UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
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:
(Exact name of registrant as specified in its charter)
|
|
|
(State or other jurisdiction of |
|
(I.R.S. Employer |
incorporation or organization) |
|
Identification No.) |
|
|
|
|
|
|
(Address of principal executive offices) |
|
(Zip Code) |
(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 | ||
|
|
|
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.
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).
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 ☐ |
☒ |
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 ☐ ☒
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
As of November 10, 2020, the issuer had a total of
SG BLOCKS, INC.
FORM 10-Q
TABLE OF CONTENTS
1 |
SG BLOCKS, INC. AND SUBSIDIARIES
|
|
September 30, 2020 |
|
|
December 31, 2019 |
|
||
|
|
(Unaudited) |
|
|
|
|
||
Assets |
|
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
Accounts receivable, net |
|
|
|
|
|
|
|
|
Contract assets |
|
|
|
|
|
|
|
|
Inventories | ||||||||
Prepaid expenses and other current assets |
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
Right-of-use asset | ||||||||
Long-term note receivable |
|
|
||||||
Intangible assets, net |
|
|
|
|
|
|
|
|
Deferred contract costs, net | ||||||||
Total Assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
|
|
|
$ |
|
|
Contract liabilities |
|
|
|
|
|
|
|
|
Earnout liability | ||||||||
Lease liability, current maturities | ||||||||
Other current liabilities | ||||||||
Total current liabilities |
|
|
|
|
|
|
|
|
Lease liability, net of current maturities | ||||||||
Total liabilities |
||||||||
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, $ |
|
|
|
|
|
|
|
|
Common stock, $ |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
Accumulated deficit |
|
|
( |
) |
|
|
( |
) |
Total stockholders’ equity |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity |
|
$ |
|
|
|
$ |
|
|
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, |
|
|||||
|
2020 |
2019 |
|
2020 |
|
2019 |
|
|||||
|
(Unaudited) |
(Unaudited) |
|
(Unaudited) |
|
(Unaudited) |
|
|||||
Revenue: |
|
|
|
|
|
|||||||
Construction services | $ | $ | $ | $ | ||||||||
Engineering services |
( |
) |
|
|
|
|
|
|
||||
Total |
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|||||
Cost of revenue: |
|
|
|
|
|
|
|
|||||
Construction services |
|
|
|
|
|
|
|
|||||
Engineering services |
( |
) |
|
|
|
|
|
|
||||
Total |
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|||||
Gross profit (loss) |
( |
) |
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|||||
Operating expenses: |
|
|
|
|
|
|
|
|||||
Payroll and related expenses |
|
|
|
|
|
|
|
|||||
General and administrative expenses |
|
|
|
|
|
|
|
|||||
Marketing and business development expense |
|
|
|
|
|
|
|
|||||
Pre-project expenses |
|
|
|
|
|
|
|
|||||
Total |
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|||||
Operating loss |
( |
) | ( |
) |
|
( |
) |
|
( |
) |
||
|
|
|
|
|
|
|
|
|||||
Other income (expense): |
|
|
|
|
|
|
|
|||||
Loss on asset disposal | ( |
) | ( |
) | ( |
) | ( |
) | ||||
Interest expense |
( |
) |
|
|
( |
) |
|
|
|
|||
Interest income |
|
|
|
|
|
|
|
|||||
Other income | ||||||||||||
Total |
( |
) |
|
|
|
( |
) | |||||
|
|
|
|
|
|
|
|
|||||
Loss before income taxes |
( |
) | ( |
) |
|
( |
) |
|
( |
) |
||
Income tax expense |
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|||||
Net loss |
$ | ( |
) | $ | ( |
) |
$ |
( |
) |
$ |
( |
) |
|
|
|
|
|
|
|
|
|||||
Net loss per share - basic and diluted: |
|
|
|
|
|
|
|
|||||
Basic and diluted |
$ | ( |
) | $ | ( |
) |
$ |
( |
) |
$ |
( |
) |
|
|
|
|
|
|
|
|
|||||
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|||||
Basic and diluted |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3 |
SG BLOCKS, INC. AND SUBSIDIARIES
|
|
$0.01 Par Value |
|
Additional |
|
Accumulated |
|
Total Stockholders’ |
|
|||||||||||
|
|
Shares |
|
Amount |
|
Capital |
|
Deficit |
|
Equity |
|
|||||||||
Balance at June 30, 2020 |
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) | $ |
|
||||||
Stock-based compensation |
|
— |
|
|
|
|
|
|
|
|
|
|
||||||||
Conversion of restricted stock units to common stock | ||||||||||||||||||||
Conversion of debt exchange to common stock | ||||||||||||||||||||
Issuance of common stock, net of issuance costs | ||||||||||||||||||||
Net loss |
|
— |
|
|
|
|
|
|
|
( |
) | ( |
) | |||||||
Balance at September 30, 2020 | $ | $ | $ | ( |
) | $ | ||||||||||||||
Balance at December 31, 2019 |
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) | $ |
|
||||||
Stock-based compensation | — | |||||||||||||||||||
Conversion of restricted stock units to common stock |
|
|
|
|
|
|
( |
