sgbx-20210630.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number: 001-38037

SG BLOCKS, INC.

(Exact name of registrant as specified in its charter)

Delaware		95-4463937
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

195 Montague Street, 14th Floor, Brooklyn, NY		11201
(Address of principal executive offices)		(Zip Code)

(646) 240-4235

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Trading Symbol(s)		Name of Each Exchange on which Registered
Common Stock, par value $0.01 per share		SGBX		The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of August 11, 2021 the issuer had a total of 8,822,489 shares of the registrant’s common stock, $0.01 par value, outstanding.

SG BLOCKS, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION		2
ITEM 1.	Financial Statements	2
	Condensed Consolidated Balance Sheets as of June 30, 2021 (Unaudited) and December 31, 2020	2
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2021 and 2020 (Unaudited)	3
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2021 and 2020 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020 (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements	6
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Result of Operations	33
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	47
ITEM 4.	Controls and Procedures	47
PART II. OTHER INFORMATION		48
ITEM 1.	Legal Proceedings	48
ITEM 1A.	Risk Factors	48
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
ITEM 3.	Defaults Upon Senior Securities	51
ITEM 4.	Mine Safety Disclosures	51
ITEM 5.	Other Information	51
ITEM 6.	Exhibits	52
SIGNATURES

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

SG BLOCKS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

	June 30, 2021			December 31, 2020
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	2,323,599		$	13,010,356
Accounts receivable, net		2,719,713			2,635,608
Contract assets		2,122,231			1,303,136
Inventories		1,409,915			778,144
Prepaid expenses and other current assets		553,975			570,775
Total current assets		9,129,433			18,298,019

Property, plant and equipment, net		7,177,533			2,683,014
Goodwill		1,309,330			1,309,330
Right-of-use asset		1,478,544			1,537,545
Long-term note receivable		701,233			682,637
Intangible assets, net		2,178,879			2,218,609
Deferred contract costs, net		132,552			152,944
Investment in and advances to equity affiliates		3,350,329			—
Total Assets	$	25,457,833		$	26,882,098

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	5,920,137		$	3,961,961
Contract liabilities		789,068			1,774,740
Lease liability, current maturities		435,608			326,654
Due to affiliates		381,770			965,561
Assumed liability		43,295			200,765
Other current liabilities		5,000			5,000
Total current liabilities		7,574,878			7,234,681

Lease liability, net of current maturities		1,042,232			1,209,594
Total liabilities		8,617,110			8,444,275

Commitments and contingencies		—			—

Stockholders’ equity:
Preferred stock, $1.00 par value, 5,405,010 shares authorized; none issued or outstanding		—			—
Common stock, $0.01 par value, 25,000,000 shares authorized; 8,822,489 issued and outstanding as of June 30, 2021 and 8,596,189 issued and outstanding as of December 31, 2020		88,225			85,962
Additional paid-in capital		41,681,186			40,443,840
Accumulated deficit		(25,851,682	)		(22,276,546	)
Total SG Blocks, Inc. stockholders’ equity		15,917,729			18,253,256
Non-controlling interest		922,994			184,567
Total stockholders’ equity		16,840,723			18,437,823
Total Liabilities and Stockholders’ Equity	$	25,457,833		$	26,882,098

The accompanying notes are an integral part of these condensed consolidated financial statements.

SG BLOCKS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

	For the Three Months Ended June 30,			For the Three Months Ended June 30,			For the Six Months Ended June 30,			For the Six Months Ended June 30,
	2021			2020			2021			2020
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenue:
Construction services	$	2,064,438		$	534,526		$	5,202,153		$	623,867
Engineering services		4,059			94,423			98,008			203,838
Medical revenue		9,785,490			—			15,741,453			—
Total		11,853,987			628,949			21,041,614			827,705

Cost of revenue:
Construction services		3,164,695			193,208			7,258,235			265,119
Engineering services		32,197			61,508			41,967			142,372
Medical revenue		5,818,051			—			9,694,187			—
Total		9,014,943			254,716			16,994,389			407,491

Gross profit		2,839,044			374,233			4,047,225			420,214

Operating expenses:
Payroll and related expenses		801,664			392,338			1,629,186			664,146
General and administrative expenses		1,888,162			766,750			3,349,518			1,258,064
Marketing and business development expense		72,438			30,899			143,065			63,237
Pre-project expenses		847			25,000			10,980			25,000
Total		2,763,111			1,214,987			5,132,749			2,010,447

Operating income (loss)		75,933			(840,754	)		(1,085,524	)		(1,590,233	)

Other income (expense):
Interest expense		(329	)		(3,452	)		(692	)		(6,263	)
Interest income		13,797			6,233			31,267			11,096
Other income		61,024			—			61,024			—
Total		74,492			2,781			91,599			4,833

Income (loss) before income taxes		150,425			(837,973	)		(993,925	)		(1,585,400	)
Income tax expense		—			—			—			—

Net income (loss)		150,425			(837,973	)		(993,925	)		(1,585,400	)

Add: net income attributable to noncontrolling interests		1,691,684			—			2,581,211			—
Net loss attributable to common stockholders of SG Blocks, Inc.	$	(1,541,259	)	$	(837,973	)	$	(3,575,136	)	$	(1,585,400	)

Net loss per share attributable to SG Blocks, Inc. - basic and diluted:
Basic and diluted	$	(0.17	)	$	(0.16	)	$	(0.41	)	$	(0.48	)

Weighted average shares outstanding:
Basic and diluted		8,822,278			5,369,132			8,783,806			3,278,913

The accompanying notes are an integral part of these condensed consolidated financial statements.

