Safe & Green(SGBX) - 2020 Q4 - Annual Report

PART I Item 1. Business. SG Blocks provides modular facilities, evolving its business model to include residential royalty fees and healthcare solutions, leveraging GreenSteel™ technology and vertical integration History and Company Overview SG Blocks provides modular facilities, acquired Echo DCL for manufacturing control, and expanded into healthcare solutions, including COVID-19 testing - SG Blocks provides modular facilities ("Modules") for multi-family housing, military, and restaurant use, manufactured using proprietary technology and design expertise[25] - In September 2020, the company acquired Echo DCL, LLC, a key supply chain provider, to gain more control over manufacturing and expand product offerings to include wood containers[25][28] - Since March 2020, the company increased its focus on providing Modules as healthcare facilities for deployable medical response solutions and partnered with Clarity Lab Solutions for laboratory testing services[25][27] License Agreement with CPF GP 2019-1 LLC SG Blocks entered an exclusive five-year license agreement with CPF for GreenSteel™ technology in residential use, establishing a royalty-fee revenue model - In October 2019, SG Blocks entered into a five-year exclusive license agreement with CPF GP 2019-1 LLC (CPF) for its GreenSteel™ technology and intellectual property for residential use in the United States, excluding military housing[30] - Under this royalty fee model, SG Blocks' revenue for residential construction is generated from royalties based on CPF's gross revenue from sales of products utilizing the licensed technology[30] Minimum Cumulative Royalty Payments to SG Blocks from CPF | Year | Minimum Royalty Payment | | :--- | :---------------------- | | 1 | $500,000 | | 2 | $750,000 | | 3 | $1,500,000 | | 4 | $2,000,000 | | 5 | $2,500,000 | - No royalty payments were received under the License Agreement during the year ended December 31, 2020[31] Distribution Agreement with Osang SG Blocks entered a non-exclusive distribution agreement with Osang for COVID-19 PCR tests, which did not yield anticipated benefits, leading to a breach of contract lawsuit - In April 2020, SG Blocks entered a non-exclusive distributorship agreement with Osang Healthcare Co Ltd for its GeneFinder™ COVID-19 Plus RealAmp Kit™ PCR tests in the United States[34] - The Distribution Agreement has not yielded anticipated benefits or generated significant revenue by the end of 2020[34] - On April 14, 2021, SG Blocks filed a lawsuit against Osang for breach of contract and fraud, seeking damages of $12 to $15 million[35] Joint Development Agreement with Grimshaw SG Blocks partnered with Grimshaw Design to develop scalable medical and educational facilities, leading to a subcontract for COVID-19 PCR testing facilities - In May 2020, SG Blocks entered a Joint Development Agreement with Grimshaw Design, LLC to develop scalable, customizable, and rapidly deployable medical facilities with laboratory systems[36] - The partnership expanded in July 2020 to include the development of rapidly deployable educational facilities[37] - In November 2020, SG Blocks was engaged as a sub-contractor for Wayne County, Michigan, to deploy D-Tec Product Series prefabricated health facilities for COVID-19 PCR testing[38] Joint Venture with Clarity Lab Solutions, LLC SG Blocks formed Clarity Mobile Venture with Clarity Labs to market lab testing products and services, securing contracts for COVID-19 testing at LAX and in Hawaii - In August 2020, SG Blocks formed Clarity Mobile Venture, a joint venture with Clarity Labs, a CLIA-certified laboratory, to jointly market, sell, and distribute lab testing products and services[40] - Clarity Mobile Venture secured a contract with the City of Los Angeles to operate a full-service modular COVID-19 PCR Test Laboratory at Los Angeles International Airport (LAX)[40] - The State of Hawaii selected Clarity Labs and Clarity Mobile Venture as a Trusted Testing Partner (TTP) for its COVID-19 travel testing program[40] Acquisition of Echo DCL, LLC SG Blocks acquired Echo DCL, LLC for $1,059,600 to vertically integrate manufacturing, expand product reach, and enhance margins and efficiency - In September 2020, SG Blocks acquired substantially all assets of Echo DCL, LLC, a container/modular manufacturer, for $1,059,600 in cash[41][42] - The acquisition aims to expand the reach of Modules, vertically integrate a large portion of cost of goods sold, and increase margins, productivity, and efficiency in design, estimating, manufacturing, and delivery[28][41] Recent Developments Recent developments include a new COO appointment, formation of SGB Development Corp. for real estate projects, a 225-apartment unit project in Austin, and the option to acquire Echo's 19-acre real estate holdings - William B. Rogers was appointed Chief Operations Officer effective December 7, 2020, with an annual salary of $300,000 and an annual bonus of up to 50% of his salary[43] - On February 17, 2021, SGB Development Corp. was formed for real property development utilizing company technologies, with SG Echo manufacturing the homes and apartments[44] - SGB Dev Co announced a 225-apartment unit project in Austin, Texas, with estimated manufacturing revenue of approximately $30 million and a profit share of $5 to $7 million over 36 months[45] - On February 24, 2021, the company executed its option to acquire Echo's 19-acre real estate holdings in Durant, OK, with closing expected in Q2 2021[46] Products Produced with Our GreenSteel™ Modular Technology The company's proprietary GreenSteel™ technology modifies cargo shipping containers into sustainable, durable, and rapidly erectable building blocks, offering three core product types - The company's proprietary GreenSteel™ technology and expertise modify code-engineered cargo shipping containers into SGBlocks™, which are safe, green building blocks for commercial, industrial, and residential construction[26][47] - Products developed with this technology are generally stronger, more durable, environmentally sensitive, and erected faster than traditional construction, typically providing 4-6 points towards LEED certification[47] - Three core product offerings range from structural core and shell (GreenSteel Modules) to partially finished containers with selected materials, and completely fabricated and finished SG Blocks buildings ready for occupancy[48] Other Modular