UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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| |
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For the quarterly period ended September 30, 2013
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OR
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o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ________________ to ________________
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Commission file number: 000-22563
SG BLOCKS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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95-4463937
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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3 Columbus Circle, 16th Floor New York, NY
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10019
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(Address of principal executive offices)
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(Zip Code)
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(646) 747-2423
(Registrant’s telephone number, including area code)
400 Madison Avenue, Suite 16C New York, NY
(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 x 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 x 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.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o (Do not check if a smaller reporting company)
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Smaller reporting company x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of November 10, 2013, there were 42,198,093 shares of the registrant’s common stock, $0.01 par value, outstanding.
SG BLOCKS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013
TABLE OF CONTENTS
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Page
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3
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3
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3
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4
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5
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6
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7
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24
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32
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32
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34
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34
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34
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35
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36
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36
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36
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37
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38
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CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30, 2013
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December 31,
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(Unaudited)
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2012
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Assets
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Current assets:
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Cash and cash equivalents
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$ |
524,580 |
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$ |
868,067 |
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Short-term investment
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39,364 |
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39,249 |
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Accounts receivable, net
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674,694 |
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284,395 |
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Costs and estimated earnings in excess of billings on uncompleted contracts
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324,370 |
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36,476 |
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Inventory
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212,925 |
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48,011 |
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Prepaid expenses and other current assets
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9,493 |
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1,405 |
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Total current assets
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1,785,426 |
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1,277,603 |
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Equipment, net
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12,718
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6,064
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| Security deposit |
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12,000 |
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- |
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Debt issuance costs, net
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|
67,245 |
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103,632 |
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Totals
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$ |
1,877,389 |
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$ |
1,387,299 |
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Liabilities and Stockholders’ Deficiency
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Current liabilities:
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Accounts payable and accrued expenses
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$ |
945,403 |
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$ |
343,080 |
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Accrued interest, related party
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26,570 |
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20,439 |
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Accrued interest
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51,530 |
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- |
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Related party accounts payable and accrued expenses
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208,370 |
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102,856 |
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Related party notes payable
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73,500 |
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73,500 |
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Convertible debentures, net
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1,455,804 |
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- |
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Billings in excess of costs and estimated earnings on uncompleted contracts
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26,999 |
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69,789 |
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Deferred revenue
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438,859 |
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201,117 |
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Conversion option liabilities
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14,152 |
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69,502 |
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Warrant liabilities
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271,459 |
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337,055 |
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Total current liabilities
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3,512,646
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1,217,338 |
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Convertible debentures, net
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229,086 |
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685,692 |
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Total liabilities
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3,741,732
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1,903,030 |
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Commitments
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Stockholders’ deficiency:
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Preferred stock, $0.01 par value, 5,000,000 shares authorized; 0 issued and outstanding at September 30, 2013 and December 31, 2012
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- |
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- |
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Common stock, $0.01 par value, 100,000,000 shares authorized; 42,198,093 issued and outstanding at September 30, 2013 and December 31, 2012
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421,981 |
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421,981 |
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Additional paid-in capital
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6,408,010
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6,099,635 |
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Accumulated deficiency
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(8,689,394 |
) |
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(7,036,776 |
) |
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Accumulated other comprehensive loss
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(4,940 |
) |
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(571 |
) |
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Total stockholders’ deficiency
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(1,864,343
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) |
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(515,731 |
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Totals
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$ |
1,877,389
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$ |
1,387,299 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
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For the Three Months Ended
September 30,
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For the Nine Months Ended
September 30,
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2013
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2012
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2013
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2012
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(Unaudited)
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(Unaudited)
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(Unaudited)
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(Unaudited)
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Revenue:
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SG Block sales
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$
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911,760
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$
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314,185
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$
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1,867,584
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$
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1,219,028
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Engineering services
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-
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23,965
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20,095
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618,719
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Project management
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820,441
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35,100
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2,422,310
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142,573
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1,732,201
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373,250
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4,309,989
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1,980,320
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Cost of revenue:
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SG Block sales
