PINX:SGBX SG Blocks Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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f10q0312_sgblocks.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2012
 
OR
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________ to ________________

Commission file number:  000-22563

SG BLOCKS, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
95-4463937
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
400 Madison Avenue, Suite 16C New York, NY
 
10017
(Address of principal executive offices)
 
(Zip Code)

(646) 747-2423
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer  o
   
Non-accelerated filer  o  (Do not check if a smaller reporting company)
Smaller reporting company  ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No  ý
 
As of May 11, 2012, there were 41,283,078 shares of the registrant’s common stock, $0.01 par value, outstanding.
 
 
 

 
 
SG BLOCKS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012
 
TABLE OF CONTENTS
 
  Page 
   
PART I. FINANCIAL INFORMATION  1
   
Item 1.  Financial Statements  1
   
Condensed Consolidated Balance Sheets March 31, 2012 (Unaudited) and December 31, 2011  1
   
Condensed Consolidated Statements of Operations and Comprehensive Loss Three Months Ended March 31, 2012 and 2011 (Unaudited)  2
   
Condensed Consolidated Statements of Changes in Stockholders' Deficiency Three Months Ended March 31, 2012 (Unaudited)   3
   
Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2012 and 2011 (Unaudited)  4
   
Notes to Condensed Consolidated Financial Statements  5
   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations   19
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk  26
   
Item 4. Controls and Procedures   26
   
PART II. OTHER INFORMATION   28
   
Item 1. Legal Proceedings   28
   
Item 1A. Risk Factors   28
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   40
   
Item 3. Defaults Upon Senior Securities   41
   
Item 4. Mine Safety Disclosures   41
   
Item 5. Other Information   41
   
Item 6. Exhibits   42
   
SIGNATURE   43
 
 
 

 
 
PART I. FINANCIAL INFORMATION
 
Item 1.  Financial Statements
 
SG BLOCKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
March 31,
2012
   
December 31,
2011
 
   
(Unaudited)
       
Assets
           
             
Current assets:
           
Cash and cash equivalents
  $ 456,125     $ 561,759  
Short-term investment
    39,137       39,110  
Accounts receivable, net
    306,509       143,320  
Costs and estimated earnings in excess of billings on uncompleted contracts
    70,396       66,454  
Inventory
    53,230       -  
Prepaid expenses and other current assets
    1,405       -  
Total current assets
    926,802       810,643  
                 
Equipment, net
    7,427       8,058  
                 
Totals
  $ 934,229     $ 818,701  
                 
Liabilities and Stockholders’ Deficiency
               
                 
Current liabilities:
               
Accounts payable and accrued expenses
  $ 512,096     $ 558,277  
Accrued compensation and related costs
    73,888       73,888  
Accrued interest, related party
    14,263       12,219  
Related party accounts payable and accrued expenses
    96,185       86,885  
Related party notes payable
    73,500       73,500  
Billings in excess of costs and estimated earnings on uncompleted contracts
    4,275       -  
Deferred revenue
    49,261       -  
Warrant liabilities
    202,700       198,471  
Total current liabilities
    1,026,168       1,003,240  
                 
Commitments
               
                 
Stockholders’ deficiency:
               
Preferred stock, $0.01 par value, 5,000,000 shares authorized; 0 issued and outstanding at March 31, 2012 and December 31, 2011
    -       -  
Common stock, $0.01 par value, 100,000,000 shares authorized; 41,243,078 issued and outstanding at March 31, 2012, 39,779,506 issued and outstanding at December 31, 2011
    412,431       397,795  
Additional paid-in capital
    5,229,977       4,688,417  
Accumulated deficiency
    (5,734,320 )     (5,270,751 )
Accumulated other comprehensive loss
    (27 )     -  
Total stockholders’ deficiency
    (91,939 )     (184,539 )
                 
Totals
  $ 934,229     $ 818,701  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
1

 
 
SG BLOCKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
 
For the Three Months Ended March 31,
 
2012
   
2011
 
   
(Unaudited)
   
(Unaudited)
 
Revenue:
           
SG Block sales
  $ 421,950     $ 1,818,125  
Engineering services
    70,795       4,190  
Project management
    31,270       -  
      524,015       1,822,315  
                 
Cost of revenue:
               
SG Block sales
    336,795       1,675,725  
Engineering services
    73,128       713  
Project management
    19,983       -  
      429,906       1,676,438  
                 
Gross profit
    94,109       145,877  
                 
Operating expenses:
               
Payroll and related expenses
    327,473       244,794  
General and administrative expenses
    256,866       85,264  
Marketing and business development expense
    19,959       63,798  
Pre-project expenses
    9,962       18,123  
Total
    614,260       411,979  
                 
Operating loss
    (520,151 )     (266,102 )
                 
Other income (expense):
               
Interest expense
    (2,044 )     (1,017 )
Interest income
    27       -  
Change in fair value of warrant liabilities
    10,446       -  
Cancellation of trade liabilities and unpaid interest
    23,153       17,498  
Other income
    25,000       -  
Total
    56,582       16,481  
                 