Products The Echo facility also produces pre-fabricated wood-based modular containers for residential and commercial use, accounting for approximately 65% of recent Module sales - At its Echo facility, the company also produces pre-fabricated modular containers using wood as the base material, for both residential and commercial use[49] - Since the acquisition of Echo, approximately 65% of the company's Module sales have been for wood-based modules[49] ESR Approval SG Blocks received an Evaluation Service Report (ESR) for its structural building materials, confirming compliance with building codes and expediting project approvals - In April 2017, the company received an Evaluation Service Report (ESR) from ICC Evaluation Service, LLC (ICC-ES) for its SGBlocks structural building materials, believed to be the first modular building company to receive such certification[50] - The ESR indicates suitability and technical capabilities in compliance with International, California, and Florida Building Codes, expediting reviews and approvals[50] - The ESR is site-specific, with six of 18 facilities currently approved to place the ICC-ES medallion, undergoing annual inspections[51] Target Markets The company targets diverse markets including housing, military, healthcare, and education, with future expansion planned for data centers and medical facilities - Target markets for products utilizing the company's technology and expertise include single-family and multi-family housing, restaurants, military, education/student housing, healthcare, equipment enclosures, office, commercial, athletic facilities, and administration facilities[54][56] - Future target markets for expansion include data centers, warehouse/public storage, reclamation/drop-off centers, and medical facilities[54] Our Competitive Strengths Competitive strengths include ESR certification, cost and time savings, hurricane/tornado/earthquake resistance, design flexibility, and vertical integration through the Echo acquisition - The company distinguishes itself through its ESR, quality, cost, and construction time savings, with proprietary methods being less expensive and faster than traditional construction, especially in urban and multi-story projects[57] - SGBlocks are designed to be hurricane-, tornado-, and earthquake-resistant, and their flexibility and stackability allow for customized designs[57] - The acquisition of Echo has enabled vertical integration of the manufacturing process, reducing cost of goods sold and increasing productivity and efficiency[58] Our Customers The company markets to a broad customer base including contractors, government agencies, and individuals, with significant revenue concentration from a few key customers - The company markets its construction products to a broad customer base, including contractors, home builders, building owners, government agencies, the U.S. Military, and individuals requiring COVID-19 tests[59] Customer Concentration (as of December 31) | Metric | 2020 | 2019 | | :------------------------------------ | :--- | :--- | | % of gross accounts receivable from 3/1 customers | 79% (3 customers) | 92% (1 customer) | | % of total revenue from 3/2 customers | 61% (3 customers) | 78% (2 customers) | Our Suppliers and Partners The company utilizes standard construction material suppliers and has an exclusive 10-year agreement with ConGlobal Industries for certified shipping containers - The company uses standard materials and suppliers common in conventional construction for modifying container shell structures and finishing modules[60] - ConGlobal Industries, Inc. is an exclusive supplier of certified shipping containers for housing, office, and retail uses within a 50-mile radius of their sites in the continental United States, under a 10-year agreement through May 14, 2024[61] Intellectual Property The company operates under its registered trademarks "SGBlocks," "GreenSteel," and its "SG" logo - The company operates under its United States registered trademarks "SGBlocks" and "GreenSteel" and its trademarked "SG" logo[62] Government Regulation and Approval The company's building design and construction adhere to local and state building codes and is subject to various federal, state, and local regulations - Building design and construction are controlled at the project level by local and state municipalities, adhering to published building codes and criteria[63] - The company is subject to various federal, state, and local government regulations applicable to its business, including laws related to employees, public health and safety, workplace safety, transportation, zoning, and fire codes[63] - The company believes it is in compliance in all material respects with existing applicable environmental laws and regulations, and its employment, health, and safety practices[63] General Corporate Information SG Blocks, Inc. was incorporated in Delaware on December 29, 1993, and its common stock trades on the Nasdaq Capital Market under "SGBX" - SG Blocks, Inc. was incorporated in Delaware on December 29, 1993, and its common stock currently trades on the Nasdaq Capital Market under the symbol "SGBX"[64] Our Emergence from Bankruptcy The company emerged from Chapter 11 bankruptcy in June 2016 under a Plan of Reorganization, resulting in the issuance of new common stock - The company and its subsidiaries filed for Chapter 11 reorganization in October 2015 and emerged from bankruptcy on June 30, 2016, under a Plan of Reorganization[65] - Upon emergence, all previously issued and outstanding shares of Former Common Stock were discharged, cancelled, and extinguished, and new common stock was issued to holders[68] - Prior to its public offering in June 2017, all outstanding shares of preferred stock were converted into common stock, and no preferred stock remains outstanding[69] Reverse Stock Split On February 5, 2020, the company effected a 1-for-20 reverse stock split of its common stock, retroactively restating all share and per share amounts - On February 5, 2020, the company effected a 1-for-20 reverse stock split of its common stock[70] - All share and per share amounts presented in the Annual Report have been retroactively restated to reflect this split as if it had occurred as of the earliest period presented[70] Recent Financing Developments In April and May 2020, the company completed public offerings, raising approximately $1.5 million and $15.6 million in net