Item 1.01.
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Entry into a Material Definitive Agreement.
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On
October 3, 2019, SG Blocks, Inc. (the “Company”) entered into an Exclusive License Agreement (the
“License Agreement”) with CPF MF 2019-1 LLC (the “Licensee”), pursuant to
which the Company granted the Licensee an exclusive license (the “License”) solely within the
United States and its legal territories to the Company’s technology, intellectual property, any improvements thereto,
and any related permits, in order to develop and commercialize 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. The License Agreement has an initial term of five (5) years and will automatically renew for subsequent five (5)
year periods. The License Agreement provides for customary terminating provisions, including the right by the Company
to terminate if the Licensee fails to make minimum royalty payments (as described below).
In
consideration for the License, during the initial term, the Licensee agreed to pay the Company a royalty of (x) five
percent (5%) on the first $20,000,000 of gross revenues derived from the Licensee’s commercialization of the License
(net of customary discounts, sales taxes, delivery charges, and amounts for returns) (the
“Gross Revenues”), (y) four and one-half percent (4.5%) on the next $30,000,000 of Gross Revenues,
and (z) five percent (5%) on all Gross Revenues thereafter (collectively, the “Royalty”), subject
to the following minimum royalty payments determined on a cumulative basis during the initial term: $500,000 in year 1,
$750,000 in year 2, $1,500,000 in year 3, $2,000,000 in year 4, and $2,500,000 in year 5. If the License Agreement is
extended beyond the initial term, then the parties will negotiate in good faith the royalty rate and the minimum royalty
payments for the renewal term(s). In addition, to the extent the Licensee sublicenses any aspect of the License to a
sublicensee, the Licensee will pay to the Company fifty percent (50%) of all payments received by the Licensee from such
sublicensee. The Company may also provide the Licensee with professional services with respect to the License, and the
Licensee will reimburse the Company for employees’ time, materials, and expenses incurred in providing such
professional services. The Licensee also separately agreed to reimburse the Company for any third-party expenses incurred by
the Company in developing the Company’s remaining and future residential projects.
The
License Agreement provides for customary indemnification obligations between the parties and further provides that the Licensee
will indemnify the Company for any claims arising out of the commercialization of the License by the Licensee or any of its subsidiaries,
contractors, or sublicensees. In addition, the License Agreement provides that the Company will provide the Licensee with cost
estimates for the fabrication and manufacturing of residential projects in the Company’s existing pipeline as of the date
of the License Agreement, and if such projects cannot be reasonably constructed and installed at or below such estimates, then
the Licensee may withhold payment of any royalty due to the Company under the License Agreement on a dollar-for-dollar basis to
offset the costs above the originally estimated amounts.
The
Company previously disclosed, under the section heading “Prospectus Supplement Summary - Recent Developments” in
its Prospectus Supplement filed on July 31, 2019 pursuant to Rule 424(b)(5) under the Securities Act of 1933, its membership
interest in CPF GP 2019-1 LLC (“CPF GP”), which is the managing member of the Licensee, which in
turn owns the land on, and intends to develop the 302-unit multifamily project in, Sullivan County, New York, known as the
“Monticello Project.” Under the License Agreement, the Company agreed to withdraw as a member of CPF GP. As
a result, the Company’s membership interest in CPF GP was forfeited and the Company no longer has any obligation to
contribute $1,300,000 of cash to CPF GP. In addition, as a result of the License
Agreement, the Licensee (rather than the Company) will supply products for the construction of the Monticello Project.
As a result of the transactions under the License Agreement, the Company anticipates that
its construction backlog will be reduced, perhaps materially. The Company intends to update its construction backlog in its
Quarterly Report on Form 10-Q for the three months ended September 30, 2019.
A
copy of the License Agreement is filed as Exhibit 10.1 hereto and is incorporated herein by reference.
On
October 3, 2019, the Company entered into a Loan Agreement and Promissory Note (the “Loan Agreement”)
with CPF GP, pursuant to which the Company agreed to loan CPF GP a principal amount of $750,000 at an annual interest rate of
five percent (5%), with a maturity date of July 31, 2023. Under the Loan Agreement, the Company will advance to CPF GP the first
installment of the principal amount, equal to $500,000, no later than October 15, 2019 and will advance to CPF GP
the second installment of the principal amount, equal to $250,000, no later than February 28, 2020. As security for this loan,
the Company will receive a security interest in all of CPF GP’s membership interests in the Licensee. The Company is considering its options in funding the first principal installment under the Loan Agreement, including but
not limited to raising equity capital or assigning its rights and obligations under the Loan Agreement to another party. If
the Company fails to fund either principal installment, such failure will constitute a default under the Loan Agreement and
a cross default under the License Agreement.
A
copy of the Loan Agreement is filed as Exhibit 10.2 hereto and is incorporated herein by reference.