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
unaudited condensed consolidated financial statements and related notes and
schedules included elsewhere in this Quarterly Report on Form 10-Q and with our
audited condensed consolidated financial statements and notes for the year ended
December 31, 2021, which were included in our Annual Report on Form 10-K for the
year then ended December 31, 2021, as filed with the Securities and Exchange
Commission (the "SEC") on April 18, 2022 (the "2021 Form 10-K"). This
discussion, particularly information with respect to our future operations,
includes forward-looking statements that involve risks and uncertainties as
described under the heading "Special note regarding forward-looking statements"
in this Quarterly Report on Form10-Q. You should review the disclosure under the
heading "Risk Factors" in this Quarterly Report on Form 10-Q for a discussion
for important factors that could cause our actual results to differ materially
from those anticipated in these forward-looking statements.

Special note regarding forward-looking statements





This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those discussed in the forward-looking statements. The statements contained in
this report that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). 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, the impact of
COVID-19, and related government "shelter-in-place" mandates and other
restrictions on business and commercial activity and the adequacy of our
insurance coverage; our ability to comply with the requirements of being a
public company; 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 2021 Form 10-K, and other filings with the Securities 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. Forward-looking statements speak only as of the date of this report.
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.

33

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Overview





We are a provider of Modular (as defined below) facilities. Prior to the
COVID-19 pandemic, the Modules we supplied were primarily for retail, restaurant
and military use and were manufactured by third party suppliers using our
proprietary technology and design and engineering expertise, which
modifies code-engineered cargo shipping containers and purpose-built modules for
use for safe and sustainable commercial, industrial and residential building.
With our acquisition in September 2020 of Echo DCL, LLC ("Echo"), one of our key
supply chain providers, we now have more control over the manufacturing process
and have increased our product offerings to add Modules made out of wood.  In
March 2020, in response to the COVID-19 pandemic we began increasing our focus
on providing our Modules as health care facilities for deployable medical
response solutions. Our partnership with Clarity Lab Solutions, LLC ("Clarity
Labs") in Boca Raton, Florida, a CLIA-certified laboratory, has allowed us to
provide laboratory testing in our Modules. During 2021, we also began to focus
on acquiring property to build multi-family housing communities that allows us
to utilize the manufacturing services of Echo.



Prior to October 2019, our business model was solely a project-based
construction model pursuant to which we were responsible for the design and
construction of finished products that incorporated our technology primarily to
customers in the retail, restaurant, military and education industries
throughout the United States. In October 2019, we changed our business model for
our residential building construction to a royalty fee model and entered into a
five-year exclusive license with CPF GP 2019-1 LLC ("CPF") under which CPF
licensed on an exclusive basis our proprietary technology and intellectual
property to develop and commercialize products in the United States (and its
territories) for residential use, including, without limitation, single-family
residences and multi-family residences, but excluding military housing. On June
15, 2021, we terminated the exclusive license by mutual agreement and ceased our
royalty fee model.?



Prior to the COVID-19 pandemic, our core customer base was comprised of
architects, landowners, builders and developers who use our Modules in
commercial and residential structures. Our cargo modified Modules allow for the
redesign, repurpose and conversion of heavy-gauge steel cargo shipping
containers into SGBlocks™, which are safe green building blocks for commercial,
industrial, and residential building construction, rather than consuming new
steel and lumber. Our technology and expertise is also used to purpose-build
modules, or prefabricated steel modular units customized for use in modular
construction ("SGPBMs" and, together with SGBlocks™, "Modules"), primarily to
augment or complement an SGBlocks™ structure.