proceeds, respectively - In April 2020, the company completed a public offering, selling 440,000 shares of common stock at $4.25 per share, resulting in approximately $1,522,339 in net proceeds[71] - In May 2020, the company completed another public offering, selling 6,900,000 shares of common stock (including over-allotment) at $2.50 per share, resulting in approximately $15,596,141 in net proceeds[72] Human Capital As of December 31, 2020, the company employed fifty full-time employees and implemented health and safety plans in response to the COVID-19 pandemic - As of December 31, 2020, SG Blocks directly employed thirteen full-time employees, and its subsidiary SG Echo directly employed thirty-seven full-time employees[73] - In response to the COVID-19 pandemic, the company implemented health and safety plans, including work-from-home flexibility, adjusted attendance policies, and increased cleaning protocols[74] Available Information The company files reports with the SEC, including Forms 10-K, 10-Q, and 8-K, which are available on its website and the SEC's website - The company is subject to the informational requirements of the Securities Exchange Act of 1934 and files reports with the U.S. Securities and Exchange Commission (SEC)[76] - Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K are available on the company's website (www.sgblocks.com) and the SEC's website (www.sec.gov)[76](index=76&type=chunk) Item 1A. Risk Factors. The company faces significant risks related to its financial position, operations, and common stock, including capital raising challenges, dilution, historical losses, operational dependencies, internal control weaknesses, industry cyclicality, and market acceptance of modular construction Risks Related to our Financial Position and Capital Requirements Risks include inability to raise capital, potential stock dilution, historical net losses, and the possibility of goodwill impairment adversely affecting financial condition - The company may be unable to raise needed capital if revenue remains flat or decreases, potentially forcing a reduction in operating expenses and adversely affecting operations[18][78] - The issuance of common stock upon the exercise of outstanding options, warrants, and restricted stock units may dilute the percentage ownership of existing stockholders and make it more difficult to raise additional equity capital[18][153] - The company has incurred net losses in prior periods ($4.5 million in 2020, $6.9 million in 2019) and cannot assure future income or successful achievement/maintenance of its growth strategy[18][81] - An impairment of goodwill could materially adversely affect financial condition and results of operations; a $2,938,653 impairment was recognized in 2019, with none in 2020[18][82] Risks Relating to the Company Company-specific risks include reliance on third-party licensees, limited operating history of new models, dependence on key personnel and major customers, and identified material weaknesses in internal controls - The residential construction business model relies on an independent third-party licensee (CPF), whose commercialization efforts and resource allocation are beyond the company's control, potentially affecting revenue generation[21][83] - The new licensing business model for residential construction and the recent acquisition of Echo have limited operating history, making it difficult to evaluate their impact and assure anticipated cost savings or income[21][85][86] - The company is dependent on the services of key personnel (Paul M. Galvin, Gerald Sheeran, Stevan Armstrong, William Rogers, Rockey Butler), and the unexpected loss of any could adversely affect operations[21][99] - A few customers accounted for approximately 61% of the company's total revenue in 2020, and the loss of business from a significant customer could have a material adverse effect[21][100] - The company has identified material weaknesses in its internal controls over financial reporting, including insufficient accounting resources and lack of formal review procedures, which may not be effectively remediated[21][103][104] Risks Relating to our Business and Industry Business and industry risks include the cyclical and seasonal nature of construction, reliance on private investment, potential supply chain disruptions, environmental regulations, and cybersecurity threats - The construction industry is highly cyclical and seasonal, influenced by economic factors, causing revenues and operating results to fluctuate, and potentially leading to operating losses during downturns[21][115] - The business relies on private investment, and a slower economy or customers' inability to finance projects could adversely affect sales and financial results[21][117] - Material disruptions at supplier or Echo facilities (e.g., natural disasters, global pandemics, labor difficulties) could prevent meeting customer demand, reduce sales, and negatively affect financial results[21][94][96][118] - The company is subject to environmental, health, and safety laws and regulations, which could lead to liabilities, increased operational costs, or sanctions for non-compliance[21][119][120] - Cybersecurity risks, including security threats and breaches of information technology systems, could result in misappropriation of data, business disruptions, reputational damage, and financial consequences[21][125][127] Risks Relating to the Construction Sector Construction sector risks include intense competition, uncertainty of modular construction market acceptance, regulatory delays, and inherent operational hazards - The construction industry is highly competitive, and increased competition or consolidation could adversely affect the company's market position and profitability[24][132] - There is no assurance that Modules or modular construction techniques will achieve widespread market acceptance and growth, making the future of the business uncertain[24][133] - Government regulations and legal challenges related to building, zoning, and land use can delay projects, increase expenses, or limit building activities[28][135] - Construction operations involve inherent hazards (personal injury, property damage), and limits on insurance coverage could expose the company to significant liability costs[28][136] Risks Relating to the Clarity Mobile Venture Sector Risks in the Clarity Mobile Venture sector include uncertain demand for COVID-19 tests, intense competition, and