UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
T | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, | For the quarterly period ended June 30, 2010 |
OR
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the transition period from ____ to ____ |
Commission File Number 333-160700
SSGI, Inc.
(Exact name of registrant as specified in its charter)
Florida | 91-1930691 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
8120 Belvedere Road, Suite 43706 DMG Drive
West Palm Beach,Lakeland, Florida 3341133811
(Address of principal executive offices)
Telephone Number - Area code (561) 333-3600(863) 644-0456
(Registrant’s telephone number, including area code)
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 o No x
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 (§232.405 of this chapter) 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. (Check one):
Large accelerated filer o | Accelerated filer o |
| |
Non-accelerated filer o | Smaller reporting company x |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
As of June 7,August 24, 2010, there were 34,187,25238,107,252 shares of the registrant’s common stock, par value $0.001 per share, outstanding.
SSGI, Inc.
Index
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PART I. | FINANCIAL INFORMATION | |
PART I. FINANCIAL INFORMATION
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Item 1. | Financial Statements | 4 |
| | |
| | | | Condensed Consolidated Statements of Income | |
| Condensed Consolidated Balance Sheets - March 31, 2010 (Unaudited) and December 31, 2009 | 4 |
| | 5Condensed Consolidated Statements of Comprehensive Income | |
| | | | | |
| Statements of Operations - Three months ended March 31, 2010 and 2009 (Unaudited) | | | 6 | |
| | | | | |
| Condensed Consolidated Statements of Cash Flow - Three months ended March 31, 2010 and 2009 (Unaudited)Flows | | | 7 | |
| | | | | 6 |
| Notes to theCondensed Consolidated Financial Statements - March 31, 2010 (Unaudited) | | | 8 | 7 |
| | | | | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | | 17 | 20 |
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk | | | 22 | 24 |
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Item 4. | Controls and Procedures | | | 22 | 24 |
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PART II. OTHER INFORMATION
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| | |
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PART II. | OTHER INFORMATION | |
| | |
Item 1. | Legal Proceedings | | | 22 | 25 |
| | | | | |
Item 1A. | Risk Factors | | | 22 | 25 |
| | | | | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | | | 22 | 25 |
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Item 3. | Defaults Upon Senior Securities | | | 23 | 25 |
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Item 4. | (Removed and Reserved) | | | 23 | 25 |
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Item 5. | Other Information | | | 23 | 25 |
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Item 6. | Exhibits | | | 23 | 25 |
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SIGNATURES | | | 24 | 26 |
Forward-Looking and Cautionary Statements
This report contains certain statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Private Securities Litigation Reform Act of 1995 provides safe harbor provisions for forward looking information. Some of the statements contained in this quarterly report are forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “plan,” “expect” and similar expressions are intended to identify forward-looking statements. Forward-looking statements include information concerning our possible or assumed future financial performance and results of operations.
We have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such statements. While it is not possible to identify all factors, factors that could cause actual future results to differ materially include the risks and uncertainties disclosed in our 2009 Annual Report on Form 10-K contained in Part I under “Risk Factors”.
Many of these factors are beyond our ability to control or predict. Any of these factors, or a combination of these factors, could materially and adversely affect our future financial condition or results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of our future performance, and our actual results and future developments may differ materially and adversely from those projected in the forward-looking statements. We caution against putting undue reliance on forward-looking statements or projecting any future results based on such statements or on present or prior earnings levels. In addition, each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statement.
Item 1. Financial Statements.
