UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
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
(State or other jurisdiction of
incorporation or organization)
5011 Gate Parkway, Building 100, Suite 100 Jacksonville, FL
(Address of principal executive offices)
95-4463937
(I.R.S. Employer
Identification No.)
32256
(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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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
Non-accelerated filer
☐
☒
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☒
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the common stock held by non-affiliates of SG Blocks, Inc. based on the closing price of the shares of common stock on the
Nasdaq Capital Market on June 30, 2021 was approximately $48,471,319.
As of April 11, 2022, the issuer had a total of 12,006,873 shares of common stock outstanding and 81 record holders.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement on Schedule 14A for its 2022 annual meeting of stockholders (the "2022 Proxy Statement") are incorporated by
reference in Part III of this report.
SG BLOCKS, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
SIGNATURES
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
[Reserved]
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Quantitative and Qualitative Disclosures About Market Risk.
Financial Statements and Supplementary Data.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Controls and Procedures.
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions, and Director Independence.
Principal Accountant Fees and Services.
Exhibits and Financial Statement Schedules.
Form 10-K Summary.
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PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements” that involve risks and uncertainties. Our actual results could differ materially from
those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, or the “Securities Act”, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange
Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,”
“expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variations intended to identify
forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such
forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially
from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those
identified below and those discussed in the section titled “Risk Factors” included under Part I, Item 1A below. Furthermore, such forward-looking statements speak only as
of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date
of such statements.
Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent
in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the
objectives and plans of ours will be achieved. Investors are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date on
which such statements are made. Any forward-looking statements made by us or on our behalf speak only as of the date they are made, and we do not undertake to update
any forward-looking statement that may be made from time to time on our behalf.
As used in this Annual Report, unless the context requires otherwise, references to “SGB”, “the Company”, “we”, “us”, and “our” refer to SG Blocks, Inc. and
its subsidiaries, as the context requires.
“SG BlocksTM”, GreenSteel™ and the SG logo are our trademarks. All other trademarks and service marks appearing in this prospectus are the property of their
respective owners.
Unless otherwise stated all shares and per share amounts for all periods presented in this Annual Report have been adjusted to reflect the 1-for-20 reverse stock
split we effected on February 5, 2020
Summary Risk Factors
Our business and our ability to execute our business strategy are subject to a number of risks of which you should be aware of before you decide to invest in our Company.
The following is a summary of the more significant risks relating to the Company. A more detailed description of our risk factors can be found below in Item 1A. Risk
Factors.
Risks Relating to our Financial Position and Capital Requirements
· We may be unable to raise needed capital, on reasonable terms or at all, should our revenue remain flat or decrease.
· The issuance of shares of our common stock upon the exercise of outstanding options, warrants and restricted stock units may dilute the percentage ownership of the
then-existing stockholders and may make it more difficult to raise additional equity capital.
· We have incurred net losses in prior periods and there can be no assurance that we will generate income in the future, or that we will be able to successfully achieve
or maintain our growth strategy.
· An impairment of goodwill could have a material adverse effect on our financial condition and results of operations.
1
Risks Relating to our Company
· Our residential construction business is difficult to evaluate because we are currently focused on a new business model and have very limited operating history and
limited information.
· The impact of the COVID-19 coronavirus outbreak, or similar global health concerns, could negatively impact our business.
· We may be unable to successfully integrate the Echo business and the acquisition of Echo DCL, LLC may not result in the benefits anticipated.
· We are dependent on the services of key personnel, a few customers and vendors, the unexpected loss of any of which may adversely affect our operations.
· We currently are, and may in the future be, subject to legal proceedings or investigations.
· In the past we have identified weaknesses in our internal controls, and although remedied we cannot provide assurances that additional material weaknesses will not
occur in the future.
Risks Relating to our Business and Industry
· We are dependent on the availability and skill of subcontractors, their willingness to work with us, and their selection of, and ability to obtain, suitable and quality
building materials.
· We depend on third parties for transportation services, and limited availability or increases in costs of transportation could adversely affect our business and
operations.
· We may have difficulty protecting our proprietary manufacturing processes.
· Expansion of our operations may strain resources, and our failure to manage growth effectively could adversely impact our operating results and harm our ability to
attract and retain key personnel.
· Our clients may adjust, cancel or suspend the contracts in our backlog.
· Our liability for estimated warranties may be inadequate.
· We can be adversely affected by failures of persons who act on our behalf to comply with applicable regulations and guidelines.
· The cyclical and seasonal nature of the construction industry causes our revenues and operating results to fluctuate, and we expect this cyclicality and seasonality to
continue in the future.
· Our business depends on the construction industry and general business, financial market and economic conditions.
· Our business relies on private investment and a slower than expected economy may adversely affect our results.
· A material disruption at one of our suppliers’ facilities could prevent us from meeting customer demand, reduce our sales and negatively affect our overall financial
results.
· Environmental, health and safety laws and regulations and any changes to, or liabilities arising under, such laws and regulations could have a material adverse effect
on our financial condition, results of operations and liquidity.
· Our business may be subject to economic and political risks of operating and obtaining supplies from foreign countries.
· Cybersecurity risks related to the technology used in our operations and other business processes, as well as security breaches of company, customer, employee and
vendor information, could adversely affect our business.
2
Risks Relating to the Construction Sector
· We may be dependent upon third-party financing, and our financial condition and results of operations could be negatively affected if additional third-party
financing for our customers does not become available.
· The construction industry is highly competitive, and such competition may increase the adverse effects of industry conditions, including the consolidation of the
industry.
· There can be no assurance that Modules or modular construction techniques that utilize our technology and expertise will achieve market acceptance and grow; thus,
the future of our business and the modular construction industry as a whole is uncertain.
· Government regulations and legal challenges may delay the start or completion of our projects, increase our expenses or limit our building activities, which could
have a negative impact on our operations.
· The dangers inherent in our operations and the limits on insurance coverage could expose us to potentially significant liability costs and materially interfere with the
performance of our operations.
Risks Relating to the Clarity Mobile Venture Sector
· There can be no assurance that the velocity of COVID-19 tests being conducted by Clarity Mobile Venture will continue at current rates or be effective for new
variants of the COVID-19 virus.
· We may be adversely affected by the actions of our competitors, many of whom have substantially greater financial, technical and other resources than we have.
· We rely on third-party vendors to supply Clarity Mobile Venture with COVID-19 tests that, if we were unable to obtain, could adversely affect our business.
Risks Relating to our Common Stock
· Our failure to meet the continued listing requirements of the Nasdaq Capital Market could result in a delisting of our common stock.
· Our stock price has been subject to fluctuations in the past, has recently been volatile and investors in our common stock may lose all or part of their investment in
our company.
· Sales of a substantial number of shares of our common stock in the public market, or the perception that they might occur, could cause the price of our common
stock to decline.
· The issuance of shares of our common stock upon the exercise of outstanding options, warrants and restricted stock units may dilute the percentage ownership of the
then-existing stockholders and may make it more difficult to raise additional equity capital.
· Certain provisions of Delaware law could discourage, delay or prevent a merger or acquisition at a premium price.
· As a “smaller reporting company,” we have availed ourselves of reduced disclosure requirements, which may make our common stock less attractive to investors.
3
ITEM 1. BUSINESS.
History and Company Overview
We are a provider of modular facilities (“Modules”). Prior to the COVID-19 pandemic, the Modules we supplied were primarily for retail, restaurant and military
use and were manufactured by third party suppliers using our proprietary technology and design and engineering expertise, which modifies code-engineered cargo shipping
containers and purpose-built modules for use for safe and sustainable commercial, industrial and residential building. With our acquisition in September 2020 of Echo DCL,
LLC (“Echo”), one of our key supply chain providers, we now have more control over the manufacturing process and have increased our product offerings to add
Modules made out of wood. In March 2020, in response to the COVID-19 pandemic we began increasing our focus on providing our Modules as health care facilities for
deployable medical response solutions. Our partnership with Clarity Lab Solutions, LLC (“Clarity Labs”) in Boca Raton, Florida, a CLIA-certified laboratory, has allowed
us to provide laboratory testing in our Modules. During 2021, we also began to focus on acquiring property to build multi-family housing communities that allows us to
utilize the manufacturing services of Echo.
Prior to October 2019, our business model was solely a project-based construction model pursuant to which we were responsible for the design and construction of
finished products that incorporated our technology primarily to customers in the retail, restaurant, military and education industries throughout the United States. In October
2019, we changed our business model for our residential building construction to a royalty fee model and entered into a five-year exclusive license with CPF GP 2019-1
LLC (“CPF”) under which CPF licensed on an exclusive basis our proprietary technology and intellectual property to develop and commercialize products in the United
States (and its territories) for residential use, including, without limitation, single-family residences and multi-family residences, but excluding military housing. On June
15, 2021, we terminated the exclusive license by mutual agreement and ceased our royalty fee model.
Prior to the COVID-19 pandemic, our core customer base was comprised of architects, landowners, builders and developers who use our Modules in commercial
and residential structures. Our cargo modified Modules allow for the redesign, repurpose and conversion of heavy-gauge steel cargo shipping containers into SGBlocks™,
which are safe green building blocks for commercial, industrial, and residential building construction, rather than consuming new steel and lumber. Our technology and
expertise is also used to purpose-build modules, or prefabricated steel modular units customized for use in modular construction (“SGPBMs” and, together with
SGBlocks™, “Modules”), primarily to augment or complement an SGBlocks™ structure.
In March 2020, we began increasing our focus on providing our Modules as health care facilities for deployable medical response solutions. In May, we entered
into a joint development agreement with Grimshaw Design to assist with the deployment of our D-Tec suite of prefabricated health facilities for on-site immediate COVID-
19 testing. In September 2020, we entered the U.S. test lab market by forming a joint venture with Clarity Labs , a manufacturer and market leader of rapid diagnostic tests,
to launch CLIA-certified laboratories. Our joint venture with Clarity Labs has allowed us to not only supply our D-Tec suite of prefabricated health facilities but also allows
us to provide testing services at such facilities. We have supplied our building modular coronavirus testing centers and provide testing services for Los Angeles
International Airport (LAX), Memorial in Wayne County, Michigan and have been selected as a Trusted Testing Partner (TTP) for Hawaii’s COVID-19 travel testing
program.
In September 2020, we acquired substantially all the assets of Echo, a Texas limited liability company, except for Echo's real estate holdings for which we obtained
a right of first refusal. Echo is a container/modular manufacturer based in Durant, Oklahoma specializing in the design and construction of permanent modular and
temporary modular buildings and was one of our key supply chain partners. Echo catered to the military, education, administration facilities, healthcare, government,
commercial and residential customers. This acquisition has allowed us to expand our reach for our Modules and has offered us an opportunity to vertically integrate a large
portion of our cost of goods sold, as well as increase margins, productivity and efficiency in the areas of design, estimating, manufacturing and delivery.
4
2021 Real Estate Developments
During February 2021, we formed SGB Development Corp. (“SG DevCorp”), our wholly owned subsidiary, which was formed for the purpose of real property
development utilizing our technologies and our manufacturing facility.
On May 10, 2021, we acquired a 50+ acre site in Lago Vista, Texas for $3,500,000, paid in cash, pursuant to the Unimproved Property Contract, dated February
25, 2021, with Northport Harbor LLC. The acquired parcel sits on Lake Travis on the Colorado River in central Texas and subsequent to the year ending December 31,
2021, the property is listed for sale.
On May 31, 2021, SG DevCorp, acquired a 50% membership interest for $600,000 in a limited liability company that is building affordable housing in the Atlanta,
Georgia metropolitan area to be known as “Norman Berry Village”. SGB DevCorp has partnered with CMC Development Group, a New York City-based real estate
development firm with national expertise providing design build services. We expect the project to develop 125,000 square feet and build approximately 138 units at
Norman Berry Village.
On June 24, 2021, SG DevCorp, as member, entered into an Operating Agreement, with Jacoby Development, Inc., a Georgia corporation (“JDI”), as manager,
dated June 24, 2021 (the “Operating Agreement”), for JDI-Cumberland Inlet, LLC, a Georgia limited liability company (“JDI-Cumberland”), pursuant to which we acquired
a 10% non-dilutable equity interest (“LLC Interest”) in JDI-Cumberland and agreed to contribute $3,000,000 in capital to it for the development of a 1,286 acre waterfront
parcel in downtown historic St. Marys, Georgia (the “Project”). SG DevCorp in conjunction with Jacoby Development of Atlanta, Georgia expects to develop a mixed-use
destination community. The closing on the 1,286-acre waterfront parcel occurred prior to the end of Q2 2021.
The Operating Agreement provides JDI with the right, at its option, to purchase the LLC Interest from SG DevCorp on or before June 24, 2023 for $3,000,000,
plus an amount equal to an annual internal rate of return (IRR) on such funds of forty (40%) percent (i.e., $1,200,000 annualized). After June 24, 2023, the Operating
Agreement provides JDI with the right, at its option, to purchase the LLC Interest from SG DevCorp for $3,000,000, plus an amount equal to an IRR of thirty-two and one-
half (32.5%) percent (i.e., $975,000 annualized). The Operating Agreement also provides that if JDI receives a good faith, bona fide written offer from an unaffiliated third
party to purchase all or any portion of the Project, JDI shall first offer the Project to SG DevCorp at the same price Echo, entered into a Fabrication and Building Services
Agreement (“Building Services Agreement”) with JDI-Cumberland to design, fabricate and install various improvements for the Project using modular structures, pursuant
to budgets prepared by SG Echo submitted for approval to JDI-Cumberland, including a marina, town center, apartments and single family units, townhomes, commercial,
retail and lodging buildings/structures, eco-tourism park, camping yurts, cabins and cottages. The Building Services Agreement has an initial term of three years, with two-
year automatic renewal provisions.
On July 14, 2021, SG DevCorp issued a Real Estate Lien Note, dated July 14, 2021, in the principal amount of $2,000,000 (the “Note”), secured by a Deed of
Trust, dated July 14, 2021, on its 50+ acre Lake Travis project site in Lago Vista, Texas and a related Assignment of Leases and Rents, dated July 8, 2021, for net loan
proceeds of $1,958,233 after fees. The Note has a term of one (1) year, provides for payments of interest only at a rate of twelve percent (12%) per annum and may be
prepaid without penalty commencing nine (9) months after its issuance date. If the Note is prepaid prior to nine (9) months after its issuance date, a 0.5% prepayment
penalty is due. SG DevCorp intends to use the proceeds of the Note for its development project.
On October 28, 2021, SG Echo entered into a Lease Agreement (the “Lease”) with May Properties, LLC, to lease an approximately 56,775 square foot facility
located at 101 Waldron Road in Durant Oklahoma (the “Premises”). The date on which SG Echo will become responsible for paying rent under the Lease (the “Lease
Commencement Date”) will be the earlier of (i) the date SG Echo begins to operate its business on the Premises or (ii) ninety (90) days after October 28, 2021. The initial
term of the Lease will commence on the Lease Commencement Date and expire one hundred and twenty (120) months after the Lease Commencement Date, with two five-
year options to renew. SG Echo’s monthly base rent for the Premises will start at $15,991.63 commencing on the Lease Commencement Date and will increase at the rate of
two percent (2%) on an annual basis up to a maximum monthly base rent of $19,111.47. The leased Premises is expected to add two new production lines for Echo to
manufacture projects for our subsidiary, SG DevCorp and others customers. Upon Echo completing certain improvements to the Premises, it will receive a credit against
future rent, not to exceed $750,000, for the cost and expense of the improvements to be applied pro rata over the remaining term of the Lease. The Lease also grants Echo an
option to purchase the Premises for (i) $1,000,000 after the fifteenth (15th) through the end of the twenty-fourth (24th) full calendar month of the Lease or (ii) $1,050,000
during the twenty-fifth (25th) through the end of the thirty-sixth (36th) full calendar month of the Lease. Pursuant to a Guaranty Agreement, dated October 28, 2021, Echo’s
obligations under the Lease have been guaranteed by the Company.
5
In connection with the Lease, Echo entered into a Loan Agreement (“Loan Agreement”) with the Durant Industrial Authority (the “Authority”) pursuant to which it
received $750,000 to be used for improvements on the Premises and issued to the Authority a non-interest bearing Forgivable Promissory Note in the principal amount of
$750,000 (the “Durant Note”). The Durant Note is due on April 29, 2029 and guaranteed by us, provided, if no event of default has occurred under the Durant Note or Loan
Agreement, one-third (1/3) of the balance of the Durant Note will be forgiven on April 29, 2027, one-half (1/2) of the balance of the Durant Note will be forgiven on April
29, 2028, and the remainder of the balance of the Durant Note will be forgiven on April 29, 2029. The Loan Agreement includes a covenant by Echo to employ a minimum
of 75 full-time employees in Durant Oklahoma and pay them no less than 1.5 times the federal minimum wage, and provides SG Echo 24 months to comply with the
provisions.
On November 10, 2021 we entered into a Purchase Agreement ("Purchase Agreement) with the Durant Industrial Authority to acquire 100% ownership of
approximately 114 mixed-use acres in Durant, Oklahoma for $865,000. We anticipate building approximately 300 residential units and up to 680,000 square feet of
industrial manufacturing space on the mixed-use property. The closing on the 114 mixed-use acres occurred in the first quarter of 2022.
Terminated License Agreement with CPF GP 2019-1 LLC
On June 15, 2021, we terminated that certain Exclusive License Agreement, dated as of October 3, 2019 (the “License Agreement”), with CPF, pursuant to which
we had granted CPF an exclusive license solely within the United States and its legal territories to our 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. In connection with the termination of the License, we entered into a Settlement and Mutual Release
Agreement (the "Settlement and Mutual Release Agreement") with CPF, and Capital Plus Financial, LLC (“Capital Plus”), a limited partner of CPF, pursuant to which the
License Agreement was terminated, we released CPF and CPF MF 2019-1 LLC (“CPF MF”) for any claims in exchange for releases from CPF and Capital Plus and we
received an assignment of CPF’s right under certain circumstances to a $1.25 million redemption distribution from CPF MF under its Operating Agreement. We and Paul
Galvin previously made loans to CPF in the principal amount of $650,000 and $100,000 evidenced by promissory notes pursuant to the terms of a certain Loan Agreement.
The loans are unaffected by the Settlement and Mutual Release Agreement and remain in effect and outstanding in accordance with the terms of the notes evidencing such
loans.
Under the License Agreement, during the initial term, CPF had agreed to pay us a royalty of (i) five percent (5%) on the first $20,000,000 of gross revenues derived
from CPF’s commercialization of the license (net of customary discounts, sales taxes, delivery charges, and amounts for returns) (the “Gross Revenues”), (ii) four and one-
half percent (4.5%) on the next $30,000,000 of Gross Revenues, and (iii) 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. During the year ended December 31, 2021 and 2020, we did not receive any royalty payments under the License Agreement.
On October 3, 2019, we had entered into a Loan Agreement and Promissory Note (the “Loan Agreement”) with CPF, which was amended on October 15, 2019 and
further amended on November 7, 2019, pursuant to which we agreed to loan CPF $750,000 at an annual interest rate of five percent (5%), with a maturity date of July 31,
2023. Under the Loan Agreement, as amended, we agreed to advance to CPF the first installment of the principal amount, equal to $500,000, no later than January 31, 2020
and the second installment of the principal amount, equal to $250,000, no later than April 15, 2020. As security for this loan, we received a security interest in all of CPF’s
membership interests in CPF MF, a Texas limited liability company of which CPF GP is the general partner. If we failed to fund either principal installment, such failure
would have constituted a default under the Loan Agreement and a cross default under the License Agreement. On January 21, 2020, pursuant to the Loan Agreement, CPF
issued to us a promissory note in the principal amount of $400,000 (the “Company Note”) and issued to Paul Galvin, our Chairman and CEO, a promissory note in the
principal amount of $100,000 (the “Galvin Note”). The transaction closed on January 22, 2020, on which date we loaned CPF $400,000 and Mr. Galvin personally loaned
CPF $100,000 on behalf of us. The Company Note and Galvin Note bear interest at five percent (5%) per annum, payable, together with the unpaid principal amount of the
promissory notes, on the earlier of the July 31, 2023 maturity date or upon the liquidation, redemption sale or issuance of a dividend upon the LLC interests in CPF MF
2019-1 LLC; provided, that the terms of the Galvin Note provide that all interest payments due to Mr. Galvin under the Galvin Note shall be paid directly to, and for the
benefit of, our Company.
6
Joint Development Agreement with Grimshaw
On May 27, 2020, we entered into a Joint Development Agreement with Grimshaw Design, LLC ("Grimshaw"). Grimshaw is engaged in architecture, planning
and industrial design. Our joint agreement is to develop a prototype and "proof of concept" for a scalable, customizable and rapidly deployable medical facility with
laboratory systems, testing booths, spaces for in-patient and out-patient care and/or other medical care units, based upon Grimshaw's designs and utilizing our container-
based or other modular structures, or pre-fabricated modular structures jointly developed by us and Grimshaw.
On July 6, 2020, we expanded our relationship with Grimshaw when we entered into another Joint Development Agreement with Grimshaw. Our joint agreement
is to develop a prototype and "proof of concept" for a scalable, customizable and rapidly deployable educational facility with classrooms, spaces for teaching, workshops,
dining, recreation, sports and/or other education-related purposes, based upon Grimshaw's designs and utilizing our container-cased or other modular structures, or pre-
fabricated modular structures jointly developed by us and Grimshaw.
On November 19, 2020, we and Memorial Hospital, of Michigan (“Memorial), entered into a Professional Services and Capital Support Contract (“PSCSC”) with
Wayne County, Michigan to appoint Memorial the primary contractor for the construction of portable on-site laboratory facilities for COVID-19 testing. The PSCCS
engages us as a sub-contractor to render services and support to Memorial in connection with the fulfillment of statements of work submitted from Wayne County to
Memorial. The program deploys the D-Tec Product Series, designed by Grimshaw and developed by SG Blocks, to deliver COVID-19 PCR testing and on-site CLIA lab
services directly into high risk and underserved areas. 20,352,054 D-Tec 1 Collection Units were deployed throughout Wayne County and provided COVID-19 test samples
to the CLIA lab for clinical testing services. The COVID-19 testing program with Memorial ceased operations in November 2021.
7
Joint Venture with Clarity Lab Solutions, LLC and Chicago Airport Testing, LLC
On August 27, 2020, we entered into a joint venture agreement (the “Clarity Mobile Venture”) with Clarity Labs, a CLIA-certified laboratory based in Miami,
Florida. Under the Clarity Mobile Venture, we, along with Clarity Labs have agreed to jointly market, sell, and distribute certain lab testing products and services (“Clarity
Mobile Venture”). On November 12, 2020, Clarity Mobile Venture entered into a contract with the City of Los Angeles for the operations of a COVID-19 PCR Test
Laboratory at Los Angeles International Airport ("LAX") to provide a full-service modular COVID-19 laboratory and testing facility onsite at Los Angeles International
Airport. This facility conducts PCR tests with results available within three hours for passengers and airline crew, and no later than 24 hours for LAX airport employees.
Additionally, other rapid coronavirus tests including antigen tests were deployed at LAX in 2021. Clarity Mobile Venture is the primary operator. On November 16, 2020,
we announced that the State of Hawaii had selected Clarity Labs and Clarity Mobile Venture to provide COVID-19 testing and clinical laboratory at LAX for testing of
passengers travelling between Los Angeles and Hawaii. In January 2021, we and other third parties formed Chicago Airport Testing LLC (“CAT”). 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. CAT
collected rental revenue from subleasing to a consortium of government entities assisting in COVID-19 testing. The consortium of government entities exercised their rights
to vacant in third quarter 2021 and CAT has ceased operations. For the year-end December 31, 2021, we recognized approximately $31,400,000 in revenue related to
activities through these joint ventures, which is included in medical revenue on the accompanying consolidated statements of operations.
Acquisition of Echo DCL, LLC
On September 17, 2020, we, through SG Echo, entered into an Asset Purchase Agreement (“Asset Purchase Agreement”) with Echo DCL, LLC, a
container/modular manufacturer that had been a key supplier of ours, to acquire substantially all the assets of Echo, except for Echo's real estate holdings, for which SG
Echo has obtained a right of first refusal to acquire same. On September 23, 2020, we, SG Echo and Echo DCL completed the transactions as contemplated by the Asset
Purchase Agreement (the “Closing”).
Pursuant to the terms of the Asset Purchase Agreement, at the Closing we paid to Echo an aggregate of $1,059,600 in cash, subject to the escrow of certain of the
purchase price funds, and SG Echo agreed to pay certain of Echo’s indebtedness, including the obligation to (i) satisfy a Guidance Line of Credit loan (“GLOC Loan”) in
the principal amount of approximately $616,000 ($316,432 of which payoff proceeds were delivered by SG Echo to Echo DCL at the closing), (ii) pay the debt service on
certain of Echo’s indebtedness in the approximate principal amount of $1.7 million for 12 months following the closing, (iii) pay the monthly principal and interest due
under the BTH Credit Line in the principal amount of $500,000 for 12 months following the closing and if Echo DCL has not fully satisfied the outstanding principal and
interest due under the BTH Credit Line and caused the BTH lender to release and terminate any encumbrances on the Purchase Assets arising out of the BTH Credit Line,
we have the right to pay the outstanding principal and interest due, and (iv) pay earn out payments equal to the net income received from the acquired business during the 3-
month period beginning on the first day of the first full month that is 3 months after the closing date, the 3-month period following the first earn out period and the 3-month
period following the second earn out period, payable in 50% in cash and 50% in shares of our common stock to be valued a $2.50 per share; provided, that up to
approximately $300,000 of any amounts paid in respect of the GLOC Loan, and any amounts paid in respect of the debt service on Echo’s indebtedness and line of credit
with BTH Bank, as described in subparagraphs (i), (ii) or (iii) above, shall be offset against and reduce the earnout payments due to Echo DCL. In no event may the number
of shares of common stock to be issued to Echo exceed 19.99% of our outstanding shares on the date of the execution of the Asset Purchase Agreement. As of December,
31, 2021, no earn out payments have been issued to Echo DCL.
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Products Produced with Our GreenSteel™ Modular Technology
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 SG Blocks 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 SG Blocks 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 involves GreenSteel technology and engineering expertise. The first product offering involves GreenSteel
Modules, which are the structural core and shell of an SG Blocks building. We procure the containers, engineer required openings with structural steel enforcements, paint
the containers 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 SG Blocks 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 SG Blocks 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.
Other Modular Products
We also produce pre-fabricated modular containers, for both residential and commercial use, at Echo using wood as the base material instead of steel containers.
We have found that many clients prefer a mix of wood and steel containers for their projects, wood for aesthetics and cost-savings, and steel for stability and durability.
Since our acquisition of Echo, approximately 75% of our Module sales have been for wood-based modules.
ESR Approval
In April 2017, the ICC Evaluation Service, LLC (“ICC-ES”) granted us an Evaluation Service Report (“ESR”) for the SGBlocks structural building materials. We
believe we are the first modular building company to receive such certification. Our ESR indicates that the ICC-ES recognizes the suitability and technical capabilities of the
SGBlocks structural building materials for use in compliance with the International Building Code and Residential Code, the California Building Code and Residential
Code, and the Florida Building Code—Building and Residential. We believe our ESR has expedited reviews and approvals by state and local building departments, helped
the SGBlocks concept gain wider acceptance in the construction industry and opened up licensing opportunities internationally We also believe the ESR will make it more
difficult for other companies in the industry to compete with us because the quality control and design acceptance criteria are specific to us and our associated facilities.
Our ESR is site-specific; therefore, only the inspected and approved facilities can place the ICC-ES mark on the containers. We currently source or fabricate our
SGBlocks from 18 facilities located throughout the continental United States. The ICC-ES has currently approved six of these facilities to place the ICC-ES medallion and
we will seek ICC-ES approval for additional facilities on an as needed basis. Each of these facilities undergo an annual inspection by ICC-ES. Currently, each of these
facilities has been re-certified by ICC-ES and is current with their recertifications. All SGBlocks manufactured at these facilities have an ESR medallion that validates the
quality control process. Because our ESR does not cover SGPBMs, this certification does not extend to buildings constructed using SGPBMs.
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Target Markets
To date, the target markets for the products that utilize our technology and expertise have been the new construction market in the United States. The Modules that
utilize our technology and expertise have a particular application in a number of segments, including:
●
Single-Family and Multi-Family Housing
● Restaurants and Quick Service Restaurants
● Military
●
Education/Student Housing
● Health Care including medical laboratories
●
Equipment Enclosures and Stacking Solutions
● Office and Commercial
● Commercial and residential customers
● Athletic facilities and support structures
● Administration Facilities
In addition, future target markets for expansion of such products and services include data centers, warehouse/public storage, reclamation/drop off centers and
medical.
Our Competitive Strengths
Although the construction industry is highly competitive, we are committed to educating the real estate community on the benefits of our technology and expertise
and positioning the products that utilize our technology and expertise as complementary to the strategy of developers, rather than as competition. We may compete for
building opportunities with regional, national and international builders that possess greater financial, marketing and other resources than we do, and competition within the
general construction industry may increase if there is future consolidation in the land development and construction industry or from new building technologies that could
arise. Within the modular building space, we compete against a small number of companies providing modular-building services. The principal competitive factors in our
business include, but are not limited to, the availability of building materials; technical product knowledge and expertise; previous experience in modular construction;
consulting or other service capabilities; pricing of products; and the marketability of our ESR within the structural building space.
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We believe we can distinguish ourselves from our competitors on the basis of our ESR, quality, cost and construction time savings when utilizing our technology
and expertise. Our proprietary construction for our cargo based containers method is typically less expensive than traditional construction methods, particularly in urban
locations and multi-story projects, and construction time is also generally reduced by using our construction method, reducing both construction and soft costs
substantially. SGBlocks are designed to be hurricane-, tornado- and earthquake-resistant and able to withstand harsh climate conditions. The flexibility and the stack-ability
of the Modules allows architects, developers and owners to design Modules to meet their specific needs. In addition, our management team has a breadth of knowledge in
the modular building industry with a combined 130 years of experience. Our experience in a wide range of construction applications, including office, enclosures,
residential, commercial, quick service restaurants, experiential and restaurant applications, gives us an advantage over our competition through the use of market-based
prototypes. With the acquisition of Echo, we have been able to vertically integrate our manufacturing process and reduce some of our cost of goods sold, productivity and
efficiency.
Our Customers
We market our construction products to a broad customer base, comprised primarily of contractors, home builders, building owners and other resellers across the
continental United States and we also market our services and technology to customers in Canada. In addition, as stated above, we now also supply our Modules to the
medical community. SG Blocks customers come from all walks in the economy and include government agencies, private developers, the U.S. Military, the Native
American Community, the QSR operators, individuals and families requiring COVID-19 tests and a host of entrepreneurs looking to launch ideas and technology. At
December 31, 2021 and 2020, 78% and 79%, respectively, of the Company’s gross accounts receivable were due from four and three customers. Revenue relating to one
and three customers represented approximately 80% and 61% of the Company’s total revenue for the years ended December 31, 2021 and 2020, respectively.
Our Suppliers and Partners
Although the primary use of shipping containers is for transportation, when constructing SGBlocks, we use standard materials to modify the container shell
structure and finish out the modules. In addition, we use the same standard construction materials to construct and finish out the wood base modules produced at Echo. We
utilize the same suppliers and materials used by conventional construction. Materials such as windows, doors, insulation mechanical systems, electrical systems and other
such supplies are all off-the-shelf materials and equipment commonly available and used in the industry. We believe we have access to alternative suppliers, with limited
disruption to the business, should circumstances change with its existing suppliers.
Intellectual Property
We operate under our United States registered trademarks “SGBlocks” and “GreenSteel” and our trademarked “SG” logo.
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Government Regulation and Approval
The design and construction of buildings is controlled at the project level, with local and state municipalities having jurisdiction in most cases. All buildings,
conventionally built or modularly built, are subject to published building codes and criteria that must be achieved during the architectural and engineering phase in order to
be approved for construction. There are no specific regulations that impact our technology. While much of the regulation in our industry occurs at the project level, we are
subject to various federal, state and local government regulations applicable to the business in the jurisdictions in which we operate, including laws and regulations relating
to our relationships with our employees, public health and safety, workplace safety, transportation, zoning and fire codes. We strive to operate in accordance with applicable
laws, codes and regulations. We believe we are in compliance in all material respects with existing applicable environmental laws and regulations and, in addition, that our
employment, workplace health and workplace safety practices comply with related regulations.
General Corporate Information
We were incorporated in the State of Delaware on December 29, 1993 under the name CDSI Holdings, Inc. On November 4, 2011, CDSI Merger Sub, Inc., our
wholly-owned subsidiary, completed a reverse merger with and into SG Building Blocks, Inc. (“SG Building”), with SG Building surviving the reverse merger as our
wholly owned subsidiary. We primarily conduct our current operations through SG Building. Prior to our emergence from bankruptcy in June 2016, our common stock was
quoted on the OTC Bulletin Board. In June 2017 and December 2019, we completed public offerings of our common stock, which currently trades on the Nasdaq Capital
Market under the symbol “SGBX.”
Our principal offices are located at 5011 Gate Parkway, Building 100, Suite 100 Jacksonville, FL 32256. Our website address is www.sgblocks.com. The
information contained in, and that can be accessed through our website, is not incorporated into and is not a part of this report. We make available on our website our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K as soon as reasonably practicable after those reports are filed with the
U.S. Securities and Exchange Commission (the “SEC”). The following Corporate Governance documents are also posted on our website: Code of Business Conduct and
Ethics and the Charters for the following Committees of the Board of Directors: Audit Committee, Compensation Committee, and Nominating and Corporate Governance
Committee. Our phone number is (646) 240-4235. Our filings may also be read and copied at the SEC’s Public Reference Room at 100 F Street NE, Room 1580
Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an
Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that
website is www.sec.gov.
Our Emergence from Bankruptcy
On October 15, 2015, SGB and its subsidiaries (collectively, the “Debtors”), filed voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) under the caption In re SG Blocks, Inc. et al., Case
No. 15-12790. On February 29, 2016, the Debtors filed a Disclosure Statement (the “Disclosure Statement”), attaching a Plan of Reorganization (the “Plan”), along with a
motion seeking approval of the Disclosure Statement by the Bankruptcy Court. On June 30, 2016 (the “Effective Date”), the Plan became effective and the Debtors emerged
from bankruptcy.
Prior to the Effective Date, SGB was authorized to issue: (i) 300,000,000 shares of common stock, par value $0.01 (the “Former Common Stock”) of which
42,918,927 shares were issued and outstanding as of June 29, 2016; and (ii) 5,000,000 shares of preferred stock, par value $0.01 (the “Former Preferred Stock”), none of
which were issued and outstanding prior to the Effective Date.
On the Effective Date, and pursuant to the terms of the Plan, SGB entered into a Securities Purchase Agreement, dated June 30, 2016, pursuant to which SGB sold
for a subscription price of $2.0 million a 12% Original Issue Discount Senior Secured Convertible Debenture to Hillair Capital Investments L.P. (“HCI”) in the principal
amount of $2.5 million, with a maturity date of June 30, 2018 (the “Exit Facility”).
On the Effective Date, all previously issued and outstanding shares of the Former Common Stock were deemed discharged, cancelled and extinguished, and,
pursuant to the Plan, SGB issued, in the aggregate, 8,195 shares (as adjusted to effect a 1-for-20 reverse stock split) of common stock, par value $0.01 (the “New Common
Stock”), to the holders of Former Common Stock. Further, under the Plan, upon the Effective Date, certain members of SGB’s management were entitled to receive options
(the “Management Options”) to acquire approximately 10,919 shares (as adjusted to effect a 1-for-20 reverse stock split), of SGB’s New Common Stock, on a fully diluted
basis.
