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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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


For the quarterly period ended September 30, 2022

 

OR

 

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

 

For the transition period from ____________ to ____________ 

 

Commission file number: 001-38037

 

SG BLOCKS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-4463937

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

5011 Gate Parkway, Building 100, Suite 100Jacksonville, FL

 

32256

(Address of principal executive offices)

 

(Zip Code)

 

(646) 240-4235

(Registrant’s telephone number, including area code) 

 

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


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

SGBX

The Nasdaq Stock Market LLC

 

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


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


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

 

Large accelerated filer  ☐

Accelerated filer  ☐  

Non-accelerated filer  ☒

Smaller reporting company  


Emerging growth company  


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


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


As of November 14, 2022 the issuer had a total of 12,050,206 shares of the registrant’s common stock, $0.01 par value, outstanding.  


 




SG BLOCKS, INC.

FORM 10-​Q


TABLE OF CONTENTS




Page Number

PART I. FINANCIAL INFORMATION
2
ITEM 1. Financial Statements 2

Condensed Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021 2

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited) 3

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited) 4

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (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 46
ITEM 4. Controls and Procedures 46
PART II. OTHER INFORMATION 
47
ITEM 1. Legal Proceedings 47
ITEM 1A. Risk Factors 47
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 49
ITEM 3. Defaults Upon Senior Securities 49
ITEM 4. Mine Safety Disclosures 49
ITEM 5. Other Information 49
ITEM 6. Exhibits 50
SIGNATURES
51

​​​

​​​​​​​​
1


PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements

SG BLOCKS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

 

September 30,

2022

 

 

December 31,
 
2021

 

 

 

 (Unaudited)

 

 


 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,118,169

 

 

$

13,024,381

 

Escrow - bond

2,000,000



Accounts receivable, net

 

 

1,713,473

 

 

 

2,917,646

 

Contract assets 

 

 

 

 

 

41,916

 

Held for sale assets

4,453,714



Inventories

894,962


1,273,825

Prepaid expenses and other current assets

 

 

692,124

 

 

 

656,279

 

Total current assets

 

 

11,872,442

 

 

 

17,914,047

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

4,881,249

 

 

 

6,839,943

 

Project development costs and other non-current assets

887,738


923,172

Goodwill

 

 

1,309,330

 

 

 

1,309,330

 

Right-of-use asset

2,655,242


1,210,053
Long-term note receivable

848,185




720,137

Intangible assets, net

 

 

1,972,645

 

 

 

2,095,232

 

Deferred contract costs, net

81,570


112,159
Investment in non-marketable securities

700,000


200,000
Investment in and advances to equity affiliates 

3,748,515


3,599,945

Total Assets 

 

$

28,956,916

 

 

$

34,924,018

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

3,493,944

 

 

$

7,568,851

 

Contract liabilities

 

 

1,274,418

 

 

 

1,437,579

 

    Lease liability, current maturities

474,375


337,469
    Due to affiliates




264,451
    Assumed liability

5,795


5,795
    Short term note payable, net

2,500,000


1,971,960

Total current liabilities

 

 

7,748,532

 

 

 

11,586,105

 










Long-term note payable

750,000


750,000
Lease liability, net of current maturities

2,195,438


872,124
Total liabilities


10,693,970


13,208,229









Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $1.00 par value, 5,405,010 shares authorized; none issued or outstanding 

 

 

 

 

 

 

Common stock, $0.01 par value, 25,000,000 shares authorized; 12,050,206 issued and 12,027,091 outstanding as of September 30, 2022 and 11,986,873 issued and outstanding as of December 31, 2021

 

 

120,502

 

 

 

119,869

 

Additional paid-in capital

 

 

55,255,628

 

 

 

53,341,405

 

Treasury stock, at cost - 23,115 shares

(49,680 )


Accumulated deficit

 

 

(37,695,340

)

 

 

(33,109,220

)
Total SG Blocks, Inc. stockholders’ equity

17,631,110


20,352,054

Non-controlling interest

 

 

631,836

 

 

 

1,363,735

 

Total stockholders’ equity

18,262,946


21,715,789

Total Liabilities and Stockholders’ Equity

 