) |
|
|
|
|
||||||||
Reverse stock split settlement |
|
( |
) |
|
|
|
( |
) |
|
|
|
( |
) | |||||||
Conversion of debt exchange to common stock | ||||||||||||||||||||
Issuance of common stock, net of issuance costs | ||||||||||||||||||||
Net loss |
|
— |
|
|
|
|
|
|
|
( |
) | ( |
) | |||||||
Balance at September 30, 2020 |
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) | $ |
|
|
|
$0.01 Par Value |
|
Additional |
|
Accumulated |
|
Total Stockholders’ |
|
|||||||||||
|
|
Shares |
|
Amount |
|
Capital |
|
Deficit |
|
Equity |
|
|||||||||
Balance at June 30, 2019 |
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) | $ |
|
||||||
Stock-based compensation |
|
— |
|
|
|
|
|
|
|
|
|
|
||||||||
Issuance of common stock, net of issuance costs | ||||||||||||||||||||
Net loss |
|
— |
|
|
|
|
|
|
|
( |
) | ( |
) | |||||||
Balance at September 30, 2019 | $ | $ | $ | ( |
) | $ | ||||||||||||||
Balance at December 31, 2018 |
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) | $ |
|
||||||
Stock-based compensation | — | |||||||||||||||||||
Issuance of common stock, net of issuance costs |
|
|
|
|
|
|
|
|
|
|||||||||||
Net loss |
|
— |
|
|
|
|
|
|
|
( |
) | ( |
) | |||||||
Balance at September 30, 2019 |
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) | $ |
|
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 September 30, |
|
|||
|
|
(Unaudited) |
|
(Unaudited) |
|
|||
Cash flows from operating activities: |
|
|
|
|
|
|||
Net loss |
|
$ |
( |
) |
$ |
( |
) |
|
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation expense |
|
|
|
|
|
|
|
|
Amortization of intangible assets |
|
|
|
|
|
|
|
|
Amortization of deferred license costs | ||||||||
Bad debt expense (benefit) | ( |
) | ||||||
Interest income on long-term note receivable |
|
|
( |
) |
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
Loss on asset disposal | ||||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
( |
) |
|
|
||
Contract assets |
|
|
( |
) |
|
|
|
|
Inventories | ( |
) | ||||||
Prepaid expenses and other current assets |
|
|
( |
) |
|
|
|
|
Accounts payable and accrued expenses |
|
|
( |
) |
|
( |
) | |
Contract liabilities |
|
|
( |
) | ||||
Other current liabilities | ||||||||
Net cash used in operating activities |
|
|
( |
) |
|
( |
) | |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Advances in note receivable | ( |
) | ||||||
Purchase of Echo DCL, LLC, net of cash acquired | ( |
) | ||||||
Purchase of property, plant and equipment | ( |
) | ( |
) | ||||
Net cash used in investing activities |
|
|
( |
) |
|
( |
) | |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from public stock offering, net of issuance costs |
|
|
|
|
|
|
|
|
Proceeds from long-term note payable | ||||||||
Settlement of common stock from reverse stock split | ( |
) | ||||||
Net cash provided by financing activities |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents | ( |
) | ||||||
Cash and cash equivalents - beginning of period | ||||||||
Cash and cash equivalents - end of period | $ | $ | ||||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Non-cash conversion of accrued interest of long-term note payable to common stock |
$ | $ | ||||||
Non-cash conversion of long-term note payable to common stock | ||||||||
Non-cash conversion of accrued salary to restricted stock units to common stock | ||||||||
Total non-cash investing and financing activities | $ | $ |
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, and 2019 (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 modifies code-engineered cargo shipping containers and purpose-built modules for use for safe and sustainable commercial, industrial and residential building construction using building products developed with the Company’s proprietary technology and design and engineering expertise. Rather than consuming new steel and lumber, the Company’s 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. The Company’s technology and expertise is also used to purpose-build modules, or prefabricated steel modular units customized for use in modular construction (“SGPBMs” and, together with SGBlocks™, “Modules”), primarily to augment or complement an SGBlocks™ structure. The Company’s core customer base is comprised of architects, landowners, builders and developers who use our Modules in commercial and residential structures. The Company’s operating model combines product design and outsourcing of the modifications and finish out of Modules using proprietary algorithms developed by the Company to produce and deliver Modules across the country. The Company believes this combination enables us to generate economies of scale while maintaining high customer service levels in the environmentally-friendly construction space.