SG BLOCKS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

	$0.01 Par Value Common Stock				Additional Paid-in		Accumulated				SG Blocks Stockholders'		Noncontrolling			Total Stockholders’
	Shares		Amount		Capital		Deficit			Equity			Interests			Equity
Balance at March 31, 2021		8,821,289	$	88,213	$	41,431,213	$	(24,310,423	)	$	17,209,003		$	1,074,094		$	18,283,097
Stock-based compensation		—		—		246,236		—			246,236			—			246,236
Conversion of warrants to common stock		1,200		12		3,737		—			3,749			—			3,749
Noncontrolling interest distribution		—		—		—		—			—			(1,842,784	)		(1,842,784	)
Net income (loss)		—		—		—		(1,541,259	)		(1,541,259	)		1,691,684			150,425
Balance at June 30, 2021		8,822,489	$	88,225	$	41,681,186	$	(25,851,682	)	$	15,917,729		$	922,994		$	16,840,723

Balance at December 31, 2020		8,596,189	$	85,962	$	40,443,840	$	(22,276,546	)	$	18,253,256		$	184,567		$	18,437,823
Stock-based compensation		—		—		532,422		—			532,422			—			532,422
Conversion of warrants to common stock		226,300		2,263		704,924		—			707,187			—			707,187
Noncontrolling interest distribution		—		—		—		—			—			(1,842,784	)		(1,842,784	)
Net income (loss)		—		—		—		(3,575,136	)		(3,575,136	)		2,581,211			(993,925	)
Balance at June 30, 2021		8,822,489	$	88,225	$	41,681,186	$	(25,851,682	)	$	15,917,729		$	922,994		$	16,840,723

	$0.01 Par Value Common Stock					Additional Paid-in			Accumulated				SG Blocks Stockholders'		Noncontrolling		Total Stockholders’
	Shares			Amount		Capital			Deficit			Equity			Interests		Equity
Balance at March 31, 2020		1,170,524		$	11,705	$	21,970,903		$	(18,331,244	)	$	3,651,364		$	—	$	3,651,364
Stock-based compensation		—			—		129,750			—			129,750			—		129,750
Conversion of restricted stock units to common stock		12,000			120		(120	)		—			—			—		—
Conversion of debt exchange to common stock		73,665			737		205,526			—			206,263			—		206,263
Issuance of common stock, net of issuance costs		7,340,000			73,400		17,045,080			—			17,118,480			—		17,118,480
Net loss		—			—		—			(837,973	)		(837,973	)		—		(837,973	)
Balance at June 30, 2020		8,596,189		$	85,962	$	39,351,139		$	(19,169,217	)	$	20,267,884		$	—	$	20,267,884

Balance at December 31, 2019		1,157,890		$	11,579	$	21,932,387		$	(17,583,817	)	$	4,360,149		$	—	$	4,360,149
Stock-based compensation		—			—		168,514			—			168,514			—		168,514
Conversion of restricted stock units to common stock		24,672			246		(246	)		—			—			—		—
Reverse stock split settlement		(38	)		—		(122	)		—			(122	)		—		(122	)
Conversion of debt exchange to common stock		73,665			737		205,526			—			206,263			—		206,263
Issuance of common stock, net of issuance costs		7,340,000			73,400		17,045,080			—			17,118,480			—		17,118,480
Net loss		—			—		—			(1,585,400	)		(1,585,400	)		—		(1,585,400	)
Balance at June 30, 2020		8,596,189		$	85,962	$	39,351,139		$	(19,169,217	)	$	20,267,884		$	—	$	20,267,884

The accompanying notes are an integral part of these condensed consolidated financial statements.

