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Home›Maximum revenue tariff›SG BLOCKS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS. (form 10-Q)

SG BLOCKS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS. (form 10-Q)

By Jacob Castillo
November 15, 2021
23
0

Introduction and some caveats



               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 the Risk Factors set forth in Part I, Item 1A of our 2020 Form
10-K as amended by the Amendment No. 1 thereto, and other filings with the
Securities Exchange Commission.  Readers are cautioned not to place undue
reliance on forward-looking statements. 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.

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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 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.


Recent business developments


On July 14, 2021, SG DevCorp entered into a Real Estate Lien Note, dated July
14, 2021, in the principal amount of $2,000,000 (the "Short-Term Note"), secured
by a Deed of Trust, dated July 14, 2021, on its 50+ acre Lake Travis project
site in Lago Vista, Texas and a related Assignment of Leases and Rents, dated
July 8, 2021, for net loan proceeds of $1,958,233 after fees. The Short-Term
Note has a term of one (1) year, provides for payments of interest only at a
rate of twelve percent (12%) per annum and may be prepaid without penalty
commencing nine (9) months after its issuance date. If the Short-Term Note is
prepaid prior to nine (9) months after its issuance date, a 0.5% prepayment
penalty is due. SG DevCorp intends to use the proceeds of the Short-Term Note
for its development projects.


On October 27, 2021, pursuant to the terms of a Securities Purchase Agreement
(the "Purchase Agreement") that we entered into on October 25, 2021 with an
institutional investor (the "Purchaser"),we received approximately $11.55
million in gross proceeds and we sold to the Purchaser (A) in a registered
direct offering (i) 975,000 shares (the "Public Shares") of its Common Stock,
par value $0.01 per share (the "Common Stock"), and (ii) pre-funded warrants
(the "Pre-Funded Warrants") to purchase up to 2,189,384 shares (the "Pre-Funded
Warrant Shares") of Common Stock and (B) in a concurrent private placement,
Series A warrants to purchase up to 1,898,630 shares (the "Common Stock Warrant
Shares") of Common Stock (the "Common Stock Warrants," and together with the
Public Shares and the Pre-Funded Warrants, the "Securities") (the "Offering The
Pre-Funded Warrants were immediately exercisable at a nominal exercise price of
$0.001 and all Pre-Funded Warrants sold have been exercised. The Common Stock
Warrants have an exercise price of $4.80 per share, are exercisable upon
issuance and will expire five years from the date of issuance.


37

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On October 28, 2021, SG Echo LLC ("SG Echo"), a subsidiary of ours entered into
a ten year Lease Agreement (the "Lease") with May Properties, LLC, to lease an
approximately 56,775 square foot facility located at 101 Waldron Road in Durant
Oklahoma (the "Premises")initially at a monthly base rent for the Premises will
start at $15,991.63 which will increase at the rate of two percent (2%) on an
annual basis up to a maximum monthly base rent of $19,111.47 . The date on which
SG Echo will become responsible for paying rent under the Lease (the "Lease
Commencement Date") will be the earlier of (i) the date SG Echo begins to
operate its business on the Premises or (ii) ninety (90) days after October 28,
2021. The Lease also grants SG Echo an option to purchase the Premises. Pursuant
to a Guaranty Agreement, dated October 28, 2021 (the "Guaranty"), SG Echo's
obligations under the Lease have been guaranteed by us. In connection with the
Lease, SG Echo entered into a Loan Agreement ("Loan Agreement") with the Durant
Industrial Authority (the "Authority") pursuant to which it received $750,000 to
be used for improvements on the Premises and issued to the Authority a
non-interest bearing Forgivable Promissory Note in the principal amount of
$750,000 (the " Forgivable Note"). The Forgivable Note is due on April 29, 2029
and guaranteed by us, provided, if no event of default has occurred under the
Forgivable Note or Loan Agreement, one-third (1/3) of the balance of the
Forgivable Note will be forgiven on April 29, 2027, one-half (1/2) of the
balance of the Forgivable Note will be forgiven on April 29, 2028, and the
remainder of the balance of the Forgivable Note will be forgiven on April 29,
2029. The Loan Agreement includes a covenant by SG Echo to employ a minimum of
75 full-time employees in Durant Oklahoma and pay them no less than 1.5 times
the federal minimum wage, and provides SG Echo 24 months to comply with the
provision.