There are three core product offerings that utilize our 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 our product offerings.
The Company also provides engineering and project management services related to the use and modification of Modules in construction.
The Company is now focusing on entering into licensing agreements across the Company’s construction opportunity verticals and will be able to focus its sales and marketing efforts on qualified lead generation for its licensees.
Reverse Stock Split
On February 5, 2020, the Company effected a
As of September 30, 2020, the Company had
6 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
2. |
Liquidity |
The Company has prepared its condensed consolidated financial statements on a going concern basis, which assumes that the Company will realize its assets and satisfy its liabilities in the normal course of business. The Company has incurred net losses since its inception and has negative operating cash flows. The Company believes it has sufficient cash and cash equivalents and backlog to meet its obligations over the next twelve months to overcome any going concern doubts. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty concerning the Company’s ability to continue as a going concern.
As of September 30, 2020, the Company had cash and cash equivalents of $
2020 |
|||||
Within 1 year | $ | ||||
1 to 2 years |
|||||
Total Backlog | $ |
The Company completed an equity offering in April 2019 and in August 2019, which resulted in net proceeds of approximately $
With the global spread of the ongoing novel coronavirus ("COVID-19") pandemic during the first nine months, the Company has implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on its employees and business. The Company is experiencing delays in projects due to the COVID-19. Any quarantines, the timing and length of containment and eradication solutions, travel restrictions, absenteeism by infected workers, labor shortages or other disruptions to the Company's suppliers and contract manufacturers or customers would likely adversely impact the Company's sales and operating results and result in further project delays. In addition, the pandemic could result in an economic downturn that could affect the demand for the Company's products. Order lead times could be extended or delayed and pricing could increase. Some products or services may become unavailable if the regional or global spread were significant enough to prevent alternative sourcing. Accordingly, the Company is considering alternative product sourcing in the event that product supply becomes problematic. The Company expects this global pandemic to have an impact on the Company's revenue and results of operations, the size and duration of which the Company is currently unable to predict. In addition, to the extent the ongoing COVID-19 pandemic adversely affects the Company's business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties which the Company faces.
7 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2020 and 2019 (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 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, 2019 included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 30, 2020. 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, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.
Recently adopted accounting pronouncements - New accounting pronouncements implemented by the Company are discussed below or in the related notes, where appropriate.
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). This ASU amends ASC 820 to add, remove and modify certain disclosure requirements for fair value measurements. For example, public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The Company adopted ASU 2018-13 effective January 1, 2020. The adoption of this guidance did not have a material impact on the Company's financial position, results of operations or cash flow.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This update will require the measurement of all expected credit losses for financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The guidance was initially effective for the Company for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” which, among other things, defers the effective date of ASU 2016-13 for public filers that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those years. Early adoption is permitted. The Company adopted ASU 2016-13 effective January 1, 2020. The adoption of this guidance did not have a material impact on the Company's financial position, results of operations or cash flow.
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
8 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
3. |
Summary of Significant Accounting Policies (continued) |
Revenue recognition – 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). 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
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.
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 will receive royalty payments based upon gross revenues earned by the licensee for commercialized products within the field of design and project management platforms for residential use, including single-family residences and multi-family residences, but excluding military housing. The Company has determined that the ELA grants 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 recognizes revenue and the Company has the right to payment of royalties. No revenue has been recognized under the ELA for the nine months ended September 30, 2020.
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 has a term of two (2) years.
