UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 001-38037
SG BLOCKS, INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 95-4463937 |
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification No.) |
|
|
|
5011 Gate Parkway, Building 100, Suite 100, Jacksonville, FL |
| 32256 |
(Address of principal executive offices) |
| (Zip Code) |
(646) 240-4235
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on which Registered | ||
Common Stock, par value $0.01 per share | SGBX | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☒ | Smaller reporting company ☒ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of November 14, 2022 the issuer had a total of 12,050,206 shares of the registrant’s common stock, $0.01 par value, outstanding.
SG BLOCKS, INC.
FORM 10-Q
TABLE OF CONTENTS
1 |
SG BLOCKS, INC. AND SUBSIDIARIES
|
| September 30, 2022 |
|
| December 31, |
| ||
|
| (Unaudited) |
|
|
| |||
Assets |
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 2,118,169 |
|
| $ | 13,024,381 |
|
Escrow - bond | 2,000,000 | — | ||||||
Accounts receivable, net |
|
| 1,713,473 |
|
|
| 2,917,646 |
|
Contract assets |
|
| — |
|
|
| 41,916 |
|
Held for sale assets | 4,453,714 | — | ||||||
Inventories | 894,962 | 1,273,825 | ||||||
Prepaid expenses and other current assets |
|
| 692,124 |
|
|
| 656,279 |
|
Total current assets |
|
| 11,872,442 |
|
|
| 17,914,047 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
| 4,881,249 |
|
|
| 6,839,943 |
|
Project development costs and other non-current assets | 887,738 | 923,172 | ||||||
Goodwill |
|
| 1,309,330 |
|
|
| 1,309,330 |
|
Right-of-use asset | 2,655,242 | 1,210,053 | ||||||
Long-term note receivable | 848,185 | 720,137 | ||||||
Intangible assets, net |
|
| 1,972,645 |
|
|
| 2,095,232 |
|
Deferred contract costs, net | 81,570 | 112,159 | ||||||
Investment in non-marketable securities | 700,000 | 200,000 | ||||||
Investment in and advances to equity affiliates | 3,748,515 | 3,599,945 | ||||||
Total Assets |
| $ | 28,956,916 |
|
| $ | 34,924,018 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
| $ | 3,493,944 |
|
| $ | 7,568,851 |
|
Contract liabilities |
|
| 1,274,418 |
|
|
| 1,437,579 |
|
Lease liability, current maturities | 474,375 | 337,469 | ||||||
Due to affiliates | — | 264,451 | ||||||
Assumed liability | 5,795 | 5,795 | ||||||
Short term note payable, net | 2,500,000 | 1,971,960 | ||||||
Total current liabilities |
|
| 7,748,532 |
|
|
| 11,586,105 |
|
Long-term note payable | 750,000 | 750,000 | ||||||
Lease liability, net of current maturities | 2,195,438 | 872,124 | ||||||
Total liabilities | 10,693,970 | 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 12,027,091 outstanding as of September 30, 2022 and 11,986,873 issued and outstanding as of December 31, 2021 |
|
| 120,502 |
|
|
| 119,869 |
|
Additional paid-in capital |
|
| 55,255,628 |
|
|
| 53,341,405 |
|
Treasury stock, at cost - 23,115 shares | (49,680 | ) | — | |||||
Accumulated deficit |
|
| (37,695,340 | ) |
|
| (33,109,220 | ) |
Total SG Blocks, Inc. stockholders’ equity | 17,631,110 | 20,352,054 | ||||||
Non-controlling interest |
|
| 631,836 |
|
|
| 1,363,735 |
|
Total stockholders’ equity | 18,262,946 | 21,715,789 | ||||||
Total Liabilities and Stockholders’ Equity |
| $ | 28,956,916 |
|
| $ | 34,924,018 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
2 |
SG BLOCKS, INC. AND SUBSIDIARIES