SG BLOCKS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

	For the Six Months Ended June 30, 2021			For the Six Months Ended June 30, 2020
	(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net loss	$	(993,925	)	$	(1,585,400	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense		198,398			1,848
Amortization of intangible assets		82,230			72,561
Amortization of deferred license costs		20,392			20,393
Bad debt expense		161,202			—
Interest income on long-term note receivable		(18,596	)		(11,096	)
Stock-based compensation		532,422			168,514
Changes in operating assets and liabilities:
Accounts receivable		(245,307	)		(483,067	)
Contract assets		(819,095	)		94,185
Inventories		(631,771	)		—
Prepaid expenses and other current assets		16,800			(203,096	)
Right of use asset		204,840			—
Accounts payable and accrued expenses		1,958,175			(235,858	)
Contract liabilities		(985,672	)		(20,106	)
Due to affiliates		(583,791	)		—
Lease liability		(204,246	)		—
Net cash used in operating activities		(1,307,944	)		(2,181,122	)

Cash flows from investing activities:
Advances in note receivable		—			(650,000	)
Purchase of property, plant and equipment		(4,692,918	)		—
Purchase of intangible asset		(42,500	)		—
Payment on assumed liability of acquired assets		(157,469	)		—
Investment in and advances to equity affiliates		(3,350,329	)		—
Net cash used in investing activities		(8,243,216	)		(650,000	)

Cash flows from financing activities:
Proceeds from conversion of warrants to common stock		707,187			—
Proceeds from public stock offering, net of issuance costs		—			17,118,480
Proceeds from long-term note payable		—			200,000
Distribution paid to noncontrolling interest		(1,842,784	)		—
Settlement of common stock from reverse stock split		—			(122	)
Net cash (used in) provided by financing activities		(1,135,597	)		17,318,358

Net increase (decrease) in cash and cash equivalents		(10,686,757	)		14,487,236

Cash and cash equivalents - beginning of period		13,010,356			1,625,671

Cash and cash equivalents - end of period	$	2,323,599		$	16,112,907

Supplemental disclosure of non-cash operating activities:
Non-cash conversion of long-term note payable to common stock	$	—		$	200,000
Non-cash conversion of accrued interest of long-term note payable to common stock		—			6,263
Total non-cash operating activities	$	—		$	206,263

The accompanying notes are an integral part of these condensed consolidated financial statements.

SG BLOCKS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2021 and 2020 (Unaudited)

1.	Description of Business

SG Blocks, Inc. (collectively with its subsidiaries, the “Company,” “we”, “us” or “our”) was previously known as CDSI Holdings, Inc., a Delaware corporation incorporated on December 29, 1993. On November 4, 2011, CDSI Merger Sub, Inc., the Company’s wholly-owned subsidiary, was merged with and into SG Building Blocks, Inc. (“SG Building,” formerly SG Blocks Inc.) (the “Merger”), with SG Building surviving the Merger and becoming a wholly-owned subsidiary of the Company. The Merger was a reverse merger that was accounted for as a recapitalization of SG Building, as SG Building was the accounting acquirer. Accordingly, the historical financial statements presented are the financial statements of SG Building.

The building products developed with our proprietary technology and design and engineering expertise are generally stronger, more durable, environmentally sensitive, and erected in less time than traditional construction methods. The use of the SGBlocks building structure typically provides between four to six points towards the Leadership in Energy and Environmental Design (“LEED”) certification levels, including reduced site disturbance, resource reuse, recycled content, innovation in design and use of local and regional materials. Due to the ability of SGBlocks to satisfy such requirements, we believe the products produced utilizing our technology and expertise is a leader in environmentally sustainable construction.

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. We procure 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.

During 2020, the Company formed, SG Echo, LLC, a wholly owned subsidiary of the Company. SG Echo, LLC was formed to complete the business acquisition as disclosed in Note 9. The Company acquired substantially all the assets of Echo DCL, a Texas limited liability company, except for Echo's real estate holdings for which we obtained a right of first refusal. Echo is a container/modular manufacturer based in Durant, Oklahoma specializing in the design and construction of permanent modular and temporary modular buildings and was one of the Company's key supply chain partners. Echo caters to the military, education, administration facilities, healthcare, government, commercial and residential customers. This acquisition has allowed the Company to expand its reach for the Modules and offer an opportunity to vertically integrate a large portion of the Company's cost of goods sold, as well as increase margins, productivity and efficiency in the areas of design, estimating, manufacturing and delivery and to become the manufacturer of the Company's core container and modular product offerings. The Company also entered into a joint venture with Clarity Lab Solutions LLC., to provide clinical lab testing related to COVID-19.

As of January 2021, the Company’s condensed consolidated financial statements include the accounts of Chicago Airport Testing LLC (“CAT”). The Company has a variable interest in CAT as described further below. CAT is in the business of marketing, selling, distributing leasing and otherwise commercially exploiting certain products and services in the COVID-19 testing and other medical industry.

In addition, during 2021, the Company formed SGB Development Corp. (“SGB Development”), which is wholly-owned by the Company. SGB Development was formed with the purpose of real property development utilizing the Company's technologies. SGB Development has a minority interest in Norman Berry II Owners LLC and JDI-Cumberland Inlet LLC as described further below.

SG BLOCKS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2021 and 2020 (Unaudited)

Reverse Stock Split

On February 5, 2020, the Company effected a 1-for-20 reverse stock split of its then-outstanding common stock, which has since been converted. All share and per share amounts set forth in the condensed consolidated financial statements of the Company have been retroactively restated to reflect the 1-for-20 reverse stock split as if it had occurred as of the earliest period presented and unless otherwise stated, all other share and per share amounts for all periods presented in these condensed consolidated financial statements have been adjusted to reflect the reverse stock split effected in February 2020.