Results of Operations


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


Impact of coronavirus (COVID-19)

             With the global spread of the ongoing novel coronavirus
("COVID-19") pandemic during 2020, we have implemented business continuity plans
designed to address and mitigate the impact of the COVID-19 pandemic on its
employees and business. The worldwide spread of the COVID-19 virus has resulted
in, and may continue to result in, a global slowdown of certain economic
activity which is likely to decrease demand for a broad variety of goods and
services, including from our customers, while also resulting in delays in
projects due to labor shortages and supplier disruptions for an unknown period
of time until the disease is contained.  To date, we have experienced some
delays and increased costs for materials, especially lumber, in projects due to
COVID-19 which we expect to continue to have an impact on our revenue and our
results of operations, the size and duration of which we are currently unable to
predict. Any quarantines, the timing and length of containment and eradication
solutions, travel restrictions, absenteeism by infected workers, labor shortages
or other disruptions to the suppliers and contract manufacturers or customers
has had and would likely adversely impact our sales, and operating results and
result in further project delays. In addition, the pandemic could result in an
economic downturn that could affect the ability of our customers and licensees
to obtain financing and therefore impact demand for our products. Order lead
times could be extended or delayed and increases we have experienced in pricing
could continue to increase. Some products or services may become unavailable if
the regional or global spread were significant enough to prevent alternative
sourcing. Accordingly, we are considering alternative product sourcing in the
event that product supply becomes problematic. We expect this global pandemic to
have an impact on the Company's revenue and results of operations, the size and
duration of which we are currently unable to predict. In addition, to the extent
the ongoing COVID-19 pandemic adversely affects our business and results of
operations, it may also have the effect of heightening many of the other risks
and uncertainties which we face.


Nine months ended September 30, 2021 and 2020:


                                                                  For the 

Nine months for the nine months

                                                                  Ended  September 30,     Ended  September 30,
                                                                          2021                     2020
Total Revenue                                                     $         29,889,104     $           1,404,265
Total Cost of revenue                                                      (25,736,809 )                (789,445 )
Total Payroll and related expenses                                          (2,865,606 )              (1,344,009 )
Total Other Operating expenses                                              (5,098,821 )              (2,386,374 )
Total Operating loss                                                        (3,812,132 )              (3,115,563 )
    Total Other income                                                          67,550                    51,890
Net loss before income tax                                                  (3,744,582 )              (3,063,673 )
Less: Net income attributable non-controlling interest                       3,661,459                         -

Net loss attributable to common shareholders of SG Blocks, Inc. $ (7,406,041) $ (3,063,673)


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Returned


During the nine months ended September 30, 2021, we derived revenue from the
following three categories of sources: construction services, engineering
services and medical revenue.  We commenced receipt of revenue from this source
in the fourth quarter of 2020 when Clarity Mobile Venture LLC commenced
operations and we continued to derive revenue from this source during the
quarter ended September 30, 2021 with strong revenue related to COVID-19 samples
collected from our Clarity Mobile joint venture in the first nine months
of 2021. Total revenue for the nine months ended September 30, 2021 was
$29,889,104 compared to $1,404,265 for the nine months ended September 30, 2020.
This increase of $28,484,839 or approximately 2028% was mainly driven by an
increase in medical revenue of approximately $23,906,000 (lab testing, test kit
sales and equipment but excluding revenue generated from construction of medical
related projects) from mainly the collection of COVID-19 test samples with
additional medical revenue from the opening and subletting of a testing facility
in the Chicago area, an increase in revenue of approximately $1,747,000 in
special use projects which includes one legacy contract commitment related to
the SG Echo acquisition, an increase in revenue of approximately $2,257,000 in
government projects, an increase in revenue of approximately of $400,000 in
medical related construction projects and a moderate increase in construction
revenue related to office and hotel/hospitality projects for approximately
$412,000 and $330,000, respectively, offset by a decrease in revenue related to
our retail and other projects for approximately $277,000 and $300,000,
respectively, for the nine months ended September 30, 2021, as compared to
September 30, 2020.