| For the Three Months Ended September 30, | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||
Revenue: | ||||||||||||
Construction services | $ | 2,685,920 | $ | 612,052 | $ | 8,567,568 | $ | 5,814,205 | ||||
Engineering services | 6,599 | 70,814 | 81,305 | 168,822 | ||||||||
Medical revenue | 1,437,738 | 8,164,624 | 11,640,953 | 23,906,077 | ||||||||
Total | 4,130,257 | 8,847,490 | 20,289,826 | 29,889,104 | ||||||||
| ||||||||||||
Cost of revenue: | ||||||||||||
Construction services | 2,688,450 | 3,132,625 | 8,631,031 | 10,421,435 | ||||||||
Engineering services | 5,001 | 6,588 | 58,893 | 48,555 | ||||||||
Medical revenue | 1,601,980 | 6,315,098 | 8,506,681 | 17,328,003 | ||||||||
Total | 4,295,431 | 9,454,311 | 17,196,605 | 27,797,993 | ||||||||
| ||||||||||||
Gross profit (loss) | (165,174 | ) | (606,821 | ) | 3,093,221 | 2,091,111 | ||||||
| ||||||||||||
Operating expenses: | ||||||||||||
Payroll and related expenses | 1,294,857 | 1,066,486 | 3,650,553 | 2,665,097 | ||||||||
General and administrative expenses | 939,044 | 975,761 | 2,515,877 | 3,006,561 | ||||||||
Marketing and business development expense | 103,111 | 54,857 | 337,941 | 197,922 | ||||||||
Pre-project expenses | — | 22,683 | — | 33,663 | ||||||||
Total | 2,337,012 | 2,119,787 | 6,504,371 | 5,903,243 | ||||||||
| ||||||||||||
Operating loss | (2,502,186 | ) | (2,726,608 | ) | (3,411,150 | ) | (3,812,132 | ) | ||||
| ||||||||||||
Other income (expense): | ||||||||||||
Loss on asset disposal | — | (34,182 | ) | — | (34,182 | ) | ||||||
Interest expense | (52,758 | ) | (293 | ) | (174,733 | ) | (985 | ) | ||||
Interest income | 9,756 | 9,973 | 33,518 | 41,240 | ||||||||
Other income (expense) | (2,963 | ) | 453 | 488,346 | 61,477 | |||||||
Total | (45,965 | ) | (24,049 | ) | 347,131 | 67,550 | ||||||
| ||||||||||||
Loss before income taxes | (2,548,151 | ) | (2,750,657 | ) | (3,064,019 | ) | (3,744,582 | ) | ||||
Income tax expense | — | — | — | — | ||||||||
| ||||||||||||
Net loss | (2,548,151 | ) | (2,750,657 | ) | (3,064,019 | ) | (3,744,582 | ) | ||||
| ||||||||||||
Add: net income (loss) attributable to noncontrolling interests | (94,568 | ) | 1,080,248 | 1,522,101 | 3,661,459 | |||||||
Net loss attributable to common stockholders of SG Blocks, Inc. | $ | (2,453,583 | ) | $ | (3,830,905 | ) | $ | (4,586,120 | ) | $ | (7,406,041 | ) |
Net loss per share attributable to SG Blocks, Inc. | ||||||||||||
Basic and diluted | $ | (0.18 | ) | $ | (0.43 | ) | $ | (0.35) | $ | (0.84 | ) | |
| ||||||||||||
Weighted average shares outstanding: | ||||||||||||
Basic and diluted | 13,459,713 | 8,822,489 | 13,228,828 | 8,796,890 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3 |
SG BLOCKS, INC. AND SUBSIDIARIES
|
| $0.01 Par Value |
| Additional |
| Treasury | Accumulated |
| SG Blocks Stockholders' | Noncontrolling | Total Stockholders’ |
| ||||||||||||||||||||
|
| Shares |
| Amount |
| Capital |
| Stock | Deficit |
| Equity | Interests | Equity |
| ||||||||||||||||||
Balance at June 30, 2022 |
| 12,050,206 |
| $ | 120,502 |
| $ | 54,660,934 |
| $ | — | $ | (35,241,757 | ) | $ | 19,539,679 | $ | 824,404 | $ | 20,364,083 |
| |||||||||||
Stock-based compensation |
| — |
| — |
|
| 594,694 |
| — |
| — |
| 594,694 | — | 594,694 |
| ||||||||||||||||
Noncontrolling interest distribution | — | — | — | — | — | — | (98,000 | ) | (98,000 | ) | ||||||||||||||||||||||