As of June 30, 2021, the Company had 8,822,489 shares of common stock issued and outstanding.

2.	Liquidity

As of June 30, 2021, the Company had cash and cash equivalents of $2,323,599 and a backlog of approximately $21 million. See Note 12 for a discussion of construction backlog. Based on our conversations with key customers, the Company anticipates its backlog to convert to revenue over the following period:

	2021
Within 1 year	$	8,179,581
1 to 2 years		12,856,250
Total Backlog	$	21,035,831

The Company has incurred losses since its inception and has negative operating cash flows. Management has taken several actions to ensure that the Company will continue as a going concern. As described below, the Company has been able to raise substantial cash through equity offerings. In addition, as further described in these consolidated financial statements, the Company has begun to recognize revenue from new revenue streams. Management believes that these actions will enable the Company to continue as a going concern.

The Company completed a public offering in April and May 2020, which resulted in net proceeds of approximately $1,522,339, and $15,596,141, respectively. See Note 13 for a discussion on these public offerings. The Company believes that it has adequate cash balances to meet obligations coming due in the next twelve months and further intends to meet its capital needs from revenue generated from operations and by containing costs, entering into strategic alliances, as well as exploring other options, including the possibility of raising additional debt or equity capital as necessary. There is, however, no assurance the Company will be successful in meeting its capital requirements prior to becoming cash flow positive. The Company does not have any additional sources secured for future funding, and if it is unable to raise the necessary capital at the times it requires such funding, it may need to materially change its business plan, including delaying implementation of aspects of such business plan or curtailing or abandoning such business plan altogether.

With the global spread of the ongoing novel coronavirus ("COVID-19") pandemic during 2020, the Company implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on its employees and business. Any quarantines, the timing and length of containment and eradication solutions, travel restrictions, absenteeism by infected workers, labor shortages or other disruptions to the Company's suppliers and contract manufacturers or customers would likely adversely impact the Company's sales and operating results and result in further project delays. In addition, the pandemic could result in an economic downturn that could affect the demand for the Company's products. Order lead times could be extended or delayed and pricing could increase. Some products or services may become unavailable if the regional or global spread were significant enough to prevent alternative sourcing. Accordingly, the Company is considering alternative product sourcing in the event that product supply becomes problematic. The Company expects this global pandemic to have an impact on the Company's revenue and results of operations, the size and duration of which the Company is currently unable to predict. In addition, to the extent the ongoing COVID-19 pandemic adversely affects the Company's business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties which the Company faces. The Company has been impacted by COVID-19 with supply chain distributions, absenteeism by infected workers and skilled labor shortages which has caused delays in projects and the Company could be further impacted if the COVID-19 pandemic continues.

SG BLOCKS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2021 and 2020 (Unaudited)

3.	Summary of Significant Accounting Policies

Basis of presentation and principals of consolidation – The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to the Current Report on Form 10-Q and Article 8 Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. The condensed financial statements and notes should be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2020 included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission on April 15, 2021. In the opinion of management, all adjustments, consisting of normal accruals, considered necessary for a fair presentation of the interim financial statements have been included. Results for the six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

Recently adopted accounting pronouncements - New accounting pronouncements implemented by the Company are discussed below or in the related notes, where appropriate.

Accounting estimates – The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Significant areas that require the Company to make estimates include revenue recognition, stock-based compensation, stock warrants liabilities and allowance for credit losses. Actual results could differ from those estimates.

Operating cycle – The length of the Company’s contracts varies, but is typically between six to twelve months. In some instances, the length of the contract may exceed twelve months. Assets and liabilities relating to contracts are included in current assets and current liabilities, respectively, in the accompanying balance sheets as they will be liquidated in the normal course of contract completion, which at times could exceed one year.

Revenue recognition – The Company determines, at contract inception, whether it will transfer control of a promised good or service over time or at a point in time, regardless of the length of contract or other factors. The recognition of revenue aligns with the timing of when promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. To achieve this core principle, the Company applies the following five steps in accordance with its revenue policy:

(1) Identify the contract with a customer

(2) Identify the performance obligations in the contract

(3) Determine the transaction price

(4) Allocate the transaction price to performance obligations in the contract

(5) Recognize revenue as performance obligations are satisfied

On certain contracts, the Company applies recognition of revenue over time, which is similar to the method the Company applied under previous guidance (i.e. percentage of completion). Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress toward complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs for a performance obligation indicate a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident.

SG BLOCKS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2021 and 2020 (Unaudited)

3.	Summary of Significant Accounting Policies (continued)

For product or equipment sales, the Company applies recognition of revenue when the customer obtains control over such goods, which is at a point in time.

On October 3, 2019, the Company entered into an Exclusive License Agreement (“ELA” ) pursuant to which it granted an exclusive license for its technology as outlined in the ELA. The ELA is described below. Under the ELA, the Company 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 six months ended June 30, 2021 and 2020. On June 15, 2021, the Company terminated the ELA that was executed on October 3, 2019 which is discussed below.