Cost of revenue and gross profit


Cost of revenue was $25,736,809 for the nine months ended September 30, 2021,
compared to $789,445 for the nine months ended September 30, 2020. The increase
of $24,947,364 or a increase of approximately 3160%, is primarily related to
higher testing volumes which required an increase in procurement of COVID-19
tests and testing supplies and higher procurement and manufacturing costs of
modifying containers and wood modular units. Due to capabilities of Echo, we
have now increased our sales of wood modular units to our customer base. As
previously stated our costs of revenue for the nine months ended September 30,
2021 include costs and expenses associated with the operations of SG Echo,
Clarity Mobile Venture and Chicago Airport Testing and our costs of revenue for
the nine months ended September 30, 2020 do not include such costs or expenses
for Clarity Mobile Venture or Chicago Airport Testing.


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


Gross profit margin as a percentage of revenue decreased to approximately 13.9%
for the nine months ended September 30, 2021 compared to approximately 44% for
the nine months ended September 30, 2020.  The decrease in gross profit margin
percentage was primarily due to a non-recurring single legacy contract
recognized in 2020 in the amount of $300,000 with no estimated costs and due to
legacy contract commitments from the acquisition of SG Echo that were recognized
in the nine months ended September 30, 2021 that incurred losses of
approximately $4,600,000 due to escalations in material pricing related to
COVID-19 and labor overages.


Payroll and Related Expenses


Payroll and related expenses for the nine months ended September 30, 2021 were
$2,865,606 compared to $1,344,009 for the nine months ended September 30, 2020.
This increase was primarily caused by an increase in salaries and additional
head count hired to help manage the growth of SG Echo and other recently
launched subsidiaries such as Chicago Airport Testing, Clarity Mobile Venture,
and SG DevCorp of approximately $878,000, an increase of approximately $364,000
in stock-based compensation expense, and an increase of approximately $278,000
for a non-recurring employee pay-out expense recognized for the nine months
ended September 30, 2021 compared to the nine months ended September 30, 2020.
We recognized $778,657 in stock-based compensation expense related to payroll
and related expenses for the nine months ended September 30, 2021, compared
to $414,563 for September 30, 2020.


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Other operating expenses (General and administrative expenses, Marketing and business development expenses and Pre-project expenses)


Other operating expenses (general and administrative expenses, marketing and
business development expenses, pre-project expenses) for the nine months ended
September 30, 2021 were $5,098,821 compared to $2,386,374 for the nine months
ended September 30, 2020. The increase resulted primarily from an increase in
rent expense of approximately $91,000 related to COVID-19 cold storage charges
and rental expense for the Chicago Airport Testing facility, an increase in
expenses associated with being a public company of approximately $157,000, an
increase in information technology expense of approximately $196,000, an
increase in insurance expense of approximately $193,000 for additional insurance
coverage for COVID-19 medical operations and premium increases on existing
policies, an increase in contract labor expense of approximately $296,000 with
the majority related to the start-up and ongoing operations of the COVID-19
medical and SGB DevCorp projects.  We also had an increase of approximately
$566,000 in laboratory medical expenses mainly from the start-up and continued
operations in Wayne County, Michigan and LAX COVID-19 testing locations and an
increase of $40,000 for real estate commissions related for Chicago Airport
Testing, an increase in accounting fees of approximately $77,000, an increase of
approximately $175,000 due to building maintenance and equipment rental expense
for both LAX COVID-19 and Chicago Airport Testing facilities, an increase of
approximately $523,500 for manager's oversight fees related to Clarity Mobile
Venture, an increase in depreciation expense of approximately $195,000, an
increase in travel expense by approximately $68,000, an increase in bad debt
expense of approximately $161,000 due from one legacy customer from the
acquisition of SG Echo with a slight decrease in legal fees of approximately
$211,000. We recognized no stock-based compensation expense related to legal
expense and marketing expense for the nine months ended September 30, 2021 and
$57,120 for the nine months ended September 30, 2020.


