Market Overview

SG Blocks Reports Second Quarter 2018 Financial Results

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Management to Host Conference Call Today at 4:30 p.m. EDT

SG
Blocks, Inc.
(NASDAQ: SGBX),
a leading designer, innovator and fabricator of container-based
structures, reported its financial results for the three and six months
ended June 30, 2018.

Key Second Quarter 2018 and Subsequent Highlights:

  • Revenue increased 130% to approximately $2.3 million, as compared to
    $1.0 million in Q2 2017. Approximately $0.8 million in revenue from a
    $5.6 million contract was deferred into the third quarter due to
    project timing from June to July 2018.
  • Construction backlog increased to $102.9 million, as compared to
    $102.8 million at March 31, 2018 with $3.8 million in contract revenue
    recognized in the six months ended June 30, 2018.
  • Performed activity on 15 out of 16 total projects in backlog in Q2
    2018.
  • Gross profit totaled approximately $32,000, as compared to $146,000 in
    Q2 2017. Gross profit margin as a percentage of revenue for projects
    outside of one $5.6 million contract had a margin profile range of 18%
    to 20% in Q2 2018.
  • Net loss totaled $1.2 million, or $(0.29) per basic and diluted share
    in Q2 2018.
  • Named Scott Hill, a 30-year modular construction veteran, as Vice
    President of Operations.
  • Secured an architectural and engineering services contract for a
    27,000-square-foot affordable housing project on the West Coast.
  • Secured a construction and delivery contract for a 3,500-square-foot
    fully modularized food and beverage park in Orlando, Florida.
  • Initiated procurement of containers for the fabrication of a 242-car
    parking garage in Houston, Texas.
  • Secured a 23 module, 6,000-square-foot construction and delivery
    project with Gather GVL, an eco-friendly food and beverage venue in
    Greenville, South Carolina.
  • Announced partnership with Isodiol International Inc. to construct an
    initial 10 "KURE Vape Pod" retail locations across the United States
    and Canada.
  • Signed Master Services Agreement with Grimshaw Architects, a leading
    global architecture firm, for incorporation into its global
    award-winning industrial design portfolio.
  • Appointed Yaniv Blumenfeld, a 20-year real estate veteran with
    extensive commercial real estate loan and equity transaction
    experience, to the Company's Board of Directors.

Management Commentary

"The second quarter of 2018 was highlighted by our improved financial
performance and the announcement of our strategic partnership with
Grimshaw Architects, a globally renowned architecture firm," said SG
Blocks Chairman and CEO Paul Galvin. "This partnership allows SG Blocks
the opportunity to participate in high-margin and high-visibility
projects around the world – moving us towards our gross margin targets
and increasing awareness of our unique container-based construction
solution throughout the global architectural industry.

"On the financial front during the second quarter, we delivered solid
revenue growth that increased 130% versus the same comparable period in
2017 and 49% as compared to the first quarter of 2018. Unfortunately,
due to site delays at the HOLA Project, we had to defer approximately
$0.8 million of revenue into the third quarter of 2018. We do expect the
HOLA Project to be commissioned in the second half of 2018 and it has
already led to the introduction of several large affordable housing
projects in the Los Angeles area," continued Galvin.

"While gross margins were muted in the second quarter of 2018 as a
result of work on legacy, lower-margin projects, we did achieve a gross
profit margin profile in the range of 18% to 20% in Q2 2018 for projects
outside of the $5.6 million HOLA contract. We believe that, given the
asset-light nature of our business model, we can handle incremental
revenue with a relatively modest increase in general and administrative
expenses. We leverage both inventory and labor of our platform partners
and, in most cases, pay for products and services only after we have
been paid by the customers.

"We continue to look for innovative new ways to expand our operating
platform and believe that we are positioning ourselves to achieve our
goal of sustainable cash flow-positive operations. Our backlog of
high-margin projects continues to grow, and we believe that in the
upcoming quarters we are setting up to deliver significant top-line
revenue growth that will achieve our stated year-end goals for fiscal
2018.