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On the Effective Date, pursuant to the terms of the Plan and SGB’s Amended and Restated Certificate of Incorporation, SGB filed with the Secretary of State of the
State of Delaware a Certificate of Designations of Convertible Preferred Stock, designating 1,801,670 shares (as adjusted to effect a 1-for-3 reverse stock split) of preferred
stock, par value $1.00, all of which were issued upon our emergence from bankruptcy. Prior to our public offering that we consummated in June 2017, all outstanding
shares of our preferred stock, were converted into 90,084 shares of common stock. No preferred stock currently remains outstanding.
Reverse Stock Split
On February 5, 2020, we effected a 1-for-20 reverse stock split of our common stock. All share and per share amounts set forth in the consolidated financial
statements have been retroactively restated to reflect the split effected in February 2020 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 this Annual Report have been adjusted to reflect the reverse stock split effected in February 2020.
Recent Financing Developments
On October 27, 2021, we closed a registered direct offering and concurrent private placement that we effected pursuant to the Securities Purchase Agreement that it
entered into on October 25, 2021 with an institutional investor and received gross proceeds of $11.55 million. Pursuant to the terms of the Purchase Agreement, we issued to
the investor (A) in a registered direct offering (i) 975,000 shares of our common stock, par value $0.01 per share (the “Common Stock”), and (ii) pre-funded warrants to
purchase up to 2,189,384 shares of Common Stock and (B) in a concurrent private placement, Series A warrants to purchase up to 1,898,630 shares of Common Stock.
Human Capital
Employees
We believe that our success depends upon our ability to attract, develop and retain key personnel. As of December 31, 2021, SGB directly employed eighteen full-time
employees and engaged outside professional firms and subcontractors to deliver projects to customers, and SG Echo directly employed sixty-nine full-time employees.
Health and Safety
The health and safety of our employees is our highest priority, and this is consistent with our operating philosophy. Accordingly, with the global spread of the ongoing
novel coronavirus pandemic, we have implemented plans designed to address and mitigate the impact of the COVID-19 pandemic on the safety of our employees and our
business, which include:
· Adding work from home flexibility;
· Adjusting attendance policies to encourage those who are sick to stay home;
· Increasing cleaning protocols across all locations;
· Initiating regular communication regarding impacts of the COVID-19 pandemic, including health and safety protocols and procedures;
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Available Information
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and in accordance therewith, we file
reports, proxy and information statements and other information with the United States Securities and Exchange Commission (the “SEC”). Our Annual Report on Form 10-
K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act are available through the investor relations section of our website at www.sgblocks.com. Reports are available free of charge as soon as reasonably
practicable after we electronically file them with, or furnish them to, the SEC. The information contained on our website is not incorporated by reference into this Annual
Report on Form 10-K.
ITEM 1A. RISK FACTORS.
Investing in our common stock involves a high degree of risk. You should consider carefully the following risks, together with all the other information in this
Annual Report on Form 10-K, including the section titled “Forward-Looking Statements,” and Part II, Item 7.“Management’s Discussion and Analysis of Financial
Condition and Results of Operation” and our consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. The
risks described below are not the only ones we face. Any of the following risks could materially and adversely affect our business. If any of the following risks actually
materializes, our operating results, financial condition and liquidity could be materially adversely affected. As a result, the trading price of our common stock could decline
and you could lose part or all of your investment. Our business, financial condition and results of operations could also be harmed by risks and uncertainties not currently
known to us or that we currently do not believe are material.
Risks Relating to our Financial Position and Capital Requirements.
If we are not successful in our efforts to increase sales or raise capital, we could experience a shortfall in cash over the next twelve months, and our ability to obtain
additional financing on acceptable terms, if at all, may be limited.
At December 31, 2021 and 2020, we had cash and cash equivalents and a short-term investment, collectively, of $13,024,381 and $13,010,356, respectively.
However, during the fiscal years ended December 31, 2021 and 2020, we reported a net loss of $5,908,372 and $4,508,162, respectively, and used $662,759 and
$2,887,950 of cash for operations, respectively. If we are not successful with our efforts to increase revenue, we could experience a shortfall in cash over the
next twelve months. If there is a shortfall, we may be forced to reduce operating expenses, among other steps, all of which would have a material adverse effect on our
operations going forward.
We may also seek to obtain debt or additional equity financing to meet any cash shortfalls. The type, timing and terms of any financing we may select will depend
on, among other things, our cash needs, the availability of other financing sources and prevailing conditions in the financial markets. However, there can be no assurance
that we will be able to secure additional funds if needed and that, if such funds are available, the terms or conditions would be acceptable to us. If we are unable to secure
additional financing, further reduction in operating expenses might need to be substantial in order for us to ensure enough liquidity to sustain our operations. Any equity
financing would be dilutive to our stockholders. If we incur debt, we will likely be subject to restrictive covenants that significantly limit our operating flexibility and
require us to encumber our assets. If we fail to raise sufficient funds and continue to incur losses, our ability to fund our operations, take advantage of strategic
opportunities, or otherwise respond to competitive pressures will be significantly limited. Any of the above limitations could force us to significantly curtail or cease our
operations, and you could lose all of your investment in our common stock. These circumstances have raise substantial doubt about our ability to continue as a going
concern, and continued cash losses may risk our status as a going concern. Our consolidated financial statements do not include any adjustments that might be necessary
should we be unable to continue as a going concern.
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We have incurred net losses in prior periods, and there can be no assurance that we will generate income in the future, or that we will be able to successfully achieve or
maintain our growth strategy.
Our ability to achieve profitability will depend upon our ability to generate and sustain substantially increased revenues. We may continue to incur operating losses
in the future as we execute our growth strategy. Although we expect that our expenses will decline due to our new business model, there can be no assurance that our
revenue from royalties will exceed our expenses, especially since we anticipate that most of our expenses will be fixed expenses that will not be dependent upon revenue
generated. The likelihood that we will generate net income in the future must be considered in light of the difficulties facing the construction industry as a whole, economic
conditions and the competitive environment in which we operate. Our operating results for future periods are subject to numerous uncertainties, and we may not achieve
sufficient revenues to sustain or increase profitability. In addition, we may be unable to successfully achieve or maintain our growth strategy, including our ability to expand
into new geographic markets.
An impairment of goodwill could have a material adverse effect on our financial condition and results of operations.
As December 31, 2021, we had $1,309,330 of goodwill. We perform an impairment test of our goodwill annually during the fourth quarter of our fiscal year or
when events occur or circumstances change that would more-likely-than-not indicate that goodwill might be impaired. Factors that may be considered a change in
circumstances, indicating that the carrying value of our goodwill may not be recoverable, include a decline in stock price and market capitalization, reduced future cash flow
estimates and slower growth rates in our industry. Our annual impairment tests resulted in no impairment of goodwill during fiscal 2021 and fiscal 2020. Deterioration in
estimated future cash flows in our reporting unit could result in further future goodwill impairment. Changes to our business strategy, changes in industry or market
conditions, changes in operating performance or other indicators of impairment could cause us to record a significant impairment charge during the period in which the
impairment is determined, negatively impacting our results of operations and financial position.
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Risks Relating to our Company
Our residential construction business is difficult to evaluate because we are currently focused on a new business model and have very limited operating history and
limited information.
We recently terminated our licensing business model for our residential construction business in the United States and are currently developing and constructing
our own residential developments. In 2019 we entered into one license agreement for use of our technology for construction of residences in the United States which we
terminated in June 2021. There is a risk that we will be unable to successfully generate revenue from this new business model. Although we believe that we will experience
increased revenue from this new business model, there can be no assurance that we will experience increased costs and generate less income that we anticipate. We are
subject to many risks associated with this new business model such as our dependence upon third parties to provide services and supply required materials. Even if we
generate revenue, there can be no assurance that we will be profitable. We are subject to the risks inherent to the operation of a new business enterprise, and cannot assure
you that we will be able to successfully address these risks.
In addition, it is still too early to evaluate the impact of our recent acquisition of Echo. Although we expect to control have better control of cost of goods and
efficiency from this acquisition, it is too early to determine the full benefits, if any to be experienced as a result of the acquisition.
The impact of the COVID-19 coronavirus outbreak, or similar global health concerns, could negatively impact our ability to source certain products, impact product
pricing, impact our customers’ ability or that of our licensee to obtain financing or have a negative impact on our business.
In March 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and the
related adverse public health developments, have adversely affected work forces, economies and financial markets globally. Our use of third-party suppliers for production
and shipping of certain products could be negatively impacted by the regional or global outbreak of illnesses, including the COVID-19 coronavirus outbreak. In addition,
any outbreak of COVID at our Echo facility could result in closures of the facility and negatively impact our ability to meet timelines. To date, we have experienced some
delays in projects due to COVID-19. Any quarantines, the timing and length of containment and eradication solutions, travel restrictions, absenteeism by infected workers,
labor shortages or other disruptions to our suppliers and their contract manufacturers or our customers would likely adversely impact our sales and operating results and
result in further project delays. In addition, the pandemic could result in an economic downturn that could affect the ability of our customers and licensees to obtain
financing and therefore impact demand for our products. Order lead times could be extended or delayed and pricing could increase. Some products or services may become
unavailable if the regional or global spread were significant enough to prevent alternative sourcing. Accordingly, we are considering alternative product sourcing in the event
that product supply becomes problematic. We expect this global pandemic to have an impact on our revenue and our results of operations, the size and duration of which we
are currently unable to predict.
In addition, the outbreak of the COVID-19 coronavirus could disrupt our operations due to absenteeism by infected or ill members of management or other
employees, or absenteeism by members of management and other employees who elect not to come to work due to the illness affecting others in our office or other
workplace, or due to quarantines. COVID-19 illness could also impact members of our Board of Directors resulting in absenteeism from meetings of the directors or
committees of directors, and making it more difficult to convene the quorums of the full Board of Directors or its committees needed to conduct meetings for the
management of our affairs.
The global outbreak of the COVID-19 coronavirus continues to rapidly evolve. The extent to which the COVID-19 coronavirus may impact our business and
clinical trials will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the
disease, the duration of the outbreak, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions and the
effectiveness of actions taken in the United States and other countries to contain and treat the disease.
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We may be unable to successfully integrate the Echo business with its current management and structure and the acquisition of Echo may not result in the benefits
anticipated.
Our failure to successfully complete the integration of Echo could have an adverse effect on our prospects, business activities, cash flow, financial condition, results
of operations and stock price. Integration challenges may include the following:
●
●
assimilating Echo’s technology and retaining personnel;
estimating the capital, personnel and equipment required for Echo based on the historical experience of management with the businesses they are familiar with;
● minimizing potential adverse effects on existing business relationships; and
●
successfully developing the new products and services.
We believe the acquisition of Echo will provide certain strategic benefits which would enable us to accelerate our business plan through an increased access to capital
in the public equity markets. However, our employee number has experienced significant growth from the acquisition as has our expenses. There can be no assurance that
these anticipated benefits of the acquisition will materialize or that if they materialize will result in increased stockholder value or revenue stream to the combined company.
Our ability to meet our workforce needs is crucial to our results of operations and future sales and profitability.
We rely on the existence of an available hourly workforce to manufacture our products. We cannot assure you that we will be able to attract and retain qualified
employees to meet current or future manufacturing needs at a reasonable cost, or at all. For instance, the demand for skilled employees has increased recently with the low
unemployment rates in Oklahoma where we have manufacturing facilities. Also, although none of our employees are currently covered by collective bargaining agreements,
we cannot assure you that our employees will not elect to be represented by labor unions in the future. Additionally, competition for qualified employees could require us to
pay higher wages to attract a sufficient number of employees. Significant increases in manufacturing workforce costs could materially adversely affect our business,
financial condition or results of operations.
We have a fixed cost base that will affect our profitability if our sales decrease.
The fixed cost levels of operating Echo can put pressure on profit margins when sales and production decline. Our profitability depends, in part, on our ability to
spread fixed costs over a sufficiently large number of products sold and shipped, and if we make a decision to reduce our rate of production, gross or net margins could be
negatively affected. Consequently, decreased demand or the need to reduce production can lower our ability to absorb fixed costs and materially impact our financial
condition or results of operations.
A material disruption at one of our suppliers’ facilities or Echo’s facilities could prevent us from meeting customer demand, reduce our sales and negatively affect our
overall financial results.
Any of the following events could cease or limit operations unexpectedly: fires, floods, earthquakes, hurricanes, on-site or off-site environmental incidents or other
catastrophes; global pandemic; utility and transportation infrastructure disruptions; labor difficulties; other operational problems; or war, acts of terrorism or other
unexpected events. Any downtime or damage at our suppliers’ facilities or Echo’s facilities could prevent us from meeting customer demand for our products or require us
to make more expensive purchases from a competing supplier. If our suppliers were to incur significant downtime, our ability to satisfy customer requirements could be
impaired, resulting in customers seeking products from other distributors, as well as decreased customer satisfaction and lower sales and operating income.
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A natural disaster, the effects of climate change, or other disruptions at our Echo facility could adversely affect our business, financial condition, and results of
operations.
We rely on the continuous operation of our Echo facility in Durant, Oklahoma for the production of our Modules. Any natural disaster or other serious disruption to
our facility due to fire, flood, earthquake, or any other unforeseen circumstance would adversely affect our business, financial condition, and results of operations. In
addition, adverse weather conditions, such as increased frequency and/or severity of storms, or floods could impair our ability to operate by damaging our facilities and
equipment or restricting product delivery to customers. The occurrence of any disruption at our manufacturing facility, even for a short period of time, may have an adverse
effect on our productivity and profitability, during and after the period of the disruption. These disruptions may also cause personal injury and loss of life, severe damage to
or destruction of property and equipment, and environmental damage. Although we maintain property, casualty, and business interruption insurance of the types and in the
amounts that we believe are customary for the industry, we are not fully insured against all potential natural disasters or other disruptions to our manufacturing facility.
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board
members.
We are subject to the reporting and corporate governance requirements of the Exchange Act, the listing requirements of the Nasdaq Capital Market and other
applicable securities rules and regulations, including the Sarbanes-Oxley Act and the Dodd-Frank Act. Compliance with these rules and regulations will increase our legal
and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. Among other things, the
Exchange Act requires that we file annual, quarterly and current reports with respect to our business and results of operations and maintain effective disclosure controls and
procedures and internal control over financial reporting. In order to continue to maintain our disclosure controls and procedures and internal control over financial reporting
to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns,
which could harm our business, financial condition, results of operations and prospects. We also may need to further expand our legal and finance departments in the future,
which will increase our costs and expenses.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies,
increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying
interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory
and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and
governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and
administrative expense and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new
laws, regulations and standards differ from the activities intended by regulatory or governing bodies, regulatory authorities may initiate legal proceedings against us and our
business and prospects may be harmed. As a result of disclosure of information in the filings required of a public company, our business and financial condition are more
visible, which may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business, financial condition,
results of operations and prospects could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources
necessary to resolve them, could divert the resources of our management and harm our business, financial condition, results of operations and prospects.
We are dependent on the services of key personnel, and the unexpected loss of their services may adversely affect our operations.
Our success depends highly upon the personal efforts and abilities of our senior management team, specifically the efforts of Paul M. Galvin, our Chief Executive
Officer, Gerald Sheeran, our Acting Chief Financial Officer and William Rogers, our Chief Operations Officer. The Company has entered into employment agreements with
Messrs. Galvin, Sheeran and Rogers. The employment agreements with Messrs. Galvin, Sheeran and Rogers each provide for two-year terms, with automatic renewal after
the end of such term. The loss of the services of one or more of these individuals could have a material adverse effect on our business. Our ability to achieve profitability and
generate increased revenue will depend upon our ability to retain, and, if necessary, attract experienced management personnel.
The loss of one or a few customers could have a material adverse effect on us.
A few customers have in the past, and may in the future, account for a significant portion of our revenues in any one year or over a period of several consecutive
years. At December 31, 2021 and 2020, 78% and 79%, respectively, of the our gross accounts receivable were due from four and three customers. Revenue relating to one
and three customers represented approximately 80% and 61% of our total revenue for the years ended December 31, 2021 and 2020, respectively. Although we have
contractual relationships with many of our significant customers, our customers may unilaterally reduce or discontinue their contracts with us at any time. The loss of
business from a significant customer could have a material adverse effect on our business, financial condition, results of operations and cash flows.
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We rely on certain vendors to supply us with materials and products that, if we were unable to obtain, could adversely affect our business.
We have relationships with key materials vendors, and we rely on suppliers for our purchases of products from them. Any inability to obtain materials or services
in the volumes required and at competitive prices from our major trading partners, the loss of any major trading partner or the discontinuation of vendor financing (if any)
may seriously harm our business because we may not be able to meet the demands of our customers on a timely basis in sufficient quantities or at all. Other factors,
including reduced access to credit by our vendors resulting from economic conditions, may impair our vendors’ ability to provide products in a timely manner or at
competitive prices. We also rely on other vendors for critical services such as transportation, supply chain and professional services. Any negative impacts to our business
or liquidity could adversely impact our ability to establish or maintain these relationships.
We currently are, and may in the future be, subject to legal proceedings or investigations, the resolution of which could negatively affect our profitability and cash flows
in a particular period.
The nature of our operations exposes us to possible litigation claims, including disputes relating to our operations and commercial and contractual arrangements.
Often the litigation matters are not totally within our control. We will contest these matters vigorously and will make insurance claims where appropriate, but because of the
uncertain nature of litigation and coverage decisions, we cannot predict the outcome of these matters. The costs associated with litigation matters could have a material
adverse effect on our financial condition and profitability. In addition, our profitability or cash flow in a particular period could be affected by an adverse ruling in any
litigation currently pending in the courts or by litigation that may be filed against us in the future. We are also subject to government regulation, which could result in
administrative proceedings in the future. For additional information, see “Item 3. Legal Proceedings.”
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We may have difficulty protecting our proprietary manufacturing processes, which could adversely affect our ability to compete.
We use a proprietary manufacturing process that allows us to be code-compliant in our SGBlocks™ product. Such manufacturing process is unique to the
construction industry and is important to ensure our continued success, and we cannot assure you that our efforts to protect our proprietary rights will be sufficient or
effective. If other companies replicate our methodology, we could lose our competitive advantage. Any future patent or trademark applications may not lead to issued
patents and registered trademarks in all instances. We also cannot be assured that the scope of any patents issued in the future will be sufficiently broad to offer meaningful
protection. Others may develop or patent similar or superior technologies, products or services, and our intellectual property rights may be challenged, invalidated,
misappropriated or infringed by others. If we are unable to protect and maintain our intellectual property rights, or if there are any successful intellectual property challenges
or infringement proceedings against us, our business and revenue could be materially and adversely affected.
Risks Relating to our Business and Industry
We, in particular Clarity Mobile Venture, are dependent on the availability and skill of subcontractors, their willingness to work with us, and their expertise in the
medical industry.
We rely and expect to continue to rely on subcontractors to perform the collection of COVID-19 tests and run testing procedures within our LAX laboratory.
Despite detailed specifications and quality control procedures, in some cases, improper processes or defective materials may cause issues in producing a timely test result.
We may need to spend money to remediate such problems when they are discovered. Defective materials and or improper testing procedures can result in refunds owed
back to our COVID-19 customers. Pervasive problems could adversely affect our business and therefore our ability to generate income at LAX. The inability to contract
with skilled subcontractors at reasonable costs and on a timely basis could erode our profit margins and adversely affect our results of operations and cash flows.
We depend on third parties for transportation services, and limited availability or increases in costs of transportation could adversely affect our business and operations.
Our business depends on the transportation of a large number of products, via railroad or truck. We rely primarily on third parties for transportation of the products
we manufacture or distribute and for the delivery of our raw materials. We are also subject to seasonal capacity constraints, which may be severely reduced due to COVID-
19 coronavirus, and weather-related delays for both rail and truck transportation. If any of our third-party transportation providers were to fail to deliver raw materials to us
or our Modules to our customers in a timely manner, we may be unable to complete projects in a timely manner and may, among other things, incur penalties for late
delivery or be unable to use the Modules as intended. In addition, if any of these third parties were to cease operations or cease doing business with us, we may be unable to
replace them at reasonable cost. Any failure of a third-party transportation provider to deliver raw materials to us or finished Modules to our customers in a timely manner
could harm our reputation, negatively affect our customer relationships, and have a material adverse effect on our operating results, cash flows, and financial condition.
Additionally, an increase in transportation rates or fuel surcharges could adversely affect our sales, profitability, and cash flows.
Expansion of our operations may strain resources, and our failure to manage growth effectively could adversely impact our operating results and harm our ability to
attract and retain key personnel.
Increased orders for our Modules have placed, and may continue to place, a strain on our operational, financial, and managerial resources and personnel. In
addition, execution of our growth strategy will require further substantial capital and effective planning. Significant rapid growth on top of our current operations could
greatly strain our internal resources, leading to a lower quality of customer service, reporting problems, and delays, resulting in a loss of market share and other problems
that could adversely affect our financial performance. Our efforts to grow could place an additional strain on our personnel, management systems, liquidity, and other
resources. If we do not manage our growth effectively, our operations could be adversely affected, resulting in slower, no or negative growth, critical shortages of cash and a
failure to achieve or sustain profitability.
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Our clients may adjust, cancel or suspend the contracts in our backlog; as such, our backlog is not necessarily indicative of our future revenues or earnings. In
addition, even if fully performed, our backlog is not a good indicator of our future gross margins.
Backlog represents the total dollar amount of revenues we expect to record in the future as a result of performing work under contracts we have been awarded.
Backlog may fluctuate significantly due to the timing of orders or awards for large projects and is not necessarily indicative of future backlog levels or the rate at which
backlog will be recognized as revenue. We include in backlog only those contracts for which we have reasonable assurance that the customer can obtain the permits for
construction and can fund the construction. As of December 31, 2020, our backlog totaled approximately $25.1 million and as of December 31, 2021, our backlog totaled
approximately $3.2 million. The decrease in backlog at December 31, 2021 from December 31, 2020 is primarily attributable to two contract cancellation, one which
occurred during the third quarter of 2021 in the amount of approximately $1.3 million and one cancellation during the fourth quarter of 2021 in the amount of
approximately $16.9 million. Our backlog is described more in detail in “Note 13 —Construction Backlog” of the notes to our consolidated financial statements included
elsewhere in this Annual Report. We cannot provide assurance that our backlog will be realized as revenues in the amounts reported or, if realized, will result in profits. In
accordance with industry practice, substantially all of our contracts are subject to cancellation, termination or suspension at our customer’s discretion. In the event of a
project cancellation, we generally would not have a contractual right to the total revenue reflected in our backlog. Projects can remain in backlog for extended periods of
time because of the nature of the project and the timing of the particular services required by the project. In addition, the risk of contracts in backlog being cancelled or
suspended generally increases during periods of widespread economic slowdowns or in response to changes in commodity prices.
The contracts in our backlog are subject to changes in the scope of services to be provided and adjustments to the costs relating to the contracts. The revenue for
certain contracts included in backlog is based on estimates. Additionally, our performance of our individual contracts can affect greatly our gross margins and, therefore, our
future profitability. We can provide no assurance that the contracts in backlog, assuming they produce revenues in the amounts currently estimated, will generate gross
margins at the rates we have realized in the past.
Our liability for estimated warranties may be inadequate, which could materially adversely affect our business, financial condition and results of operations.
We are subject to construction defect and warranty claims arising in the ordinary course of business. These claims are common in the construction industry and can
be costly. At this time, our third-party providers offer guarantees and warranties in accordance with industry standards that flow through to our clients. A large number of
warranty claims could have a material adverse effect on our results of operations.
We can be adversely affected by failures of persons who act on our behalf to comply with applicable regulations and guidelines.
Although we expect all of our associates (i.e., employees), officers and directors to comply at all times with all applicable laws, rules and regulations, there are
instances in which subcontractors or others through whom we do business may engage in practices that do not comply with applicable regulations or guidelines. It is
possible that our associates may become aware of these practices but do not take steps to prevent them. If we learn of practices relating to buildings constructed on our
behalf that do not comply with applicable regulations or guidelines, we will move actively to stop the non-complying practices as soon as possible, and we will take
disciplinary action with regard to our associates who were aware of the practices, including in some instances terminating their employment. However, regardless of the
steps we take, we may be subject to fines or other governmental penalties, and our reputation may be negatively affected.
The cyclical and seasonal nature of the construction industry causes our revenues and operating results to fluctuate, and we expect this cyclicality and seasonality to
continue in the future.
The construction industry is highly cyclical and seasonal and is influenced by many international, national and regional economic factors, including the availability
of consumer and wholesale financing, which may be severely reduced due to COVID-19 coronavirus, seasonality of demand, consumer confidence, interest rates, income
levels and general economic conditions, including inflation and recessions. As a result of the foregoing factors, the revenues and operating results we derive from customers
will fluctuate and we currently expect them to continue to fluctuate in the future. Moreover, we have experienced, and may continue to experience, operating losses during
cyclical downturns in the construction market. These and other economic factors could have a material adverse effect on demand for our products and our financial
condition and operating results.
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Our business depends on the construction industry and general business, financial market and economic conditions.
The construction industry is cyclical and significantly affected by changes in general and local economic and real estate conditions, such as employment levels,
consumer confidence, demographic trends, housing demand, inflation, deflation, interest rates and credit availability. Changes in these general and local economic
conditions or deterioration in the broader economy could negatively impact the level of purchases, capital expenditures and creditworthiness of our indirect customers and
suppliers, and, therefore, our royalty income and financial condition, results of operations and cash flows. Changes in these economic conditions may affect some of our
regions or markets more than others. If adverse conditions affect our larger markets, they could have a proportionately greater impact on us than on some other companies.
In addition, any uncertainty regarding global economic conditions such as raising gas prices may have an adverse effect on the results of operations and financial condition
of us or our customers, distributors and suppliers, such as negative effects of currency exchange fluctuations. A shortage of labor in the construction industry could also have
an impact on our financial results.
Our business relies on private investment and a slower than expected economy may adversely affect our results.
A significant portion of our sales are for projects with non-public owners, such as non-residential builders and home builders who make investments with private
funds into their projects. Construction spending is affected by their customers’ ability to finance projects, which may be severely reduced due to the COVID-19 coronavirus.
Residential and nonresidential construction could decline if companies and consumers are unable to finance construction projects or if the economy slows or is stalled, which
could result in delays or cancellations of capital projects. If the economy slows, or if housing starts and nonresidential projects do not increase, sales of our products directly
by us to consumers and related services may decline, and our financial position, results of operations and liquidity could be materially adversely affected.
A material disruption at one of our suppliers’ facilities or Echo's facilities could prevent us from meeting customer demand, reduce our sales and negatively affect our
overall financial results.
Any of the following events could cease or limit operations unexpectedly: fires, floods, earthquakes, hurricanes, on-site or off-site environmental incidents or other
catastrophes; global pandemic; utility and transportation infrastructure disruptions; labor difficulties; other operational problems; or war, acts of terrorism or other
unexpected events. Any downtime or damage at our suppliers’ facilities or Echo's facilities could prevent us from meeting customer demand for our products or require us
to make more expensive purchases from a competing supplier. If our suppliers were to incur significant downtime, our ability to satisfy customer requirements could be
impaired, resulting in customers seeking products from other distributors, as well as decreased customer satisfaction and lower sales and operating income.
Environmental, health and safety laws and regulations and any changes to, or liabilities arising under, such laws and regulations could have a material adverse effect
on our financial condition, results of operations and liquidity.
We are subject to a variety of federal, state and local laws and regulations relating to, among other things: the release or discharge of materials into the environment;
the management, use, generation, treatment, processing, handling, storage, transport or disposal of solid and hazardous wastes and materials; and the protection of public
and employee health and safety and the environment. These laws and regulations may expose us to liability for the conduct of others or for our actions, even if such actions
complied with all applicable laws at the time these actions were taken. These laws and regulations may also expose us to liability for claims of personal injury or property or
natural resource damage related to alleged exposure to, or releases of, regulated or hazardous materials. The existence of contamination at properties we own, lease or
operate could also result in increased operational costs or restrictions on our ability to use those properties as intended, including for purposes of construction materials
distribution. In addition, because our properties are generally situated adjacent to or near industrial companies, our properties may be at an increased risk of having
environmental contaminants from other properties spill or migrate onto or otherwise affect our properties.
Despite our compliance efforts, there is an inherent risk of liability in the operation of our business, especially from an environmental standpoint, and, from time to
time, we may be in noncompliance with environmental, health and safety laws and regulations. These potential liabilities or non-compliances could have an adverse effect
on our operations and profitability. In some instances, we must have government approvals, certificates, permits or licenses in order to conduct our business, which may
require us to make significant capital, operating and maintenance expenditures to comply with environmental, health and safety laws and regulations. Our failure to obtain
and maintain required approvals, certificates, permits or licenses or to comply with applicable governmental requirements could result in sanctions, including substantial
fines or possible revocation of our authority to conduct some or all of our operations. The cost of complying with such laws could have a material adverse effect on our
financial condition, results of operations and liquidity.
22
Our business may be subject to economic and political risks of operating and obtaining supplies from foreign countries, including adverse impact of changes in
international trade and tariff policies.
We operate in and source some of our products from outside of the United States, and our suppliers may also rely upon non-domestic products. As such, any
significant changes to, among other things, the general political and social conditions in foreign counties in which we maintain operations or sourcing relationships,
unfavorable changes in U.S. trade legislation and regulation, the recent outbreak of the COVID-19 coronavirus, the imposition of governmental economic sanctions on
countries in which we do business or other trade barriers, threats of war, terrorism or governmental instability, labor disruptions, currency controls, fluctuating exchange
rates with respect to contracts not denominated in U.S. dollars and unanticipated or unfavorable changes in government policies with respect to laws and regulations, anti-
inflation measures and method of taxation. If we are unable to navigate foreign regulatory environments, or if we are unable to enforce our contract rights in foreign
countries, our business could be adversely impacted. Any of these events could interrupt our business and cause operational disruptions, increase our costs of operations,
reduce our sales or otherwise have an adverse effect on our operating performance.
The U.S. government has indicated its intent to alter its approach to trade policy, including, in some instances, to revise, renegotiate or terminate certain
multilateral trade agreements. It has also imposed new tariffs on certain foreign goods and raised the possibility of imposing additional increases or new tariffs on other
goods. Such actions have, in some cases, led to retaliatory trade measures by certain foreign governments. Such policies could make it more difficult or costly for us to do
business in or procure products from those countries. In turn, we may need to raise prices or make changes to our operations, which could negatively impact our revenue or
operating results. At this time, it remains unclear what additional actions, if any, will be taken by the U.S. government or foreign governments with respect to tariff and
international trade agreements and policies, and we cannot predict future trade policy or the terms of any revised trade agreements or any impact on our business.
Our operating results will be subject to fluctuations and are inherently unpredictable.
In order to achieve profitability, we will need to generate and sustain higher revenue while maintaining reasonable cost and expense levels. In our most recent
quarter, we experienced a loss. We do not know if our revenue will grow, or if it will grow sufficiently to outpace our expenses, which we expect to increase as we expand
our operational capacity. We may not be able to become profitable on a quarterly or an annual basis. Our quarterly revenue and operating results will be difficult to predict
and have in the past fluctuated from quarter to quarter. The amount, timing and mix of project sales, often for a single medium or large-scale project, may cause large
fluctuations in our revenue and other financial results. Further, our revenue mix of high margin materials sales versus lower margin projects can fluctuate dramatically
quarter to quarter, which may adversely affect our revenue and financial results in any given period. Finally, our ability to meet project completion schedules for an
individual project and the corresponding revenue impact under the percentage-of-completion method of recognizing revenue, may similarly cause large fluctuations in our
revenue and other financial results. This may cause us to miss any future guidance announced by us.
We base our planned operating expenses in part on our expectations of future revenue, and a significant portion of our expenses are fixed in the short-term. If revenue for a
particular quarter is lower than we expect, we likely will be unable to proportionately reduce our operating expenses for that quarter, which would harm our operating results
for that quarter. This may cause us to miss any guidance announced by us.
Cybersecurity risks related to the technology used in our operations and other business processes, as well as security breaches of company, customer, employee and
vendor information, could adversely affect our business.
We rely on various information technology systems to capture, process, store and report data and interact with customers, vendors and employees. Despite careful
security and controls design, as the prevalence of cyber-attacks continues to increase, our information technology systems, and those of our third-party providers, could
become subject to increased security threats, such as phishing and malware incidents. Our security measures may be unable to prevent certain security breaches, and any
such network, system, data or other breaches could result in misappropriation of sensitive data, transactional errors, theft of funds, business disruptions, loss of or damage to
intellectual property, loss of customers and business opportunities, unauthorized access to or disclosure of confidential or personal information (which could cause a breach
of applicable data protection legislation), regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensatory costs and additional
compliance costs, any of which could have a material adverse effect on our reputation, business, financial condition, results of operations and cash flows.
23
Because the techniques used to obtain unauthorized access to, or disable, degrade or sabotage, information technologies systems change frequently, and may not be
recognized until after they have been launched against a target, we may be unable to anticipate these techniques, implement adequate preventative measures or remediate
any breach in a timely or effective manner. In addition, the development and maintenance of preventative or detective measures is costly, and requires ongoing monitoring
and updating as technologies change and efforts to circumvent security measures become more sophisticated. As well as incurring additional costs, sophisticated hardware
and operating system software and applications that we procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that
could unexpectedly interfere with the operation of the systems, or we may be unable to successfully integrate and launch new systems as planned without disruptions to our
operations. Misuse of internal applications, theft of intellectual property, trade secrets, funds or other corporate assets and inappropriate disclosure of confidential
information could stem from such incidents.
Despite our efforts, we remain potentially vulnerable to cyber-attacks and security breaches, and any such attack or breach could adversely affect our reputation,
business, financial condition or results of operations.
We could suffer adverse tax and other financial consequences if we are unable to utilize our net operating loss carryforwards.
At December 31, 2021, we had tax net operating loss carry forwards totaling approximately $26.1 million. The net operating loss expires
beginning 2030 through 2037 for those losses generated in 2017 and prior years. Approximately $14.8 million of such net operating losses will carry forward indefinitely
and be available to offset up to 80% of future taxable income each year. During 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was passed,
which temporarily removes such 80% limitation for years 2020 and 2019. At December 31, 2021, we had a valuation allowance of approximately $7.4 million, primarily
related to net operating loss carry forwards that are not more likely than not to be utilized due to an inability to carry back these losses in most states and short carry
forward periods that exist in certain states. If we are unable to use our net operating losses, we may be required to record charges or reduce our deferred tax assets, which
could have an adverse effect on our results of operations.
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Risks Relating to the Construction Sector
We are dependent upon third-party financing, and our financial condition and results of operations could be negatively affected if additional third-party financing for
our customers does not become available
Our business and earnings depend substantially on our ability to obtain financing for the development of their construction projects, which may be adversely
impacted by the recent COVID-19 coronavirus outbreak. The availability and cost of such financing is further dependent on the number of financial institutions
participating in the industry, the departure of financial institutions from the industry, the financial institutions’ lending practices, the strength of the domestic and
international credit markets generally, governmental policies and other conditions, all of which are beyond our control. In light of the current economic climate, some of our
projects may not be successful in obtaining additional funds in a timely manner, on favorable terms or at all. The availability of borrowed funds, especially for construction
financing, has been greatly reduced, and lenders may require project developers to invest increased amounts of equity in a project in connection with both new loans and the
extension of existing loans. Unfavorable changes in the availability and terms of financing in the industry will have a material adverse effect on certain privately financed
projects.