In March 2020, we began increasing our focus on providing our Modules as health
care facilities for deployable medical response solutions. In May, we entered
into a joint development agreement with Grimshaw Design to assist with the
deployment of our D-Tec suite of prefabricated health facilities for on-site
immediate COVID-19 testing. In September 2020, we entered the U.S. test lab
market by forming a joint venture with Clarity Labs , a manufacturer and market
leader of rapid diagnostic tests, to launch CLIA-certified laboratories.  Our
joint venture with Clarity Labs has allowed us to not only supply our D-Tec
suite of prefabricated health facilities but also allows us to provide testing
services at such facilities. We have supplied our building modular coronavirus
testing centers and provide testing services for Los Angeles International
Airport (LAX), Memorial in Wayne County, Michigan and have been selected as a
Trusted Testing Partner (TTP) for Hawaii's COVID-19 travel testing program.


In September 2020, we acquired substantially all the assets of Echo, a Texas
limited liability company, except for Echo's real estate holdings for which we
obtained a right of first refusal. Echo is a container/modular manufacturer
based in Durant, Oklahoma specializing in the design and construction of
permanent modular and temporary modular buildings and was one of our key supply
chain partners.  Echo catered to the military, education, administration
facilities, healthcare, government, commercial and residential customers. This
acquisition has allowed us to expand our reach for our Modules and has
offered us an opportunity to vertically integrate a large portion of our cost of
goods sold, as well as increase margins, productivity and efficiency in the
areas of design, estimating, manufacturing and delivery.


34

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Results of Operations

Six Months Ended June 30, 2022 and 2021:




                                                                    For the Six        For the
                                                                      Months          Six Months
                                                                    Ended June        Ended June
                                                                     30, 2022          30, 2021
Total Revenue                                                     $  16,159,569     $ 21,041,614
Total Cost of revenue                                               (12,901,174 )    (18,623,607 )
Total Payroll and related expenses                                   (2,355,696 )     (1,629,186 )
Total Other Operating expenses                                       (1,811,663 )     (1,874,345 )
Total Operating loss                                                   (908,964 )     (1,085,524 )
Total Other income                                                      393,096           91,599
Total Loss before income tax                                           (515,868 )       (993,925 )
Add: Net income attributable non-controlling interest                 

1,616,669 2,581,211 Net loss attributable to common stockholders of SG Blocks, Inc. $ (2,132,537 ) $ (3,575,136 )





Revenue


During the six months ended June 30, 2022, we derived revenue from the following
three categories of sources: construction services, engineering services and
medical revenue. Medical revenue was a new source of revenue which commenced
during the fourth quarter of 2020 when Clarity Mobile Venture LLC commenced
operations. We continued to derive revenue from this source during the quarter
ended June 30, 2022. Total revenue for the six months ended June 30, 2022 was
$16,159,569 compared to $21,041,614 for the six months ended June 30, 2021. This
decrease of $4,882,045 or approximately 23% was mainly driven by a decrease in
medical revenue of $5,538,238, offset by an increase in construction services
which consisted an increase in office projects of $4,282,289, a decrease in
government projects of $2,183,103 and a decrease of special use projects of
$1,656,995.


Cost of Revenue and Gross Profit




Cost of revenue was $12,901,174 for the six months ended June 30, 2022, compared
to $18,623,607 for the six months ended June 30, 2021. The decrease of
$5,722,433 or a decrease of approximately 31%, is primarily related to lower
testing volumes resulting in a decrease in our medical cost of revenue as well
as a decrease in cost of goods sold from construction services in the amount of
$1,303,729.


Gross profit was $3,258,395 and $2,418,007 for the six months ended June 30, 2022 and 2021, respectively.




Gross profit margin percentage increased to 20% for the six months ended June
30, 2022 compared to 11% for the six months ended June 30, 2021 primarily due to
a legacy contract from the acquisition of SG Echo which incurred losses during
the six months ended June 30, 2021 from escalations in material pricing related
to COVID-19 and labor overages.


35

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Payroll and Related Expenses

Payroll and related expenses for the six months ended June 30, 2022 were $2,355,696 compared to $1,629,186 for the six months ended June 30, 2021. This increase was primarily caused by an increase of approximately $747,740 in stock-based compensation during the six months ended June 30, 2022.

