Introduction and Certain Cautionary Statements
As used in this Quarterly Report, unless the context requires otherwise, references to the "Company," "we," "us," and "our" refer to SG Blocks, Inc. and its subsidiaries. The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and schedules included elsewhere in this Quarterly Report on Form 10-Q and with our audited condensed consolidated financial statements and notes for the year ended December 31, 2020, which were included in our Annual Report on Form 10-K for the year then ended December 31, 2020, as filed with the Securities and Exchange Commission (the "SEC") on April 15, 2021 and Amendment No. 1 thereto filed with the SEC on April 30, 2021 (the "2020 Form 10-K"). This discussion, particularly information with respect to our future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Special note regarding forward-looking statements" in this Quarterly Report on Form10-Q. You should review the disclosure under the heading "Risk Factors" in this Quarterly Report on Form 10-Q and under Part I, Item IA of the 2020 Form 10-K for a discussion for important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Special note regarding forward-looking statements
This Quarterly Report on Form-10Q contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Statements contained in this Quarterly Report on Form 10-Q may use forward-looking terminology, such as "anticipates," "believes," "could," "would," "estimates," "may," "might," "plan," "expect," "intend," "should," "will," or other variations on these terms or their negatives. All statements other than statements of historical facts are statements that could potentially be forward-looking. We caution that forward-looking statements involve risks and uncertainties and actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate or prediction is realized. Factors that could cause or contribute to such differences include, but are not limited to: general economic, political and financial conditions, both in the United States and internationally; our ability to obtain additional financing on acceptable terms, if at all, or to obtain additional capital in other ways; our ability to increase sales, generate income, effectively manage our growth and realize our backlog; competition in the markets in which we operate, including the consolidation of our industry, our ability to expand into and compete in new geographic markets and our ability to compete by protecting our proprietary manufacturing process; a disruption or cybersecurity breach in our or third-party suppliers' information technology systems; our ability to adapt our products and services to industry standards and consumer preferences and obtain general market acceptance of our products; supply chain problems, including product shortages and the availability of raw materials, and potential loss of relationships with key vendors, suppliers or subcontractors; the seasonality of the construction industry in general, and the commercial and residential construction markets in particular; a disruption or limited availability with our third party transportation vendors; the loss or potential loss of any significant customers; exposure to product liability, including the possibility that our liability for estimated warranties may be inadequate, and various other claims and litigation; our ability to attract and retain key employees; our ability to attract private investment for sales of product; the credit risk from our customers and our customers' ability to obtaining third-party financing if and as needed; an impairment of goodwill; the impact of federal, state and local regulations, including changes to international trade and tariff policies, and the impact of any failure of any person acting on our behalf to comply with applicable regulations and guidelines; costs incurred relating to current and future legal proceedings or investigations; the cost of compliance with environmental, health and safety laws and other local building regulations; our ability to utilize our net operating loss carryforwards and the impact of changes in the United States' tax rules and regulations; dangers inherent in our operations, such as natural or man-made disruptions to our facilities and project sites, the impact of COVID-19, and related government “shelter-in-place” mandates and other restrictions on business and commercial activity and the adequacy of our insurance coverage; our ability to comply with the requirements of being a public company; fluctuations in the price of our common stock, including decreases in price due to sales of significant amounts of stock; potential dilution of the ownership of our current stockholders due to, among other things, public offerings or private placements by us or issuances upon the exercise of outstanding options or warrants and the vesting of restricted stock units; the ability of our principal stockholders, management and directors to potentially exert control due to their ownership interest; any ability to pay dividends in the future; potential negative reports by securities or industry analysts regarding our business or the construction industry in general; Delaware law provisions discouraging, delaying or preventing a merger or acquisition at a premium price; our ability to remain listed on the Nasdaq Capital Market; our classification as a smaller reporting company resulting in, among other things, a potential reduction in active trading of our common stock or increased volatility in our stock price; and any factors discussed in "Part II - Item 1A. Risk Factors" to this Quarterly Report on Form 10-Q as well as our 2020 Form 10-K as amended by the Amendment No. 1 thereto, and other filings with the Securities Exchange Commission. In addition, certain information presented below is based on unaudited financial information. There can be no assurance that there will be no changes to this information once audited financial information is available. As a result, readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date of this report. The Company will not undertake to update any forward-looking statement herein or that may be made from time to time on behalf of the Company.
Overview
Using our proprietary technology and design and engineering expertise, we modify code-engineered cargo shipping containers and purpose-built modules for use for safe and sustainable commercial, industrial and residential building construction. Rather than consuming new steel and lumber, our proprietary technology and design and engineering expertise allows for the redesign, repurpose and conversion of heavy-gauge steel cargo shipping containers into SGBlocks™, which are safe green building blocks for commercial, industrial, and residential building construction.
Our business model originally was a project-based construction model pursuant to which we were responsible for the design, construction and sale of finished products that incorporated our technology to customers throughout the United States primarily in the multi-family housing, restaurant, military and education industries. From October 2019 to June 2021, our business model for residential building construction became a royalty-fee model established under a five-year exclusive license with CPF MF 2019-1 LLC (“CPF”) pursuant to which CPF received an exclusive license for our proprietary technology for residential use, including, without limitation, single-family residences and multi-family residences, but specifically excluding military housing. Our Ridge Avenue Project, a residential housing project in Atlanta, was also excluded from the license to CPF. In June 2021, we terminated the license to CPF and recommenced our original project-based business model pursuant to which we design, construct and sell finished products to customers throughout the United States.