"Moreover, the third quarter of 2018 is off to a strong start as we are
participating in an increased number of project referral opportunities
with our new partner, Grimshaw Architects. Due to this activity and our
growing backlog, we recently made a strategic hire, Scott Hill, as our
new Vice President of Operations. Mr. Hill is a leading modular
construction expert and we believe his expertise will ensure an
accelerated conversion of our backlog and efficiently scale our rapidly
growing platform business. We believe Mr. Hill's appointment is also a
testament to the level of inbound interest we are receiving regarding
potential partnerships utilizing our sustainable method of construction.
We believe this indicates that our disruptive solution to traditional
construction is gaining momentum.

"We look forward to sharing more on our developing story at several
institutional investor conferences in the fall and the upcoming Heart of
Los Angeles Community Arts and Recreation Center Ribbon Cutting
Ceremony," concluded Galvin.

Second Quarter 2018 Financial Results

Revenue in Q2 2018 totaled $2.3 million, an increase of 130% compared to
$1.0 million in Q2 2017. This increase in revenue was primarily a result
of revenue being recognized on additional projects that were in progress
or completed during the three months ended June 30, 2018 as compared to
June 30, 2017. Revenue in Q2 2018 included $1.1 million from work in
progress on a contract in the amount of approximately $5.6 million.
Approximately $0.8 million in revenue from this $5.6 million contract
was deferred into the third quarter due to project timing.

Construction backlog totaled $102.9 million at June 30, 2018, as
compared to $102.8 million at March 31, 2018 and $9.7 million at June
30, 2017. The increase in backlog at the end of Q2 2018 as compared to
the end of Q1 2018 was largely attributable to the signing of two new
contracts for food and beverage venues in Orlando, Florida and
Greenville, South Carolina respectively. As of June 30th, 2018, the
Company had 16 projects, or approximately 684,856 square feet, in
backlog.

Gross profit totaled $32,000 in Q2 2018 as compared to $0.1 million in
Q2 2017. Gross profit margin as a percentage of revenue decreased to
1.0% in Q2 2018, as compared to approximately 15% in Q2 2017. The
decrease in gross profit as a percentage of revenue is primarily
attributable to lower contracted margins and unanticipated site related
costs on a contract in the amount of approximately $5.6 million. Gross
profit margin as a percentage of revenue for projects excluding the $5.6
million contract had a margin profile range of 18% to 20% in Q2 2018.

Operating expenses increased to $1.3 million in Q2 2018 from $0.7
million in Q2 2017. The increase in operating expenses was primarily due
to increased headcount, professional fees and business development
related travel expenses.

Net loss totaled $1.2 million, or $(0.29) per basic and diluted share,
in Q2 2018, compared to net loss of $1.7 million or $(3.15) per basic
and diluted share in Q2 2017.

Adjusted EBITDA loss increased to $1.52 million for the first six months
of 2018 compared to $0.64 million for the same period in 2017. See below
under the heading "Use of Non-GAAP Financial Information" for a
discussion of adjusted EBITDA and a reconciliation of such measure to
the most comparable measure calculated under U.S. generally accepted
accounting principles ("GAAP").

Cash and cash equivalents at June 30, 2018 totaled $3.0 million, as
compared to $4.5 million at March 31, 2018. The decrease in cash was
primarily the result of a $0.9 million quarter over quarter increase to
our accounts receivable caused by the timing of delivery of a large
order late in the second quarter of 2018. We expect accounts receivable
and cash flow to normalize in the third quarter of 2018.

Further details about the Company's results for the second quarter of
2018 and the six months ended June 30, 2018 are available in its
Quarterly Report on Form 10-Q, accessible in the investor relations
section of the Company's website at www.sgblocks.com
and through the U.S. Securities and Exchange Commission's website.

Conference Call Information

SG Blocks CEO Paul Galvin and CFO Mahesh Shetty will host the conference
call, followed by a question and answer period.

To access the call, please use the following information:

Date:           Tuesday, August 14, 2018
Time: 4:30 p.m. ET, 1:30 p.m. PT
Toll-free dial-in number: 1-877-407-9716
International dial-in number: 1-201-493-6779
Conference ID: 13681965

Please call the conference telephone number 5-10 minutes prior to the
start time. An operator will register your name and organization. If you
have any difficulty connecting with the conference call, please contact
MZ Group at 1-949-491-8235.

