Safe & Green(SGBX) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for SG Blocks, Inc ITEM 1. Financial Statements This section presents the unaudited condensed consolidated financial statements of SG Blocks, Inc. and its subsidiaries, including balance sheets, statements of operations, changes in stockholders' equity, and cash flows, along with comprehensive notes detailing business operations, accounting policies, liquidity, and significant financial events for the periods ended June 30, 2020, and 2019 Condensed Consolidated Balance Sheets The Condensed Consolidated Balance Sheets present the financial position of SG Blocks, Inc. and its subsidiaries as of June 30, 2020, and December 31, 2019, showing a significant increase in cash and total assets primarily from public offerings, while total liabilities slightly decreased Condensed Consolidated Balance Sheets | Metric | June 30, 2020 | December 31, 2019 | | :-------------------------- | :-------------- | :---------------- | | Cash and cash equivalents | $16,112,907 | $1,625,671 | | Total current assets | $17,986,023 | $2,906,809 | | Total Assets | $22,280,119 | $6,634,611 | | Total current liabilities | $2,012,235 | $2,274,462 | | Total stockholders' equity | $20,267,884 | $4,360,149 | Condensed Consolidated Statements of Operations The Condensed Consolidated Statements of Operations show decreased total revenue for both the three and six months ended June 30, 2020, due to a business model shift, yet gross profit percentage improved despite continued net losses Three Months Ended June 30: | Metric | 2020 (Unaudited) | 2019 (Unaudited) | Change | | :-------------------- | :--------------- | :--------------- | :----- | | Total Revenue | $628,949 | $727,908 | -13.6% | | Gross Profit | $374,233 | $267,318 | +40.0% | | Net Loss | $(837,973) | $(971,709) | -13.8% | | Basic and Diluted EPS | $(0.16) | $(4.02) | -96.0% | Six Months Ended June 30: | Metric | 2020 (Unaudited) | 2019 (Unaudited) | Change | | :-------------------- | :--------------- | :--------------- | :----- | | Total Revenue | $827,705 | $2,463,032 | -66.4% | | Gross Profit | $420,214 | $811,423 | -48.2% | | Net Loss | $(1,585,400) | $(1,462,444) | +8.4% | | Basic and Diluted EPS | $(0.48) | $(6.43) | -92.5% | - Gross profit percentage increased to approximately 51% for the six months ended June 30, 2020, compared to approximately 33% for the six months ended June 30, 2019, primarily due to a single contract of $300,000 with no estimated costs[179] Condensed Consolidated Statements of Changes in Stockholders' Equity The Condensed Consolidated Statements of Changes in Stockholders' Equity show a substantial increase in total stockholders' equity from December 31, 2019, to June 30, 2020, primarily driven by significant common stock issuances from public offerings, despite ongoing net losses Condensed Consolidated Statements of Changes in Stockholders' Equity | Metric | June 30, 2020 | December 31, 2019 | | :------------------------------------ | :-------------- | :---------------- | | Total Stockholders' Equity | $20,267,884 | $4,360,149 | | Common Stock Shares Outstanding | 8,596,189 | 1,157,890 | | Additional Paid-in Capital | $39,351,139 | $21,932,387 | | Accumulated Deficit | $(19,169,217) | $(17,583,817) | - Issuance of common stock, net of issuance costs, contributed $17,118,480 for the six months ended June 30, 2020[14] Condensed Consolidated Statements of Cash Flows The Condensed Consolidated Statements of Cash Flows indicate a significant net increase in cash and cash equivalents for the six months ended June 30, 2020, primarily due to substantial cash provided by financing activities, offsetting cash used in operating and investing activities Six Months Ended June 30: | Cash Flow Activity | 2020 (Unaudited) | 2019 (Unaudited) | | :-------------------------------- | :--------------- | :--------------- | | Net cash used in operating activities | $(2,181,122) | $(1,747,202) | | Net cash used in investing activities | $(650,000) | $0 | | Net cash provided by financing activities | $17,318,358 | $552,709 | | Net increase (decrease) in cash | $14,487,236 | $(1,194,493) | | Cash and cash equivalents - end of period | $16,112,907 | $173,902 | - Cash provided by financing activities increased by $16,765,649, primarily due to increased proceeds from public stock offerings and a long-term note payable[206] Notes to Condensed Consolidated Financial Statements The notes provide detailed explanations of the company's business, accounting policies, financial instruments, and significant events, including liquidity concerns, revenue recognition changes, and ongoing litigation, highlighting the shift to a royalty-based business model and recent capital raises Note 1. Description of Business SG Blocks, Inc. specializes in modifying code-engineered cargo shipping containers and purpose-built modules for commercial, industrial, and residential construction, emphasizing sustainable building, and effected a 1-for-20 reverse stock split on February 5, 2020 - SG Blocks, Inc. modifies code-engineered cargo shipping containers and purpose-built modules (SGBlocks™ and SGPBMs) for safe and sustainable commercial, industrial, and residential building construction[20] - The