3. | Summary of Significant Accounting Policies |
Basis of presentation and principals of consolidation – The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. The condensed consolidated financial statements and notes should be read in conjunction with the financial statements and notes for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on March 29, 2019. In the opinion of management, all adjustments, consisting of normal accruals, considered necessary for a fair presentation of the interim financial statements have been included. Results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, SG Building Blocks, Inc. and SG Residential, Inc. All significant intercompany accounts and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period’s presentation.
Recently adopted accounting pronouncements – New accounting pronouncements implemented by the Company are discussed below or in the related notes, where appropriate.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The update’s principal objective is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet. ASU 2016-02 continues to retain a distinction between finance and operating leases but requires lessees to recognize a right-of-use asset representing their right to use the underlying asset for the lease term and a corresponding lease liability on the balance sheet for all leases with terms greater than twelve months. The update is effective for fiscal years beginning after December 15, 2018. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”), which provides entities with an additional transition method. Under ASU 2018-11, entities have the option of recognizing the cumulative effect of applying the new standard as an adjustment to beginning retained earnings in the year of adoption while continuing to present all prior periods under previous lease accounting guidance. In July 2018, the FASB also issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”), which clarifies how to apply certain aspects of ASU 2016-02. The Company adopted ASU 2016-02, ASU 2018-10 and ASU 2018-11 effective January 1, 2019. The Company had no operating or finance lease agreements as of March 31, 2019. The adoption of ASU No. 2016-02 did not have a material impact on the Company’s financial statements and disclosures.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”), which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards. Under ASC 718, the measurement date for equity-classified, share-based awards is generally the grant date of the award. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. The Company adopted ASU 2018-07 effective January 1, 2019. The adoption provides administrative relief by fixing the remaining unamortized expense of the award and eliminating the requirement to quarterly re-measure the Company’s nonemployee awards. The adoption of ASU No. 2018-07 did not have a material impact on the Company’s financial statements and disclosures.
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2019 and 2018 (Unaudited)
3. | Summary of Significant Accounting Policies (continued) |
Recently issued accounting pronouncements not yet adopted – New accounting pronouncements requiring implementation in future periods are discussed below.
In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), to simplify the test for goodwill impairment by removing Step 2. An entity will, therefore, perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the fair value, not to exceed the total amount of goodwill allocated to the reporting unit. An entity still has the option to perform a qualitative assessment to determine if the quantitative impairment test is necessary. The ASU is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. Adoption of the ASU is on a prospective basis. Based on current evaluation, the Company does not expect that ASU No. 2017-04 will have a material impact on the Company’s financial statements.
In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). This ASU amends ASC 820 to add, remove and modify certain disclosure requirements for fair value measurements. For example, public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. Management does not expect the adoption of ASU 2018-13 to have a material impact on the Company’s financial position, results of operations or cash flow.
Accounting estimates – The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Significant areas that require the Company to make estimates include revenue recognition, stock-based compensation and allowance for doubtful accounts. Actual results could differ from those estimates.
Operating cycle – The length of the Company’s contracts varies, but is typically between six to twelve months. In some instances, the length of the contract may exceed twelve months. Assets and liabilities relating to current and long-term contracts are included in current assets and current liabilities, respectively, in the accompanying balance sheets as they will be liquidated in the normal course of contract completion, which at times could exceed one year.
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2019 and 2018 (Unaudited)
3. | Summary of Significant Accounting Policies (continued) |
Revenue recognition – The Company applies recognition of revenue over time, which is similar to the method the Company applied under previous guidance (i.e., percentage of completion). The Company determines, at contract inception, whether it will transfer control of a promised good or service over time or at a point in time—regardless of the length of contract or other factors. The recognition of revenue aligns with the timing of when promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. To achieve this core principle, the Company applies the following five steps in accordance with its revenue policy:
(1) Identify the contract with a customer
(2) Identify the performance obligations in the contract
(3) Determine the transaction price
(4) Allocate the transaction price to performance obligations in the contract
(5) Recognize revenue as performance obligations are satisfied
Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress toward complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs for a performance obligation indicate a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident.
Disaggregation of Revenues
The Company’s revenues are principally derived from construction and engineering contracts related to Modules. Our contracts are with many different customers in numerous industries.