Our results of operations also depend on the ability of any potential privately financed licensees to obtain loans for the purchase of new buildings. Over the past few
years, lenders have tightened the credit underwriting standards, which have reduced lending volumes. If this trend continues, it would negatively impact our sales, which
depend in large part on the availability and cost of financing. In addition, where our potential customers must sell their existing buildings or real estate in order to develop
new buildings, increases in mortgage costs and/or lack of availability of mortgages could prevent buyers of potential customers’ existing buildings from obtaining the
mortgages they need to complete their purchases, which would result in our potential customers’ inability to make purchases from us. If our potential customers cannot
obtain suitable financing, our sales and results of operations would be adversely affected.
The construction industry is highly competitive, and such competition may increase the adverse effects of industry conditions, including the consolidation of the
industry.
We operate in a very competitive environment characterized by competition from numerous local, regional and national builders. We may compete for financing,
raw materials and skilled management and labor resources. A decline in construction starts could adversely affect demand for our buildings and our results of operations.
Increased competition could require us to further increase our selling incentives and/or reduce our prices, which could negatively affect our profits. We may be unable to
successfully expand into or compete in the markets in new geographic areas. In addition, while we believe our ESR may improve our competitive position by potentially
expediting reviews and approvals by state and local building departments and certifying our specific quality control and design acceptance criteria, there is no assurance that
it will have the desired impact.
There can be no assurance that Modules or modular construction techniques that utilize our technology and expertise will achieve market acceptance and grow; thus,
the future of our business and the modular construction industry as a whole is uncertain.
There can be no assurance that we will achieve market acceptance for our technology and expertise or that the modular construction market will grow. Our business
may be disrupted by the introduction of new products and services and is subject to changing consumer preferences and industry trends, which may adversely affect our
ability to plan for the future development and marketing of our products. Although Modules have particular applications in a wide variety of market segments, there is no
assurance that we will be able to expand our relationship within such market segments or, even if we do, that general market acceptance for our technology and expertise or
Modules will continue to increase.
25
Government regulations and legal challenges may delay the start or completion of our projects, increase our expenses or limit our building activities, which could have
a negative impact on our operations.
Various domestic and international rules and regulations concerning building, zoning, sales and similar matters apply to and/or affect the construction
industry. Governmental regulation affects construction activities, as well as sales activities, mortgage lending activities and other dealings with consumers. These industries
also have experienced an increase in state and local legislation in the United States and regulations that limit the availability or use of land. Municipalities may also restrict
or place moratoriums on the availability of utilities, such as water and sewer taps. In some areas, municipalities may enact growth control initiatives, which restrict the
number of building permits available in a given year. In addition, we may be required to apply for additional approvals or modify our existing approvals because of changes
in local circumstances or applicable law. If governments in locations in which we operate take actions like the ones described, they could adversely affect our business by
causing delays, increasing our costs or limiting our ability to operate in those areas. Further, we may experience delays and increased expenses as a result of legal challenges
to our proposed projects, whether brought by governmental authorities or private parties. Failure to comply with laws or regulations applicable to or affecting us, or the
passage in the future of new and more stringent laws affecting us, may adversely affect our financial condition or results of operations.
The dangers inherent in our operations, such as disruptions to our facilities and project sites, and the limits on insurance coverage could expose us to potentially
significant liability costs and materially interfere with the performance of our operations.
While we believe our insurance coverage is adequate and in line with our industry’s standards, all construction, including modular construction, involves operating
hazards that can cause personal injury or loss of life, severe damage to and destruction of property and equipment and suspension of operations, including, but not limited to,
natural or man-made disruptions to our facilities and project sites. The failure of such structures during and after installation can result in similar injuries and damages.
Although we believe that our insurance coverage is adequate, there can be no assurance that we will be able to maintain adequate insurance in the future at rates we consider
reasonable, or that our insurance coverage will be adequate to cover future claims that may arise. Claims for which we are not fully insured may adversely affect our
working capital and profitability. In addition, changes in the insurance industry have generally led to higher insurance costs and decreased availability of coverage. The
availability of insurance that covers risks we and our competitors typically insure against may decrease, and the insurance that we are able to obtain may have higher
deductibles, higher premiums and more restrictive policy terms.
Risks Relating to the Clarity Mobile Venture Sector
There can be no assurance that the velocity of COVID-19 tests being conducted by Clarity Mobile Venture will continue at current rates or be effective for new variants
of the COVID-19 virus.
There can be no assurance that the demand for Clarity Mobile Venture’s COVID-19 testing and related laboratory services will continue to grow at the current pace. While
we expect that the coronavirus will be a part of our lives for the foreseeable future, viruses constantly change through mutation, and new variants of the COVID-19 virus are
expected to occur over time. Our business may be disrupted by the emergence and spread of new variants of the COVID-19 virus that may require different types of tests
that may or may not be readily available to us at the time. Currently, we are deploying several COVID-19 tests including PCR and Rapid-Antigen tests. No assurance can
be given that the COVID-19 tests currently deployed by us will be effective for any future variants.
26
We may be adversely affected by actions of our competitors.
The market for COVID-19 testing facilities is highly competitive. Many of our competitors have substantially greater financial, technical and other resources than we have.
Our ability to compete effectively depends in part on market acceptance of our testing solutions and our ability to service customers in a timely manner. There can be no
assurance that we will be able to compete effectively or that we will respond appropriately to industry trends or to activities of competitors.
We rely on third-party vendors to supply us with the COVID-19 tests that Clarity Mobile Venture uses that, if we were unable to obtain, could adversely affect our
business.
Clarity Mobile Venture relies on third-party vendors to supply it with COVID-19 tests. Any inability to obtain COVID-19 tests in the volumes required and at competitive
prices from our vendors, the loss of any major vendor may seriously harm our business because we may not be able to meet the demands of our customers on a timely basis
in sufficient quantities or at all.
Risks Relating to our Common Stock
Our failure to meet the continued listing requirements of the Nasdaq Capital Market could result in a delisting of our common stock.
Our common stock is listed on the Nasdaq Capital Market (“Nasdaq” or the “Nasdaq Capital Market”), which imposes, among other requirements, a minimum bid
requirement. Although we are currently in compliance with the continued listing requirements of the Nasdaq Capital Market in the past we have experiences periods of time
when we were not compliant with the minimum bid price requirements and, there can be no assurance that we will be able to maintain compliance in the future.
The delisting of our common stock from Nasdaq may make it more difficult for us to raise capital on favorable terms in the future, or at all. Such a delisting would
likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. Further, if our
common stock were to be delisted from Nasdaq, our common stock would cease to be recognized as a covered security, and we would be subject to additional regulation in
each state in which we offer our securities. Moreover, there is no assurance that any actions that we take to restore our compliance with the Nasdaq minimum bid
requirement would stabilize the market price or improve the liquidity of our common stock, prevent our common stock from falling below the Nasdaq minimum bid price
required for continued listing again or prevent future non-compliance with Nasdaq’s listing requirements.
There can be no assurance that we will continue to meet the minimum bid price requirement, or any other requirement in the future. If we fail to meet the minimum
bid price requirement, or other applicable Nasdaq listing requirements, including maintaining minimum levels of stockholders’ equity or market values of our common
stock, our common stock could be delisted. Delisting from Nasdaq would cause us to pursue eligibility for trading of our common stock on other markets or exchanges, or
on an over-the-counter market. In such case, our stockholders’ ability to trade or obtain quotations of the market value of our common stock would be severely limited
because of lower trading volumes and transaction delays. These factors could contribute to lower prices and larger spreads in the bid and ask prices of these securities. There
can be no assurance that our common stock, if delisted from the Nasdaq, would be listed on a national securities exchange, a national quotation service or the over-the-
counter markets. Delisting from the Nasdaq could also result in negative publicity, make it more difficult for us to raise additional capital, adversely affect the market
liquidity of our common stock, decrease securities analysts’ coverage of us or diminish investor, supplier and employee confidence. In addition, our stock could become a
“penny stock,” which would make trading of our common stock more difficult.
27
Our stock price has been subject to fluctuations in the past, has recently been volatile, and will likely continue to be subject to fluctuations and decline, due to factors
beyond our control, and investors in our common stock may lose all or part of their investment in our company.
The trading price of our common stock has been and is expected to continue to be volatile and has been and may continue to be subject to wide fluctuations in
response to various factors, some of which are beyond our control, including limited trading volume. On March 15, 2022, the reported low sale price of our common stock
was $1.60, the reported high sale price was $1.71 and closing price of our common stock was $1.64 while on June 30, 2021, the closing price of our common stock was
$5.50. We may incur rapid and substantial decreases in our stock price in the foreseeable future that are unrelated to our operating performance for prospects. In addition to
the factors discussed in this “Risk Factors” section and elsewhere in this Annual Report, these factors include:
● economic and market conditions or trends in our industry or the economy as a whole and, in particular, in the construction industry;
● additions or departures of key personnel;
● operating results that fall below expectations;
● industry developments;
● new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
● material litigation or government disputes;
● the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC;
● changes in financial estimates or recommendations by any securities analysts who follow our common stock;
● the size of our market float and potential dilution due to the exercise of outstanding options and warrants;
● future sales of our common stock by our officers, directors and significant stockholders, including sales pursuant to a registration statement filed to permit a
significant stockholder to sell shares of our common stock, pursuant to certain registration rights granted to such stockholder;
● other events or factors, including those resulting from such events, or the prospect of such events, including war, terrorism and other international conflicts, public
health issues including health epidemics or pandemics, such as the recent outbreak of the COVID-19 novel coronavirus, and natural disasters such as fire, hurricanes,
earthquakes, tornados or other adverse weather and climate conditions, whether occurring in the United States or elsewhere, could disrupt our operations, disrupt the
operations of our suppliers or result in political or economic instability; and
● period-to-period fluctuations in our financial results.
In addition, the securities markets have, from time to time, experienced significant price and volume fluctuations that are unrelated to the operating performance of
particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock. Since the stock price of our common stock
has fluctuated in the past, has recently been volatile and will likely be volatile in the future, investors in our common stock may lose all or part of their investment in our
company. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities
litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.
28
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board
members.
We are subject to the reporting and corporate governance requirements of the Exchange Act, the listing requirements of the Nasdaq Capital Market and other
applicable securities rules and regulations, including the Sarbanes-Oxley Act and the Dodd-Frank Act. Compliance with these rules and regulations will increase our legal
and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. Among other things, the
Exchange Act requires that we file annual, quarterly and current reports with respect to our business and results of operations and maintain effective disclosure controls and
procedures and internal control over financial reporting. In order to continue to maintain our disclosure controls and procedures and internal control over financial reporting
to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns,
which could harm our business, financial condition, results of operations and prospects. We also may need to further expand our legal and finance departments in the future,
which will increase our costs and expenses.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing
legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many
cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies.
This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We
intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expense and a
diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards
differ from the activities intended by regulatory or governing bodies, regulatory authorities may initiate legal proceedings against us and our business and prospects may be
harmed. As a result of disclosure of information in the filings required of a public company, our business and financial condition are more visible, which may result in
threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business, financial condition, results of operations and
prospects could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them,
could divert the resources of our management and harm our business, financial condition, results of operations and prospects.
Sales of a substantial number of shares of our common stock in the public market, or the perception that they might occur, could cause the price of our common stock
to decline.
The price of our common stock could decline if there are substantial sales of our common stock, particularly sales by our directors, executive officers and
significant stockholders. If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could
occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business.
In addition, shares subject to outstanding options under our Incentive Plan are and will become eligible for sale in the public market in the future, subject to certain
legal and contractual limitations. Substantial sales of such shares, at that time, could depress the sale price of our common stock.
Significant sales of our common stock, or the possibility that these sales may occur, might make it more difficult for us to sell equity securities in the future at a
time and at a price that we deem appropriate. In addition, we may issue shares of our common stock in connection with investments or acquisitions in the future. The amount
of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of common stock.
The issuance of shares of our common stock upon the exercise of outstanding options, warrants and restricted stock units may dilute the percentage ownership of the
then-existing stockholders and may make it more difficult to raise additional equity capital.
As of April 11, 2022, there are outstanding options and warrants to purchase 36,436 and 2,025,520 shares of common stock, respectively, in addition to 2,220,514 vested
and unvested restricted stock units. The exercise of such options and warrants and the vesting of restricted stock units would dilute the then-existing stockholders’
percentage ownership of our stock, and any sales in the public market of common stock underlying such securities could adversely affect prevailing market prices for the
common stock. Moreover, the terms upon which we would be able to obtain additional equity capital could be adversely affected because the holders of our options and
warrants can be expected to exercise them at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable to us than those provided
by such securities.
29
The issuance of additional securities by our Board of Directors (the “Board” or “Board of Directors”) will dilute the ownership interests of our current stockholders
and could discourage the acquisition of us.
Our Board, without any action by our stockholders, is authorized to designate and issue additional classes or series of capital stock (including classes or series of
preferred stock) as it deems appropriate and to establish the rights, preferences and privileges of such classes or series, and we currently have an effective universal shelf
registration statement on file with the SEC, providing for the potential issuance of shares of our common stock and other securities. The issuance of any new class or series
of capital stock would not only dilute the ownership interest of our current stockholders but may also adversely affect the voting power and other rights of holders of
common stock. The rights of holders of preferred stock and other classes of common stock that may be issued may be superior to the rights of the holders of the existing
class of common stock in terms of the payment of ordinary and liquidating dividends and voting rights.
In addition, the ability of the Board to designate and issue such shares could impede or deter an unsolicited tender offer or takeover proposal regarding us and the
issuance of additional shares having preferential rights could adversely affect the voting power and other rights of holders of common stock and render more difficult the
removal of current management, even if such removal may be in the stockholders’ best interests.
We do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock.
For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash
dividends on our common stock. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend upon results of
operations, financial condition, restrictions imposed by applicable law and other factors our Board of Directors deem relevant. Accordingly, if you purchase shares of our
common stock, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash
dividends in the foreseeable future should not purchase our common stock.
If securities or industry analysts do not publish research or reports about our business or our industry, or publish negative reports about our business or our industry,
our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that securities or industry analysts publish about us, our business, our
industry or our competitors. If one or more of the analysts who cover us change their recommendation regarding our stock adversely, change their opinion of the prospects
for our company in a negative manner or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If one or more of
these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or
trading volume to decline.
Certain provisions of Delaware law could discourage, delay or prevent a merger or acquisition at a premium price.
Certain provisions of Delaware law could discourage potential acquisition proposals, delay or prevent a change in control of our company, or limit the price that
investors may be willing to pay in the future for shares of our common stock. Because we are incorporated in Delaware, we are governed by the provisions of Section 203 of
the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a
period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is
approved in a prescribed manner. Such provisions may discourage, delay or prevent a merger or acquisition of the Company, including a transaction in which the acquirer
may offer a premium price for our stock.
If our shares become subject to the penny stock rules, it would become more difficult to trade our shares.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a
price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided
that current price and volume information with respect to transactions in such securities is provided by the exchange or system. If we do not retain a listing on
the Nasdaq Capital Market and if the price of our shares of common stock is less than $5.00, our common stock will be deemed a penny stock (meaning that our shares
may be considered highly speculative and may trade infrequently, which can make them difficult to accurately price or sell). The penny stock rules require a broker-dealer,
before a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In
addition, the penny stock rules require that, before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special
written determination that the penny stock is a suitable investment for the purchaser and receive: (i) the purchaser’s written acknowledgment of the receipt of a risk
disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure
requirements may have the effect of reducing the trading activity in the secondary market for our common stock, and therefore stockholders may have difficulty selling their
shares.
30
As a “smaller reporting company,” we may avail ourselves of reduced disclosure requirements, which may make our common stock less attractive to investors.
We are a “smaller reporting company” under applicable SEC rules and regulations, and, as a result of the SEC’s recent amendment to the definition of “smaller
reporting company,” we will continue to be a “smaller reporting company” for so long as either (i) the market value of our common stock held by non-affiliates as of the end
of our most recently completed second quarter (“public float”) is less than $250 million or (ii) annual revenues of less than $100 million during the most recently completed
fiscal year and (A) no public float or (B) a public float of less than $700 million. As a “smaller reporting company,” we have relied on exemptions from certain SEC
disclosure requirements that are applicable to other public companies. These exemptions include reduced financial disclosure and reduced disclosure obligations regarding
executive compensation. Until such time as we cease to be a “smaller reporting company,” such reduced disclosure in our SEC filings may make it harder for investors to
analyze our operating results and financial prospects. If some investors find our common stock less attractive as a result of our reduced disclosure, there may be a less
active trading market for our common stock and our stock price may be more volatile.
Our shares of common stock are from time to time thinly traded, so stockholders may be unable to sell at or near ask prices or at all if they need to sell shares to raise
money or otherwise desire to liquidate their shares.
Our common stock has from time to time been “thinly-traded,” meaning that the number of persons interested in purchasing our common stock at or near ask
prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company that is
relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if
we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the
purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our
shares is minimal or non-existent, as compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support continuous sales without
an adverse effect on share price. We cannot give stockholders any assurance that a broader or more active public trading market for our common stock will develop or be
sustained, or that current trading levels will be sustained.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Headquarters and Other Office Space
We lease office space in Jacksonville, Florida for our corporate headquarters. We also lease office space in Bedford, Texas of approximately 1,738 square feet to
support Echo's procurement and accounting functions.
Development Site
We own approximately 58 acres of raw land on the Colorado River on Lake Travis in Lago Vista, Texas, outside of the greater Austin area.
Laboratory Facility
Clarity Mobile Venture operates a laboratory at LAX airport consisting of approximately 480 square feet and is part of our medical segment.
Manufacturing Facilities
Echo operates and leases one manufacturing facility of approximately 61,000 square feet. Echo is renovating a second manufacturing facility which totals
approximately 58,000 square feet of manufacturing space. Both spaces are located in Durant, Oklahoma and the second manufacturing facility will be leased space
commencing in 2022.
ITEM 3. LEGAL PROCEEDINGS.
The information included in “Note 20 – Commitments and Contingencies” of the Company’s consolidated financial statements included elsewhere in this Annual
Report is incorporated by reference into this Item.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
31
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
PART II
Market Information
Our common stock is listed and traded on the Nasdaq Capital Market under the symbol “SGBX.”
Holders
As of the close of business on April 11, 2022, there were approximately 81 holders of record of our common stock, which does not reflect those shares held
beneficially or those shares held in “street” name. Accordingly, the number of beneficial owners of our common stock exceeds this number. On April 11, 2022, the closing
sales price of our common stock as reported on the Nasdaq Capital Market was $2.25.
Dividend Policy
We have never paid any cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends by
us will depend on our future earnings, financial condition and such other business and economic factors as our management may consider relevant.
Recent Sales of Unregistered Securities
We did not sell any unregistered securities from January 1, 2021 through December 31, 2021 that were not previously disclosed in our filings with the SEC.
Issuer Purchases of Equity Securities
We did not repurchase any of our outstanding shares during 2021.
Performance Graph and Purchases of Equity Securities
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this
item.
32
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock Transfer and Trust Company, LLC. The transfer agent’s principal business address is
6201 15th Avenue, Brooklyn, New York 11219, and its telephone number is (800) 937-5449.
Equity Compensation Plan Information
As of December 31, 2021, the following securities issued under equity compensation were outstanding:
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of
Shares Issuable
Upon Exercise of
Outstanding
Options,
Warrants or
Rights
(a) (1)
Weighted-
Average Exercise
Price of
Outstanding
Options
(b)
Number of
Shares
Remaining
Available for
Issuance Under
Equity
Compensation
Plans (Excluding
Shares Reflected
in Column
(a))(c) (2)
$
$
2,256,950 $
—
2,256,950
$
78.71 $
—
78.71
$
1,343,377
—
1,343,377
(1)
Includes 36,436 shares issuable upon the exercise of options and 2,220,514 shares issuable upon the vesting of restricted stock units outstanding under the SG Blocks,
Inc. Stock Incentive Plan.
(2) Represents shares available for issuance under the SG Blocks, Inc. Stock Incentive Plan.
ITEM 6. [RESERVED]
33
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Introduction and Certain Cautionary Statements
The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with our consolidated financial
statements and related notes and schedules included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited
to, intensified competition and operating problems in our operating business projects and their impact on revenues and profit margins or additional factors, and those
discussed in the section entitled “Risk Factors” in Part I, Item 1A of this Annual Report. In addition, certain information presented below is based on unaudited financial
information.
Background
Using our proprietary technology and design and engineering expertise, we modify code-engineered cargo shipping containers and purpose-built modules for use
for safe and sustainable commercial, industrial and residential building construction. Rather than consuming new steel and lumber, our proprietary technology and design
and engineering expertise allows for the redesign, repurpose and conversion of heavy-gauge steel cargo shipping containers into SGBlocks™, which are safe green building
blocks for commercial, industrial, and residential building construction.
Prior to October 2019, our business model was solely a project-based construction model pursuant to which we were responsible for the design and construction of
finished products that incorporated our technology primarily to customers in the multi-family housing, restaurant, military and education industries throughout the United
States. In October 2019, we changed our business model for our residential building construction to a royalty fee model when we entered into a five year exclusive license
with CPF pursuant to which CPF licensed on an exclusive basis our proprietary technology, intellectual property, any improvements thereto, and any related permits, with
the right to develop and commercialize products in the United States and its territories within the field of design and project management platforms for residential use,
including, without limitation, single-family residences and multi-family residences, but specifically excluding military housing. On June 15, 2021, we terminated the
exclusive license with CPF by mutual agreement and changed our business model back to a project-based construction model.
34
In March 2020, we began increasing our focus on providing our Modules as health care facilities for deployable medical response solutions. In May, we entered
into a partnership with Grimshaw Design for the deployment of our D-Tec suite of prefabricated health facilities for on-site immediate COVID-19 testing. In September we
entered the U.S. test lab market by forming a joint venture with Clarity Labs, a manufacturer and market leader of rapid diagnostic tests, to launch CLIA-certified
laboratories. Our joint venture with Clarity has allowed us to not only supply our prefabricated health facilities but also allows us to provide testing services at such
facilities. We have supplied our building modular coronavirus testing centers and provide testing services for Los Angeles International Airport (LAX), Memorial Hospital
in Wayne County, Michigan and have been selected as a Trusted Testing Partner (TTP) for Hawaii’s COVID-19 travel testing program.
In September 2020, we acquired substantially all the assets of Echo DCL, LLC ("Echo"), 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 our key supply chain partners. This acquisition has allowed us to expand our reach for our Modules and offers us an opportunity to
vertically integrate a large portion of our cost of goods sold, as well as increase margins, productivity and efficiency in the areas of design, estimating, manufacturing and
delivery.
In November 2020, Clarity Mobile Venture, our joint venture partnership, entered into a contract with the City of Los Angeles for the operations of a COVID-19
PCR test laboratory at Los Angeles International Airport ("LAWA") to provide a full-service modular laboratory and testing facility onsite at the airport. The facility is
located across from LAWA Terminal 6 and opened in December 2020. The facility administers PCR tests with results available within three hours for passengers and airline
crew, and no later than 24 hours for LAWA airport employees. Additionally, other rapid coronavirus tests including antigen tests have been provided. Clarity Mobile
Venture will be the primary operator of the facility.
In November 2020, we and Memorial Hospital (“Memorial”) in Wayne County, Michigan entered into a Professional Services and Capital Support Contract
(“PSCSC”) with Wayne County, Michigan which engaged the Company as a sub-contractor to render services and support to support Memorial, as the primary contractor,
in connection with the fulfillment of statements of work submitted from Wayne County to Memorial to construct portable on-site laboratory facilities for COVID-19
testing. The program deploy the D-Tec Product Series designed by Grimshaw Architects and developed by SG Blocks. Two D-Tec 1 Collection Units were deployed
throughout Wayne County and provided COVID-19 test samples to the CLIA lab for clinical testing services. The COVID-19 testing program with Memorial ceased
operations in November 2021.
Our operations are currently conducted out of two segments (i) construction services (and engineering services) and (ii) medical revenue. During the year ended
December 31, 2021, a significant portion of our revenue, approximately 82% of our revenue, was derived from our medical revenue segment, while approximately 18% of
our revenue was derived from construction services.
35
Table of Contents
Results of Operations
Our operations for the years ended December 31, 2021 and 2020 may not be indicative of our future operations.
Years Ended December 31, 2021 and 2020:
Total Revenue
Construction services (includes engineering)
Medical revenue
Consolidated
Year over year % growth:
Construction services
Medical revenue
Consolidated
Net revenue % mix:
Construction services
Medical revenue
Consolidated
Operating Income (Loss)
Construction services
Medical
Development
Corporate and Support
Consolidated
Other Income (Expenses)
Add: Net profit attributable to common stockholders of SG Blocks, Inc.
Net loss attributable to common stockholders of SG Blocks, Inc.
36
For the Year Ended
December 31, 2021
For the Year Ended
December 31, 2020
$
$
6,793,690
31,548,012
38,341,702
4,514,123
4,241,500
8,755,623
50% %
644% %
338 %
18 %
82 %
100 %
(7,041,313 )
8,405,332
(203,078 )
(7,143,791 )
(5,982,850 )
74,478
4,924,302
—
—
—
52 %
48 %
100 %
161,212
996,956
—
(5,741,001 )
(4,582,832 )
74,670
184,567
(10,832,674 )
(4,692,729 )
Revenue
During the year ended December 31, 2021, we derived revenue substantially all of our revenue from the following two segments: construction services and medical
revenue. Total revenue for the year ended December 31, 2021 was $38,341,702 compared to $8,755,623 for the year ended December 31, 2020. Revenue increased 338% in
2021, compared to the prior year.
Medical revenue increased 644% in 2021 compared to the prior year. The revenue growth primarily reflects a full year of COVID-19 testing revenue in 2021 versus
2020 which represents testing revenue for the fourth quarter of 2020. The overall volume of testing samples collected at LAX airport increased significantly from 2020 due
to us being on-site at LAX airport for the entire year of 2021. The majority of the medical revenue came from operations of our Clarity Mobile joint venture.
Construction services revenue increased 50% in 2021 compared to the prior year. The revenue growth primarily is due to the acquisition of Echo DCL, LLC in
September 2020. The revenue growth reflects increased modular revenue from SG Echo's manufacturing facility. We manufactured several smaller prototype modules in
2021 in order to gain larger unit orders from our existing customer base.
Operating Income (Loss)
Operating Loss was $5,982,850 for the year ended December 31, 2021, compared to $4,582,832 for the year ended December 31, 2020, representing an increase of
$1,400,018 or 31%. in 2021 compared to the prior year.
Construction services operating loss in 2021 was $7,041,313 as compared to the prior year's operating income of $161,213, primarily due to higher procurement
and manufacturing costs of modifying containers and wood modular units. The costs of materials such as lumber, plumbing, roofing, and other supplies to modify and build
these units were increased due in part to COVID-19 supply chain issues. We purchased Echo in 2020 and assumed their current projects that had lower gross margins due to
the increase in materials prices. In addition, we incurred higher than expected material and labor costs on several prototype modules projects in 2021 in order to win future
revenue orders. We do not anticipate the same number of prototype projects in 2022. We expect construction operating loss to continue to be negatively impacted through at
least Q1 2022 by COVID-19 related costs and we have completed in 2021 all but one of the assumed contracts from the purchase of Echo.
Medical revenue operating income in 2021 was $8,405,332, as compared to the prior year's operating income of $996,956, primarily due to increased testing
samples being collected at our COVID-19 laboratory at LAX airport and the selection of higher priced COVID-19 tests available for our customers seeking a rapid COVID-
19 test result, partially offset by increased labor costs and lower than anticipated testing volume with our COVID-19 testing program with Memorial Healthcare and Wayne
County, Michigan. We have ceased operations with Memorial Healthcare in Q4 2021.
Development operating loss in 2021 is related to operating expenses incurred for certain development projects that were started in 2021 and currently being
developed for future use. No revenue has been generated by development in 2021 to offset these operating expenses.
Corporate and support operating loss increased in 2021, as compared to the prior year, and such increase is primarily due to increases overhead costs in public
expenses related to SEC compliance and legal costs, increase payroll due to additional head count and stock compensation in order to retain key employees, increases in IT
support and increase in insurance expenses to support the various operations of the Company.
37
Other Income (Expense)
Interest income for the year ended December 31, 2021 was $57,266 mainly derived from bank interest and interest associated with an outstanding note receivable.
There was $61,675 of interest income for the December 31, 2020. Other income for the year ended December 31, 2021 and 2020 was $62,602 and $23,282, respectively.
Interest expense for the year ended December 31, 2021 and 2020 was $1,254 and $9,275, respectively. The interest expense for 2020 was mainly related to the Securities
Purchase Agreement entered into on February 4, 2020 with an accredited investor. Loss on asset disposal for the year ended December 31, 2021 and 2020 was $44,081 and
$1,012, respectively.
Income Tax Provision
A 100% valuation allowance was provided against the deferred tax asset consisting of available net operating loss carryforwards and, accordingly, no income tax
benefit was provided.
Impact of Inflation
The impact of inflation upon our revenue and income (loss) from continuing operations during each of the past two fiscal years has not been material to its
financial position or results of operations for those years because we do not maintain any inventories whose costs are affected by inflation.
Impact of Coronavirus (COVID-19)
With the continuing global spread of the novel coronavirus ("COVID-19") pandemic during 2021, we have implemented business continuity plans designed to
address and mitigate the impact of the COVID-19 pandemic on its employees and business. The worldwide spread of variants of the COVID-19 virus is expected to result in
a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods and services, including from our customers, while also resulting in
delays in projects due to labor shortages and supplier disruptions for an unknown period of time until the disease is contained. To date, we have experienced some delays in
projects due to COVID-19, in particular supply chain issues, which we expect to continue and to continue to have an impact on our revenue and our results of operations,
the size and duration of which we are currently unable to predict. Any quarantines, the timing and length of containment and eradication solutions, travel restrictions,
absenteeism by infected workers, labor shortages or other disruptions to the suppliers and contract manufacturers or customers would likely adversely impact our sales, and
operating results and result in further project delays. In addition, the continued pandemic could result in an economic downturn that could affect the ability of our customers
and licensees to obtain financing and therefore impact demand for our products. Order lead times could be extended or delayed and increases we have experienced in pricing
could continue to increase. Some products or services may become unavailable if the regional or global spread were significant enough to prevent alternative sourcing.
Accordingly, we are considering alternative product sourcing in the event that product supply becomes problematic. We expect this global pandemic to have an impact on
the Company's revenue and results of operations, the size and duration of which we are currently unable to predict. In addition, to the extent the ongoing COVID-19
pandemic adversely affects our business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties which we face.
38
Liquidity and Capital Resources
As of December 31, 2021 and December 31, 2020, we had an aggregate of $13,024,381 and $13,010,356, respectively, of cash and cash equivalents and short-term
investments. To date, we have financed our operations from revenue generated from operations and sales of our equity and to a lesser extent debt financing.
On February 4, 2020, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an accredited investor, pursuant to which we issued to the
investor a secured note in the aggregate principal amount of $200,000 (the “Note”). The Note is one of a series of up to $400,000 of notes that may be issued by us, bears
interest at a rate of nine percent (9%) per annum, is due on July 31, 2023, and is secured under a Pledge Agreement, dated February 4, 2020, entered into with the investor
(the “Pledge Agreement”) by a security interest in the royalty payable to us under that certain Exclusive License Agreement, dated October 3, 2019, with CPF GP 2019-1
LLC. We have the right to prepay the Note, in whole or in part, at any time and from time to time, without premium or penalty.
In April 2020, we completed a public offering where we pursuant to which we issued 440,000 shares of common stock at a public offering price of $4.25 per share
which resulted in net proceeds of approximately $1,522,339 after deducting underwriting discounts and commissions and other expenses related to the offering. We incurred
a total of approximately $347,661 in issuance costs in connection with the offering and issued no warrants to purchase shares of common stock to the underwriter.
In May 2020, we sold 6,000,000 shares of our common stock at a public offering price of $2.50 per share and on May 15, 2020, pursuant to the terms of the
Underwriting Agreement dated May 6, 2020 by and among us and ThinkEquity, a division of Fordham Financial Management, Inc., as representatives of several
underwriters named therein ("ThinkEquity"), ThinkEquity was granted an over-allotment option to purchase up to an additional 900,000 shares of our common stock, in
connection with the previously announced public offering. On May 15, 2020, ThinkEquity exercised in full such option with respect to all 900,000 shares of our common
stock. After giving effect to the full exercise of the over-allotment option, the total number of shares of common stock sold by us in the public offering was 6,900,000 shares
of common stock and total net proceeds to us, after deducting underwriting discounts and commissions and other offering expenses payable by us, were approximately
$15,596,141. We incurred a total of approximately $1,653,859 in issuance costs in connection with the offering and issued warrants to purchase 300,000 shares of common
stock to the underwriter.
In October 2021, we completed a registered direct offering and concurrent private offering pursuant to which we sold an aggregate of 975,000 shares of common
stock and pre-funded warrants to purchase up to 2,189,384 shares of Common Stock and warrants to purchase 1,898,630 shares of Common Stock which resulted in net
proceeds of approximately $10,488,000 after deducting underwriting commission and other expenses related to the offering.
39
At December 31, 2021 and December 31, 2020, we had a cash balance and short-term investments of $13,024,381 and $13,010,356. As of December 31, 2021,
our stockholders’ equity was 20,352,054 compared to $18,253,256 as of December 31, 2020. Our net loss for the years ended December 31, 2021 and 2020 was $5,908,372
and $4,508,162, respectively. This increase was primarily due to an increase in gross profit of approximately $108,000 offset by an increase in operating expenses of
approximately $1,508,000 in 2021. Net cash used in operating activities was $662,759 and $2,887,950 for the years ended December 31, 2021 and 2020, respectively.
The increase resulted mainly from an increase of approximately $2,678,356 in working capital, an increase of approximately $386,000 in non-cash stock compensation
expense, an increase of approximately $348,000 in depreciation, an increase in loss on asset disposal of approximately $43,000, an increase in bad debt expense of
approximately $157,000 offset by an increase in the overall net loss of approximately $1,400,000 in the year ended December 31, 2021 compared to year ended December
31, 2020. We anticipate our cash balance is sufficient to last at least twelve months from April 15, 2022.
We may need to generate additional revenues or secure additional financing sources, such as debt or equity capital, to fund future growth, which financing may not
be available on favorable terms or at all. We do not have any additional sources secured for future funding, and if we are unable to raise the necessary capital at the times we
require such funding, we may need to materially change our business plan, including delaying implementation of aspects of such business plan or curtailing or abandoning
such business plan altogether.