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788,628
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236,483
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1,534,496
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923,252
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Engineering services
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-
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|
37,659
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15,275
|
|
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|
541,309
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Project management
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|
726,533
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|
31,527
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2,533,672
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128,986
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| |
|
|
1,515,161
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|
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|
305,669
|
|
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|
4,083,443
|
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1,593,547
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Gross profit
|
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|
217,040
|
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|
67,581
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|
226,546
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386,773
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Operating expenses:
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Payroll and related expenses
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|
332,878
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|
358,918
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|
1,009,971
|
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|
1,073,808
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General and administrative expenses
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|
151,460
|
|
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|
211,580
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|
528,721
|
|
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|
731,689
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Marketing and business development expense
|
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|
33,982
|
|
|
|
12,443
|
|
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|
89,412
|
|
|
|
65,502
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Pre-project expenses
|
|
|
2,476
|
|
|
|
9,627
|
|
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|
36,770
|
|
|
|
32,020
|
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|
Total
|
|
|
520,796
|
|
|
|
592,568
|
|
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|
1,664,874
|
|
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|
1,903,019
|
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| |
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
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Operating loss
|
|
|
(303,756
|
)
|
|
|
(524,987
|
)
|
|
|
(1,438,328
|
)
|
|
|
(1,516,246
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(184,277
|
)
|
|
|
(2,067
|
)
|
|
|
(505,378
|
)
|
|
|
(6,154
|
)
|
|
Interest income
|
|
|
35
|
|
|
|
37
|
|
|
|
115
|
|
|
|
105
|
|
|
Change in fair value of financial instruments
|
|
|
22,616
|
|
|
|
1,160
|
|
|
|
290,973
|
|
|
|
34,224
|
|
|
Cancellation of trade liabilities and unpaid interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,447
|
|
|
Total
|
|
|
(161,626
|
)
|
|
|
(870
|
)
|
|
|
(214,290
|
)
|
|
|
59,622
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(465,382
|
)
|
|
$
|
(525,857
|
)
|
|
$
|
(1,652,618
|
)
|
|
$
|
(1,456,624
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(639
|
)
|
|
|
-
|
|
|
|
(4,369
|
)
|
|
|
(634
|
)
|
|
Total comprehensive loss
|
|
$
|
(466,021
|
)
|
|
$
|
(525,857
|
)
|
|
$
|
(1,656,987
|
)
|
|
$
|
(1,457,258
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
42,198,093
|
|
|
|
41,985,950
|
|
|
|
42,198,093
|
|
|
|
41,137,769
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' DEFICIENCY
For the Nine Months Ended September 30, 2013 (Unaudited)
| |
|
$0.01 Par Value
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Accumulated
Other
Comprehensive
|
|
|
|
|
| |
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficiency
|
|
|
Loss
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2012
|
|
|
42,198,093 |
|
|
$ |
421,981 |
|
|
$ |
6,099,635 |
|
|
$ |
(7,036,776 |
) |
|
$ |
(571 |
) |
|
$ |
(515,731 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
- |
|
|
|
- |
|
|
|
305,517 |
|
|
|
- |
|
|
|
- |
|
|
|
305,517 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrants issued
|
|
|
- |
|
|
|
- |
|
|
|
2,858 |
|
|
|
- |
|
|
|
- |
|
|
|
2,858 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,369 |
) |
|
|
(4,369 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,652,618 |
) |
|
|
- |
|
|
|
(1,652,618 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance – September 30, 2013
|
|
|
42,198,093 |
|
|
$ |
421,981 |
|
|
$ |
6,408,010
|
|
|
$ |
(8,689,394 |
) |
|
$ |
(4,940 |
) |
|
$ |
(1,864,343 |
) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
For the Nine Months Ended September 30,
|
|
2013
|
|
|
2012
|
|
| |
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Cash flows from operating expenses:
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(1,652,618 |
) |
|
$ |
(1,456,624 |
) |
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
2,131 |
|
|
|
1,927 |
|
|
Amortization of debt issuance costs
|
|
|
67,245 |
|
|
|
- |
|
|
Amortization of discount on convertible debentures
|
|
|
319,225 |
|
|
|
- |
|
|
Interest income on short-term investment
|
|
|
(115 |
) |
|
|
(105 |
) |
|
Change in fair value of financial instruments
|
|
|
(290,973 |
) |
|
|
(34,224 |
) |
|
Stock-based compensation
|
|
|
305,517
|
|
|
|
416,219 |
|
|
Bad debts expense
|
|
|
- |
|
|
|
53,111 |
|
|
Cancellation of trade liabilities and unpaid interest
|
|
|
- |
|
|
|
(31,447 |
) |
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(390,299 |
) |
|
|
(244,908 |
) |
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
|
(287,894 |
) |
|
|
58,347 |
|
|
Inventory
|
|
|
(164,914 |
) |
|
|
(9,820 |
) |
|
Prepaid expenses and other current assets
|
|
|
(8,088 |
) |
|
|
(1,405 |
) |
| Security deposit |
|
|
(12,000 |
) |
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
602,323
|
|
|
|
55,561 |
|
|
Accrued interest, related party
|
|
|
6,131 |
|
|
|
6,154 |
|
|
Accrued interest
|
|
|
51,530 |
|
|
|
- |
|
|
Related party accounts payable and accrued expenses
|
|
|
105,514 |
|
|
|
50,731 |
|
Billings in excess of costs and estimated earningson uncompleted contracts
|
|
|
(42,790 |
) |
|
|
81,117 |
|
|
Deferred revenue
|
|
|
237,742 |
|
|
|
120,900 |
|
|
Net cash used in operating activities
|
|
|
(1,152,333 |
) |
|
|
(934,466 |
) |
| |
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities
|
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(8,785 |
) |
|
|
(549 |
) |
|
Net cash used in investing activities
|
|
|
(8,785 |
) |
|
|
(549 |
) |
| |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Expenditures on debt issuance costs
|
|
|
(28,000 |
) |
|
|
- |
|
|
Proceeds from common stock to be issued
|
|
|
- |
|
|
|
14,000 |
|
|
Proceeds from issuance of common stock and warrants in private offering
|
|
|
- |
|
|
|
642,183 |
|
|
Proceeds from issuance of convertible debentures and warrants
|
|
|
850,000 |
|
|
|
- |
|
|
Net cash provided by financing activities
|
|
|
822,000 |
|
|
|
656,183 |
|
| |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(4,369 |
) |
|
|
(634 |
) |
| |
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(343,487 |
) |
|
|
(279,466 |
) |
| |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - beginning of period
|
|
|
868,067 |
|
|
|
561,759 |
|
| |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - end of period
|
|
$ |
524,580 |
|
|
$ |
282,293 |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
- |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
In connection with the 2012 private offering, $80,000 was paid for a prior liability which was included in accounts payable and accrued expenses.
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Issuance of common stock for settlement of debt
|
|
$ |
- |
|
|
$ |
67,782 |
|
| |
|
|
|
|
|
|
|
|
|
Forgiveness of related party accrued compensation
|
|
$ |
- |
|
|
$ |
73,888 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2013 and 2012 (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 merger that was accounted for as a recapitalization of SG Building as SG Building was 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. As of September 30, 2013, SG Brazil is inactive.
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
Through September 30, 2013, the Company has incurred an accumulated deficiency since inception of $8,689,394. At September 30, 2013, the Company had a cash balance of $524,580. At November 13, 2013, the Company had a cash balance of approximately $441,000.
Since the Company’s inception, it has generated revenues from SG Block sales, engineering services, and project management.
The Company expects that through the next 10 to 16 months, the capital requirements to fund the Company’s growth will consume all of the cash flows that it expects to generate from its operations, as well as from the proceeds of intended issuances of debt and equity securities. The Company further believes that during this period, while the Company is focusing on the growth and expansion of its business, the gross profit that it expects to generate from operations will not generate sufficient funds to cover anticipated operating costs. Accordingly, the Company requires external funding to sustain operations and to follow through on the execution of its business plan. However, there can be no assurance that the Company’s plans will materialize and/or that the Company will be successful in funding estimated cash shortfalls through additional debt or equity capital and through the cash generated by the Company’s operations. Given these conditions, the Company’s ability to continue as a going concern is contingent upon it being able to secure an adequate amount of debt or equity capital to enable it to meet its cash requirements. In addition, the Company’s ability to continue as a going concern must be considered in light of the problems, expenses and complications frequently encountered by entrants into established markets, the competitive environment in which the Company operates and the current capital raising environment.
Since inception, the Company’s operations have primarily been funded through proceeds from equity and debt financings and sales activity. Although management believes that the Company has access to capital resources, there are currently no commitments in place for new financing at this time, and there is no assurance that the Company will be able to obtain funds on commercially acceptable terms, if at all.
During the nine months ended September 30, 2013, the Company raised $850,000 in net new funds through the issuance of convertible debentures (See Note 7). The proceeds from these issuances were used to fund the Company’s operations and working capital needs.
The Company intends to raise additional funds in 2014 through a private placement of its common stock as well as additional issuances of convertible debentures. The additional capital would be used to fund the Company’s operations, including the costs that it expects to incur as a public company. The current level of cash and operating margins is not enough to cover the existing fixed and variable obligations of the Company, so increased revenue performance and the addition of capital through issuances of securities are critical to the Company’s success. Should the Company not be able to raise additional capital through a private placement or some other financing source, the Company would take one or more of the following actions to conserve cash: reduction in employee headcount, reduction in base salaries to senior executives and employees, and other cost reduction measures. Assuming that the Company is successful in its growth plans and development efforts, the Company believes that it will be able to raise additional funds through sales of its stock. There is no guarantee that the Company will be able to raise such additional funds on acceptable terms, if at all.