The following tables provide further disaggregation of the Company’s revenues by categories:
| | | Three Months Ended March 31,
|
| Revenue by Customer Type | | 2019 | |
| 2018 |
| Multi-Family | | $ | 70,873 | | | 4 | % |
|
| $ | — | | | — | % |
| Office | | | 1,125,603 | | | 65 | % |
|
| | 363,629 | | | 24 | % |
| Retail | | | 530,659 | | | 31 | % |
|
| | 114,944 | | | 7 | % |
| School | | | — | | | — | % |
|
| | 759,835 | | | 49 | % |
| Special Use | | | 6,812 | | | — | % |
|
| | 305,118 | | | 20 | % |
| Other | | | 1,177 | | | — | % | |
| | — | | | — | % |
| Total revenue by customer type | | $ | 1,735,124 | | | 100 | % |
|
| $ | 1,543,526 | | | 100 | % |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2019 and 2018 (Unaudited)
3. | Summary of Significant Accounting Policies (continued) |
Contract Assets and Contract Liabilities
Accounts receivable are recognized in the period when the Company’s right to consideration is unconditional. Accounts receivable are recognized net of an allowance for doubtful accounts. A considerable amount of judgment is required in assessing the likelihood of realization of receivables.
The timing of revenue recognition may differ from the timing of invoicing to customers.
Contract assets include unbilled amounts from long-term construction services when revenue recognized under the cost-to-cost measure of progress exceeds the amounts invoiced to customers, as the amounts cannot be billed under the terms of our contracts. Such amounts are recoverable from customers based upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract. Contract assets are generally classified as current within the condensed consolidated balance sheets and labeled as “costs and estimated earnings in excess of billings on uncompleted contracts”.
Contract liabilities from construction and engineering contracts occur when amounts invoiced to customers exceed revenues recognized under the cost-to-cost measure of progress. Contract liabilities additionally include advanced payments from customers on certain contracts. Contract liabilities decrease as the Company recognizes revenue from the satisfaction of the related performance obligation. Contract liabilities are generally classified as current within the condensed consolidated balance sheet and labeled as “billings in excess of costs and estimated earnings on uncompleted contracts”.
Although the Company believes it has established adequate procedures for estimating costs to complete on open contracts, it is at least reasonably possible that additional significant costs could occur on contracts prior to completion. The Company periodically evaluates and revises its estimates and makes adjustments when they are considered necessary.
Cash and cash equivalents – The Company considers cash and cash equivalents to include all short-term, highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less upon acquisition. Cash and cash equivalents totaled $250,464 as of March 31, 2019 and $1,368,395 as of December 31, 2018.
Short-term investment – The Company classifies any investment with a maturity greater than three months but less than one year as short-term investment. The Company had no short-term investments as of March 31, 2019 or December 31, 2018.
Accounts receivable and allowance for doubtful accounts – Accounts receivable are receivables generated from sales to customers and progress billings on performance type contracts. Amounts included in accounts receivable are deemed to be collectible within the Company’s operating cycle. The Company recognizes account receivable at invoiced amounts.
The allowance for doubtful accounts reflects the Company's best estimate of probable losses inherent in the accounts receivable balances. Management provides an allowance for doubtful accounts based on the Company’s historical losses, specific customer circumstances, and general economic conditions. Periodically, management reviews accounts receivable and adjusts the allowance based on current circumstances and charges off uncollectible receivables when all attempts to collect have been exhausted and the prospects for recovery are remote. Recoveries are recognized when they are received. Actual collection losses may differ from the Company’s estimates and could be material to its consolidated financial position, result of operations, and cash flows.
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2019 and 2018 (Unaudited)
3. | Summary of Significant Accounting Policies (continued) |
Inventory – Raw construction materials (primarily shipping containers) are valued at the lower of cost (first-in, first-out method) or net realizable value. Finished goods and work-in-process inventories are valued at the lower of cost or net realizable value, using the specific identification method. There was no inventory as of March 31, 2019 or December 31, 2018.
Goodwill – The Company performs its impairment test of goodwill at the reporting unit level each fiscal year, or more frequently if events or circumstances change that would more likely than not reduce the fair value of its reporting unit below its carrying values. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, management conducts a two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing the fair value of the applicable reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds the reporting unit’s fair value, management performs the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. The Company’s evaluation of goodwill completed during the year ended December 31, 2018 resulted in no impairment losses.
Intangible assets – Intangible assets represent the preliminary assets identified upon emergence from bankruptcy and consist of $2,766,000 of proprietary knowledge and technology which is being amortized over 20 years and $1,113,000 of customer contracts which was being amortized over 2.5 years. In addition, intangible assets include $28,820 of trademarks and $5,300 of website costs which are being amortized over 5 years. The Company evaluated intangible assets for impairment during the year ended December 31, 2018, and determined that there were no impairment losses. The accumulated amortization as of March 31, 2019 and 2018 was $1,505,472 and $1,026,889, respectively. The amortization expense for the three months ended March 31, 2019 and 2018 was $36,281 and $147,316, respectively. The estimated amortization expense for the successive five years is as follows:
| For the year ended December 31, | | | |
| 2019 | | $ | 108,843 | |
| 2020 | | | 145,124 | |
| 2021 | | | 145,124 | |
| 2022 | | | 140,801 | |
| 2023 | | | 139,007 | |
| Thereafter | | | 1,728,749 | |
| | | $ | 2,407,648 | |
Property, plant and equipment – Property, plant and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated lives of each asset. Estimated useful life for significant classes of assets are as follows: computer and software 3 to 5 years and equipment 5 to 7 years. Repairs and maintenance are charged to expense when incurred.