reliance on third-party test suppliers - There is no assurance that the demand for COVID-19 tests conducted by Clarity Mobile Venture will continue at current rates or that existing tests will be effective for new variants of the virus[28][137] - The market for COVID-19 testing facilities is highly competitive, with many competitors possessing substantially greater financial, technical, and other resources[29][139] - Reliance on third-party vendors to supply COVID-19 tests means that an inability to obtain these tests in required volumes or at competitive prices could adversely affect the business[29][140] Risks Relating to our Common Stock Risks related to common stock include potential Nasdaq delisting, price volatility, dilution from future sales, and anti-takeover provisions under Delaware law - Failure to meet Nasdaq Capital Market continued listing requirements (e.g., minimum bid price) could result in delisting, negatively affecting stock price and future capital raising ability[29][141][142] - The company's stock price has been volatile and is expected to continue fluctuating due to factors beyond its control, potentially leading to investors losing all or part of their investment[30][145][146] - Sales of a substantial number of common stock shares in the public market, or the perception of such sales, could cause the stock price to decline and dilute existing stockholders' ownership[30][150][153] - Certain provisions of Delaware law (Section 203) could discourage, delay, or prevent a merger or acquisition at a premium price[32][158] Item 1B. Unresolved Staff Comments. There are no unresolved staff comments to report - The company has no unresolved staff comments[162] Item 2. Properties. The company maintains its headquarters in leased office space in Brooklyn, New York, and operates a manufacturing facility in Durant, Oklahoma, through its subsidiary Echo - The company leases office space in Brooklyn, New York, for its headquarters[163] - Echo, a subsidiary, operates a manufacturing facility located in Durant, Oklahoma[163] Item 3. Legal Proceedings. The company is involved in various legal proceedings arising in the normal course of business, including a lawsuit filed against Osang Healthcare Company, Ltd. for breach of contract and fraud seeking $12-$15 million - The company is subject to certain claims and lawsuits arising in the normal course of business[102][164] - On April 14, 2021, the company filed a lawsuit against Osang Healthcare Company, Ltd. for breach of contract and fraud, seeking damages in the amount of $12 to $15 million[35][164] - The company is currently unable to predict the possible loss or range of loss for its ongoing litigations (Pizzarotti, Teton, HOLA, Shetty, Osang) and has made no provision related to these matters in the consolidated financial statements[432][443][445][451][453] Item 4. Mine Safety Disclosures. This item is not applicable to the company - This item is not applicable[165] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. The company's common stock trades on Nasdaq under "SGBX" with 81 holders, has no dividend policy, and reported no unregistered security sales or share repurchases in 2020 Market Information The company's common stock is listed and traded on the Nasdaq Capital Market under the symbol "SGBX" - The company's common stock is listed and traded on the Nasdaq Capital Market under the symbol "SGBX"[168] Holders As of April 9, 2021, there were approximately 81 holders of record of the company's common stock, with a closing sales price of $4.10 - As of April 9, 2021, there were approximately 81 holders of record of the company's common stock[168] - The closing sales price of the common stock on the Nasdaq Capital Market on April 9, 2021, was $4.10[168] Dividend Policy The company has never paid cash dividends and does not anticipate doing so, intending to retain future earnings for business expansion - The company has never paid any cash dividends on its common stock and does not anticipate paying them in the foreseeable future[169] - Any future earnings are intended to be retained to finance the development and expansion of the business[156][169] Recent Sales of Unregistered Securities The company did not sell any unregistered securities from January 1, 2020, through December 31, 2020, that were not previously disclosed - The company did not sell any unregistered securities from January 1, 2020, through December 31, 2020, that were not previously disclosed[170] Issuer Purchases of Equity Securities The company did not repurchase any of its outstanding shares during 2020 - The company did not repurchase any of its outstanding shares during 2020[171] Performance Graph and Purchases of Equity Securities As a smaller reporting company, the company is not required to provide a performance graph or information on purchases of equity securities - As a smaller reporting company, the company is not required to provide the information for this item[172] Transfer Agent and Registrar American Stock Transfer and Trust Company, LLC serves as the transfer agent and registrar for the company's common stock - The transfer agent and registrar for the company's common stock is American Stock Transfer and Trust Company, LLC[173] Equity Compensation Plan Information Information regarding equity compensation plans will be provided in the "Equity Compensation Plan" section of the company's 2021 Proxy Statement - The information required by this section will be contained in the "Equity Compensation Plan" section of the company's 2021 Proxy Statement[174] Item 6. Selected Financial Data. As a smaller reporting company, the company is not required to provide selected financial data - As a smaller reporting company, the company is not required to provide the information for this item[175] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. This section analyzes the company's financial condition and operational results, noting significant 2020 revenue growth from medical projects, business model shifts, improved liquidity from equity offerings, and the impact of COVID-19 Introduction and Certain Cautionary Statements This discussion should be read with consolidated financial statements and contains forward-looking statements subject to risks and uncertainties - This discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes[176] - The discussion contains forward-looking statements that involve risks and uncertainties, which