Other income (expenses)


Interest income for the nine months ended September 30, 2021 was $41,240 mainly
derived from bank interest and interest associated with an outstanding note
receivable. There was $38,497 of interest income for the nine months ended
September 30, 2020. Other income for the nine months ended September 30, 2021
and 2020 was $61,477 and $23,282, respectively. Interest expense for the
nine months ended September 30, 2021 and 2020 was $985 and $8,877,
respectively.  The interest expense for 2020 was mainly related to the
Securities Purchase Agreement entered into on February 4, 2020 with an
accredited investor.  Loss on asset disposal for the nine months ended September
30, 2021 and 2020 was $34,182 and $1,012, respectively.



Income Tax Provision


A 100% valuation allowance has been made against the deferred tax asset made up of available net operating losses and, therefore, no tax benefit has been provided.


Impact of Inflation


The impact of inflation on the Company’s revenues and revenues (losses) from continuing operations during each of the past two years was not material to its financial position or results of operations for those years. because the Company does not maintain inventory whose costs are affected by inflation.


40


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Three months ended September 30, 2021 and 2020:

                                                                 For the Three        For the Three
                                                                  Months Ended         Months Ended
                                                               September 30, 2021   September 30, 2020
Total Revenue                                                  $        

$ 8,847,490,576,560

     Total Cost of revenue                                             (8,742,420 )           (381,954 )
     Total Payroll and related expenses                                (1,236,420 )           (679,863 )
     Total Other Operating expenses                                    (1,595,258 )         (1,040,073 )
Total Operating loss                                                   

(2,726,608) (1,525,330)

     Total Other income (expense)                                         (24,049 )             47,057
Net loss before income tax                                             (2,750,657 )         (1,478,273 )
Less: Net income attributable non-controlling interest                  1,080,248                    -
Net loss attributable to common stockholders of SG             $       (3,830,905 ) $       (1,478,273 )
Blocks, Inc.Net loss



Revenue



During the three months ended September 30, 2021, we derived revenue from the
following three categories of sources: construction services, engineering
services and medical revenue.  We commenced receipt of revenue from this source
in the fourth quarter of 2020 when Clarity Mobile Venture LLC commenced
operations and we continued to derive revenue from this source during the
quarter ended September 30, 2021 with strong revenue related to COVID-19 samples
collected from our Clarity Mobile joint venture in the three months ended
September 30, 2021. Total revenue for the three months ended September 30,
2021 was $8,847,490 compared to $576,560 for the three months ended September
30, 2020. This increase of $8,270,930 or approximately 1435% was mainly driven
by an increase in medical revenue of approximately $8,164,000 (lab testing, test
kit sales and equipment but excluding revenue generated from construction of
medical related projects) from mainly the collection of COVID-19 test samples
with additional medical revenue from the opening and subletting of a testing
facility in the Chicago area, an increase in revenue of approximately $80,000 in
special use projects which includes one legacy contract commitment related to
the SG Echo acquisition, an increase in revenue of approximately $74,000 in
government projects, an increase in revenue of approximately $74,500 in
multi-family projects offset by a moderate decrease in revenue of approximately
$35,000 in medical related construction projects and approximately $81,000 for
hotel/hospitality projects, respectively for the three months ended September
30, 2021, as compared to September 30, 2020.


Cost of revenue and gross profit



Cost of revenue was $8,742,420 for the three months ended September 30, 2021,
compared to $381,954 for the three months ended September 30, 2020. The
increase of $8,360,466 or an increase of approximately 2189%, is primarily
related to higher testing volumes which required an increase in procurement of
COVID-19 tests and testing supplies and higher procurement and manufacturing
costs of modifying containers and wood modular units.