Common stock purchase warrants and other derivative financial instruments – The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provides a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company’s own stock. The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if any event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement shares (physical settlement or net-cash settlement). The Company assesses classification of common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities or equity is required.
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2019 and 2018 (Unaudited)
3. | Summary of Significant Accounting Policies (continued) |
Fair value measurements – Financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, are carried at cost, which the Company believes approximates fair value due to the short-term nature of these instruments.
The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.
The Company uses three levels of inputs that may be used to measure fair value:
| Level 1 | Quoted prices in active markets for identical assets or liabilities. |
| Level 2 | Quoted prices for similar assets and liabilities in active markets or inputs that are observable. |
| Level 3 | Inputs that are unobservable (for example, cash flow modeling inputs based on assumptions). |
Share-based payments – The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, including non-employee directors, the fair value of a stock option award is measured on the grant date. The fair value amount is then recognized over the period services are required to be provided in exchange for the award, usually the vesting period. The Company recognizes stock-based compensation expense on a graded-vesting basis over the requisite service period for each separately vesting tranche of each award. Stock-based compensation expense to employees and all directors is reported within payroll and related expenses in the consolidated statements of operations. Stock-based compensation expense to non-employees is reported within marketing and business development expense in the consolidated statements of operations.
Income taxes – The Company accounts for income taxes utilizing the asset and liability approach. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes generally represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from the differences between the financial and tax bases of the Company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted.
The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for anticipated tax audit issues based on the Company’s estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when the liabilities are no longer determined to be necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.
Concentrations of credit risk – Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents. The Company places its cash with high credit quality institutions. At times, such amounts may be in excess of the FDIC insurance limits. The Company has not experienced any losses in its account and believes that it is not exposed to any significant credit risk on the account.
With respect to receivables, concentrations of credit risk are limited to a few customers in the construction industry. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers other than normal lien rights. At March 31, 2019 and December 31, 2018, 72% and 76%, respectively, of the Company’s accounts receivable were due from two customers.
Revenue relating to two and three customers represented approximately 89% and 80% of the Company’s total revenue for the three months ended March 31, 2019 and 2018, respectively.
Cost of revenue relating to two and three vendors represented approximately 95% and 75% of the Company’s total cost of revenue for the three months ended March 31, 2019 and 2018, respectively. The Company believes it has access to alternative suppliers, with limited disruption to the business, should circumstances change with its existing suppliers.
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2019 and 2018 (Unaudited)
11. | Share-based Compensation |
On October 26, 2016, the Company’s Board of Directors approved the issuance of up to 500,000 shares of the Company’s common stock in the form of restricted stock or options (“2016 Stock Plan”). Effective January 20, 2017, the 2016 Stock Plan was amended and restated as the SG Blocks, Inc. Stock Incentive Plan, as further amended effective June 1, 2018 (the “Incentive Plan”). The Incentive Plan authorizes the issuance of up to 2,500,000 shares of common stock. It authorizes the issuance of equity-based awards in the form of stock options, stock appreciation rights, restricted shares, restricted share units, other share-based awards and cash-based awards to non-employee directors and to officers, employees and consultants of the Company and its subsidiaries, except that incentive stock options may only be granted to the Company’s employees and its subsidiary’s employees. The Incentive Plan expires on October 26, 2026, and is administered by the Compensation Committee of the Board of Directors of the Company. Each of the Company’s employees, directors, and consultants are eligible to participate in the Incentive Plan. As of March 31, 2019, there were 1,020,202 shares of common stock available for issuance under the Incentive Plan.
Stock-Based Compensation Expense
Stock-based compensation expense is included in the consolidated statements of operations as follows:
|
|
| Three Months Ended March 31, |
|
|
|
| 2019 |
| | 2018 |
|
| Payroll and related expenses | | $ | 162,493 | | | $ | 79,989 | |
| Total | | $ | 162,493 | | | $ | 79,989 | |
The following table presents total stock-based compensation expense by security type included in the consolidated statements of operations:
|
|
| Three Months Ended March 31, |
|
|
|
| 2019 |
|
| 2018 |
|
| Stock options | | $ | 32,098 | | | $ | 79,989 | |
| Restricted stock units | | | 130,395 | | | | — | |
| Total |
| $ | 162,493 |
|
| $ | 79,989 |
|
Stock-Based Option Awards
The fair value of the stock-based option awards granted during the three months ended March 31, 2019 and 2018, were estimated at the date of grant using the Black-Scholes option valuation model with the following assumptions:
| | | 2019 | |
| 2018
| |
| Expected dividend yield | | | — | % |
|
| — | % |
| Expected stock volatility | | | 68.35 | % |
|
| 25.70 | % |
| Risk-free interest rate | | | 2.44 | % |
|
| 2.56 | % |
| Expected life | | | 3.00 | |
|
| 5.00 |
|
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2019 and 2018 (Unaudited)
11. | Share-based Compensation (continued) |
Because the Company does not have significant historical data on employee exercise behavior, the Company uses the “Simplified Method” to calculate the expected life of the stock-based option awards granted to employees. The simplified method is calculated by averaging the vesting period and contractual term of the options.