These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern.
The Company’s financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should it be unable to continue as a going concern.
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2013 and 2012 (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. In the opinion of management, all adjustments, consisting of normal accruals, considered necessary for a fair presentation of the interim financial statements have been included. Results for the nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013
The condensed consolidated financial statements and notes should be read in conjunction with the financial statements and notes for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2013.
Reclassification – Certain prior period amounts have been reclassified to conform to the current period presentation.
Basis of consolidation – The condensed 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 condensed 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, warrant liabilities and allowance for doubtful accounts. Actual results could differ from those estimates.
Operating cycle – The length of the Company’s contracts varies, but is typically between six to twelve months. 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.
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2013 and 2012 (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 claim obligations to date and does not anticipate that any claims are likely to occur 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.
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2013 and 2012 (Unaudited)
3. Summary of Significant Accounting Policies (continued)
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.
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 which provides for the Company to receive an advance of 75% of any accounts receivable that it factors. On August 13, 2012, the factoring agreement was increased for up to $1,000,000 for credit worthy retail clients. 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 which the customer is insolvent. The agreement originally expired January 2013 and was automatically extended for a one year period. The agreement will continue to automatically extend for successive periods of one year unless either party formally cancels. For the nine months ended September 30, 2013 and 2012, there has been no activity with regard to this agreement. Under the convertible debentures agreement as described in Note 7, the Company is precluded from any borrowing under this factoring agreement.
Inventory – Raw construction materials (primarily shipping containers) are valued at the lower of costs (first-in, first-out method) or market. Finished goods and work-in-process inventories are valued at the lower of costs or market, using the specific identification method. As of September 30, 2013 and December 31, 2012, work-in-process inventory amounted to $212,925 and $48,011, respectively.
Debt issuance costs – All debt issuances are stated at cost, net of amortization. Amortization is computed over the estimated useful life of the related assets on a straight-line method. As of September 30, 2013, all debt issuance costs are amortized over 18 months.
Convertible instruments – The Company 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 (a) 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, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
The Company has determined that the embedded conversion options should be bifurcated from their host instruments and a portion of the proceeds received upon the issuance of the hybrid contract have been allocated to the fair value of the derivative. The derivative is subsequently marked to market at each reporting date based on current fair value, with the changes in fair value reported in results of operations.
Common stock purchase warrants and other derivative financial instruments – The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provides a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company’s own stock. The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if any event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement of settlement shares (physical settlement or net-cash settlement). The Company assesses classification of common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities or equity is required.
The Company’s free standing derivatives consist of warrants to purchase common stock that were issued to a placement agent involved with the private offering memorandum as well as issuances of convertible debentures as described in Note 9 . The Company evaluated the common stock purchase warrants to assess their proper classification in the consolidated balance sheet and determined that the common stock purchase warrants feature a characteristic permitting cash settlement at the option of the holder. Accordingly, these instruments have been classified as warrant liabilities in the accompanying condensed consolidated balance sheets as of September 30, 2013 and December 31, 2012.
Fair value measurements – Financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are carried at cost, which the Company believes approximates fair value due to the short-term nature of these instruments.
The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximized the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2013 and 2012 (Unaudited)
3. Summary of Significant Accounting Policies (continued)
The Company uses three levels of inputs that may be used to measure fair value:
|
Level 1
|
Quoted prices in active markets for identical assets or liabilities
|
|
Level 2
|
Quoted prices for similar assets and liabilities in active markets or inputs that are observable.
|
|
Level 3
|
Inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).
|
Financial liabilities measured at fair value on a recurring basis are summarized below:
| |
|
September 30,
2013
|
|
|
Quoted
prices in
active market
for identical
assets
(Level l)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
|
Warrant Liabilities
|
|
$ |
271,459 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
271,459 |
|
|
Conversion Option Liabilities
|
|
$ |
14,152 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
14,152 |
|
| |
|
December 31,
2012
|
|
|
Quoted
prices in
active market
for identical
assets
(Level l)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
|
Warrant Liabilities
|
|
$ |
337,055 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
337,055 |
|
|
Conversion Option Liabilities
|
|
$ |
69,502 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
69,502 |
|
Warrant and conversion option liabilities are measured at fair value using the lattice pricing model and are classified within Level 3 of the valuation hierarchy. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s Chief Financial Officer, who reports to the Chief Executive Officer, determines its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s Chief Financial Officer and are approved by the Chief Executive Officer.
The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis:
| |
|
For the nine
months ended
September 30,
2013
|
|
|
For the nine
months ended
September 30,
2012
|
|
|
Beginning balance
|
|
$ |
406,557 |
|
|
$ |
198,471 |
|
|
Aggregate fair value of conversion option liabilities and warrants issued
|
|
|
170,027 |
|
|
|
19,130 |
|
|
Change in fair value of conversion option liabilities and warrants
|
|
|
(290,973 |
) |
|
|
(34,224 |
) |
|
Ending balance
|
|
$ |
285,611 |
|
|
$ |
183,377 |
|
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2013 and 2012 (Unaudited)
3. Summary of Significant Accounting Policies (continued)
The significant assumptions and valuation methods that the Company used to determine fair value and the change in fair value of the Company’s derivative financial instruments are discussed in Notes 7 and 9.
The Company presented warrant and conversion option liabilities at fair value on its condensed consolidated balance sheets, with the corresponding changes in fair value recorded in the Company’s condensed consolidated statements of operations for the applicable reporting periods. As disclosed in Notes 7 and 9, the Company computed the fair value of the warrant and conversion option liability at the date of issuance and the reporting dates of September 30, 2013 and December 31, 2012 using the lattice pricing method.
The calculation of the lattice pricing model involves the use of the fair value of the Company’s common stock, estimated term, volatility, risk-free interest rates, the size of the time step and dividend yield (if applicable). The Company developed the assumptions that were used as follows: The fair value of the Company’s common stock was obtained from publically quoted prices as well as valuation models developed by the Company. The results of the valuation were assessed for reasonableness by comparing such amount to sales of other equity and equity linked securities to unrelated parties for cash and intervening events affected in the price of the Company’s stock. The term represents the remaining contractual term of the derivative; the volatility rate was developed based on analysis of the Company’s historical stock price volatility and the historical volatility rates of several other similarly situated companies (using a number of observations that was at least equal to or exceeded the number of observations in the life of the derivative financial instrument at issue); the risk free interest rates were obtained from publicly available US Treasury yield curve rates; the dividend yield is zero because the Company has not paid dividends and does not expect to pay dividends in the foreseeable future. The size of the time step is used to determine the up ratio and down ratio probabilities applied in the lattice model and are proportional to the remaining term of the derivative instrument.