$

28,956,916

 

 

$

34,924,018

 

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

2


SG BLOCKS, INC. AND SUBSIDIARIES


Condensed Consolidated Statements of Operations

 

For the

Three Months Ended

September 30,


For the

Three Months Ended

September 30,


For the

Nine Months Ended

September 30,


For the

Nine Months Ended

September 30,


 

2022
2021
2022
2021

 

(Unaudited)
(Unaudited)
(Unaudited)
(Unaudited)

Revenue:









Construction services $
2,685,920

$

612,052


$ 8,567,568
$ 5,814,205

Engineering services  


6,599

70,814

81,305

168,822

Medical revenue


1,437,738

8,164,624

11,640,953

23,906,077

Total  


4,130,257

8,847,490

20,289,826

29,889,104

 













Cost of revenue:













Construction services


2,688,450

3,132,625

8,631,031

10,421,435

Engineering services


5,001
6,588

58,893

48,555
Medical revenue 
1,601,980

6,315,098

8,506,681

17,328,003

Total   


4,295,431

9,454,311

17,196,605

27,797,993

 













Gross profit (loss)


(165,174 )
(606,821 )
3,093,221

2,091,111

 













Operating expenses:













Payroll and related expenses


1,294,857

1,066,486

3,650,553

2,665,097

General and administrative expenses


939,044

975,761

2,515,877

3,006,561

Marketing and business development expense


103,111

54,857

337,941

197,922

Pre-project expenses




22,683



33,663

Total


2,337,012

2,119,787

6,504,371

5,903,243

 













Operating loss


(2,502,186 )
(2,726,608 )
(3,411,150 )
(3,812,132 )

 













Other income (expense):













Loss on asset disposal



(34,182 )


(34,182 )

Interest expense


(52,758 )
(293 )
(174,733 )
(985 )

Interest income


9,756

9,973

33,518

41,240
Other income (expense)
(2,963 )
453

488,346

61,477

Total


(45,965 )
(24,049 )
347,131
67,550

 













Loss before income taxes  


(2,548,151 )
(2,750,657 )
(3,064,019 )
(3,744,582 )

Income tax expense   









 













Net loss


(2,548,151 )
(2,750,657 )
(3,064,019 )
(3,744,582 )

 













Add: net income (loss) attributable to noncontrolling interests  
(94,568 )
1,080,248

1,522,101
3,661,459
Net loss attributable to common stockholders of SG Blocks, Inc.  $ (2,453,583 ) $ (3,830,905 ) $ (4,586,120 ) $ (7,406,041 )













Net loss per share attributable to SG Blocks, Inc.













Basic and diluted

$ (0.18 ) $ (0.43 ) $ (0.35) $ (0.84 )

 













Weighted average shares outstanding:













Basic and diluted


13,459,713

8,822,489

13,228,828

8,796,890

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

3


SG BLOCKS, INC. AND SUBSIDIARIES

 

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



 

 

$0.01 Par Value
Common Stock

 


Additional
Paid-in

 



Treasury


Accumulated

 



SG Blocks Stockholders' 

Noncontrolling


Total
Stockholders’

 

 

 

Shares

 


Amount

 


Capital

 



Stock

Deficit

 


Equity


Interests


Equity

 

Balance at June 30, 2022

 


12,050,206

 


$

120,502

 


$

54,660,934

 


$

$

(35,241,757

)
$ 19,539,679

$ 824,404

$ 20,364,083

 

Stock-based compensation

 


 



 


 

594,694

 





 

 



594,694





594,694

 

Noncontrolling interest distribution




















(98,000 )

(98,000 )
Repurchase of common stock

(23,115)








(49,680 )




(49,680 )




(49,680 )

Net Loss

 


 



 


 

 





 

(2,453,583

)

(2,453,583 )

(94,568 )

(2,548,151 )
Balance at September 30, 2022

12,027,091

$ 120,502

$ 55,255,628

$ (49,680 )
$ (37,695,340 )
$ 17,631,110

$ 631,836

$ 18,262,946

































Balance at December 31, 2021 

 


11,986,873

 