Cash Flow Summary
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents
For The Year Ended
December 31,
2021
2020
$
$
(662,759 ) $
(9,471,257 )
10,148,041
14,025 $
(2,887,950 )
(3,045,723 )
17,318,358
11,384,685
40
Table of Contents
Operating activities used net cash of $662,759 during the Year ended December 31, 2021, and $2,887,950 during the Year ended December 30, 2020. Generally,
our net operating cash flows fluctuate primarily based on changes in our profitability and working capital. Cash used in operating activities decreased by approximately
$2,225,000 primarily due to an decrease in working capital of approximately $2,675,000 due in part to increases in accrued losses from the legacy SG Echo contracts we
assumed and increases in accounts payable with the additions of operations of new entities, SG DevCorp, Chicago Airport Testing, and SG Echo, from the corresponding
period of the prior year. In addition, we had an increase of approximately $386,000 in stock-based compensation, an increase of approximately $348,000 in depreciation
expense, an increase of approximately $157,000 in bad debt expense and an increase in the overall net loss of approximately $1,400,200, during the Year ended December
31, 2021 compared to the Year ended December 31, 2020.
Investing activities used net cash of $9,471,257 during the Year ended December 31, 2021, and $3,045,723 during the Year ended December 30, 2020. Cash used
in investing activities increased from the corresponding period of the prior year primarily due to the purchase of property, plant and equipment of approximately $3,250,000
which includes the land purchase for the Lago Vista - Austin project, purchase of intangible assets of $42,500, an investments in two SG DevCorp entities totaling
approximately $3,600,000 and we received proceeds from the sale of equipment for $225,000.
Financing activities provided net cash of $10,148,041 during the year ended December 31, 2021, and provided net cash of $17,318,358 during the Year ended
December 31, 2020. Cash provided by financing activities decreased by approximately $7,170,000 due to a decrease in proceeds from public stock offerings and proceeds
from long-term note payable in the year ended 31, 2021. Cash used by financing activities for the year ended December 31, 2021 increased by approximately $3,745,000 as
compared to the year ended December 31, 2020 due to distributions paid to our non-controlling interest partner, offset by an increase of approximately $707,000 in proceeds
from conversion of outstanding warrants to common stock and proceeds from short-term note payable of $2,000,000.
We provide services to our construction customers in three separate phases: the design phase, the architectural and engineering phase and the construction phase.
Each phase is independent of the other, but builds through a progression of concept through delivery of a completed structure. These phases may be embodied in a single
contract or in separate contracts, which is typical of a design build process model. As of December 31, 2021, we had 11 projects totaling $3,217,909 under contract, which,
if they all proceed to construction, will result in us constructing approximately 101,392 square feet of modular space. Of these contracts, all eleven (11) projects combine all
three phases or parts thereof and including construction. We expect that all of this revenue will be realized by December 31, 2022.
Backlog may fluctuate significantly due to the timing of orders or awards for large projects and is not necessarily indicative of future backlog levels or the rate at
which backlog will be recognized as revenue. The decrease in backlog at December 31, 2021 is primarily attributable to one new contract we entered into during the first
quarter of 2021 for approximately $1,325,000, one new contract in the third quarter of 2021 for approximately $857,000 and one partial contract cancellation of
approximately ($1,300,000), one new contract we entered into during the fourth quarter of 2021 for approximately $780,000 and one contract cancellation of approximately
($16,920,000) offset by work in progress or completed contracts during the year ended 2021 for approximately $6,793,000. We expect that all of this revenue will be
realized by December 31, 2022. Backlog does not include COVID tests or testing services provided through our joint venture, Clarity Mobile Venture.
There can be no assurance that our customers will decide to and/or be able to proceed with these construction projects, or that we will ultimately recognize revenue
from these projects in a timely manner or at all.
41
Off-Balance Sheet Arrangements
As of December 31, 2021 and 2020, we had no material off-balance sheet arrangements to which we are a party.
In the ordinary course of business, we enter into agreements with third parties that include indemnification provisions which, in our judgment, are normal and
customary for companies in our industry sector. These agreements are typically with consultants and certain vendors. Pursuant to these agreements, we generally agree to
indemnify, hold harmless, and reimburse indemnified parties for losses suffered or incurred by the indemnified parties with respect to actions taken or omitted by us. The
maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to
defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of liabilities relating to these provisions is minimal.
Accordingly, we have no liabilities recorded for these provisions as of December 31, 2021.
Critical Accounting Policies and New Accounting Pronouncements
Critical Accounting Policies
Our financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). In connection with
the preparation of the financial statements, we are required to make assumptions and estimates and apply judgments that affect the reported amounts of assets, liabilities,
revenue, and expenses, and the related disclosures. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors that we
believe to be relevant at the time the consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates, and
judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined
with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in “Note 3—Summary of Significant Accounting Policies” of the notes to our consolidated financial statements
included elsewhere in this Annual Report. We believe that the following accounting policies are the most critical in fully understanding and evaluating our reported
financial results.
Share-based payments. We measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For
employees and directors, including non-employee directors, the fair value of the award is measured on the grant date. For non-employees, the fair value of the award is
generally re-measured on interim financial reporting dates and vesting dates until the service period is complete. The fair value amount is then recognized over the period
services are required to be provided in exchange for the award, usually the vesting period. We recognize stock-based compensation expense on a graded-vesting basis over
the requisite service period for each separately vesting tranche of each award. Stock-based compensation expense to employees and all directors is reported within payroll
and related expenses in the consolidated statements of operations. Stock-based compensation expense to non-employees is reported within marketing and business
development expense in the consolidated statements of operations.
Convertible instruments. SGB bifurcates conversion options from their host instruments and accounts for them as free-standing derivative financial instruments
according to certain criteria. The criteria include circumstances in which (i) the economic characteristics and risks of the embedded derivative instrument are not clearly and
closely related to the economic characteristics and risks of the host contract; (ii) the hybrid instrument that embodies both the embedded derivative instrument and the host
contract is not re-measured at fair value under otherwise applicable GAAP measures with changes in fair value reported in earnings as they occur; and (iii) a separate
instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
42
SGB determined that the embedded conversion options that were included in the previously outstanding convertible debentures should be bifurcated from their
host and a portion of the proceeds received upon the issuance of the hybrid contract has been allocated to the fair value of the derivative. The derivative was subsequently
marked to market at each reporting date based on current fair value, with the changes in fair value reported in results of operations.
Revenue recognition – 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)
(2)
(3)
(4)
(5)
Identify the contract with a customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to performance obligations in the contract
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.
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, we entered into an Exclusive License Agreement (“ELA” ) pursuant to which we granted an exclusive license for our technology as outlined
in the ELA. The ELA is described below. Under the ELA, we were to receive royalty payments based upon gross revenues earned by the licensee for commercialized
products within the field of design and project management platforms for residential use, including single-family residences and multi-family residences, but excluding
military housing. We have determined that the ELA granted the licensee a right to access our intellectual property throughout the license period (or its remaining economic
life, if shorter), and thus recognizes revenue over time as the licensee recognizes revenue and we have the right to payment of royalties. On June 15, 2021 we terminated the
Exclusive License Agreement with CPF that we had entered into on October 3, 2019. No revenue has been recognized under the ELA for the year ended December 31,
2021.
43
On October 9, 2019, we entered into a Right of First Refusal Agreement (the “Agreement”) with CMC Development LLC (“CMC”). See Note 3 for a discussion on
the Right of First Refusal Agreement. Under the agreement, we have 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, we agreed to issue to CMC 2,500 shares of restricted stock of our
common stock, of which 1,250 shares will vest and be issued on September 30, 2020 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 our common stock has yet to be issued to CMC.
The Agreement also provides that CMC has engaged us 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 cost of the project is $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. We are no longer participating on Ridge Avenue as
CMC has decided to proceed with this project as a traditional construction build. We reported this as a cancellation within our backlog footnote, see Note 13 on this
discussion. No revenue has been recognized under the Agreement during the year ended December 31, 2021.
We entered into a joint venture agreement with Clarity Lab Solutions, LLC (“Clarity Labs”) (the “JV”). Revenue from the activities of the JV is related to clinical
testing services and is recognized when services have been rendered, which is at a point in time. In addition, we formed Chicago Airport Testing, LLC which collects rental
revenue. During the year ending December 31, 2021, we recognized approximately $31,400,000 in revenue related to activities through the two JV's, which is included in
medical revenue on the accompanying consolidated statements of operations.
We acquired a 10% non-dilutable equity interest for JDI-Cumberland Inlet, LLC and acquired a 50% membership interest in Norman Berry II Owner LLC in the
second quarter of 2021. We have determined we are not the primary beneficiary and thus will not consolidate the activities on the consolidated financial statements. We will
use the equity method to report the activities as an investment in on our consolidated financial statements.
Goodwill. Goodwill represents the excess of reorganization value over the fair value of identified net assets upon emergence from bankruptcy. In accordance with
the accounting guidance on goodwill, SGB 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 value. Our evaluation of goodwill completed during the year ended
December 31, 2021, resulted in no impairment loss.
Intangible assets – Intangible assets consist of $2,766,000 of proprietary knowledge and technology, which is being amortized over 20 years. In addition, included
in intangible assets is $97,164 of trademarks, and $47,800 of website costs that are being amortized over 5 years. We evaluated intangible assets for impairment during the
year ended December 31, 2021, and determined that there are no impairment losses.
44
New Accounting Pronouncements
See Note 3 to the accompanying consolidated financial statements for all recently adopted and new accounting pronouncements.
Non-GAAP Financial Information
In addition to our results under GAAP, we also present EBITDA and Adjusted EBITDA for historical periods. EBITDA and Adjusted EBITDA are non-GAAP
financial measures and have been presented as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We
calculate EBITDA as net income (loss) before interest expense, income tax benefit (expense), depreciation and amortization. We calculate Adjusted EBITDA as EBITDA
before certain non-recurring adjustments such as loss on conversion of convertible debentures, change in fair value of financial instruments and stock compensation expense.
EBITDA and Adjusted EBITDA are presented because they are important metrics used by management as one of the means by which it assesses our financial
performance. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. These
measures, when used in conjunction with related GAAP financial measures, provide investors with an additional financial analytical framework that may be useful in
assessing us and our results of operations.
EBITDA and Adjusted EBITDA have certain limitations. EBITDA and Adjusted EBITDA should not be considered as alternatives to net income (loss), or any
other measures of financial performance derived in accordance with GAAP. These measures also should not be construed as an inference that our future results will be
unaffected by unusual or non-recurring items for which these non-GAAP measures make adjustments. Additionally, EBITDA and Adjusted EBITDA are not intended to be
liquidity measures because of certain limitations, including, but not limited to:
●
●
They do not reflect our cash outlays for capital expenditures;
They do not reflect changes in, or cash requirements for, working capital; and
● Although depreciation and amortization are non-cash charges, the assets are being depreciated and amortized and may have to be replaced in the future, and these
non-GAAP measures do not reflect cash requirements for such replacements.
Other companies, including other companies in our industry, may not use such measures or may calculate one or more of the measures differently than as
presented in this Annual Report, limiting their usefulness as a comparative measure.
In evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same or similar to some of the
adjustments made in our calculations, and our presentation of EBITDA and Adjusted EBITDA should not be construed to mean that our future results will be unaffected by
such adjustment. Management compensates for these limitations by using EBITDA and Adjusted EBITDA as supplemental financial metrics and in conjunction with our
results prepared in accordance with GAAP. The non-GAAP information should be read in conjunction with our consolidated financial statements and related notes.
45
The following is a reconciliation of EBITDA and Adjusted EBITDA to the nearest GAAP measure, net loss:
For the Year Ended
December 31, 2021
Net loss attributable to common stockholders of SG Blocks, Inc.
Addback interest expense
Addback interest income
Addback depreciation and amortization
EBITDA (non-GAAP)
Addback loss on asset disposal
Addback litigation expense
Addback stock-based compensation expense
Adjusted EBITDA (non-GAAP)
$
$
For the Year Ended
December 31, 2020
(4,692,729 )
9,275
(61,675)
239,982
(4,505,147 )
(10,832,674 ) $
1,254
(57,266)
605,405
(10,283,281 )
44,081
570,934
1,647,391
(8,020,875 ) $
1,012
461,613
1,261,215
(2,781,307 )
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements and the notes thereto, together with the report thereon of Whitley Penn LLP, our registered public accounting firm, dated April 15, 2022,
appear beginning on page F-1 of this report.
46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Disclosure Controls and Procedures.
Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, carried out an evaluation of the effectiveness of our
“disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this Annual Report (the “Evaluation
Date”). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed,
summarized and reported, within the time periods specified in the SEC rules and forms, and (ii) is accumulated and communicated to our management, including our
Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
The Principal Executive Officer and the Principal Financial Officer believe that the consolidated financial statements and other information contained in this
Annual Report present fairly, in all material respects, our business, financial condition and results of operations.
(b) Management’s Annual Report on Internal Control over Financial Reporting
Our management is also responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f)
or 15d-15(f) of the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of the inherent limitations
of internal control systems, our internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures
may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, we used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on our assessment,
we concluded that, as of December 31, 2021, our internal control over financial reporting was effective based on those criteria.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the exemption provided to issuers that are neither “large
accelerated filers” nor “accelerated filers” under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
(c) Changes in Internal Control over Financial Reporting
There were changes made to our internal control process that improved the timely closing of our accounting records and added additional steps within our review
process for complex and new transactions over financial reporting that occurred during the fourth quarter of 2021.
ITEM 9B. OTHER INFORMATION.
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
47
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Below is certain information regarding our directors and executive officers.
PART III
Name of Director or Executive Officer
Ages
Position
Served as an Officer and/or Director
Since
59
49
46
50
53
70
54
41
Chairman of the Board and Chief
Executive Officer
Director
Director
Director
Director
Director
Chief Operating Officer
Acting Chief Financial Officer
November 2011
April 2018
June 2020
November 2011
May 2021
May 2021
December 2020
August 2019
Paul M. Galvin
Yaniv Blumenfeld
Maggie Coleman (1)(3)(6)
Christopher Melton (2)(5)
Joseph Safina (1)(3)
David Villarreal (4)(5)(7)
William Rogers
Gerald Sheeran
(1) Audit Committee Member.
(2) Audit Committee Chairman.
(3) Compensation Committee Member.
(4) Compensation Committee Chairman.
(5) Nominating and Corporate Governance Committee Member.
(6) Nominating and Corporate Governance Committee Chair
(7) Lead Independent Director.
Paul M. Galvin was appointed as a director and the Company’s Chief Executive Officer upon consummation of the reverse merger among CDSI Holdings Inc., CDSI
Merger Sub, Inc., the Company, and certain stockholders of the Company on November 4, 2011 (the “Merger”). Mr. Galvin is a founder of SG Blocks, LLC, the
predecessor entity of the Company. He has served as the Chief Executive Officer of the Company since April 2009 and as a director of the Company since January 2007.
Mr. Galvin has been a managing member of TAG Partners, LLC (“TAG”), an investment partnership formed for the purpose of investing in the Company, since October
2007. Mr. Galvin brings over 30 years of experience developing and managing real estate, including residential condominiums, luxury sales and market rate and affordable
rental projects. Prior to his involvement in real estate, he founded a non-profit organization that focused on public health, housing and child survival, where he served for
over a decade in a leadership position. During that period, Mr. Galvin designed, developed and managed emergency food and shelter programs through New York City’s
Human Resources Administration and other federal and state entities. From November 2005 to June 2007, Mr. Galvin was Chief Operating Officer of a subsidiary of
Yucaipa Investments, where he worked with religious institutions that needed to monetize underperforming assets. While there, he designed and managed systems that
produced highest and best use analyses for hundreds of religious assets and used them to acquire and re-develop properties across the U.S. Mr. Galvin holds a Bachelor of
Science in Accounting from LeMoyne College and a Master’s Degree in Social Policy from Fordham University. He was formerly an adjunct professor at Fordham
University’s Graduate School of Welfare. Mr. Galvin previously served for 10 years on the Sisters of Charity Healthcare System Advisory Board and six years on the board
of SentiCare, Inc. In 2011, the Council of Churches of New York recognized Mr. Galvin with an Outstanding Business Leadership Award.
We selected Mr. Galvin to serve on our Board because he brings extensive knowledge of the real estate and finance industries and managements experience.
Mr. Galvin’s pertinent experience, qualifications, attributes and skills include his expertise in real estate development and management and finance.
48
Yaniv Blumenfeld joined the Board of Directors in April 2018. He founded Glacier Global Partners LLC in 2009 and is responsible for its strategic direction and
oversees its investments and day-to-day management, including origination, underwriting, closing, investor relations and asset management functions. Mr. Blumenfeld
has over 20 years of real estate experience, 13 years of which have been with leading Wall Street firms, where he was responsible for structuring, underwriting,
pricing, securitizing and syndicating over $16 billion of commercial real estate loans and equity transactions. Prior to founding Glacier Global Partners LLC, Mr.
Blumenfeld was a Managing Director at The Bear Stearns Companies, Inc. and JPMorgan Chase & Co., and, in such role, was responsible for structuring and closing
over $2 billion in real estate debt and equity transactions for institutional clientele. Prior to that, Mr. Blumenfeld was a Managing Director and Head of the CMBS
Capital Markets Group for the U.S. at EuroHypo AG, then world’s largest real estate investment bank. In that capacity, Mr. Blumenfeld expanded the large loan
CMBS group and oversaw the structuring, pricing, securitization and syndication functions and served on the bank’s investment committee in charge of approving all
transactions. He designed and implemented risk-control measures, standardized underwriting and pricing models and structured over $4 billion of real estate loans.
Other positions previously held by Mr. Blumenfeld include Senior Vice President at Lehman Brothers, PaineWebber/UBS and Daiwa Securities. Prior to joining the
banking industry, Mr. Blumenfeld worked as a real estate consultant at Ernst & Young real estate consulting group, advising real estate owners and operators, and
various investment banks. Mr. Blumenfeld received a Bachelor of Science in real estate finance from Cornell University School of Hotel Administration. He is a
member of the CRE Finance Council, was a guest lecturer at Columbia University, and was a recipient of the Young Jewish Professional NYC Real Estate
Entrepreneur & Achievement Award in 2013. He is also involved with various philanthropic organizations, including The American Israel Public Affairs Committee,
White Plains Hospital, American Friends of Rabin Medical Center and is on the board of directors of Arts Westchester and the White Plains Business Improvement
District.
We selected Mr. Blumenfeld to serve on our Board because he brings extensive knowledge of the real estate finance industry. Mr. Blumenfeld’s pertinent
experience, qualifications, attributes and skills include expertise in real estate finance, risk-control, developments, investment banking and capital raising.
Maggie Coleman was appointed as a director of the Company in June of 2020. She is Managing Partner as Sera Global where she leads the Private Capital
Advisory practice for real estate and is reponsible for advising leading general partners, operating companies and managers of real assets on capital formation and fund
strategy including capital raising. Additional, she oversees Sera Global's investor coverage across institutional relationships, private equity and private capital groups.
Prior to joining Sera Global, she was a Senior Managing Director and Co-Head of International Capital, Americas at Jones Lang LaSalle Incorporated (NYSE: JLL), a
Fortune 500 company. In this role, Ms. Coleman led a team that was primarily focused on cross-border capital deployment from global investors across Canada,
EMEA and Asia Pacific. Ms. Coleman was responsible for placing capital from international investors into JLL’s direct transactions, structuring recapitalizations and
joint ventures, while also helping offshore capital acquire and finance JLL’s global investment portfolios and large single asset sales. Ms. Coleman has been involved
in over $20 billion in transactions and has directed the JLL platform that has executed over $53 billion in transactions since 2011, including over $10 billion in loan
sales in the US, Europe and Asia. Further, Ms. Coleman was responsible for business development, client management and the execution of global transactions and is a
frequent speaker on global capital flows in the real estate sector. Ms. Coleman also served in various other positions at JLL including as Executive Vice President at
JLL form 2013-209 and Managing Director for, 2016-2019. Prior to its merger with JLL in 2008, Ms. Coleman worked as a Director within the M&A Advisory
Services group of Staubach Capital Markets specializing in real estate structured financial solutions and investment banking. Ms. Coleman earned a master’s degree
from the University of Chicago in Political Economy and a bachelor’s degree in business economics & public policy (BEPP) and international business from Indiana
University’s Kelley School of Business. Ms. Coleman is a council member of the Urban Development/Mixed-Use Council (UDMUC) at the Urban Land Institute.
Commercial Property Executive named Ms. Coleman as a recipient of the “Rising Leader Award” for 2012. In 2012, Ms. Coleman also received the Catalyst Award
from JLL for her achievements in team management. Ms. Coleman is affiliated with the Guild Board of the Boys & Girls Clubs of Chicago and is a member of the
Board of Directors of the Jackson Chance Foundation.
We selected Ms. Coleman to serve on our Board because she brings extensive real estate investment knowledge. Ms. Coleman’s pertinent experience,
qualifications, attributes and skills include expertise in real estate investment and financial literacy.
Christopher Melton was appointed as a director of the Company upon consummation of the Merger on November 4, 2011. Mr. Melton is a licensed real estate
salesperson in the State of South Carolina and until June 2019 was a principal of Callegro Investments, LLC, a specialist land investor investing in the southeastern
U.S., which he founded 2012. Since June 2019 he has served as a specialist Land Advisor with SVN. Mr. Melton also serves on several public and private boards,
including Jupiter Wellness, Inc. since August 2019 and has served since February 2018 as chief investment officer and analyst at TNT Capital Advisors, a capital
advisory firm based in Florida. He also served as a sales agent as MSK Commercial Services, a commercial real estate company, from February 2018 to June 2019.
From 2000 to 2008, Mr. Melton was a Portfolio Manager for Kingdon Capital Management (“Kingdon”) in New York City, where he ran an $800 million book in
media, telecom and Japanese investment. Mr. Melton opened Kingdon’s office in Japan, where he set up a Japanese research company. From 1997 to 2000, Mr. Melton
served as a Vice President at JPMorgan Investment Management as an equity research analyst, where he helped manage $500 million in REIT funds under
management. Mr. Melton was a Senior Real Estate Equity Analyst at RREEF Funds in Chicago from 1995 to 1997. RREEF Funds is the real estate investment
management business of Deutsche Bank’s Asset Management division. Mr. Melton earned a Bachelor of Arts in Political Economy of Industrial Societies from the
University of California, Berkeley in 1995. Mr. Melton earned Certification from University of California, Los Angeles’s Anderson Director Education Program in
2014.
49
We selected Mr. Melton to serve on our Board because he brings extensive knowledge of finance and the real estate industry. Mr. Melton’s pertinent experience,
qualifications, attributes and skills include financial literacy and expertise, managerial experience and the knowledge and experience he has attained through his real
estate investment and development activities.
Joseph Safina was appointed as a director of the Company on May 28, 2021. Mr. Safina is a serial entrepreneur with over thirty years of experience in
investment banking working with public and privately held small to mid-cap companies. Since 1997, Mr. Safina has been the principal of Safina Capital, an “all-stage”
investment firm which offers its portfolio companies investment capital, strategic insight, global relationships and operational support. He has been instrumental in
helping his clients with large-scale fund-raising, merger & acquisitions, business development, marketing and financial management. In 1988, Joseph Safina joined
NYSE Member firm, Gruntal & Co., as a Senior Vice President. He was a top producer and was tasked with building Gruntal’s Corporate Finance Department. He left
Gruntal & Co. in 1993 and founded Nichols, Safina, Lerner & Co. Inc. (NSL) - a New York-based broker dealer. As the C.E.O. of NSL, he navigated the firm from a
start-up into a 200 employee, multi-location company. Mr. Safina also headed up NSL’s trading desk, making markets in hundreds of stocks and was profiled as one of
the top ten Bankers in the country in R.J. Shook’s “The Winners Circle”. Mr. Safina has raced cars professionally for over ten years and has competed at the prestigious
24 Hours at Daytona, The 12 Hours of Sebring and The 24 Hours of Dubai representing BMW, Ford and Porsche with several IMSA podium finishes. He is also a
pilot, scuba diver and competitive cyclist.
We selected Mr. Safina to serve on our Board because he brings extensive knowledge of finance industry. Mr. Safina’s pertinent experience, qualifications,
attributes and skills include financial literacy and expertise, managerial experience and the knowledge and experience he has attained through his investment activities.
David Villarreal was appointed as a director of the Company on May 28, 2021. Mr. Villarreal’s career spans over 40 years in various management, business and
leadership capacities, beginning in 1977 when he served as Deputy Mayor and Senior Deputy Economic Development Advisor, under Mayor Tom Bradley in the City
of Los Angeles. He has served since August 2014 as the Chief Administrative Officer of Affinity Partnerships, LLC, a Costco national mortgage services platform
provider, with annual closed loan production of $8+ billion through a network of ten national mortgage lenders. From March 2011 to August 2014, he served as the
President -Corporate Business Development, of Prime Source Mortgage, Inc. From September 2008 to September 2012, he served as a Consultant to the International
Brotherhood of Teamsters.
We selected Mr. Villarreal to serve on our Board because he brings extensive knowledge of mortgage and real estate industry. Mr. Villarreal’s pertinent
experience, qualifications, attributes and skills include financial literacy and expertise, managerial experience and the knowledge and experience he has attained
through his real estate investment activities.
William Rogers has served as the Company’s Chief Operating Officer since December 2020. Mr. Rogers has over 30 years of professional construction
experience as lead superintendent. From April 2007 through December 2020, Mr. Rogers acted as the Construction Superintendent at Plaza Construction Corp. based
out of New York City. As the Construction Superintendent, Mr. Rogers supervised and directed subcontractors while demonstrating strong leadership, communication,
organizational and time management skills. As part of his responsibilities, Mr. Rogers monitored costs including labor and material, project schedule and progress, and
coordinated the sequence of construction details.
Gerald Sheeran has served as the Controller of the Company since March of 2018 and Acting Chief Financial Officer since August 22, 2019. Mr. Sheeran
brings to our Company extensive experience and expertise in areas of finance and accounting. Prior to joining the Company, Mr. Sheeran was a Senior Accounting
Manager for Lucid Energy Group from March of 2013 to March of 2018. Before his time at Lucid Energy Group, Mr. Sheeran worked for several different companies
in connection with their accounting, reporting, and financial operations. Mr. Sheeran holds a Bachelor of Business Administration in Accounting from the University of
Texas at Arlington.
50
Board Leadership Structure
The Board recognizes that one of its key responsibilities is to evaluate and determine its optimal leadership structure to provide independent oversight of
management. Our Board is currently led by a Chairman of the Board who also serves as our Chief Executive Officer. The Board understands that the right Board
leadership structure may vary depending on the circumstances, and our independent directors periodically assess these roles and the Board leadership to ensure the
leadership structure best serves the interests of the Company and stockholders.
Mr. Galvin currently holds the Chairman and Chief Executive Officer roles. Mr. Villarreal currently serves as the Lead Independent Director appointed by the
majority of the Board.
The responsibilities of the Lead Independent Director include, among others: (i) serving as primary intermediary between non-employee directors and
management; (ii) approving the agenda and meeting schedules for the Board; (iii) advising the Chairman of the Board as to the quality, quantity and timeliness of the
information submitted by management to directors; (iv) recommending director candidates and selections for the membership and chairman position for each
committee of the Board; (v) calling meetings of independent directors; and (vi) serving as liaison for consultation and communication with stockholders.
We believe the current leadership structure, with combined Chairman and Chief Executive Officer roles and a Lead Independent Director, best serves the
Company and its stockholders at this time. Mr. Galvin possesses detailed and in-depth knowledge of the Company and the industry and the issues, opportunities and
challenges we face, and is best positioned to ensure the most critical business issues are brought for consideration by the Board. In addition, having one leader serving
as both the Chairman and Chief Executive Officer provides decisive, consistent and effective leadership, as well as clear accountability to our stockholders and
customers. This enhances our ability to communicate our message and strategy clearly and consistently to our stockholders, employees, customers and suppliers,
particularly during times of turbulent economic and industry conditions. The Board believes the appointment of a strong Lead Independent Director and the use of
regular executive sessions of the non-management directors, along with a majority the Board being composed of independent directors, allow it to maintain effective
oversight of management. We believe that the combination of the Chairman and Chief Executive Officer roles is appropriate in the current circumstances and, based on
the relevant facts and circumstances, separation of these offices would not serve our best interests and the best interests of our stockholders at this time.
Director Independence
Nasdaq Listing Rule 5605 requires a majority of a listed company’s board to be comprised of independent directors. In addition, the Nasdaq Listing Rules require
that, subject to specified exceptions, each member of a listed company’s audit and compensation committees be independent under the Securities Exchange Act of
1934, as amended (the “Exchange Act”). Members of the Audit Committee and Compensation Committee must also satisfy the independence criteria set forth in Rules
10A-3 and 10C-1 under the Exchange Act, respectively. Under Nasdaq Listing Rule 5605(a)(2), a director will only qualify as an “independent director” if, in the
opinion of the Board, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a
director. In order to be considered independent for purposes of Exchange Act Rule 10A-3, an Audit Committee member may not, other than in his or her capacity as a
member of the Audit Committee, the Board or any other committee of the Board, accept, directly or indirectly, any consulting, advisory or other compensatory fee
from the Company or any of its subsidiaries, or otherwise be affiliated with the Company or any of its subsidiaries. In order for Compensation Committee members to
be considered independent for purposes of Exchange Act Rule 10C-1, the Board must consider all factors specifically relevant to determining whether a director has a
relationship to the Company that is material to that director’s ability to be independent from management in connection with the duties of a Compensation Committee
member, including, but not limited to: (1) the source of compensation of the director, including any consulting advisory or other compensatory fee paid by the
Company to the director; and (2) whether the director is affiliated with the Company or any of its subsidiaries or affiliates.
The Board has reviewed the materiality of any relationship that each of our directors has with the Company and has determined that each of Messrs. Villarreal,
Melton and Safina, and Ms. Coleman, is “independent” in accordance with the Nasdaq Listing Rules. Mr. Galvin is not considered “independent” due to his executive
position. Mr. Blumenfeld is also not considered "independent" due to compensation he received from certain business relationships he has with us. As such
independent directors comprise a majority of our Board and the members of our Audit, Compensation, and Nominating, Environmental, Social and Corporate
Governance Committees are fully independent.
51
Board and Committee Responsibilities
Generally
The Board is the ultimate decision-making body of the Company, except with respect to those matters to be decided by the stockholders. It selects the Chief
Executive Officer and other members of the senior management team, which is charged with the conduct of the Company’s day-to-day business. The Board acts as an
advisor and counselor to senior management and ultimately monitors its performance. The function of the Board to monitor the performance of senior management is
facilitated by the presence of non-employee directors who have substantive knowledge of the Company’s business.
Our Board has established a separate standing Audit Committee, Compensation Committee and Nominating, Environmental, Social and Corporate Governance
Committee. Each of the Audit Committee, Compensation Committee and Nominating, Environmental, Social and Corporate Governance Committee operates pursuant
to a written charter, a copy of which may be viewed on the Company’s website at https://www.sgblocks.com under the “Investors — Corporate Governance” tab.
Audit Committee
The members of our Audit Committee are Mr. Melton, who serves as chairperson, Mr. Safina and Ms. Coleman. The Audit Committee Charter requires that the
Audit Committee consist of at least three members of the Board, each of whom is required to be independent as defined by Nasdaq and SEC rules. The Board has
determined that each member of the Audit Committee is independent, as defined by Rule 10A-3 of the Exchange Act and Nasdaq Marketplace Rule 5605(a)(2). The
Board has also determined that Mr. Melton is an “audit committee financial expert,” as defined in Item 407(d)(5) of Regulation S-K under the Exchange Act.
The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of our independent registered public accounting firm.
Functions of the Audit Committee include, but are not limited to, reviewing the results and scope of the audit performed, and the financial recommendations provided
by, our independent registered public accounting firm and coordinating the Board’s oversight of our internal financing and accounting processes.
All audit services to be provided to the Company by our independent public accounting firm, Whitley Penn, are pre-approved by the Audit Committee prior to
the initiation of such services (except for items exempt from pre-approval requirements under applicable laws and rules). The Audit Committee approved all services
provided by Whitley Penn to us during 2021.
Compensation Committee
The members of our Compensation Committee are Mr. Villarreal, who serves as chairperson, Ms. Coleman and Mr. Safina. The Compensation Committee
Charter requires that the Compensation Committee consist of at least two members of the Board, each of whom is required to be independent as defined by Nasdaq
rules. The Board has determined that each member of the Compensation Committee is independent, as defined in Nasdaq Marketplace Rule 5605(a)(2).
Functions of the Compensation Committee, include, but are not limited to: reviewing and approving, or recommending the Board approve, compensation
arrangements for our executive officers, including salary and payments under the Company’s equity-based plans; reviewing compensation for non-employee directors
and recommending changes to the Board; and administering our stock compensation plans. Our principal executive officer annually reviews the performance of each of
the named executive officers and other officers and makes recommendations regarding the named executive officers and other officers and managers of the company,
while the Compensation Committee reviews the performance of our principal executive officer. The conclusions and recommendations resulting from our principal
executive officer’s review are then presented to the Compensation Committee for its consideration and approval. The Compensation Committee can exercise its
discretion in modifying any of our principal executive officer’s recommendations. The Compensation Committee may delegate its authority to a subcommittee of its
members.
In performing its functions, the Compensation Committee may retain or obtain the advice of such compensation consultants, legal counsel and other advisors. In
September 2020, the Compensation Committee engaged Haigh & Company as its independent compensation consultant. With the assistance of Haigh & Company, the
Compensation Committee developed and implemented an organizational framework covering salary, annual bonus and equity ownership, with the goal of attracting
and retaining talented individuals who are critical to the Company’s long-term success and aligning pay with performance. Based on the information received from the
consultant, the Compensation Committee believes that the work Haigh & Company performed in 2020 did not raise a conflict of interest and that it was fully
independent. The Compensation Committee had previously engaged Haigh & Company in February 2018 as its independent compensation consultant.
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Nominating, Environmental, Social and Corporate Governance Committee
The members of our Nominating, Environmental, Social and Corporate Governance Committee are Ms. Coleman, who serves as the chairperson, Mr. Melton
and Mr. Villarreal. The Nominating, Environmental, Social and Corporate Governance Committee Charter requires that the Nominating, Environmental, Social and
Corporate Governance Committee consist of at least two members of the Board, each of whom is required to be independent as defined by Nasdaq rules. The Board
has determined that each member of the Nominating, Environmental, Social and Corporate Governance Committee is independent, as defined in Nasdaq Marketplace
Rule 5605(a)(2). Specific responsibilities of the Nominating, Environmental, Social and Corporate Governance Committee include: (i) considering and recommending
to the Board, candidates for election to the Board; (ii) considering recommendations and proposals submitted by stockholders in respect of Board nominees,
establishing policies in respect of such recommendations and proposals (including stockholder communications with the board of directors), and recommending any
action to the Board in respect of such stockholder recommendations and proposals; (iii) identifying, evaluating and recommending to the board of directors, candidates
to serve on committees of the Board; (iv) assessing the performance of the Board; (v) reviewing the Company’s sustainability and societal impact and (vi) reviewing
risk governance structure, risk assessment and risk management practices and guidelines, policies and processes for risk assessment and risk management, including
cyber security measures.
Role of the Board in Risk Oversight
Our executive officers are responsible for the day-to-day management of risks the Company faces, while our Board has an advisory role in the Company’s risk
management process, as a whole and at the committee level, and, in particular, the Board is responsible for monitoring and assessing strategic and operational risk
exposures, including cybersecurity risk. The Board and committees rely on the representations of management, the external audit of our financial and operating results,
our systems of internal control and our historic practices when assessing the Company’s risks. The Audit Committee oversees management of financial risk exposures
and the steps management has taken to monitor and control these exposures, and additionally provides oversight of internal controls. The Compensation Committee, in
conjunction with the Audit Committee, assesses and monitors whether any of the Company’s compensation policies and programs have the potential to encourage
excessive risk-taking. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire Board is regularly
informed about such risks by committee reports, as well as advice and counsel from expert advisors.