Share-based payments – The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and 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. The Company recognizes stock-based compensation expense on a graded-vesting basis over the requisite service period for each separately vesting tranche of each award. Stock-based compensation expense is reflected within operating expenses in the condensed consolidated statements of operations.
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2013 and 2012 (Unaudited)
3. Summary of Significant Accounting Policies (continued)
Foreign currency translation – The Company’s international subsidiary considers its local currency to be its functional currency. Assets and liabilities of the Company’s subsidiary operating in a foreign country are translated into U.S. dollars using both the exchange rate in effect at the balance sheet date or historical date, as applicable. Results of operations are translated using the average exchange rates prevailing throughout the period. The effects of exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are included in stockholders’ deficiency as a component of accumulated other comprehensive loss, while gains and losses resulting from foreign currency translations are included in operations.
Income taxes – The Company accounts for income taxes utilizing the asset and liability approach. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes generally represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from the differences between the financial and tax bases of the Company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted.
The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for anticipated tax audit issues based on the Company’s estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when the liabilities are no longer determined to be necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined to be more likely than not that the benefit of such deferred tax asset will not be realized in future periods. If it becomes more likely than not that a tax asset will be used, the related valuation allowance on such assets would be reduced.
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2013 and 2012 (Unaudited)
3. Summary of Significant Accounting Policies (continued)
Concentrations of credit risk – Financial instruments that potentially subject the Company to concentration of credit risk, consist principally of cash and cash equivalents. The Company places its cash with high credit quality institutions. At times, such amounts may be in excess of the FDIC insurance limits. The Company has not experienced any losses in such account and believes that it is not exposed to any significant credit risk on the account.
With respect to receivables, concentrations of credit risk are limited to a few customers in the construction industry. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers other than normal lien rights. At September 30, 2013 and December 31, 2012, 79% and 59%, respectively, of the Company’s accounts receivable were due from four and three customers, respectively.
Revenue relating to three and one customers, respectively, represented approximately 92% and 86% of the Company’s total revenue for the three months ended September 30, 2013 and 2012, respectively. Revenue relating to three and two customers, respectively, represented approximately 77% and 76% of the Company’s total revenue for the nine months ended September 30, 2013 and 2012, respectively. During the nine months ended September 30, 2012 24% of the Company’s total revenue was recognized by SG Brazil.
Costs of revenue relating to one vendor, who is a related party and disclosed in Note 12, represented approximately 22% and 76% of the Company’s total cost of revenue for the three months ended September 30, 2013 and 2012. Cost of revenue relating to two unrelated vendor represented approximately 56% of the Company’s total cost of revenue for the three months ended September 30, 2013. Costs of revenue relating to one vendor, who is a related party and disclosed in Note 12, represented approximately 30% and 50% of the Company’s total cost of revenue for the nine months ended September 30, 2013 and 2012. Cost of revenue relating to one unrelated vendor represented approximately 34% of the Company’s total cost of revenue for the nine months ended September 30, 2013. The Company believes it would be able to use other vendors at reasonable comparable terms if needed.
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2013 and 2012 (Unaudited)
4. Accounts Receivable
At September 30, 2013 and December 31, 2012, the Company’s accounts receivable consisted of the following:
| |
|
2013
|
|
|
2012
|
|
|
Billed:
|
|
|
|
|
|
|
|
SG Block sales
|
|
$
|
472,728
|
|
|
$
|
207,390
|
|
|
Engineering services
|
|
|
147,764
|
|
|
|
216,535
|
|
|
Project management
|
|
|
228,632
|
|
|
|
34,900
|
|
|
Total gross receivables
|
|
|
849,124
|
|
|
|
458,825
|
|
|
Less: allowance for doubtful accounts
|
|
|
(174,430
|
) |
|
|
(174,430
|
) |
|
Total net receivables
|
|
$
|
674,694
|
|
|
$
|
284,395
|
|
5. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts consist of the following at September 30, 2013 and December 31, 2012:
| |
|
2013
|
|
|
2012
|
|
|
Costs incurred on uncompleted contracts
|
|
$
|
735,025
|
|
|
$
|
177,529
|
|
|
Provision for loss on uncompleted contracts
|
|
|
10,177
|
|
|
|
6,680
|
|
|
|
|
|
(25,249
|
)
|
|
|
6,156
|
|
| |
|
|
719,953
|
|
|
|
190,365
|
|
|
Less: billings to date
|
|
|
(422,582
|
)
|
|
|
(223,678
|
)
|
| |
|
|
|
|
|
|
|
|
| |
|
$
|
297,371
|
|
|
$
|
(33,313
|
)
|
The above amounts are included in the accompanying condensed consolidated balance sheets under the following captions at September 30, 2013 and December 31, 2012.
| |
|
2013
|
|
|
2012
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
|
|
|
$
|
36,476
|
|
|
Billings in excess of cost and estimated earnings on uncompleted contracts
|
|
|
(26,999
|
) |
|
|
(69,789
|
) |
| |
|
$
|
|
|
|
$
|
(33,313
|
) |
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2013 and 2012 (Unaudited)
5. Costs and Estimated Earnings on Uncompleted Contracts (continued)
Although management believes it has established adequate procedures for estimating costs to complete on open contracts, it is at least reasonably possible that additional significant costs could occur on contracts prior to completion. The Company periodically evaluates and revises its estimates and makes adjustments when they are considered necessary.
As of September 30, 2013 and December 31, 2012, the Company has accrued anticipated losses on uncompleted contracts in the amount of $10,177 and $6,680, respectively. This amount is included in cost of revenue on the accompanying condensed consolidated statements of operations and comprehensive loss and is included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheets.
6. Debt Issuance Costs
Debt issuance costs consisted of the following at September 30, 2013 and December 31, 2012:
| |
|
2013
|
|
|
2012
|
|
|
Financial advisor fee
|
|
$
|
108,000
|
|
|
$
|
80,000
|
|
|
Legal fees
|
|
|
15,466
|
|
|
|
15,466
|
|
|
Fair value of warrants issued (as disclosed in Note 10 )
|
|
|
11,024
|
|
|
|
8,166
|
|
| |
|
|
134,490
|
|
|
|
103,632
|
|
|
Less: accumulated amortization
|
|
|
67,245
|
|
|
|
-
|
|
| |
|
$
|
67,245
|
|
|
$
|
103,632
|
|
Amortization expense of debt issuance costs for the three months and nine months ended September 30, 2013 amounted to $22,415 and $67,245, respectively, and is included in interest expense on the accompanying condensed consolidated statements of operations.