$

119,869

 


$

53,341,405

 


$

$

(33,109,220)

)
$ 20,352,054

$ 1,363,735

$ 21,715,789

 

Stock-based compensation

20,000


200


1,914,656








1,914,856





1,914,856
Issuance of restricted stock units

43,333


433


(433 )














Noncontrolling interest distribution



















(2,254,000 )

(2,254,000 )
Repurchase of common stock

(23,115)








(49,680 )




(49,680 )




(49,680 )

Net income (loss)

 


 



 


 

 





 

(4,586,120

)

(4,586,120 )

1,522,101


(3,064,019 )

Balance at September 30, 2022

 


12,027,091

 


$

120,502

 


$

55,255,628

 


$ (49,680 )

$

(37,695,340 )
$ 17,631,110

$ 631,836

$
18,262,946


  

 

 

$0.01 Par Value
Common Stock

 


Additional
Paid-in

 


Accumulated

 



SG Blocks Stockholders' 

Noncontrolling


Total
Stockholders’

 

 

 

Shares

 


Amount

 


Capital

 


Deficit

 


Equity


Interests


Equity

 

Balance at June 30, 2021

 


8,822,489

 


$

88,225

 


$

41,681,186

 


$

(25,851,682

)
$ 15,917,729

$ 922,994

$ 16,840,723

 

Stock-based compensation

 


 



 


 

246,236

 


 

 



246,236





246,236

 

Noncontrolling interest distribution
















(1,216,350 )

(1,216,350 )

Net income (loss)

 


 



 


 

 


 

(3,830,905

)

(3,830,905 )

1,080,248


(2,750,657 )
Balance at September 30, 2021

8,822,489

$ 88,225

$ 41,927,422

$ (29,682,587 )
$ 12,333,060

$ 786,892

$ 13,119,952





























Balance at December 31, 2020

 


8,596,189

 


$

85,962

 


$

40,443,840

 


$

(22,276,546

)
$ 18,253,256

$ 184,567

$ 18,437,823

 

Stock-based compensation







778,657





778,657





778,657
Conversion of warrants to common stock

226,300


2,263


704,925





707,188





707,188
Noncontrolling interest distribution
















(3,059,134 )

(3,059,134 )

Net income (loss)

 


 



 


 

 


 

(7,406,041

)

(7,406,041 )

3,661,459


(3,744,582 )

Balance at September 30, 2021

 


8,822,489

 


$

88,225

 


$

41,927,422

 


$

(29,682,587 )
$ 12,333,060

$ 786,892

$
13,119,952



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


4


SG BLOCKS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

 

 

For the

Nine Months Ended 
September 30, 2022

 


For the

Nine Months Ended 
September 30, 2021

 

 

 

(Unaudited)

 


(Unaudited)

 

Cash flows from operating activities:

 

 

 


 

 

Net loss

 

$

(3,064,019

)

$

(3,744,582

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 


 

 

 

Depreciation expense

 

 

317,249

 


 

294,860

 

Amortization of intangible assets

 

 

122,587

 


 

124,053

 

Amortization of deferred license costs

30,589


30,589
Amortization of debt issuance costs

23,726




Bad debt expense

 

 

7,024


 

161,202

Interest income on long-term note receivable

 

 

(28,048

)

 

(28,048

)

Stock-based compensation

 

 

1,874,857

 


 

778,657

 

Loss on asset disposal

241


34,182

Changes in operating assets and liabilities:

 

 

 

 


 

 

 

Accounts receivable

 

 

1,197,149


 

(1,092,210

)
Escrow - bond

(2,000,000 )


Contract assets

 

 

41,916


 

818,514

Inventories

378,863

(11,937 )

Prepaid expenses and other current assets

 

 

(35,845

)

 

(235,202

)
Right of use asset

356,350

390,581

Accounts payable and accrued expenses

 

 

(4,006,868

)

 

3,173,788

Contract liabilities



(163,161

)

 

(598,560

)
     Due to affiliates

(264,451 )

(738,451 )
     Lease liability

(341,319 )

(389,853 )

Net cash used in operating activities

 

 

(5,553,160

)