Family Relationships
There are no family relationships between the directors of the Board or any of the executive officers of the Company.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires our executive officers, directors and persons who beneficially own more than 10 percent of a registered class of SG
Blocks, Inc. equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock. Such officers, directors and
persons are required by SEC regulation to furnish us with copies of all Section 16(a) forms that they file with the SEC.
Based solely on a review of the copies of such forms that were received by us, or written representations from certain reporting persons that no Forms 5 were
required for those persons, we are not aware of any failures to file reports or report transactions in a timely manner during the year ended December 31, 2021.
Code of Business Conduct and Ethics
financial officer and principal accounting officer. The Code of Business Conduct and Ethics
Our Board has adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers and directors, including our principal executive
officer, principal
is posted on our website
at https://www.sgblocks.com under the “Investors — Corporate Governance” tab, and is available free of charge, upon request to our Corporate Secretary at SG Blocks,
Inc., 5011 Gate Parkway, Building 100, Suite 100, Jacksonville, Florida 32256; telephone number: (646) 240-4235. Any substantive amendment of the Code of
Business Conduct and Ethics, and any waiver of the Code of Business Conduct and Ethics for executive officers or directors, will be made only after approval by the
Board or a committee of the Board and will be disclosed on our website. In addition, any such waiver will be disclosed within four days on a Form 8-K filed with the
SEC if then required by applicable rules and regulations.
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ITEM 11. EXECUTIVE COMPENSATION.
We are a “smaller reporting company” and the following compensation disclosure is intended to comply with the requirements applicable to smaller reporting companies.
Although the rules allow us to provide less detail about its executive compensation program, the Compensation Committee is committed to providing the information
necessary to help stockholders understand its executive compensation-related decisions. Accordingly, this section includes supplemental narratives that describe the 2020
executive compensation program for our named executive officers.
The following discussion and table relates to compensation arrangements on behalf of, and compensation paid by our Company to, our “named executive officers”: Paul M.
Galvin, Gerald Sheeran, and William Rogers.
Summary Compensation Table
The following table sets forth all compensation awarded to, paid to or earned by the following named executive officers for the fiscal years ended December 31, 2021 and
2020:
Name and Principal Position
Paul M. Galvin,
Chairman and Chief Executive Officer
Gerald Sheeran,
Acting Chief Financial Officer and Controller
William Rogers
Chief Operating Officer
Year
2021
2020
2021
2020
2021
2020
$
$
$
$
$
$
Salary
($)
Bonus
($)
400,000 $
330,945 $
191,250 $
157,500 $
300,000 $
20,000 $
100,000 $
— $
64,250 $
— $
75,000 $
— $
Stock
Awards
($)(1)
1,183,000 $
1,274,096 $
338,000 $
150,030 $
802,750 $
— $
All Other
Compensation
($)(2)
40,657 $
36,674 $
17,529 $
33,694 $
Total
($)
1,723,657
1,641,715
611,029
341,224
9,903 $
5,769 $
1,187,653
25,769
(1) On October 1, 2021, the Compensation Committee granted RSUs with a value of $1,183,000 to Mr. Galvin, $802,750 to Mr. Rogers and $338,000 to Mr.
Sheeran. On April 14, 2020, the Compensation Committee granted RSUs with a value of $53,935 to Mr. Galvin and $14,280 to Mr. Sheeran. On September 23,
2020 the Compensation Committee awarded, RSUs with a value of $135,750 to Mr. Sheeran. On December 9, 2020, the Compensation Committee awarded RSUs
with a value of $1,220,161 to Mr. Galvin. This column indicates the aggregate grant date fair value, as determined in accordance with Financial Accounting
Standards Board Accounting Standards Codification Topic 718, Compensation — Stock Compensation (“FASB ASC Topic 718”). See “Note 19 — Share-based
Compensation” of the Notes to Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2021 for an
explanation of the assumptions made in valuing these awards.
(2) For 2021, all other compensation consisted of: Mr. Galvin — automobile allowance of $9,600, medical insurance allowance of $29,257 and phone allowance of
$1,800; Mr. Sheeran — phone allowance of $1,500, automobile allowance of $1,500, $5,125 matching contributions under the Company's 401(k) plan, medical
insurance allowance of $9,404; Mr. Rogers — medical insurance allowance of $8,278 and $1,625 phone allowance. For 2020, all other compensation consisted of:
Mr. Galvin — automobile allowance of $10,400, medical insurance allowance of $24,474 and phone allowance of $1,800; Mr. Rogers — other allowances of
$5,769 Mr. Sheeran — phone allowance of $1,500, medical insurance allowance of $7,894, other allowances of $22,500 and $1,800 matching contributions under
the Company’s qualified 401(k) plan.
54
Narrative Disclosure to Summary Compensation Table
Following is a brief summary of each core element of the compensation program for our named executive officers.
Base Salary
We provide competitive base salaries that are intended to attract and retain key executive talent. Base salary levels depend on the executive’s position,
responsibilities, experience, market factors, recruitment and retention factors, internal equity factors and our overall compensation philosophy. Effective January
1, 2017, we entered into an employment agreement with Mr. Galvin as described further below under “Employment Agreements.” On July 24, 2018, the
Compensation Committee approved an increase to the annual base salary of Mr. Galvin, the Company’s President, retroactive to January 1, 2018. Mr. Galvin’s
salary increased from $240,000 to $370,000. Such increases were based on a competitive market assessment provided by Haigh & Company, the Compensation
Committee’s independent compensation consultant. On December 1, 2019, the annual base salary for Mr. Galvin decreased from $370,000 to $180,000. On April
24, 2020, the annual base salary for Mr. Galvin increased from $180,000 to $400,000.
On August 22, 2019, the Board appointed Gerald Sheeran, the former Controller of the Company, as the acting Chief Financial Officer of the Company.
Effective on August 21, 2019, the annual base salary of Mr. Sheeran increased from $120,000 to $180,000 as a result of his appointment to Acting Chief Financial
Officer. The annual base salary for Mr. Sheeran decreased from $180,000 to $120,000 effective December 1, 2019. On May 15, 2020, the annual base salary for
Mr. Sheeran increased from $120,000 to $180,000. On September 30, 2021, we entered into an employment agreement with Mr. Sheeran as described further
below under “Employment Agreements” pursuant to which the annual base salary for Mr. Sheeran increased from $180,000 to $225,000.
On December 7, 2020, the Company appointed William Rogers to serve as the Company’s Chief Operations Officer with an annual base salary of
$300,000 per year. On September 27, 2021, we entered into an employment agreement with William Rogers as described further below under “Employment
Agreements”.
Pursuant to the terms of the Rogers Employment Agreement, October 1, 2021, Mr. Rogers was issued a restricted stock grant under our Stock Incentive
Plan, as amended (the “Plan”), of 37,500 shares of the Company’s common stock, vesting upon issuance, and the grant to Mr. Rogers of a restricted stock grant
under the Plan of 200,000 shares of our common stock, vesting monthly over two years.
Bonus Payments
No bonuses were earned by any named executive officer for 2020. Bonus were accrued in 2021 for Mr. Galvin for $100,000, Mr. Rogers for $75,000 and
Mr. Sheeran for $56,250 and subsequently paid in 2022. Mr. Sheeran had a bonus of $8,000 in 2021 that was approved by management prior to Mr. Sheeran
entering into the executive employment agreement.
Stock Options
In the past, we generally offered stock options to our key employees, including our named executive officers, as the long-term incentive component of our
compensation program. Our stock options allow key employees to purchase shares of our Common Stock at a price per share equal to the fair market value of our
common stock on the date of grant, and may be intended to qualify as “incentive stock options” under the Internal Revenue Code. No stock options were granted
to any named executive officer for 2021 or 2020.
55
Employment Agreements
The following discussion relates to compensation arrangements on behalf of, and compensation paid by the Company to, Messrs. Galvin, and Armstrong
pursuant to the terms of their employment/consulting agreements with the Company.
Paul M. Galvin
We employ Mr. Galvin, our Chief Executive Officer and Chairman of the Board, pursuant to employment agreement, effective January 1, 2017. The
employment agreement provided for an initial term of two years, with automatic renewals unless earlier terminated pursuant to the provisions of the employment
agreement. The employment agreement originally provided for base compensation in the amount of $240,000 per year, which was increased to $370,000 in early
2019, but subsequently reduced to $180,000 in December 2019. The employment agreement also provides for incentive compensation at the discretion of our
Board. The agreement provides for the payment of severance compensation in an amount equal to one year of his base annual salary, if his employment is
terminated by the Company other than for “Cause,” as defined therein. In April 2020, we entered into an amendment to Mr. Galvin’s employment agreement,
dated January 1, 2017, to extend the term of employment to December 31, 2021 and increased the annual base salary to $400,000, provide for a performance
bonus structure for a bonus of up to 50% of base salary upon the Company’s achievement of $2,000,000 EBITDA and additional performance bonus payments for
the achievement of EBITDA in excess of $2,000,000 based on a percentage of the incremental increase in EBITDA (ranging from 10% of the incremental
increase in EBITDA if the Company achieves over $2,000,000 and up to $7,000,000 in EBITDA, 8% of the incremental increase in EBITDA if the Company
achieves over $7,000,000 and up to $12,000,000 in EBITDA and 3% of the incremental increase in EBITDA over $12,000,000), provide for a profits-
based additional bonus of up to $250,000 in certain limited circumstances, and provide for one (1) year severance, plus a pro-rated amount of any unpaid bonus
earned by him during the year as verified by the Company’s principal financial officer, if Mr. Galvin is terminated without cause. At the Company’s option, up to
fifty (50%) percent of the EBITDA performance bonuses may be paid in restricted stock units if then available for grant under the Company’s Stock Incentive
Plan. All other terms of the employment agreement remain in full force and effect.
William Rogers
On September 27, 2021, we entered into an executive employment agreement with William Rogers to employ Mr. Rogers as the Company’s Chief
Operating Officer for an initial term of two (2) years, which provides for an annual base salary of $300,000, a discretionary bonus of up to 25% of his base salary
upon achievement of objectives as may be determined by the Company’s board of directors, term life insurance coverage equal to two (2) times annual base
salary, three weeks’ vacation and severance in the event of a termination without cause in amount equal to one year’s annual base salary and benefits.
Pursuant to the terms of the Rogers Employment Agreement, October 1, 2021, Mr. Rogers was issued a restricted stock grant under our Stock Incentive
Plan, as amended (the "Plan"), of 37,500 shares of the Company’s common stock, vesting upon issuance, and a restricted stock grant under the Plan of 200,000
shares of our common stock, vesting monthly over two years.
Mr. Rogers is subject to a one-year post-termination non-compete and non-solicit of employees and clients. He is also bound by confidentiality
provisions.
Gerald Sheeran
On September 30, 2021, we entered into an executive employment agreement with Gerald Sheeran to employ Mr. Sheeran as the Company’s Acting
Chief Financial Officer for an initial term of two (2) years, which provides for an annual base salary of $225,000, a discretionary bonus of up to 25% of his base
salary upon achievement of objectives as may be determined by the Company’s board of directors, a car allowance and severance in the event of a termination
without cause in amount equal to equal to one year’s annual base salary and benefits.
Pursuant to the terms of the employment agreement, we issued a restricted stock grant under the Plan of 100,000 shares of common stock, vesting
quarterly over two (2) years.
Mr. Sheeran is subject to a one-year post-termination non-compete and non-solicit of employees and clients. He is also bound by confidentiality
provisions.
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RSU Grants
On October 1, 2021, the Company's Compensation Committee (the “Compensation Committee”) of the Board of Directors of SG Blocks, Inc. granted the
following awards of restricted stock units (RSUs) under the Plan: (i) Paul Galvin, the Company’s Chairman and CEO, 350,000 RSUs under the Plan vesting
quarterly over two years, (ii) William Rogers, the Company’s Chief Operating Officer, 37,500 RSUs under the Plan vesting upon issuance and 200,000 RSU’s
under the Plan vesting monthly over two years, (iii) Gerald Sheeran, the Company’s Acting Chief Financial Officer, 100,000 RSUs under the Plan vesting
quarterly over two years.
Retirement, Health, Welfare, and Additional Benefits
Our executive officers are eligible to participate in our employee benefit plans and programs, including medical benefits, flexible spending accounts, short
and long-term disability and life insurance, to the same extent as our other full-time employees, subject to the terms and eligibility requirements of those plans.
Our executive officers are also eligible to participate in a tax-qualified 401(k) defined contribution plan to the same extent as our other full-time employees.
Currently, we do match contributions made by participants in the 401(k) plan or make other contributions to participant accounts.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information regarding the outstanding option awards held by the named executive officers as of December 31, 2021:
Name
Paul M. Galvin
Options Awards
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
—
—
4,108(5)
5,298(1)
3,973(1)
4,841(2)
4,914(3)
667(4)
—
—
—
— $
— $
— $
— $
— $
Option
Exercise
Price
($)
—
—
92.20
100.00
120.00
60.00
60.00
60.00
Option
Expiration
Date
—
—
3/30/2028
3/10/2027
3/10/2027
1/30/2027
11/01/2026
11/01/2026
Stock Awards
Number of
shares or
units of stock
that have not
vested
(#)
306,250(9) $
590(7) $
—
—
—
—
—
—
Market value
of shares or
units of stock
that have not
vested
($)
575,750
1,110
—
—
—
—
—
—
Grant Date
10/1/2021
3/22/2019
3/30/2018
3/10/2017
3/10/2017
1/30/2017
11/01/2016
11/01/2016
William Rogers
10/1/2021
—
—
—
—
175,000(10) $
329,000
Gerald Sheeran
10/1/2021
09/23/2020
03/30/2018
—
—
1,250(6)
—
—
— $
57
—
—
92.20
—
—
3/30/2028
87,500(9)
25,000(8)
—
164,500
32,696
—
(1)
In connection with a public offering by the Company, completed in June 2017, Mr. Galvin was granted performance-based option awards, to vest upon
the completion of certain conditions. A portion of the shares were granted at an exercise price to equal the price per share at which the public purchased
shares in the offering ($100.00 per share), while the remainder were granted at an exercise price equal to 120% of such price per share ($120.00 per
share). In September 2017, the Compensation Committee determined that each of Mr. Galvin met his respective performance conditions, and the option
awards vested in full.
(2) With respect to Mr. Galvin, 990 options vested on the grant date, while the remaining 3,851 vested in equal quarterly installments on the last day of each
fiscal quarter following the date of grant over a two-year period. All options vested in full as of December 31, 2018.
(3) Of these options, 2,184 vested on the grant date, while the remainder vest in three equal installments of 910 on the three anniversaries following the
grant date. Such options vested in full as of November 1, 2019.
(4) Mr. Galvin received these options in connection with their service as directors of the Company. The options vested in equal quarterly installments on the
last day of each fiscal quarter following the date of grant and vested in full as of September 30, 2017.
(5)
(6)
(7)
(8)
(9)
These options vest in equal quarterly installments over a two year period, beginning March 31, 2018, and vested in full as of December 31, 2019.
These options vest in equal quarterly installments over a three year period, beginning March 30, 2018, and vest in full as of March 31, 2021.
The shares subject to these restricted stock units vest in three equal installments over a three year period, beginning December 31, 2020, and vest in full as
of December 31, 2022.
The shares subject to these restricted stock units vest over a two year period with 1/3 due at grant, 1/3 on the one year anniversary of the grant date and
1/3 on the two year anniversary of the grant date, beginning September 23,2020, and vest in full as of September 23, 2022.
The shares subject to these restricted stock units vest in quarterly installments over a two year period, beginning October 1, 2021, and vest in full as of
September 30, 2023.
(10) The shares subject to these restricted stock units vest in equal monthly installments over a two year period, beginning October 1, 2021, and vest in full as
of September 30, 2023.
Compensation Program
DIRECTOR COMPENSATION
Our director compensation program is designed to attract and retain highly qualified directors and align their interests with those of our stockholders.
We compensate directors who are not employed by the Company with a combination of cash and equity awards. Mr. Galvin did not receive any
compensation for serving on our Board in 2021.
The Compensation Committee reviews the director compensation program and recommends proposed changes for approval by the Board. As part of
this review, the Compensation Committee considers the significant amount of time expended, and the skill level required, by each director not employed by
the Company in fulfilling his or her duties on the Board, each director’s role and involvement on the Board and its committees and the market compensation
practices and levels of our peer companies.
During its annual review of the director compensation program in 2020, the Compensation Committee considered an analysis prepared by its
independent consultant, Haigh & Company, which summarized director compensation trends for independent directors and pay levels at the same peer
companies used to evaluate the compensation of our named executive officers. Following this review, and after considering the advice of Haigh & Company
about market practices and pay levels, the Compensation Committee recommended, and the Board approved, the new compensation program for non-
employee directors described below, which remained in effect during 2021.
58
Cash Fees
The following table sets forth the cash fee schedule for compensating non-employee directors from January 2021 through December 2021:
Annual Board Retainer
Lead Independent Director
Audit Committee Chair
Compensation Committee Chair
Nominating, Environmental, Social and Corporate Governance Committee Chair
1/21 – 12/21
40,000
12,500
12,500
12,500
7,500
$
$
$
$
$
The above fees are to be paid quarterly in four equal installments, to each person serving as a non-employee director at the time when such payment is
made. Non-employee directors may choose to receive the annual Board retainer as equity in restricted stock units (“RSUs”), in, effective January 15 of the
year in which the annual cash retainer is otherwise earned. Among other things, each RSU granted represents the right to receive one share of Common
Stock; vests one year after grant, subject to the recipient’s continued service as a director of the Company through such date; and is payable six months after
the termination of the director from the Board or death or disability. Directors receive no additional per-meeting fee for Board or committee meeting
attendance.
Annual Equity Awards
In addition, pursuant to the Plan, during 2021 non-employee directors received an annual grant of 11,834 RSUs (the “Equity Awards”), with a grant
date value of approximately $40,000. The RSUs were issued on October 1, 2021 and vest monthly over one year from the date of grant and, if earlier, in full
on the date of the 2022 Annual Meeting of Shareholders.
Additional Compensation
In connection with special committees that the Board may form from time to time in connection with various transactions or undertakings, the Board
may award additional compensation to the directors, in its discretion, for membership on such special committees. The Board may, from time to time, grant
additional merit-based cash or equity compensation to non-employee directors for extraordinary service. All directors are reimbursed for expenses incurred
in connection with each Board and committee meeting attended.
59
The following table sets forth information regarding all forms of compensation that were both earned by and paid to our non-employee directors during the
year ended December 31, 2021. The compensation arrangements for Mr. Galvin is disclosed in the Summary Compensation Table set forth in the “Executive
Compensation” section of this Annual Report on Form 10-K. Mr. Galvin did not receive compensation for his services as a director during the year ended
December 31, 2021.
DIRECTOR COMPENSATION TABLE
Name
Yaniv Blumenfeld
Maggie Coleman
Christopher Melton
Joseph Safina
David Villarreal
Fees Earned or
Paid in Cash
($)
Stock
Awards(1)
All Other
Compensation
($)
$
$
$
$
$
40,000
50,000
62,500
23,333
37,917
$
$
$
$
$
39,999 $
39,999 $
39,999 $
39,999 $
39,999 $
— $
— $
— $
— $
— $
Total
79,999
89,999
102,499
63,332
77,916
(1)
This column indicates the aggregate grant date fair value, as determined in accordance with Financial Accounting Standards Board Accounting Standards
Codification Topic 718, Compensation — Stock Compensation (“FASB ASC Topic 718”), of the RSUs granted in April and November 2020. See “Note
19 — Share-based Compensation” of the Notes to Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended
December 31, 2021 for an explanation of the assumptions made in valuing these awards.
(2) Does not include $66,295.53 paid to a company controlled by Mr. Blumenfeld for development work related to the Company’s Lago Vista project and
$75,000 in consulting fees paid to Mr. Blumenfeld’s spouse $75,000 in connection with the Company’s Covid 19 testing program.
(3) Mr. Safina and Mr. Villarreal joined the Board in May 2021.
The aggregate number of option and stock awards outstanding (including exercisable and unexercised stock options and vested and unvested RSUs) as of
December 31, 2021 for each non-employee director was as follows:
Name
Yaniv Blumenfeld
Maggie Coleman
Christopher Melton
Joseph Safina
David Villareal
Option Awards
(#)
Stock Awards
(#)
—
—
833
—
—
30,625
32,754
30,625
11,834
11,834
60
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Unless otherwise indicated the mailing address of each of the stockholders below is c/o SG Blocks, Inc., 5011 Gate Parkway, Building 100, Suite 100, Jacksonville,
Florida 32256. Except as otherwise indicated, and subject to applicable community property laws, except to the extent authority is shared by both spouses under applicable
law, the Company believes the persons named in the table have sole voting and investment power with respect to all shares of common stock held by them.
The following table sets forth certain information, as of April 11, 2022, with respect to the beneficial ownership of our common stock by each of the following:
· each person who is known by us to be the beneficial owner of more than 5% of our outstanding stock;
· each of our directors;
· each of our named executive officers; and
· all of our directors and executive officers as a group.
As of April 11, 2021, we had 12,006,873 shares of common stock outstanding.
We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess
sole or shared voting power or investment power with respect to those securities. Unless otherwise indicated, the persons or entities identified in this table have sole voting
and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.
Name of Beneficial Owner(1)
Executive Officers & Directors
Paul M. Galvin, Chairman and Chief Executive Officer(2)
Yaniv Blumenfeld, Director(3)
Christopher Melton, Director(4)
Maggie Coleman, Director(5)
William Rogers(6)
Gerald Sheeran, Acting Chief Financial Officer(7)
Joseph Safina, Director (8\)
David Villarreal, Director (9)
Common
Stock
Shares subject to
Options &
RSU
Total Number of
Shares
Beneficially
Owned
Percentage
Ownership
6,170
1,556
557
—
—
417
—
—
496,402
26,679
27,512
28,808
104,167
79,250
7,888
7,888
502,572
28,235
28,069
28,808
104,167
79,667
7,888
7,888
4 %
*
*
*
*
*
*
*
6.5 %
5.2 %
All Current Executive Officers and Directors, as a group (9 persons)
9,522
827,994
837,516
5% or Greater Stockholders
E. Bran Bagley (10)
* Less than 1% ownership interest.
626,500
—
626,500
61
(1) The number of shares and the percent beneficially owned by each entity or individual are based upon 12,006,873 shares of common stock outstanding and assume the
exercise of all exercisable options and vesting of all outstanding time-based restricted stock units (including those that would be exercisable or vested within 60 days
of April 11, 2022). The percent beneficially owned is a fraction, the numerator of which is the number of shares of common stock beneficially owned by each entity
or individual (including any exercisable options, as described herein) and the denominator of which is the number of outstanding shares of common stock plus the
number of shares of common stock which would be issued upon (i) exercise by the subject entity or individual of such entity or individual’s own options and warrants
and (ii) vesting of outstanding time-based restricted stock units. This method of computing the percent beneficially owned results in the aggregate ownership
percentages of all owners exceeding 100%.
(2)
Includes 5,663 shares of common stock held directly by Mr. Galvin and 507 shares held by TAG Partners, LLC (“TAG”), an investment partnership formed for the
purpose of investing in the Company. Mr. Galvin is a managing member of and has a controlling interest in TAG and may be deemed to beneficially own the share of
common stock held by TAG, over which he has shared voting and dispositive power. Mr. Galvin disclaims beneficial ownership of the shares of common stock held
by TAG except to the extent of his pecuniary interest therein. Also includes 23,800 options to purchase our common shares presently exercisable or exercisable within
60 days of April 11, 2022. Includes 472,602 in vested RSUs and does not include 263,090 unvested RSUs that will not vest within 60 days of April 11, 2022.
(3)
Includes 1,556 shares of common stock directly held by Mr. Blumenfeld. Includes 26,679 in vested RSUs and does not include 3,946 unvested RSUs that will not
vest within 60 days of April 11, 2022.
(4)
Includes 20 shares of common stock held in Mr. Melton’s retirement account, which Mr. Melton indirectly owns, and 537 shares of common stock held directly by
Mr. Melton. Includes 833 options held by Mr. Melton to purchase our common stock presently exercisable or exercisable within 60 days of April 11, 2022. Includes
26,679 in vested RSUs and does not include 3,946 unvested RSUs that will not vest within 60 days of April 11, 2022.
(5)
Includes 28,808 in vested RSUs and does not include 3,946 unvested RSUs that will not vest within 60 days of April 11, 2022.
(6)
Includes 104,167 in vested RSUs and does not include 133,333 unvested RSUs that will not vest within 60 days of April 11, 2022.
(7)
Includes 417 shares of common stock held by Mr. Sheeran. Also includes 1,250 options to purchase common stock presently exercisable or exercisable within 60
days of April 11, 2022. Includes 78,000 in vested RSUs and does not include 100,000 unvested RSUs that will not vest within 60 days of April 11, 2022.
(8)
Includes 7,888 in vested RSUs and does not include 3,946 unvested RSUs that will not vest within 60 days of April 11, 2022.
(9)
Includes 7,888 in vested RSUs and does not include 3,946 unvested RSUs that will not vest within 60 days of April 11, 2022.
(10) Share ownership information is based on information contained in a Schedule 13G filed with the Securities and Exchange Commission on November 29, 2021 by E.
Bryan Bagley. E. Bryan Bagley has sole voting and dispositive power with regard to 316,500 shares of our common stock and shares voting and shares dispositive
power with respect to 310,000 shares of our common stock. The principal business address for, E..Bryan Bagley is 1470 Arlington Drive, Salt Lake City, Utah
84103.
Equity Compensation Plan Information
See Part I, Item 5— Equity Compensation Plan Information for certain information regarding our equity compensation plans.
62
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Related Party Transactions
The following is a summary of transactions since January 1, 2020 to which we have been a party in which the amount involved exceeded $120,000 and in which any
of our executive officers, directors or beneficial holders of more than five percent of our capital stock had or will have a direct or indirect material interest, other than
compensation arrangements and equity awards granted to our executive officers and directors during 2020 and 2021 that are described under the sections of this proxy
statement entitled “Executive Compensation” and “Director Compensation”.
On January 21, 2020, CPF GP 2019-1 LLC (“CPF GP”) issued to the Company a promissory note in the principal amount of $400,000 (the “Company Note”) and
issued to Paul Galvin, the Company’s Chairman and CEO, a promissory note in the principal amount of $100,000 (the “Galvin Note”). The transaction closed on January 22,
2019, on which date the Company loaned CPF GP 2019-1 LLC $400,000 and Mr. Galvin personally loaned CPF GP $100,000 on behalf of the Company.
The Company Note and Galvin Note were issued pursuant to the Loan Agreement and Promissory Note, dated October 3, 2019, as amended on October 15, 2019 and
November 7, 2019 by and between the CPF GP and the Company, and bear interest at five percent (5%) per annum, payable, together with the unpaid principal amount of
the promissory notes, on the earlier of the July 31, 2023 maturity date or upon the liquidation, redemption sale or issuance of a dividend upon the LLC interests in CPF MF
2019-1 LLC, a Texas limited liability company of which CPF GP is the general partner. The terms of the Galvin Note, however, provide that all interest payments due to
Mr. Galvin under the Galvin Note shall be paid directly to, and for the benefit of, the Company. In connection with the issuance of the Company Note and the Galvin Note,
CPF GP, the Company and Mr. Galvin entered into a Security Agreement, dated January 21, 2020, pursuant to which CPF GP granted a security interest in its LLC interests
in CPF MF 2019-1 LLC to the Company and Mr. Galvin to secure its obligations thereunder. Subsequent to the year ended December 31, 2021, the Galvin Note was
assigned to the Company and the principal amount of $100,000 was returned to Mr. Galvin. The Company has a promissory note in the principal amount of $100,000 and
the assignment of the promissory note occurred in January 2022.
On January 31, 2020, Mahesh Shetty, the Company’s former President and Chief Financial Officer (“Former Employee”), filed suit against the Company and its
Chairman and Chief Executive Officer, Paul Galvin, claiming (i) $372,638 in unpaid wages and bonuses and (ii) $300,000 due in severance (hereafter the “Action”). On
March 25, 2020, the Former Employee filed an amended complaint raising additional claims of retaliation under the Fair Labor Standards Act, 29 U.S.C. §201 et. seq.
(“FLSA”), and contractual indemnification. On April 27, 2020, the Company filed a motion to dismiss the Action. The Company asserted that the Former Employee agreed
to accept (and did receive) restricted stock units of the Company’s common stock in full satisfaction and payment of all alleged unpaid wages and bonuses that are claimed
in the Action, and/or has otherwise been paid in full for all amounts claimed. The Company further maintained that the Former Employee’s employment agreement
precludes any entitlement to or liability for severance. On June 15, 2020, the Court entered a decision granting in part and denying in part the Company’s motion to dismiss.
Specifically, the Court dismissed the Former Employee’s claim (i) for severance (in the amount of $300,000) and unpaid wages pursuant to the FLSA, but denied dismissal
of the Former Employee’s claims for retaliation under the FLSA or unpaid wages allegedly due under the New York Labor Law.
On or about September 14, 2021, the Company and Former Employee entered into a settlement and release agreement resolving their respective claims. On
September 14, 2021, the parties filed a joint motion seeking court approval of the settlement. The motion to approve the settlement remains pending before the court.
During 2021, the Company paid a company controlled by Yaniv Blumenfeld $66,296 for development work related to the Company’s Lago Vista project and paid
Mr. Blumenfeld’s spouse $75,642 in consulting fees in connection with the Company’s COVID-19 testing program.
63
Related Party Review Procedures
Pursuant to our Audit Committee charter, our Audit Committee reviews on an on-going basis our policies and procedures for reviewing and approving or
ratifying all “Related Party Transactions” (defined as transactions required to be disclosed pursuant to Item 404 of Regulation S-K), including the Company’s Related
Person Transaction Policy, and recommend any changes to the Board. In accordance with our Related Person Transaction Policy and Nasdaq Rule 4350 (h), the Audit
Committee conducts appropriate review and oversight of all related person transactions for potential conflict of interest situations on an ongoing basis. Any transaction
with a related person is subject to our written policy for transactions with related persons. Pursuant to such policy, our Audit Committee reviews in advance all related
person transactions. The Audit Committee approves only those related person transactions that are determined to be in, or not inconsistent with, the best interests of the
Company and its stockholders, taking into account all available facts and circumstances as the Audit Committee determines in good faith to be necessary. These facts
and circumstances will typically include, but not be limited to: whether the transaction was undertaken in the ordinary course of business of the Company; the purpose
and potential benefits of the transaction to the Company; the terms of the transaction and of comparable transactions that would be available to unrelated third parties
or to employees generally; and the impact on a director’s independence in the event the related person is a director, an immediate family member of a director or an
entity in which a director is a partner, stockholder or executive officer. In reviewing and approving such transactions, the Audit Committee obtains, or will direct
management to obtain on its behalf, all information that the Audit Committee believes to be relevant and important to a review of the transaction prior to its approval.
The Audit Committee may adopt any further policies and procedures relating to the approval of related person transactions that it deems necessary or advisable from
time to time.
Director Independence
The information included under the heading “Director Independence” in Part III, Item 10 is hereby incorporated by reference into this Item 13.
64
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Whitley Penn LLP serves as our independent registered public accounting firm.
Independent Registered Public Accounting Firm Fees
The following table sets forth the aggregate fees for professional service rendered by Whitley Penn for each of the last two fiscal years:
Audit fees(1)
Audit-related fees(2)
Tax fees(3)
All other fees(4)
Totals
2021
2020
225,000
—
—
—
225,000
$
$
199,500
—
—
—
199,500
$
$
(1) Audit fees include fees paid to Whitley Penn for professional services rendered for the audit for our annual financial statements and reviews of the financial
statements included in our Quarterly Reports on Form 10-Q and fees related to securities registration statements and related comfort letter procedures.
(2) Audit-related fees principally involve other assurance and related services.
(3) Tax services include tax compliance and tax planning consulting services. No tax services were performed for us by Whitley Penn in 2021 or 2020.
(4) No other services were performed for us by Whitley Penn in 2021 or 2020.
The Audit Committee has implemented pre-approval procedures consistent with the rules adopted by the SEC. All audit services to be provided to the Company by
our independent public accounting firm, Whitley Penn, are pre-approved by the Audit Committee prior to the initiation of such services (except for items exempt from pre-
approval requirements under applicable laws and rules). The Audit Committee has determined that the provision of the services by Whitley Penn reported hereunder had no
impact on its independence.
65
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) INDEX TO 2021 CONSOLIDATED FINANCIAL STATEMENTS:
PART IV
Our financial statements and the notes thereto, together with the report thereon of Whitley Penn LLP, our registered public accounting firm, dated April 15, 2022,
appear beginning on page F-1 of this Annual Report. See Table of Contents of the Consolidated Financial Statements included in this Annual Report.
(a)(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because they are not applicable, not material or the required information is shown in the financial statements or notes thereto.
(a)(3) EXHIBITS
The information required by this Item is listed in the accompanying Exhibit Index below.
66
ITEM 16. FORM 10-K SUMMARY.
Not applicable.
Exhibit Index
Exhibit
No.
2.1
Description
Order Confirming Debtors’ Amended Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (incorporated herein by reference to Exhibit 2.1 to the
Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on July 7, 2016 (File No. 000-22563).
2.2
Disclosure Statement for Amended Plan of Reorganization for SG Blocks, Inc., et al. under Chapter 11 of the Bankruptcy Code (incorporated herein by reference
2.3
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
4.1
to Exhibit 2.2 to the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on July 7, 2016 (File No. 000-
22563)).
Order of the Bankruptcy Court for the Southern District of New York Approving the Disclosure Statement and Setting Plan of Reorganization Confirmation
Deadlines (incorporated herein by reference to Exhibit 2.3 to the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange
Commission on July 7, 2016 (File No. 000-22563)).
Amended and Restated Certificate of Incorporation of SG Blocks, Inc. (incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K as filed
by SG Blocks, Inc. with the Securities and Exchange Commission on July 7, 2016 (File No. 000-22563)).
Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (incorporated herein by reference to Exhibit 3.2 to the
Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on July 7, 2016 (File No. 000-22563)).
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of SG Blocks, Inc. (incorporated herein by reference to Exhibit 3.1 to the
Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on February 28, 2017 (File No. 000-22563)).
Certificate of Amendment to Certificate of Designation, dated May 11, 2017 (incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K
as filed by SG Blocks, Inc. with the Securities and Exchange Commission on May 12, 2017 (File No. 001-38037)).
Certificate of Elimination of Series A Convertible Preferred Stock, dated December 13, 2018 (incorporated herein by reference to Exhibit 3.1 to the Current
Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on December 17, 2018 (File No. 001-38037)).
Certificate of Amendment to the Amended and Restated Certificate of Incorporation dated June 5, 2019 (incorporated herein by reference to Exhibit 3.1 to the
Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on June 5, 2019 (File No. 001-38037)).
Form of Certificate of Designation of the Series B Convertible Preferred Stock (incorporated herein by reference to Exhibit 3.7 to the Registration Statement on
Form S-1/A as filed by SG Blocks, Inc. with the Securities and Exchange Commission on December 9, 2019 (File No. 333-235295))
Certificate of Amendment to the Amended and Restated Certificate of Incorporation, as amended, of SG Blocks, Inc. (incorporated herein by reference to Exhibit
3.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on February 5, 2020 (File No. 001-38037)).