Repurchase of common stock | (23,115) | — | — | (49,680 | ) | — | (49,680 | ) | — | (49,680 | ) | |||||||||||||||||||||
Net Loss |
| — |
| — |
|
| — |
| — |
| (2,453,583 | ) | (2,453,583 | ) | (94,568 | ) | (2,548,151 | ) | ||||||||||||||
Balance at September 30, 2022 | 12,027,091 | $ | 120,502 | $ | 55,255,628 | $ | (49,680 | ) | $ | (37,695,340 | ) | $ | 17,631,110 | $ | 631,836 | $ | 18,262,946 | |||||||||||||||
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 | 1,914,656 | — | — | 1,914,856 | — | 1,914,856 | ||||||||||||||||||||||||
Issuance of restricted stock units | 43,333 | 433 | (433 | ) | — | — | — | — | — | |||||||||||||||||||||||
Noncontrolling interest distribution | — | — | — | — | — | — | (2,254,000 | ) | (2,254,000 | ) | ||||||||||||||||||||||
Repurchase of common stock | (23,115) | — | — | (49,680 | ) | — | (49,680 | ) | — | (49,680 | ) | |||||||||||||||||||||
Net income (loss) |
| — |
| — |
|
| — |
| — |
| (4,586,120 | ) | (4,586,120 | ) | 1,522,101 | (3,064,019 | ) | |||||||||||||||
Balance at September 30, 2022 |
| 12,027,091 |
| $ | 120,502 |
| $ | 55,255,628 |
| $ | (49,680 | ) | $ | (37,695,340 | ) | $ | 17,631,110 | $ | 631,836 | $ | 18,262,946 |
|
| $0.01 Par Value |
| Additional |
| Accumulated |
| SG Blocks Stockholders' | Noncontrolling | Total Stockholders’ |
| |||||||||||||||||
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | Interests | Equity |
| |||||||||||||||
Balance at June 30, 2021 |
| 8,822,489 |
| $ | 88,225 |
| $ | 41,681,186 |
| $ | (25,851,682 | ) | $ | 15,917,729 | $ | 922,994 | $ | 16,840,723 |
| |||||||||
Stock-based compensation |
| — |
| — |
|
| 246,236 |
|
| — |
| 246,236 | — | 246,236 |
| |||||||||||||
Noncontrolling interest distribution | — | — | — | — | — | (1,216,350 | ) | (1,216,350 | ) | |||||||||||||||||||
Net income (loss) |
| — |
| — |
|
| — |
|
| (3,830,905 | ) | (3,830,905 | ) | 1,080,248 | (2,750,657 | ) | ||||||||||||
Balance at September 30, 2021 | 8,822,489 | $ | 88,225 | $ | 41,927,422 | $ | (29,682,587 | ) | $ | 12,333,060 | $ | 786,892 | $ | 13,119,952 | ||||||||||||||
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 | — | — | 778,657 | — | 778,657 | — | 778,657 | |||||||||||||||||||||
Conversion of warrants to common stock | 226,300 | 2,263 | 704,925 | — | 707,188 | — | 707,188 | |||||||||||||||||||||
Noncontrolling interest distribution | — | — | — | — | — | (3,059,134 | ) | (3,059,134 | ) | |||||||||||||||||||
Net income (loss) |
| — |
| — |
|
| — |
|
| (7,406,041 | ) | (7,406,041 | ) | 3,661,459 | (3,744,582 | ) | ||||||||||||
Balance at September 30, 2021 |
| 8,822,489 |
| $ | 88,225 |
| $ | 41,927,422 |
| $ | (29,682,587 | ) | $ | 12,333,060 | $ | 786,892 | $ | 13,119,952 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4 |
SG BLOCKS, INC. AND SUBSIDIARIES
|
| For the Nine Months Ended |
| For the Nine Months Ended |
| |||
|
| (Unaudited) |
| (Unaudited) |
| |||
Cash flows from operating activities: |
|
|
|
|
| |||
Net loss |
| $ | (3,064,019 | ) | $ | (3,744,582 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
| |
Depreciation expense |
|
| 317,249 |
|
| 294,860 |
| |
Amortization of intangible assets |
|
| 122,587 |
|
| 124,053 |
| |
Amortization of deferred license costs | 30,589 | 30,589 | ||||||
Amortization of debt issuance costs | 23,726 | — | ||||||
Bad debt expense |
|
| 7,024 |
| 161,202 | |||
Interest income on long-term note receivable |
|
| (28,048 | ) |
| (28,048 | ) | |
Stock-based compensation |