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


Gross profit as a percentage of revenue decreased to approximately 1% for the
three months ended September 30, 2021 compared to approximately 34% for the
three months ended September 30, 2020. The decrease in gross profit margin
percentage was primarily due to a non-recurring single legacy contract
recognized in 2020 in the amount of $300,000 with no estimated costs and due to
legacy contract commitments from the acquisition of SG Echo that were recognized
in 2021 that incurred losses of approximately $2,250,000 due to escalations in
material pricing related to COVID-19 and labor overages



Payroll and Related Expenses



Payroll and related expenses for the three months ended September 30, 2021 were
$1,236,420 compared to $679,863 for the three months ended September 30, 2020.
This increase was primarily caused by an increase in salaries and additional
head count to help manage the growth of SG Echo and other recently launched
subsidiaries such as Chicago Airport Testing, Clarity Mobile Ventures, and SG
DevCorp of approximately $334,000, an increase of approximately $278,000 for a
non-recurring employee pay-out expense and an decrease of
approximately $57,000 in stock-based compensation expense, recognized for
the three months ended September 30, 2021 compared to the three months
ended September 30, 2020. We recognized $246,236 in stock-based compensation
expense related to payroll and related expenses for the three months ended
September 30, 2021, compared to $303,169 for September 30, 2020.


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Operating results (continued)

Other operating expenses (General and administrative expenses, Marketing and business development expenses and Pre-project expenses)


Other operating expenses (general and administrative expenses, marketing and
business development expenses, pre-project expenses) for the three months
ended September 30, 2021 were $1,595,258 compared to $1,040,073 for the
three months ended September 30, 2020. The increase resulted primarily from an
increase in expenses associated with being a public company of approximately
$47,500, an increase in information technology expense of approximately $62,000,
an increase in insurance expense of approximately $94,000 for additional
insurance coverage for COVID-19 medical operations and premium increases on
existing policies, and an increase in accounting fees of $47,000.  The Company
had an increase of approximately $107,500 in laboratory medical expenses mainly
from the start-up and continued operations in Wayne County, Michigan and LAX
COVID-19 testing locations, an increase of approximately $171,000 for manager's
oversight fees related to Clarity Mobile Venture, an increase in depreciation
expense of approximately $65,500, an increase of approximately $54,000 due to
building maintenance and equipment rental expense for both LAX COVID-19 and
Chicago Airport Testing facilities, an increase in travel expense by
approximately $17,500.  The Company also had a decrease in contract labor and
consulting expense of approximately $62,000 and a slight decrease in legal fees
of approximately $107,000.



Other Income (Expense)


Interest income for the three months ended September 30, 2021 and 2020 was
$9,973 and $27,401 mainly derived from bank interest and interest associated
with an outstanding note receivable. Interest expense for
the three months ended September 30, 2021 and 2020 was $293 and $2,614 and
mainly related to the Securities Purchase Agreement entered into on February 4,
2020 with an accredited investor. Other income for the three months ended
September 30, 2021 and 2020 was $453 and $23,282. Loss on asset disposal for the
three months ended September 30, 2021 and 2020 was $34,182 and $1,012,
respectively.



Liquidity and capital resources



As of September 30, 2021 and December 31, 2020, we had an aggregate of
$3,290,702 and $13,010,356, respectively, of cash and cash equivalents. To date,
we have financed our operations from revenue generated from operations and sales
of our equity and to a lesser extent debt financings.


On February 4, 2020, we entered into a Securities Purchase Agreement with an
accredited investor, pursuant to which we issued to the investor a secured note
in the aggregate principal amount of $200,000 (the "Long-Term Note"), which bore
interest at a rate of nine percent (9%) per annum and was due on July 31, 2023,
and was secured by a security interest in the royalty payable to us under that
certain Exclusive License Agreement, dated October 3, 2019, with CPF
GP 2019-1 LLC. During the third quarter of 2020, the Long-Term Note to investor
of $200,000 and unpaid accrued interest of $6,263 was converted
into 73,665 shares of common stock.



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In april 2020, we completed a public offering pursuant to which we sold 440,000 common shares at a public offering price of $ 4.25 per share, which generated net proceeds of approximately $ 1,522,339 After deducting subscription discounts and commissions and other expenses related to the offering.

In May 2020, we completed a public offering pursuant to which we sold a total of 6,900,000 common shares at a public offering price of
$ 2.50 per share, which generated net proceeds of approximately
$ 15,596,141 After deducting subscription discounts and commissions and other expenses related to the offering.