The following table summarizes stock-based option activities and changes during the three months ended March 31, 2019. The table includes options granted to employees and directors of the Company, as described below:
| | | Shares | | | Weighted Average Fair Value Per Share | | | Weighted
Average Exercise Price Per Share | | | Weighted Average Remaining Terms (in years) | | | Aggregate Intrinsic Value | |
| Outstanding – December 31, 2018 | | | 1,105,059 | | | $ | 1.24 | | | $ | 4.06 | | | | 8.41 | | | $ | — | |
| Granted | | | — | | | | — | | | | — | | | | | | | | | |
| Exercised | | | — | | | | — | | | | — | | | | | | | | | |
| Cancelled | | | (25,000 | ) | | | — | | | | — | | | |
| | | | | |
| Outstanding – March 31, 2019 | | | 1,080,059 | | | | 1.24 | | | | 4.05 | | | | 8.15 | | | $ | — | |
| Exercisable – December 31, 2018 | | | 949,355 | | | | 1.23 | | | | 4.00 | | | | 8.30 | | | | — | |
| Exercisable – March 31, 2019 | | | 970,190 | | | $ | 1.23 | | | $ | 4.01 | | | | 8.07 | | | $ | — | |
For the three months ended March 31, 2019 and 2018, the Company recognized stock-based compensation expense of $32,098 and $79,989, respectively, related to stock options. This expense is included in payroll and related expenses in the accompanying consolidated statements of operations.
As of March 31, 2019, there was $131,815 of total unrecognized compensation costs related to non-vested stock options, which will be expensed over a weighted average period of one year. The intrinsic value is calculated as the difference between the fair value of the stock price at year end and the exercise price of each of the outstanding stock options. The fair value of the stock price at March 31, 2019 was $1.84 per share.
In March 2018, the Company granted Mr. Galvin, Mr. Shetty and six employees of the Company options to purchase 82,154, 81,342 and an aggregate of 86,504, respectively, shares of the Company’s common stock with an exercise price of $4.61 per share. These options vest in equal quarterly installments over either a two-year and three-year period and will fully vest by the end of March 31, 2021. The options with a two-year period, which includes those granted to Mr. Galvin and Mr. Shetty, will vest in full by December 31, 2019; the options with a three-year vesting period will vest in full by March 31, 2021. The fair value of these options upon issuance amounted to $320,000.
Non-Employee Stock Options
In September 2017, in connection with an advisory agreement entered into by the Company (the “Advisory Agreement”), a consultant was granted options to purchase 50,000 shares of the Company’s common stock, with an exercise price of $6.25. The options were scheduled to vest when certain performance conditions were met. These performance conditions consisted of the purchase of fifty modular units from the Company by qualified customers. As of March 31, 2019, the required performance conditions were not met, and the options expired.
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2019 and 2018 (Unaudited)
11. | Share-based Compensation (continued) |
Restricted Stock Units
Effective July 26, 2018, a total of 27,955 of restricted stock units were granted to the Company’s non-employee directors, under the Company’s stock-based compensation plan, at the calculated fair value of $5.36 per share, which represents the average closing price of the Company’s common stock for the ten trading days immediately preceding and including the grant date. Restricted stock units granted to directors in 2018 vest on the earlier of (A) the first anniversary of the date of the grant or (B) the date of the annual meeting of the Company’s stockholders that occurs in the year immediately following the date of the grant; and are payable six months after the termination of the director from the Board or death or disability.
On March 22, 2019, a total of 314,058 of restricted stock units were granted to Mr. Galvin, Mr. Armstrong, Mr. Shetty, six employees and one consultant of the Company, under the Company's stock-based compensation plan, at the fair value of $2.70 per share, which represents the closing price of the Company's common stock on February 26, 2019. Restricted stock units granted to Mr. Galvin, Mr. Armstrong, Mr. Shetty, and an aggregate of six employees and one consultant of 122,785, 15,432, 114,575 and an aggregate of 61,266, respectively, vest in installments over either a one-year, two-year, three-year and four-year period and will fully vest by the end of December 31, 2022. The fair value of these units upon issuance amounted to $847,957.
