors on June 5, 2019 vest on the earlier of (A) the first anniversary of the date of the grant or (B) the date of the annual meeting of the Company’s stockholders that occurs in the year immediately following the date of the grant; and are payable six months after the termination of the director from the Board or death or disability. On April 14, 2020, a total of 35,331 of restricted stock units were granted to Mr. Galvin, Mr. Armstrong, Mr. Sheeran, five employees and two consultants of the Company, under the Company's stock-based compensation plan, at the fair value of $4.76 per share, which represents the closing price of the Company's common stock on April 14, 2020. Restricted stock units granted to Mr. Galvin, Mr. Armstrong, Mr. Sheeran, and an aggregate of five employees and one consultant of 11,331, 1,000, 3,000 and an aggregate of 8,000, respectively, will vest in full on the first anniversary of the vesting commencement date and one consultant received 12,000 restricted stock units that vested immediately on April 15, 2020. The fair value of these units upon issuance amounted to $168,176. On April 14, 2020, a total of 12,000 of restricted stock units were granted to three of the Company’s non-employee directors, under the Incentive Plan, at the calculated fair value of $4.76 per share, which represents the closing price of the Company’s common stock on April 14, 2020. The restricted stock units granted on April 14, 2020 will fully vest on April 14, 2021, subject to each individual’s continued service as a director of the Company through such date, and are payable six months after the termination of the director from the Company’s Board of Directors or death or disability. The fair value of these units upon issuance amounted to $57,120. On September 23, 2020, a total of 425,000 of restricted stock units were granted to Mr. Armstrong, Mr. Sheeran, seven employees and one consultant of the Company, under the Company's stock-based compensation plan, at the fair value of $ 1.81 per share, which represents the closing price of the Company's common stock on September 23, 2020. Restricted stock units granted to Mr. Armstrong, Mr. Sheeran, and an aggregate of seven employees and one consultant of 50,000, 75,000 and an aggregate of 300,000, respectively, and 1/3 will vest on September 23, 2020, 1/3 on the one year anniversary of the grant date and 1/3 on the two year anniversary of the grant date. The fair value of these units upon issuance amounted to $769,250. 26 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 15 . Share-based Compensation (continued) On November 11, 2020, a total of 46,826 of restricted stock units were granted to three of the Company’s non-employee directors, under the Incentive Plan, at the calculated fair value of $ 2.39 per share, which represents the closing price of the Company’s common stock on November 11, 2020. The restricted stock units granted on November 11, 2020 will vest 1/2 on November 11, 2020 and 1/2 on the one year anniversary of the grant date, subject to each individual’s continued service as a director of the Company through such date, and are payable six months after the termination of the director from the Company’s Board of Directors or death or disability. The fair value of these units upon issuance amounted to $111,920. On December 9, 2020, a total of 372,000 of restricted stock units were granted to Mr. Galvin, under the Company's stock-based compensation plan, at the fair value of $ 3.28 per share, which represents the closing price of the Company's common stock on December 9, 2020. Restricted stock units granted to Mr. Galvin will vest 1/2 on December 9, 2020 and 1/2 on the first year anniversary of the grant date. The fair value of these units upon issuance amounted to $1,220,160. On October 1, 2021, a total of 1,214,500 of restricted stock units were granted to Mr. Galvin, Mr. Rogers, Mr. Armstrong, Mr. Sheeran, thirteen employees and three consultants of the Company, under the Company's stock-based compensation plan, at the fair value of $ 3.38 per share, which represents the closing price of the Company's common stock on October 1, 2021. Restricted stock units granted to Mr. Galvin, Mr. Armstrong, Mr. Sheeran, and an aggregate of thirteen employees and two consultants of 350,000 , 40,000 , 100,000 and an aggregate of 475,000 , respectively, vesting quarterly over two years from the anniversary of the grant date. Restricted stock units granted to Mr. Rogers and one consultant of 37,500 and 12,000 vest upon issuance date. Restricted stock units granted to Mr. Rogers of 200,000 vest monthly over a two -year period. The fair value of these units upon issuance amounted to $ 4,105,010 . On October 1, 2021, a