The Agreement also provides that CMC has engaged the Company to build and design, in the aggregate, approximately 100 residential and commercial units at 1100 Ridge Avenue, Atlanta, Georgia, which is known as the “Ridge Avenue, Atlanta Project.” The total value of the project is approximately $
9 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
3. |
Summary of Significant Accounting Policies (continued) |
In May 2020, the Company and OSANG Healthcare Co., Ltd. ("Osang"), a South Korea based global manufacturer and distributor of medical grade diagnostic tests and equipment, announced the signing of a one year, non-exclusive distributorship agreement for the United States, for OHC's "GeneFinder COVID-19 Plus RealAmp Kit." This is a test designed to detect SARS-CoV-2, the virus that causes COVID-19. The Distributorship Agreement is Osang's standard form of distributorship agreement and provides the Company with the non-exclusive right to distribute Osang's GeneFinder COVID-19 Plus RealAmp Kit in the United States for a stated term of one (1) year. Pursuant to the terms of the Distributorship Agreement, the Company is required to make payment for
Disaggregation of Revenues
The Company’s revenues are principally derived from construction and engineering contracts related to Modules. The Company's contracts are with customers in various industries.
The following tables provide further disaggregation of the Company’s revenues by categories:
Three Months Ended September 30, |
|||||||||||||||
Revenue by Customer Type |
2020 |
2019 |
|||||||||||||
Hospitality | $ | % | $ | % | |||||||||||
Multi-Family (includes Single-Family) |
|
|
|
% |
|
( |
) |
|
% | ||||||
Office |
|
|
% |
|
|
% |
|||||||||
Retail |
|
|
% |
|
|
% |
|||||||||
School | % | % | |||||||||||||
Special use | % | % | |||||||||||||
Other |
|
|
% |
|
|
% |
|||||||||
Total revenue by customer type |
$ |
|
|
% |
$ |
|
|
% |
Nine Months Ended September 30, |
|||||||||||||||
Revenue by Customer Type |
2020 |
2019 |
|||||||||||||
Hospitality | $ | % | $ | % | |||||||||||
Medical (modular structures) | % | % | |||||||||||||
Multi-Family (includes Single-Family) |
|
|
|
% |
|
|
|
% | |||||||
Office |
|
|
% |
|
|
% |
|||||||||
Retail |
|
|
% |
|
|
% |
|||||||||
School | % | % | |||||||||||||
Special Use |
|
|
% |
|
|
% | |||||||||
Other (1) |
|
|
% |
|
|
% |
|||||||||
Total revenue by customer type |
$ |
|
|
% |
$ |
|
|
% |
(1) Construction fee of $
10 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
3. |
Summary of Significant Accounting Policies (continued) |
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.
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. Because of this, the Company is no longer obliged to its Original Agreement. Upon entering the ELA, the Company had an outstanding accounts receivable balance of $
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 has also been excluded from the License. The License Agreement has an initial term of five (5) years and will automatically renew for subsequent five (5) year periods. The License Agreement provides for customary terminating provisions, including the right by the Company to terminate if the Licensee fails to make minimum royalty payments (as described below).
11 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
3. |
Summary of Significant Accounting Policies (continued) |
The License Agreement provides for customary indemnification obligations between the parties and further provides that the Licensee will indemnify the Company for any claims arising out of the commercialization of the License by the Licensee or any of its subsidiaries, contractors, or sublicensees. In addition, the License Agreement provides that the Company will provide the Licensee with cost estimates for the fabrication and manufacturing of residential projects in the Company’s existing pipeline as of the date of the License Agreement, and if such projects cannot be reasonably constructed and installed at or below such estimates, then the Licensee may withhold payment of any royalty due to the Company under the License Agreement on a dollar-for-dollar basis to offset the costs above the originally estimated amounts.
Business Combinations - The Company accounts for business acquisitions using the acquisition method of accounting in accordance with ASC 805 “Business Combinations”, which requires recognition and measurement of all identifiable assets acquired and liabilities assumed at their fair value as of the date control is obtained. The Company determines the fair value of assets acquired and liabilities assumed based upon its best estimates of the acquisition-date fair value of assets acquired and liabilities assumed in the acquisition. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired. Subsequent adjustments to fair value of any contingent consideration are recorded to the Company’s condensed consolidated statements of operations. Costs that the Company incurs to complete the business combination are charged to general and administrative expenses as they are incurred.
