UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The purpose of management’s discussion and analysis (“MD&A”) is to increase the understanding of the reasons for material changes in our financial condition since the most recent fiscal year-end and results of operations during the current fiscal period as compared to the corresponding period of the preceding fiscal year.  The MD&A should be read in conjunction with the condensed consolidated financial statements and accompanying notes and our 2009 Annual Report on Form 10-K.

Business Environment and Results of Operations

SSGI, Inc. (the “Company”, “we”) was incorporated under the laws of the State of Florida as Phage Therapeutics International, Inc. on December 26, 1996. In February 2008, through a share exchange, the company acquired Surge Solutions Group, Inc.. As a consequence of the latter exchange, which qualified as a reverse merger, we became the accounting acquirer and the reporting entity prospectively.

On July 7, 2009, we filed a Form S-1 with the Securities and Exchange Commission to register a portion of our common stock and to become a fully reporting Company in accordance with the Securities and Exchange Act of 1934. On December 9, 2009, the Company’s registration statement was declared effective.

We specialize in petroleum contracting and general construction in Florida which includes insurance restoration andincluding new commercial construction.  We perform under cost-plus-fee contracts, fixed-price contracts, and fixed-price contracts modified by incentive and penalty provisions.  The lengthlengths of our contracts typically range from three months or less to one year.

We are a multi disciplined solutions company specializing in threetwo specific markets of general construction including; insurance restoration,including petroleum contracting and commercial construction.

Revenue

Gross Profit (Loss)

For the threesix months ended March 31,June 30, 2010, we had a gross loss as a percentage of contract revenues of 26%11.67% or $0.19$0.43 million on revenues of $.74$3.66 million as compared to a $.14$.16 million gross profit on sales of $1.67$2.70 million for the same period in 2008.2009.  Our gross loss decreased to a negative $0.19increased $0.59 million from a gross profit of $0.14$0.16 million for the threesix months end March 31,June 30, 2010 and 2009, respectively.  Our cost of revenues earned decreasedincreased approximately 39%61.6% from $1.53$2.53 million for the threesix months ended March 31,June 30, 2009 to $0.93$4.09 million for the threesix months ended March 31,June 30, 2010.  This decrease was due primarily to the our inability to fund cash needed to commence construction on new contracts.contracts as well as the unfavorable pricing model required to obtain contracted work.

General and Administrative

General and administrative expenses remained constant at $0.43increased from $0.94 million to $1.52 million for boththe periods ended March 31,June 30, 2009 and 2010, and 2009, respectively.  Although payrollPayroll and related costs decreased 42%increased 73% from $0.19$0.47 million for the threesix months ended March 31,June 30, 2009 to $0.11$0.81 million for the threesix months ended March 31,June 30, 2010, professional fees increased 104%163% from $0.05$0.11 to $0.11$0.30 million for the same periods. The decreaseincrease in payroll and related costs was due primarily to the lackacquisition of construction activity between the periods.B&M Construction Co., Inc., and combination of two operating companies.  The increase in professional fees was due mainly to our litigation costs incurred in collecting several delinquent contracts, and legal fees associated with regulatory filings. Marketingfilings and advertising costs decreased 82% from $0.045 to $0.008 million for the three months ended March 31, 2009 and 2010, respectively. This decrease was due primarily to our transition from retail oriented contracts, which need advertising and marketing, to bid oriented petroleum contracts which do not require costs associated with advertising and marketing.acquisition expenses.  Insurance costs increased 34%28.8% from 2009 to 2010 for firstsecond quarter of each period. This increase was due primarily to the Company purchasing its own insurance coverage on rental equipment that was previously purchased each time the weequipment was rented equipment through the equipment rental companies. Due to rising costs of employee health insurance, our insurance expense was also affected adversely between the periods.

Other Income and Expenses

Total interest expense increased from $0.03 milliondecreased minimally for the threesix months ended March 31,June 30, 2009 to $0.06 million for the three months ended March 31, 2010, or 100%.  The increase is due to $0.02 million in interest paid or accrued on loans of $1.23 million made to us by Ryan Seddon, our former Chairman of the Board, Chief Executive Officer and President, and Ricardo Sabha, a former officer and director and current employee as of the three months ended March 31,June 30, 2010. We paid $0.01 million in interest same individuals during the three months ended March 31, 2009.  We paid interest to a financial institution on its promissory note during the threesix months ended March 31,June 30, 2010 and 2009 of approximately $0.006$0.018 million and $0.009$0.012 million, respectively.