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


At September 30, 2021 and December 31, 2020 we had a cash balance of
$3,290,702 (which does not include the proceeds from the offering we consummated
in October 2021) and $13,010,356, respectively. As of September 30, 2021,
our stockholders' equity was $13,119,952, compared to $18,437,823 as of December
31, 2020. Our net loss for the nine months ended September 30, 2021 was
$3,744,582 and net cash used in operating activities was $1,032,417. We
anticipate our cash balance is sufficient to last at least twelve months from
November 15, 2021. We anticipate cost of revenue will increase once the Lease at
101 Waldon Road commences and SG Echo fulfills its obligations under the loan
agreement to employ a minimum of 75 full time employees in Durant, Oklahoma and
pay them no less than 1.5 times the federal minimum wages within a 24 month
period.


We may need to generate additional revenues or secure additional financing
sources, such as debt or equity capital, to fund future growth, which financing
may not be available on favorable terms or at all. We do not have any additional
sources secured for future funding, and if we are unable to raise the necessary
capital at the times we require such funding, we may need to materially change
our business plan, including delaying implementation of aspects of such business
plan or curtailing or abandoning such business plan altogether.


Cash Flow Summary


                                                           Nine Months Ended
                                                             September 30,
                                                           2021           2020
Net cash provided by (used in):
Operating activities                                  $ (1,032,417 ) $ (4,453,862 )
Investing activities                                    (8,283,525 )   (1,442,602 )
Financing activities                                      (403,712 )   17,318,358

Net increase (decrease) in cash and cash equivalents $ (9,719,654) $ 11,421,894


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Operating activities used net cash of $1,032,417 during the nine months ended
September 30, 2021, and $4,453,862 during the nine months ended September 30,
2020. Generally, our net operating cash flows fluctuate primarily based on
changes in our profitability and working capital. Cash used in operating
activities decreased by approximately $3,421,000 primarily due to an decrease in
working capital of approximately $3,287,000 due in part to increases in accrued
losses from the legacy SG Echo contracts we assumed and increases in accounts
payable with the additions of operations of new entities, SG DevCorp, Chicago
Airport Testing, and SG Echo, from the corresponding period of the prior year.
In addition, we had an increase of approximately $307,000 in stock-based
compensation, an increase of approximately $292,000 in depreciation expense, an
increase of approximately $161,000 in bad debt expense and an increase in the
overall net loss of approximately $681,000, in the nine months ended September
30, 2021 compared to the nine months ended September 30, 2020.



Investing activities used net cash of $8,283,525 during the nine months ended
September 30, 2021, and $1,442,602 during the nine months ended September 30,
2020. Cash used in investing activities increased from the corresponding period
of the prior year primarily due to the purchase of property, plant and equipment
of approximately $4,756,000 which includes the land purchase for the Lago Vista
- Austin project, purchase of intangible assets of $42,500, payments on assumed
liabilities related to the Echo DCL, LLC acquisition of approximately $195,000,
an investments in two SG DevCorp entities totaling approximately $3,464,000 and
we received proceeds from the sale of equipment for $225,000.



Financing activities used net cash of $403,712 during the nine months ended
September 30, 2021, and provided net cash of $17,318,358 during the nine months
ended September 30, 2020.  Cash provided by financing activities decreased by
approximately $17,318,000 due to a decrease in proceeds from public stock
offerings and proceeds from long-term note payable in the nine months ended
September 30, 2021. Cash used by financing activities for the nine months ended
September 30, 2021 increased by approximately $3,059,000 as compared to the nine
months ended September 30, 2020 due to distributions paid to our non-controlling
interest partner, offset by an increase of approximately $707,000 in proceeds
from conversion of outstanding warrants to common stock and proceeds from
short-term note payable of $1,948,000.


We provide services to our construction and engineering customers in three
separate phases: 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 September 30, 2021, we
had 15 projects totaling $20,074,693 under contract, which, if they all proceed
to construction, will result in our constructing approximately 232,898 square
feet of container and modular space. Of these contracts, all fifteen projects
combine all three phases or parts thereof and including construction. We expect
that all of this revenue will be realized by September 30, 2023.