total of 59,170 of restricted stock units were granted to five of the Company's non-employee directors, under the Company's stock-based compensation plan, at the fair value of $ 3.38 per share, which represents the closing price of the Company's common stock on October 1, 2021. The restricted stock units granted October 1, 2021 vesting monthly over one year - and, if earlier, in full on the date of the Company’s 2022 Annual Meeting of Stockholders. On December 7, 2021, a total of 62,500 of restricted stock units were granted to five of the Company's non-employee advisory directors, under the Company's stock-based compensation plan, at the fair value of $ 2.36 per share, which represents the closing price of the Company's common stock on December 7, 2021. The restricted stock units granted vest in equal monthly installments over one year period. For the three months ended June 30, 2022 and 2021 , the Company recognized stock-based compensation of $ 631,076 and $ 246,236 related to restricted stock units. For the six months ended June 30, 2022 and 2021, the Company recognized stock-based compensation of $ 1,280,162 and $ 529,756 related to restricted stock units. This expense is included in the payroll and related expenses, general and administrative expenses, and marketing and business development expense in the accompanying condensed consolidated statement of operations. The following table summarized restricted stock unit activities during the six months ended June 30, 2022: Number of Shares Non-vested balance at January 1, 2022 1,274,137 Granted — Vested ( 425,998 ) Forfeited/Expired ( 90,689 ) Non-vested balance at June 30, 2022 757,450 27 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 16. Commitm ents and Contingencies Legal Proceedings The Company is subject to certain claims and lawsuits arising in the normal course of business. The Company assesses liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that the Company will incur a loss and the amount of the loss can be reasonably estimated, the Company records a liability in our consolidated financial statements. These legal accruals may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, the Company does not record an accrual, consistent with applicable accounting guidance. Based on information currently available, advice of counsel, and available insurance coverage, the Company believes that the established accruals are adequate and the liabilities arising from the legal proceedings will not have a material adverse effect on the consolidated financial condition. However, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate resolution of a matter will not exceed established accruals. As a result, the outcome of a particular matter or a combination of matters may be material to the results of operations for a particular period, depending upon the size of the loss or the income for that particular period. 1.) Pizzarotti Litigation - On or about August 10, 2018 Pizzarotti, LLC filed a complaint against the Company and Mahesh Shetty, the Company’s former President and CFO, and others, seeking unspecified damages for an alleged breach of contract by the Company and another entity named Phipps & Co. (“Phipps”). The lawsuit was filed as Pizzarotti, LLC. v. Phipps & Co., et al., Index No. 653996/2018 and commenced in the Supreme Court of the State of New York for the County of New York. On or about April 1, 2019, Phipps filed cross-claims against the Company and Mr. Shetty asserting claims for indemnification, contribution, fraud, negligence, negligent misrepresentation, and breach of contract. SG Blocks has likewise cross claimed against Phipps for indemnification and contribution, claiming that any damages to the Plaintiff were the result of the acts or omissions of Phipps and its principals. Pizzarotti’s suit arose from a contract dated April 3, 2018 that it executed with Phipps whereby Pizzarotti, a construction manager, engaged Phipps to perform stone procuring and tile work at a construction project located at 161 Maiden Lane, New York 10038. Pizzarotti’s claims against the Company arise from a purported assignment agreement dated August 10, 2018, whereby Pizzarotti claims that the Company agreed to assume certain obligations of Phipps under a certain trade contract between Pizzarotti and Phipps & Co. Phipps’ claims against the Company arise from a purported Assignment Agreement, dated as of May 30, 2018, between Pizzarotti, Phipps and the Company (the “Assignment Agreement”), pursuant to which, it is alleged, that the Company agreed to provide a letter of credit in connection with the sub-contracted work to be provided by Phipps to Pizzarotti. The Company believes that the Assignment Agreement