7. Convertible Debentures
On December 27, 2012, the Company entered a Securities Purchase Agreement (“Securities Purchase Agreement”) with Hillair Capital Investments L.P. (“Hillair), whereby the Company issued and sold to Hillair: (i) $1,120,000 in 8% Original Discount Senior Secured Convertible Debentures due July 1, 2014, for $1,000,000 (“Debenture”), and (ii) a Common Stock purchase warrant to purchase up to 2,604,651 shares of the Company’s Common Stock with a fair value of $199,806 at issuance, which has been recorded as a discount to the debenture. (As disclosed in Note 9) The Company recorded a discount of $120,000, which will be amortized over the term of the debenture, using the effective interest method. At any time after December 28, 2012, until the Debenture is no longer outstanding, the Debenture shall be convertible, in whole or in part, into shares of Common Stock at the option of Hillair, subject to certain conversion limitations set forth in the Debenture. The initial conversion price for the Debenture is $0.43 per share, subject to adjustments upon certain events, as set forth in the Debenture. The Company shall pay interest on the aggregate unconverted and then outstanding principal amount of the Debenture at 8% per annum, payable quarterly on January 1, April 1, July 1 and October 1, beginning on July 1, 2013. Interest is payable in cash or at the Company’s option in shares of Common Stock, provided certain conditions are met, based on a share value equal to the lesser of (a) $0.43 per share, subject to adjustments upon certain events, and (b) 90% of the average of the volume weighted average price for 20 consecutive trading days prior to the applicable interest payment date, provided that the price shall be equal to at least a $0.01 discount to the volume weighted average price for the trading day that is immediately prior to the applicable interest payment date. Merriman Capital, Inc. (“Merriman”) acted as financial advisor to the Company in connection with the transaction and received a fee consisting of $80,000 and warrants to purchase up to 104,186 shares of the Company’s Common Stock. (As disclosed in Note 9) In connection with the issuance of the Debenture, the Company also paid Hillair $45,000 for due diligence which has been recorded as a discount to the debenture, and will be amortized over the term of the debenture, using the effective interest method. In addition, the Company incurred $15,466 in legal fees which are included in debt issuance costs in the accompanying condensed consolidated balance sheet at September 30, 2013 and December 31, 2012.
On January 8, 2013 and January 9, 2013, the Company issued and sold to Next View Capital LP (“Next View”) and another investor (“Another Investor”) an aggregate of (i) $392,000 in 8% Original Discount Senior Secured Convertible Debentures due July 1, 2014, for $350,000 (“January 2013 Debentures”), and (ii) Common Stock purchase warrants to purchase up to 911,628 shares of the Company’s Common Stock with a fair value of $69,933 at issuance, which has been recorded as a discount to the January 2013 Debentures. (As disclosed in Note 9). The Company recorded a discount of $42,000, which will be amortized over the term of the debenture, using the effective interest method. Except for the date of issuance, these debentures and warrants have the same terms and conditions as the debenture and warrant issued to Hillair as described above. Merriman acted as financial advisor to the Company in connection with this transaction and received a fee consisting of $28,000 and warrants to purchase up to 36,466 shares of the Company’s Common Stock. (As disclosed in Note 9)
On each of April 1, 2014 and July 1, 2014, the Company is obligated to redeem a total amount equal to $756,000 in connection with the Hillair, Next View and Another Investor debentures. In lieu of a cash redemption and subject to the Company meeting certain equity conditions described in the Debenture, the Company may elect to pay the Periodic Redemption Amount in shares based on a conversion price equal to the lesser of (a) $0.43 per share, subject to adjustments upon certain events, and (b) 90% of the average of the volume weighted average price for the 20 consecutive trading days prior to the applicable redemption date, provided that the conversion price shall be equal to at least a $0.01 discount to the volume weighted average price for the 20 consecutive days that is immediately prior to the applicable redemption date.
In April 2013, the Company issued and sold to Frank Casano (“Casano”) and Scott Masterson (“Masterson”) an aggregate of (i) $560,000 in 8% Original Discount Senior Secured Convertible Debentures due October 15, 2014, for $500,000 (“April 2013 Debentures”), and (ii) Common Stock purchase warrants to purchase up to 1,302,326 shares of the Company’s Common Stock with a fair value of $60,801 at issuance, which has been recorded as a discount to the April 2013 Debentures. (As disclosed in Note 9).The Company recorded a discount of $60,000, which will be amortized over the term of the debenture, using the effective interest method. Except for the date of issuance, these debentures and warrants have the same terms and conditions as the debenture and warrant issued to Hillair as described above.
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2013 and 2012 (Unaudited)
7. Convertible Debentures (continued)
On each of July 15, 2014 and October 15, 2014, the Company is obligated to redeem a total amount equal to $280,000 in connection with the Casano and Masterson debentures. In lieu of a cash redemption and subject to the Company meeting certain equity conditions described in the Debenture, the Company may elect to pay the Periodic Redemption Amount in shares based on a conversion price equal to the lesser of (a) $0.43 per share, subject to adjustments upon certain events, and (b) 90% of the average of the volume weighted average price for the 20 consecutive trading days prior to the applicable redemption date, provided that the conversion price shall be equal to at least a $0.01 discount to the volume weighted average price for the 20 consecutive days that is immediately prior to the applicable redemption date.
A summary of the Company’s convertible debentures as of September 30, 2013 is as follows:
|
Hillair Debentures, net of $217,154 discount
|
|
$
|
902,847
|
|
|
January 2013 Debentures, net of $68,128 discount
|
|
|
323,872
|
|
|
April 2013 Debentures, net of $101,829 discount
|
|
|
458,171
|
|
| |
|
|
|
|
|
Total debt
|
|
|
1,684,890
|
|
| |
|
|
|
|
|
Less current portion
|
|
|
1,455,804
|
|
| |
|
|
|
|
|
Long-term debt
|
|
$
|
229,086
|
|
For the three months and nine months ended September 30, 2013, interest expense on the convertible debentures amounted to $42,073 and $112,777, respectively, and is included on the accompanying condensed consolidated statements of operations. For the three months and nine months ended September 30, 2013, total amortization relating to the discount amounted to $117,723 and $319,225, respectively, and is included in interest expense on the accompanying condensed consolidated statements of operations.