 

(1,032,417

)

 

 

 

 

 


 

 

 

Cash flows from investing activities:

 

 

 

 


 

 

 

Purchase of property, plant and equipment

(1,996,200 )

(4,806,294 )
Purchase of intangible asset



(42,500 )
Proceeds from sale of equipment

760


225,000
Repayment of promissory note

(100,000 )


Payment on assumed liability of acquired assets



(194,969 )
Project development costs and other non-current assets

(805,362 )


Investment in and advances to equity affiliates

(148,570 )

(3,464,762 )
Investment in non-marketable securities

(500,000 )


Net cash used in investing activities

 

 

(3,549,372

)

 

(8,283,525

)

 

 

 

 

 


 

 

 

Cash flows from financing activities:

 

 

 

 


 

 

 

Proceeds from conversion of warrants to common stock




707,188
Repurchase of common stock

(49,680)



Proceeds from short-term note payable

500,000


1,948,234
Distribution paid to non-controlling interest

(2,254,000
)

(3,059,134 )

Net cash used in financing activities

 

 

(1,803,680

)

 

(403,712

)
 

 


 
Net decrease in cash and cash equivalents

(10,906,212 )

(9,719,654 )









Cash and cash equivalents - beginning of period

13,024,381


13,010,356









Cash and cash equivalents - end of period
$ 2,118,169

$ 3,290,702









Supplemental disclosure of non-cash investing and financing activities:







Initial value of lease liability

$ 1,801,584

$

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

5


SG BLOCKS, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2022 and 2021 (Unaudited)

 

1.

Description of Business 

 

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


The Company operates in the following four segments: (i) manufacturing; (ii) medical; (ii) real estate development; and (iv) environmental. The manufacturing segment designs and constructs modular structures built in the Company’s factories.  In the medical segment the Company uses its modular technology to provide turnkey solutions to medical testing and treatment and generates revenue from the medical testing. The Company’s real estate development segment builds innovative and green single or multifamily projects in underserved regions nationally using modules built in one of the Company’s vertically integrated factories. The environmental segment, the newest segment, is a sustainable medical and waste management solution that collects waste and treats waste for safe disposal.


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

 

There are three core product offerings that utilize the Company's technology and engineering expertise. The first product offering involves GreenSteel™ modules, which are the structural core and shell of an SGBlocks building. The Company procures the containers, engineer required openings with structural steel enforcements, paint the SGBlocks and then deliver them on-site, where the customer or a customer’s general contractor will complete the entire finish out and installation. The second product offering involves replicating the process to create the GreenSteel product and, in addition, installing selected materials, finishes and systems (including, but not limited to floors, windows, doors, interior painting, electrical wiring and fixtures, plumbing outlets and bathrooms, roofing system) and delivering SGBlocks pre-fabricated containers to the site for a third party licensed general contractor to complete the final finish out and installation. Finally, the third product offering is the completely fabricated and finished SGBlocks building (including but not limited to floors, windows, doors, interior painting, electrical wiring and fixtures, plumbing outlets and bathrooms, roofing systems), including erecting the final unit on site and completing any other final steps. The building is ready for occupancy and/or use as soon as installation is completed. Construction administration and/or project management services are typically included in the Company's product offerings.

 

The Company also provides engineering and project management services related to the use and modification of Modules in construction.  

 

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. The Company acquired substantially all the assets of Echo DCL, a Texas limited liability company, except for Echo's real estate holdings for which the Company 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 through the fourth quarter of 2021, the Company’s consolidated financial statements include the accounts of Chicago Airport Testing LLC (“CAT”). The Company had 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. (“SG DevCorp”), which is wholly-owned by the Company. SG DevCorp was formed with the purpose of real property development utilizing the Company's technologies.  SG DevCorp has a minority interest in Norman Berry II Owners LLC and JDI-Cumberland Inlet LLC as described further below.    


6


 

SG BLOCKS, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2022 and 2021 (Unaudited)


Reverse Stock Split

 

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

 

As of September 30, 2022, the Company had 12,050,206 shares of common stock issued and 12,027,091 shares of common stock outstanding.


2.