Variable Interest Entities – The Company accounts for certain legal entities as variable interest entities (“VIE"). When evaluating a VIE for consolidation, the Company must determine whether or not there is a variable interest in the entity. Variable interests are investments or other interests that absorb portions of an entity’s expected losses or receive portions of the entity’s expected returns. If it is determined that the Company does not have a variable interest in the VIE, no further analysis is required and the VIE is not consolidated. If the Company holds a variable interest in a VIE, the Company consolidates the VIE when there is a controlling financial interest in the VIE and therefore are deemed to be the primary beneficiary. The Company is determined to have a controlling financial interest in a VIE when it has both the power to direct the activities of the VIE that most significantly impact the VIE economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to that VIE. This determination is evaluated periodically as facts and circumstances change.
On August 27, 2020 the Company entered into a joint venture agreement with Clarity Lab Solutions, LLC (“Clarity Labs”) (the “JV”). In consideration and subject to Clarity Lab’s services and commitments and provided the agreement remains valid and in force, and is not terminated, SGB shall issue
12 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
3. |
Summary of Significant Accounting Policies (continued) |
Cash and cash equivalents – The Company considers cash and cash equivalents to include all short-term, highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less upon acquisition. Cash and cash equivalents totaled $
Short-term investment – The Company classifies investments consisting of a certificate of deposit with a maturity greater than three months but less than one year as short-term investment. The Company had
Accounts receivable and allowance for credit losses – Accounts receivable are receivables generated from sales to customers and progress billings on performance type contracts. Amounts included in accounts receivable are deemed to be collectible within the Company’s operating cycle. The Company recognizes accounts receivable at invoiced amounts.
The allowance for credit losses reflects the Company's best estimate of expected losses inherent in the accounts receivable balances. Management provides an allowance for credit losses based on the Company’s historical losses, specific customer circumstances, and general economic conditions. Periodically, management reviews accounts receivable and adjusts the allowance based on current circumstances and charges off uncollectible receivables when all attempts to collect have been exhausted and the prospects for recovery are remote. Recoveries are recognized when they are received. Actual collection losses may differ from our estimates and could be material to our condensed consolidated financial position, results of operations, and cash flows.
Inventory – Raw construction materials (primarily shipping containers and fabrication materials) are valued at the lower of cost (first-in, first-out method) or net realizable value. Finished goods and work-in-process inventories are valued at the lower of cost or net realizable value, using the specific identification method. Medical equipment and COVID-19 test and testing supplies are valued at the lower of cost, (first-in, first-out method) or net realizable value. As of September 30, 2020 there was inventory of $
Goodwill – The Company performs its impairment test of goodwill at the reporting unit level each fiscal year, or more frequently if events or circumstances change that would more likely than not reduce the fair value of its reporting unit below its carrying values. The Company performs a goodwill impairment test by comparing the fair value of the reporting unit with its carrying value and recognizes an impairment charge for the amount by which the carrying value exceeds the fair value, not to exceed the total amount of goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. The Company’s evaluation of goodwill completed during the year ended December 31, 2019 resulted in impairment loss of $
13 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
3. |
Summary of Significant Accounting Policies (continued) |
Intangible assets –
For the year ending December 31,: |
|
|
|
||
2020 |
|
$ |
|
|
|
2021 |
|
|
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
$ |
|
|
Property, plant and equipment – Property, plant and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated lives of each asset. Estimated useful lives for significant classes of assets are as follows: computer and software
Convertible instruments – The Company bifurcates conversion options from their host instruments and accounts for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
Common stock purchase warrants and other derivative financial instruments – The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provides a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company’s own stock. The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if any event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement shares (physical settlement or net-cash settlement). The Company assesses classification of common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities or equity is required.
14 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
3. |
Summary of Significant Accounting Policies (continued) |
Fair value measurements – Financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are carried at cost, which the Company believes approximates fair value due to the short-term nature of these instruments.
The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.
The Company uses three levels of inputs that may be used to measure fair value:
|
Level 1 |
Quoted prices in active markets for identical assets or liabilities. |
|
Level 2 |
Quoted prices for similar assets and liabilities in active markets or inputs that are observable. |
|
Level 3 |
Inputs that are unobservable (for example, cash flow modeling inputs based on assumptions). |
Financial assets and liabilities measured at fair value on a recurring basis are summarized below as of September 30, 2020:
Level 3: |
|||||||||
Significant |
|||||||||
unobservable |
|||||||||
inputs |
Total |
||||||||
Earnout liability | $ | $ |
Transfer into and transfers out of the hierarchy levels are recognized as if they had taken place at the end of the reporting period. There were no transfers into or out of the hierarchy levels during the nine months ended September 30, 2020 or 2019, besides the transfer in of the earnout liability.