Amended and Restated Bylaws of SG Blocks, Inc. dated June 4, 2021 (incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K as filed
by SG Blocks, Inc. with the Securities and Exchange Commission on June 7, 2021 (File No. 001-38037)).
Form of Warrant to Purchase Common Stock (incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc. with
the Securities and Exchange Commission on July 14, 2017 (File No. 001-38037)).
67
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9*
10.1#
10.2#
Form of Indenture (incorporated herein by reference to Exhibit 4.2 to the Registration Statement on Form S-3 as filed by SG Blocks, Inc. with the Securities and
Exchange Commission on December 18, 2018 (File No. 333-228882)).
Form of Common Stock Purchase Warrant (incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K as filed by SG Blocks, Inc. with
the Securities and Exchange Commission on May 1, 2019 (File No. 001-38037)).
Form of Series A Common Stock Purchase Warrant (incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K as filed by SG
Blocks, Inc. with the Securities and Exchange Commission on May 1, 2019 (File No. 001-38037)).
Form of Representative’s Warrant Agreement (incorporated herein by reference to Exhibit 4.1 of the Current Report on Form 8-K as filed by SG Blocks, Inc. with
the Securities and Exchange Commission on July 31, 2019 (File No. 001-38037)).
Form of 9% Secured Note (incorporated herein by reference to Exhibit 4.1 of the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and
Exchange Commission on February 6, 2020 (File No. 001-38037)
Form of Representative’s Warrant (incorporated herein by reference to Exhibit 4.14 to the Registration Statement on Form S-1/A filed with the Securities and
Exchange Commission on May 5, 2020 (File No. 333-237682)).
Form of Pre-Funded Warrant (incorporated herein by reference to Exhibit 4.15 to the Registration Statement on Form S-1/A filed with the Securities and
Exchange Commission on May 5, 2020 (File No. 333-237682)).
Description of Capital Stock
Form of SG Blocks, Inc. Incentive Stock Option Agreement (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K as filed by SG
Blocks, Inc. with the Securities and Exchange Commission on November 1, 2016 (File No. 000-22563)).
Form of SG Blocks, Inc. Nonqualified Stock Option Agreement (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K as filed by
SG Blocks, Inc. with the Securities and Exchange Commission on November 1, 2016 (File No. 000-22563)).
10.3#
Form of Director Indemnification Agreement (incorporated herein by reference to Exhibit 10.1 to the Registration Statement on Form S-1 as filed by SG
Blocks, Inc. with the Securities and Exchange Commission on February 6, 2017 (File No. 333-215922)).
10.4#
10.5#
SG Blocks, Inc. Stock Incentive Plan (incorporated herein by reference to Exhibit 10.10 to the Registration Statement on Form S-1 as filed by SG Blocks, Inc.
with the Securities and Exchange Commission on February 6, 2017 (File No. 333-215922)).
Executive Employment Agreement, effective as of January 1, 2017, between Paul M. Galvin and SG Blocks, Inc. (incorporated herein by reference to Exhibit
10.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on March 14, 2017 (File No. 000-22563)).
68
10.16#
Amendment No. 1 to the SG Blocks, Inc. Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K as filed by
SG Blocks, Inc. with the Securities and Exchange Commission on June 5, 2018 (File No. 001-38037)).
10.17#
Form of SG Blocks, Inc. Restricted Share Unit Agreement (Non-Employee Directors) (incorporated herein by reference to Exhibit 10.1 to the Current Report on
Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on July 30, 2018 (File No. 001-38037)).
10.18#
Form of Restricted Share Unit Agreement (incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q as filed by SG Blocks, Inc.
with the Securities and Exchange Commission on August 14, 2019 (File No. 001-38037)).
10.19#
Form of Restricted Share Unit Agreement (Special Bonus) (incorporated herein by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q as filed by
SG Blocks, Inc. with the Securities and Exchange Commission on August 14, 2019 (File No. 001-38037)).
10.20
Exclusive License Agreement, entered into as of October 3, 2019 by and between SG Blocks, Inc. and CPF MF 2019-1 LLC (incorporated herein by reference
to Exhibit 10.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on October 9, 2019 (File No. 001-
38037))
10.21
Loan Agreement and Promissory Note, dated effective October 3, 2019, between SG Blocks, Inc., as lender, and CPF GP 2019-1 LLC, as borrower
(incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission
on October 9, 2019 (File No. 001-38037))
10.22
Right of First Refusal Agreement, entered into as of October 9, 2019 by and between SG Blocks, Inc. and CMC Development LLC (incorporated herein by
reference to Exhibit 10.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on October 15, 2019
(File No. 001-38037))
10.23
Amendment to Loan Agreement and Promissory Note between SG Blocks, Inc. and CPF GP 2019-LLC (incorporated herein by reference to Exhibit 10.2 to the
10.24
10.25
10.26
10.27
Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on October 15, 2019 (File No. 001-38037))
Second Amendment to Loan Agreement and Promissory Note dated November 7, 2019 between CPF GP 2019-1 LLC and SG Blocks, Inc (incorporated herein
by reference to Exhibit 10.1 of the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on November 13,
2019 (File No. 001-38037)).
Amendment No. 1 to Exclusive License Agreement, entered into as of October 3, 2019 by and between SG Blocks, Inc. and CPF MF 2019-1 LLC (incorporated
herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q as filed by SG Blocks, Inc. with the Securities and Exchange Commission on November
14, 2019 (File No. 001-38037))
Waiver of Warrant (incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and
Exchange Commission on December 13, 2019 (File No. 001-38037)).
Promissory Note, dated January 21, 2020, issued by CPF GP 2019-1 LLC to SG Blocks, Inc. (incorporated herein by reference to Exhibit 10.1 of the Current
Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on January 23, 2020 (File No. 001-38037)
69
10.28
Promissory Note, dated January 21, 2020, issued by CPF GP 2019 -1 LLC to Paul Galvin (incorporated herein by reference to Exhibit 10.2 of the Current
Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on January 23, 2020 (File No. 001-38037)
10.29
10.30
Security Agreement, by and among CPF GP 2019-1 LLC, SG Blocks, Inc. and Paul Galvin, dated January 21, 2020 (incorporated herein by reference to Exhibit
10.3 of the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on January 23, 2020 (File No. 001-38037)
Form of Securities Purchase Agreement (incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K as filed by SG Blocks, Inc. with
the Securities and Exchange Commission on February 6, 2020 (File No. 001-38037)
10.31
Form of Pledge Agreement (incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities
10.32
10.33
10.34
10.35#
10.36#
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
and Exchange Commission on February 6, 2020 (File No. 001-38037)
Distributorship Agreement between Osang Healthcare Co., Ltd. and SG Blocks, Inc., effective as of April 28, 2020 (incorporated herein by reference to Exhibit
10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 2020 (File No. 001-38037))
Amendment to Distributorship Agreement between Osang Healthcare Co., Ltd. and SG Blocks, Inc., dated April 30, 2020 (incorporated herein by reference to
Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 2020 (File No. 001-38037)).
Agreement between Osang Group Co. Ltd. and SG Blocks, Inc., dated May 1, 2020 (incorporated herein by reference to Exhibit 10.3 to the Current Report on
Form 8-K filed with the Securities and Exchange Commission on May 5, 2020 (File No. 001-38037)).
Amendment No. 2 to the SG Blocks, Inc. Stock Incentive Plan (incorporated by reference to Appendix A to the Definitive Proxy Statement on Schedule 14A filed
with the Securities and Exchange Commission on June 25, 2020 (File No. 001-38037))
Asset Purchase Agreement by and between SG Echo, LLC and Echo DCL, LLC, dated September 17, 2020 (incorporated herein by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 22, 2020 (File No. 001-38037)).
Unimproved Property Contract, dated February 25, 2021, by and between SG Blocks, Inc. and Northport Harbor LLC (incorporated herein by reference to
Exhibit 10.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on May 11, 2021 (File No. 001-
38037)).
Settlement and Mutual Release Agreement, dated June 15, 2021, by and among CPF GP 2019-1 LLC, Capital Plus Financial, LLC and SG Blocks, Inc.
(incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on
June 21, 2021 (File No. 001-38037)).
Termination of Exclusive License Agreement, effective June 15, 2021 (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K as
filed by SG Blocks, Inc. with the Securities and Exchange Commission on June 21, 2021 (File No. 001-38037)).
Assignment of Limited Rights Under Membership Interest Redemption Agreement, dated June 15, 2021, by and among Capital Plus Financial, LLC, SG Blocks,
Inc. and CPF GP 2019-1 LLC (incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities
and Exchange Commission on June 21, 2021 (File No. 001-38037)).
Operating Agreement by and between SGB Development Corp., Jacoby Development, Inc. and JDI-Cumberland Inlet. LLC, dated June 24, 2021 (incorporated
herein by reference to Exhibit 10.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on June 28, 2021
(File No. 001-38037)).
Fabrication and Building Services Agreement by and between JDI-Cumberland Inlet, LLC and SG Echo, LLC, dated June 24, 2021 (incorporated herein by
reference to Exhibit 10.2 to the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on June 28, 2021 (File No.
001-38037)).
Real Estate Lien Note, dated July 14, 2021, in the principal amount of $2,000,000 (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form
8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on July 19, 2021 (File No. 001-38037)).
Deed of Trust, dated July 14, 2021 (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K as filed by SG Blocks, Inc. with the
Securities and Exchange Commission on July 19, 2021 (File No. 001-38037)).
Assignment of Leases and Rents, dated July 8, 2021 (incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K as filed by SG Blocks,
Inc. with the Securities and Exchange Commission on July 19, 2021 (File No. 001-38037)).
Amendment No. 3 to the SG Blocks, Inc. Stock Incentive Plan (incorporated by reference to Appendix A to the Definitive Proxy Statement on Schedule 14A filed
with the Securities and Exchange Commission on July 14, 2021 (File No. 001-38087)).
Employment Agreement, dated September 27, 2021, between SG Blocks, Inc. and William Rogers (incorporated herein by reference to Exhibit 10.1 to the
Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on October 1, 2021 (File No. 001-38037)).
Employment Agreement, dated September 30, 2021, between SG Blocks, Inc. and Gerald Sheeran (incorporated herein by reference to Exhibit 10.1 to the
Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on October 1, 2021 (File No. 001-38037)).
70
10.49
10.50
10.51
10.52
10.53
10.54
21.1*
23.1*
24.1*
31.1*
31.2*
32.1*
Placement Agency Agreement, dated as of October 25, 2021, by and between the Company and the Placement Agent (incorporated herein by reference to Exhibit
10.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on October 26, 2021 (File No. 001-38037)).
Form of Securities Purchase Agreement, dated as of October 25, 2021 by and between the Company and the Purchaser named therein (incorporated herein by
reference to Exhibit 10.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on October 26, 2021 (File
No. 001-38037)).
Lease Agreement by and between SG Echo LLC and May Properties, LLC, dated October 28, 2021 (incorporated herein by reference to Exhibit 10.1 to the
Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on November 2, 2021 (File No. 001-38037)).
Guaranty by SG Blocks, Inc. dated October 28, 2021 (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K as filed by SG Blocks,
Inc. with the Securities and Exchange Commission on November 2, 2021 (File No. 001-38037)).
Loan Agreement by and among SG Echo LLC, The Durant Industrial Authority and SG Blocks, Inc., as guarantor, dated October 29, 2021 (incorporated herein
by reference to Exhibit 10.3 to the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on November 2, 2021
(File No. 001-38037)).
Forgivable Promissory Note, dated October 29, 2021, issued by SG Echo LLC (incorporated herein by reference to Exhibit 10.4 to the Current Report on Form 8-
K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on November 2, 2021 (File No. 001-38037)).
List of Subsidiaries*
Consent of Whitley Penn LLP, Independent Registered Public Accounting Firm
Power of Attorney (included on signature page).
Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification by Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS* XBRL Instance Document - the instance document does not appear in the Interactive Data File as the XBRL tags are embedded within the Inline XBRL
document.
101.SCH* XBRL Taxonomy Extension Schema Document.
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB* XBRL Taxonomy Extension Label Linkbase Document.
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document.
*
#
Filed herewith.
Management contract or compensatory plan or arrangement required to be identified pursuant to Item 15(a)(3) of this report.
71
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
SIGNATURES
the undersigned, thereunto duly authorized.
SG BLOCKS, INC.
By:
/s/ Paul M. Galvin
Paul M. Galvin
Chief Executive Officer and Chairman of the Board (Principal
Executive Officer)
Date: April 15, 2022
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints Paul M. Galvin and Gerald A. Sheeran, and each of them, his attorneys-in-fact, each
with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign this Annual Report on Form 10-K and any and all amendments to
this report on Form 10-K, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that such attorneys-in-fact and agents or any of them or his or their substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the
Company and in the capacities and on the date indicated.
/s/ Paul M. Galvin
Paul M. Galvin
/s/ Gerald A. Sheeran
Gerald A. Sheeran
/s/ David Villarreal
David Villarreal
/s/ Yaniv Blumenfeld
Yaniv Blumenfeld
/s/ Christopher Melton
Christopher Melton
/s/ Margaret Coleman
Margaret Coleman
/s/ Joseph Safina
Joseph Safina
Signature
Title
Chief Executive Officer and Chairman of the Board (Principal
Executive Officer)
Date
April 15, 2022
Acting Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
April 15, 2022
Director
Director
Director
Director
Director
72
April 15, 2022
April 15, 2022
April 15, 2022
April 15, 2022
April 15, 2022
SG BLOCKS, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2021 and 2020
Table of Contents
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID: 726)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
F-2
F-5
F-6
F-7
F-8
F-9
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
SG Blocks, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of SG Blocks, Inc. and subsidiaries (the “Company”), as of December 31, 2021 and 2020, and the related
consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended and the related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company, as of December 31, 2021 and 2020, and
the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on
our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for
the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be
communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging,
subjective, or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they
relate.
Revenue Recognition – Determination of Estimated Costs to Complete for Contracts Recognized Over Time
Description of the Matter
The Company’s construction and engineering contracts generally recognize revenue over time as there is a continuous transfer of control to the customer. Approximately
18% of the Company’s revenue during the year ended December 31, 2021 was for construction and engineering contracts whereby revenue was recorded over time. The
Company uses the amount of cost incurred under the contract as a measure of progress towards completion, and revenue recognized is measured principally by the costs
incurred and accrued to date for each contract as a percentage of the estimated total cost for each contract at completion. Contract costs include all direct material, labor,
and indirect costs related to contract performance. Changes in job performance, job conditions, estimated contract costs and profitability and final contract settlements may
result in revisions to costs and income, and the effects of these revisions are recognized prospectively in the period in which the revisions are determined. This measurement
and comparison process requires updates to the estimate of total costs to complete the contract, and these updates include subjective assessments and judgments.
F-2
We identified the Company’s estimation of the costs to complete each contract as a critical audit matter due to the high degree of auditor judgment and the increased extent
of effort that was required when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the estimate of costs to
complete contracts recognized over time.
How We Addressed the Matter in Our Audit
Our audit procedures related to forecasts of estimated costs to complete contracts recognized over time included the following, among others:
• We selected a sample of contracts and obtained and inspected the executed contract and change orders to validate existence and understand the scope of each contract.
• We performed a site visit near the end of the reporting period. We observed and inspected the projects in process and inquired of project managers to gain an
understanding of the progress on significant projects in process.
• We selected a sample of project costs incurred to ensure accuracy of costs incurred during the year. We also verified that project costs, both direct and indirect, were
applied to the correct project.
• We evaluated and tested management’s process to estimate future costs to complete contracts recognized over time. This evaluation included ensuring the
consistency of management’s process and policies regarding change orders and timely costs revisions; performing a retrospective review of prior estimates to actual
results; and analyzing actual costs incurred subsequent to December 31, 2021 as compared to the estimated future costs to complete as of December 31, 2021.
Goodwill Impairment Analysis
Description of the Matter
The Company’s evaluation of goodwill for impairment involves the comparison of the estimated fair value of each reporting unit to its carrying value. The annual
impairment test of goodwill at a reporting unit level is performed annually during the fourth quarter, or more frequently if events or circumstances indicate the fair value of a
reporting unit may be below its respective carrying value. The Company uses a discounted cash flow model (income approach) and several market approaches to estimate
the fair value of the reporting unit. The discounted cash flow model requires management to make significant estimates and assumptions related to discount rates and
forecasts of future revenues and reporting unit profit margins. The market approach requires management to make significant estimates and assumptions related to
identifying comparable public companies and determining an appropriate revenue multiple to calculate fair value. Changes in these assumptions could have a significant
impact on the fair value and the amount of any goodwill impairment charge.
The Company performed its annual impairment test of goodwill during the fourth quarter. No impairment was recorded, because the estimated fair values of each of the
Company’s reporting units exceeded their carrying values. Given that forecasted revenues and reporting unit profit margins are sensitive to changes in demand and
efficiency of operations, auditing management’s assumptions involved subjective judgment. As a result, we identified the Company’s evaluations of goodwill impairment as
a critical audit matter due to the high degree of auditor judgment and the increased extent of effort that was required when performing audit procedures to evaluate the
reasonableness of management’s estimates and assumptions related to the forecasts of revenue and profit margins, the selection of discount rates, and the selection of
appropriate revenue multiples, including the need to involve our fair value specialists.
F-3
How We Addressed the Matter in Our Audit
Our audit procedures related to forecasts of future revenues and operating unit profit margins (“forecasts”), the selection of discount rates, and the determination of
appropriate revenue multiples included the following, among others:
•
•
•
•
•
•
We evaluated the reasonableness of management’s forecasts by evaluating the reasonableness of management’s future operating plans, which include expanding
production capacity and gaining operating efficiencies.
We evaluated the reasonableness of management’s forecasts by performing a sensitivity analysis on the forecasts used in the discounted cash flow model to
determine the impact to fair value as various assumptions are changed.
We evaluated the reasonableness of the revenue multiples used in the market approach to determine the impact to fair value as various assumptions are changed.
With the assistance of our fair value specialists, we evaluated the reasonableness of management’s fair value estimate by:
Testing the Company’s process to develop the estimates, which included evaluating the methods, data, and significant assumptions used in developing the estimate.
Testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation.
/s/ Whitley Penn LLP
We have served as the Company’s auditor since 2016.
Dallas, Texas
April 15, 2022
F-4
SG BLOCKS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Contract assets
Inventories
Prepaid expenses
Total current assets
Property, plant and equipment, net
Project development costs and other non-current assets
Goodwill
Right-of-use asset, net
Long-term notes receivable
Intangible assets, net
Deferred contract costs, net
Investment in non-marketable securities
Investment in and advances to equity affiliates
Total Assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses
Contract liabilities
Lease liability, current maturities
Due to affiliates
Assumed liability
Short term note payable, net
Other current liabilities
Total current liabilities
Long-term note payable
Lease liability, net of current maturities
Total liabilities
Stockholders’ equity:
Preferred stock, $0.00 par value, 5,405,010 shares authorized; none issued or outstanding.
Common stock, $0.01 par value, 25,000,000 shares authorized; 11,986,873 issued and outstanding as of December 31, 2021 and
8,596,189 issued and outstanding as of December 31, 2020.
Additional paid-in capital
Accumulated deficit
Total SG Blocks, Inc. stockholders’ equity
Non-controlling interests
Total Stockholders' equity
Total Liabilities and Stockholders’ Equity
The accompanying notes are an integral part of these consolidated financial statements.
F-5
2021
2020
13,024,381 $
2,917,646
41,916
1,273,825
656,279
17,914,047
6,839,943
923,172
1,309,330
1,210,053
720,137
2,095,232
112,159
200,000
3,599,945
34,924,018 $
7,568,851 $
1,437,579
337,469
264,451
5,795
1,971,960
—
11,586,105
750,000
872,124
13,208,229
13,010,356
2,635,608
1,303,136
778,144
570,775
18,298,019
2,683,014
—
1,309,330
1,537,545
682,637
2,218,609
152,944
—
—
26,882,098
3,961,961
1,774,740
326,654
965,561
200,765
—
5,000
7,234,681
—
1,209,594
8,444,275
—
—
119,869
53,341,405
(33,109,220 )
20,352,054
1,363,735
21,715,789
34,924,018 $
85,962
40,443,840
(22,276,546 )
18,253,256
184,567
18,437,823
26,882,098
$
$
$
$
SG BLOCKS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Revenue:
Construction services
Engineering services
Medical revenue
Total
Cost of revenue:
Construction services
Engineering services
Medical revenue
Total
For the Years Ended December 31,
2021
2020
$
$
6,537,941
255,749
31,548,012
38,341,702
13,251,470
154,126
22,607,058
36,012,654
4,104,917
409,206
4,241,500
8,755,623
3,224,457
322,853
2,988,134
6,535,444
Gross profit
Operating expenses:
Payroll and related expenses
General and administrative expenses
Marketing and business development expense
Pre-project expenses
Total
Operating loss
Other income (expense):
Interest expense
Interest income
Other income
Loss on asset disposal
Loss from equity affiliates
Total
Loss before income taxes
Income tax expense
Net loss
Add: net profit attributable to noncontrolling interests
Net loss attributable to common stockholders of SG Blocks, Inc.
Net loss per share attributable to SG Blocks, Inc. - basic and diluted:
Basic and diluted
Weighted average shares outstanding:
Basic and diluted
2,329,048
2,220,179
4,186,642
3,788,024
288,438
48,794
8,311,898
2,992,207
3,449,849
230,248
130,707
6,803,011
(5,982,850)
(4,582,832)
(1,254)
57,266
62,602
(44,081 )
(55)
74,478
(9,275)
61,675
23,282
(1,012)
—
74,670
(5,908,372)
—
(4,508,162)
—
(5,908,372)
(4,508,162)
4,924,302
(10,832,674 )
$
184,567
(4,692,729)
(1.16 )
$
(0.79 )
9,339,199
5,959,403
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-6
SG BLOCKS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
Balance at January 1, 2020
Stock-based compensation
Conversion of restricted stock units to
common stock
Reverse stock split settlement
Conversion of debt exchange to
common stock
Issuance of common stock, net of
issuance costs
Net income (loss)
Balance at December 31, 2020
Balance at January 1, 2021
Stock-based compensation
Conversion of warrants to common
stock
Issuance of common stock, net of
issuance costs
Noncontrolling interest distribution
Net income (loss)
Balance at December 31, 2021
$0.01 Par Value
Common Stock
Shares
1,157,890 $
—
Amount
11,579 $
—
24,672
(38)
73,665
246
—
737
7,340,000
—
8,596,189 $
73,400
—
85,962 $
Preferred
Stock
Additional
Paid-in
Capital
Accumulated
Deficit
— $ 21,932,387 $ (17,583,817 ) $
SG Blocks
Stockholders' Noncontrolling
Interests
Equity
4,360,149 $
1,261,215
— $
—
Total
Stockholders’
Equity
4,360,149
1,261,215
—
1,261,215
—
—
(246 )
(122)
—
205,526
— 17,045,080
—
—
—
—
—
(122)
206,263
—
— $ 40,443,840 $ (22,276,546 ) $ 18,253,256 $
—
—
(4,692,729)
17,118,480
(4,692,729)
—
—
—
—
(122)
206,263
17,118,480
—
184,567
(4,508,162)
184,567 $ 18,437,823
8,596,189
—
85,962
—
— 40,443,840
1,736,531
—
(22,276,546)
—
18,253,256
1,736,531
184,567
—
18,437,823
1,736,531
226,300
2,263
—
704,925
—
707,188
—
707,188
3,164,384
—
—
31,644
—
—
11,986,873 $
119,869 $
—
— 10,456,109
—
—
—
— (10,832,674)
—
— $ 53,341,405 $ (33,109,220) $ 20,352,054 $
10,487,753
—
(10,832,674)
10,487,753
—
(3,745,134)
(3,745,134)
4,924,302
(5,908,372)
1,363,735 $ 21,715,789
The accompanying notes are an integral part of these consolidated financial statements.
F-7
SG BLOCKS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation expense
Amortization of intangible assets
Amortization of deferred license costs
Bad debt expense and recoveries
Interest income on notes receivable
Stock-based compensation
Loss on asset disposal
Loss on equity affiliates
Changes in operating assets and liabilities:
Accounts receivable
Contract assets
Inventories
Prepaid expenses and other current assets
Right of use asset
Accounts payable and accrued expenses
Contract liabilities
Due to affiliates
Other current liability
Lease liability
Net cash used in operating activities
Cash flows used in investing activities:
Purchase of property, plant and equipment
Purchase of Echo DCL, LLC, net of cash acquired
Purchase of intangible asset
Proceeds from sale of equipment
Advances in notes receivable
Payment on assumed liability of acquired assets
Project development costs
Payment on security deposit
Investment in non-marketable securities
Investment in and advances to equity affiliates
Net cash used in investing activities
Cash flows provided by financing activities:
Proceeds from public stock offering and other private placements, net of issuance costs
Proceeds from conversion of warrants to common stock
Proceeds from short-term note payable
Payment of note issuance costs
Proceeds from long-term note payable
Distribution paid to noncontrolling interest
Settlement of common stock from reverse stock split
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents - beginning of year
Cash and cash equivalents - end of year
Supplemental disclosure of cash flow information:
Cash paid during the year for Interest
Supplemental disclosure of non-cash operating activities:
Non-cash conversion of long term debt
Non-cash conversion of interest expense of long term debt
The accompanying notes are an integral part of these consolidated financial statements.
F-8
For the
Year Ended
December 31,
2021
For the
Year Ended
December 31,
2020
$
(5,908,372) $
(4,508,162 )
398,744
165,877
40,785
167,202
(37,500 )
1,647,391
44,081
55
(449,240)
1,261,220
(495,681)
(61,778 )
473,331
3,606,889
(337,161)
(701,110)
(5,000)
(472,492)
(662,759)
(4,824,756)
—
(42,500)
225,000
—
(194,969)
(630,470)
(203,562)
(200,000)
(3,600,000)
(9,471,257)
50,655
148,541
40,786
10,018
(32,637 )
1,261,215
1,012
—
(890,531)
(1,166,692)
(647,345)
(489,437)
81,256
1,129,189
1,236,174
965,561
5,000
(82,553)
(2,887,950)
(1,568,115)
(743,168)
—
—
(650,000)
(84,440)
—
—
—
—
(3,045,723)
10,487,753
707,188
2,000,000
(51,766)
750,000
(3,745,134)
—
10,148,041
17,118,480
—
—
—
200,000
—
(122)
17,318,358
14,025
11,384,685
13,010,356
1,625,671
13,024,381 $
13,010,356
562 $
2,614
— $
— $
200,000
6,263
$
$
$
$
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
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 11. 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, the Company’s 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. (“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.
F-9
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
1.
Description of Business (continued)
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 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 consolidated financial statements have been adjusted to reflect the reverse stock split effected in February 2020.
As of December 31, 2021, the Company had 11,986,873 shares of common stock issued and outstanding.
2.
Liquidity
As of December 31, 2021, the Company had cash and cash equivalents of $13,024,381 and a backlog of approximately $3.2 million. See Note
13 for a discussion of construction backlog. Based on the Company's conversations with key customers, the Company anticipates its backlog to
convert to revenue over the following period:
Within 1 year
1 to 2 years
Thereafter
Total Backlog
2021
3,217,909
—
—
3,217,909
$
$
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 17 for a discussion on these public offerings. The Company completed a public and concurrent private
offering in October 2021, which resulted in net proceeds of approximately $10,488,000. See Note 17 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.
F-10
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
2.
Liquidity (continued)
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.
3.
Summary of Significant Accounting Policies
Basis of presentation and principals of consolidation – The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the applicable
rules and regulations of the United States Securities and Exchange Commission (“SEC”) and include the accounts of the
Company and its wholly owned subsidiaries, SG Building Blocks, Inc., SG Residential, Inc. and SG Echo, LLC. All
intercompany balances and transactions are eliminated. Investments in 50% or less owned partnerships and affiliates are
accounted for using the equity method unless it is determined that we have effective control of the entity, in which case
we would consolidate the entity. Certain prior period amounts have been reclassified to conform to the current period’s
presentation.
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 consolidated financial statements in conformity with GAAP requires management to make
estimates, judgements 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, together with
amounts disclosed in the related notes to the financial statements. The Company's estimates used in these financial statements include, but
are not limited to, revenue recognition, stock-based compensation, accounts receivable reserves, inventory valuations, goodwill, the
valuation allowance related to the Company’s deferred tax assets, the carrying amount of intangible assets, right of use assets and the
recoverability and useful lives of long-lived assets. Certain of the Company’s estimates could be affected by external conditions, including
those unique to the Company and general economic conditions. It is reasonably possible that these external factors could have an effect on
the Company’s estimates and could cause actual results to 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.
F-11
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
3.
Summary of Significant Accounting Policies (continued)
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.
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. No revenue has been recognized under the ELA for the year ended December 31, 2021. 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 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 is 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.
F-12
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
3.
Summary of Significant Accounting Policies (continued)
The Agreement also provided 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 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
has reported this as a cancellation within the Company's backlog footnote, see Note 13 on this discussion. No revenue has been recognized
under the Agreement during the year ending December 31, 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 year ended December 31, 2021, the
Company recognized approximately $31.4 million 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 primarily derived from two segments, construction related to Modules projects 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 $30,744,769 and $7,596,933, respectively, for the year ended December 31, 2021. Revenue recognized at a point in time and
recognized over time were $4,057,086 and $4,698,537, respectively, for the year ended December 31, 2020.
F-13
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
3.
Summary of Significant Accounting Policies (continued)
The following tables provide further disaggregation of the Company’s revenues by categories:
Revenue by Segments and Customer Type
Construction Segment:
Government
Hotel/Hospitality
Multi-Family (includes Single Family)
Medical (construction services)
Office
Retail
School
Special Use
Other (1)
Total Construction Revenue Segment (includes engineering
service revenue)
Medical Revenue Segment (includes lab testing, kit sales and
equipment)
Total Revenue by Segments and Customer Type
$
$
$
$
(1) Construction fee of $300,000 with no cost of revenue during 2020.
Contract Assets and Contract Liabilities
Twelve Months Ended December 31,
2021
2020
2,335,031
1,110,303
103,672
495,122
534,001
285,177
—
1,930,384
—
6,793,690
6% $
3%
—%
1%
2 %
1 %
— %
5%
—%
751,697
487,111
126,222
778,883
191,505
427,444
36,500
1,414,761
300,000
18% $
4,514,123
31,548,012
82% $
4,241,500
9%
6%
1 %
9%
2 %
5 %
—%
16%
3 %
51%
49%
38,341,702
100 %
$
8,755,623
100 %
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 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 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.
F-14
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
3.
Summary of Significant Accounting Policies (continued)
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
December 31, 2021, accumulated amortization related to deferred contract costs amounted to $91,765. During the years ended December 31,
2021 and 2020, amortization expense relating to the deferred contract costs amounted to $40,785 and $40,786 and is included in general and
administrative expenses on the accompanying consolidated statements 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 ELA had an initial term of five (5) years and was to automatically renew for subsequent five (5) year periods. The ELA provided for
customary terminating provisions, including the right by the Company to terminate if the Licensee failed 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 com mercialization 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 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.
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.
F-15
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
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 Entities – The Company accounts for certain legal entities as variable interest entities (“VIE"). When
evaluating a VIE for consolidation, the Company must determine whether or not there is a variable interest in the entity.
Variable interests are investments or other interests that absorb portions of an entity’s expected losses or receive
portions of the entity’s expected returns. If it is determined that the Company does not have a variable interest in the
VIE, no further analysis is required and the VIE is not consolidated. If the Company holds a variable interest in a VIE,
the Company consolidates the VIE when there is a controlling financial interest in the VIE and therefore are deemed to
be the primary beneficiary. The Company is determined to have a controlling financial interest in a VIE when it has both
the power to direct the activities of the VIE that most significantly impact the VIE economic performance and the
obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to that VIE.
This determination is evaluated periodically as facts and circumstances change.
On August 27, 2020 the Company entered into a joint venture agreement with Clarity Lab Solutions, LLC (“Clarity
Labs”) (the “JV”). In consideration and subject to Clarity Lab’s services and commitments and provided the agreement
remains valid and in force, and is not terminated, 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
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. As of December 31, 2020, $965,561 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 year ended December 31, 2020, the Company recognized revenue of
$641,178 to Clarity Labs, of which $420,773 is included in accounts receivable as of December 31, 2020. The
Company has determined it is the primary beneficiary of Clarity Mobile Venture and has thus consolidated the activities
in its 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 consolidated financial statements.
F-16
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
3.
Summary of Significant Accounting Policies (continued)
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. 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 consolidated financial statements. The Company will use
the equity method to report the activities as an investment in its 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 $13,024,381 and $13,010,356 as of December 31, 2021 and 2020,
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 December 31, 2021 or 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 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 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. 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.
F-17
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
3.
Summary of Significant Accounting Policies (continued)
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 years ended December 31,
2021 or 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, included in intangible assets is $97,164 of trademarks, and $47,800 of website costs that are being amortized over 5 years. The Company
evaluated intangible assets for impairment during the year ended December 31, 2021 and 2020 and determined that there are no impairment losses. The
accumulated amortization and amortization expense as of and for the year ended December 31, 2021 was $815,732 and $165,877, respectively. The
accumulated amortization and amortization expense for the years ended December 31, 2020 was $649,855 and $148,541 respectively. The estimated
amortization expense for the successive five years is as follows:
For the year ending December 31,:
2022
2023
2024
2025
2026
Thereafter
$
$
162,970
161,175
160,469
157,051
139,717
1,313,850
2,095,232
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.
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.
F-18
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
3.
Summary of Significant Accounting Policies (continued)
Fair value measurements – Financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are
carried at cost, which the Company believes approximates fair value due to the short-term nature of these instruments.
The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.
The Company uses three levels of inputs that may be used to measure fair value:
Level 1
Level 2
Level 3
Quoted prices in active markets for identical assets or liabilities.
Quoted prices for similar assets and liabilities in active markets or inputs that are observable.
Inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).
The earnout liability on SG Echo represents the only financial liability measured at fair value on a recurring basis as of December 31, 2021 and 2020 and
was a level 3 asset. As of December 31, 2021 and 2020, the estimated value of the earnout liability was zero.
Transfer into and transfers out of the hierarchy levels are recognized as if they had taken place at the end of the reporting period. There were no transfers
into or out of the hierarchy levels during the year ended December 31, 2021 or 2020, besides the transfer in of the earnout liability.
Share-based payments – The Company measures the cost of services received in exchange for an award of equity instruments based on the
fair value of the award. For employees and directors, including non-employee directors, the fair value of a stock option award is measured on
the grant date. The fair value amount is then recognized over the period services are required to be provided in exchange for the award, usually
the vesting period. The Company recognizes stock-based compensation expense on a graded-vesting basis over the requisite service period for
each separately vesting tranche of each award. Stock-based compensation expense to employees and all directors are reported within payroll
and related expenses in the consolidated statements of operations. Stock-based compensation expense to non-employees is reported within
marketing and business development expense in the 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.
F-19
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
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 December
31, 2021 and 2020, 78% and 79%, respectively, of the Company’s gross accounts receivable were due from four and three customers.
Revenue in excess of 10% relating to one and three customers represented approximately 80% and 61% of the Company's total revenue for the year ended
December 31, 2021 and 2020, respectively.