Liquidity 


As of September 30, 2022, the Company had cash and cash equivalents of $2,118,169 and a backlog of  $2,585,012. See Note 11 for a discussion of construction backlog. Based on our conversations with key customers, the Company anticipates its backlog to convert to revenue over the following period:  



   
2022


Within 1 year
$ 2,585,012

Total Backlog
$ 2,585,012


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


The Company completed a public and concurrent private offering in October 2021, which resulted in net proceeds of approximately $10,488,000. See Note 12 for a discussion on the public and concurrent private offering. The Company believes that it has adequate cash balances to meet obligations coming due in the next twelve months and further intends to meet its capital needs from revenue generated from operations and by containing costs, entering into strategic alliances, as well as exploring other options, including the possibility of raising additional debt or equity capital as necessary. There is, however, no assurance the Company will be successful in meeting its capital requirements prior to becoming cash flow positive. The Company does not have any additional sources secured for future funding, and if it is unable to raise the necessary capital at the times it requires such funding, it may need to materially change its business plan, including delaying implementation of aspects of such business plan or curtailing or abandoning such business plan altogether.  


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


7



SG BLOCKS, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2022 and 2021 (Unaudited)

  

3.

Summary of Significant Accounting Policies

 

Basis of presentation and principals of consolidation – The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to the Current Report on Form 10-Q and Article 8 Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. The condensed financial statements and notes should be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2021 included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission on April 18, 2022. In the opinion of management, all adjustments, consisting of normal accruals, considered necessary for a fair presentation of the interim financial statements have been included. Results for the nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.


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

 

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


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


Reclassification – Certain prior year balances were reclassified to conform to current period presentation. There was no impact to income (loss) or cash flows as a result of these reclassifications.    


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


                (1)  Identify the contract with a customer


                (2)  Identify the performance obligations in the contract


                (3)  Determine the transaction price

 

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

 

                (5)  Recognize revenue as performance obligations are satisfied


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


8


SG BLOCKS, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2022 and 2021 (Unaudited)

 

3.

Summary of Significant Accounting Policies (continued)


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


On October 3, 2019, the Company entered into an Exclusive License Agreement (“ELA” ) pursuant to which it granted an exclusive license for its technology as outlined in the ELA. The ELA is described below. Under the ELA, the Company was to receive royalty payments based upon gross revenues earned by the licensee for commercialized products within the field of design and project management platforms for residential use, including single-family residences and multi-family residences, but excluding military housing. The Company has determined that the ELA granted the licensee a right to access the Company’s intellectual property throughout the license period (or its remaining economic life, if shorter), and thus recognizes revenue over time as the licensee recognized revenue and the Company has the right to payment of royalties. On June 15, 2021, the Company terminated the ELA that was executed on October 3, 2019.   


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

 

The Agreement also provided that CMC had engaged the Company to build and design, in the aggregate, approximately 100 residential and commercial units at 1100 Ridge Avenue, Atlanta, Georgia, which is known as the “Ridge Avenue, Atlanta Project.” The total expected gross revenue to the Company for the project to be derived by CMC is approximately $16,900,000. The project is a residential project but it was not subject to the recently terminated ELA. The planning stage of the project was initially delayed due to COVID-19. The Company is no longer participating on Ridge Avenue as CMC has decided to proceed with this project as a traditional construction build. The Company previously reported this as a cancellation within the Company's backlog footnote, see Note 11 on this discussion. No revenue has been recognized under the Agreement during the nine months ended September 30, 2022 and 2021.


The Company entered into a joint venture agreement with Clarity Lab Solutions, LLC (“Clarity Labs”) (the “JV”) in the fourth quarter of 2020. Revenue from the activities of the JV is related to clinical testing services and is recognized when services have been rendered, which is at a point in time.  Included in the consideration the Company expected to be entitled to receive, the Company estimates its contractual allowances, payer denials and price concessions. In addition, the Company formed Chicago Airport Testing, LLC which collected rental revenue from subleasing to a consortium of government entities assisting in COVID-19 testing. For the nine months ended September 30, 2022 and 2021, the Company recognized approximately $11,640,000 and $22,950,000 related to activities through these two joint ventures, which is included in medical revenue on the accompanying consolidated statements of operations.