SSGI, INC. AND SUBSIDIARIES |
CONSOLIDATED BALANCE SHEETS |
| | | | | | |
| | | | | | |
ASSETS | | | | | | |
| | June 30, | | | December 31, | |
| | 2010 | | | 2009 | |
CURRENT ASSETS: | | (unaudited) | | | (audited) | |
| | | | | | |
Cash and cash equivalents | | $ | 104,236 | | | $ | 121,970 | |
Restricted cash deposits | | | 237,918 | | | | 507,028 | |
Contracts receivable, net | | | 1,720,253 | | | | 1,091,343 | |
Costs and estimated earnings in excess of billings | | | | | | | | |
on uncompleted contracts | | | 704,060 | | | | 57,411 | |
Prepaid expenses and other current assets | | | 38,785 | | | | 89,591 | |
| | | | | | | | |
TOTAL CURRENT ASSETS | | | 2,805,252 | | | | 1,867,343 | |
| | | | | | | | |
PROPERTY AND EQUIPMENT, NET | | | 546,370 | | | | 347,874 | |
| | | | | | | | |
GOODWILL | | | 5,062,144 | | | | - | |
| | | | | | | | |
CASH SURRENDER VALUE OF INSURANCE AND OTHER ASSETS | | | 785,897 | | | | 15,538 | |
| | | | | | | | |
TOTAL ASSETS | | $ | 9,199,663 | | | $ | 2,230,755 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | |
| | | | | | | | |
Accounts payable and accrued expenses | | $ | 2,723,811 | | | $ | 1,951,881 | |
Billings in excess of costs and estimated earnings | | | | | | | | |
on uncompleted contracts | | | 747,123 | | | | 251,797 | |
Current portion of long term debt | | | 491,984 | | | | 111,891 | |
Promissory note payable | | | 893,160 | | | | 353,691 | |
Current portion of due to stockholders | | | 450,000 | | | | 11,395 | |
Term note payable, related party | | | 707,116 | | | | 965,458 | |
| | | | | | | | |
TOTAL CURRENT LIABILITIES: | | | 6,013,194 | | | | 3,646,113 | |
| | | | | | | | |
LONG TERM LIABILITIES | | | | | | | | |
Due to stockholders, net of current portion | | | 125,000 | | | | 1,185,091 | |
Long term debt, net of current portion | | | 1,576,249 | | | | 133,540 | |
| | | | | | | | |
TOTAL LIABILITIES | | | 7,714,443 | | | | 4,964,744 | |
| | | | | | | | |
STOCKHOLDERS' EQUITY (DEFICIT) | | | | | | | | |
| | | | | | | | |
Common stock - $.001 Par Value, 100,000,000 shares authorized | | | | | | | | |
34,187,952 and 34,687,630 issued and outstanding, respectively | | | 34,187 | | | | 34,688 | |
Additional paid in capital | | | 8,464,836 | | | | 3,138,628 | |
Accumulated deficit | | | (6,965,436 | ) | | | (5,907,305 | ) |
Total | | | 1,533,587 | | | | (2,733,989 | ) |
Non-controlling interest in subsidiary | | | (48,367 | ) | | | - | |
| | | | | | | | |
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) | | | 1,485,220 | | | | (2,733,989 | ) |
| | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | $ | 9,199,663 | | | $ | 2,230,755 | |
SSGI, INC.
BALANCE SHEETS
| | March 31, | | | December 31, | |
| | 2010 | | | 2009 | |
| | (unaudited) | | | (audited) | |
ASSETS | | | | | | |
| | | | | | |
CURRENT ASSETS: | | | | | | |
| | | | | | |
Cash and cash equivalents | | $ | 111,103 | | | $ | 121,970 | |
Restricted cash deposits | | | 237,918 | | | | 507,028 | |
Contracts receivable, net | | | 348,401 | | | | 1,091,343 | |
Prepaid expenses | | | 59,921 | | | | 89,591 | |
Costs and estimated earnings in excess of billings on uncompleted contracts | | | 34,323 | | | | 57,411 | |
Total current assets | | | 791,666 | | | | 1,867,343 | |
PROPERTY AND EQUIPMENT, NET | | | 319,324 | | | | 347,874 | |
OTHER ASSETS | | | 14,280 | | | | 15,538 | |
| | $ | 1,125,270 | | | $ | 2,230,755 | |
LIABILITIES AND STOCKHOLDERS' DEFICIT | | | | | | | | |
| | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | |
| | | | | | | | |
Accounts payable and accrued expenses | | $ | 1,784,029 | | | $ | 1,951,881 | |
Current portion of notes payable | | | 85,000 | | | | 111,891 | |
Promissory note payable | | | 353,691 | | | | 353,691 | |
Term note payable, related party | | | 707,116 | | | | 965,458 | |
Current portion of due to stockholders | | | 11,624 | | | | 11,395 | |
Billings in excess of costs and estimated earnings on uncompleted contracts | | | 228,848 | | | | 251,797 | |
Total current liabilities | | | 3,170,308 | | | | 3,646,113 | |
| | | | | | | | |
OTHER LIABILITIES: | | | | | | | | |
| | | | | | | | |
Due to stockholders, net of current portion | | | 1,217,614 | | | | 1,185,091 | |
Long term debt, net of current portion | | | 112,142 | | | | 133,540 | |
Total liabilities | | | 4,500,064 | | | | 4,964,744 | |
| | | | | | | | |
STOCKHOLDERS' DEFICIT: | | | | | | | | |
| | | | | | | | |
Common stock - $.0010 Par value, 100,000,000 shares authorized, 34,687,630 issued and outstanding | | | 34,688 | | | | 34,688 | |
Additional paid in capital | | | 3,160,158 | | | | 3,138,628 | |
Accumulated deficit | | | (6,569,640 | ) | | | (5,907,305 | ) |
Total stockholders' deficit | | | (3,374,794 | ) | | | (2,733,989 | ) |
| | $ | 1,125,270 | | | $ | 2,230,755 | |
The accompanying notes are an integral part of these consolidated financial statements.