company offers three core product offerings: GreenSteel™ modules (structural core and shell), pre-fabricated containers with selected materials/finishes, and completely fabricated/finished SGBlocks buildings ready for occupancy[21] - A 1-for-20 reverse stock split of its common stock was effected on February 5, 2020, with all share and per share amounts retroactively restated[23] Note 2. Liquidity SG Blocks has incurred net losses and negative operating cash flows since inception, raising substantial doubt about its ability to continue as a going concern, but recent public offerings have significantly increased cash balances, and the company believes it has adequate cash for the next twelve months, while also facing project delays and economic uncertainty due to the COVID-19 pandemic - The company has incurred net losses and negative operating cash flows since its inception, raising substantial doubt about its ability to continue as a going concern[26] - As of June 30, 2020, the company had cash and cash equivalents of $16,112,907 and a backlog of approximately $17.3 million, which is anticipated to convert to revenue over the next 1-2+ years[27] - The company completed public offerings in April and May 2020, resulting in net proceeds of approximately $1.5 million and $15.6 million, respectively, which are expected to meet obligations for the next twelve months[27] - The COVID-19 pandemic is causing project delays and is expected to impact the company's revenue and results of operations, with the size and duration currently unpredictable[28] Note 3. Summary of Significant Accounting Policies This note outlines the company's accounting policies, including the basis of presentation, recently adopted accounting pronouncements (ASU 2018-13 and ASU 2016-13 with no material impact), and key estimates, detailing the five-step revenue recognition process, the Exclusive License Agreement (ELA) for residential use, and the non-exclusive distributorship agreement for COVID-19 test kits, along with policies for cash, receivables, inventory, goodwill, intangible assets, property, plant and equipment, convertible instruments, share-based payments, income taxes, and concentrations of credit risk - The company applies a five-step process for revenue recognition, recognizing revenue over time, similar to the percentage of completion method[37] - An Exclusive License Agreement (ELA) was granted to CPF GP 2019-1 LLC for residential use of the company's technology, with royalty payments recognized over time as the licensee earns revenue, though no revenue was recognized under the ELA for the six months ended June 30, 2020[39] - A one-year non-exclusive distributorship agreement was signed with OSANG Healthcare Co., Ltd. in May 2020 to distribute GeneFinder COVID-19 Plus RealAmp Kit in the US, with no revenue recognized under this agreement for the six months ended June 30, 2020[43] Revenue by Customer Type (Six Months Ended June 30): | Customer Type | 2020 Revenue | 2020 % | 2019 Revenue | 2019 % | | :-------------------------- | :----------- | :----- | :----------- | :----- | | Hospitality | $42,799 | 5% | $(1,252) | 0% | | Medical (modular structures) | $58,532 | 7% | $0 | 0% | | Multi-Family (includes Single-Family) | $51,963 | 6% | $112,191 | 5% | | Office | $50,909 | 6% | $1,207,897 | 49% | | Retail | $323,502 | 39% | $1,137,384 | 46% | | Special Use | $0 | 0% | $6,812 | 0% | | Other (1) | $300,000 | 37% | $0 | 0% | | Total Revenue | $827,705 | 100% | $2,463,032 | 100% | - Goodwill impairment loss of $2,938,653 was recognized in 2019 due to a deterioration in estimated future cash flows; no impairment occurred during the six months ended June 30, 2020[61] - At June 30, 2020, 88% of gross accounts receivable were due from two customers, and 69% of total revenue for the six months ended June 30, 2020, was from three customers, indicating significant customer concentration[76][77] Note 4. Accounts Receivable Accounts receivable, net, increased from $1,101,185 at December 31, 2019, to $1,584,252 at June 30, 2020, with the allowance for doubtful accounts remaining unchanged at $785,895 and no new provisions, recoveries, or write-offs during the period Accounts Receivable | Category | June 30, 2020 | December 31, 2019 | | :---------------------- | :-------------- | :---------------- | | Total gross receivables | $2,370,147 | $1,887,080 | | Less: allowance for doubtful accounts | $(785,895) | $(785,895) | | Total net receivables | $1,584,252 | $1,101,185 | - There was no provision for doubtful accounts, no recoveries collected, and no write-offs during the six months ended June 30, 2020[79] Note 5. Contract Assets and Contract Liabilities Net contract liabilities increased from $(62,942) at December 31, 2019, to $(137,021) at June 30, 2020, indicating that billings to customers exceeded revenue recognized on uncompleted contracts, with contract assets decreasing while contract liabilities increased during the period Contract Assets and Contract Liabilities | Category | June 30, 2020 | December 31, 2019 | | :------------------------------------ | :-------------- | :---------------- | | Costs incurred on uncompleted contracts | $622,745 | $513,558 | | Estimated earnings to date | $178,553 | $127,032 | | Gross contract assets | $801,298 | $640,590 | | Less: billings to date | $(938,319) | $(703,532) | | Net contract liabilities | $(137,021) | $(62,942) | - Contract assets decreased from $106,015 to $11,830, and contract liabilities (as a negative balance) increased from $(168,957) to $(148,851) from December 31, 2019, to June 30, 2020[83] Note 6. Property, plant and equipment Net property, plant and equipment decreased slightly from $11,747 at December 31, 2019, to $9,899 at June 30, 2020, due to ongoing depreciation, with depreciation expense for the six months ended June 30, 2020, being $1,848, down from $6,301 in the prior year Property, plant and equipment, net | Category | June 30, 2020 | December 31, 2019 | | :-------------------------- | :-------------- | :---------------- | | Property, plant and equipment, net | $9,899 | $11,747 | - Depreciation expense for the six months ended June 30, 2020, was $1,848, compared to $6,301 for the same period in 2019[84] Note 7. Notes Receivable The company issued two promissory notes to CPF GP 2019-1 LLC totaling $650,000 in January and April 2020, bearing 5% annual interest and maturing on July 31, 2023, secured by CPF GP's membership interests in CPF MF 2019-1 LLC - Issued promissory notes to CPF GP 2019-1 LLC for $400,000 (January 2020) and $250,000 (April 2020), totaling $650,000[87][88] - The notes bear interest at five percent (5%) per annum, payable with principal on the earlier of July 31, 2023, or upon liquidation/redemption of LLC interests in CPF MF 2019-1 LLC[87][88] Note 8. Notes Payable In February 2020, the company issued a $200,000 secured note bearing 9% interest, due July 31, 2023, to an accredited investor, which, along with accrued interest, was converted into 73,665 shares of common stock during the three months ended June 30, 2020 - Issued a $200,000 secured note to an accredited investor on February 4, 2020, bearing 9% annual interest and due July 31, 2023[89] - The note and $6,263 of unpaid accrued interest were converted into 73,665 shares of the company's common stock during the three months ended June 30, 2020[89] Note 9. Net Income (Loss) Per Share Basic and diluted net loss per share for the three months ended June 30, 2020, was $(0.16), a significant improvement from $(4.02) in 2019, despite a net loss, and for the six months, it was $(0.48) in 2020, compared to $(6.43) in 2019, with potentially dilutive common shares excluded from diluted EPS calculation due to the net loss Net Loss Per Share - Basic and Diluted: | Period | 2020 | 2019 | | :-------------------------- | :----- | :----- | | Three Months Ended June 30 | $(0.16) | $(4.02) | | Six Months Ended June 30 | $(0.48) | $(6.43) | - Potentially dilutive common shares (options, restricted stock units, and warrants) were excluded from the calculation of diluted per share amounts due to the company's net loss, making basic and diluted EPS identical[91] Note 10. Convertible Debentures In November 2019, the company issued a $480,770 senior secured convertible debenture for $375,000 in proceeds, which was fully repaid by December 13, 2019, and included warrants for the placement agent that were later surrendered - Issued a $480,770 senior secured convertible debenture for $375,000 in proceeds (22% original issue discount) in November 2019, which was fully repaid by December 13, 2019[92] - Warrants to purchase 5,404 shares of common stock, granted to the placement agent, were surrendered on December 10, 2019[94][96] Note 11. Construction Backlog The construction backlog decreased slightly from $17,634,261 at December 31, 2019, to $17,293,227 at June 30, 2020, primarily due to revenue earned, offset by new contracts, with all current backlog revenue expected to be realized by September 30, 2022, though it is subject to cancellations and adjustments Construction Backlog: | Metric | June 30, 2020 | December 31, 2019 | | :------------------------------------ | :-------------- | :---------------- | | Balance - beginning of period | $17,634,261 | $97,657,379 | | New contracts and change orders | $514,041 | $17,659,053 | | Adjustments and cancellations, net | $(27,370) | $(94,697,336) | | Less: contract revenue earned | $(827,705) | $(2,984,835) | | Balance - end of period | $17,293,227 | $17,634,261 | - The company expects to satisfy its backlog, representing unsatisfied performance obligations, over the following period: $4,436,977 within 1 year, $10,285,000 in 1 to 2 years, and $2,571,250 thereafter[99] - Backlog does not include expected royalty fees to the company under the Exclusive License Agreement (ELA) from projects to be delivered by its licensee[98] Note 12. Stockholders' Equity The company significantly increased its stockholders' equity through multiple public offerings in December 2019, April 2020, and May 2020, raising substantial net proceeds, involving the sale of common stock and, in some cases, the issuance of warrants to underwriters, while the number of authorized common shares was decreased in June 2019 - Completed a public offering in December 2019, selling 857,500 shares of common stock for $2,117,948 in net proceeds[105] - Completed a public offering in April 2020, selling 440,000 shares of common stock for approximately $1,522,339 in net proceeds[106] - Completed a public offering in May 2020, selling 6,900,000 shares of common stock (including over-allotment option) for approximately $15,596,141 in net proceeds, and issued warrants to purchase 300,000 shares[107] - The number of authorized shares of common stock was decreased from 300,000,000 to 25,000,000 on June 5, 2019[111] Note 13. Warrants The company has issued various warrants in conjunction with public offerings and securities purchase agreements, including 300,000 warrants to underwriters in May 2020, which have different exercise prices and expiration dates, potentially diluting future net income per share - In May 2020, the company issued warrants to purchase an aggregate of 300,000 shares of common stock to the underwriter at an initial exercise price of $3.14 per share, exercisable from November 6, 2020, to May 5, 2025[116] - As of June 30, 2020, there were warrants to purchase 353,190 shares of common stock outstanding that could potentially dilute future net income per share[91] Note 14. Share-based Compensation Share-based compensation expense for the six months ended June 30, 2020, was $168,514, a decrease from $339,361 in 2019, including expenses for stock options and restricted stock units (RSUs), with 47,331 RSUs granted in April 2020 to employees, consultants, and directors, with various vesting schedules Total Stock-Based Compensation Expense: | Period | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Stock options | $2,667 | $40,098 | $5,333 | $72,196 | | Restricted Stock Units | $127,083 | $136,770 | $163,181 | $267,165 | | Total | $129,750 | $176,868 | $168,514 | $339,361 | - In April 2020, 35,331 restricted stock units were granted to Mr. Galvin, Mr. Armstrong, Mr. Sheeran, five employees, and two consultants, and 12,000 restricted stock units were granted to three non-employee directors, all at a fair value of $4.76 per share[128][129] - As of June 30, 2020, there was $8,000 of total unrecognized compensation costs related to non-vested stock options, expected to be expensed over less than one year[124] Note 15. Commitments and Contingencies The company is involved in several legal proceedings, including the Pizzarotti Litigation, Vendor Litigation against Teton Buildings, and litigation with HOLA Community Partners and EDI International, as well as a former employee's suit for unpaid wages and retaliation, with the company vigorously defending these actions and unable to predict the outcome or potential loss, having made no related provisions in financial statements, and the CEO's employment agreement was amended in April 2020, extending the term and revising compensation structure - The company is a defendant in the Pizzarotti Litigation for alleged breach of contract; certain claims were dismissed in June 2020, but the breach of Assignment Agreement claim remains[134][136] - The company filed suit against Teton Buildings, LLC for breach of contract damages of approximately $2.1 million, but Teton's Chapter 7 bankruptcy conversion makes recovery less likely[140][141] - The company commenced an action against HOLA Community Partners and the City of Los Angeles for breach of contract, conversion, trade secret misappropriation, and negligence, seeking over $1 million, while HOLA filed a separate action against the company for negligence, product liability, and breach of contract, seeking over $4 million[143][145] - A former President and CFO filed suit for $372,638 in unpaid wages and bonuses and severance; the court dismissed the severance and FLSA unpaid wages claims but denied dismissal of FLSA retaliation and NY Labor Law unpaid wages claims[154] - The CEO's employment agreement was amended in April 2020, extending the term to December 31, 2021, setting an annual base salary of $400,000, and establishing a performance bonus structure based on EBITDA achievement[159] Note 16. Subsequent Events In July 2020, the company entered a Joint Development Agreement with Grimshaw Design, LLC to develop scalable education and medical facilities, and the 2020 Annual Meeting of Stockholders, held on July 30, 2020, resulted in the election of directors, ratification of auditors, approval of executive compensation, and an increase of 1,000,000 shares for the Stock Incentive Plan - In July 2020, the company entered into a Joint Development Agreement with Grimshaw Design, LLC to develop scalable, customizable, and rapidly deployable education facilities and pressurized 150 housing units for quarantine[160] - At the 2020 Annual Meeting of Stockholders on July 30, 2020, directors were elected, auditors ratified, executive compensation approved (advisory), and the Stock Incentive Plan was amended to increase authorized shares by 1,000,000[161] ITEM 2. Management's Discussion and Analysis of Financial Condition and Result of Operations This section provides management's perspective on the company's financial performance and condition, detailing the shift to a royalty-based model, strategic partnerships, financing activities, COVID-19 impact, revenue and expense trends, liquidity, capital resources, and critical accounting policies Introduction and Certain Cautionary Statements This section introduces the Management's