In April 2020, we expanded our product offerings and began focusing on the medical projects when we entered into the COVID-19 diagnostic market through the distribution of COVID-19 diagnostic tests. We have subsequently entered into additional collaborations for the distribution of diagnostic tests as well as collaborations for the use of our modular technology for the building of medical test centers that include COVID-19 testing. During 2020, we entered into a joint venture, and have begun, to provide clinical lab testing, as well as test kit sales related to a separate distributer agreement. In addition, in January 2021, we together with other third parties formed Chicago Airport Testing LLC (“CAT”). CAT, is in the business of marketing, selling, distributing leasing and otherwise commercially exploiting certain products and services in the medical industry, including COVID-19 testing.
In September 2020, we acquired substantially all the assets of Echo, a Texas limited liability company, except for Echo's real estate holdings for which we obtained a right of first refusal, which we subsequently exercised on February 24, 2021. Echo is a container/modular manufacturer based in Durant, Oklahoma specializing in the design and construction of permanent modular and temporary modular buildings and was one of our key supply chain partners. Echo catered to the military, education, administration facilities, healthcare, government, commercial and residential customers. This acquisition has allowed us to expand our reach for our Modules and offers us an opportunity to vertically integrate a large portion of our cost of goods sold, as well as increase margins, productivity and efficiency in the areas of design, estimating, manufacturing and delivery. We decided not to pursue the option to acquire Echo's real estate holdings in the second quarter of 2021.
Recent Business Developments
On May 10, 2021, we acquired a 50+ acre site in Lago Vista, Texas (the “Lago Vista Site”) for $3,500,000, paid in cash, pursuant to an Unimproved Property Contract, dated February 25, 2021, with Northport Harbor LLC. The acquired parcel sits on Lake Travis on the Colorado River in central Texas and we plan to build upscale condominiums, a health club, marina and other amenities. Our current plan is to develop 277,000 square feet at the Lago Vista site and build 225 units on the Lago Vista Site with the first units estimated to be delivered in the second and third quarter of 2022 and completion of all units estimated to be fourth quarter of 2022, subject to adequate supply chain and personnel.
On May 31, 2021, our subsidiary SGB Development Corp. (“SG DevCorp”), acquired a 50% membership interest in a limited liability company that is building affordable housing in the Atlanta, Georgia metropolitan area to be known as “Norman Berry Village”. SGB DevCorp has partnered with CMC, a New York City-based real estate development firm with national expertise, with ZT Architecture & Land Development and Community Development Consortium providing design build services. CMC has previously engaged SG Blocks to complete a design build project known as Ridge Avenue, also in Atlanta. We expect the project to develop 125,000 square feet and build 138 units at Norman Berry Village with the first units estimated to be delivered in the second quarter of 2022 and completion of all units estimated to be fourth quarter of 2022, subject to adequate supply chain and personnel.
On June 15, 2021, we terminated the Exclusive License Agreement with CPF that we had entered into on October 3, 2019. In connection with the termination we entered into a Settlement and Mutual Release Agreement (the “Settlement Agreement”) with CPF, the general partner (the “Licensee”) of CPF MF 2019-1 LLC (“CPF MF”), and Capital Plus Financial, LLC, a limited partner of the Licensee (“Capital Plus”) and an Assignment of Limited Rights Under Membership Interest Redemption Agreement, dated June 15, 2021, with Capital Plus and the Licensee in connection with the termination of that certain Exclusive License Agreement, dated as of October 3, 2019 (the “License Agreement”), with the Licensee Pursuant to the Settlement Agreement with CPF and Capital Plus, the License Agreement was terminated, we released CPF and CPF MF for any claims in exchange for releases from CPF and Capital Plus and we receiving an assignment of CPF’s right under certain circumstances to a $1.25 million redemption distribution from CPF MF under its Operating Agreement.
On June 24, 2021, SG DevCorp, as member, entered into an Operating Agreement, with Jacoby Development, Inc., a Georgia corporation (“JDI”), as manager, dated June 24, 2021 (the “Operating Agreement”), for JDI-Cumberland Inlet, LLC, a Georgia limited liability company (“JDI-Cumberland”), pursuant to which SG DevCorp acquired a 10% non-dilutable equity interest (“LLC Interest”) in JDI-Cumberland and contributed $3,000,000 in capital for the development of a 1,286 acre waterfront parcel in downtown historic St. Marys, Georgia (the “Project”). SG DevCorp in conjunction with Jacoby Development of Atlanta, Georgia expects to develop a mixed-use destination community. The 1,286-acre waterfront parcel of land closed on June 30, 2021. We expect that JDI-Cumberland Inlet, LLC will build 1,280 units of approximately 1,000 square feet per home for this Project with the first units estimated to be delivered in the third quarter of 2022 and completion of all units estimated to be completed over a three year period, subject to adequate supply chain and personnel.