The Company bifurcated the conversion option from its debt host. The fair value of the conversion option liabilities were determined to be $108,795 at the date of issuance, utilizing the lattice method. Consequently, the Company recorded a discount of $108,795 on the debentures, which will be amortized over the term of the debenture, using the effective interest method. The fair value of the conversion option liabilities as of September 30, 2013 was $14,152. The significant assumptions which the Company used to measure the fair value at the date of issuance and September 30, 2013 of the conversion option liability are as follows:
| |
|
Date of
Issuance
|
|
|
September 30,
2013
|
|
|
Stock price
|
|
$ |
0.24-0.30 |
|
|
$ |
0.23 |
|
|
Term
|
|
1.25 to 1.5 years
|
|
|
0.5 to 1.04 years
|
|
|
Volatility
|
|
|
50 |
% |
|
|
50 |
% |
|
Risk-free interest rate
|
|
|
0.14-0.21 |
% |
|
|
0.10 |
% |
|
Exercise price
|
|
$ |
0.43 |
|
|
$ |
0.43 |
|
|
Delta
|
|
|
0.02-0.03 |
|
|
|
0.01-0.02 |
|
|
Up Ratio
|
|
|
1.072-1.079 |
|
|
|
1.046-1.066 |
|
|
Down Ratio
|
|
|
0.921-0.928 |
|
|
|
0.934-0.954 |
|
|
Up transition probability
|
|
|
0.500 |
|
|
|
0.500 |
|
In connection with the Securities Purchase Agreement, the Company is required to maintain compliance with a variety of contractual provisions which include certain affirmative and negative covenants. The requirements principally consist of a requirement to maintain timely filings with the SEC, reserve sufficient authorized shares to issue upon the exercise of the underlying conversion option, and permit the note holders to participate in future financing transactions. The Company is also restricted, among other things, from incurring new indebtedness, permitting additional liens, making material changes to its charter documents, repay or repurchase more than a de minims number of shares of its common stock or common stock equivalents, repay or repurchase any indebtedness, pay cash dividends, enter into transactions with affiliates or use the proceeds of the convertible notes to provide funding to its Brazilian subsidiary. The underlying securities purchase and debenture agreements also provide for the Company to pay liquidated damages in the event of its failure to (i) deliver shares upon the conversion of the notes, in which case the liquidated damages would amount to a cash payment of $10 per trading day (increasing to $15 per trading day on the fifth trading day) for each $1,000 of principal amount being converted until such certificates are delivered (ii) maintain timely required filings with the SEC, in which case the liquidated damages would amount to a cash payment of two percent (2.0%) of the aggregate subscription amount of such purchasers securities on the day of the failure to maintain timely filings with the SEC and on every thirtieth (30th) day thereafter until the required documents are filed with the SEC or is no longer required for the purchaser to transfer the underlying shares pursuant to Rule 144 and (iii) to compensate the Holder for a Buy-in of securities previously sold by the Holder, as defined in the agreements, on a failure to timely deliver certificates upon conversion by the Holder. If the holder is subject to a Buy-in, then Company shall (A) pay in cash to the Holder (in addition to any other remedies available to or elected by the Holder) the amount, if any, by which (x) the Holder’s total purchase price (including any brokerage commissions) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that the Holder was entitled to receive from the conversion at issue multiplied by (2) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions) and (B) at the option of the Holder, either reissue (if surrendered) this Debenture in a principal amount equal to the principal amount of the attempted conversion (in which case such conversion shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements.
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2013 and 2012 (Unaudited)
8. Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of the common shares issuable upon the exercise of stock options and warrants. Potentially dilutive common shares are excluded from the calculation if their effect is antidilutive. At September 30, 2013, there were options and warrants to purchase 10,320,001 and 6,119,864 shares of common stock, respectively, outstanding which could potentially dilute future net income (loss) per share. At September 30, 2013 the Company also had outstanding convertible debt which is initially convertible into 4,818,605 shares of Common Stock, which could potentially increase under certain circumstances related to the market price of the Company’s Common Stock at the time of conversion. At September 30, 2012, there were options and warrants to purchase 9,287,501 and 1,160,607 shares of common stock, respectively, outstanding which could potentially dilute future net income (loss) per share.
Basic and diluted net loss per share was calculated as follows:
| |
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
| |
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
Net loss
|
|
$ |
(465,382 |
) |
|
$ |
(525,857 |
) |
|
$ |
(1,652,618 |
) |
|
$ |
(1,456,624 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
42,198,093 |
|
|
|
41,985,950 |
|
|
|
42,198,093 |
|
|
|
41,137,769 |
|
|
Dilutive effect of stock options and warrants
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Weighted average shares outstanding - diluted
|
|
|
42,198,093 |
|
|
|
41,985,950 |
|
|
|
42,198,093 |
|
|
|
41,137,769 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.03 |
) |
9. Warrants
In conjunction with a private placement in October 2010 (the “2010 Private Placement”), the Company issued warrants to Ladenburg, the placement agent for the 2010 Private Placement. The warrants entitle Ladenburg to purchase up to a total of 1,044,584 shares of common stock for $0.25 per share. The warrants expire October 28, 2015. The warrants are exercisable, at the option of the holder, at any time prior to their expiration. The fair value of warrants issued to placement agents was calculated utilizing the lattice method. The warrants issued to Ladenburg contain provisions that make them redeemable for cash by the holder of the warrant under certain circumstances that are not within the control of the Company. Accordingly, the fair market value of the warrants as of the date of issuance has been classified as liabilities. The fair value of the 2010 Private Placement warrants as of September 30, 2013 was $54,728.
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2013 and 2012 (Unaudited)
9. Warrants (continued)
In conjunction with a private placement in 2012 (the “2012 Private Placement”), the Company issued warrants to Ladenburg in March 2012. The warrants entitle Ladenburg to purchase up to a total of 86,323 shares of common stock for $0.35 per share and expire March 27, 2017. The Company also issued warrants to Ladenburg in May 2012 in connection with the additional 702,872 shares of common stock issued in the 2012 Private Placement. These warrants entitle Ladenburg to purchase 29,700 shares of common stock at $0.35 per share and expire May 22, 2017. The warrants are exercisable, at the option of the holder, at any time prior to their expiration. The fair value of warrants issued to placement agents was calculated utilizing the lattice method. The warrants issued to Ladenburg contain provisions that make them redeemable for cash by the holder of the warrant under certain circumstances that are not within the control of the Company. Accordingly, the fair market value of the warrants as of the date of issuance has been classified as liabilities. The fair value of the 2012 Private Placement warrants as of September 30, 2013 was $5,275.