Other Operating Expenses (General and administrative expenses, Marketing and business development expense, and Pre-project expenses)




Other operating expenses (general and administrative expenses, marketing and
business development expenses, pre-project expenses) for the six months ended
June 30, 2022 were $1,811,663 compared to $1,874,345 for the six months ended
June 30, 2021.

Other Income (Expense)


Interest income for the six months ended June 30, 2022 was $23,762 mainly
derived from bank interest and interest associated with an outstanding note
receivable. There was $31,267 of interest income for the six months ended June
30, 2021. Other income for the six months ended June 30, 2022 was $491,309
primarily related to a return of escrow from the SG Echo acquisition. There was
61,024 other income for the six months ended June 30, 2021. Interest expense for
the six months ended June 30, 2022 and 2021 was $121,975 and $692, respectively.
The increase in interest expense resulted from the notes payable entered into
during July 2021.



Income Tax Provision


A 100% valuation allowance was provided against the deferred tax asset consisting of available net operating loss carry forwards and, accordingly, no income tax benefit was provided.





Impact of Inflation


Inflation has caused increases on some of the Company's estimated costs for construction projects in progress and completed during the past two fiscal years, which has affected the Company's revenue and income(loss) from continuing operations.

Our operations for the three months ended June 30, 2022 and 2021 may not be indicative of our future operations.

36

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Three Months Ended June 30, 2022 and 2021:





                                                                    For the Three         For the Three
                                                                  Months Ended June     Months Ended June
                                                                      30, 2022              30, 2021
Total Revenue                                                     $       7,554,971     $      11,853,987
Total Cost of revenue                                                    (6,783,011 )          (9,842,606 )
Total Payroll and related expenses                                       (1,211,509 )            (801,664 )
Total Operating expenses                                                   (888,307 )          (1,133,784 )
Total Operating profit (loss)                                            (1,327,856 )              75,933
     Total Other income (expense)                                           310,260                74,492
Total Income (Loss) before income tax                                    (1,017,596 )             150,425
Add: Net profit attributable non-controlling interests                      397,764             1,691,684

Net loss attributable to common stockholders of SG Blocks, Inc. $ (1,415,360 ) $ (1,541,259 )





Revenue


During the quarter ended June 30, 2022, we derived revenue from the following
three categories of sources: construction services, engineering services and
medical revenue. The medical revenue source was a new source that commenced
operations in the fourth quarter of 2020 and continued with strong revenue
related to COVID-19 samples collected from our Clarity Mobile joint venture in
the second quarter 2022. Total revenue for the three months ended June 30, 2022
was $7,554,971 compared to $11,853,987 for the three months ended June 30, 2021.
This decrease of $4,299,016 or approximately 36% was mainly driven by a decrease
in medical revenue of $6,468,104 offset by an increase in construction services
which consisted of an increase in office projects of $3,730,806, and a decrease
in government projects of $1,097,660.


Cost of Revenue and Gross Profit




Cost of revenue was $6,783,011 for the three months ended June 30, 2022,
compared to $9,842,606 for the three months ended June 30, 2021. The decrease of
$3,059,595 or a decrease of approximately 31%, is primarily related to lower
testing volumes resulting in a decrease in our medical revenue as well as a
decrease in cost of goods sold from construction services in the amount of
$1,078,868.


Gross profit was $771,960 and $2,011,381 for the three months ended June 30, 2022 and 2021, respectively.




Gross profit margin percentage decreased to approximately 10% for the three
months ended June 30, 2022 compared to approximately 17% for the three months
ended June 30, 2021. This decrease was primarily from a contract in the amount
of $5,954,950 recognizing gross profit of $32,459 on $3,724,226 of revenue
during the three months ended June 30, 2022.


37

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Payroll and Related Expenses

Payroll and related expenses for the three months ended June 30, 2022 were $1,211,509 compared to $801,664 for the three months ended June 30, 2021. This increase was primarily caused by an increase of approximately $384,840 in stock-based compensation expense.