The Operating Agreement provides JDI with the right, at its option, to purchase the LLC Interest from SG DevCorp on or before June 24, 2023 for $3,000,000, plus an amount equal to an annual internal rate of return (IRR) on such funds of forty (40%) percent (i.e., $1,200,000 annualized). After June 24, 2023, the Operating Agreement provides JDI with the right, at its option, to purchase the LLC Interest from SG DevCorp for $3,000,000, plus an amount equal to an IRR of thirty-two and one-half (32.5%) percent (i.e., $975,000 annualized). The Operating Agreement also provides that if JDI receives a good faith, bona fide written offer from an unaffiliated third party to purchase all or any portion of the Project, JDI shall first offer the Project to SG DevCorp at the same price and upon substantially the same terms as are contained in the third party offer.
In connection with our acquisition of the LLC Interest, our subsidiary, SG Echo, LLC (“SG Echo”), entered into a Fabrication and Building Services Agreement (“Building Services Agreement”) with JDI-Cumberland to design, fabricate and install various improvements for the Project using modular structures, pursuant to budgets prepared by SG Echo submitted for approval to JDI-Cumberland, including a marina, town center, apartments and single family units, townhomes, commercial, retail and lodging buildings/structures, eco-tourism park, camping yurts, cabins and cottages,. The Building Services Agreement has an initial term of three years, with two-year automatic renewal provisions.
On July 14, 2021, SG DevCorp entered into a Real Estate Lien Note, dated July 14, 2021, in the principal amount of $2,000,000 (the “Note”), secured by a Deed of Trust, dated July 14, 2021, on its 50+ acre Lake Travis project site in Lago Vista, Texas and a related Assignment of Leases and Rents, dated July 8, 2021, for net loan proceeds of $1,958,233 after fees. The Note has a term of one (1) year, provides for payments of interest only at a rate of twelve percent (12%) per annum and may be prepaid without penalty commencing nine (9) months after its issuance date. If the Note is prepaid prior to nine (9) months after its issuance date, a 0.5% prepayment penalty is due. SG DevCorp intends to use the proceeds of the Note for its development projects.
Results of Operations
Our operations for the six months ended June 30, 2021 and 2020 may not be indicative of our future operations. Our operations for the three and six months ended June 30,2021 includes the operations of SG Echo which was acquired in September 2020, Clarity Mobile Venture and Chicago Airport Testing and accordingly the operations for the three and six months ended June 30, 2020 do not include any revenue or costs associated with SG Echo, Clarity Mobile Venture and Chicago Airport Testing.
Impact of Coronavirus (COVID-19)
With the global spread of the ongoing novel coronavirus ("COVID-19") pandemic during 2020, we have implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on its employees and business. The worldwide spread of the COVID-19 virus has resulted in, and may continue to result in, a global slowdown of certain economic activity which is likely to decrease demand for a broad variety of goods and services, including from our customers, while also resulting in delays in projects due to labor shortages and supplier disruptions for an unknown period of time until the disease is contained. To date, we have experienced some delays and increased costs for materials, especially lumber, in projects due to COVID-19 which we expect to continue to have an impact on our revenue and our results of operations, the size and duration of which we are currently unable to predict. Any quarantines, the timing and length of containment and eradication solutions, travel restrictions, absenteeism by infected workers, labor shortages or other disruptions to the suppliers and contract manufacturers or customers would likely adversely impact our sales, and operating results and result in further project delays. In addition, the pandemic could result in an economic downturn that could affect the ability of our customers and licensees to obtain financing and therefore impact demand for our products. Order lead times could be extended or delayed and increases we have experienced in pricing could continue to increase. Some products or services may become unavailable if the regional or global spread were significant enough to prevent alternative sourcing. Accordingly, we are considering alternative product sourcing in the event that product supply becomes problematic. We expect this global pandemic to have an impact on the Company's revenue and results of operations, the size and duration of which we are currently unable to predict. In addition, to the extent the ongoing COVID-19 pandemic adversely affects our business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties which we face.
Six Months Ended June 30, 2021 and 2020:
|
|
|
For the Six Months Ended
June 30, 2021
|
|
|
For the Six Months Ended
June 30, 2020
|
|
|
Total Revenue
|
|
$
|
21,041,614
|
|
|
$
|
827,705
|
|
|
Total Cost of revenue
|
|
|
(16,994,389
|
)
|
|
|
(407,491
|
)
|
|
Total Payroll and related expenses
|
|
|
(1,629,186
|
)
|
|
|
(664,146
|
)
|
|
Total Other Operating expenses
|
|
|
(3,503,563
|
)
|
|
|
(1,346,301
|
)
|
|
Total Operating loss
|
|
|
(1,085,524
|
)
|
|
|
(1,590,233
|
)
|
|
Total Other income
|
|
|
91,599
|
|
|
|
4,833
|
|
|
Total Loss before income tax
|
|
|
(993,925
|
)
|
|
|
(1,585,400
|
)
|
|
Add: Net income attributable non-controlling interest
|
|
|
2,581,211
|
|
|
|
—
|
|
|
Net loss attributable to common stockholders of SG Blocks, Inc.