CMC Right of First Refusal Agreement – On October 9, 2019, the Company entered into a Right of First Refusal Agreement (the “Agreement”) with CMC Development LLC (“CMC”), which has a term of two (2) years. Under the Agreement, the Company has a right of first refusal with respect to being engaged as a designer and builder of any real estate projects for which CMC has secured the rights to develop and in which CMC has a greater than fifty percent (50%) interest in the owner or developer entity and has the right to select the builder for such real estate project (the “ROFR Rights”). In exchange for such ROFR Rights, the Company agreed to issue to CMC 2,500 shares of restricted stock of the Company’s common stock, of which 1,250 shares vested on March 31, 2021 and the remaining 1,250 shares will vest and be issued on September 30, 2021, unless the Agreement is earlier terminated. In the event that the Agreement is earlier terminated, CMC will still be entitled to receive the entire amount of such restricted stock that has vested as of such earlier termination date, but in no event less than 1,250 shares of such restricted stock. The Agreement also provides for customary indemnification and confidentiality obligations between the parties. The 2,500 shares of restricted stock of the Company's common stock has yet to be issued to CMC.

The Agreement also 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 expected gross revenue to the Company for the project to be derived by CMC is approximately $16,900,000. The project is a residential project but it was not subject to the recently terminated Exclusive License Agreement, dated October 3, 2019. The planning stage of the project was initial delayed due to COVID-19 but the project is still active. No revenue has been recognized under the Agreement for the six months ended June 30, 2021 or 2020.

The Company entered into a joint venture agreement with Clarity Lab Solutions, LLC (“Clarity Labs”) (the “JV”) in the fourth quarter of 2020. Revenue from the activities of the JV is related to clinical testing services and is recognized when services have been rendered, which is at a point in time. Included in the consideration the Company expected to be entitled to receive, the Company estimates its contractual allowances, payer denials and price concessions. During the six months ended June 30, 2021, the Company recognized approximately $15,000,000 related to activities through the JV, which is included in medical revenue on the accompanying consolidated statements of operations. In addition, the Company formed Chicago Airport Testing, LLC which is currently collecting rental revenue from subleasing to a consortium of government entities assisting in COVID-19 testing.

Disaggregation of Revenues

The Company’s revenues are derived from construction and engineering contracts related to Modules, and medical revenue derived from lab testing and test kit sales. The Company's contracts are with customers in various industries. Revenue recognized at a point in time and recognized over time were $15,750,903 and $5,290,711, respectively, for the six months ending June 30, 2021. All revenue recognized for the six months ending June 30, 2020 was over time.

SG BLOCKS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2021 and 2020 (Unaudited)

3.	Summary of Significant Accounting Policies (continued)

The following tables provide further disaggregation of the Company’s revenues by categories:

	Three Months Ended June 30,
Revenue by Customer Type	2021					2020
Construction and Engineering Services:
Government	$	1,097,660		9	%	$	—	—	%
Hotel/Hospitality		283,355		2	%		38,135	6	%
Medical - Construction		242,533		2	%		57,033	9	%
Multi-Family (includes Single Family)		(22,398	)	—	%		21,291	3	%
Office		258,069		2	%		10,058	2	%
Other (1)		—		—	%		300,000	48	%
Retail		2,688		—	%		202,432	32	%
Special Use		206,590		2	%		—	—	%
Subtotal		2,068,497		17	%		628,949	100	%
Medical Revenue:
Medical (lab testing, kit sales and equipment)		9,785,490		83	%		—	—	%
Total revenue by customer type	$	11,853,987		100	%	$	628,949	100	%

(1) Construction fee of $300,000 with no cost of revenue.

	Six Months Ended June 30,
Revenue by Customer Type	2021				2020
Construction and Engineering Services:
Government	$	2,183,142	11	%	$	—	—	%
Hotel/Hospitality		453,781	2	%		42,799	5	%
Medical - Construction		494,093	2	%		58,532	7	%
Multi-Family (includes Single Family)		22,348	—	%		51,963	6	%
Office		435,461	2	%		50,909	6	%
Other (1)		—	—	%		300,000	37	%
Retail		44,701	—	%		323,502	39	%
Special Use		1,666,635	8	%		—	—	%
Subtotal		5,300,161	25	%		827,705	100
Medical Revenue:
Medical (lab testing, kit sales and equipment)		15,741,453	75	%		—	—	%
Total revenue by customer type	$	21,041,614	100	%	$	827,705	100	%

(1) Construction fee of $300,000 with no cost of revenue.