On January 15, 2019 and February 26, 2019, a total of 10,514 of restricted stock units were granted to two of the Company’s non-employee directors, under the Incentive Plan, at the calculated fair value of $2.94 and $2.76 per share, which represents the average closing price of the Company’s common stock for the ten trading days immediately preceding and including the grant date. The restricted stock units granted on January 15, 2019 will vest on January 15, 2020, subject to each individual’s continued service as a director of the Company through such date, and are payable six months after the termination of the director from the Company’s Board of Directors or death or disability. The restricted stock units granted on February 26, 2019 vest on the earlier of (A) the first anniversary of the date of the grant or (B) the date of the 2019 annual meeting of the Company’s stockholders subject to each individual’s continued service as a director of the Company through such date, and are payable six months after the termination of the director from the Board of Directors or death or disability.
For the three months ended March 31, 2019 and 2018, the Company recognized stock-based compensation expense of $130,395 and $0 related to restricted stock units. This expense is included in the payroll and related expenses in the accompanying condensed consolidated statement of operations. For the three months ended March 31, 2019 and 2018, the Company recognized $54,315 and $0 related to restricted stock units in lieu of accrued compensation.
The following table summarizes restricted stock unit activities during the three months ended March 31, 2019:
|
| Number of Shares
|
| Non-vested balance at January 1, 2019 |
|
| 22,364 |
|
| Granted |
|
| 324,572 |
|
| Vested | |
| — | |
| Forfeited/Expired | |
| — | |
| Non-vested balance at March 31, 2019 | |
| 346,936 |
|
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2019 and 2018 (Unaudited)
Introduction and Certain Cautionary Statements
As used in this Quarterly Report, unless the context requires otherwise, references to the “Company,” “we,” “us,” and “our” refer to SG Blocks, Inc. and its subsidiaries. The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with our condensed consolidated financial statements and related notes and schedules included elsewhere in this Quarterly Report on Form 10-Q. The unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with our audited consolidated financial statements and notes for the year ended December 31, 2018, which were included in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on March 29, 2019 (the “2018 Form 10-K”). Statements contained in this Quarterly Report on Form 10-Q may use forward-looking terminology, such as “anticipates,” “believes,” “could,” “would,” “estimates,” “may,” “might,” “plan,” “expect,” “intend,” “should,” “will,” or other variations on these terms or their negatives. All statements other than statements of historical facts are statements that could potentially be forward-looking. The Company cautions that forward-looking statements involve risks and uncertainties and actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate or prediction is realized. Factors that could cause or contribute to such differences include, but are not limited to: general economic, political and financial conditions, both in the United States and internationally; our ability to obtain additional financing on acceptable terms, if at all, or to obtain additional capital in other ways; our ability to increase sales, generate income, effectively manage our growth and realize our backlog; competition in the markets in which we operate, including the consolidation of our industry, our ability to expand into and compete in new geographic markets and our ability to compete by protecting our proprietary manufacturing process; a disruption or cybersecurity breach in our or third-party suppliers’ information technology systems; our ability to adapt our products and services to industry standards and consumer preferences and obtain general market acceptance of our products; product shortages and the availability of raw materials, and potential loss of relationships with key vendors, suppliers or subcontractors; the seasonality of the construction industry in general, and the commercial and residential construction markets in particular; a disruption or limited availability with our third party transportation vendors; the loss or potential loss of any significant customers; exposure to product liability, including the possibility that our liability for estimated warranties may be inadequate, and various other claims and litigation; our ability to attract and retain key employees; our ability to attract private investment for sales of product; the credit risk from our customers and our customers’ ability to obtaining third-party financing if and as needed; an impairment of goodwill; the impact of federal, state and local regulations, including changes to international trade and tariff policies, and the impact of any failure of any person acting on our behalf to comply with applicable regulations and guidelines; costs incurred relating to current and future legal proceedings or investigations; the cost of compliance with environmental, health and safety laws and other local building regulations; our ability to utilize our net operating loss carryforwards and the impact of changes in the United States’ tax rules and regulations; dangers inherent in our operations, such as natural or man-made disruptions to our facilities and project sites, and the adequacy of our insurance coverage; our ability to comply with the requirements of being a public company, including Nasdaq Capital Market listing requirements; fluctuations in the price of our common stock, including decreases in price due to sales of significant amounts of stock; potential dilution of the ownership of our current stockholders due to, among other things, public offerings or private placements by the Company or issuances upon the exercise of outstanding options or warrants and the vesting of restricted stock units; the ability of our principal stockholders, management and directors to potentially exert control due to their ownership interest; any ability to pay dividends in the future; potential negative reports by securities or industry analysts regarding our business or the construction industry in general; Delaware law provisions discouraging, delaying or preventing a merger or acquisition at a premium price; our ability to remain listed on the Nasdaq Capital Market and the possibility that our stock will be subject to penny stock rules; our classification as a smaller reporting company resulting in, among other things, a potential reduction in active trading of our common stock or increased volatility in our stock price; and any factors discussed in “Part II—Item 1A. Risk Factors” to this Quarterly Report on Form 10-Q as well as our 2018 Form 10-K and other filings with the Securities and Exchange Commission. In addition, certain information presented below is based on unaudited financial information. There can be no assurance that there will be no changes to this information once audited financial information is available. As a result, readers are cautioned not to place undue reliance on forward-looking statements. The Company will not undertake to update any forward-looking statement herein or that may be made from time to time on behalf of the Company.