|
|
$
|
(3,575,136
|
)
|
|
$
|
(1,585,400
|
)
|
Revenue
During the six months ended June 30, 2021, we derived revenue from the following three categories of sources: construction services, engineering services and medical revenue. The medical revenue source was a new source and we commenced receipt of revenue from this source in the fourth quarter of 2020 when Clarity Mobile Venture LLC commenced operations and we continued to derive revenue from this source during the quarter ended June 30, 2021 with strong revenue related to COVID-19 samples collected from our Clarity Mobile joint venture in the first six months of 2021. Total revenue for the six months ended June 30, 2021 was $21,041,614 compared to $827,705 for the six months ended June 30, 2020. This increase of $20,213,909 or approximately 2442% was mainly driven by an increase in medical revenue of approximately $15,740,000 (lab testing, test kit sales and equipment but excluding revenue generated from construction of medical related projects) from mainly the collection of COVID-19 test samples with additional medical revenue from the opening and subletting of a testing facility in the Chicago area, an increase in revenue of approximately $1,665,000 in special use projects which includes one legacy contract commitment related to the SG Echo acquisition, an increase in revenue of approximately $2,180,000 in government projects, an increase in revenue of approximately of $435,000 in medical related construction projects and a moderate increase in construction revenue related to office and hotel/hospitality projects for approximately $385,000 and $410,000, respectively, offset by a decrease in revenue related to our retail and other projects for approximately $275,000 and $300,000, respectively, for the six months ended June 30, 2021, as compared to June 30, 2020.
Cost of Revenue and Gross Profit
Cost of revenue was $16,994,389 for the six months ended June 30, 2021, compared to $407,491 for the six months ended June 30, 2020. The increase of $16,586,898 or a increase of approximately 4070%, is primarily related to higher testing volumes which required an increase in procurement of COVID-19 tests and testing supplies and higher procurement and manufacturing costs of modifying containers and wood modular units. Due to capabilities of Echo, we have now increased our sales of wood modular units to our customer base. As previously stated our costs of revenue for the six months ended June 30, 2021 include costs and expenses associated with the operations of SG Echo, Clarity Mobile Venture and Chicago Airport Testing and our costs of revenue for the six months ended June 30, 2020 do not include such costs or expenses.
Gross profit was $4,047,225 and $420,214 for the six months ended June 30, 2021 and 2020, respectively.
Gross profit margin percentage decreased to approximately 19% for the six months ended June 30, 2021 compared to approximately 51% for the six months ended June 30, 2020. The decrease in gross profit margin percentage was primarily due to a non-recurring single legacy contract recognized in 2020 in the amount of $300,000 with no estimated costs and due to legacy contract commitments from the acquisition of SG Echo that were recognized in the six months ended June 30, 2021 that incurred losses of approximately $2,400,000 due to escalations in material pricing related to COVID-19 and labor overages.
Payroll and Related Expenses
Payroll and related expenses for the six months ended June 30, 2021 were $1,629,186 compared to $664,146 for the six months ended June 30, 2020. This increase was primarily caused by an increase in salaries and additional head count hired to help manage the growth of SG Echo and other recently launched subsidiaries such as Chicago Airport Testing, Clarity Mobile Venture, and SGB Development Corp. of approximately $543,000 and an increase of approximately $420,000 in stock-based compensation expense, recognized for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. We recognized $532,422 in stock-based compensation expense related to payroll and related expenses for the six months ended June 30, 2021, compared to $111,394 for June 30, 2020.
Other Operating Expenses (General and administrative expenses, Marketing and business development expense, and Pre-project expenses)
Other operating expenses (general and administrative expenses, marketing and business development expenses, pre-project expenses) for the six months ended June 30, 2021 were $3,503,563 compared to $1,346,301 for the six months ended June 30, 2020. The increase resulted primarily from an increase in rent expense of approximately $100,000 related to COVID-19 cold storage charges and rental expense for the Chicago Airport Testing facility, an increase in public expenses of approximately $109,000, an increase in information technology expense of approximately $113,000, an increase in insurance expense of approximately $99,000 for additional insurance coverage for COVID-19 medical operations, an increase in contract labor expense of approximately $466,000 with the majority related to the start-up and ongoing operations of the COVID-19 medical projects. The Company had an increase of approximately $458,000 in laboratory medical expenses mainly from the start-up and continued operations in Wayne County, Michigan and LAX COVID-19 testing locations, an increase of approximately $352,000 for manager’s oversight fees related to Clarity Mobile Venture, an increase in depreciation expense of approximately $114,000, an increase in travel expense by approximately $68,000, an increase in bad debt expense of approximately $161,000 due from one legacy customer from the acquisition of SG Echo with a slight decrease in legal fees of approximately $109,000. We recognized no stock-based compensation expense related to legal expense and marketing expense for the six months ended June 30, 2021 and $57,120 for the six months ended June 30, 2020.
Interest income for the six months ended June 30, 2021 was $31,267 mainly derived from bank interest and interest associated with an outstanding note receivable. There was $11,096 of interest income for the six months ended June 30, 2020. Other income for the six months ended June 30, 2021 was $61,024 related to miscellaneous income. There was no other income for the six months ended June 30, 2020. Interest expense for the six months ended June 30 2021 and 2020 was $692 and $6,263, respectively.
Income Tax Provision
A 100% valuation allowance was provided against the deferred tax asset consisting of available net operating loss carry forwards and, accordingly, no income tax benefit was provided.