was void for lack of consideration and moved to dismiss the case on those and other grounds. On June 17, 2020, the New York Supreme Court entered an order dismissing certain claims against the Company brought by cross claimant Phipps & Co. Specifically, the court dismissed Phipps’ claims for indemnification, contribution, fraud, negligence and negligent misrepresentation. The court did not dismiss Phipps’ claim for breach of the Assignment Agreement. The issue of the validity of the Assignment Agreement, and the Company’s defenses to the claims brought by the plaintiff Pizzarotti, and cross claimant Phipps, are being litigated. The Company maintains that the Assignment Agreement, to the extent valid and enforceable, was properly terminated and/or there are no damages, and, consequently, that the claims brought against the Company are without merit. The Company intends to continue to vigorously defend the litigation. The parties have engaged in written discovery but no depositions have been conducted as of yet. By motion dated February 24, 2021, Pizzarotti moved to stay the entire action pending the outcome of a separate litigation captioned Pizzarotti, LLC v. FPG Maiden Lane, LLC et. al ., Index No. 651697/2019, involving some of the same parties (but excluding the Company). Phipps cross moved to consolidate the two actions. The Company opposed both motions. On April 26, 2021, the court denied both motions and directed the parties to meet and confer concerning the scheduling of depositions. On May 10, 2021, the parties jointly filed with the court a proposed order providing the completion of depositions of all parties and nonparties by September 30, 2021. The court has not entered the proposed discovery order and no action has been taken by the plaintiff Pizzarotti nor the defendant-cross claimant Phipps since the proposed order was submitted. There are no scheduled hearings or conferences before the court at this time. Litigation is subject to many uncertainties, and the outcome of this action is not predicted with assurance. The Company is currently unable to predict the possible loss or range of loss, if any, associated with the resolution of this litigation, and, accordingly, the Company has made no provision related to this matter in the consolidated financial statements. 28 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 16. Commitments and Contingencies (continued) Vendor Litigation 1.) Teton Buildings, LLC (i) On January 1, 2019, SG Blocks commenced an action against Teton Buildings, LLC (“Teton”) in Harris County, Texas (“ Teton Texas Action ”) to recover approximately $ 2,100,000 arising from defendant’s breach of the operative contract related to Heart of Los Angeles construction project in Los Angeles (the “HOLA Project”) entered into on or about June 2, 2017. The Petition brought claims of breach of contract, negligence, and breach of express warranty. In or about February 2022 SG Blocks dismissed without prejudice the Teton Texas Action. (ii) On or about September 12, 2018, the Company entered into a Firm Price Quote and Purchase (the “GVL Contract”) with Teton to govern the manufacture and provision of 23 shipping containers and modular units (the “Teton GVL Modules”) for the Four Oaks Gather GVL project in South Carolina (the “GVL Project.”). The Company maintains that Teton breached the GVL Contract by (i) failing to timely deliver the Teton GVL Modules, (ii) delivering Teton GVL Modules that were defective in their design and manufacture, (iii) otherwise failed to meet South Carolina Building Code regulations and (iv) breached applicable warranties. As a result of the breach and defects in performance, design and manufacture by Teton, Company asserts that it has sustained approximately $ 761,401.66 in actual and consequential damages, excluding attorney’s fees. On October 16, 2019, Teton filed for Chapter 11 in the United States Bankruptcy Court for Southern District of Texas, Houston Division styled In re: Teton Buildings, LLC and bearing the case number 19-35811. On February 11, 2020, the Company filed a proof of claim again Teton in the amount of $ 2,861,401.66 arising from the HOLA Project and the GVL Contract. On or about March 16, 2020, the Bankruptcy Court converted Teton’s Chapter 11 reorganization case to a Chapter 7 liquidation case. On July 18, 2019, Ronald Sommers, the Chapter 7 Trustee, filed a Report of No Distribution stating that there is no property available for distribution to creditors. On August 20, 2019, the Bankruptcy Court closed the Teton bankruptcy case. As such, there is no prospect of any recovery against Teton. On January 22, 2021, the Company filed a third-party complaint against Teton in the United