SG BLOCKS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2021 and 2020 (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 was 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 $306,143, which was forfeited and recognized this amount as deferred contract costs. This amount was offset by $102,217, which was reimbursement from the licensee for project costs on this project. The Company incurred total deferred contract costs of $203,926. The Company considered this amount an incremental cost of obtaining that ELA, because the Company expected to recover those costs through future royalty payments. The Company initially planned to amortize the asset over sixty months, which is the initial term of the ELA because the asset relates to the services transferred to the customer during the contract term. As of June 30, 2021, accumulated amortization related to deferred contract costs amounted to $71,374. During the six months ended June 30, 2021 and 2020, amortization expense relating to the deferred contract costs amounted to $20,392 and $20,393, respectively, and is included in general and administrative expenses on the accompanying condensed consolidated statement of operations. As previously mentioned, the ELA was terminated on June 15, 2021 but the Company expects to recover the deferred contract costs from the Assignment of Limited Rights Under Membership Interest Redemption Agreement, dated June 15, 2021 as described below.

Exclusive License Agreement – On October 3, 2019, as amended on October 17, 2019, the Company entered into the ELA with CPF GP 2019-1 LLC (the “Licensee”), pursuant to which the Company granted the Licensee an exclusive license (the “License”) solely within the United States and its legal territories to the Company’s technology, intellectual property, any improvements thereto, and any related permits, in order to develop and commercialize products within the field of design and project management platforms for residential use, including single-family residences and multi-family residences, but excluding military housing. The Ridge Avenue Project has also been excluded from the License. The License Agreement had an initial term of five (5) years and was to automatically renew for subsequent five (5) year periods. The License Agreement provided for customary terminating provisions, including the right by the Company to terminate if the Licensee fails to make minimum royalty payments (as described below).

SG BLOCKS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2021 and 2020 (Unaudited)

3.	Summary of Significant Accounting Policies (continued)

In consideration for the License, during the initial term, the Licensee agreed to pay the Company a royalty of (x) five percent (5%) on the first $20,000,000 of gross revenues derived from the Licensee’s commercialization of the License (net of customary discounts, sales taxes, delivery charges, and amounts for returns) (the “Gross Revenues”), (y) four and one-half percent (4.5%) on the next $30,000,000 of Gross Revenues, and (z) five percent (5%) on all Gross Revenues thereafter (collectively, the “Royalty”) , subject to the following minimum royalty payments determined on a cumulative basis during the initial term: $500,000 in year 1, $750,000 in year 2, $1,500,000 in year 3, $2,000,000 in year 4, and $2,500,000 in year 5. License Agreement provided that if it was extended beyond the initial term, then the parties would negotiate in good faith the royalty rate and the minimum royalty payments for the renewal term(s). In addition, to the extent the Licensee sublicenses any aspect of the License to a sub-licensee, the Licensee was obligated to pay to the Company fifty percent (50%) of all payments received by the Licensee from such sublicensee. The License Agreement also provided that the Company could also provide the Licensee with professional services with respect to the License, and the Licensee was obligated to the Company for employees’ time, materials, and expenses incurred in providing such professional services. The Licensee also separately agreed to reimburse the Company for any third-party expenses incurred by the Company in developing the Company’s remaining and future residential projects.

The License Agreement provided for customary indemnification obligations between the parties and further provides that the Licensee will indemnify the Company for any claims arising out of the commercialization of the License by the Licensee or any of its subsidiaries, contractors, or sublicensees. In addition, the License Agreement provided that the Company would 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.

On June 15, 2021, the Company terminated the Exclusive License Agreement with CPF that the Company had entered into on October 3, 2019. In connection with the termination, the Company entered into a Settlement and Mutual Release Agreement (the “Settlement Agreement”) with CPF, the general partner (the “Licensee”) of CPF MF 2019-1 LLC (“CPF MF”), and Capital Plus Financial, LLC, a limited partner of the Licensee (“Capital Plus”) and an Assignment of Limited Rights Under Membership Interest Redemption Agreement, dated June 15, 2021, with Capital Plus and the Licensee. In connection with the termination of that certain Exclusive License Agreement, dated as of October 3, 2019 (the “License Agreement”), with the Licensee Pursuant to the Settlement Agreement with CPF and Capital Plus, the License Agreement was terminated, the Company released CPF and CPF MF for any claims in exchange for releases from CPF and Capital Plus and the Company is receiving an assignment of CPF’s right under certain circumstances to a $1.25 million redemption distribution from CPF MF under its Operating Agreement.

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.

SG BLOCKS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2021 and 2020 (Unaudited)

3.	Summary of Significant Accounting Policies (continued)

On August 27, 2020 the Company entered into a joint venture agreement with Clarity Lab Solutions, LLC (“Clarity Labs”) (the “JV”). In consideration and subject to Clarity Lab’s services and commitments and provided the agreement remains valid and in force, and is not terminated, the Company agreed to issue 200,000 restricted shares of SGB common stock over a defined vesting period starting in December 1, 2020. The restricted shares of SGB common stock were not issued to Clarity Labs as certain capital commitments were not met. Clarity Labs is a licensed clinical laboratory that uses specialized molecular testing equipment and that focuses on the diagnosis and treatment of critical diseases, including COVID-19. Clarity Labs is also engaged in the business of manufacturing, importing and distributions various medical tests. Under the JV, the Company and Clarity Labs will jointly market, sell, and distribute certain products and services (“Clarity Mobile Venture”). As of June 30, 2021, $381,770 was due to Clarity Labs for expenses paid on behalf of Clarity Mobile Venture, and is included in Due to Affiliates on the accompanying consolidated balance sheets. In addition, during the six months ended June 30, 2021, the Company recognized revenue of $60,110 and other income of $60,000 to Clarity Labs, of which $60,000 is included in accounts receivable as of June 30, 2021. The Company has determined it is the primary beneficiary of Clarity Mobile Venture and has thus consolidated the activities in its condensed consolidated financial statements.