Other Operating Expenses (General and administrative expenses, Marketing and business development expense, and Pre-project expenses)




Other operating expenses (general and administrative expenses, marketing and
business development expenses, pre-project expenses) for the three months ended
June 30, 2022 were $888,307 compared to $1,133,784 for the three months ended
June 30, 2021. The decrease resulted primarily from a decrease in contract labor
costs of approximately $320,000.


Other Income (Expense)




Interest income for the three months ended June 30, 2022 was $10,979 mainly
derived from bank interest and interest associated with an outstanding note
receivable. There was $13,797 of interest income for the three months ended June
30, 2021. Interest expense for the three months ended June 30, 2022 and 2021 was
$73,126 and $329, respectively. Other income for the three months ended June 30,
2022 was $372,407 primarily related to a return of escrow from the SG Echo
acquisition. There was $61,024 other income for the three months ended June 30,
2021.



Income Tax Provision


A 0% valuation allowance was provided against the deferred tax asset consisting
of available net operating loss carry forwards and, accordingly, no income tax
benefit was provided.



Impact of Inflation

Inflation has caused increases on some of the Company's estimated costs for construction projects in progress and completed during the past two fiscal years, which has affected the Company's revenue and income(loss) from continuing operations.




38


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Impact of Coronavirus (COVID-19)




With the global spread of the ongoing novel coronavirus ("COVID-19") pandemic
beginning in 2020, we have implemented business continuity plans designed to
address and mitigate the impact of the COVID-19 pandemic on our employees and
business. The worldwide spread of the COVID-19 virus has resulted in a global
slowdown of economic activity, which is likely to decrease demand for a broad
variety of goods and services, including from our customers, while also
resulting in delays in projects due to labor shortages and supplier disruptions
for an unknown period of time until the disease is contained. To date, we have
experienced some delays in projects due to COVID-19, which we expect to have an
impact on our revenue and our results of operations, the size and duration of
which we are currently unable to predict. Any quarantines, the timing and length
of containment and eradication solutions, travel restrictions, absenteeism by
infected workers, labor shortages or other disruptions to the suppliers and
contract manufacturers or customers would likely adversely impact our sales, and
operating results and result in further project delays. In addition, the
pandemic could result in an economic downturn that could affect the ability of
our customers and licensees to obtain financing and therefore impact demand for
our products. Order lead times could be extended or delayed and increases we
have experienced in pricing could continue to increase. Some products or
services may become unavailable if the regional or global spread were
significant enough to prevent alternative sourcing. Accordingly, we are
considering alternative product sourcing in the event that product supply
becomes problematic. We expect this global pandemic to have an impact on our
revenue and results of operations, the size and duration of which we are
currently unable to predict. In addition, to the extent the ongoing COVID-19
pandemic adversely affects our business and results of operations, it may also
have the effect of heightening many of the other risks and uncertainties which
we face.


Liquidity and Capital Resources

As of June 30, 2022 and December 31, 2021 we had an aggregate of $2,428,211 and $13,024,381, respectively, of cash and cash equivalents and short-term investments.




Historically, our operations have primarily been funded through proceeds from
equity and debt financings, as well as revenue from operations.
In June 2017, we completed a public offering, resulting in net proceeds of
approximately $6,800,000 after deducting underwriting discounts and commissions
and other expenses. In July 2017, in connection with a public offering, the
underwriters exercised their option to purchase 11,250 additional shares of
common stock. As a result of the exercise and closing of the option to purchase
additional shares, total net proceeds from the public offering were
approximately $7,900,000 after deducting underwriting discounts and commissions
and related expenses.


In April 2019, we issued 42,388 shares of our common stock at a price of $22.00
per share through a Securities Purchase Agreement with certain institutional
investors and accredited investors.


In August 2019, we issued 45,000 shares of our common stock at a price of $17.00 per share pursuant to the terms of an Underwriting Agreement to the public.