Interest expenses associated with amortizing loans for the purchase of vehicles decreased approximately 34%50% between the two years due to reduction in the principal.

Net Loss

We incurred net losses of $0.66$1.01 million and $0.32$1.03 million for the yearsperiods ended March 31,June 30, 2010 and 2009, respectively. Our net losses increaseddecreased approximately 107%2.0% or $0.34$0.02 million between the two years.

During the threesix months ended March 31,June 30, 2010, we experienced a gross loss from our construction business. We were unable to commence or complete construction on some of our contracts. Of the net loss incurred, approximately 29% or $0.19 million is associated with this gross loss. We also experienced a 100% increase in interest expense from $0.028 million for the three months ended March 31, 2009 to $0.056 million for the three months ended March 31, 2010.  Of the interest expense for the three months ended March 31, 2010, $0.019 million was allocated directly to cost of revenues earned and included in the gross loss as reported in the Company’s statement of operations at March 31, 2010.contracts, pre-acquisition. Also contributing to the net loss was the 104%163% increase in professional fees between the two periods.  These professional fees were incurred as a result of our litigation on delinquent accounts, and fees incurred for its regulatory filings.filings and acquisition related costs

We experienced losses on several of our contracts. Approximately $0.05 million of costs of revenues earned were incurred on contracts that were completed in previous periods.  Our policy is to allocate overhead associated with our program managers, a portion of our senior management and warehouse salaries as well as indirect vehicle costs to contracts in progress.  For the threesix months ended March 31,June 30, 2010, we allocated indirect overhead of approximately $0.09$0.084 million directly to cost of revenues earned.

Liquidity and Capital Resources

As of March 31,June 30, 2010, we had total current assets of approximately $0.79$2.81 million, comprised of cash, contracts receivable, prepaid expenses and costs and estimated earnings in excess of billings on uncompleted contracts.  This compares with current assets in the same categories of approximately $1.87 million at December 31, 2009.  Contracts receivable decreased 68%increased 58% from $1.09 million as of December 31, 2009 to $.35$1.72 million at March 31,June 30, 2010. Costs and estimated earnings in excess of billings on uncompleted contracts decreased 40%increased 1,127% from $0.057 million to $0.034$0.704 million as of December 31, 2009 and March 31,June 30, 2010, respectively.  These decreasesincreases are a result of our lackacquisition of B&M Construction Co., Inc. and the addition of capital resources that allowed us to commence construction ofon several of our contracts and because of this we were unable to bill for new contracts.  The Company also used, as required by terms of its term note payable to related party, approximately  $0.27 million of its restricted cash deposits to reduce principal and interest on its term note payable to a related party. Prepaid expenses decreased $0.03$0.05 million, or 34%57% from $0.09 million as of December 31, 2009 to $0.06$0.04 as of March 31,June 30, 2010.  This decrease is due primarily to reduction in prepaid insurance. The insurance expense was associated with our auto, general liability and directors and officers liability insurance policies.  At March 31,June 30, 2010, property and equipment, net, decreasedincreased approximately 8%57% due to depreciation expense incurred during the three months ended March 31, 2010.

The Company’s current liabilities are comprised of accounts payable and accrued expenses, current portions of notes payable to stockholders, term note payable to a related party, promissory note payable and billings in excess of costs and estimated earnings on uncompleted contracts. At March 31,June 30, 2010, current liabilities were $3.17$6.01 million as compared to $3.65 million at December 31, 2009.  This decrease of 13% from December 31, 2009 to March 31, 2010 wasAccounts payable and accrued liabilities increased $0.77 million, or 40%, due primarily to a 24% reductionan inability to make timely payments to suppliers and vendors.  Billings in excess of costs and earnings increased from $0.25 million to $0.75 million for the currentperiods ended June 30, 2009 and June 30 2010, respectively.  This was due to the practice of billing customers before any significant progress or costs had been incurred on projects, essentially customer financing.  Current portion of notes payable and a 27% reduction in term note payable to a related party. The 24% reduction inincreased 340% associated with prior retired shareholders of the current portion of notes payable was a result of amortization of loans for our transportation equipment.  Theacquired company.  A 27% reduction in the term note payable to a related party was a result of cash released from a third party bonding agent and paid to the holder of the term note payable related party.  For the threesix months ended March 31,June 30, 2010, we completed two bonded contracts which resulted in $0.27 million being released from restricted cash deposits, reported in the current asset section of our balance sheet, the proceeds of which were paid directly from a third party bonding agent to the holder of the term note payable to a related party. At December 31, 2009, we failed to make additional payments required under the terms of the term note and were in default.  In April of 2010, the holder of the term note payable related party agreed to extend the maturity date to April 2011.