|
| 1,874,857 |
|
| 778,657 |
| |
Loss on asset disposal | 241 | 34,182 | ||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
| |
Accounts receivable |
|
| 1,197,149 |
| (1,092,210 | ) | ||
Escrow - bond | (2,000,000 | ) | — | |||||
Contract assets |
|
| 41,916 |
| 818,514 | |||
Inventories | 378,863 | (11,937 | ) | |||||
Prepaid expenses and other current assets |
|
| (35,845 | ) |
| (235,202 | ) | |
Right of use asset | 356,350 | 390,581 | ||||||
Accounts payable and accrued expenses |
|
| (4,006,868 | ) |
| 3,173,788 | ||
Contract liabilities | (163,161 | ) |
| (598,560 | ) | |||
Due to affiliates | (264,451 | ) | (738,451 | ) | ||||
Lease liability | (341,319 | ) | (389,853 | ) | ||||
Net cash used in operating activities |
|
| (5,553,160 | ) |
| (1,032,417 | ) | |
|
|
|
|
|
|
|
| |
Cash flows from investing activities: |
|
|
|
|
|
|
| |
Purchase of property, plant and equipment | (1,996,200 | ) | (4,806,294 | ) | ||||
Purchase of intangible asset | — | (42,500 | ) | |||||
Proceeds from sale of equipment | 760 | 225,000 | ||||||
Repayment of promissory note | (100,000 | ) | — | |||||
Payment on assumed liability of acquired assets | — | (194,969 | ) | |||||
Project development costs and other non-current assets | (805,362 | ) | — | |||||
Investment in and advances to equity affiliates | (148,570 | ) | (3,464,762 | ) | ||||
Investment in non-marketable securities | (500,000 | ) | — | |||||
Net cash used in investing activities |
|
| (3,549,372 | ) |
| (8,283,525 | ) | |
|
|
|
|
|
|
|
| |
Cash flows from financing activities: |
|
|
|
|
|
|
| |
Proceeds from conversion of warrants to common stock | — | 707,188 | ||||||
Repurchase of common stock | (49,680) | — | ||||||
Proceeds from short-term note payable | 500,000 | 1,948,234 | ||||||
Distribution paid to non-controlling interest | (2,254,000 | ) | (3,059,134 | ) | ||||
Net cash used in financing activities |
|
| (1,803,680 | ) |
| (403,712 | ) | |
Net decrease in cash and cash equivalents | (10,906,212 | ) | (9,719,654 | ) | ||||
Cash and cash equivalents - beginning of period | 13,024,381 | 13,010,356 | ||||||
Cash and cash equivalents - end of period | $ | 2,118,169 | $ | 3,290,702 | ||||
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
For the Nine Months Ended September 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 Company operates in the following four segments: (i) manufacturing; (ii) medical; (ii) real estate development; and (iv) environmental. The manufacturing segment designs and constructs modular structures built in the Company’s factories. In the medical segment the Company uses its modular technology to provide turnkey solutions to medical testing and treatment and generates revenue from the medical testing. The Company’s real estate development segment builds innovative and green single or multifamily projects in underserved regions nationally using modules built in one of the Company’s vertically integrated factories. The environmental segment, the newest segment, is a sustainable medical and waste management solution that collects waste and treats waste for safe disposal.
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.
6 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 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 September 30, 2022, the Company had 12,050,206 shares of common stock issued and 12,027,091 shares of common stock outstanding.