39

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Liquidity and Capital Resources (continued)




In December 2019, we completed the public offering where we issued 857,500
shares of common stock at a public offering price of $3.00 per share resulting
in net proceeds of approximately $2,117,948 after deducting underwriting
discounts and commissions and other expenses. In our November 2019 debt
financing, we received a cash payment in the aggregate amount of $375,000
pursuant to a Securities Purchase Agreement that we entered into with Red
Diamond Partners LLC (the "Lender"), and we issued to the Lender a Debenture
(the "Debenture") in the aggregate principal amount of $480,770 (representing an
original issue discount of 22%), which Debenture was secured by a security
interest in all of our existing and future assets, subject to existing security
interests and exceptions. We received net proceeds of approximately $326,250
after deducting certain fees due to the placement agent and certain transaction
expenses. The Debenture was repaid in full out of the proceeds of our December
2019 public offering.


On February 4, 2020, we entered into a Securities Purchase Agreement with an
accredited investor, pursuant to which we issued to the investor a secured note
in the aggregate principal amount of $200,000 (the "Note"). The Note bears
interest at a rate of nine percent (9%) per annum, is due on July 31, 2023, and
is secured under a Pledge Agreement, dated February 4, 2020, entered into with
the investor (the "Pledge Agreement") by a security interest in the royalty
payable to us under that certain Exclusive License Agreement, dated October 3,
2019, with CPF GP 2019-1 LLC. We have the right to prepay the Note, in whole or
in part, at any time and from time to time, without premium or penalty. During
the third quarter of 2020, the Note to investor of $200,000 and unpaid accrued
interest of $86,263 was converted into 73,665 shares of common stock.


In April 2020, we completed a public offering where we issued 440,000 shares of
common stock at a public offering price of $4.25 per share, which resulted in
net proceeds of approximately $1,522,339, after deducting underwriting discounts
and commissions and other expenses related to the offering.


In May 2020, we sold an aggregate of 6,900,000 shares of our common stock at a
public offering price of $2.50 per share and on May 15, 2020, and received total
net proceeds after deducting underwriting discounts and commissions and other
offering expenses payable by us, were approximately $15,596,141.


In October 2021, we received aggregate gross proceeds of $11.55 million from our
issuance to an investor (A) in a registered direct offering of (i) 975,000
shares of our common stock and (ii) pre-funded warrants to purchase an aggregate
of 2,189,384 shares of common stock and (B) in a concurrent private placement
Series A warrants to purchase up to 1,898,630 shares of Common Stock.


We continue to generate losses from operations. At June 30, 2022 and December
31, 2021 we had a cash balance and short-term investment of $2,428,211 and
$13,024,381, respectively. As of June 30, 2022, our stockholders' equity was
$20,364,083 compared to $21,715,789 as of December 31, 2021. Our net loss
attributable to common stockholders of SG Blocks, Inc. for the six months ended
June 30, 2022 was $2,132,537 and net cash used in operating activities was
$5,362,545. We anticipate our cash balance is sufficient to last at least twelve
months from the date of this Quarterly Report on Form 10-Q.


We may need to generate additional revenues or secure additional financing
sources, such as debt or equity capital, to fund future growth, which financing
may not be available on favorable terms or at all. We do not have any additional
sources secured for future funding, and if we are unable to raise the necessary
capital at the times we require such funding, we may need to materially change
our business plan, including delaying implementation of aspects of such business
plan or curtailing or abandoning such business plan altogether.


Cash Flow Summary


                                                  Six Months Ended
                                                      June 30,
                                                2022            2021
Net cash used in:
Operating activities                       $  (5,362,545 ) $  (1,307,944 )
Investing activities                          (3,077,625 )    (8,243,216 )
Financing activities                          (2,156,000 )    (1,135,597 )

Net decrease in cash and cash equivalents $ (10,596,170 ) $ (10,686,757 )





40

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Operating activities used net cash of $5,362,545 during the six months ended
June 30, 2022, and used net cash of  $1,307,944 during the six months ended June
30, 2021. Generally, our net operating cash flows fluctuate primarily based on
changes in our profitability and working capital. Cash used in operating
activities increased by approximately $4,054,601.