Background
We are one of the leading design and construction services firms using code-engineered cargo shipping containers for safe and sustainable construction. We offer the construction industry a safer, greener, faster, longer-lasting and more economical alternative to conventional construction methods. We redesign, repurpose and convert heavy-gauge steel cargo shipping containers into SGBlocks™, which are safe green building blocks for commercial, industrial and residential building construction.
We fabricate modules for construction of buildings using either SGBlocks™, which are modified cargo shipping containers for use in construction, or SGPBMs, which are prefabricated steel modular units customized for use in modular construction primarily to augment or complement a SGBlocks™ structure.
When using SGBlocks™, we take existing steel shipping containers and repurpose them into modules that can be stacked, arranged, or configured to fit most structural applications. The use of these repurposed shipping containers allows architects, builders, and owners more design flexibility and greater construction efficiency than traditional methods of construction. SGBlocks™ also have a particular application in meeting safe, affordable and sustainable housing needs, especially in hurricane- and earthquake-prone areas.
When using SGPBMs, we customize an engineered steel structure to meet customer design and specifications, primarily to augment or complement a SGBlocks™ structure.
Results of Operations
Three Months Ended March 31, 2019 and 2018:
| | Three Months
Ended March 31, 2019 | | | Three Months
Ended March 31, 2018 | |
Revenue | | $ | 1,735,124 | | | $ | 1,543,526 | |
Cost of revenue | | | (1,191,019 | ) | | | (1,379,930 | ) |
Operating expenses | | | (1,034,840 | ) | | | (917,704 | ) |
Operating loss | | | (490,735 | ) | | | (754,108 | ) |
Other income (expense) | | | — | | | | 4 |
|
Net loss | | $ | (490,735 | ) | | $ | (754,104 | ) |
Revenue
Total revenue for the three months ended March 31, 2019 was $1,735,124 compared to $1,543,526 for the three months ended March 31, 2018. This increase of $191,598 or 12% was mainly driven by growth in the Company’s retail and office contracts that were in progress or completed for the three months ended March 31, 2019 as compared to March 31, 2018. Revenue resulting from the Company's retail and office contracts increased by approximately $1,177,689, which was offset by a decrease in revenue from the Company’s school and special use contracts of $1,058,141.
Cost of Revenue and Gross Profit
Cost of revenue was $1,191,019 for the three months ended March 31, 2019 compared to $1,379,930 for the three months ended March 31, 2018. The decrease of $188,911 is primarily related to the lower cost of buying and modifying containers.
Gross profit was $544,105 and $163,596 for the three months ended March 31, 2019 and 2018, respectively.
Gross profit percentage increased to 31% for the three months ended March 31, 2019 compared to 11% for the three months ended March 31, 2018 primarily due to lower margins in the three months ended March 31, 2018 from a legacy contract.
Payroll and Related Expenses
Payroll and related expenses for the three months ended March 31, 2019 were $638,550 compared to $405,418 for the three months ended March 31, 2018. This increase was primarily caused by an increase in salaries and additional head count of $129,472 and an increase in stock-based compensation expense of $82,504 recognized during the three months ended March 31, 2019 compared to the three months ended March 31, 2018. We recognized $162,493 in stock-based compensation expense for the three months ended March 31, 2019, compared to $79,989 for March 31, 2018.
Other Operating Expenses
Other operating expenses for the three months ended March 31, 2019 were $396,290 compared to $512,286 for the three months ended March 31, 2018. The decrease resulted primarily from decreases in marketing and business development costs of approximately $33,000, a decrease of approximately $111,000 in amortization expense caused by customer contracts being fully amortized at the end of 2018 and an increase of approximately $40,000 in board of directors compensation expense for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.
Other Income (Expense)
For the three months ended March 31, 2019, we recognized no interest income compared to $4 during the three months ended March 31, 2018.
Income Tax Provision
A 100% valuation allowance was provided against the deferred tax asset consisting of available net operating loss carryforwards and, accordingly, no income tax benefit was provided.
Liquidity and Capital Resources
As of March 31, 2019 and December 31, 2018, we had an aggregate of $250,464 and $1,368,395, respectively, of cash and cash equivalents. Our condensed consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business.