Disaggregation of Revenues


The Company’s revenues are principally derived from construction and engineering contracts related to Modules, and medical revenue derived from lab testing and test kit sales. The Company's contracts are with customers in various industries. Revenue recognized at a point in time and recognized over time were $11,640,953 and $8,648,873, respectively, for the nine months ending September 30, 2022. Revenue recognized at a point in time and recognized over time were $23,906,077 and $5,983,027, respectively, for the nine months ending September 30, 2021


Revenue recognized at a point in time and recognized over time were $1,437,738 and $2,692,519, respectively, for the three months ending September 30, 2022. Revenue recognized at a point in time and recognized over time were $8,164,624 and $682,866, respectively, for the three months ending September 30, 2021


9


SG BLOCKS, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2022 and 2021 (Unaudited)

 

3.

Summary of Significant Accounting Policies (continued)

   

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




Three Months Ended September 30,

Revenue by Customer Type

2022

2021


Construction and Engineering Services:















    Government

$

%
$ 74,052

1 %

    Hotel

1,224,181

30 %

217,474

2 %

    Medical - Construction



%



(35,021

)

%

    Multi-Family (includes Single Family)


%


79,721

1


    Office

1,468,338


35

%


151,453

2


    Retail





%

42,345

%

    Special Use



%

152,842

2 %

Subtotal

2,692,519

65 %

682,866

8 %

Medical Revenue:














 Medical (lab testing, kit sales and equipment)

1,437,738


35

%

8,164,624


92

%


Total revenue by customer type

$

4,130,257


100

%  


$

8,847,490

100




Nine Months Ended September 30,

Revenue by Customer Type

2022

2021


Construction and Engineering Services:















    Government

$ 39

%
$ 2,257,193

8 %

    Hotel

2,368,960

13 %

671,255

2 %

    Medical - Construction



%



459,072

2

%

    Multi-Family (includes Single Family)

86,034


%


102,069


    Office

6,178,856


30

%


586,914

2


    Retail



5,344

%

87,046

%

    Special Use

9,640

%

1,819,478

6 %

Subtotal

8,648,873

43 %

5,983,027

20 %

Medical Revenue:














Medical (lab testing, kit sales and equipment)

11,640,953


57

%

23,906,077


80

%


Total revenue by customer type

$

20,289,826


100

%  


$

29,889,104

100

%


Contract Assets and Contract Liabilities  

Accounts receivable are recognized in the period when the Company’s right to consideration is unconditional. Accounts receivable are recognized net of an allowance for credit losses. A considerable amount of judgment is required in assessing the likelihood of realization of receivables.

The timing of revenue recognition may differ from the timing of invoicing to customers. 

Contract assets include unbilled amounts from long-term construction services when revenue recognized under the cost-to-cost measure of progress exceeds the amounts invoiced to customers, as the amounts cannot be billed under the terms of our contracts. Such amounts are recoverable from customers based upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract. Contract assets are generally classified as current within the condensed consolidated balance sheets.

 

Contract liabilities from construction and engineering contracts occur when amounts invoiced to customers exceed revenues recognized under the cost-to-cost measure of progress. Contract liabilities additionally include advanced payments from customers on certain contracts. Contract liabilities decrease as the Company recognizes revenue from the satisfaction of the related performance obligation. Contract liabilities are generally classified as current within the condensed consolidated balance sheet.


10


SG BLOCKS, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2022 and 2021 (Unaudited)

 

3.

Summary of Significant Accounting Policies (continued)


Although the Company believes it has established adequate procedures for estimating costs to complete on open contracts, it is at least reasonably possible that additional significant costs could occur on contracts prior to completion. The Company periodically evaluates and revises its estimates and makes adjustments when they are considered necessary.