Share-based payments – The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, including non-employee directors, the fair value of a stock option award is measured on the grant date. The fair value amount is then recognized over the period services are required to be provided in exchange for the award, usually the vesting period. The Company recognizes stock-based compensation expense on a graded-vesting basis over the requisite service period for each separately vesting tranche of each award. Stock-based compensation expense to employees and all directors are reported within payroll and related expenses in the consolidated statements of operations. Stock-based compensation expense to non-employees is reported within marketing and business development expense in the condensed consolidated statements of operations.
Income taxes – The Company accounts for income taxes utilizing the asset and liability approach. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes generally represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from the differences between the financial and tax bases of the Company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted.
The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for anticipated tax audit issues based on the Company’s estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when the liabilities are no longer determined to be necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.
15 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
3. |
Summary of Significant Accounting Policies (continued) |
Concentrations of credit risk – Financial instruments, that potentially subject the Company to concentration of credit risk, consist principally of cash and cash equivalents. The Company places its cash with high credit quality institutions. At times, such amounts may be in excess of the FDIC insurance limits. The Company has not experienced any losses in such account and believes that it is not exposed to any significant credit risk on the account.
With respect to receivables, concentrations of credit risk are limited to a few customers in the construction industry. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers other than normal lien rights. At September 30, 2020 and December 31, 2019,
Revenue relating to
Cost of revenue relating to
4. |
Accounts Receivable |
At September 30, 2020 and December 31, 2019, the Company’s accounts receivable consisted of the following:
|
|
2020 |
|
|
2019 |
|
|||
Billed: |
|
|
|
|
|
|
|||
Construction services |
$ | $ | |||||||
Engineering services |
|
|
|
|
|
|
|
|
|
Retainage receivable |
|
|
|
|
|
|
|
|
|
Other receivable |
|||||||||
Total gross receivables |
|
|
|
|
|
|
|
|
|
Less: allowance for credit losses |
|
|
( |
) |
|
|
( |
) |
|
Total net receivables |
|
$ |
|
|
|
$ |
|
|
16 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
5. |
Contract Assets and Contract Liabilities |
Costs and estimated earnings on uncompleted contracts, which represent contract assets and contract liabilities, consisted of the following at September 30, 2020 and December 31, 2019:
|
|
|
2020 |
|
|
2019 |
|
||
|
Costs incurred on uncompleted contracts |
|
$ |
|
|
|
$ |
|
|
|
Estimated earnings to date on uncompleted contracts |
|
|
|
|
|
|
|
|
|
Gross contract assets |
|
|
|
|
|
|
|
|
|
Less: billings to date |
|
|
( |
) |
|
|
( |
) |
|
Net contract liabilities, on uncompleted contracts |
|
$ |
( |
) |
|
$ |
( |
) |
The above amounts are included in the accompanying condensed consolidated balance sheets under the following captions at September 30, 2020 and December 31, 2019.
|
|
|
2020 |
|
|
2019 |
|
||
|
Contract assets |
|
$ |
|
|
|
$ |
|
|
|
Contract liabilities |
|
|
( |
) |
|
|
( |
) |
|
Net contract liabilities |
|
$ |
( |
) |
|
$ |
( |
) |
Although management believes it has established adequate procedures for estimating costs to complete on open contracts, it is at least reasonably possible that additional significant costs could occur on contracts prior to completion. The Company periodically evaluates and revises its estimates and makes adjustments when they are considered necessary.