could cause actual results to differ materially[176] Background The company uses proprietary technology for modular construction, shifted to a residential royalty model, expanded into healthcare facilities, and acquired Echo DCL for vertical integration - The company modifies cargo shipping containers and purpose-built modules using proprietary technology for safe and sustainable commercial, industrial, and residential building construction[177] - In October 2019, the residential building construction business model shifted to a royalty fee model through an exclusive license with CPF, where revenue is generated from royalties rather than direct sales[178] - Since March 2020, the company increased its focus on providing Modules as healthcare facilities for deployable medical response solutions, including a joint venture with Clarity Labs for testing services[181] - In September 2020, the company acquired substantially all assets of Echo DCL, LLC to vertically integrate manufacturing, expand product reach, and increase margins and efficiency[182] Results of Operations The results of operations detail revenue, cost of revenue, gross profit, operating expenses, and net loss, highlighting key changes between 2019 and 2020 Consolidated Statements of Operations Highlights | Metric | Year Ended Dec 31, 2020 | Year Ended Dec 31, 2019 | | :------------------------------------------ | :---------------------- | :---------------------- | | Total Revenue | $8,755,623 | $2,984,835 | | Total Cost of Revenue | $6,535,444 | $2,307,488 | | Gross Profit | $2,220,179 | $677,347 | | Total Operating Expenses | $6,803,011 | $7,381,359 | | Operating Loss | $(4,582,832) | $(6,704,012) | | Net Loss | $(4,508,162) | $(6,920,540) | | Net Loss Attributable to Common Stockholders | $(4,692,729) | $(6,920,540) | | Basic and Diluted EPS | $(0.79) | $(22.85) | | Weighted Average Shares Outstanding | 5,959,403 | 302,844 | Revenue Total revenue significantly increased in 2020, primarily driven by growth in medical-related projects, including COVID-19 test samples and medical construction sales - Total revenue for the year ended December 31, 2020, increased by $5,770,788 (193%) to $8,755,623 from $2,984,835 in 2019[187] - This increase was primarily due to growth in medical-related projects of approximately $5,020,000, including $4,241,500 from COVID-19 test samples and kits, and $778,500 from medical construction sales[187] - Revenue from construction services increased by $1,295,936, with increases in government, special use, and hospitality projects, partially offset by decreases in retail and office customer types[187] Cost of Revenue and Gross Profit Cost of revenue increased due to higher procurement of medical supplies and manufacturing costs, leading to an increase in gross profit and gross profit percentage - Cost of revenue increased by $4,227,956 (183%) to $6,535,444 in 2020 from $2,307,488 in 2019, mainly due to higher procurement of COVID-19 testing supplies and medical equipment, and increased manufacturing costs for modular units[188] - Gross profit increased to $2,220,179 in 2020 from $677,347 in 2019[189] - Gross profit percentage increased to 25% in 2020 from 23% in 2019, primarily due to higher margins on lab testing and other medical-related construction contracts[189] Payroll and Related Expenses Payroll and related expenses increased in 2020, primarily due to higher stock-based compensation expense and increased non-chargeable production salaries - Payroll and related expenses increased to $2,992,207 in 2020 from $2,392,587 in 2019[190] - This increase was primarily driven by an approximately $488,000 increase in stock-based compensation expense and a $102,000 increase in non-chargeable production salaries[190] Other Operating Expenses Other operating expenses decreased in 2020 due to no goodwill impairment loss, partially offset by increased general and administrative expenses - Other operating expenses decreased to $3,810,804 in 2020 from $4,988,722 in 2019[191] - The decrease was primarily due to no goodwill impairment loss recognized in 2020, compared to an impairment loss of approximately $2,938,000 in 2019[191] - This decrease was partially offset by a $1,661,573 increase in general and administrative expenses, including higher rent, depreciation, legal fees, insurance, supplies, IT, and consulting services[191] Other Income (Expense) Total other income significantly improved in 2020, driven by interest income from bank interest and notes receivable, and a decrease in interest expense - Total other income (expense) was $74,670 in 2020, a significant improvement from $(216,528) in 2019[186] - Interest income was $61,675 in 2020 (none in 2019), mainly derived from bank interest and an outstanding note receivable[193] - Interest expense decreased to $9,275 in 2020 from $178,995 in 2019[193] Income Tax Provision A 100% valuation allowance was provided against the deferred tax asset, resulting in no income tax benefit for 2020 and 2019 - A 100% valuation allowance was provided against the deferred tax asset, resulting in no income tax benefit for the years ended December 31, 2020 and 2019[194] Impact of Inflation The impact of inflation on the company's revenue and income (loss) has not been material due to the absence of inventories significantly affected by inflation - The impact of inflation on the company's revenue and income (loss) has not been material due to the absence of inventories whose costs are significantly affected by inflation[195] Impact of Coronavirus (COVID-19) The company implemented business continuity plans to mitigate COVID-19 impacts, but project delays are expected to affect revenue and operations, with unpredictable size and duration - The company implemented business continuity plans to address and mitigate the impact of the COVID-19 pandemic on its employees and business[196] - The company has experienced project delays due to COVID-19, which is expected to impact revenue and results of operations, with the size and duration currently unpredictable[196] - The pandemic could lead to an economic downturn, affecting customer financing, product demand, and potentially causing labor shortages or supplier disruptions[196] Liquidity and Capital Resources Liquidity improved significantly in 2020 due to substantial equity offerings, supporting a growing construction backlog, despite historical operating losses Cash and Stockholders' Equity (2019-2020) | Metric | December 