For the year ending December 31, 2021 and 2020, there were no vendors that represented 10% or more of our cost of revenue. 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 December 31, 2021 and 2020, the Company’s accounts receivable consisted of the following:
Billed:
Construction services
Engineering services
Medical revenue
Retainage receivable
Other receivable
Total gross receivables
Less: allowance for credit losses
Total net receivables
2021
2020
$
$
2,293,187
$
86,388
679,446
635,049
186,692
3,880,762
(963,116)
2,917,646 $
1,391,555
86,264
1,157,819
615,136
180,748
3,431,522
(795,914)
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 $963,116 and $795,914 as of December 31, 2021 and 2020, respectively. There was a provision of $167,202 for credit losses, no recoveries
collected for credit losses and no write offs during the year ended December 31, 2021. There was a provision for credit losses of $10,018, and no write offs for
the year ended December 31, 2020. The total net receivables as of January 1, 2020 was $1,101,185.
F-20
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
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 December 31, 2021
and 2020:
Costs incurred on uncompleted contracts
Provision for loss on uncompleted contracts
Estimated earnings (losses) to date on uncompleted contracts
Gross contract assets
Less: billings to date
Net contract liabilities on uncompleted contracts
2021
2020
$
4,272,425
2,238,578
(3,156,377)
3,354,626
(4,750,289)
(1,395,663) $
4,572,581
—
872,302
5,444,883
(5,916,487)
(471,604)
$
$
The above amounts are included in the accompanying consolidated balance sheets under the following captions at December 31, 2021 and 2020.
Contract assets
Contract liabilities
Net contract liabilities
2021
41,916 $
(1,437,579)
(1,395,663) $
2020
1,303,136
(1,774,740)
(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. The Company has experienced accrued losses on legacy contract commitments from the acquisition of SG ECHO due to
escalations in material pricing related to COVID-19 and labor overages.
6.
Project Development Costs and Other Non-Current Assets
Project development costs and other non-current assets are stated at costs. At December 31, 2021, the Company’s project development costs related mainly to
its development segment totaled $719,610 and other non-current assets which includes security deposits totaled $203,562. There were no costs related to project
development costs or other non-current assets as of December 31, 2020.
F-21
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
7.
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 December 31, 2021 and 2020, the Company’s property, plant and equipment, net consisted of the following:
Computer equipment and software
Furniture and other equipment
Leasehold improvements
Equipment and machinery
Automobiles
Building held for lease
Laboratory and temporary units
Land
Construction in process
Property, plant and equipment
Less: accumulated depreciation
Property, plant and equipment, net
$
$
2021
2020
$
156,701
275,606
15,400
1,219,056
4,638
196,416
1,362,760
3,576,130
442,515
7,249,222
(409,279)
$
6,839,943
73,991
11,593
6,071
1,127,647
4,638
501,336
1,016,238
—
—
2,741,514
(58,500)
2,683,014
Depreciation expense for the years ended December 31, 2021 and 2020 amounted to $398,744 and $50,655, respectively. For the year ended December 31, 2021,
a total of $204,482 of depreciation was classified as an indirect costs to cost of goods sold. No depreciation expense was reclassified to cost of goods sold in 2020.
8.
Notes Receivable
On January 21, 2020, CPF GP 2019-1 LLC (“CPF GP”) issued to the Company a promissory note in the principal amount of $400,000 (the “Company Note”)
and issued to Paul Galvin, the Company’s Chairman and CEO, a promissory note in the principal amount of $100,000 (the “Galvin Note”). The transaction closed
on January 22, 2020, on which date the Company loaned CPF GP 2019-1 LLC $400,000 and Mr. Galvin personally loaned CPF GP $100,000 on behalf of the
Company. The Company Note and Galvin Note were issued pursuant to that certain Loan Agreement and Promissory Note, dated October 3, 2019 (the “Loan
Agreement”), as amended on October 15, 2019 and November 7, 2019 by and between the CPF GP and the Company, and bear interest at five percent (5%) per
annum, payable, together with the unpaid principal amount of the promissory notes, on the earlier of the July 31, 2023 maturity date or upon the liquidation,
redemption sale or issuance of a dividend upon the LLC interests in CPF MF 2019-1 LLC, a Texas limited liability company of which CPF GP is the general
partner; provided, that the terms of the Galvin Note provide that all interest payments due to Mr. Galvin under the Galvin Note shall be paid directly to, and for
the benefit of, the Company.
In April 2020, CPF GP issued to the Company a promissory note in the principal amount of $250,000 (the “Company Note 2”). The transaction closed on April
15, 2020, on which date the Company loaned CPF GP 2019-1 LLC $250,000. The Company Note was issued pursuant to that certain Loan Agreement and
Promissory Note, dated October 3, 2019 (the “Loan Agreement 2”), as amended on October 15, 2019 and November 7, 2019 by and between the CPF GP and the
Company, and bear interest at five percent (5%) per annum, payable, together with the unpaid principal amount of the promissory notes, on the earlier of the July
31, 2023 maturity date or upon the liquidation, redemption sale or issuance of a dividend upon the LLC interests in CPF MF 2019-1 LLC, a Texas limited liability
company of which CPF GP is the general partner. Interest income recognized for the years ended December 31, 2021 and 2020 amounted to $37,500 and $32,637,
respectively.
Subsequent to the year ended December 31, 2021, the Galvin Note was assigned to the Company and the principal amount of $100,000 was returned to Mr.
Galvin. The Company has a promissory note in the principal amount of $100,000 (the "Company Note 3") and the assignment occurred in January 2022. The
promissory notes are unaffected by the Settlement and Mutual Release Agreement and remain in effect and outstanding in accordance with the terms of the notes
evidencing such loans. See Note 3 for a discussion on the Settlement and Mutual Release Agreement and termination of the ELA with CPF.
F-22
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
9.
Accounts Payables and Accrued Liabilities
The Company's accounts payables and accrued liabilities at December 31, 2021 and 2020, consisted of the following:
Accounts payable (1)
Accrued public fees (2)
Accrued construction cost of goods sold
Accrued losses (3)
Accrued medical cost of goods sold
Accrued g&a
Accrued project development costs
Accrued payroll and benefits (4)
Accrued interest
Accrued non-income taxes (5)
2021
3,784,662
$
2020
3,012,338
$
121,749
367,298
2,238,578
208,512
176,432
77,700
545,003
11,333
37,584
7,568,851
79,448
408,600
—
180,000
71,014
—
210,561
—
—
3,961,961
$
Total Accounts Payable and Accrued Liabilities
$
(1) Payables also includes insurance financing payable and construction retainage payable balances along with the Company's normal account payable balances.
(2) Public fees include accruals for accounting, legal, and SEC compliance expenses.
(3) Losses for on-going construction projects related to the Construction segment.
(4) Accrued wages, salaries, PTO, benefits, taxes, and other incentive plan expenses.
(5) Non-income taxes includes property taxes, franchise taxes and other.
10.
Notes Payable
On February 4, 2020, the Company entered into a Securities Purchase Agreement with an accredited investor, pursuant to which the Company issued to the
investor a secured note in the aggregate principal amount of $200,000 (“Note”) that bears interest at a rate of nine percent (9%) per annum, due on July 31, 2023,
that is secured under a Pledge Agreement, dated February 4, 2020, entered into with the investor by a security interest in the royalty payable to the Company
under that certain Exclusive License Agreement, dated October 3, 2019, with CPF GP 2019-1 LLC. The Company had the right to prepay the Note, in whole or
in part, at any time and from time to time, without premium or penalty. During the year ended December 31, 2020, the Note to investor of $200,000 and unpaid
accrued interest of $6,263 was converted into 73,665 shares of the Company's common stock.
On July 14, 2021, SG DevCorp, a subsidiary of the Company, issued a Real Estate Lien Note, in the principal amount of $2,000,000 (the “Short-Term Note”),
secured by a Deed of Trust, dated July 14, 2021 (the “Deed of Trust”), on the Company's 50+ acre Lake Travis project site in Lago Vista, Texas and a related
Assignment of Leases and Rents, dated July 8, 2021 (“Assignment of Rents”), for net loan proceeds of approximately $1,948,234 after fees. The Short-Term Note
has a term of one (1) year, provides for payments of interest only at a rate of twelve percent (12%) per annum and may be prepaid without penalty commencing
nine (9) months after its issuance date. If the Short-Term Note is prepaid prior to nine (9) months after its issuance date, a 0.5% prepayment penalty is due. The
Company capitalized $112,348 in interest charges and $23,727 in debt issuance costs as of December 31, 2021 related to the Lago Vista project in accordance
with ASC 835-20.
F-23
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
10.
Notes Payable (continued)
On October 29, 2021, SG Echo, a subsidiary of the Company, entered into a Loan Agreement (“Loan Agreement”) with the Durant Industrial Authority (the
“Authority”) pursuant to which it received $750,000 to be used for renovation improvements related to the Company's second manufacturing facility and issued
to the Authority a non-interest bearing Forgivable Promissory Note in the principal amount of $750,000 (the “Forgivable Note”). The Forgivable Note is due on
April 29, 2029 and guaranteed by the Company, provided, if no event of default has occurred under the Forgivable Note or Loan Agreement, one-third (1/3) of
the balance of the Forgivable Note will be forgiven on April 29, 2027, one-half (1/2) of the balance of the Forgivable Note will be forgiven on April 29, 2028,
and the remainder of the balance of the Forgivable Note will be forgiven on April 29, 2029. The Loan Agreement includes a covenant by SG Echo to employ a
minimum of 75 full-time employees in Durant Oklahoma and pay them no less than 1.5 times the federal minimum wage, and provides SG Echo 24 months to
comply with the provision.
11.
Business Combination
On September 17, 2020, the Company, through SG Echo, LLC (its wholly owned subsidiary), entered into an Asset Purchase Agreement (“APA") to acquire
substantially all of the assets of Echo DCL, LLC (“Echo”) for $1,059,600 in cash (the “Echo Acquisition”), except for ECHO DCL's real estate holdings. The
Echo Acquisition closed on September 23, 2020. In addition, the sellers of Echo have the potential of additional consideration based upon the APA. In
accordance with ASC 805, the Echo Acquisition is accounted for as a business combination. The Echo Acquisition was made for the purpose of expanding the
Company’s footprint into the modular manufacturing business.
The purchase consideration amounted to:
Cash
Earnout liability
Settlement of accounts receivable and net contract liabilities
$
$
1,059,600
—
(94,980 )
964,620
The settlement of accounts receivable and net contract liabilities represents amounts effectively settled upon the purchase of Echo, which originated from
contacts between the Company and Echo prior to the purchase date.
The following table summarizes the preliminary allocation of the purchase price to the assets acquired and liabilities assumed for the Echo Acquisition:
Cash and cash equivalents
Accounts receivable
Inventories
Prepaid expenses and other current assets
Property, plant and equipment
Right-of-use assets
Goodwill
Intangible assets
Accounts payable and accrued expenses
Assumed liability
Contract liabilities
Lease liability
F-24
$
$
316,432
252,557
130,799
7,400
1,154,818
57,120
85,810
68,344
(733,529)
(285,204)
(32,807 )
(57,120 )
964,620
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
11.
Business Combination (continued)
As part of the Echo Acquisition, the Company recorded a contingent consideration liability for additional payments due to the sellers of Echo. These payments are
due in accordance with the APA and are based upon the net income obtained from the Echo business during certain earnout periods. The earnout periods
concluded as of September 30, 2021. The initial contingent consideration liability of $0 was based on the fair value of the contingent consideration liability at the
acquisition date, and is payable in cash and shares of restricted common stock of the Company. Any contingent liability would be paid out in the period after the
earn out period, once additional advances are paid in full. As of December 31, 2021, the liability is $0, and no payment has been paid out.
12.
Leases
The Company leases an office, a plant and certain equipment under non-cancelable operating and finance lease agreements. The leases have remaining lease terms
of one and a half years to four years. The plant lease includes an option to extend the lease for up to five years.
Supplemental balance sheet information related to leases is as follows:
Balance Sheet Location
December 31,
2021
Operating Leases
Right-of-use assets, net
Current liabilities
Non-current liabilities
Total operating lease liabilities
Finance Leases
Right-of-use assets
Current liabilities
Non-current liabilities
Total finance lease liabilities
Weighted Average Remaining Lease Term
Operating leases
Finance leases
Weighted Average Discount Rate
Operating leases
Finance leases
Lease liability, current maturities
Lease liability, net of current maturities
Lease liability, current maturities
Lease liability, net of current maturities
F-25
$
$
$
$
1,177,879
(317,977 )
(860,481)
(1,178,458)
32,174
(19,492 )
(11,643 )
(31,135 )
3.69 years
1.61 years
3%
3%
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
12.
Leases (continued)
As the leases do not provide an implicit rate, the Company used an incremental borrowing rate based on the information available at the lease commencement date
in determining the present value of the lease payments, which is reflective of the specific term of the leases and economic environment of each geographic region.
Anticipated future lease costs, which are based in part on certain assumptions to approximate minimum annual rental commitments under non-cancelable leases,
are as follows:
Year Ending December 31,
2022
2023
2024
2025
2026
Total lease payments
Less: Imputed interest
Present value of lease liabilities
Operating
Financing
$
$
348,984 $
330,300
324,000
243,000
—
1,246,284
67,826
1,178,458 $
20,160 $
11,760
—
—
—
31,920
785
31,135 $
Total
369,144
342,060
324,000
243,000
—
1,278,204
68,611
1,209,593
Chicago Airport Testing has subleased its leased vacant area for a period of one year, the sublessee has the option to terminate at any time after the first six months.
The sublessee elected to terminate the Agreement, effective as of July 31, 2021 and the Company has no remaining lease revenue from the sublessee.
13.
Construction Backlog
The following represents the backlog of signed construction and engineering contracts in existence at December 31, 2021 and 2020, which represents the
amount of revenue the Company expects to realize from work to be performed on uncompleted contracts in progress and from contractual agreements in effect
at December 31, 2021 and December 31, 2020, respectively, on which work has not yet begun:
Balance - beginning of period
New contracts and change orders during the period
Adjustments and cancellations, net
Subtotal
Less: contract revenue earned during the period
Balance - end of period
F-26
2021
25,117,461 $
3,191,335
(18,297,197)
10,011,599
(6,793,690)
3,217,909 $
2020
17,634,261
13,816,785
(27,370)
31,423,676
(6,306,215)
25,117,461
$
$
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
13.
Construction Backlog (continued)
Backlog at December 31, 2021 included two contracts entered into during the third quarter of 2020 in the amount of approximately $4 million and
approximately $2.95 million along with three contracts during the fourth quarter of 2020 in the amount of approximately $2.7 million, $0.80 million, and
$0.70 million. The Company executed one large contract in the first quarter of 2021 in the amount of approximately $1.3 million, one large contract in the third
quarter of 2021 of approximately of $0.87 million and had one large partial contract cancellation to an existing contract of approximately ($1.3) million. The
Company executed one large contract in the fourth quarter of 2021 in the amount of approximately $0.78 million and had one contract cancellation in the
amount of approximately $16.9 million. The Company expects that all of this revenue will be realized by December, 2022. As previously discussed in Note 3,
the ELA was terminated and in connection with the termination a Settlement and Mutual Release Agreement was executed. The Company is receiving an
assignment of CPF's right to a $1.25 million redemption distribution for one such project. The Company does not expect to receive any royalties from the
terminated ELA and Backlog does not include the redemption distribution fee.
The Company’s remaining backlog as of December 31, 2021 represents the remaining transaction price of firm contracts for which work has not been
performed and excludes unexercised contract options.
The Company expects to satisfy its backlog which represents the remaining unsatisfied performance obligation on contracts as of December 31, 2021 over
the following period:
Within 1 year
1 to 2 years
Thereafter
Total Backlog
2021
3,217,909
—
—
3,217,909
$
$
Although backlog reflects business that is considered to be firm, cancellations, deferrals or scope adjustments may occur. Backlog is adjusted to reflect any
known project cancellations, revisions to project scope and cost and project deferrals, as appropriate.
14.
Segment Reporting
We have organized our operations into three segments: Construction, Medical, and Development. We allocate to segment results the operating expenses “Payroll
and related expenses,” “General and administrative,” “Marketing and business development,” and “Pre-project” based on usage, which is generally reflected in the
segment in which the costs are incurred. These segments reflect the way our executive team evaluates the Company’s business performance and manages its
operations. The Construction segment includes the Company's manufacturing unit SG ECHO and other modules projects. The Medical segment mainly consists of
the Company's joint venture COVID-19 laboratory operations. The Development segment includes real property development utilizing our technology and our
manufacturing facility. Corporate and support consists of general corporate expenses such as our executive office; the corporate finance, accounting, audit, tax,
human resources, risk management, information technology, marketing, and legal groups; corporate overhead and other items not allocated to any of the
Company's segments. From time to time, the Company revises the measurement of each segment's cost of revenue and operating expenses, including any corporate
overhead allocations, as determined by the information regularly reviewed by its executive team. Information for the Company's segments, as well as for Corporate
and support, is provided in the following table:
F-27
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
14.
Segment Reporting (continued)
Construction
Medical
Development Corporate/Support
Consolidated
Fiscal Year Ended December 31, 2021
Revenue
Operating income (loss)
Other income (expense)
Income (loss) before income taxes
Less: Net income (loss) attributable to
non-controlling interest
Net income (loss) attributable to common
stockholders of SG Blocks, Inc.
Total assets
Depreciation and amortization
Capital expenditures
Fiscal Year Ended December 31, 2020
Revenue
Operating income (loss)
Other income (expense)
Income (loss) before income taxes
Net income (loss) attributable to non-
controlling interest
Net income (loss) attributable to common
stockholders of SG Blocks, Inc.
Total assets
Depreciation and amortization
Capital expenditure
$
$
$
$
$
$
$
$
$
$
6,793,690
(7,041,313)
5,163
(7,036,150)
-
(7,036,150)
12,274,536
351,795
886,504
4,514,122
161,212
(3,012)
158,200
—
158,200
10,545,092
225,770
189,144
$
$
$
$
$
$
$
$
$
$
$
31,548,012
8,405,332
(9,878)
8,395,455
4,924,303
3,471,152
$
5,884,098
240,266
362,122
$
$
$
4,241,501
996,956
—
996,956
184,567
812,389
4,368,848
4,256
1,350,252
$
$
$
$
$
$
-
(203,078)
(55)
(203,133)
-
(7,143,792)
79,248
(7,064,544))
-
-
(203,133)
$
(7,064,544)
8,053,885
0
3,576,130
$
$
$
8,711,499
13,345
0
$
$
$
$
$
38,341,702
(5,982,851)
74,478
(5,908,372)
4,924,303
(10,832,675)
34,924,018
605,406
4,824,756
— $
—
—
—
—
— $
0
0
0
$
$
$
— $
(5,741,001)
77,682
(5,663,319)
8,755,623
(4,582,833)
74,670
(4,508,163)
—
184,567
(5,663,318)
11,968,157
9,956
28,720
$
$
$
$
(4,692,729)
26,882,097
239,982
1,568,115
15.
Income Taxes
The Company’s provision (benefit) for income taxes consists of the following for the year ended December 31, 2021 and 2020:
Deferred:
Federal
State and local
Total deferred
Total provision (benefit) for income taxes
Less: valuation reserve
Income tax provision
F-28
2021
2020
$
$
(2,302,762) $
(477,375)
(2,780,137)
(2,780,137)
2,780,137
— $
(974,181)
(567,767)
(1,541,948)
(1,541,948)
1,541,948
—
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
15.
Income Taxes (continued)
A reconciliation of the federal statutory rate to 0.0% for the year ended December 31, 2021 and 2020 to the effective rate for income from operations before
income taxes is as follows:
Benefit for income taxes at federal statutory rate
State and local income taxes, net of federal benefit
Goodwill impairment
Change in state rate
Less valuation allowance
Effective income tax rate
2021
2020
21.0 %
3.9
—
—
(24.9 )
0.0%
21.0 %
3.9
—
—
(24.9 )
0.0%
The tax effects of these temporary differences along with the net operating losses, net of an allowance for credits, have been recognized as deferred tax assets
(liabilities) at December 31, 2021 and 2020 as follows:
Net operating loss carryforward
Bad debt reserve
Employee stock compensation
Intangible assets
Depreciation
Accrued expenses
Charity
Net deferred tax asset
Valuation allowance
Net deferred tax asset
2021
2020
$
$
6,480,539 $
239,334
1,231,564
(488,958)
(131,437)
47,184
205
7,378,431
(7,378,431)
— $
4,127,323
197,785
800,036
(529,260)
(44,979 )
47,184
205
4,598,294
(4,598,294)
—
The Company establishes a valuation allowance, if based on the weight of available evidence, it is more likely than not that some portion or all of the deferred
assets will not be realized. During 2021 certain adjustments were made to the Company’s net operating loss carryforward tax asset for IRC Section 382
limitations. The valuation allowance increased by $2,780,137 and $1,541,948 during 2021 and 2020, respectively.
As of December 31, 2021, the Company had a net operating loss carryforward of approximately $26.1 million for Federal and State tax purposes. The net
operating loss expires beginning 2030 through 2037 for those losses generated in 2017 and prior years. Approximately $14.8 million of such net operating
losses will carryforward indefinitely and be available to offset up to 80% of future taxable income each year. Subsequent to December 31, 2019, the
Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was passed, which temporarily removes such 80% limitation for years 2019 and 2020. The
Company’s net operating loss carryforward may be subject to annual limitations, which could reduce or defer the utilization of the losses as a result of an
ownership change as defined in Section 382 of the Internal Revenue Code.
As required by the provisions of ASC 740, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax
authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount
recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement
with the relevant tax authority. Differences between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured
pursuant to the interpretation are referred to as “unrecognized benefits.” A liability is recognized (or amount of net operating loss or amount of tax refundable is
reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not
recognized as a result of applying the provisions of ASC 740.
The Company recognizes interest and penalties related to uncertain tax positions in general and administrative expenses. As of December 31, 2021, the
Company has no unrecognized tax positions, including interest and penalties. The tax years 2018 - 2020 are still open to examination by the major tax
jurisdictions in which the Company operates. The Company files returns in the United States Federal tax jurisdiction and various other state jurisdictions.
F-29
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
16.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding
during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common
and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of the common shares issuable upon the exercise
of stock options and warrants. Potentially dilutive common shares are excluded from the calculation if their effect is antidilutive.
At December 31, 2021, there were options, including options granted to non-employees and non-directors, restricted stock units and warrants to purchase 36,436,
2,220,514 and 2,025,520 shares of common stock, respectively, outstanding that could potentially dilute future net income per share. Because the Company had a
net loss as of December 31, 2021, it is prohibited from including potential common shares in the computation of diluted per share amounts. Accordingly, the
Company has used the same number of shares outstanding to calculate both the basic and diluted loss per share. At December 31, 2020, there were options,
including options to non-employees and non-directors, restricted stock units and warrants to purchase 36,436, 884,343 and 353,190 shares of common stock,
respectively, outstanding that could potentially dilute future net income per share.
17.
Stockholders’ Equity
Public Offerings – In June 2017, the Company issued 75,000 shares of its common stock at $100.00 per share through the Public Offering. The Company incurred
$1,388,615 in issuance costs from the Public Offering and issued 3,750 warrants valued at $55,475 to the underwriters (as discussed in Note 18).
In July 2017, as permitted by the underwriting agreement entered into in connection with the Public Offering, the underwriters exercised their option to purchase an
additional 11,250 shares of common stock at $100.00 per share. The Company incurred $176,771 in issuance costs from this issuance. In connection with this
exercise, certain affiliates of the underwriters were granted additional warrants to purchase 563 shares of common stock in the aggregate valued at $8,321 (as
discussed in Note 18).
In connection with and prior to the Public Offering, the Company issued 90,084 shares of its common stock upon conversion of all outstanding preferred stock and
25,833 shares of its common stock upon conversion of the previously outstanding convertible debentures.
In December 2019, the Company completed a public offering of its common stock (the “Public Offering”). In connection with the Public Offering, the Company
sold 857,500 shares of common stock at a public offering price of $3.00 per share, resulting in aggregate net proceeds of $2,117,948 after deducting underwriting
discounts and commissions and other expenses related to the offering. The Company incurred $454,552 in issuance costs from the Public Offering and no warrants
to purchase were issued to the underwriters.
In April 2020, the Company also completed a public offering of its common stock (the "April Public Offering"). In connection with the April Public Offering, the
Company sold 440,000 shares of common stock at a public offering price of $4.25 per share, resulting in aggregate net proceeds of approximately $1,522,339 after
deducting underwriting discounts and commissions and other expenses related to the offering. The Company incurred a total of approximately $347,661 in issuance
costs in connection with the offering and no warrants to purchase were issued to the underwriters.
F-30
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
17.
Stockholders’ Equity (continued)
In May 2020, the Company completed a public offering of its common stock (the "May Public Offering"). In connection with the May Public Offering, the
Company sold 6,000,000 shares of common stock at a public offering price of $2.50 per share. Pursuant to the terms of the related Underwriting Agreement dated
May 6, 2020 by and among the Company and ThinkEquity, a division of Fordham Financial Management, Inc., as representatives of several underwriters named
therein ("ThinkEquity"), ThinkEquity was granted an over-allotment option to purchase up to an additional 900,000 shares of the Company's common stock, par
value $0.01 per share (the "Common Stock"), in connection with the previously announced public offering. On May 15, 2020, ThinkEquity exercised in full such
option with respect to all 900,000 shares of the Company's Common Stock (the "Option Shares"). After giving effect to the full exercise of the over-allotment
option, the total number of shares of Common Stock sold by the Company in the May Public Offering was 6,900,000 shares of Common Stock and total net
proceeds to the Company, after deducting underwriting discounts and commissions and other offering expenses payable by the Company, were approximately
$15,596,141. The Company incurred a total of approximately $1,653,859 in issuance costs in connection with the offering and issued warrants to purchase 300,000
shares of common stock to the underwriters.
In October 2021, the Company closed a registered direct offering and concurrent private placement of its common stock (the "October Offering") that the
Company effected pursuant to the Securities Purchase Agreement that it entered into on October 25, 2021 with an institutional investor and received gross proceeds
of $11.55 million. Pursuant to the terms of the Purchase Agreement, the Company issued to the investor (A) in a registered direct offering (i) 975,000 shares (the
“Public Shares”) of its Common Stock, par value $0.01 per share (the “Common Stock”), and (ii) pre-funded warrants (the “Pre-Funded Warrants”) to purchase up
to 2,189,384 shares (the “Pre-Funded Warrant Shares”) of Common Stock and (B) in a concurrent private placement, Series A warrants to purchase up to
1,898,630 shares (the “Common Stock Warrant Shares”) of Common Stock (the “Common Stock Warrants,” and together with the Public Shares and the Pre-
Funded Warrants, the “Securities”) (the “Offering The Pre-Funded Warrants were immediately exercisable at a nominal exercise price of $0.001 and all Pre-
Funded Warrants sold have been exercised. The Common Stock Warrants have an exercise price of $4.80 per share, are exercisable upon issuance and will expire
five years from the date of issuance. A.G.P./Alliance Global Partners (the “Placement Agent”) acted as the exclusive placement agent for the transaction pursuant
to that certain Placement Agency Agreement, dated as of October 25, 2021, by and between the Company and the Placement Agent (the “Placement Agency
Agreement”), the Placement Agent received (i) a cash fee equal to seven percent (7.0%) of the gross proceeds from the placement of the Securities sold by the
Placement Agent in the Offering and (ii) a non-accountable expense allowance of one half of one percent (0.5%) of the gross proceeds from the placement of
theGross Proceeds Securities sold by the Placement Agent in the Offering. The Company also reimbursed the Placement Agent’s expenses up to $50,000 upon
closing the Offering. The net proceeds to the Company after deducting the Placement Agent’s fees and the Company’s estimated offering expenses was
approximately $10.5 million.
Securities Purchase Agreement – In April 2019, the Company issued 42,388 shares of its common stock at $22.00 per share through a Securities Purchase
Agreement (the “Purchase Agreement”) with certain institutional investors and accredited investors. Concurrently with the sale of the common stock, pursuant to
the Purchase Agreement, the Company also sold common stock purchase warrants to such investors to purchase up to an aggregate of 42,388 shares of common
stock. The Company incurred $379,816 in issuance costs from the offering and issued 4,239 warrants to the underwriters. The warrants are further discussed in
Note 18.
F-31
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
17.
Stockholders’ Equity (continued)
Decrease in Authorized Shares – On June 5, 2019, at the Company’s annual meeting of stockholders, the stockholders approved an amendment to the
Company’s amended and restated certificate of incorporation to decrease the number of authorized shares of common stock
from 300,000,000 to 25,000,000 shares. Following the meeting, on June 5, 2019, the Company filed a certificate of amendment to the amended and restated
certificate of incorporation to decrease its authorized shares of common stock accordingly. There was no change to the number of authorized shares of
preferred stock.
Underwriting Agreement – In August 2019, the Company issued 45,000 shares of its common stock at $17.00 per share pursuant to the terms of an
Underwriting Agreement (the “Underwriting Agreement”) to the public. The Company incurred $181,695 in issuance costs from the offering and issued
warrants to purchase 2,250 shares of common stock to the underwriter. The warrants are further discussed in Note18.
18.
Warrants
In conjunction with the June 2017 Public Offering, the Company issued to certain affiliates of the underwriters, as compensation, warrants to purchase an
aggregate of 4,313 shares of common stock at an exercise price of $125.00 per share. The warrants are exercisable at the option of the holder on or after June
21, 2018 and expire June 21, 2023. The fair value of warrants was calculated utilizing a Black-Scholes model and amounted to $63,796. The fair market value
of the warrants as of the date of issuance has been included in issuance costs in additional paid-in capital.
In conjunction with the Purchase Agreement in April 2019, the Company also sold warrants to purchase up to an aggregate of 42,388 shares of common stock
at an initial exercise price of $27.50 per share. The warrants are exercisable at the option of the holder on or after October 29, 2019 and expire October 29,
2024. The Company issued to certain affiliates of the underwriters, as compensation, warrants to purchase an aggregate of 4,239 shares of common stock at
an initial exercise price of $27.50 per share. The warrants are exercisable at the option of the holder on or after October 29, 2019 and expire April 24, 2024.
In conjunction with the Underwriting Agreement in August 2019, the Company issued to the underwriter, as compensation, warrants to purchase an aggregate
of 2,250 shares of common stock at an initial exercise price of $21.25 per share. The warrants are exercisable at the option of the holder on or after February
1, 2020 and expire August 29, 2024.
In conjunction with the Underwriting Agreement in May 2020, the Company issued to the underwriter, as compensation, warrants to purchase an aggregate of
300,000 shares of common stock at an initial exercise price of $3.14 per share. The warrants are exercisable at the option of the holder on or after November
6, 2020 and expire May 5, 2025. During the year ended December 31, 2021, 226,300 warrants were exercised and converted into common stock of the
Company. The Company has received proceeds of approximately $707,000 from the exercise of the warrants.
In conjunction with the Purchase Agreement in October 2021, the Company also issued Series A warrants to purchase up to 1,898,630 shares of Common
Stock in a concurrent private placement. The warrants are have an exercise price of $4.80 per share, exercisable at the option of the holder on or after October
26, 2021 and will expire five years from the date of issuance.
F-32
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
19.
Share-based Compensation
On October 26, 2016, the Company’s Board of Directors approved the issuance of up to 25,000 shares of the Company’s common stock in the form of
restricted stock or options (“2016 Stock Plan”). Effective January 20, 2017, the 2016 Stock Plan was amended and restated as the SG Blocks, Inc. Stock
Incentive Plan, as further amended effective June 1, 2018 and as further amended on July 30, 2020 and as further amended on August 18, 2021, (the
“Incentive Plan”). The Incentive Plan authorizes the issuance of up to 3,625,000 shares of common stock. It authorizes the issuance of equity-based awards
in the form of stock options, stock appreciation rights, restricted shares, restricted share units, other share-based awards and cash-based awards to non-
employee directors and to officers, employees and consultants of the Company and its subsidiary, except that incentive stock options may only be granted
to the Company’s employees and its subsidiary’s employees. The Incentive Plan expires on October 26, 2026, and is administered by the Company’s
Compensation Committee of the Board of Directors. Each of the Company’s employees, directors, and consultants are eligible to participate in the
Incentive Plan. As of December 31, 2021, there were 1,343,377 shares of common stock available for issuance under the Incentive Plan.
Stock-based compensation expense is included in the consolidated statements of operations as follows:
Payroll and related expenses
General and administrative expenses
Total
Year Ended December 31,
2020
2021
1,204,095
1,647,391 $
57,120
1,261,215
—
1,647,391 $
$
$
The following table presents total stock-based compensation expense by security type included in the consolidated statements of operations:
Stock options
RSUs
Total
Year Ended December 31,
2021
2020
$
$
2,666 $
1,644,725
$
1,647,391
10,667
1,250,548
1,261,215
Because the Company does not have significant historical data on employee exercise behavior, the Company uses the “Simplified Method” to calculate the
expected life of the stock-based option awards granted to employees. The simplified method is calculated by averaging the vesting period and contractual
term of the options.
F-33
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
19.
Share-based Compensation (continued)
The following table summarizes stock-based option activities and changes during the years ended December 31, 2021 and 2020, as described below:
Outstanding – December 31, 2019
Granted
Exercised
Cancelled
Outstanding – December 31, 2020
Granted
Exercised
Cancelled
Outstanding – December 31, 2021
Exercisable – December 31, 2020
Exercisable – December 31, 2021
Shares
Weighted
Average Fair
Value Per Share
$
Weighted
Average
Exercise Price
Per Share
Weighted
Average
Remaining
Terms (in years)
Aggregate
Intrinsic Value
81.20
—
—
—
78.71
—
—
—
78.71
78.67
78.71
7.40
$
6.34 $
5.34 $
6.34
5.34 $
—
—
—
—
—
$
24.80
—
—
—
35.54 $
—
—
—
24.80
24.80
24.80 $
53,170
—
—
(16,734)
36,436 $
—
—
—
36,436
36,332
36,436 $
For the years ended December 31, 2021 and December 31, 2020, the Company recognized stock-based compensation expense of $2,666 and $10,667,
respectively, related to stock options. This expense is included in payroll and related expenses in the accompanying consolidated statements of operations.
As of December 31, 2021, there was no unrecognized compensation costs related to non-vested stock options and all options have been expensed. The
intrinsic value is calculated as the difference between the fair value of the stock price at year end and the exercise price of each of the outstanding stock
options. The fair value of the stock price at December 31, 2021 was $1.88 per share.
Restricted Stock Units
On March 22, 2019, a total of 15,703 of restricted stock units were granted to Mr. Galvin, Mr. Armstrong, Mr. Shetty, six employees and one
consultant of the Company, under the Company's stock-based compensation plan, at the fair value of $54.00 per share, which represents the closing
price of the Company's common stock on February 26, 2019. Restricted stock units granted to Mr. Galvin, Mr. Armstrong, Mr. Shetty, and an
aggregate of six employees and one consultant of 6,139, 772, 5,729 and an aggregate of 3,063, respectively, vest in installments over either a one-year,
two-year, three-year and four-year period and will fully vest by the end of December 31, 2022. The fair value of these units upon issuance amounted to
$847,957.