Investing activities used net cash of $3,077,625 during the six months ended
June 30, 2022, and $8,243,216 net cash in the six months ended June 30, 2021 a
decrease in cash used of $5,165,591. This change results primarily from a
decrease of $2,941,009 of the purchase of property and equipment during the six
months ended June 30, 2022 and $3,350,239 of an investment in and advances to
equity affiliates during the six months ended June 30, 2021.


Financing activities used net cash of $2,156,000 during the six months ended
June 30, 2022. Financing activities used $1,135,597 net cash during the six
months ended June 30, 2021. This change of $1,020,403 results from the proceeds
from conversion of warrants to common stock in the amount of $707,187 during the
six months ended June 30, 2021 and an increase of $312,316 of distributions paid
to non-controlling interest during the six months ended June 30, 2022.


We provide services to our construction and engineering 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 June 30, 2022, we had
ten projects totaling $4,183,116 under contract. Of these contracts, all ten
projects combine all three phases or parts thereof and including construction.
We expect that all of this revenue will be realized by December 31, 2022.


Backlog may fluctuate significantly due to the timing of orders or awards for
large projects and is not necessarily indicative of future backlog levels or the
rate at which backlog will be recognized as revenue. Our backlog increased by
approximately $965,000 from December 31, 2021 to June 30, 2022. We expect that
all of this revenue will be realized by December 31, 2022. Backlog does not
include COVID tests or testing services provided through our joint venture,
Clarity Mobile Venture.


There can be no assurance that our customers will decide to and/or be able to
proceed with these construction projects, or that we will ultimately recognize
revenue from these projects in a timely manner or at all.


41

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Off-Balance Sheet Arrangements

As of June 30, 2022 and December 31, 2021, we had no material off-balance sheet arrangements to which we are a party.





In the ordinary course of business, we enter into agreements with third parties
that include indemnification provisions which, in our judgment, are normal and
customary for companies in our industry sector. These agreements are typically
with consultants and certain vendors. Pursuant to these agreements, we generally
agree to indemnify, hold harmless, and reimburse indemnified parties for losses
suffered or incurred by the indemnified parties with respect to actions taken or
omitted by us. The maximum potential amount of future payments we could be
required to make under these indemnification provisions is unlimited. We have
not incurred material costs to defend lawsuits or settle claims related to these
indemnification provisions. As a result, the estimated fair value of liabilities
relating to these provisions is minimal. Accordingly, we have no liabilities
recorded for these provisions as of June 30, 2022.



Critical Accounting Policies and New Accounting Pronouncements





Critical Accounting Estimates



Our condensed consolidated financial statements have been prepared using
generally accepted accounting principles in the United States of America
("GAAP"). In connection with the preparation of the financial statements, we are
required to make assumptions and estimates and apply judgments that affect the
reported amounts of assets, liabilities, revenue, and expenses, and the related
disclosures. We base our assumptions, estimates, and judgments on historical
experience, current trends, and other factors that we believe to be relevant at
the time the consolidated financial statements are prepared. On a regular basis,
we review the accounting policies, assumptions, estimates, and judgments to
ensure that our financial statements are presented fairly and in accordance with
GAAP. However, because future events and their effects cannot be determined with
certainty, actual results could differ from our assumptions and estimates, and
such differences could be material.



Our significant accounting policies are discussed in "Note 3- Summary of Significant Accounting Policies" of the notes to our condensed consolidated financial statements included elsewhere in this report. We believe that the following accounting policies are the most critical in fully understanding and evaluating our reported financial results.