On January 18, 2021 the Company entered into an operating agreement to form CAT. The purpose of CAT is to market, sell, distribute, lease and otherwise commercially exploit certain products and services in the COVID-19 testing industry. The Company has determined it is the primary beneficiary of CAT and has thus consolidated the activities in its condensed consolidated financial statements.

Investment Entities – On May 31, 2021, the Company's subsidiary SGB Development Corp. agreed to contribute $600,000 to acquire a 50% membership interest in Norman Berry II Owner LLC. The Company contributed $350,329 of the initial $600,000 in the second quarter of 2021 with the remaining amount being funded in the third quarter of 2021. The purpose of Norman Berry II Owner LLC is to develop and provide affordable housing in the Atlanta, Georgia metropolitan area. The Company has determined it is not the primary beneficiary of "Norman Berry" and thus will not consolidate the activities in its condensed consolidated financial statements. The Company will use the equity method to report the activities as an investment in on its condensed consolidated financial statements.

On June 24, 2021, the Company's subsidiary SGB Development Corp. entered into an operating agreement with Jacoby Development for a 10% non-dilutable equity interest for JDI-Cumberland Inlet, LLC. The Company contributed $3,000,000 for its 10% equity interest. The purpose of JDI-Cumberland Inlet, LLC is to develop a waterfront parcel in a mixed-use destination community. The Company has determined it is not the primary beneficiary of JDI-Cumberland Inlet, LLC and thus will not consolidate the activities in its condensed consolidated financial statements. The Company will use the equity method to report the activities as an investment in on its condensed consolidated financial statements.

Cash and cash equivalents – The Company considers cash and cash equivalents to include all short-term, highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less upon acquisition. Cash and cash equivalents totaled $2,323,599 as of June 30, 2021 and $13,010,356 as of December 31, 2020.

Short-term investment – The Company classifies investments consisting of a certificate of deposit with a maturity greater than three months but less than one year as short-term investment. The Company had no short-term investment as of June 30, 2021 or December 31, 2020, respectively.

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.

SG BLOCKS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2021 and 2020 (Unaudited)

3.	Summary of Significant Accounting Policies (continued)

Inventory – Raw construction materials (primarily shipping containers and fabrication materials) are valued at the lower of cost (first-in, first-out method) or net realizable value. Finished goods and work-in-process inventories are valued at the lower of cost or net realizable value, using the specific identification method. Medical equipment and COVID-19 test and testing supplies are valued at the lower of cost, (first-in, first-out method) or net realizable value. As of June 30, 2021 there was inventory of $4,429 for construction materials, and $1,405,486 of medical equipment and COVID-19 test and testing supplies. As of December 31, 2020 there was inventory of $4,429 for construction materials, and $773,715 of medical equipment and COVID-19 test and testing supplies.

Goodwill – The Company performs its impairment test of goodwill at the reporting unit level each fiscal year, or more frequently if events or circumstances change that would more likely 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. There were no impairments during the year ended December 31, 2020 or the six months ended June 30, 2021 and 2020. The Company has taken the recent COVID-19 pandemic into consideration when determining impairment.

Intangible assets – Intangible assets consist of $2,766,000 of proprietary knowledge and technology, which is being amortized over 20 years. In addition, $97,164 of trademarks, and $47,800 of website costs are being amortized over 5 years. The Company evaluated intangible assets for impairment during the year ended December 31, 2020, and determined that there were no impairment losses. There was no impairment during the six months ended June 30, 2021 and 2020. The accumulated amortization as of June 30, 2021 and 2020 was $732,085 and $1,686,876, respectively. The amortization expense for the six months ended June 30, 2021 and 2020 was $82,230 and $72,561, respectively. The amortization expense for the three months ended June 30, 2021 and 2020 was $41,823 and $36,281, respectively. The estimated amortization expense for the successive five years is as follows:

For the year ending December 31,:
2021	$	83,646
2022		162,970
2023		161,176
2024		160,469
2025		157,051
Thereafter		1,453,567
	$	2,178,879

Property, plant and equipment – Property, plant and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated lives of each asset. Estimated useful lives for significant classes of assets are as follows: computer and software 3 to 5 years, furniture and other equipment 5 to 7 years, automobiles 2 to 5 years, buildings held for lease 5 to 7 years, and equipment 5 to 29 years. Repairs and maintenance are charged to expense when incurred.

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.