On January 15, 2019 and February 26, 2019, a total of 526 of restricted stock units were granted to two of the Company’s non-employee directors,
under the Incentive Plan, at the calculated fair value of $58.80 and $55.20 per share, respectively, which represents the average closing price of the
Company’s common stock for the ten trading days immediately preceding and including the grant date. The restricted stock units granted on January
15, 2019 will vest on January 15, 2020, subject to each individual’s continued service as a director of the Company through such date, and are payable
six months after the termination of the director from the Company’s Board of Directors or death or disability. The restricted stock units granted on
February 26, 2019 vest on the earlier of (A) the first anniversary of the date of the grant or (B) the date of the 2019 annual meeting of the Company’s
stockholders subject to each individual’s continued service as a director of the Company through such date, and are payable six months after the
termination of the director from the Board of Directors or death or disability.
F-34
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
19.
Share-based Compensation (continued)
Effective June 5, 2019, a total of 9,189 of restricted stock units were granted to the Company’s non-employee directors, under the Company’s stock-
based compensation plan, at the calculated fair value of $16.40 per share, which represents the average closing price of the Company’s common stock
for the ten trading days immediately preceding and including the grant date. Restricted stock units granted to directors on June 5, 2019 vest on the
earlier of (A) the first anniversary of the date of the grant or (B) the date of the annual meeting of the Company’s stockholders that occurs in the year
immediately following the date of the grant; and are payable six months after the termination of the director from the Board or death or disability.
On April 14, 2020, a total of 35,331 of restricted stock units were granted to Mr. Galvin, Mr. Armstrong, Mr. Sheeran, five employees
and two consultants of the Company, under the Company's stock-based compensation plan, at the fair value of $4.76 per share, which represents the
closing price of the Company's common stock on April 14, 2020. Restricted stock units granted to Mr. Galvin, Mr. Armstrong, Mr. Sheeran, and an
aggregate of five employees and one consultant of 11,331, 1,000, 3,000 and an aggregate of 8,000, respectively, will vest in full on the first anniversary
of the vesting commencement date and one consultant received 12,000 restricted stock units that vested immediately on April 15, 2020. The fair value
of these units upon issuance amounted to $168,176.
On April 14, 2020, a total of 12,000 of restricted stock units were granted to three of the Company’s non-employee directors, under the Incentive Plan,
at the calculated fair value of $4.76 per share, which represents the closing price of the Company’s common stock on April 14, 2020. The restricted
stock units granted on April 14, 2020 will fully vest on April 14, 2021, subject to each individual’s continued service as a director of the Company
through such date, and are payable six months after the termination of the director from the Company’s Board of Directors or death or disability. The
fair value of these units upon issuance amounted to $57,120.
On September 23, 2020, a total of 425,000 of restricted stock units were granted to Mr. Armstrong, Mr. Sheeran, seven employees and one consultant
of the Company, under the Company's stock-based compensation plan, at the fair value of $1.81 per share, which represents the closing price of the
Company's common stock on September 23, 2020. Restricted stock units granted to Mr. Armstrong, Mr. Sheeran, and an aggregate of seven
employees and one consultant of 50,000, 75,000 and an aggregate of 300,000, respectively, and 1/3 will vest on September 23, 2020, 1/3 on the one
year anniversary of the grant date and 1/3 on the two year anniversary of the grant date. The fair value of these units upon issuance amounted to
$769,250.
On November 11, 2020, a total of 46,826 of restricted stock units were granted to three of the Company’s non-employee directors, under the Incentive
Plan, at the calculated fair value of $2.39 per share, which represents the closing price of the Company’s common stock on November 11, 2020. The
restricted stock units granted on November 11, 2020 will vest 1/2 on November 11, 2020 and 1/2 on the one year anniversary of the grant date, subject
to each individual’s continued service as a director of the Company through such date, and are payable six months after the termination of the director
from the Company’s Board of Directors or death or disability. The fair value of these units upon issuance amounted to $111,920.
On December 9, 2020, a total of 372,000 of restricted stock units were granted to Mr. Galvin, under the Company's stock-based compensation plan, at
the fair value of $3.28 per share, which represents the closing price of the Company's common stock on December 9, 2020. Restricted stock units
granted to Mr. Galvin will vest 1/2 on December 9, 2020 and 1/2 on the first year anniversary of the grant date. The fair value of these units upon
issuance amounted to $1,220,160.
F-35
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
19.
Share-based Compensation (continued)
On October 1, 2021, a total of 1,214,500 of restricted stock units were granted to Mr. Galvin, Mr. Rogers, Mr. Armstrong, Mr. Sheeran,
thirteen employees and three consultant of the Company, under the Company's stock-based compensation plan, at the fair value of $3.38 per share,
which represents the closing price of the Company's common stock on October 1, 2021. Restricted stock units granted to Mr. Galvin, Mr. Armstrong,
Mr. Sheeran, and an aggregate of thirteen employees and two consultant of 350,000, 40,000, 100,000 and an aggregate of 475,000, respectively,
vesting quarterly over two years from the anniversary of the grant date. Restricted stock units granted to Mr. Rogers and one consultant of 37,500 and
12,000 vest upon issuance date. Restricted stock units granted to Mr. Rogers of 200,000 vest monthly over a two-year period. The fair value of these
units upon issuance amounted to $4,105,010.
On October 1, 2021, a total of 59,170 of restricted stock units were granted to five of the Company's non-employee directors, under the Company's
stock-based compensation plan, at the fair value of $3.38 per share, which represents the closing price of the Company's common stock on October 1,
2021. The restricted stock units granted October 1, 2021 vesting monthly over one year and, if earlier, in full on the date of the
Company’s 2022 Annual Meeting of Stockholders.
On December 7, 2021, a total of 62,500 of restricted stock units were granted to five of the Company's non-employee advisory directors, under the
Company's stock-based compensation plan, at the fair value of $2.36 per share, which represents the closing price of the Company's common stock on
December 7, 2021. The restricted stock units granted vest in equal monthly installments over one year period.
For the year ended December 31, 2021 and 2020, the Company recognized stock-based compensation of $1,644,725 and $1,250,548 related to restricted
stock units. This expense is included in the payroll and related expenses and general and administrative expenses in the accompanying consolidated
statement of operations. The Company capitalized project development costs of $89,140 related to restricted stock units for the year ended December 31,
2021. As of December 31, 2021, there was a total of $3,955,323 in unrecognized compensation costs related to non-vested restricted stock units.
The following table summarized restricted stock unit activities during the year ended December 31, 2021:
Non-vested balance at January 1, 2021
Granted
Vested
Forfeited/Expired
Non-vested balance at December 31, 2021
F-36
Number of
Shares
527,504
1,336,170
(589,537)
—
1,274,137
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
20.
Commitments and Contingencies
Legal Proceedings
The Company is subject to certain claims and lawsuits arising in the normal course of business. The Company assesses liabilities and contingencies in
connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that the Company will incur a loss and the amount
of the loss can be reasonably estimated, the Company records a liability in our consolidated financial statements. These legal accruals may be increased or
decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or the amount of the loss is not estimable, the Company does
not record an accrual, consistent with applicable accounting guidance. Based on information currently available, advice of counsel, and available insurance
coverage, the Company believes that the established accruals are adequate and the liabilities arising from the legal proceedings will not have a material adverse
effect on the consolidated financial condition. However, that in light of the inherent uncertainty in legal proceedings there can be no assurance that the ultimate
resolution of a matter will not exceed established accruals. As a result, the outcome of a particular matter or a combination of matters may be material to the
results of operations for a particular period, depending upon the size of the loss or the income for that particular period.
1.) Pizzarotti Litigation - On or about August 10, 2018 Pizzarotti, LLC filed a complaint against the Company and Mahesh Shetty, the Company’s former
President and CFO, and others, seeking unspecified damages for an alleged breach of contract by the Company and another entity named Phipps & Co.
(“Phipps”). The lawsuit was filed as Pizzarotti, LLC. v. Phipps & Co., et al., Index No. 653996/2018 and commenced in the Supreme Court of the State of New
York for the County of New York. On or about April 1, 2019, Phipps filed cross-claims against the Company and Mr. Shetty asserting claims for
indemnification, contribution, fraud, negligence, negligent misrepresentation, and breach of contract. SG Blocks has likewise cross claimed against Phipps for
indemnification and contribution, claiming that any damages to the Plaintiff were the result of the acts or omissions of Phipps and its principals.
Pizzarotti’s suit arose from a contract dated April 3, 2018 that it executed with Phipps whereby Pizzarotti, a construction manager, engaged Phipps to perform
stone procuring and tile work at a construction project located at 161 Maiden Lane, New York 10038. Pizzarotti’s claims against the Company arise from a
purported assignment agreement dated August 10, 2018, whereby Pizzarotti claims that the Company agreed to assume certain obligations of Phipps under a
certain trade contract between Pizzarotti and Phipps & Co. Phipps’ claims against the Company arise from a purported Assignment Agreement, dated as of May
30, 2018, between Pizzarotti, Phipps and the Company (the “Assignment Agreement”), pursuant to which, it is alleged, that the Company agreed to provide a
letter of credit in connection with the sub-contracted work to be provided by Phipps to Pizzarotti.
The Company believes that the Assignment Agreement was void for lack of consideration and moved to dismiss the case on those and other grounds. On June
17, 2020, the New York Supreme Court entered an order dismissing certain claims against the Company brought by cross claimant Phipps & Co. Specifically,
the court dismissed Phipps’ claims for indemnification, contribution, fraud, negligence and negligent misrepresentation. The court did not dismiss Phipps’
claim for breach of the Assignment Agreement. The issue of the validity of the Assignment Agreement, and the Company’s defenses to the claims brought by
the plaintiff Pizzarotti, and cross claimant Phipps, are being litigated. The Company maintains that the Assignment Agreement, to the extent valid and
enforceable, was properly terminated and/or there are no damages, and, consequently, that the claims brought against the Company are without merit. The
Company intends to continue to vigorously defend the litigation. The parties have engaged in written discovery but no depositions have been conducted as of
yet. By motion dated February 24, 2021, Pizzarotti moved to stay the entire action pending the outcome of a separate litigation captioned Pizzarotti, LLC v.
FPG Maiden Lane, LLC et. al., Index No. 651697/2019, involving some of the same parties (but excluding the Company). Phipps cross moved to consolidate
the two actions. The Company opposed both motions. On April 26, 2021, the court denied both motions and directed the parties to meet and confer concerning
the scheduling of depositions. On May 10, 2021, the parties jointly filed with the court a proposed order providing the completion of depositions of all parties
and nonparties by September 30, 2021. The court has not entered the proposed discovery order and no action has been taken by the plaintiff Pizzarotti nor the
defendant-cross claimant Phipps since the proposed order was submitted. There are no scheduled hearings or conferences before the court at this time.
Litigation is subject to many uncertainties, and the outcome of this action is not predicted with assurance. The Company is currently unable to predict the
possible loss or range of loss, if any, associated with the resolution of this litigation, and, accordingly, the Company has made no provision related to this matter
in the consolidated financial statements.
F-37
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
20.
Commitments and Contingencies (continued)
2.) ICON Construction Inc. v. SG Blocks, Inc. et. al. On or about June 8, 2021 ICON Construction Inc. (“ICON”) filed a complaint against the Company and
Echo DCL LLC (“Echo DCL”), seeking unspecified damages, arising out of a certain asset purchase agreement entered into between ICON and Echo DCL on
or about February 20, 2020 (the “ICON-Echo Asset Agreement”) whereby, inter alia, Echo DCL acquired all of the assets of ICON. On or about September 17,
2020, Echo DCL and SG Echo LLC entered into a certain asset purchase agreement (the “Echo Asset Agreement”) whereby, inter alia, SG Echo acquired all of
the assets of Echo DCL. In the Echo Asset Agreement Echo DCL represented and warranted to SG Echo that it had good and marketable title to the assets, had
full right and power to transfer same, and that the same were free and clear of any encumbrances except for a certain permitted lien held by BTH Bank.
ICON alleges that ECHO DCL breached the terms of the ICON-Echo Asset Agreement and that the Company agreed to assume Echo DCL’s liabilities
obligations under the ICON-Echo Asset Agreement. Icon also claims a security interest in the assets conveyed to SG Echo by Echo DCL. The Company has
filed an answer to the ICON complaint denying the allegations and raised eleven affirmative defenses and that it is entitled to indemnification and/or
contribution from Echo DCL and its principal Michael Ames. The parties are currently engaged in discovery.
Litigation is subject to many uncertainties, and the outcome of this action is not predicted with assurance. The Company is currently unable to predict the
possible loss or range of loss, if any, associated with the resolution of this litigation, and, accordingly, the Company has made no provision related to this matter
in the consolidated financial statements.
Vendor Litigation
1.) Teton Buildings, LLC
(i) On January 1, 2019, SG Blocks commenced an action against Teton Buildings, LLC (“Teton”) in Harris County, Texas (“Teton Texas Action”) to recover
approximately $2,100,000 arising from defendant’s breach of the operative contract related to Heart of Los Angeles construction project in Los Angeles (the
“HOLA Project”) entered into on or about June 2, 2017. The Petition brought claims of breach of contract, negligence, and breach of express warranty. In or
about February 2022 SG Blocks dismissed without prejudice the Teton Texas Action.
(ii) On or about September 12, 2018, the Company entered into a Firm Price Quote and Purchase (the “GVL Contract”) with Teton to govern the manufacture
and provision of 23 shipping containers and modular units (the “Teton GVL Modules”) for the Four Oaks Gather GVL project in South Carolina (the “GVL
Project.”). The Company maintains that Teton breached the GVL Contract by (i) failing to timely deliver the Teton GVL Modules, (ii) delivering Teton GVL
Modules that were defective in their design and manufacture, (iii) otherwise failed to meet South Carolina Building Code regulations and (iv) breached
applicable warranties. As a result of the breach and defects in performance, design and manufacture by Teton, Company asserts that it has sustained
approximately $761,401.66 in actual and consequential damages, excluding attorney’s fees. On October 16, 2019, Teton filed for Chapter 11 in the United
States Bankruptcy Court for Southern District of Texas, Houston Division styled In re: Teton Buildings, LLC and bearing the case number 19-35811. On
February 11, 2020, the Company filed a proof of claim again Teton in the amount of $2,861,401.66 arising from the HOLA Project and the GVL Contract. On
or about March 16, 2020, the Bankruptcy Court converted Teton’s Chapter 11 reorganization case to a Chapter 7 liquidation case. On July 18, 2019, Ronald
Sommers, the Chapter 7 Trustee, filed a Report of No Distribution stating that there is no property available for distribution to creditors. On August 20, 2019,
the Bankruptcy Court closed the Teton bankruptcy case. As such, there is no prospect of any recovery against Teton.
F-38
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
20.
Commitments and Contingencies (continued)
On January 22, 2021, the Company filed a third-party complaint against Teton in the United States District Court for the Central District of California, Case No.
2:20−cv−03432 in the HOLA Action (described below), seeking to determine Teton’s liability in its capacity as a bankruptcy debtor in order to collect any
damages payable from Teton’s liability insurance carrier or carriers. On July 23, 2021, the Company filed a First Amended Third-Party Complaint against
Teton and other named third party defendants (see #2 below). Teton has been served with the First Amended Third-Party Complaint and on or about February
11, 2022, Teton filed an answer and affirmative defenses. The parties in the HOLA Action are currently conducting discovery.
The Company is currently unable to predict the possible loss or range of loss, if any, associated with the resolution of this litigation, and, accordingly, the
Company has made no provision related to this matter in the consolidated financial statements.
2.) SG Blocks, Inc. v HOLA Community Partners, et. al.
On April 13, 2020, Plaintiff SG Blocks, Inc. (“SG Blocks” or the “Company”) filed a Complaint against HOLA Community Partners (“HCP”), Heart of Los
Angeles Youth, Inc. (“HOLA”) (HCP and HOLA are collectively referred to as the “HOLA Defendants”), and the City of Los Angeles (“City”) in the United
States District Court for the Central District of California, Case No. 2:20-cv-03432-ODW (“HOLA Action”). The Company asserted seven claims against
HOLA Defendants arising out of and related to the HOLA Project, to wit, for: (1) breach of contract; (2) conversion; (3) default and judicial foreclosure under
the Agreement as a security agreement; (4) misappropriation of trade secrets under California Civil Code section 3426; (5) misappropriation of trade secrets
under 18 U.S.C. § 1836; and (6) intentional interference with contractual relations. On April 20, 2020, HOLA filed a separate action against the Company in the
Los Angeles Superior Court arising out of the HOLA Project, asserting claims of (1) negligence; (2) strict products liability; (3) strict products liability, (4)
breach of contract; (5) breach of express warranty; (6) violation of Business and Professions Code § 7031(b); and (7) violation of California’s unfair
competition law, Business and Professions Code section 17200 (“UCL”) (“HOLA State Court Action”). The HOLA State Court Action was removed to the
Central District of California and consolidated with the HOLA Action.
On January 22, 2021, the Company filed a Third-Party Complaint in the HOLA Action against Third-Party Defendants Teton Buildings, LLC, Avesi
Construction, LLC, and American Home Building and Masonry Corp (“AHB”) for indemnity and contribution with respect to HOLA’s claims. The Company
has also notified its general liability carrier Sompo International regarding coverage concerning HOLA’s claims On February 25, 2021, the Court entered an
order dismissing the Company’s claims for (1) breach of contract; (2) conversion; (3) default and judicial foreclosure under the Agreement as a security
agreement; (4) misappropriation of trade secrets under California Civil Code section 3426; (5) misappropriation of trade secrets under 18 U.S.C. § 1836; but
denied dismissal of the Company’s claims for intentional interference with contractual relations. The Court also denied the Company’s motion to dismiss
HOLA’s claims.
On March 12, 2021, the HOLA Defendants filed an answer to the Company’s complaint against it denying liability and asserting affirmative defenses. On
March 12, 2021, the Company filed an answer to the HOLA Defendants’ First Amended Consolidated Complaint against it, denying liability and asserting
affirmative defenses.
On April 26, 2021, the Company and the HOLA Defendants filed a Joint Stipulation to Dismiss HOLA Community Partners’ Sixth Claim for Relief (violation
of California Business and Professions Code §7031(b)), with prejudice, pursuant to Fed. R. Civ. P. 41(a)(1)(A)(ii).
F-39
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
20.
Commitments and Contingencies (continued)
On July 23, 2021, the Company filed a First Amended Third-Party Complaint adding the following additional third party defendants seeking, inter alia,
contractual indemnity, equitable indemnity; and contribution: American Home Building and Masonry Corp. (“American Home”), Anderson Air Conditioning,
L.P. (“Anderson”). Broadway Glass and Mirror, Inc. (“Broadway”), Marne Construction, Inc. (“Marne”), The McIntyre Company (“McIntrye”), Dowell &
Bradley Construction, Inc. dba J R Construction (“JR Construction”) Junior Steel Co. (“Junior Steel”) Saddleback Roofing, Inc. (“Saddleback”) Schindler
Elevator Corporation (“Schindler”) U.S. Smoke & Fire Corp. (“U.S. Smoke”) and FirstForm, Inc. (“FirstForm”) (collectively the “Additional Third Party
Defendants”).
On September 2, 2021, Schindler Elevator Corp. filed its answer to the First Amended Third-Party Complaint. On September 3, 2021, Junior Steel Co. filed its
answer to the First Amended Third-Party Complaint. On September 7, 2021, Anderson Air Conditioning, L.P. filed its answer to the First Amended Third-Party
Complaint. On October 6, 2021, the McIntyre Group filed its answer to the First Amended Third-Party Complaint.
On February 7, 2022, the Company filed a request for entry of a Clerk’s default against the following defendants: American Home Building and Masonry
Corp., Avesi Construction, Marne Construction, Inc., Firstform, Inc., Dowell & Bradley Construction, Inc, Saddleback Roofing, Inc., and US Smoke and Fire
Corp. On February 9, 2022, the court entered a clerk’s default pursuant to Federal Rule 55 against the following defendants: American Home Building and
Masonry Corp. Avesi Construction, Dowel & Bradley Construction, Inc., Saddleback Roofing Inc. and US smoke and Fire Corp. The parties that have
answered and appeared in the case are currently engaged in discovery. The cut-off for fact discovery has been extended to September 12, 2022, and a trial has
been set for January 31, 2023.
Litigation is subject to many uncertainties, and the outcome of this action is not predicted with assurance. The Company is currently unable to predict the
outcome or possible recovery or loss or range of loss, if any, associated with the resolution of this litigation, and, accordingly, the Company has made no
provision related to this matter in the consolidated financial statements.
3.) SG Blocks, Inc. v. EDI International, PC.-
On June 21, 2019, SG Blocks filed a lawsuit against EDI International, PC, a New Jersey corporation, in the Superior Court of the State of California, County
of Los Angeles, Central District, in connection with the parties' consulting agreement, dated June 29, 2016, pursuant to which EDI International, PC, was to
provide, for a fee, certain architectural and design services for the HOLA Project. SG Blocks, Inc. claims that EDI International, PC, tortiously interfered with
SG Blocks, Inc's economic relationship with HOLA Community Partners and Heart of Los Angeles Youth, Inc. EDI International, PC, filed a cross-complaint
for alleged unpaid fees and tortious interference with EDI International, PC's contractual relationship with HOLA Community Partners and Heart of Los
Angeles Youth, Inc. EDI International, PC's cross-complaint seeks in excess of $30,428.71 in damages.
On July 8, 2020, SG Blocks, Inc. added PVE LLC as a defendant in the lawsuit, claiming PVE LLC is liable to the same extent as EDI International, PC. The
case is currently in the discovery stage and a trial date has been set for May 2, 2022.
On May 14, 2021, EDI accepted the Company’s Statutory Offer of Compromise, pursuant to California Code of Civil Procedures §998, to settle EDI’s cross-
claims. On July 26, 2021, the Company and EDI entered into a certain General Release agreement whereby in exchange for payment by the Company in the
amount of $67,125.83 EDI released SG Blocks from all liabilities and damages related to EDI’s cross-claims. The Company continues to prosecute its claim
against EDI for tortious interference with the Company’s economic relationship with HOLA Community Partners and Heart of Los Angeles Youth, Inc. The
parties are in engaged in the discovery and a trial date has been set for September 6, 2022. The parties have agreed to mediate their dispute. Mediation has been
scheduled to take place on or about May 17, 2022.
Litigation is subject to many uncertainties, and the outcome of this action is not predicted with assurance. The Company is currently unable to predict the
outcome or possible recovery or loss or range of loss, if any, associated with the resolution of this litigation, and, accordingly, the Company has made no
provision related to this matter in the consolidated financial statements.
F-40
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
20.
Commitments and Contingencies (continued)
Other Litigation
1.) Shetty v. SG Blocks, Inc. et. al., Case No. 20-CV-00550, United States District Court, Eastern District of New York.
On January 31, 2020, Mahesh Shetty, the Company’s former President and Chief Financial Officer (“Former Employee”), filed suit against the Company and
its Chairman and Chief Executive Officer, Paul Galvin, claiming (i) $372,638 in unpaid wages and bonuses and (ii) $300,000 due in severance (hereafter the
“Action”). On March 25, 2020, the Former Employee filed an amended complaint raising additional claims of retaliation under the Fair Labor Standards Act,
29 U.S.C. §201 et. seq. (“FLSA”), and contractual indemnification. On April 27, 2020, the Company filed a motion to dismiss the Action. The Company
asserted that the Former Employee agreed to accept (and did receive) restricted stock units of the Company’s common stock in full satisfaction and payment of
all alleged unpaid wages and bonuses that are claimed in the Action, and/or has otherwise been paid in full for all amounts claimed. The Company further
maintained that the Former Employee’s employment agreement precludes any entitlement to or liability for severance. On June 15, 2020, the Court entered a
decision granting in part and denying in part the Company’s motion to dismiss. Specifically, the Court dismissed the Former Employee’s claim (i) for severance
(in the amount of $300,000) and unpaid wages pursuant to the FLSA, but denied dismissal of the Former Employee’s claims for retaliation under the FLSA or
unpaid wages allegedly due under the New York Labor Law.
On or about September 14, 2021, the Company and Former Employee entered into a settlement and release agreement resolving their respective claims. On
September 14, 2021, the parties filed a joint motion seeking court approval of the settlement. By order dated February 8, 2022, the court approved the
settlement. On February 9, 2022 the court closed the case.
2.) SG Blocks, Inc. v. Osang Healthcare Company, Ltd.,
On April 14, 2021, the Company commenced an action against Osang Healthcare Company, Ltd. (“Osang”) in the United States District Court, Eastern District
of New York, Case No. 21-01990 (“Osang Action”) . The Company has asserted that Osang materially breached a certain Managed Supply Agreement
(“MSA”) entered into between the parties on October 12, 2020, pursuant to which the Company received on consignment two million (2,000,000) units of
Osang’s “Genefinder Plus RealAmp Covid-19 PCR Test” (the “Covid-19 Test”) for domestic and international distribution. The Company has also asserted that
Osang breached the covenant of good faith and fair dealing, fraudulently induced it to enter into the MSA, and violated §349 of the New York General Business
Law’s prohibition of deceptive business practices.
On June 18, 2021, Osang served a motion to dismiss the Osang Action pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. On July 30, 2021, the
Company served its opposition to the motion to dismiss. The motion has been fully briefed and submitted to the court and the parties are awaiting a ruling
thereon. On January 10, 2022 the court entered an order staying discovery pending its ruling on the defendant’s motion to dismiss.
Litigation is subject to many uncertainties, and the outcome of this action is not predicted with assurance. The Company is currently unable to predict the
outcome or possible recovery, if any, associated with the resolution of this litigation, and, accordingly, the Company has made no provision related to this
matter in the consolidated financial statements.
F-41
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
20.
Commitments and Contingencies (continued)
Commitments
In April 2020, the Company entered into an amendment to its employment agreement, dated January 1, 2017, with Paul Gavin (the "Amendment"), to extend
the term of employment to December 31, 2021, provide for an annual base salary of $400,000, provide for a performance bonus structure for a bonus of up to
50% of base salary upon the Company’s achievement of $2,000,000 EBITDA and additional performance bonus payments for the achievement of EBITDA in
excess of $2,000,000 based on a percentage of the incremental increase in EBITDA (ranging from 10% of the incremental increase in EBITDA if the Company
achieves over $2,000,000 and up to $7,000,000 in EBITDA, 8% of the incremental increase in EBITDA if the Company achieves over $7,000,000 and up to
$12,000,000 in EBITDA and 3% of the incremental increase in EBITDA over $12,000,000), provide for a profits-based additional bonus of up to $250,000 in
certain limited circumstances, and provide for one (1) year severance, plus a pro-rated amount of any unpaid bonus earned by him during the year as verified by
the Company’s principal financial officer, if Mr. Galvin is terminated without cause. At the Company’s option, up to fifty (50%) percent of the EBITDA
performance bonuses may be paid in restricted stock units if then available for grant under the Company’s Stock Incentive Plan. All other terms of the
employment agreement remain in full force and effect.
21.
Subsequent Events
Subsequent to December 31, 2021, the Company acquired an approximately 114-acre “McLean mixed-use” site in Durant, Oklahoma for approximately
$870,000. With this space, the Company plans to build approximately 300 residential units, and up-to 680,000 square feet of industrial manufacturing space on
this mixed-use property.
Subsequent to December 31, 2021, the lease commencement date for SG Echo's second manufacturing facility became effective on February 7, 2022. The leased
property is currently under renovation and located in Durant, Oklahoma.
Subsequent to December 31, 2021, the Company made a capital investment in Moliving, a nomadic hospitality solution company on February 24, 2022. 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.
Subsequent to December 31, 2021, Paul Galvin, Company's Chairman and CEO assigned a promissory note (the “Galvin Note”) in the principal amount of
$100,000 (the "Company Note 3") over to the Company in the first quarter of 2022. The original promissory note was issued to Mr. Galvin on January 21, 2020,
from CPF GP 2019-1 LLC (“CPF GP”) in the amount of $100,000. Since inception of the Galvin note, all interest associated with the promissory note was
assigned to the Company.
F-42
DESCRIPTION OF SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Exhibit 4.8
SG Blocks, Inc. (the “Company,” “we,” “us,” and “our”) had one class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), which is our common stock, par value $0.01 per share (the “common stock”).
General
The following is a description of the material terms of our common stock. This is a summary only and does not purport to be complete. It is subject to and qualified in its
entirety by reference to our Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), and our Amended and Restated Bylaws (the
“Bylaws”). We encourage you to read our Certificate of Incorporation, our Bylaws and the applicable provisions of the Delaware General Corporation Law (the “DGCL”),
for additional information.
Description of Common Stock
Authorized Shares of Common Stock. We currently have authorized 25,000,000 shares of common stock.
Voting. Holders of our common stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders, including the election of
directors, and do not have cumulative voting rights. Our directors are elected by a plurality of the votes cast by the stockholders entitled to vote at our annual meeting of
stockholders.
Dividends. Subject to the prior rights of any class or series of preferred stock which may from time to time be outstanding, if any, holders of our common stock are entitled
to receive dividends ratably when, as and if declared by our Board of Directors, out of funds legally available for that purpose. We have not paid any dividends on our
common stock and none are contemplated in the foreseeable future. We anticipate that all earnings that may be generated from our operations will be used to finance our
growth.
Liquidation. Upon our liquidation, dissolution or winding up, holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities
and payment of accrued dividends and liquidation preferences on the preferred stock, if any.
Rights and Preferences. The holders of our common stock have no preemptive, subscription or redemption rights pertaining to our common stock and have no rights to
convert their common stock into any other securities. The absence of preemptive rights could result in a dilution of the interest of the existing stockholders should additional
shares of our common stock be issued. In addition, the rights of holders of our common stock are subject to, and may be adversely affected by, the rights of holders of
shares of any series of preferred stock that we may designate and issue in the future. See “Risk Factors” section in the Form 10-K for a further description of risks related to
our common stock.
Fully Paid and Nonassessable. All of our issued and outstanding shares of common stock are fully paid and nonassessable.
Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and Bylaws
Certain provisions of Delaware law, our Certificate of Incorporation and our Bylaws contain provisions that could have the effect of delaying, deferring or discouraging
another party from acquiring control of us. These provisions, which are summarized below, are expected to discourage certain types of coercive takeover practices and
inadequate takeover bids. These provisions are also designed, in part, to encourage persons seeking to acquire control of us to first negotiate with our Board of Directors. We
believe that the benefits of increased protection of our potential ability to negotiate with an unfriendly or unsolicited acquirer outweigh the disadvantages of discouraging
such proposals, including proposals that are priced above the then-current market value of our common stock, because, among other reasons, such negotiation could result in
an improvement of the terms of such proposals.
Certificate of Incorporation and Bylaws
Certain provisions set forth in our Certificate of Incorporation, our Bylaws and in Delaware law, which are summarized below, may be deemed to have an anti-takeover
effect and may delay, deter or prevent a tender offer or takeover attempt that a stockholder might consider to be in its best interests, including attempts that might result in a
premium being paid over the market price for the shares held by stockholders.
Proposals of business and nominations. Our Bylaws generally regulate proposals of business and nominations for election of directors by stockholders. In general, Section
3.16 requires stockholders intending to submit proposals or nominations at a stockholders meeting to provide the Company with advance notice thereof, including
information regarding the stockholder proposing the business or nomination as well as information regarding the proposed business or nominee. Section 3.16 provides a time
period during which business or nominations must be provided to the Company that will create a predictable window for the submission of such notices, eliminating the risk
that the Company finds a meeting will be contested after printing its proxy materials for an uncontested election and providing the Company with a reasonable opportunity
to respond to nominations and proposals by stockholders.
Blank Check Preferred Stock. Our Board of Directors has the right to issue preferred stock in one or more series and to determine the designations, rights, preferences of
such preferred stock without stockholder approval.
Board Vacancies. Our Bylaws generally provide that only the board of directors (and not the stockholders) may fill vacancies and newly created directorships.
While the foregoing provisions of our Certificate of Incorporation, Bylaws and Delaware law may have an anti-takeover effect, these provisions are intended to enhance the
likelihood of continuity and stability in the composition of the Board of Directors and in the policies formulated by the Board of Directors and to discourage certain types of
transactions that may involve an actual or threatened change of control. In that regard, these provisions are designed to reduce our vulnerability to an unsolicited acquisition
proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging
others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market price of our common stock that could result from
actual or rumored takeover attempts. Such provisions also may have the effect of preventing changes in our management.
Delaware Anti-Takeover Statute
We are subject to the provisions of Section 203 of the DGCL (“Section 203”) regulating corporate takeovers. In general, Section 203 prohibits a publicly-held Delaware
corporation from engaging, under certain circumstances, in a business combination with an interested stockholder for a period of three years following the date the person
became an interested stockholder unless:
●
●
●
prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, the outstanding
voting stock owned by the interested stockholder, (1) shares owned by persons who are directors and also officers and (2) shares owned by employee stock plans in
which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer;
or
at or subsequent to the date of the transaction, the business combination is approved by the board of directors of the corporation and authorized at an annual or
special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
Generally, a business combination includes a merger, asset, stock sale or other transaction resulting in a financial benefit to the interested stockholder. An interested
stockholder is a person who, together with affiliates and associates, owns or, within three years prior to the determination of interested stockholder status, did own 15% or
more of a corporation’s outstanding voting stock. We expect the existence of Section 203 to have an anti-takeover effect with respect to transactions our Board of Directors
does not approve in advance. We also anticipate that Section 203 may discourage business combinations or other attempts that might result in a premium over the market
price for the shares of common stock held by our stockholders.
Listing of Common Stock on the Nasdaq Capital Market
Our common stock is currently listed on the Nasdaq Capital Market under the trading symbol “SGBX.”
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock Transfer and Trust Company, LLC. The transfer agent’s principal business address is 6201 15th
Avenue, Brooklyn, New York 11219, and its telephone number is (800) 937-5449.
Subsidiaries of the Registrant
Subsidiary
SG Building Blocks, Inc.
SG Residential, Inc.
SG Echo, LLC
Clarity Mobile Venture, LLC
Chicago Airport Testing, LLC
SGB Development Corp.
Exhibit 21.1
Jurisdiction of Incorporation or Organization
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statements on Form S-8 ( File No. 333-259719, File No. 333-248571, File No. 333-225439 File No. 333-
223950, File No. 333-201469), Form S-3 (File No. 333-226787 and File No. 333-228882) and Form S-1 (File No. 333-260996, File No. 333-237682 and File No. 333-
235295) of SG Blocks, Inc. of our report dated April 15, 2022, relating to the consolidated financial statements appearing in this Annual Report on Form 10-K of SG
Blocks, Inc. for the year ended December 31, 2021.
/s /Whitley Penn LLP
Dallas, Texas
April 15, 2022
I, Paul M. Galvin, certify that:
CERTIFICATION PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of SG Blocks, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: April 15, 2022
By:
/s/ Paul M. Galvin
Name: Paul M. Galvin
Title: Chairman and Chief Executive Officer
(Principal Executive Officer)
I, Gerald A. Sheeran, certify that:
CERTIFICATION PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of SG Blocks, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: April 15, 2022
By:
/s/ Gerald A. Sheeran
Name: Gerald A. Sheeran
Title: Acting Chief Financial Officer
(Principal Financial Officer and Principal Accounting
Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. §1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the annual report of SG Blocks, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2021 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, Paul M. Galvin, the Chief Executive Officer of the Company, and I, Gerald A. Sheeran, the Acting Chief
Financial Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best
of my knowledge and belief that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
April 15, 2022
April 15, 2022
/s/ Paul M. Galvin
Name:
Title:
Paul M. Galvin
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Gerald A. Sheeran
Name:
Title:
Gerald A. Sheeran
Acting Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
This certification accompanies each Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley
Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff upon request.