Discussion and Analysis, emphasizing that it should be read with the unaudited condensed consolidated financial statements, and includes cautionary statements regarding forward-looking information, directing readers to the 'Risk Factors' section for potential material differences in actual results - The discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes included in this Quarterly Report on Form 10-Q[162] - It contains forward-looking statements that involve risks and uncertainties, and actual results could differ materially from those discussed[162] Special note regarding forward-looking statements This section provides a detailed disclaimer about forward-looking statements, outlining common terminology used and emphasizing that actual results may differ materially due to various factors, including economic conditions, financing ability, competition, supply chain disruptions, and the impact of COVID-19, cautioning readers not to place undue reliance on these statements, and stating the company does not undertake to update them - Forward-looking statements use terminology such as 'anticipates,' 'believes,' 'could,' 'estimates,' 'may,' 'plan,' 'expect,' 'intend,' 'should,' 'will,' or variations thereof[163] - Actual results could differ materially due to factors including general economic conditions, ability to obtain financing, competition, supply chain disruptions, customer loss, litigation, regulatory changes, and the impact of COVID-19[163] - The company cautions readers not to place undue reliance on forward-looking statements and does not undertake to update them[163] Overview SG Blocks specializes in modular construction using repurposed shipping containers and purpose-built modules for commercial, industrial, and residential projects, having shifted its residential construction business model in October 2019 from project-based construction to a royalty fee model through an exclusive license agreement with CPF GP 2019-1 LLC - The company modifies code-engineered cargo shipping containers and purpose-built modules (SGBlocks™ and SGPBMs) for safe and sustainable commercial, industrial, and residential building construction[164] - In October 2019, the business model for residential construction shifted to a royalty fee model through an exclusive license with CPF GP 2019-1 LLC, with revenue now generated from royalties based on CPF's gross revenue from products utilizing the company's technology[165] Recent Business Developments SG Blocks entered into a Memorandum of Understanding with Transcend Onsite Care in March 2020 for joint products like modular medical and testing units, and a non-exclusive distributorship agreement with Osang Healthcare Co., Ltd. in April 2020 to distribute COVID-19 test kits in the US, followed by a Joint Development Agreement with Grimshaw Design, LLC in May 2020 to develop scalable medical facilities - Entered a non-binding Memorandum of Understanding with Transcend Onsite Care in March 2020 to provide joint products and services, including modular primary care medical units and COVID-19 diagnostic testing units[166] - Signed a one-year non-exclusive distributorship agreement with Osang Healthcare Co., Ltd. in April 2020 to distribute its GeneFinder COVID-19 Plus RealAmp Kit in the United States[167] - Entered into a Joint Development Agreement with Grimshaw Design, LLC in May 2020 to develop a prototype for scalable, customizable, and rapidly deployable medical facilities[170] Recent Financing Developments The company provided a $750,000 loan to CPF GP in January and April 2020, secured by CPF GP's membership interests, and in February 2020, a $200,000 secured note was issued to an accredited investor, which was later converted into common stock, with significant capital raised through public offerings in April and May 2020, generating approximately $1.5 million and $15.6 million in net proceeds, respectively - Loaned CPF GP $750,000 in two installments (January and April 2020) at 5% annual interest, secured by CPF GP's membership interests[171] - Issued a $200,000 secured note at 9% interest in February 2020, which was converted into 73,665 shares of common stock during the three months ending June 30, 2020[172] - Completed an underwritten public offering in April 2020, selling 440,000 shares for approximately $1,522,339 in net proceeds[173] - Completed an underwritten public offering in May 2020, selling 6,900,000 shares (including over-allotment option) for approximately $15,596,141 in net proceeds and issued warrants to purchase 300,000 shares[174] Results of Operations The company's results of operations for the six and three months ended June 30, 2020, reflect a significant decrease in total revenue compared to 2019, primarily due to the shift to a royalty business model and declines in retail and office customer types, but despite lower revenue, gross profit percentage improved due to a no-cost construction contract, while operating expenses saw mixed changes, leading to continued net losses Six Months Ended June 30, 2020 and 2019 For the six months ended June 30, 2020, total revenue decreased by 66% to $827,705, while cost of revenue decreased by 75%, leading to a 48% decline in gross profit, but the gross profit percentage