2. | Liquidity |
As of September 30, 2022, the Company had cash and cash equivalents of $2,118,169 and a backlog of $2,585,012. See Note 11 for a discussion of construction 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 | $ | 2,585,012 | |||
Total Backlog | $ | 2,585,012 |
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 in the past 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 has negatively affected the economy and has affected the demand for the Company's products. During COVID-19, order lead times were extended and delayed and pricing has increased. 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 Nine Months Ended September 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 nine months ended September 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 reclassified 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 Nine Months Ended September 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.
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 was 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 had 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 nine months ended September 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 nine months ended September 30, 2022 and 2021, the Company recognized approximately $11,640,000 and $22,950,000 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 $11,640,953 and $8,648,873, respectively, for the nine months ending September 30, 2022. Revenue recognized at a point in time and recognized over time were $23,906,077 and $5,983,027, respectively, for the nine months ending September 30, 2021.
Revenue recognized at a point in time and recognized over time were $1,437,738 and $2,692,519, respectively, for the three months ending September 30, 2022. Revenue recognized at a point in time and recognized over time were $8,164,624 and $682,866, respectively, for the three months ending September 30, 2021.
9 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 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 September 30, | |||||||||||||||
Revenue by Customer Type | 2022 | 2021 | |||||||||||||
Construction and Engineering Services: | |||||||||||||||
Government | $ | — | — | % | $ | 74,052 | 1 | % | |||||||
Hotel | 1,224,181 | 30 | % | 217,474 | 2 | % | |||||||||
Medical - Construction | — | — | % | (35,021 | ) | — | % | ||||||||
Multi-Family (includes Single Family) | — | — | % | 79,721 | 1 | % | |||||||||
Office | 1,468,338 | 35 | % | 151,453 | 2 | % | |||||||||
Retail | — | — | % | 42,345 | — | % | |||||||||
Special Use | — | — | % | 152,842 | 2 | % | |||||||||
Subtotal | 2,692,519 | 65 | % | 682,866 | 8 | % | |||||||||
Medical Revenue: | |||||||||||||||
Medical (lab testing, kit sales and equipment) | 1,437,738 | 35 | % | 8,164,624 | 92 | % | |||||||||
Total revenue by customer type | $ | 4,130,257 | 100 | % | $ | 8,847,490 | 100 | % |
Nine Months Ended September 30, | |||||||||||||||
Revenue by Customer Type | 2022 | 2021 | |||||||||||||
Construction and Engineering Services: | |||||||||||||||
Government | $ | 39 | — | % | $ | 2,257,193 | 8 | % | |||||||
Hotel | 2,368,960 | 13 | % | 671,255 | 2 | % | |||||||||
Medical - Construction | — | — | % | 459,072 | 2 | % | |||||||||
Multi-Family (includes Single Family) | 86,034 | — | % | 102,069 | — | % | |||||||||
Office | 6,178,856 | 30 | % | 586,914 | 2 | % | |||||||||
Retail | 5,344 | — | % | 87,046 | — | % | |||||||||
Special Use | 9,640 | — | % | 1,819,478 | 6 | % | |||||||||
Subtotal | 8,648,873 | 43 | % | 5,983,027 | 20 | % | |||||||||
Medical Revenue: | |||||||||||||||
Medical (lab testing, kit sales and equipment) | 11,640,953 | 57 | % | 23,906,077 | 80 | % | |||||||||
Total revenue by customer type | $ | 20,289,826 | 100 | % | $ | 29,889,104 | 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 Nine Months Ended September 30, 2022 and 2021 (Unaudited)
3. | Summary of Significant Accounting Policies (continued) |
Although 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 was 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 planed to amortize the asset over sixty months, which was the initial term of the ELA because the asset relates to the services transferred to the customer during the contract term. As of September 30, 2022, accumulated amortization related to deferred contract costs amounted to $122,355. During the nine months ended September 30, 2022 and 2021, amortization expense relating to the deferred contract costs amounted to $30,589 and $30,589, 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 October 3, 2019, as amended 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 was also been excluded from the License. The License Agreement has an initial term of five (5) years and provided for automatic renew for subsequent five (5) year periods. The License Agreement provided 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 provided that the Licensee 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 Nine Months Ended September 30, 2022 and 2021 (Unaudited)
3. | Summary of Significant Accounting Policies (continued) |