The conference call will be broadcast live and available for replay at http://public.viavid.com/index.php?id=130738
and via the investor relations section of the Company's website at www.sgblocks.com.

A replay of the conference call will be available after 7:30 p.m.
Eastern time through August 28th, 2018.

Toll-free replay number:           1-844-512-2921
International replay number: 1-412-317-6671
Replay ID: 13681965

Use of Non-GAAP Financial Information

In addition to our results under GAAP, the Company presents 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 our Company and our results of operations.

Set forth below is a reconciliation of EBITDA and Adjusted EBITDA to net
income (loss) for the six months ended June 30, 2018 and 2017,
respectively:

  Six   Six
Months Months
Ended Ended
June 30, June 30,
  2018     2017  
Net loss $ (1,987,005 ) $ (2,396,002 )
Addback interest expense - 330,388
Addback depreciation and amortization   296,511     294,570  
EBITDA (non-GAAP) (1,690,494 ) (1,771,044 )
Addback loss on conversion of convertible debentures - 1,018,475
Less change in fair value of financial instruments - (96,327 )
Addback stock compensation expense   165,314     209,383  
Adjusted EBITDA (non-GAAP) $ (1,525,180 ) $ (639,513 )

About SG Blocks, Inc.

SG Blocks, Inc. is a premier innovator in advancing and promoting the
use of code-engineered cargo shipping containers and purpose-built steel
modules for safe and sustainable construction. The firm offers a product
that exceeds many standard building code requirements, and also supports
developers, architects, builders and owners in achieving greener
construction, faster execution, and stronger buildings of higher value.
Each project starts with GreenSteel™, the structural core and shell of
an SG Blocks building, and then customized to client specifications. For
more information, visit www.sgblocks.com.

Forward-Looking Statements

Certain statements in this press release constitute "forward-looking
statements" within the meaning of the federal securities laws. Words
such as "may," "might," "will," "should," "believe," "expect,"
"anticipate," "estimate," "continue," "predict," "forecast," "project,"
"plan," "intend" or similar expressions, or statements regarding intent,
belief or current expectations, are forward-looking statements. While SG
Blocks believes these forward-looking statements are reasonable, undue
reliance should not be placed on any such forward-looking statements,
which are based on information available to us on the date of this
release. These forward-looking statements are based upon current
estimates and assumptions and are subject to various risks and
uncertainties, including, without limitation, those set forth in SG
Blocks' filings with the Securities and Exchange Commission. Thus,
actual results could be materially different from those presented
herein. SG Blocks expressly disclaims any obligation to update or alter
statements whether as a result of new information, future events or
otherwise, except as required by law.

SG BLOCKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 

June 30,

 

December 31,

 

2018

   

2017

 
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 3,020,614 $ 4,870,824
Short-term investment - 30,033
Accounts receivable, net 2,227,684 3,005,875
Costs and estimated earnings in excess of billings on uncompleted
contracts
131,392 61,175
Prepaid expenses and other current assets   236,326     183,890  
Total current assets   5,616,016     8,151,797  
 
Equipment, net 8,701 6,796
Goodwill 4,162,173 4,162,173
Intangible assets, net   2,733,615     3,028,247  
 
Total Assets $ 12,520,505   $ 15,349,013  
 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,988,854 $ 2,148,091
Billings in excess of costs and estimated earnings on uncompleted
contracts
  825,468     1,673,048  
Total current liabilities 2,814,322 3,821,139
 
Commitments and Contingencies
 
Stockholders' equity:
Preferred stock, $1.00 par value, 5,405,010 shares authorized; 0
issued and outstanding as of June 30, 2018 and December 31, 2017
- -
Common stock, $0.01 par value, 300,000,000 shares authorized;
4,260,041 issued and outstanding as of June 30, 2018 and December
31, 2017
42,601 42,601
Additional paid-in capital 17,469,843 17,304,529
Accumulated deficit   (7,806,261 )   (5,819,256 )
Total stockholders' equity   9,706,183     11,527,874  
 