Net loss
  $ (463,569 )   $ (249,621 )
                 
Comprehensive loss
               
Foreign currency translation adjustment
    (27 )     -  
Total comprehensive loss
  $ (463,596 )   $ (249,621 )
                 
Net loss per share - basic and diluted:
               
Basic and diluted
  $ (0.01 )   $ (0.01 )
                 
Weighted average shares outstanding:
               
Basic and diluted
    39,843,839       31,764,777  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
2

 
 
SG BLOCKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' DEFICIENCY
 
For the Three Months Ended March 31, 2012 (Unaudited)
                   
   
$0.01 Par Value Common Stock
   
Additional
Paid-in
Capital
   
Accumulated
Deficiency
   
Accumulated Other
Comprehensive Loss
   
Total
 
   
Shares
   
Amount
 
Balance - December 31, 2011
    39,779,506     $ 397,795     $ 4,688,417     $ (5,270,751 )   $ -     $ (184,539 )
                                                 
Stock issued in private offering, net of warrant liabilities in the amount of $14,675, and closing costs in the amount of $28,642
    1,463,572       14,636       454,297       -       -       468,933  
                                                 
Stock-based compensation
    -       -       87,263       -       -       87,263  
                                                 
Foreign currency translation adjustment
    -       -       -       -       (27 )     (27 )
                                                 
Net loss
    -       -       -       (463,569 )     -       (463,569 )
                                                 
Balance - March 31, 2012
    41,243,078     $ 412,431     $ 5,229,977     $ (5,734,320 )   $ (27 )   $ (91,939 )
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
3

 

SG BLOCKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Three Months Ended March 31,
 
2012
   
2011
 
   
(Unaudited)
   
(Unaudited)
 
Cash flows from operating expenses:
           
Net loss
  $ (463,569 )   $ (249,621 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation expense
    631       499  
Interest income on short-term investment
    (27 )     -  
Change in fair value of warrant liabilities
    (10,446 )     -  
Stock-based compensation
    87,263       -  
Cancellation of trade liabilities and unpaid interest
    (23,153 )     (17,498 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (163,189 )     (318,082 )
Costs and estimated earnings in excess of billings
               
on uncompleted contracts
    (3,942 )     -  
Inventory
    (53,230 )     279,945  
Prepaid expenses and other current assets
    (1,405 )     3,333  
Accounts payable and accrued expenses
    26,972       122,919  
Accrued compensation and related costs
    -       (66,068 )
Accrued interest, related party
    2,044       -  
Accrued interest
    -       1,017  
Related party accounts payable and accrued expenses
    9,300       8,326  
Billings in excess of costs and estimated earnings
               
on uncompleted contracts
    4,275       (1,800 )
Deferred revenue
    49,261       194,218  
Net cash used in operating activities
    (539,215 )     (42,812 )
                 
Cash flows used in investing activities
               
Purchase of equipment
    -       (2,911 )
Net cash used in investing activities
    -       (2,911 )
                 
Cash flows from financing activities:
               
Proceeds from issuances of common stock
    -       1,000,000  
Proceeds from issuance of common stock and warrants in private offering
    433,608       -  
Net cash provided by financing activities
    433,608       1,000,000  
                 
Effect of exchange rate changes on cash
    (27 )        
                 
Net increase (decrease) in cash
    (105,634 )     954,277  
                 
Cash and cash equivalents - beginning of period
    561,759       1,038,661  
                 
Cash and cash equivalents - end of period
  $ 456,125     $ 1,992,938  
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ -     $ -  
Supplemental disclosure of non-cash financing activities:
     In connection with the private offering, $50,000 was paid for a prior liability
     which was included in accounts payable and accrued expenses.
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
4

 

SG BLOCKS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2012 and 2011 (Unaudited)


1.           Description of Business
 
SG Blocks, Inc. (the “Company”) was previously known as CDSI Holdings, Inc. (a Delaware corporation incorporated on December 29, 1993).  On November 4, 2011, the Company’s wholly-owned subsidiary was merged with and into SG Building Blocks, Inc. (“SG Building”, formerly SG Blocks Inc.) (the “Merger”), with SG Building surviving the Merger and becoming a wholly-owned subsidiary of the Company. The Merger was a reverse merge that was accounted for as a recapitalization of SG Building as SG Building is the accounting acquirer. Accordingly, the historical financial statements presented are the financial statements of SG Building.
 
During 2012, the Company formed SG Blocks Sistema De Constucao Brasileiro LTDA. (“SG Brazil”), a wholly owned subsidiary of the Company. The Company formed SG Brazil in order to actively explore opportunities in Brazil.
 
The Company is a provider of code engineered cargo shipping containers modified for use in “green” construction. The Company also provides engineering and project management services related to the use of modified containers in construction.
 