States District Court for the Central District of California, Case No. 2:20−cv−03432 in the HOLA Action (described below), seeking to determine Teton’s liability in its capacity as a bankruptcy debtor in order to collect any damages payable from Teton’s liability insurance carrier or carriers. On July 23, 2021, the Company filed a First Amended Third-Party Complaint against Teton and other named third party defendants (see #2 below). Teton has been served with the First Amended Third-Party Complaint and on or about February 11, 2022, Teton filed an answer and affirmative defenses. The parties in the HOLA Action are currently conducting discovery. The Company is currently unable to predict the possible loss or range of loss, if any, associated with the resolution of this litigation, and, accordingly, the Company has made no provision related to this matter in the consolidated financial statements. 29 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 16. Commitm ents and Contingencies (continued) 2.) SG Blocks, Inc. v HOLA Community Partners, et. al . On April 13, 2020, Plaintiff SG Blocks, Inc. (“SG Blocks” or the “Company”) filed a Complaint against HOLA Community Partners (“HCP”), Heart of Los Angeles Youth, Inc. (“HOLA”) (HCP and HOLA are collectively referred to as the “HOLA Defendants”), and the City of Los Angeles (“City”) in the United States District Court for the Central District of California, Case No. 2:20-cv-03432-ODW (“HOLA Action”). The Company asserted seven claims against HOLA Defendants arising out of and related to the HOLA Project, to wit, for: (1) breach of contract; (2) conversion; (3) default and judicial foreclosure under the Agreement as a security agreement; (4) misappropriation of trade secrets under California Civil Code section 3426; (5) misappropriation of trade secrets under 18 U.S.C. § 1836; and (6) intentional interference with contractual relations. On April 20, 2020, HOLA filed a separate action against the Company in the Los Angeles Superior Court arising out of the HOLA Project, asserting claims of (1) negligence; (2) strict products liability; (3) strict products liability, (4) breach of contract; (5) breach of express warranty; (6) violation of Business and Professions Code § 7031(b); and (7) violation of California’s unfair competition law, Business and Professions Code section 17200 (“UCL”) (“HOLA State Court Action”). The HOLA State Court Action was removed to the Central District of California and consolidated with the HOLA Action. On January 22, 2021, the Company filed a Third-Party Complaint in the HOLA Action against Third-Party Defendants Teton Buildings, LLC, Avesi Construction, LLC, and American Home Building and Masonry Corp (“AHB”) for indemnity and contribution with respect to HOLA’s claims. The Company has also notified its general liability carrier Sompo International regarding coverage concerning HOLA’s claims On February 25, 2021, the Court entered an order dismissing the Company’s claims for (1) breach of contract; (2) conversion; (3) default and judicial foreclosure under the Agreement as a security agreement; (4) misappropriation of trade secrets under California Civil Code section 3426; (5) misappropriation of trade secrets under 18 U.S.C. § 1836; but denied dismissal of the Company’s claims for intentional interference with contractual relations. The Court also denied the Company’s motion to dismiss HOLA’s claims. On March 12, 2021, the HOLA Defendants filed an answer to the Company’s complaint against it denying liability and asserting affirmative defenses. On March 12, 2021, the Company filed an answer to the HOLA Defendants’ First Amended Consolidated Complaint against it, denying liability and asserting affirmative defenses. On April 26, 2021, the Company and the HOLA Defendants filed a Joint Stipulation to Dismiss HOLA Community Partners’ Sixth Claim for Relief (violation of California Business and Professions Code §7031(b)), with prejudice, pursuant to Fed. R. Civ. P. 41(a)(1)(A)(ii). On July 23, 2021, the Company filed a First Amended Third-Party Complaint adding the following additional third party defendants seeking, inter alia , contractual indemnity, equitable indemnity; and contribution: American Home Building and Masonry Corp. (“American Home”), Anderson Air Conditioning, L.P. (“Anderson”). Broadway Glass and Mirror, Inc. (“Broadway”), Marne Construction, Inc. (“Marne”), The McIntyre Company (“McIntrye”), Dowell & Bradley Construction, Inc. dba J R Construction (“JR Construction”) Junior Steel Co. (“Junior Steel”) Saddleback Roofing, Inc. (“Saddleback”) Schindler Elevator Corporation (“Schindler”) U.S. Smoke & Fire Corp. (“U.S. Smoke”) and FirstForm, Inc. (“FirstForm”) (collectively the “Additional Third Party Defendants”). On September 2, 2021, Schindler Elevator Corp. filed its answer to the First Amended Third-Party Complaint. On September 3, 2021, Junior Steel Co. filed its answer to the First Amended Third-Party Complaint. On September 7, 2021, Anderson Air Conditioning, L.P. filed its answer to the First Amended Third-Party Complaint. On October 6, 2021, the McIntyre Group filed its answer to the First Amended Third-Party Complaint. On February 7, 2022, the Company filed a request for entry of a Clerk’s default against the following defendants: American Home Building and Masonry Corp., Avesi Construction, Marne Construction, Inc., Firstform, Inc., Dowell & Bradley Construction, Inc, Saddleback Roofing, Inc., and US Smoke and Fire Corp. On February 9, 2022, the court entered a clerk’s default pursuant to Federal Rule 55 against the following defendants: American Home Building and Masonry Corp. Avesi Construction, Dowel & Bradley Construction, Inc., Saddleback Roofing Inc. and US smoke and Fire Corp. The parties that have answered and appeared in the case are currently engaged in discovery. The cut-off for fact discovery has been extended to September 12, 2022, and a trial has been set for January 31, 2023. Litigation is subject to many uncertainties, and the outcome of this action is not predicted with assurance. The Company is currently unable to predict the outcome or possible recovery or loss or range of loss, if any, associated with the resolution of this litigation, and, accordingly, the Company has made no provision related to this matter in the consolidated financial statements. 30 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 16. Commitments and Contingencies (continued) 3.) SG Blocks, Inc. v. EDI International, PC .- On June 21, 2019, SG Blocks filed a lawsuit against EDI International, PC, a New Jersey corporation, in the Superior Court of the State of California, County of Los Angeles, Central District, in connection with the parties' consulting agreement, dated June 29, 2016, pursuant to which EDI International, PC, was to provide, for a fee, certain architectural and design services for the HOLA Project. SG Blocks, Inc. claims that EDI International, PC, tortiously interfered with SG Blocks, Inc's economic relationship with HOLA Community Partners and Heart of Los Angeles Youth, Inc. EDI International, PC, filed a cross-complaint for alleged unpaid fees and tortious interference with EDI International, PC's contractual relationship with HOLA Community Partners and Heart of Los Angeles Youth, Inc. EDI International, PC's cross-complaint seeks in excess of $ 30,428.71 in damages. On July 8, 2020, SG Blocks, Inc. added PVE LLC as a defendant in the lawsuit, claiming PVE LLC is liable to the same extent as EDI International, PC. The case is currently in the discovery stage and a trial date has been set for May 2, 2022. On May 14, 2021, EDI accepted the Company’s Statutory Offer of Compromise, pursuant to California Code of Civil Procedures §998, to settle EDI’s cross-claims. On July 26, 2021, the Company and EDI entered into a certain General Release agreement whereby in exchange for payment by the Company in the amount of $ 67,125.83 EDI released SG Blocks from all liabilities and damages related to EDI’s cross-claims. The Company continues to prosecute its claim against EDI for tortious interference with the Company’s economic relationship with HOLA Community Partners and Heart of Los Angeles Youth, Inc. The discovery period has concluded and a trial date has been set for September 6, 2022. Litigation is subject to many uncertainties, and the outcome of this action is not predicted with assurance. The Company is currently unable to predict the outcome or possible recovery or loss or range of loss, if any, associated with the resolution of this litigation, and, accordingly, the Company has made no provision related to this matter in the consolidated financial statements. Other Litigation 1.) Shetty v. SG Blocks, In c . et. al., - Case No. 20-CV-00550, United States District Court, Eastern District of New York. On January 31, 2020, Mahesh Shetty, the Company’s former President and Chief Financial Officer (“Former Employee”), filed suit against the Company and its Chairman and Chief Executive Officer, Paul Galvin, claiming (i) $ 372,638 in unpaid wages and bonuses and (ii) $ 300,000 due in severance (hereafter the “Action”). On March 25, 2020, the Former Employee filed an amended complaint raising additional claims of retaliation under the Fair Labor Standards Act, 29 U.S.C. §201 et. seq. (“FLSA”), and contractual indemnification. On April 27, 2020, the Company filed a motion to dismiss the Action. The Company asserted