31, 2020 | December 31, 2019 | | :--------------------------------- | :---------------- | :---------------- | | Cash and cash equivalents | $13,010,356 | $1,625,671 | | Stockholders' equity | $18,253,256 | $4,360,149 | | Net loss | $(4,508,162) | $(6,920,540) | | Net cash used in operating activities | $(2,887,950) | $(2,815,621) | - Historically, operations have been funded through equity and debt financings, and revenue; substantial cash was raised through public offerings in April and May 2020 (approximately $1.5 million and $15.6 million net proceeds, respectively)[198][204][206] - The company anticipates continued operating losses and may need additional revenues or financing (debt or equity) to fund future growth, which may not be available on favorable terms[207][208] - As of December 31, 2020, the company had a backlog of 21 signed construction and engineering contracts totaling $25,117,461, expected to be realized by September 30, 2022[209][210] Off-Balance Sheet Arrangements The company had no material off-balance sheet arrangements as of December 31, 2020 and 2019, but enters into ordinary course indemnification agreements - As of December 31, 2020 and 2019, the company had no material off-balance sheet arrangements[213] - The company enters into indemnification agreements in the ordinary course of business, with unlimited maximum potential future payments, but has not incurred material costs to date[214] Critical Accounting Policies and New Accounting Pronouncements This section outlines critical accounting policies, including share-based payments, convertible instruments, and revenue recognition, and discusses the adoption of new accounting pronouncements Critical Accounting Policies Critical accounting policies include share-based payments, convertible instruments, revenue recognition (over time or point in time), goodwill impairment, and intangible asset amortization - Critical accounting policies include share-based payments, convertible instruments, and revenue recognition, which require significant assumptions and estimates[217][218][221] - Revenue recognition for construction and engineering contracts is applied over time using a cost-to-cost input method, while product or equipment sales revenue is recognized at a point in time[222][223] - Goodwill is tested annually for impairment; no impairment loss was recognized in 2020, but $2,938,653 was recognized in 2019 due to a deterioration in estimated future cash flows[230][351] - Intangible assets, including proprietary knowledge and trademarks, are amortized over 5-20 years, with no impairment losses determined in 2020[231][352] New Accounting Pronouncements The company adopted ASU 2018-13 and ASU 2016-13 effective January 1, 2020, with no material impact on its financial statements - The company adopted ASU 2018-13 (Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement) and ASU 2016-13 (Financial Instruments – Credit Losses) effective January 1, 2020, with no material impact on its financial position, results of operations, or cash flow[317][318] Non-GAAP Financial Information The company presents non-GAAP financial measures, EBITDA and Adjusted EBITDA, as supplemental performance indicators, acknowledging their limitations compared to GAAP - The company presents EBITDA and Adjusted EBITDA as supplemental non-GAAP financial measures to assess financial performance, acknowledging their limitations compared to GAAP measures[234][235][236] Reconciliation of Net Loss to EBITDA and Adjusted EBITDA | Metric | Year Ended Dec 31, 2020 | Year Ended Dec 31, 2019 | | :------------------------------------------ | :---------------------- | :---------------------- | | Net loss attributable to common stockholders | $(4,692,729) | $(6,920,540) | | Addback interest expense | 9,275 | 178,995 | | Addback interest income | (61,675) | — | | Addback depreciation and amortization | 239,982 | 164,941 | | EBITDA (non-GAAP) | $(4,505,147) | $(6,576,604) | | Addback goodwill impairment | — | 2,938,653 | | Addback loss on asset disposal | 1,012 | 52,039 | | Addback litigation expense | 461,613 | — | | Addback stock-based compensation expense | 1,261,215 | 729,404 | | Adjusted EBITDA (non-GAAP) | $(2,781,307) | $(2,856,508) | Item 7A. Quantitative and Qualitative Disclosures About Market Risk. This item is not applicable to the company - This item is not applicable[239] Item 8. Financial Statements and Supplementary Data. The company's financial statements and supplementary data, along with the independent auditor's report, are presented starting on page F-1 of this report - The company's financial statements and notes, along with the report of Whitley Penn LLP, appear beginning on page F-1 of this report[240] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. There have been no changes in or disagreements with accountants on accounting and financial disclosure - There have been no changes in or disagreements with accountants on accounting and financial disclosure[242] Item 9A. Controls and Procedures. Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were not effective as of December 31, 2020, due to identified material weaknesses, including insufficient accounting resources and lack of formal review procedures - Management concluded that the company's disclosure controls and procedures were not effective as of December 31, 2020[243] - Internal control over financial reporting was not effective as of December 31, 2020, based on criteria set forth by COSO, due to identified material weaknesses[246] - Material weaknesses include insufficient internal controls related to the timely closing of accounting records (due to insufficient accounting resources and lack of formal review procedures) and the application of technical accounting guidance to complex/new transactions[245] - There was no change in internal control over financial reporting during the fourth quarter of 2020[248] Item 9B. Other Information There is no other information to report under this item - There is no other information to report under this item[249] PART III Item 10. Directors, Executive Officers and Corporate Governance. Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2021 Proxy Statement - Information required by this item is incorporated by reference from specific sections of the company's 2021 Proxy Statement, including "Proposal 1 – Election of Directors" and "Information About Our Executive Officers"[251] Item 11. Executive Compensation. Information regarding executive compensation is incorporated by reference from the company's 2021 Proxy Statement - Information required by this item is incorporated by reference from the "Executive Compensation" and "Director Compensation" sections of the company's 2021 Proxy Statement[252] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Information regarding security ownership of certain beneficial owners and management, and related stockholder matters, is incorporated by reference from the company's 2021 Proxy Statement - Information required by this item is incorporated by reference from the "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan" sections of the company's 2021 Proxy Statement[253] Item 13. Certain Relationships and Related Transactions, and Director Independence. Information regarding certain relationships and related transactions, and director independence, is incorporated by reference from the company's 2021 Proxy Statement - Information required by this item is incorporated by reference from the "The Board and its Committees – Certain Relationships and Related Party Transactions" and "The Board and its Committees – Director Independence" sections of the company's 2021 Proxy Statement[254] Item 14. Principal Accountant Fees and Services. Information regarding principal accountant fees and services is incorporated by reference from the company's 2021 Proxy Statement - Information required by this item is incorporated by reference from the "Proposal 2 – Ratification of Appointment of Independent Registered Public Accounting Firm" and "The Board and its Committees – Board and Committee Responsibilities – Audit Committee" sections of the company's 2021 Proxy Statement[255] PART IV Item 15. Exhibits and Financial Statement Schedules. This section lists the exhibits filed as part of the Annual Report on Form 10-K and notes that all financial statement schedules are omitted because the required information is presented within the financial statements or their notes - The company's financial statements and notes are included starting on page F-1 of this Annual Report[258] - 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[259] - An Exhibit Index provides a list of the accompanying exhibits[260][263] Item 16. Form 10-K Summary. This item is not applicable to the company - This item is not applicable[262] SIGNATURES SIGNATURES The Annual Report on Form 10-K was duly signed on behalf of SG Blocks, Inc. by its Chief Executive Officer and Chairman of the Board, Paul M. Galvin, its Acting Chief Financial Officer, Gerald A. Sheeran, and its Directors on April 15, 2021 - The Annual Report was signed by Paul M. Galvin (Chief Executive Officer and Chairman of the Board), Gerald A. Sheeran (Acting Chief Financial Officer), and Directors Yaniv Blumenfeld, Christopher Melton, and Margaret Coleman on April 15, 2021[272][275] Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Whitley Penn LLP issued a fair opinion on the consolidated financial statements, highlighting critical audit matters regarding estimated contract costs and the fair value of assets acquired in the Echo DCL, LLC business combination - Whitley Penn LLP audited the consolidated financial statements of SG Blocks, Inc. and subsidiaries for December 31, 2020 and 2019, and expressed a fair opinion in conformity with accounting principles generally accepted in the United States of America (GAAP)[278] - Critical audit matters identified include the determination of estimated costs to complete for contracts recognized over time and the fair value of net assets acquired and contingent consideration in the Echo DCL, LLC business combination[282][285][289] - These critical audit matters involved especially challenging, subjective, or complex judgments, requiring a high degree of auditor judgment and increased effort[285][291] Consolidated Balance Sheets The consolidated balance sheets show a significant increase in total assets and stockholders' equity from December 31, 2019, to December 31, 2020, primarily driven by an increase in cash and cash equivalents and property, plant, and equipment Consolidated Balance Sheet Highlights | Metric | December 31, 2020 | December 31, 2019 | | :-------------------------------- | :---------------- | :---------------- | | Total Assets | $26,882,098 | $6,634,611 | | Total Current Assets | $18,298,019 | $2,906,809 | | Cash and cash equivalents | $13,010,356 | $1,625,671 | | Property, plant and equipment, net | $2,683,014 | $11,747 | | Goodwill | $1,309,330 | $1,223,520 | | Total Liabilities | $8,444,275 | $2,274,462 | | Total Stockholders' Equity | $18,437,823 | $4,360,149 | Consolidated Statements of Operations The consolidated statements of operations reflect a substantial increase in total revenue for 2020, primarily from medical services, leading to an improved gross profit Consolidated Statements of Operations Highlights | Metric | Year Ended Dec 31, 2020 | Year Ended Dec 31, 2019 | | :------------------------------------------ | :---------------------- | :---------------------- | | Total Revenue | $8,755,623 | $2,984,835 | | Total Cost of Revenue | $6,535,444 | $2,307,488 | | Gross Profit | $2,220,179 | $677,347 | | Total Operating Expenses | $6,803,011 | $7,381,359 | | Operating Loss | $(4,582,832) | $(6,704,012) | | Net Loss | $(4,508,162) | $(6,920,540) | | Net Loss Attributable to Common Stockholders | $(4,692,729) | $(6,920,540) | | Basic and Diluted EPS | $(0.79) | $(22.85) | | Weighted Average Shares Outstanding | 5,959,403 | 302,844 | Consolidated Statements of Changes in Stockholders' Equity The consolidated statements of changes in stockholders' equity show a substantial increase in total stockholders' equity in 2020, primarily driven by significant proceeds from public stock offerings, despite a net loss for the year - Total stockholders' equity increased from $4,360,149 at December 31, 2019, to $18,437,823 at December 31, 2020[300] - Additional paid-in capital saw a significant increase of $17,045,080 in 2020, primarily from the issuance of common stock, net of issuance costs[300] - Net loss attributable to common stockholders was $(4,692,729) in 2020 and $(6,920,540) in 2019[300] - Stock-based compensation expense recognized was $1,261,215 in 2020 and $946,660 in 2019[300] Consolidated Statements of Cash Flows The consolidated statements of cash flows indicate a significant net increase in cash and cash equivalents in 2020, primarily driven by substantial