2.           Liquidity and Financial Condition
 
Since inception, the Company has generated losses from operations and the Company anticipates it will continue to generate losses from operations for the foreseeable future. As of March 31, 2012, the Company’s stockholders’ deficiency was approximately $92,000. Net cash used in operating activities was $539,215 for the three months ended March 31, 2012. Operations since inception have been funded with the proceeds from equity and debt financings and sales activity. As of March 31, 2012, the Company had cash and cash equivalents of $456,125.  As of May 8, 2012, the Company had cash and cash equivalents of approximately $356,000 and cash of $220,000 held in the Company’s private placement escrow account.  
 
The Company has incurred additional losses subsequent to the date of this report. It is anticipated that existing capital resources will enable the Company to continue operations through at least May 31, 2013.  However, the Company will require additional capital in order to execute the long term aspects of the Company’s business plan. If the Company is unable to raise additional capital or encounters unforeseen circumstances that place constraints on its capital recourses, the Company will be required to take various measures to conserve liquidity, which could include, but not necessarily be limited to, curtailing its business development activities or suspending the pursuit of its business plan.
 
The Company has identified cost reduction measures which when implemented would result in a reduction in employee headcount, reduction in base salaries to senior executives and employees, and other cost savings measures.  These actions are expected to result in annual cost savings which should start to be realized in the third quarter of 2012.   Additionally, subsequent to March 31, 2012, $73,888 of accrued compensation and related costs were forgiven by two employees of the Company.
 
5

 
 
SG BLOCKS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2012 and 2011 (Unaudited)

 
3.           Summary of Significant Accounting Policies
 
Interim financial information – The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles  (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements.  Results for the three month ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
 
The condensed consolidated financial statements and notes should be read in conjunction with the financial statements and notes for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2012.
 
Reclassification – Certain prior year amounts have been reclassified to conform to the current period presentation.
 
Basis of consolidation – The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, SG Building and SG Brazil. All intercompany balances and transactions have been eliminated.
 
Accounting estimates – The preparation of consolidated financial statements in conformity with generally accepted accounting principles 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 which 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 one to two years. Assets and liabilities relating to long-term contracts are included in current assets and current liabilities in the accompanying balance sheets as they will be liquidated in the normal course of contract completion, which at times could exceed one year.
 
Revenue recognition – The Company accounts for its long-term contracts associated with the design, engineering, manufacture and project management of building projects and related services, using the percentage-of-completion accounting method. Under this method, revenue is recognized based on the extent of progress towards completion of the long-term contract. The Company uses the cost to cost basis because management considers it to be the best available measure of progress on these contracts.
 
 
6

 

SG BLOCKS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2012 and 2011 (Unaudited)

 
3.           Summary of Significant Accounting Policies (continued)
 
Contract costs include all direct material and labor costs and those indirect costs related to contract performance. General and administrative costs, marketing and business development expenses and pre-project expenses are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. An amount equal to contract costs attributable to claims is included in revenue when realization is probable and the amount can be reliably estimated.
 
The asset, “Costs and estimated earnings in excess of billing on uncompleted contracts,” represents revenue recognized in excess of amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represents billing in excess of revenue recognized.
 
The Company offers a one-year warranty on completed contracts.  The Company has not incurred any material losses for warranties to date and nor does it anticipate incurring any material losses for warranties that are currently outstanding.  Accordingly, no warranty reserve is considered necessary for any of the periods presented.
 
The Company also supplies repurposed containers to its customers. In these cases, the Company serves as a supplier to its customers for standard and made to order products that it sells at fixed prices.  Revenue from these contracts is generally recognized when the products have been delivered to the customer, accepted by the customer and collection is reasonably assured.  Revenue is recognized upon completion of the following: an order for product is received from a customer; written approval for the payment schedule is received from the customer and the corresponding required deposit or payments are received; a common carrier signs documentation accepting responsibility for the unit as agent for the customer; and the unit is delivered to the customer’s shipping point.
 
Amounts billed to customers in a sales transaction for shipping and handling are classified as revenue.  Products sold are generally paid for based on schedules provided for in each individual customer contract including upfront deposits and progress payments as products are being manufactured.
 
Funds received in advance of meeting the criteria for revenue recognition are deferred and are recorded as revenue when they are earned.
 
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.
 
 
7

 
 
SG BLOCKS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2012 and 2011 (Unaudited)

 
3.           Summary of Significant Accounting Policies (continued)
 
Accounts receivable – 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.  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.
 
The Company has a factoring agreement in place as of March 31, 2012 and December 31, 2011. The agreement provides for the Company to receive an advance of 75% of any accounts receivable that it factors. The factoring agreement also provides for discount fees ranging from 2.5% to 7.5% of the face value of any accounts receivable factored. The factoring agreement is with recourse except in an instance where the customer is insolvent. The agreement expires January 2013, and will be automatically extended for successive periods of one year unless either party formally cancels. For the three months ended March 31, 2012 and 2011 there has been no activity with regard to this agreement.
 
Inventory – Raw construction materials (primarily shipping containers) are valued at th

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