Total Liabilities and Stockholders' Equity $ 12,520,505   $ 15,349,013  
 
SG BLOCKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 

For the Three Months

 

For the Six Months Ended

Ended June 30,

June 30,

  2018       2017     2018      

2017

 
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue:
Block sales $ 42,799 $ - $ 42,799 $ -
Construction services   2,262,998     1,001,734     3,806,526     1,606,327  
Total 2,305,797 1,001,734 3,849,325 1,606,327
 
Cost of revenue:
Block sales 33,084 - 33,084 -
Construction services   2,241,141     855,947     3,621,071     1,307,311  
Total   2,274,225     855,947     3,654,155     1,307,311  
 
Gross profit 31,572 145,787 195,170 299,016
 
Operating expenses:
Payroll and related expenses 572,612 292,550 978,029 635,598
General and administrative expenses 555,087 330,118 981,362 724,059
Marketing and business development expense 97,541 37,618 178,588 66,186
Pre-project expenses   45,000     7,508     49,964     16,647  
Total   1,270,240     667,794     2,187,943     1,442,490  
 
Operating loss (1,238,668 ) (522,007 ) (1,992,773 ) (1,143,474 )
 
Other income (expense):
Interest expense - (165,194 ) - (330,388 )
Interest income - 4 4 8
Other income 5,764 - 5,764 -
Loss on debt conversion - (1,018,475 ) - (1,018,475 )
Change in fair value of financial instruments   -     -     -     96,327  
Total   5,764     (1,183,665 )   5,768     (1,252,528 )
 
Net loss $ (1,232,904 ) $ (1,705,672 ) $ (1,987,005 ) $ (2,396,002 )
 
Net loss per share - basic and diluted:
Basic and diluted $ (.29 ) $ (3.15 ) $ (.47 ) $ (6.75 )
 
Weighted average shares outstanding:
Basic and diluted   4,260,041     541,424     4,260,041     354,703  
 
SG BLOCKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 

For the Six

 

For the Six

Months

Months

Ended

Ended

June 30,

June 30,

 

2018

   

2017

 
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (1,987,005 ) $ (2,396,002 )
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation expense 1,879 1,379
Amortization of discount on convertible debentures - 330,388
Amortization of intangible assets 294,632 293,191
Interest income on short-term investment (4 ) (8 )
Loss on conversion of convertible debentures - 1,018,475
Change in fair value of financial instruments - (96,327 )
Stock-based compensation 165,314 209,383
Changes in operating assets and liabilities:
Accounts receivable 778,191 137,077
Costs and estimated earnings in excess of billings on uncompleted
contracts
(70,217 ) (224,800 )
Prepaid expenses and other current assets (52,436 ) (192,624 )
Inventory - 9,445
Intangible assets - (28,820 )
Accounts payable and accrued expenses (159,237 ) 378,123
Billings in excess of costs and estimated earnings on uncompleted
contracts
(847,580 ) 390,713
Deferred revenue   -     (72,788 )
Net cash used in operating activities   (1,876,463 )   (243,195 )
 
Cash flows from investing activities:
Purchase of equipment (3,784 ) -
Proceeds from short-term investment   30,037     -  
Net cash provided by investing activities   26,253     -  
 
Cash flows from financing activities:
Proceeds from public stock offering, net of offering costs - 6,826,558
Payments on convertible debentures   -     (1,500,000 )
Net cash provided by financing activities   -     5,326,558  
 
Net increase (decrease) in cash and cash equivalents (1,850,210 ) 5,083,363
 
Cash and cash equivalents - beginning of period   4,870,824     549,100  
 
Cash and cash equivalents - end of period $ 3,020,614   $ 5,632,463  
 
Supplemental disclosure of non-cash financing activities:
Conversion of convertible debentures to common stock $ - $ 2,583,334
Conversion of preferred stock to common stock $ - $ 1,801,670
Offering costs not paid and included in accounts payable and accrued
expenses
$ -   $ 715,173  

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