proceeds from financing activities (public stock offerings), offsetting cash used in operating and investing activities Consolidated Statements of Cash Flows Highlights | Cash Flow Activity | Year Ended Dec 31, 2020 | Year Ended Dec 31, 2019 | | :------------------------------------------ | :---------------------- | :---------------------- | | Net cash used in operating activities | $(2,887,950) | $(2,815,621) | | Net cash used in investing activities | $(3,045,723) | $(2,070) | | Net cash provided by financing activities | $17,318,358 | $3,074,967 | | Net increase in cash and cash equivalents | $11,384,685 | $257,276 | | Cash and cash equivalents - end of period | $13,010,356 | $1,625,671 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on the company's business, significant accounting policies, financial instruments, and other financial information, covering revenue, business combinations, fair value, goodwill, intangible assets, and share-based compensation 1. Description of Business SG Blocks provides modular facilities using proprietary technology, formed SG Echo for manufacturing, and retroactively restated share amounts after a 1-for-20 reverse stock split - SG Blocks, Inc. provides modular facilities using proprietary technology to modify cargo shipping containers and purpose-built modules for commercial, industrial, and residential construction[304][305] - In 2020, the company formed SG Echo, LLC to manufacture its core container and modular product offerings and began providing clinical lab testing and test kit sales through a joint venture and distributorship agreement[308] - On February 5, 2020, the company effected a 1-for-20 reverse stock split, with all share and per share amounts retroactively restated[309] 2. Liquidity As of December 31, 2020, the company had $13,010,356 in cash and a $25.1 million construction backlog, with liquidity boosted by equity offerings despite ongoing COVID-19 uncertainties - As of December 31, 2020, the company had cash and cash equivalents of $13,010,356 and a construction backlog of approximately $25.1 million, with $12,261,211 expected within 1 year and $12,856,250 in 1 to 2 years[311] - Despite incurring losses and negative operating cash flows since inception, the company raised substantial cash through equity offerings in April and May 2020 (net proceeds of approximately $1.5 million and $15.6 million, respectively)[312] - The ongoing COVID-19 pandemic has caused project delays and is expected to impact revenue and results of operations, with uncertain size and duration, potentially affecting demand and supply chains[313] 3. Summary of Significant Accounting Policies This section outlines significant accounting policies, including revenue recognition, business combinations, fair value measurements, goodwill and intangible assets, share-based payments, income taxes, and concentrations of credit risk Revenue Recognition Revenue is recognized over time for construction contracts and at a point in time for product sales, with royalty payments from the Exclusive License Agreement recognized over time - Revenue is recognized over time for construction and engineering contracts using a cost-to-cost input method, and at a point in time for product or equipment sales when the customer obtains control[322][323][324] - Royalty payments from the Exclusive License Agreement (ELA) are recognized over time as the licensee recognizes revenue; no revenue was recognized under the ELA in 2020[325] Revenue by Recognition Method (2020) | Recognition Method | Amount | | :----------------- | :------------- | | Point in time | $4,057,086 | | Over time | $4,698,537 | Revenue by Customer Type (2020 vs. 2019) | Customer Type | 2020 Revenue | 2020 % | 2019 Revenue | 2019 % | | :------------------------------------ | :------------- | :----- | :------------- | :----- | | Government | $751,697 | 9% | — | —% | | Hospitality | $487,111 | 6% | — | —% | | Multi-Family | $126,222 | 1% | $94,178 | 3% | | Medical (lab testing, test kit sales, equipment) | $4,241,500 | 49% | — | —% | | Medical (construction services) | $778,883 | 9% | — | —% | | Office | $191,505 | 2% | $1,468,734 | 49% | | Retail | $427,444 | 5% | $1,413,669 | 48% | | School | $36,500 | —% | — | —% | | Special Use | $1,414,761 | 16% | $6,812 | —% | | Other | $300,000 | 3% | $1,442 | —% | | Total Revenue | $8,755,623 | 100% | $2,984,835 | 100% | Business Combinations The company accounts for business acquisitions using the acquisition method, recognizing identifiable assets and liabilities at fair value, as applied to the Echo DCL, LLC acquisition in September 2020 - The company accounts for business acquisitions using the acquisition method (ASC 805), recognizing identifiable assets acquired and liabilities assumed at their fair value[343] - Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired[343] - The acquisition of Echo DCL, LLC in September 2020 was accounted for as a business combination, with a purchase consideration of $964,620[375][376] Preliminary Allocation of Echo Acquisition Purchase Price | Asset/Liability | Amount | | :------------------------------------ | :------------- | | Cash and cash equivalents | $316,432 | | Accounts receivable | $252,557 | | Inventories | $130,799 | | Prepaid expenses and other current assets | $7,400 | | Property, plant and equipment | $1,154,818 | | Right-of-use assets | $57,120 | | Goodwill | $85,810 | | Intangible assets | $68,344 | | Accounts payable and accrued expenses | $(733,529) | | Assumed liability | $(285,204) | | Contract liabilities | $(32,807) | | Lease liability | $(57,120) | | Total | $964,620 | Fair Value Measurements The company measures fair value using a three-level hierarchy based on input observability, with the earnout liability being the only recurring Level 3 financial liability as of December 31, 2020 - The company measures the fair value of financial assets and liabilities using a three-level hierarchy based on the observability of inputs: Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[357] - The earnout liability was the only financial liability measured at fair value on a recurring basis as of December 31, 2020, classified as a Level 3 asset with an estimated value of zero[357] Goodwill The company performs an annual impairment test of goodwill at the reporting unit level, recognizing no impairment in 2020 but $2,938,653 in 2019 - The company performs an annual impairment test of goodwill at the reporting u