Historically, our operations have primarily been funded through proceeds from equity and debt financings, as well as revenue from operations. In June and July 2017, we sold 1,725,000 shares of our common stock in a public offering, including an over-allotment option exercised by the underwriters. We received net proceeds of approximately $7,900,000 after deducting underwriting discounts and commissions and related expenses. We incurred a total of $1,565,386 in issuance costs in connection with the Public Offering. In addition, in April 2019, we closed a follow-on offering, pursuant to which we sold 847,750 shares of our common stock. In connection with the follow-on offering, we also sold common stock purchase warrants to purchase up to an aggregate of 847,750 shares of common stock. Such warrants were sold in a private placement pursuant to Section 4(a)(2) and Rule 506(b) under the Securities Act of 1933, as amended. We received net proceeds of approximately $692,248 after deducting certain fees due to the placement agent and certain transaction expenses.
We anticipate that we will continue to generate losses from operations for the foreseeable future. As of March 31, 2019, our stockholders’ equity was $6,806,140, compared to $7,080,067 as of December 31, 2018. Our net loss from operations for the three months ended March 31, 2019 was $490,735 and net cash used in operating activities was $1,117,931.
We are attempting to generate sufficient revenues, and may need to secure additional financing sources, such as debt or equity capital, to support our daily operations and fund future growth, which financing may not be available on favorable terms or at all. We currently have a Form S-3 shelf registration statement on file with the Securities and Exchange Commission. If we issue additional equity securities to raise funds, our existing stockholders may experience further dilution, and the new equity securities may have rights, preferences and privileges senior to those of our existing stockholders. If we issue debt securities to raise additional funds, we may incur debt service obligations, become subject to additional restrictions that limit or restrict our ability to operate our business or be required to encumber our assets. There can be no assurance that we will be able to raise any such capital on terms acceptable to us, if at all. We do not have any additional sources secured for future funding, and if we are unable to raise the necessary capital at the times we require such funding, we may need to materially change our business plan, including delaying implementation of aspects of such business plan or curtailing or abandoning such business plan altogether.
Management believes that the actions presently being taken to further implement its business plan and generate sufficient revenues provide the opportunity for us to continue as a going concern. While we believe in the viability of our strategy to increase revenues and in our ability to raise additional funds, we cannot provide any assurances to that effect. Our ability to continue as a going concern is dependent upon our ability to further implement our business plan and generate sufficient revenues.
The condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Cash Flow Summary
| Three Month Ended
March 31,
|
|
| 2019
|
| 2018
|
| Net cash provided by (used in): |
|
|
|
|
|
|
|
| Operating activities |
| $ | (1,117,931 | ) | $ | (384,783 | ) |
| Investing activities |
|
| — |
|
| 26,853 |
|
| Financing activities |
|
| — |
|
| — |
|
| Net increase (decrease) in cash and cash equivalents |
| $ | (1,117,931 | ) | $ | (357,930 | ) |
Operating activities used net cash of $1,117,931 in the three months ended March 31, 2019, and $384,783 in the three months ended March 31, 2018. Generally, our net operating cash flows fluctuate primarily based on changes in our profitability and working capital. Cash used in operating activities increased by $733,148 primarily from a decrease in working capital of $970,000 and a net decrease of $111,035 in amortization, offset by a decrease in net loss of $263,369 and a net increase of $82,504 in stock compensation expense in the three months ended March 31, 2019 compared to three months ended March 31, 2018.
Investing activities provided no net cash in the three months ended March 31, 2019, and net cash of $26,853 in the three months ended March 31, 2018 primarily due to an increase in proceeds from short-term investments.
Financing activities provided no net cash in the three months ended March 31, 2019, and 2018.
We provide services to our customers in three separate phases: the design phase, the architectural and engineering phase and the construction phase. Each phase is independent of the other, but builds through a progression of concept through delivery of a completed structure. These phases may be embodied in a single contract or in separate contracts, which is typical of a design build process model. As of March 31, 2019, we had eleven projects totaling $95,839,840 under contract, which, if they all proceed to construction, will result in our constructing approximately 677,536 square feet of container space. Of these contracts, two projects totaling approximately 32,320 square feet were in the architectural and engineering phase and nine projects totaling approximately 645,216 square feet were contracts combining all three phases or parts thereof and including construction. We expect that all of this revenue will be realized by June 30, 2021.
Backlog may fluctuate significantly due to the timing of orders or awards for large projects and is not necessarily indicative of future backlog levels or the rate at which backlog will be recognized as revenue. The decrease in backlog at March 31, 2019 from the prior year is primarily attributable to work in progress or completed contracts during the first quarter for approximately $1,735,000.
There can be no assurance that our customers will decide to and/or be able to proceed with these construction projects, or that we will ultimately recognize revenue from these projects in a timely manner or at all.
Off-Balance Sheet Arrangements
As of March 31, 2019 and December 31, 2018, we had no material off-balance sheet arrangements to which we are a party.