6. |
Property, plant and equipment |
Property, plant and equipment are stated at cost less accumulated depreciation and amortization and depreciated using the straight-line method over their useful lives. At September 30, 2020 and December 31, 2019, the Company’s property, plant and equipment, net consisted of the following:
|
|
|
2020 |
|
|
2019 |
|
||
|
Computer equipment and software |
|
$ |
|
|
|
$ |
|
|
|
Furniture and other equipment |
|
|
|
|
|
|
|
|
Equipment and machinery | |||||||||
Automobiles | |||||||||
Building held for leases | |||||||||
Construction in progress | |||||||||
|
Property, plant and equipment |
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
Property, plant and equipment, net |
|
$ |
|
|
|
$ |
|
|
Depreciation expense for the three months ended September 30, 2020 and 2019 amounted to $
17 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
7. |
Notes Receivable |
On January 21, 2020, CPF GP 2019-1 LLC (“CPF GP”) issued to the Company a promissory note in the principal amount of $
In April 2020, CPF GP issued to the Company a promissory note in the principal amount of $
8. |
Notes Payable |
On February 4, 2020, the Company entered into a Securities Purchase Agreement with an accredited investor, pursuant to which the Company issued to the investor a secured note in the aggregate principal amount of $
9. |
Business Combination |
On September 17, 2020, the Company, through SG Echo, LLC (its wholly owned subsidiary), entered into an Asset Purchase Agreement (“APA") to acquire substantially all of the assets of Echo DCL, LLC (“Echo”) for $
The purchase consideration amounted to:
Cash | $ | |||
Earnout liability | ||||
Settlement of accounts receivable and net contract liabilities | ( |
) | ||
$ |
The settlement of accounts receivable and net contract liabilities represents amounts effectively settled upon the purchase of Echo, which originated from contacts between the Company and Echo prior to the purchase date.
The following table summarizes the preliminary allocation of the purchase price to the assets acquired and liabilities assumed for the Echo Acquisition:
18 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
9. |
Business Combination (continued) |
Cash and cash equivalents |
$ |
|
||
Accounts receivable |
|
|
||
Inventories |
|
|
||
Prepaid expenses and other current assets |
|
|
||
Property, plant and equipment |
|
|
||
Right-of-use assets |
|
|
||
Intangible assets |
|
|
||
Accounts payable and accrued expenses |
|
( |
) | |
Contract liabilities |
|
( |
) | |
Lease liability |
|
( |
) | |
|
$ |
|
As part of the Echo Acquisition, the Company recorded a contingent consideration liability for additional payments due to the sellers of Echo, and is included in earnout liability. These payments are due in accordance with the APA and are based upon the net income obtained from the Echo business during certain earnout periods. The initial contingent consideration liability of $
As of September 30, 2020, the Company has not completed its measurement period with respect to the Echo transaction. The amounts above represent provisional amounts recorded at this time and are subject to adjustments once the measurement period has ended.
10. |
Leases |
The Company leases an office, a plant and certain equipment under non-cancelable operating lease agreements.
Supplemental balance sheet information related to leases is as follows:
Balance Sheet Location |
September 30, 2020 | ||||
Operating Leases | |||||
Right-of-use assets, net | $ | ||||
Current liabilities | Lease liability, current maturities |
|
|||
Non-current liabilities | Lease liability, net of current maturities | ||||
Total operating lease liabilities | $ | ||||
Finance Leases | |||||
Right-of-use assets | $ | ||||
Current liabilities | Lease liability, current maturities | ||||
Non-current liabilities | Lease liability, net of current maturities | ||||
Total finance lease liabilities | $ | ||||
Weighted Average Remaining Lease Term |
|||||
Operating leases | |||||
Finance leases | |||||
Weighted Average Discount Rate |
|||||
Operating leases | |||||
Finance leases |
19 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
10. |
Leases (continued) |
As the leases do not provide an implicit rate, the Company used an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments, which is reflective of the specific term of the leases and economic environment of each geographic region.
Anticipated future lease costs, which are based in part on certain assumptions to approximate minimum annual rental commitments under non-cancelable leases, are as follows:
Year Ending December 31, | Operating | Financing | Total | ||||||||
2020 (remaining) | $ | $ | $ | ||||||||
2021 | |||||||||||
2022 | |||||||||||
2023 | |||||||||||
2024 | |||||||||||
Thereafter | |||||||||||
Total lease payments | |||||||||||
Less: Imputed interest | |||||||||||
Present value of lease liabilities | $ | $ | $ |
Operating leases for office space and the plant, with total lease payments of $
11. |
Net Income (Loss) Per Share |
Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of the common shares issuable upon the exercise of stock options and warrants. Potentially dilutive common shares are excluded from the calculation if their effect is antidilutive.
At September 30, 2020, there were options, including options granted to non-employees and non-directors, restricted stock units and warrants to purchase
20 |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Co