Impact of Inflation
The impact of inflation upon the Company’s revenue and income (loss) from continuing operations during each of the past two fiscal years has not been material to its financial position or results of operations for those years because the Company does not maintain any inventories whose costs are affected by inflation.
Three Months Ended June 30, 2021 and 2020:
|
|
|
For the Three Months Ended
June 30, 2021
|
|
|
For the Three Months Ended
June 30, 2020
|
|
|
Total Revenue
|
|
$
|
11,853,987
|
|
$
|
628,949
|
|
|
Total Cost of revenue
|
|
|
(9,014,943
|
)
|
|
(254,716
|
)
|
|
Total Payroll and related expenses
|
|
|
(801,664
|
)
|
|
(392,338
|
)
|
|
Total Other Operating expenses
|
|
|
(1,961,447
|
)
|
|
(822,649
|
)
|
|
Total Operating income (loss)
|
|
|
75,933
|
|
|
(840,754
|
)
|
|
Total Other income
|
|
|
74,492
|
|
|
2,781
|
|
|
Total Income (Loss) before income tax
|
|
|
150,425
|
|
|
(837,973
|
)
|
|
Add: Net income attributable non-controlling interest
|
|
|
1,691,684
|
|
|
—
|
|
|
Net loss attributable to common stockholders of SG Blocks, Inc.Net loss
|
|
$
|
(1,541,259
|
)
|
$
|
(837,973
|
)
|
Revenue
During the three months ended June 30, 2021, we derived revenue from the following three categories of sources: construction services, engineering services and medical revenue. The medical revenue source was a new source and we commenced receipt of revenue from this source in the fourth quarter of 2020 when Clarity Mobile Venture LLC commenced operations and we continued to derive revenue from this source during the quarter ended June 30, 2021 with strong revenue related to COVID-19 samples collected from our Clarity Mobile joint venture in the three months ended June 30, 2021. Total revenue for the three months ended June 30, 2021 was $11,853,987 compared to $628,949 for the three months ended June 30, 2020. This increase of $11,225,038 or approximately 1785% was mainly driven by an increase in medical revenue of approximately $9,785,000 (lab testing, test kit sales and equipment but excluding revenue generated from construction of medical related projects) from mainly the collection of COVID-19 test samples with additional medical revenue from the opening and subletting of a testing facility in the Chicago area, an increase in revenue of approximately $206,000 in special use projects which includes one legacy contract commitment related to the SG Echo acquisition, an increase in revenue of approximately $1,097,000 in government projects, an increase in revenue of approximately of $185,000 in medical related construction projects and a moderate increase in construction revenue related to office and hotel/hospitality projects for approximately $248,000 and $245,000, respectively, offset by a decrease in revenue related to our retail and other projects for approximately $199,000 and $300,000, respectively, for the six months ended June 30, 2021, as compared to June 30, 2020.
Cost of Revenue and Gross Profit
Cost of revenue was $9,014,943 for the three months ended June 30, 2021, compared to $254,716 for the three months ended June 30, 2020. The increase of $8,760,227 or an increase of approximately 3439%, is primarily related to higher testing volumes which required an increase in procurement of COVID-19 tests and testing supplies and higher procurement and manufacturing costs of modifying containers and wood modular units.
Gross profit was $2,839,044 and $374,233 for the three months ended June 30, 2021 and 2020, respectively.
Gross profit percentage decreased to approximately 24% for the three months ended June 30, 2021 compared to approximately 60% for the three months ended June 30, 2020. The decrease in gross profit margin percentage was primarily due to a non-recurring single legacy contract recognized in 2020 in the amount of $300,000 with no estimated costs and due to four legacy contract commitments from the acquisition of SG Echo that were recognized in 2021 that incurred losses of approximately $1,200,000 due to escalations in material pricing related to COVID-19 and labor overages
Payroll and Related Expenses
Payroll and related expenses for the three months ended June 30, 2021 were $801,664 compared to $392,338 for the three months ended June 30, 2020. This increase was primarily caused by an increase in salaries and additional head count to help manage the growth of SG Echo and other recently launched subsidiaries such as Chicago Airport Testing, Clarity Mobile Ventures, and SGB Development Corp. of approximately $253,000 and an increase of approximately $173,500 in stock-based compensation expense, recognized for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. We recognized $246,236 in stock-based compensation expense related to payroll and related expenses for the three months ended June 30, 2021, compared to $72,630 for June 30, 2020.
Results of Operations (continued)
Other Operating Expenses (General and administrative expenses, Marketing and business development expense, and Pre-project expenses)
Other operating expenses (general and administrative expenses, marketing and business development expenses, pre-project expenses) for the three months ended June 30, 2021 were $1,961,447 compared to $822,649 for the three months ended June 30, 2020. The increase resulted primarily from an increase in rent expense of approximately $48,000 related to COVID-19 cold storage charges and rental expense for the Chicago Airport Testing facility, an increase in public expenses of approximately $93,000, an increase in information technology expense of approximately $50,000, an increase in insurance expense of approximately $81,000 for additional insurance coverage for COVID-19 medical operations, an increase in contract labor expense of approximately $281,000 with the majority related to the start-up and ongoing operations of the COVID-19 medical projects. The Company had an increase of approximately $76,000 in laboratory medical expenses mainly from the start-up and continued operations in Wayne County, Michigan and LAX COVID-19 testing locations, an increase of approximately $321,000 for manager’s oversight fees related to Clarity Mobile Venture, an increase in depreciation expense of approximately $64,000, an increase in travel expense by approximately $34,500, an increase in bad debt expense of $161,000 due from one legacy customer from the acquisition of SG Echo with a slight decrease in legal fees of $125,000. We recognized no stock-based compensation expense related to legal expense and marketing expense for the three months ended June 30, 2021 and $57,120 for the three months ended June 30, 2020.