As part of the issuance of convertible debentures to Hillair as disclosed in Note 7, the Company issued warrants to Hillair. The warrants entitle Hillair to purchase up to 2,604,651 shares of Common Stock for $0.4488 per share, subject to adjustments upon certain events. The warrants may be exercised at any time on or after June 27, 2013 and expire on June 27, 2018. The fair value of warrants issued to Hillair was calculated utilizing the lattice method. The warrants issued to Hillair contain provisions that make them redeemable for cash by the holder of the warrant under certain circumstances that are not within the control of the Company. Accordingly, the fair market value of the warrants as of the date of issuance has been classified as liabilities and has been included as a debt discount of the convertible debentures described in Note 7. The fair value of the Hillair warrants as of September 30, 2013 was $112,730.
In connection, with the issuance of convertible debentures to Hillair, the Company issued warrants to Merriman. The warrants entitle Merriman to purchase up to 52,093 shares of Common Stock for $0.4488 per share and 52,093 shares of Common Stock at $0.43 per share. The fair market value of the warrants as of the date of issuance has been classified as equity and is recorded in deferred loan costs on the accompanying consolidated balance sheets. The fair value of the Merriman warrants as of the date of issuance was $8,166.
As part of the issuance of convertible debentures to Next View and Another Investor as disclosed in Note 7, the Company issued warrants to Next View and Another Investor. The warrants entitle Next View and Another Investor to purchase up to 651,163 and 260,465, respectively, shares of Common Stock for $0.4488 per share, subject to adjustments upon certain events. The warrants issued to Next View and Another Investor contain substantially all of the same terms as the warrants issued to Hillair. The fair market value of the warrants as of the date of issuance has been classified as liabilities and has been included as a debt discount of the convertible debentures described in Note 7. The fair value of the Next View and Another Investor warrants as of September 30, 2013 was $39,455.
In connection, with the issuance of convertible debentures to Next View and Another Investor, the Company issued warrants to Merriman. The warrants entitle Merriman to purchase up to 18,233 shares of Common Stock for $0.4488 per share and 18,233 shares of Common Stock at $0.43 per share. The fair market value of the warrants as of the date of issuance has been classified as equity and is recorded in deferred loan costs on the accompanying consolidated balance sheets. The fair value of the Merriman warrants as of the date of issuance was $2,858.
As part of the issuance of convertible debentures to Casano and Masterson as disclosed in Note 7, the Company issued warrants to Casano and Masteson. The warrants entitle Casano and Masterson to purchase up to 1,041,861 and 260,465, respectively, shares of Common Stock for $0.4488 per share, subject to adjustments upon certain events. The warrants issued to Casano and Masterson contain substantially all of the same terms as the warrants issued to Hillair. The fair market value of the warrants as of the date of issuance has been classified as liabilities and has been included as a debt discount of the convertible debentures described in Note 7. The fair value of the Next View and Another Investor warrants as of September 30, 2013 was $59,271.
The change in fair value of the warrants of $10,069 and $1,160 is included in the accompanying condensed consolidated statements of operations for the three months ended September 30, 2013 and 2012, respectively. The change in fair value of the warrants of $196,330 and $34,224 is included in the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2013 and 2012, respectively.
The significant assumptions which the Company used to measure the fair value of warrants at September 30, 2013 and December 31, 2012 is as follows:
| |
|
2013
|
|
|
2012
|
|
|
Stock price
|
|
$ |
0.23 |
|
|
$ |
0.35 |
|
|
Term
|
|
2.33 - 5 Years
|
|
|
2.84 -5 Years
|
|
|
Volatility
|
|
|
50 |
% |
|
|
50 |
% |
|
Risk-free interest rate
|
|
|
0.33-1.39 |
% |
|
|
0.36 – 0.72 |
% |
|
Exercise prices
|
|
$ |
0.25-0.4488 |
|
|
$ |
0.25-0.4488 |
|
|
Dividend yield
|
|
|
0.00 |
% |
|
|
0.00 |
% |
|
Delta
|
|
|
0.03 - 0.08 |
|
|
|
0.08 |
|
|
Up ratio
|
|
|
1.093 - 1.145 |
|
|
|
1.144 |
|
|
Down ratio
|
|
|
0.858 - 0.907 |
|
|
|
0.857 |
|
|
Up transition probability
|
|
|
0.500 |
|
|
|
0.500 |
|
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2013 and 2012 (Unaudited)
10. Stock Options and Grants
2011 Plan – On July 27, 2011, in connection with the Merger, the Company obtained the written consent of holders of a majority of its outstanding common stock approving the 2011 Incentive Stock Plan (the “2011 Plan”). The 2011 Plan covers up to 8,000,000 shares of common stock, and all officers, directors, employees, consultants and advisors are eligible to be granted awards under the 2011 Plan. An incentive stock option may be granted under the 2011 Plan only to a person who, at the time of the grant, is an employee of the Company or its subsidiaries. The 2011 Plan expires on July 26, 2021, and is administered by the Company’s board of directors. As of September 30, 2013, there were 3,928 shares of common stock available for issuance under the 2011 Plan.
During 2012, the Company’s board of directors approved the issuance of up to an additional 2,000,000 shares of the Company’s common stock in the form of restricted stock or options. These options generally have the same terms and conditions as those provided under the 2011 Plan, however, the authorization of these options is not subject to shareholder approval. The issuance of these options will be approved by the Company’s board of directors on a case-by-case basis. As of September 30, 2013, there were 76,071 shares of common stock available for issuance under this approval.
A summary of stock option activity as of September 30, 2013 and changes during the nine months then ended are presented below:
| |
|
Shares
|
|
|
Weighted Average Fair Value Per Share
|
|
|
Weighted Average Exercise Price Per Share
|
|
|
Weighted Average Remaining Terms (in years)
|
|
|
Aggregate Intrinsic Value
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding – December 31, 2012
|
|
|
9,317,501 |
|
|
$ |
0.11 |
|
|
$ |
0.36 |
|
|
9.03 |
|
|
539,650 |
|
|
Granted
|
|
|
602,500
|
|
|
|
0.09
|
|
|
|
0.40
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
Cancelled
|
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- |
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- |
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- |
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Outstanding – September 30, 2013
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9,920,001
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|
$ |
0.11 |
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|
$ |
0.36 |
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8.35
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$ |
162,925 |
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| |
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Exercisable – December 31, 2012
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|
|
4,973,333 |
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|
$ |
0.11 |
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|
$ |
0.30 |
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|
|
8.97 |
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|
$ |
359,600 |
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Exercisable – September 30, 2013
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|
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6,467,500
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|
$ |
0.11 |
|
|
$ |
0.36 |
|
|
|
8.32
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|
|
$ |
107,683 |
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For the three months and nine months ended September 30, 2013, the Company recognized stock-based compensation expense of $96,209 and $305,517, respectively, which is included in payroll and related expenses in the accompanying condensed consolidated statements of operations.