that the Former Employee agreed to accept (and did receive) restricted stock units of the Company’s common stock in full satisfaction and payment of all alleged unpaid wages and bonuses that are claimed in the Action, and/or has otherwise been paid in full for all amounts claimed. The Company further maintained that the Former Employee’s employment agreement precludes any entitlement to or liability for severance. On June 15, 2020, the Court entered a decision granting in part and denying in part the Company’s motion to dismiss. Specifically, the Court dismissed the Former Employee’s claim (i) for severance (in the amount of $ 300,000 ) and unpaid wages pursuant to the FLSA, but denied dismissal of the Former Employee’s claims for retaliation under the FLSA or unpaid wages allegedly due under the New York Labor Law. On or about September 14, 2021, the Company and Former Employee entered into a settlement and release agreement resolving their respective claims. On September 14, 2021, the parties filed a joint motion seeking court approval of the settlement. By order dated February 8, 2022, the court approved the settlement. On February 9, 2022 the court closed the case. 31 SG BLOCKS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the Six Months Ended June 30, 2022 and 2021 (Unaudited) 16. Commitments and Contingencies (continued) 2.) S G Blocks, Inc. v. Osang Healthcare Company, L td. , On April 14, 2021, the Company commenced an action against Osang Healthcare Company, Ltd. (“Osang”) in the United States District Court, Eastern District of New York, Case No. 21-01990 (“Osang Action”) . The Company has asserted that Osang materially breached a certain Managed Supply Agreement (“MSA”) entered into between the parties on October 12, 2020, pursuant to which the Company received on consignment two million ( 2,000,000 ) units of Osang’s “Genefinder Plus RealAmp Covid-19 PCR Test” (the “Covid-19 Test”) for domestic and international distribution. The Company has also asserted that Osang breached the covenant of good faith and fair dealing, fraudulently induced it to enter into the MSA, and violated §349 of the New York General Business Law’s prohibition of deceptive business practices. On June 18, 2021, Osang served a motion to dismiss the Osang Action pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. On July 30, 2021, the Company served its opposition to the motion to dismiss. The motion has been fully briefed and submitted to the court and the parties are awaiting a ruling thereon. On January 10, 2022 the court entered an order staying discovery pending its ruling on the defendant’s motion to dismiss. Litigation is subject to many uncertainties, and the outcome of this action is not predicted with assurance. The Company is currently unable to predict the outcome or possible recovery, if any, associated with the resolution of this litigation, and, accordingly, the Company has made no provision related to this matter in the consolidated financial statements. Commitments In April 2020, the Company entered into an amendment to its employment agreement, dated January 1, 2017, with Paul Gavin (the "Amendment"), to extend the term of employment to December 31, 2021, provide for an annual base salary of $400,000 provide for a performance bonus structure for a bonus of up to 50% of base salary upon the Company’s achievement of $2,000,000 EBITDA and additional performance bonus payments for the achievement of EBITDA in excess of $2,000,000 based on a percentage of the incremental increase in EBITDA (ranging from 10% of the incremental increase in EBITDA if the Company achieves over $2,000,000 and up to $7,000,000 in EBITDA, 8% of the incremental increase in EBITDA if the Company achieves over $7,000,000 and up to $12,000,000 in EBITDA and 3% of the incremental increase in EBITDA over $12,000,000), provide for a profits-based additional bonus of up to $250,000 in certain limited circumstances, and provide for one (1) year severance, plus a pro-rated amount of any unpaid bonus earned by him during the year as verified by the Company’s principal financial officer, if Mr. Galvin is terminated without cause. At the Company’s option, up to fifty (50%) percent of the EBITDA performance bonuses may be paid in restricted stock units if then available for grant under the Company’s Stock Incentive Plan.All other terms of the employment agreement remain in full force and effect. 17. Subsequent Events On July 5, 2022, the Company entered into an amendment to its employment agreement, dated January 1, 2017, as amended, with Paul Galvin, to provide for the payment of an annual base salary of $ 500,000 . All other terms of the employment agreement remain in full force and effect. 32