increased to 51% due to a no-cost construction contract, and despite an overall decrease in operating expenses, the net loss increased by 8.4% to $(1,585,400) Financial Performance (Six Months Ended June 30): | Metric | 2020 | 2019 | Change (%) | | :-------------------- | :----------- | :----------- | :--------- | | Total Revenue | $827,705 | $2,463,032 | -66.4% | | Total Cost of Revenue | $(407,491) | $(1,651,609) | -75.3% | | Gross Profit | $420,214 | $811,423 | -48.2% | | Gross Profit Percentage | 51% | 33% | +18 ppts | | Total Operating Expenses | $(2,010,447) | $(2,273,867) | -11.6% | | Net Loss | $(1,585,400) | $(1,462,444) | +8.4% | - The decrease in revenue was mainly driven by declines in retail (approximately $814,000) and office (approximately $1,157,000) customer types, alongside the shift to a royalty business model[177] - Payroll and related expenses decreased by approximately $620,000, primarily due to a decrease in stock-based compensation expense and reduced salaries/headcount[180] - Other operating expenses increased by approximately $356,611, mainly due to higher legal fees, consulting fees, marketing expense, and amortization, partially offset by decreases in audit fees, travel, and contract labor[181] Three Months Ended June 30, 2020 and 2019 For the three months ended June 30, 2020, total revenue decreased by 14% to $628,949, while cost of revenue decreased by 45%, leading to a 40% increase in gross profit and a gross profit percentage of 60%, with the net loss improving by 13.8% to $(837,973) compared to the prior year Financial Performance (Three Months Ended June 30): | Metric | 2020 | 2019 | Change (%) | | :-------------------- | :----------- | :----------- | :--------- | | Total Revenue | $628,949 | $727,908 | -13.6% | | Total Cost of Revenue | $(254,716) | $(460,590) | -44.7% | | Gross Profit | $374,233 | $267,318 | +40.0% | | Gross Profit Percentage | 60% | 37% | +23 ppts | | Total Operating Expenses | $(1,214,987) | $(1,239,027) | -1.9% | | Net Loss | $(837,973) | $(971,709) | -13.8% | - The decrease in revenue was mainly driven by declines in retail (approximately $404,000) and office (approximately $72,000) customer types, offset by increases in other, medical, and hospitality customer types[184] - Payroll and related expenses decreased by approximately $253,289, primarily due to a decrease in stock-based compensation expense and reduced salaries/headcount[187] - Other operating expenses increased by approximately $229,249, driven by higher legal fees, pre-project expenses, and consulting expenses, partially offset by decreases in audit fees, contract labor, and travel expenses[188] Income Tax Provision A 100% valuation allowance was applied against the deferred tax asset from net operating loss carryforwards, resulting in no income tax benefit for the period - A 100% valuation allowance was provided against the deferred tax asset consisting of available net operating loss carryforwards, resulting in no income tax benefit[190] Impact of Inflation The impact of inflation on the company's revenue and income has not been material due to the absence of inventories whose costs are significantly affected by inflation - The impact of inflation on the company's revenue and income (loss) from continuing operations has not been material, as the company does not maintain inventories whose costs are affected by inflation[191] Impact of Coronavirus (COVID-19) The COVID-19 pandemic has caused project delays and is expected to impact revenue and operations, though the full extent is unpredictable, with the company implementing business continuity plans and considering alternative product sourcing to mitigate potential disruptions - The company is experiencing delays in projects due to the COVID-19 pandemic, which is expected to impact revenue and results of operations, with the size and duration currently unpredictable[192] - Business continuity plans have been implemented, and the company is considering alternative product sourcing to mitigate potential disruptions from quarantines, travel restrictions, labor shortages, and economic downturns[192] Liquidity and Capital Resources The company's cash and cash equivalents significantly increased to $16,112,907 at June 30, 2020, from $1,625,671 at December 31, 2019, primarily due to substantial net proceeds from public offerings in April and May 2020, and despite ongoing net losses and cash used in operations, the company anticipates sufficient cash for at least the next twelve months but acknowledges the need for potential future financing to support growth, which may not be available on favorable terms - Cash and cash equivalents increased significantly from $1,625,671 at December 31, 2019, to $16,112,907 at June 30, 2020[194] - Recent public offerings in April 2020 ($1,522,339 net proceeds) and May 2020 ($15,596,141 net proceeds) were the primary drivers of increased liquidity[200][201] - Despite anticipating continued losses, the company expects its cash balance to be sufficient for at least twelve months from August 13, 2020[202] - The company may need additional debt or equity financing for future growth, with no assurance that such funding will be available on favorable terms, potentially requiring