As of September 30, 2013, there was $134,020 of total unrecognized compensation costs related to non-vested stock options, which will be expensed over a weighted average period of 0.41 years. The intrinsic value is calculated as the difference between the fair value as of the balance sheet date and the exercise price of each of the outstanding stock options. The fair value at September 30, 2013 and December 31, 2012 was $0.23 and $0.30 per share, respectively, as determined by using a weighted value between the income approach method and the weighted average bulletin board price.
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2013 and 2012 (Unaudited)
10. Stock Options and Grants (continued)
During 2011, the Company executed a two year consulting agreement with a consultant, to act as a Senior Advisor of the Company. In consideration for the services to be performed under the agreement, the Company shall on the last business day of each month during the term, grant the consultant an option to purchase 10,000 shares of the Company’s Common Stock with an exercise price equal to fair market value. One-third of the options vest upon the grant date, the second third vests on the first anniversary date of the grant date, and the remaining third vests on the second anniversary of the grant date. During the nine months ending September 30, 2013, the consultant was granted options to purchase 90,000 shares of the Company’s Common Stock with exercise prices ranging from $0.16 to $0.32 per share. These options were not granted under the 2011 Plan. The fair value of these options upon issuance amounted to $13,828.
On March 14, 2013, under the 2011 Plan, three employees and directors of the Company were granted options to purchase 150,000 shares of the Company’s Common Stock with an exercise price of $0.43 per share. One-third of the options vest upon the grant date, the second third vests on the first anniversary date of the grant date, and the remaining third vests on the second anniversary of the grant date. The fair value of these options upon issuance amounted to $11,310.
On March 14, 2013, seven employees and directors of the Company were granted options to purchase 362,500 shares of the Company’s Common Stock with an exercise price of $0.43 per share. These options were granted separate and apart from the 2011 Plan and were not granted from the shares available under the Company’s 2011 Plan. One-third of the options vest upon the grant date, the second third vests on the first anniversary date of the grant date, and the remaining third vests on the second anniversary of the grant date. The fair value of these options upon issuance amounted to $27,333.
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2013 and 2012 (Unaudited)
10. Stock Options and Grants (continued)
The fair value of the stock-based option awards granted during the nine months ended September 30, 2013 were estimated at the date of grant using the Black-Scholes option valuation model with the following assumptions:
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Stock price
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$
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0.23-0.24
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Expected dividend yield
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0.00
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%
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Expected stock volatility
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50
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%
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Risk-free interest rate
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0.88-2.78
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%
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Expected life
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5.5 - 10 years
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Because the Company does not have significant historical data on employee exercise behavior, the Company uses the “Simplified Method” to calculate the expected life of the stock-based option awards. The simplified method is calculated by averaging the vesting period and contractual term of the options.
11. Commitments
Operating lease – The Company leases office space in New York City to conduct its business. The Company’s previous lease began in October 2011 and was terminated as of September 30, 2013. $24,742 and 83,334 shares of the company’s common stock will be issued to the former lessor in lieu of the balance due of $49,742 as of September 30, 2013. Non-contingent rent increases were being amortized over the life of the lease on a straight line basis. As of September 30, 2013 the reversal of the accrued rent increases resulted in a decrease of rent expense. The Company’s current lease began on October 1, 2013 and expires December 31, 2014. The rental expense charged to operations for the three months ended September 30, 2013 and 2012 amounted to $3,898 (net of $23,773 in reversal of accrued rent upon termination of lease) and $28,217, respectively. The rental expense charged to operations for the nine months ended September 30, 2013 and 2012 amounted to $57,672 and $84,651, respectively. Future minimum rental payments on this lease are as follows for the year ending December 31,:
12. Related Party Transactions
ConGlobal Industries, Inc. is a minority stockholder of the Company and provides containers and labor on domestic projects. The Company recognized Cost of Goods Sold of $338,656 and $238,578, for services ConGlobal Industries, Inc. rendered during the three months ended September 30, 2013 and 2012, respectively. The Company recognized Cost of Goods Sold of $1,215,710 and $803,149, for services ConGlobal Industries, Inc. rendered during the nine months ended September 30, 2013 and 2012, respectively As of September 30, 2013 and December 31, 2012, $161,592 and $62,844, respectively, of such expenses are included in related party accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.
SG BLOCKS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months Ended September 30, 2013 and 2012 (Unaudited)
12. Related Party Transactions (continued)
The Lawrence Group is a minority stockholder of the Company and is a building design, development and project delivery firm. The Company recognized Cost of Goods Sold of $52,966 for services The Lawrence Group rendered during the nine months ended September 30, 2013. As of September 30, 2013 and December 31, 2012, $27,629 and $37,233, respectively, of expenses were included in related party accounts payable and accrued expenses in the accompanying condensed consolidated balance sheet.
The Company has accrued certain reimbursable expenses of owners of the Company. Such expenses amounted to $19,149 and $2,779 for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, and are included in related party accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets as of September 30, 2013 and December 31, 2012.
13. Cancellation of Trade Liabilities and Unpaid Interest
For the three months and nine months ended September 30, 2013 and 2012, the Company recognized debt forgiveness income of $0, $0, $0, and $31,447 respectively, as shown on the accompanying statements of operations, which represents forgiveness of trade accounts payable resulting from settlement agreements with vendors.
14. Subsequent Events
On October 1, 2013, the Company entered into a one year consulting agreement pursuant to which, in exchange for certain services, the consultant will receive up to 1,000,000 shares of the Company’s common stock in addition to cash payments. In November 2013, the Company’s board of directors approved the issuance of 1,000,000 shares of the Company’s common stock to the consultant, of which 500,000 shares will be held in escrow. If neither party has terminated the consulting agreement during the first six month period after the execution of the agreement, the escrowed shares will be released to the consultant. The consultant will also be paid a monthly fee of $7,000 beginning on October 1, 2013 through January 2014. Beginning February 2014 and May 2014, the monthly fee will increase to $10,000 and $12,500, respectively, for the duration of the agreement.
During November 2013, the Company’s board of directors approved the 2013 Stock Plan. The 2013 Stock Plan covers up to 2,000,000 shares of common stock, and all officers, directors, employees, consultants and advisors are eligible to be granted awards under the 2013 Stock Plan. The 2013 Stock Plan is administered by the Company’s board of directors.
During November 2013, two consultants of the Company were each granted options to purchase 200,000 shares of the Company’s Common Stock with an exercise price of $0.43 per share. These options were granted separate and apart from the 2011 Plan and were not granted from the shares available under the Company’s 2011 Plan. These options were granted under the 2013 Stock Plan. One-third of the options vest upon the grant date, the second third vests on August 12, 2014, and the remaining third vests on August 12, 2015.
During November 2013, the Company’s board of directors also approved a grant of 25,000 shares of the Company’s common stock to a consultant in exchange for marketing services.