SG BLOCKS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2021 and 2020 (Unaudited)

3.	Summary of Significant Accounting Policies (continued)

Common stock purchase warrants and other derivative financial instruments – The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provides a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company’s own stock. The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if any event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement shares (physical settlement or net-cash settlement). The Company assesses classification of common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities or equity is required.

Fair value measurements – Financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are carried at cost, which the Company believes approximates fair value due to the short-term nature of these instruments.

The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

The Company uses three levels of inputs that may be used to measure fair value:

	Level 1	Quoted prices in active markets for identical assets or liabilities.
	Level 2	Quoted prices for similar assets and liabilities in active markets or inputs that are observable.
	Level 3	Inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).

Transfer into and transfers out of the hierarchy levels are recognized as if they had taken place at the end of the reporting period.

Share-based payments – The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, including non-employee directors, the fair value of a stock option award is measured on the grant date. The fair value amount is then recognized over the period services are required to be provided in exchange for the award, usually the vesting period. The Company recognizes stock-based compensation expense on a graded-vesting basis over the requisite service period for each separately vesting tranche of each award. Stock-based compensation expense to employees and all directors are reported within payroll and related expenses in the consolidated statements of operations. Stock-based compensation expense to non-employees is reported within marketing and business development expense in the condensed consolidated statements of operations.

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.

SG BLOCKS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2021 and 2020 (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 June 30, 2021 and December 31, 2020, 62% and 79%, respectively, of the Company’s gross accounts receivable in excess of 10% were due from two and three customers.

Revenue in excess of 10% relating to one and two customers represented approximately 77% and 72% of the Company's total revenue for the three months ended June 30, 2021 and 2020, respectively. Revenue relating to one and three customers represented approximately 71% and 69% of the Company's total revenue for the six months ended June 30, 2021 and 2020, respectively.

Cost of revenue in excess of 10% relating to three and two vendors represented approximately 52% and 51% of the Company’s total cost of revenue for the three months ended June 30, 2021 and 2020, respectively. Cost of revenue relating to three and four vendors represented approximately 48% and 75% of the Company’s total cost of revenue for the six months ended June 30, 2021 and 2020, respectively. The Company believes it has access to alternative suppliers, with limited disruption to the business, should circumstances change with its existing suppliers.

4.	Accounts Receivable

At June 30, 2021 and December 31, 2020, the Company’s accounts receivable consisted of the following:

	2021			2020
Billed:
Construction services	$	2,111,793		$	1,391,555
Engineering services		21,364			86,264
Medical revenue		679,578			1,157,819
Retainage receivable		615,136			615,136
Other receivable		248,958			180,748
Total gross receivables		3,676,829			3,431,522
Less: allowance for credit losses		(957,116	)		(795,914	)
Total net receivables	$	2,719,713		$	2,635,608

Receivables are evaluated for collectability and allowances for potential losses are established or maintained on applicable receivables. The allowance for credit losses was $957,116 as of June 30, 2021. There was a provision of $161,202 for credit losses, no recoveries collected for credit losses and no write offs during the six months ended June 30, 2021. There was a provision for credit losses of $10,018, and no write offs for the year ended December 31, 2020.

SG BLOCKS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the Six Months EndedJune 30, 2021 and 2020 (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 June 30, 2021 and December 31, 2020:

	2021			2020
Costs incurred on uncompleted contracts	$	6,924,517		$	4,572,581
Provision for loss on uncompleted contracts		194,450			—
Estimated earnings to date on uncompleted contracts		(1,446,921	)		872,302
Gross contract assets		5,672,046			5,444,883
Less: billings to date		(4,338,883	)		(5,916,487	)
Net contract assets (liabilities), on uncompleted contracts	$	1,333,163		$	(471,604	)

The above amounts are included in the accompanying condensed consolidated balance sheets under the following captions at June 30, 2021 and December 31, 2020.

	2021			2020
Contract assets	$	2,122,231		$	1,303,136
Contract liabilities		(789,068	)		(1,774,740	)
Net contract assets (liabilities)	$	1,333,163		$	(471,604	)

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 June 30, 2021 and December 31, 2020, the Company’s property, plant and equipment, net consisted of the following:

	2021			2020
Computer equipment and software	$	138,543		$	73,991
Furniture and other equipment		19,482			11,593
Leasehold improvements		13,871			6,071
Equipment and machinery		1,175,104			1,127,647
Automobiles		4,638			4,638
Building held for leases		501,336			501,336
Laboratory and temporary units		1,358,904			1,016,238
Land		3,576,130			—
Construction in progress		646,422			—
Property, plant and equipment		7,434,430			2,741,514
Less: accumulated depreciation		(256,897	)		(58,500	)
Property, plant and equipment, net	$	7,177,533		$	2,683,014

Depreciation expense for the three months ended June 30, 2021 and 2020 amounted to $107,208 and $924 respectively. Depreciation expense for the six months ended June 30, 2021 and 2020 amounted to $198,398 and $1,848 respectively.

SG BLOCKS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the Six Months Ended June 30, 2021 and 2020 (Unaudited)