We are indebted to a financial institution for a promissory notenotes with a principal balancebalances of $0.89 million at June 30, 2010 and $0.35 million at March 31, 2010 and December 31, 2009.  In February of 2010, the Company was successful in extending the principal balance to December 2010.  No principalPrincipal payments were made in the amount of $0.10 million during the threesix months ended March 31,June 30, 2010.

Other liabilities consist of the long term portion of debt due to Ryan Seddon, our former Chairman of the Board, Chief Executive Officer and President, and Ricardo Sabha, a former officer and director and current employee  and notes payable to financial institutions for our transportation equipment.equipment, purchase consideration to the majority B&M Shareholder and notes payable to former shareholders of B&M Construction.  Other liabilities increased approximately $0.01$0.39 million or 1%30% over the balance $1.32 million at December 31, 2009.  This increase was due primarily to additional advanced made bythe purchase consideration to the majority B&M Construction shareholder in the amount of $1.17 million.  Ryan Seddon, ourthe former Chairman of the Board, Chief Executive Officer and President, and Ricardo Sabha, a former officer and director and current employee to the Company. These loans increased to $1.22Company forgave $1.07 million at March 31, 2010, or 3%, from $1.19 million at December 31, 2009.in loans. Former B&M Construction shareholders accounted for $0.75 million.  Notes payable to several financial institutions for the purchases of our transportation equipment decreased from $0.13$0.04 million to $0.11$0.17 million between these two periods due to amortization of the principal balance as a result of monthly installment payments.

We have insufficient working capital to fund ongoing operations and are expecting this trend which will cause us to continue to incur further losses in the future. Although we decreased our total liabilities by 9%, wecontinue.  We have had to use most of our cash resources from operations to pay acquisition related expenses as well as general and administrative expenses.  At March 31,June 30, 2010, the current liabilities exceed current assets by $2.4$3.2 million.  Included in the current assets is $0.24 million of restricted cash deposits that are used to satisfy term notes payable to related parties and will not be available to be utilized by the Company to fund operations in the future.

At March 31,June 30, 2010, the contracts receivable was $0.35$1.72 million or 20%63% of the accounts payable and accrued expenses balance of $1.78$2.72 million in contrast to the contracts receivable balance of $1.09 million or 56% of the accounts payable and accrued expenses balance of $1.95 million at December 31, 2009. Typically, the we use collections from contracts receivable to reduce accounts payable and accrued expenses that are directly related to the contracts resulting in the posting of new contracts receivable.  This decrease in the ratio of contracts receivable to accounts payable and accrued expenses at March 31, 2010The company was a direct cause of the Company not being able to commence construction on new contracts and thus increase billings.billings during the period ended June 30, 2010.  The Company needed collections from its contractcontracts receivable to fund general and administrative expenses.  Without the Company raising additional capital, it will be unable to reduce the accounts payable and accrued expenses balance and it will continue to experience liquidity problems.  The inability to pay these accrued costs of revenues earned has caused our vendors to cease extending credit to us and has continued to challenge our efforts to commence construction on new contracts.

Currently, we are unable to fund the cost of revenues needed to begin new projects for which we are contracted. Without significant capital infusions to satisfy our cash flow shortage, we will not be able to continue operations in the short term.an efficient manner. We have focused on this situation for an extended period of time and have not yet been successful in acquiring the needed capital.  We are considering all options as it relates to our current cash flow needs.

The following is a summary of the Company’s cash flows provided by (used in) operating, investing and financing activities for the years ended March 31,June 30, 2010 and 2009 (in 000’s):

 

There are no material pending legal proceedings to which we are a party or to which any of our property is subject, nor are there any such proceedings known to be contemplated by governmental authorities.  None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.