Share-based payments. We measure the cost of services received in exchange for
an award of equity instruments based on the fair value of the award. For
employees and directors, including non-employee directors, the fair value of the
award is measured on the grant date. For non-employees, the fair value of the
award is generally re-measured on interim financial reporting dates and vesting
dates until the service period is complete. The fair value amount is then
recognized over the period services are required to be provided in exchange for
the award, usually the vesting period. We recognize stock-based compensation
expense on a graded-vesting basis over the requisite service period for each
separately vesting tranche of each award. Stock-based compensation expense to
employees and all directors is reported within payroll and related expenses in
the consolidated statements of operations. Stock-based compensation expense to
non-employees is reported within marketing and business development expense in
the consolidated statements of operations.



Other derivative financial instruments. SGB classifies as equity any contracts
that (i) require physical settlement or net-share settlement or (ii) provide a
choice of net-cash settlement or settlement in SGB's own shares (physical
settlement or net-share settlement), provided that such contracts are indexed to
SGB's own stock. SGB 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 SGB's control) or (ii)
give the counterparty a choice of net-cash settlement or settlement shares
(physical settlement or net-cash settlement). SGB 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.


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Critical Accounting Policies (continued)




Convertible instruments. SGB bifurcates conversion options from their host
instruments and accounts for them as free-standing derivative financial
instruments according to certain criteria. The criteria include circumstances in
which (i) the economic characteristics and risks of the embedded derivative
instrument are not clearly and closely related to the economic characteristics
and risks of the host contract; (ii) the hybrid instrument that embodies both
the embedded derivative instrument and the host contract is not re-measured at
fair value under otherwise applicable GAAP measures with changes in fair value
reported in earnings as they occur; and (iii) a separate instrument with the
same terms as the embedded derivative instrument would be considered a
derivative instrument.



SGB determined that the embedded conversion options that were included in the
previously outstanding convertible debentures should be bifurcated from their
host and a portion of the proceeds received upon the issuance of the hybrid
contract has been allocated to the fair value of the derivative. The derivative
was subsequently marked to market at each reporting date based on current fair
value, with the changes in fair value reported in results of operations.



Revenue recognition - we determine, 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
we expect to be entitled in exchange for those goods or services. To achieve
this core principle, we apply the following five steps in accordance with its
revenue policy:



                (1) Identify the contract with a customer



                (2) Identify the performance obligations in the contract



                (3) Determine the transaction price



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



                (5) Recognize revenue as performance obligations are satisfied



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


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




On October 3, 2019, we entered into an Exclusive License Agreement ("ELA" )
pursuant to which it granted an exclusive license for its technology as outlined
in the ELA. The ELA is described below. Under the ELA, we will receive royalty
payments based upon gross revenues earned by the licensee for commercialized
products within the field of design and project management platforms for
residential use, including single-family residences and multi-family residences,
but excluding military housing. We have determined that the ELA grants the
licensee a right to access our intellectual property throughout the license
period (or its remaining economic life, if shorter), and thus recognizes revenue
over time as the licensee recognizes revenue and we have the right to payment of
royalties. No revenue has been recognized under the ELA for the six months ended
June 30, 2022.


We entered into a joint venture agreement with Clarity Lab Solutions, LLC
("Clarity Labs") (the "JV") in the fourth quarter of 2020. Revenue from the
activities of the JV is related to clinical testing services and is recognized
when services have been rendered, which is at a point in time. In addition, we
formed Chicago Airport Testing, LLC which collects rental revenue Included in
the consideration we expected to be entitled to receive, we estimate its
contractual allowances, payer denials and price concessions. During the six
months ended June 30, 2022, we recognized $10,203,215 in revenue related to
activities through the JV, which is included in medical revenue on the
accompanying consolidated statements of operations.