Critical Accounting Policies
Our condensed consolidated financial statements have been prepared using generally accepted accounting principles in the United States of America (“GAAP”), which require management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and on other factors that management believes to be reasonable. Actual results may differ from those estimates. Critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of our condensed consolidated financial statements. A discussion of such critical accounting policies, which include share-based payments, derivative instruments, goodwill, intangible assets and revenue recognition, can be found in our 2018 Form 10-K. There have been no material changes in critical accounting policies from those disclosed in the 2018 Form 10-K.
Non-GAAP Financial Information
In addition to our results under GAAP, we also present EBITDA and Adjusted EBITDA for historical periods. EBITDA and Adjusted EBITDA are non-GAAP financial measures and have been presented as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We calculate EBITDA as net income (loss) before interest expense, income tax benefit (expense), depreciation and amortization. We calculate Adjusted EBITDA as EBITDA before certain non-recurring adjustments such as stock-based compensation expense.
EBITDA and Adjusted EBITDA are presented because they are important metrics used by management as one of the means by which it assesses our financial performance. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. These measures, when used in conjunction with related GAAP financial measures, provide investors with an additional financial analytical framework that may be useful in assessing us and our results of operations.
EBITDA and Adjusted EBITDA have certain limitations. EBITDA and Adjusted EBITDA should not be considered as alternatives to net income (loss), or any other measures of financial performance derived in accordance with GAAP. These measures also should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items for which these non-GAAP measures make adjustments. Additionally, EBITDA and Adjusted EBITDA are not intended to be liquidity measures because of certain limitations, including, but not limited to:
| ● | They do not reflect our cash outlays for capital expenditures; |
| ● | They do not reflect changes in, or cash requirements for, working capital; and |
| ● | Although depreciation and amortization are non-cash charges, the assets are being depreciated and amortized and may have to be replaced in the future, and these non-GAAP measures do not reflect cash requirements for such replacements. |
Other companies, including other companies in our industry, may not use such measures or may calculate one or more of the measures differently than as presented in this Quarterly Report on Form 10-Q, limiting their usefulness as a comparative measure.
In evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same or similar to some of the adjustments made in our calculations, and our presentation of EBITDA and Adjusted EBITDA should not be construed to mean that our future results will be unaffected by such adjustment. Management compensates for these limitations by using EBITDA and Adjusted EBITDA as supplemental financial metrics and in conjunction with our results prepared in accordance with GAAP. The non-GAAP information should be read in conjunction with our consolidated financial statements and related notes.
The following is a reconciliation of EBITDA and Adjusted EBITDA to the nearest GAAP measure, net loss:
| | Three Months
Ended March 31, 2019 | | | Three Months
Ended March 31, 2018 | |
Net loss | | $ | (490,735 | ) | | $ | (754,104 | ) |
Addback depreciation and amortization | | | 39,446 | | | | 148,247 | |
EBITDA (non-GAAP) | | | (451,289 | ) | | | (605,857 | ) |
Addback stock-based compensation expense | | | 162,493 | | | | 79,989 | |
Adjusted EBITDA (non-GAAP) | | $ | (288,796 | ) | | $ | (525,868 | ) |
Not applicable.
Disclosure Controls and Procedures
Management, with the participation of our Principal Executive Officer and Principal Financial Officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
The Principal Executive Officer and the Principal Financial Officer believe that the condensed consolidated financial statements and other information contained in this Quarterly Report on Form 10-Q present fairly, in all material respects, our business, financial condition and results of operations.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
The information included in "Note 12 - Commitments and Contingencies" of the Company's condensed consolidated financial statements included elsewhere in this Form 10-Q is incorporated by reference into this Item.
There have been no material changes from the risk factors disclosed in “Part I—Item 1A. Risk Factors” in our 2018 Form 10-K.
None.
None.
Not applicable.
None.
| EXHIBIT INDEX |
| Exhibit Number | | Description |
| 4.1 |
| Form of Common Stock Purchase Warrant (incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on May 1, 2019). |
| 4.2 |
| Form of Series A Common Stock Purchase Warrant (incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on May 1, 2019). |
| 10.1** |
| Securities Purchase Agreement, dated April 25, 2019, between SG Blocks, Inc. and the purchasers thereto (incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on April 26, 2019). |
| 31.1+ | | Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2+ | | Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1* | | Certification by Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS+ | | XBRL Instance Document - the instance document does not appear in the Interactive Data File as the XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH+ | | XBRL Taxonomy Extension Schema Document. |
| 101.CAL+ | | XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF+ | | XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB+ | | XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE+ | | XBRL Taxonomy Extension Presentation Linkbase Document. |
| ** |
| Exhibits and schedules to this exhibit have been omitted pursuant to Regulation S-K, Item 601(a)(5). |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | SG BLOCKS, INC. |
| | (Registrant) |
| | | |
| Date: May 13, 2019 | By: | /s/ Mahesh S. Shetty |
| | | Mahesh S. Shetty President and Chief Financial Officer (Principal Financial and Accounting Officer) |