Deferred Contract Costs - Prior to entering into the ELA, the Company was subject to an agreement to construct and develop a certain property (“Original Agreement”), which now is subject to the ELA. Upon entering into the ELA, the Company was no longer obliged to its Original Agreement. Upon entering the ELA, the Company had an outstanding accounts receivable balance of $306,143which 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 $203,926The Company considered this amount an incremental cost of obtaining that ELA, because the Company expects to recover those costs through future royalty payments. The Company planed to amortize the asset over sixty months, which was the initial term of the ELA because the asset relates to the services transferred to the customer during the contract term. As of September 30, 2022, accumulated amortization related to deferred contract costs amounted to $122,355. During the nine months ended September 30, 2022 and 2021, amortization expense relating to the deferred contract costs amounted to $30,589 and $30,589, respectively, and is included in general and administrative expenses on the accompanying condensed consolidated statement of operations. As previously mentioned, the ELA was terminated on June 15, 2021 but the Company expects to recover the deferred contract costs from the Assignment of Limited Rights Under Membership Interest Redemption Agreement, dated June 15, 2021 as described below.

 

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

 

In consideration for the License, during the initial term, the Licensee agreed to pay the Company a royalty of (x) five percent (5%) on the first $20,000,000 of gross revenues derived from the Licensee’s commercialization of the License (net of customary discounts, sales taxes, delivery charges, and amounts for returns) (the “Gross Revenues”), (y) four and one-half percent (4.5%) on the next $30,000,000 of Gross Revenues, and (z) five percent (5%) on all Gross Revenues thereafter (collectively, the “Royalty”), subject to the following minimum royalty payments determined on a cumulative basis during the initial term: $500,000 in year 1, $750,000 in year 2, $1,500,000 in year 3, $2,000,000 in year 4, and $2,500,000 in year 5. In addition, to the extent the Licensee sublicensed any aspect of the License to a sub-licensee, the Licensee was obligated to pay to the Company fifty percent (50%) of all payments received by the Licensee from such sublicensee.  


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


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

 

 

11


SG BLOCKS, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2022 and 2021 (Unaudited)

 

3.

Summary of Significant Accounting Policies (continued)


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 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 EntitiesThe 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, the Company agreed to issue 200,000 restricted shares of common stock over a defined vesting period starting in December 1, 2020. The restricted shares of  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 distributing 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 December 31, 2021, $502,958 was due to Clarity Labs for expenses paid on behalf of Clarity Mobile Venture, and is included in Due to Affiliates, Accounts Payable and Accrued Expenses on the accompanying consolidated balance sheets. In addition, during the year ended December 31, 2021, the Company recognized revenue of $60,110 and other income of $60,000 to Clarity Labs, of which none is included in accounts receivable as of December 31, 2021. The Company has determined it is the primary beneficiary of Clarity Mobile Venture and has thus consolidated the activities in its consolidated financial statements. Due to the ongoing lower affects of COVID-19 restrictions, the JV is being wound down during the fourth quarter of 2022.


On January 18, 2021 the Company entered into an operating agreement to form CAT. The purpose of CAT was 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 consolidated financial statements. 


Investment Entities – On May 31, 2021, the Company's subsidiary SG DevCorp agreed to contribute $600,000 to acquire a 50% membership interest in Norman Berry II Owner LLC.  The Company contributed $350,329 and $114,433 of the initial $600,000 in the second quarter and third quarter of 2021 respectively, with the remaining $135,238 funded in the fourth 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 consolidated financial statements. The Company will use the equity method to report the activities as an investment in its consolidated financial statements. 


On June 24, 2021, the Company's subsidiary, SG DevCorp, 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. During the nine months ended September 30, 2022, the Company contributed an additional $148,570The 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 consolidated financial statements. The Company will use the equity method to report the activities as an investment in its consolidated financial statements.


12


SG BLOCKS, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2022 and 2021 (Unaudited)


3.

Summary of Significant Accounting Policies (continued)

 

On February 24, 2022 the Company made a $500,000 capital investment for a 1.2% ownership in Moliving, a nomadic hospitality solution company, which included in investment in non-marketable securities on the accompanying condensed consolidated balance sheets. The Company also executed a side agreement to build the first sixty Moliving units and an additional ninety units after the first sixty units are manufactured.  


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 $2,118,169 and $13,024,381 as of September 30, 2022, and December 31, 2021, respectively.