Other Income (Expense)
Interest income for the three months ended June 30, 2021 and 2020 was $13,797 and $6,233 mainly derived from bank interest and interest associated with an outstanding note receivable. Interest expense for the three months ended June 30, 2021 and 2020 was $329 and $3,452 and mainly related to the Securities Purchase Agreement entered into on February 4, 2020 with an accredited investor. Other income for the three months ended June 30, 2021 was $61,024 related to miscellaneous income. There was no other income for the three months ended June 30, 2020.
Liquidity and Capital Resources
As of June 30, 2021 and December 31, 2020, we had an aggregate of $2,323,599 and $13,010,356, respectively, of cash and cash equivalents.
On February 4, 2020, we entered into a Securities Purchase Agreement with an accredited investor, pursuant to which we issued to the investor a secured note in the aggregate principal amount of $200,000 (the “Note”), which bore interest at a rate of nine percent (9%) per annum and was due on July 31, 2023, and was secured by a security interest in the royalty payable to us under that certain Exclusive License Agreement, dated October 3, 2019, with CPF GP 2019-1 LLC. During the third quarter of 2020, the Note to investor of $200,000 and unpaid accrued interest of $6,263 was converted into 73,665 shares of common stock.
In April 2020, we completed a public offering where we pursuant to which we sold 440,000 shares of common stock at a public offering price of $4.25 per share which resulted in net proceeds of approximately $1,522,339 after deducting underwriting discounts and commissions and other expenses related to the offering.
In May 2020, we completed a public offering pursuant to which we sold an aggregate of 6,900,000 shares of common stock at a public offering price of $2.50 per share which resulted in net proceeds of approximately $15,596,141 after deducting underwriting discounts and commissions and other expenses related to the offering.
We anticipate that we will continue to generate losses from operations until the fourth quarter of 2021. At June 30, 2021 and December 31, 2020 we had a cash balance of $2,323,599 and $13,010,356, respectively. As of June 30, 2021, our stockholders’ equity was $16,840,723, compared to $18,437,823 as of December 31, 2020. Our net loss for the six months ended June 30, 2021 was $993,925 and net cash used in operating activities was $1,307,944. We anticipate our cash balance is sufficient to last at least twelve months from August 13, 2021.
We may need to generate additional revenues or secure additional financing sources, such as debt or equity capital, to fund future growth, which financing may not be available on favorable terms or at all. We do not have any additional sources secured for future funding, and if we are unable to raise the necessary capital at the times we require such funding, we may need to materially change our business plan, including delaying implementation of aspects of such business plan or curtailing or abandoning such business plan altogether.
Cash Flow Summary
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|
Six Months Ended
June 30,
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(1,307,944)
|
|
$
|
(2,181,122
|
)
|
|
Investing activities
|
|
|
(8,243,216)
|
|
|
(650,000
|
)
|
|
Financing activities
|
|
|
(1,135,597)
|
|
|
17,318,358
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(10,686,757)
|
|
$
|
14,487,236
|
|
Operating activities used net cash of $1,307,944 during the six months ended June 30, 2021, and $2,181,122 during the six months ended June 30, 2020. Generally, our net operating cash flows fluctuate primarily based on changes in our profitability and working capital. Cash used in operating activities decreased by approximately $873,178 primarily due to an decrease in working capital of approximately $442,000, an increase of approximately $364,000 in stock-based compensation, an increase of approximately $196,500 in depreciation expense, an increase of approximately $161,000 in bad debt expense and a decrease in the overall net loss of approximately $591,000, in the six months ended June 30, 2021 compared to the six months ended June 30, 2020.
Investing activities used net cash of $8,243,216 during the six months ended June 30, 2021, and $650,000 during the six months ended June 30, 2020. Cash used in investing activities increase from the corresponding period of the prior year primarily due to the purchase of property, plant and equipment of approximately $4,692,000 which included the land purchase for the Austin project totaling approximately $3,575,000, purchase of intangible assets of $42,500, payments on assumed liabilities related to the Echo DCL, LLC acquisition of approximately $157,500, and investments in two SGB Development entities totaling approximately $3,350,000.
Financing activities used net cash of $1,135,597 during the six months ended June 30, 2021, and provided net cash of $17,318,358 during the six months ended June 30, 2020. Cash provided by financing activities decreased by approximately $17,318,000 due to a decrease in proceeds from public stock offerings and proceeds from long-term note payable in the six months ended June 30, 2021. Cash used by financing activities for the six months ended June 30, 2021 increased by approximately $1,842,784 due to distributions paid to our non-controlling interest partner, offset by an increase of approximately $707,000 in proceeds from conversion of outstanding warrants to common stock.