material changes to its business plan[203] Cash Flow Summary For the six months ended June 30, 2020, net cash provided by financing activities significantly increased to $17,318,358, primarily from public stock offerings, leading to a net increase in cash and cash equivalents of $14,487,236, offsetting increased cash used in operating activities ($2,181,122) and investing activities ($650,000, mainly for a note receivable) Cash Flow Summary (Six Months Ended June 30): | Activity | 2020 | 2019 | | :-------------------------------- | :----------- | :----------- | | Operating activities | $(2,181,122) | $(1,747,202) | | Investing activities | $(650,000) | $0 | | Financing activities | $17,318,358 | $552,709 | | Net increase (decrease) in cash | $14,487,236 | $(1,194,493) | - Cash used in operating activities increased by approximately $433,920, primarily due to a decrease in working capital, an increase in interest income, a decrease in stock-based compensation, an increase in amortization expense, an increase in overall net loss, and a decrease in bad debt benefits[204] - Cash used in investing activities was $650,000, primarily due to an advance in a note receivable[205] - Cash provided by financing activities increased by $16,765,649, driven by increased proceeds from public stock offerings and a long-term note payable[206] Off-Balance Sheet Arrangements As of June 30, 2020, and December 31, 2019, the company had no material off-balance sheet arrangements, and it enters into customary indemnification agreements in the ordinary course of business, for which no material costs have been incurred, and liabilities are considered minimal - The company had no material off-balance sheet arrangements as of June 30, 2020, and December 31, 2019[210] - Customary indemnification provisions are entered into with third parties, but no material costs have been incurred, and the estimated fair value of liabilities is minimal[211] Critical Accounting Policies and New Accounting Pronouncements This section highlights critical accounting policies, including share-based payments, other derivative financial instruments, convertible instruments, revenue recognition, goodwill, and intangible assets, reiterating the five-step revenue recognition process and the accounting for the Exclusive License Agreement, and refers to Note 3 for details on recently adopted and new accounting pronouncements, which had no material impact - Critical accounting policies include share-based payments, other derivative financial instruments, convertible instruments, revenue recognition, goodwill, and intangible assets[214][215][217][219][223][224] - Revenue recognition follows a five-step process, recognizing revenue over time, including royalty payments from the Exclusive License Agreement[219][221][222] - Goodwill impairment of $2,938,653 was recognized in 2019, but there was no impairment during the six months ended June 30, 2020, for either goodwill or intangible assets[223][224] - Recently adopted accounting pronouncements (ASU 2018-13 and ASU 2016-13) did not have a material impact on the company's financial position, results of operations, or cash flow[32][33][225] Non-GAAP Financial Information The company presents non-GAAP financial measures, EBITDA and Adjusted EBITDA, as supplemental performance indicators, with EBITDA being net income (loss) before interest, taxes, depreciation, and amortization, and Adjusted EBITDA further excluding non-recurring items like litigation expense and stock compensation, though these measures have limitations such as not reflecting cash outlays for capital expenditures or working capital - The company presents EBITDA and Adjusted EBITDA as supplemental non-GAAP financial measures to assess financial performance[226][227] - EBITDA is calculated as net income (loss) before interest expense, income tax benefit (expense), depreciation, and amortization[226] - Adjusted EBITDA further excludes certain non-recurring adjustments such as loss on conversion of convertible debentures, change in fair value of financial instruments, and stock compensation expense[226] EBITDA and Adjusted EBITDA Reconciliation (Six Months Ended June 30): | Metric | 2020 | 2019 | | :-------------------------- | :------------- | :------------- | | Net loss | $(1,585,400) | $(1,462,444) | | Addback interest expense | $6,263 | $0 | | Addback interest income | $(11,096) | $0 | | Addback depreciation and amortization | $94,802 | $78,863 | | EBITDA (non-GAAP) | $(1,495,431) | $(1,386,581) | | Addback litigation expense | $267,840 | $0 | | Addback stock compensation expense | $168,514 | $339,361 | | Adjusted EBITDA (non-GAAP) | $(1,059,077) | $(1,044,220) | - Limitations of these non-GAAP measures include not reflecting cash outlays for capital expenditures, changes in working capital, or cash requirements for asset replacements[229] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there are no applicable quantitative and qualitative disclosures about market risk for the company - The company has no applicable quantitative and qualitative disclosures about market risk[232] ITEM 4. Controls and Procedures Management, with the Principal Executive Officer and Principal Financial Officer, concluded that the