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 September 30, 2022 or December 31, 2021, respectively. 

   

Escrow - bond – Escrow – bond represents monies held by a third party surety for the performance of a project which will be remitted to the Company upon criteria as described in the underlying agreements. $2,000,000 was returned to the Company during July 2022 and the remaining amount is expected to be returned during the three months ending December 31, 2022.


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 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, 2022 there was inventory of $406,084 for construction materials, and $488,878 of medical equipment and COVID-19 test and testing supplies. As of December 31, 2021 there was inventory of $516,731 for construction materials, and $757,094 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  nine months ended September 30, 2022 or 2021. 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, 2021 and determined that there were no impairment losses. There was no impairment during the nine months ended September 30, 2022. The accumulated amortization as of September 30, 2022 and 2021 was $938,319 and $773,908, respectively. The amortization expense for the nine months ended September 30, 2022 and 2021 was $122,587 and $124,053, respectively. The amortization expense for the three months ended September 30, 2022 and 2021 was $39,243 and $41,823, respectively. The estimated amortization expense for the successive five years is as follows:


13


SG BLOCKS, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2022 and 2021 (Unaudited)


3.

Summary of Significant Accounting Policies (continued)

  


For the year ending December 31,:

 

 

 


2022 

 

$

40,382

 


2023 

 

 

161,176

 


2024

 

 

160,469

 


2025 

 

 

157,052

 


2026

 

 

139,717

 


Thereafter 

 

 

1,313,849

 


 

 

$

1,972,645

 


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.


Held For Sale Assets – On May 10, 2021 the Company's subsidiary, SG DevCo acquired the Lago Vista, Texas property for $3,576,130. Management has implemented a plan to sell this property during 2022, which meets all of the criteria required to classify it as Held for Sale. Including the project development costs associated with Lago Vista of $877,584, the book value is now $4,453,714


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.


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.


14


SG BLOCKS, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2022 and 2021 (Unaudited)

 

3.

Summary of Significant Accounting Policies (continued)


The 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.


Other income – Included in other income for the three and nine months ended September 30, 2022 is amounts in escrow resulting from the SG Echo acquisition which were remitted to the Company.  At the time of acquisition and previously, the Company did not believe such amount was recognizable.


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. 

 

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, 2022 and December 31, 2021, 83% and 78%, respectively, of the Company’s gross accounts receivable were due from two and four customers. 


Revenue relating to three and one customers represented approximately 93% and 90% of the Company's total revenue for the three months ended September 30, 2022 and 2021, respectively. Revenue relating to two and one customers represented approximately 88% and 77% of the Company's total revenue for the nine months ended September 30, 2022 and 2021, respectively. 


Cost of revenue relating to two vendors represented approximately 68% of the Company’s total cost of revenue for the three months ended September 30, 2021.  Cost of revenue relating to three vendors represented approximately 54% of the Company’s total cost of revenue for the nine months ended September 30, 2021. The Company believes it has access to alternative suppliers, with limited disruption to the business, should circumstances change with its existing suppliers.


15


SG BLOCKS, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2022 and 2021 (Unaudited)

 

4.

Accounts Receivable

 

At September 30, 2022 and December 31, 2021, the Company’s accounts receivable consisted of the following: 



 

 

 2022

 

 

2021

 


Billed:

 


 

 


 


   Construction services

$ 1,986,502

$ 2,293,187

   Engineering services

 

 

11,794

 

 

 

86,388

 


   Medical revenue

2,675


679,446

   Retainage receivable

 

 

543,416

 

 

 

635,049

 


   Other receivable



132,202


186,692

      Total gross receivables

 

 

2,676,589

 

 

 

3,880,762

 


Less: allowance for credit losses  

 

 

(963,116

)

 

 

(963,116

)


      Total net receivables

 

$

1,713,473

 

 

$

2,917,646

 


Receivables are evaluated for collectability and allowances for potential losses are established or maintained on applicable receivables. There was a provision for credit losses of  $7,024 and $161,202 during the nine months ended September 30, 2022. and 2021, respectively


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, 2022 and December 31, 2021:

 


 

 

2022

 

 

2021