We provide services to our construction and engineering customers in three separate phases: the design phase, the architectural and engineering phase and the construction phase. Each phase is independent of the other, but builds through a progression of concept through delivery of a completed structure. These phases may be embodied in a single contract or in separate contracts, which is typical of a design build process model. As of June 30, 2021, we had 14 projects totaling $21,035,831 under contract, which, if they all proceed to construction, will result in our constructing approximately 224,026 square feet of container and modular space. Of these contracts, all fourteen projects combine all three phases or parts thereof and including construction. We expect that all of this revenue will be realized by June 30, 2023.
Backlog may fluctuate significantly due to the timing of orders or awards for large projects and is not necessarily indicative of future backlog levels or the rate at which backlog will be recognized as revenue. The decrease in backlog of approximately $4,081,000 from December 31, 2020 is primarily attributable to one new contract we entered into during the first quarter of 2021 for approximately $1,325,000 and offset by work in progress or completed contracts during the first six months of 2021 for approximately $5,328,000.
There can be no assurance that our customers will decide to and/or be able to proceed with these construction projects, or that we will ultimately recognize revenue from these projects in a timely manner or at all.
Off-Balance Sheet Arrangements
As of June 30, 2021 and December 31, 2020, we had no material off-balance sheet arrangements to which we are a party.
In the ordinary course of business, we enter into agreements with third parties that include indemnification provisions which, in our judgment, are normal and customary for companies in our industry sector. These agreements are typically with consultants and certain vendors. Pursuant to these agreements, we generally agree to indemnify, hold harmless, and reimburse indemnified parties for losses suffered or incurred by the indemnified parties with respect to actions taken or omitted by us. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of liabilities relating to these provisions is minimal. Accordingly, we have no liabilities recorded for these provisions as of June 30, 2021.
Critical Accounting Policies and New Accounting Pronouncements
Critical Accounting Policies
Our condensed consolidated financial statements have been prepared using generally accepted accounting principles in the United States of America (“GAAP”). In connection with the preparation of the financial statements, we are required to make assumptions and estimates and apply judgments that affect the reported amounts of assets, liabilities, revenue, and expenses, and the related disclosures. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors that we believe to be relevant at the time the consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates, and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in “Note 3— Summary of Significant Accounting Policies” of the notes to our condensed consolidated financial statements included elsewhere in this report. We believe that the following accounting policies are the most critical in fully understanding and evaluating our reported financial results.
Share-based payments. We measure 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 the award is measured on the grant date. For non-employees, the fair value of the award is generally re-measured on interim financial reporting dates and vesting dates until the service period is complete. 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. We recognize 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 is 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 consolidated statements of operations.
Other derivative financial instruments. SGB classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provide a choice of net-cash settlement or settlement in SGB’s own shares (physical settlement or net-share settlement), provided that such contracts are indexed to SGB’s own stock. SGB 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 SGB’s control) or (ii) give the counterparty a choice of net-cash settlement or settlement shares (physical settlement or net-cash settlement). SGB 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.
Critical Accounting Policies (continued)
Convertible instruments. SGB 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 (i) 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; (ii) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable GAAP measures with changes in fair value reported in earnings as they occur; and (iii) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
SGB determined that the embedded conversion options that were included in the previously outstanding convertible debentures should be bifurcated from their host and a portion of the proceeds received upon the issuance of the hybrid contract has been allocated to the fair value of the derivative. The derivative was subsequently marked to market at each reporting date based on current fair value, with the changes in fair value reported in results of operations.
Revenue recognition – we determine, 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 we expect to be entitled in exchange for those goods or services. To achieve this core principle, we apply 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, we apply recognition of revenue over time, which is similar to the method we 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.
Critical Accounting Policies (continued)
For product or equipment sales, we apply recognition of revenue when the customer obtains control over such goods, which is at a point in time.
On October 3, 2019, we entered into an Exclusive License Agreement (“ELA” ) pursuant to which we granted an exclusive license for our technology as outlined in the ELA. The ELA is described below. Under the ELA, we were to receive royalty payments based upon gross revenues earned by the licensee for commercialized products within the field of design and project management platforms for residential use, including single-family residences and multi-family residences, but excluding military housing. We have determined that the ELA granted the licensee a right to access our intellectual property throughout the license period (or its remaining economic life, if shorter), and thus recognizes revenue over time as the licensee recognizes revenue and we have the right to payment of royalties. No revenue has been recognized under the ELA for the six months ended June 30, 2021. On June 15, 2021 we terminated the Exclusive License Agreement with CPF that we had entered into on October 3, 2019.
We entered into a joint venture agreement with Clarity Lab Solutions, LLC (“Clarity Labs”) (the “JV”) in the fourth quarter of 2020. Revenue from the activities of the JV is related to clinical testing services and is recognized when services have been rendered, which is at a point in time. In addition, we formed Chicago Airport Testing, LLC which collects rental revenue. During the six months ending June 30, 2021, we recognized $15,621,142 in revenue related to activities through the two JV's, which are included in medical revenue on the accompanying consolidated statements of operations.