Backlog may fluctuate significantly due to the timing of orders or awards for
large projects and is not necessarily indicative of future backlog levels or the
rate at which backlog will be recognized as revenue. The decrease in backlog of
approximately $5,042,000 from December 31, 2020 is primarily attributable to one
new contract we entered into during the first quarter of 2021 for approximately
$1,325,000, one new contract in the third quarter of 2021 for approximately
$857,000 and had one large partial contract cancellation of approximately
($1,300,000) and offset by work in progress or completed contracts during the
first nine months of 2021 for approximately $5,983,000.


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


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Off-balance sheet provisions

From September 30, 2021 and December 31, 2020, we did not have any material off-balance sheet arrangements to which we were 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 September 30, 2021.



Critical accounting policies and new accounting statements


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 main accounting policies are described 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 essential in order to fully understand and assess 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.


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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.


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Critical accounting policies (continued)

For sales of products or equipment, we apply revenue recognition when the customer gets control of those goods, which is at a particular 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 nine months ended September 30, 2021.  On June 15, 2021 we terminated
the Exclusive License Agreement with CPF that we had entered into on October 3,
2019.



    We entered into a joint venture agreement with Clarity Lab Solutions, LLC
("Clarity Labs") (the "JV") in the fourth quarter of 2020. Revenue from the
activities of the JV is related to clinical testing services and is recognized
when services have been rendered, which is at a point in time. In addition, we
formed Chicago Airport Testing, LLC which collects rental revenue. During the
nine months ended September 30, 2021, we recognized $23,757,962 in revenue
related to activities through the two JV's, which are included in medical
revenue on the accompanying consolidated statements of operations.


    We acquired a 10% non-dilutable equity interest for JDI-Cumberland Inlet,
LLC and acquired a 50% membership interest in Norman Berry II Owner LLC in the
second quarter of 2021. We have determined we are not the primary beneficiary
and thus will not consolidated the activities on the condensed consolidated
financial statements. We will use the equity method to report the activities as
an investment in on our condensed consolidated financial statements.


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 nine months ended September 30, 2021.



Intangible assets - Intangible assets consist of $2,766,000 of proprietary
knowledge and technology which is being amortized over 20 years, $97,164 of
trademarks which is being amortized over 5 years, $47,800 of website fees which
is being amortized over 5 years. Our evaluation of intangible assets for
impairment during the year ended December 31, 2020, determined that there were
no impairment losses. There was no impairment during the nine months ended
September 30, 2021.



New accounting statements

See note 3 to the accompanying consolidated financial statements for all recently adopted and new pronouncements.


47

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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,
litigation expenses and stock compensation expense.



EBITDA and Adjusted EBITDA are presented because they are important metrics used
by management as one of the means by which it assesses our financial
performance. 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 or cash flow requirements for working capital; and

? Although depreciation and amortization are non-cash charges, assets are

being depreciated and amortized and may need to be replaced in the future, and

    these non-GAAP measures do not reflect cash requirements for such
    replacements.




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      Three Months           Nine               Nine
                                              Ended              Ended          Months Ended       Months Ended
                                           September 30,     September 30,     September 30,      September 30,
                                               2021              2020               2021               2020
Net loss attributable to common
stockholders of SG Blocks, Inc.            $  (3,830,905 )   $  (1,478,273 )   $  (7,406,041) )   $  (3,063,673) )
    Addback interest expense                         293             2,614                985              8,877
    Subtract interest income                      (9,973 )         (27,401 )          (41,240 )          (38,497 )
   Addback depreciation and amortization         148,482            47,488            449,502            142,290
EBITDA (non-GAAP)                             (3,692,103 )      (1,455,572 )      (6,996,794) )      (2,951,003) )
    Addback loss on asset disposal                34,182             1,012             34,182              1,012
    Addback litigation expense                   413,796           127,205            555,068            395,045
   Addback stock compensation expense            246,236           303,169            778,657            471,683
Adjusted EBITDA (non-GAAP)                 $  (2,997,889 )   $  (1,024,186 )   $  (5,628,887) )   $  (2,083,263) )



48

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