Critical Accounting Policies (continued)

Goodwill - Goodwill represents the excess of reorganization value over the fair
value of identified net assets upon emergence from bankruptcy. In accordance
with the accounting guidance on goodwill, we perform our impairment test of
goodwill at the reporting unit level each fiscal year, or more frequently if
events or circumstances change that would more likely than not reduce the fair
value of its reporting unit below its carrying value. Our evaluation of goodwill
completed during the year ended December 31, 2021, resulted in no impairment
loss. There was no impairment during the six months ended June 30, 2022.


Intangible assets - Intangible assets consist of $2,766,000 of proprietary
knowledge and technology which is being amortized over 20 years, $97,164 of
trademarks which is being amortized over 5 years, $47,800 of website fees which
is being amortized over 5 years. Our evaluation of intangible assets for
impairment during the year ended December 31, 2021, determined that there were
no impairment losses. There was no impairment during the six months ended June
30, 2022.


New Accounting Pronouncements

See Note 3 to the accompanying consolidated financial statements for all recently adopted and new accounting pronouncements.





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Non-GAAP Financial Information





In addition to our results under GAAP, we also present EBITDA and Adjusted
EBITDA for historical periods. EBITDA and Adjusted EBITDA are non-GAAP financial
measures and have been presented as supplemental measures of financial
performance that are not required by, or presented in accordance with, GAAP. We
calculate EBITDA as net income (loss) before interest expense, income tax
benefit (expense), depreciation and amortization. We calculate Adjusted EBITDA
as EBITDA before certain non-recurring adjustments such as loss on conversion of
convertible debentures, change in fair value of financial instruments and stock
compensation expense.



EBITDA and Adjusted EBITDA are presented because they are important metrics used
by management as one of the means by which it assesses our financial
performance. EBITDA and Adjusted EBITDA are also frequently used by analysts,
investors and other interested parties to evaluate companies in our industry.
These measures, when used in conjunction with related GAAP financial measures,
provide investors with an additional financial analytical framework that may be
useful in assessing us and our results of operations.



EBITDA and Adjusted EBITDA have certain limitations. EBITDA and Adjusted EBITDA
should not be considered as alternatives to net income (loss), or any other
measures of financial performance derived in accordance with GAAP. These
measures also should not be construed as an inference that our future results
will be unaffected by unusual or non-recurring items for which these non-GAAP
measures make adjustments. Additionally, EBITDA and Adjusted EBITDA are not
intended to be liquidity measures because of certain limitations, including, but
not limited to:



  ? They do not reflect our cash outlays for capital expenditures;



? They do not reflect changes in, or cash requirements for, working capital; and

? Although depreciation and amortization are non-cash charges, the assets are

being depreciated and amortized and may have to be replaced in the future, and


    these non-GAAP measures do not reflect cash requirements for such
    replacements.




Other companies, including other companies in our industry, may not use such
measures or may calculate one or more of the measures differently than as
presented in this 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.



Non-GAAP Financial Information (continued)

The following is a reconciliation of EBITDA and Adjusted EBITDA to the nearest GAAP measure, net gain (loss):




                                                                   Three
                                         Three Months Ended    Months Ended       Six Months Ended      Six Months Ended
                                           June 30, 2022       June 30, 2021        June 30, 2022         June 30, 2021
Net loss attributable to common
stockholders of SG Blocks, Inc.         $       (1,415,360 )   $  (1,541,259 )   $      (2,132,537 )   $      (3,575,136 )
    Addback interest expense                        73,126               329               121,975                   692
    Addback interest income                        (10,979 )         (13,797 )            (23,762)               (31,267 )
   Addback depreciation and
amortization                                       156,731           159,227               313,573               301,020
EBITDA (non-GAAP)                               (1,196,482 )     

(1,395,500 ) (1,720,751 ) (3,304,691 )


    Addback litigation expense                      53,391            60,053               167,774               141,272
   Addback stock compensation expense              631,076           246,236             1,280,162               532,422
Adjusted EBITDA (non-GAAP)              $         (512,015 )   $  (1,089,211 )   $       (272,815)     $      (2,630,997 )



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