We acquired a 10% non-dilutable equity interest for JDI-Cumberland Inlet, LLC and acquired a 50% membership interest in Norman Berry II Owner LLC in the second quarter of 2021. We have determined we are not the primary beneficiary and thus will not consolidated the activities on the condensed consolidated financial statements. We will use the equity method to report the activities as an investment in on our condensed consolidated financial statements.
Goodwill – Goodwill represents the excess of reorganization value over the fair value of identified net assets upon emergence from bankruptcy. In accordance with the accounting guidance on goodwill, we perform our impairment test of goodwill at the reporting unit level each fiscal year, or more frequently if events or circumstances change that would more likely than not reduce the fair value of its reporting unit below its carrying value. Our evaluation of goodwill completed during the year ended December 31, 2020, resulted in no impairment loss. There was no impairment during the six months ended June 30, 2021.
Intangible assets – Intangible assets consist of $2,766,000 of proprietary knowledge and technology which is being amortized over 20 years, $97,164 of trademarks which is being amortized over 5 years, $47,800 of website fees which is being amortized over 5 years. Our evaluation of intangible assets for impairment during the year ended December 31, 2020, determined that there were no impairment losses. There was no impairment during the six months ended June 30, 2021.
New Accounting Pronouncements
See Note 3 to the accompanying consolidated financial statements for all recently adopted and new accounting pronouncements.
Non-GAAP Financial Information
In addition to our results under GAAP, we also present EBITDA and Adjusted EBITDA for historical periods. EBITDA and Adjusted EBITDA are non-GAAP financial measures and have been presented as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We calculate EBITDA as net income (loss) before interest expense, income tax benefit (expense), depreciation and amortization. We calculate Adjusted EBITDA as EBITDA before certain non-recurring adjustments such as loss on conversion of convertible debentures, change in fair value of financial instruments and stock compensation expense.
EBITDA and Adjusted EBITDA are presented because they are important metrics used by management as one of the means by which it assesses our financial performance. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. These measures, when used in conjunction with related GAAP financial measures, provide investors with an additional financial analytical framework that may be useful in assessing us and our results of operations.
EBITDA and Adjusted EBITDA have certain limitations. EBITDA and Adjusted EBITDA should not be considered as alternatives to net income (loss), or any other measures of financial performance derived in accordance with GAAP. These measures also should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items for which these non-GAAP measures make adjustments. Additionally, EBITDA and Adjusted EBITDA are not intended to be liquidity measures because of certain limitations, including, but not limited to:
|
|
●
|
They do not reflect our cash outlays for capital expenditures;
|
|
|
●
|
They do not reflect changes in, or cash requirements for, working capital; and
|
|
|
●
|
Although depreciation and amortization are non-cash charges, the assets are being depreciated and amortized and may have to be replaced in the future, and these non-GAAP measures do not reflect cash requirements for such replacements.
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Other companies, including other companies in our industry, may not use such measures or may calculate one or more of the measures differently than as presented in this Quarterly Report on Form 10-Q, limiting their usefulness as a comparative measure.
In evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same or similar to some of the adjustments made in our calculations, and our presentation of EBITDA and Adjusted EBITDA should not be construed to mean that our future results will be unaffected by such adjustment. Management compensates for these limitations by using EBITDA and Adjusted EBITDA as supplemental financial metrics and in conjunction with our results prepared in accordance with GAAP. The non-GAAP information should be read in conjunction with our consolidated financial statements and related notes.
Non-GAAP Financial Information (continued)
The following is a reconciliation of EBITDA and Adjusted EBITDA to the nearest GAAP measure, net loss:
|
|
Three Months Ended June 30, 2021
|
|
|
Three Months Ended June 30, 2020
|
|
|
Six Months Ended
June 30, 2021
|
|
|
Six Months Ended
June 30, 2020
|
|
|
Net loss attributable to common stockholders of SG Blocks, Inc.
|
|
$
|
(1,541,259
|
)
|
|
$
|
(837,973
|
)
|
|
$
|
(3,575,136
|
)
|
|
$
|
(1,585,400
|
)
|
|
Addback interest expense
|
|
|
329
|
|
|
|
3,452
|
|
|
|
692
|
|
|
|
6,263
|
|
|
Addback interest income
|
|
|
(13,797
|
)
|
|
|
(6,233
|
)
|
|
|
(31,267
|
)
|
|
|
(11,096
|
)
|
|
Addback depreciation and amortization
|
|
|
159,227
|
|
|
|
47,401
|
|
|
|
301,020
|
|
|
|
94,802
|
|
|
EBITDA (non-GAAP)
|
|
|
(1,395,500
|
)
|
|
|
(793,353
|
)
|
|
|
(3,304,691
|
)
|
|
|
(1,495,431
|
)
|
|
Addback litigation expense
|
|
|
60,053
|
|
|
|
131,102
|
|
|
|
141,272
|
|
|
|
267,840
|
|
|
Addback stock compensation expense
|
|
|
246,236
|
|
|
|
129,750
|
|
|
|
532,422
|
|
|
|
168,514
|
|
|
Adjusted EBITDA (non-GAAP)
|
|
$
|
(1,089,211
|
)
|
|
$
|
(532,501
|
)
|
|
$
|
(2,630,997
|
)
|
|
$
|
(1,059,077
|
)
|