company's disclosure controls and procedures were effective as of June 30, 2020, with no material changes in internal control over financial reporting during the quarter, other than personnel changes and allocation of work to outside vendors Evaluation of Disclosure Controls and Procedures As of June 30, 2020, the Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective in ensuring timely and accurate reporting of required information - Management, with the Principal Executive Officer and Principal Financial Officer, concluded that disclosure controls and procedures were effective as of June 30, 2020[233] - The condensed consolidated financial statements and other information in the report are believed to fairly present the company's business, financial condition, and results of operations[234] Changes in Internal Control over Financial Reporting No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2020, other than personnel changes and the allocation of accounting work to outside vendors - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2020, other than personnel changes and the allocation of work to outside vendors[235] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, unregistered sales of equity securities, defaults on senior securities, mine safety disclosures, other information, and a list of exhibits ITEM 1. Legal Proceedings This section incorporates by reference the detailed information on legal proceedings from Note 15, 'Commitments and Contingencies,' of the condensed consolidated financial statements - Information regarding legal proceedings is incorporated by reference from Note 15 – Commitments and Contingencies[236] ITEM 1A. Risk Factors This section updates and expands on the risks disclosed in the 2019 Form 10-K, highlighting significant concerns such as the company's ability to increase sales or raise capital to avoid cash shortfalls, the uncertainty of revenue generation from new collaborations (Transcend, Osang), product liability risks for medical kits, the adverse impact of the COVID-19 pandemic on operations and demand, potential dilution from outstanding equity instruments, reliance on a few key customers and vendors, and the inherent uncertainties of backlog realization and net operating loss utilization - There is a risk of cash shortfall over the next twelve months if the company is not successful in increasing sales or raising additional capital, despite recent public offerings[238][239] - There is no assurance that collaborations with Transcend (modular medical units) or the Distributorship Agreement with Osang (COVID-19 test kits) will be successful or generate significant revenue[240][241] - Product liability and other claims related to Osang's GeneFinder COVID-19 Plus RealAmp Kit may have material adverse effects on the business, despite indemnification agreements and insurance[242][243] - The COVID-19 pandemic is expected to adversely impact the company's ability to source products, product pricing, customer financing, and cause project delays, with unpredictable size and duration[244] - The issuance of shares upon the exercise of outstanding options, warrants, and restricted stock units (totaling 445,545 shares as of August 10, 2020) may dilute the percentage ownership of existing stockholders[247] - The loss of one or a few significant customers (e.g., 69% of H1 2020 revenue from three customers) could have a material adverse effect on the business[248] - Reliance on certain key vendors (e.g., 75% of H1 2020 cost of revenue related to four vendors) for materials and products could adversely affect the business if supply is disrupted[249] - The company's backlog of approximately $17.3 million (June 30, 2020) is not necessarily indicative of future revenues or earnings, as contracts are subject to cancellation, termination, or scope adjustments[250] - The company could suffer adverse tax and other financial consequences if it is unable to utilize its net operating loss carryforwards (approximately $12.9 million at December 31, 2019)[252] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds that have not been previously disclosed - No unregistered sales of equity securities or use of proceeds have occurred that were not previously disclosed in SEC filings[253] ITEM 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report - No defaults upon senior securities[254] ITEM 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[255] ITEM 5. Other Information There is no other information to report under this item - No other information to report under this item[256] ITEM 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including underwriting agreements, consulting agreements, distributorship agreements, and certifications - The exhibits include various agreements such as Underwriting Agreements, a Consulting Agreement, Distributorship Agreements, and certifications by the Chief Executive Officer and Chief Financial Officer[258] SIGNATURES The report is duly signed on behalf of SG Blocks, Inc. by Paul M. Galvin, Chief Executive Officer and Chairman of the Board, on August 13, 2020 - The report was signed by Paul M. Galvin, Chief Executive Officer and Chairman of the Board, on behalf of SG Blocks, Inc. on August 13, 2020[263]