SSGI, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) |
STATEMENTS OF OPERATIONS
(Unaudited)
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| | | | | | | | | | | | | |
CONTRACT REVENUES EARNED | | $ | 2,925,691 | | | $ | 1,023,022 | | | $ | 3,664,428 | | | $ | 2,696,207 | |
COST OF REVENUES EARNED | | | 3,159,298 | | | | 1,001,732 | | | | 4,092,123 | | | | 2,532,851 | |
| | | | | | | | | | | | | | | | | |
GROSS PROFIT (LOSS) | | | (233,607 | ) | | | 21,290 | | | | (427,695 | ) | | | 163,356 | |
| | | | | | | | | | | | | | | | | |
GENERAL AND ADMINISTRATIVE EXPENSES | | | | | | | | | | | | | |
| Payroll and related costs | | | 698,949 | | | | 277,190 | | | | 806,441 | | | | 466,128 | |
| Insurance | | | 52,331 | | | | 42,671 | | | | 124,281 | | | | 96,527 | |
| Marketing and advertising | | | 16,010 | | | | 25,880 | | | | 24,056 | | | | 70,411 | |
| Office and technology expenses | | | 116,853 | | | | 61,738 | | | | 176,215 | | | | 97,325 | |
| Professional fees | | | 194,415 | | | | 61,989 | | | | 301,503 | | | | 114,571 | |
| Travel and entertainment | | | 16,852 | | | | 7,039 | | | | 23,380 | | | | 9,388 | |
| Other operating expenses | | | 46,152 | | | | 31,575 | | | | 115,218 | | | | 84,974 | |
| TOTAL GENERAL AND ADMINISTRATIVE EXPENSES | | | 1,141,562 | | | | 508,082 | | | | 1,571,094 | | | | 939,324 | |
| | | | | | | | | | | | | | | | | |
LOSS FROM OPERATIONS | | | (1,375,169 | ) | | | (486,792 | ) | | | (1,998,789 | ) | | | (775,968 | ) |
| | | | | | | | | | | | | | | | | |
OTHER INCOME (EXPENSES): | | | | | | | | | | | | | | | | |
| Interest income | | | - | | | | - | | | | 15 | | | | 45 | |
| Other income | | | 1,009,855 | | | | 2,063 | | | | 1,009,855 | | | | 2,629 | |
| Financing costs | | | - | | | | - | | | | - | | | | (181,201 | ) |
| Interest expense | | | (30,482 | ) | | | (45,663 | ) | | | (68,927 | ) | | | (73,983 | ) |
| Loss on asset disposition | | | - | | | | - | | | | (285 | ) | | | (2,305 | ) |
| TOTAL OTHER INCOME (EXPENSES): | | | 979,373 | | | | (43,600 | ) | | | 940,658 | | | | (254,815 | ) |
| | | | | | | | | | | | | | | | | |
NET LOSS BEFORE TAXES | | | (395,796 | ) | | | (530,392 | ) | | | (1,058,131 | ) | | | (1,030,783 | ) |
| | | | | | | | | | | | | | | | | |
PROVISION FOR TAXES | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
LOSS BEFORE NON-CONTROLLING INTEREST IN | | | | | | | | | | | | | |
| NET LOSS OF SUBSIDIARY | | | (395,796 | ) | | | (530,392 | ) | | | (1,058,131 | ) | | | (1,030,783 | ) |
| | | | | | | | | | | | | | | | | |
NON-CONTROLLING INTEREST IN NET LOSS | | | | | | | | | | | | | |
| OF SUBSIDIARY | | | 48,367 | | | | - | | | | 48,367 | | | | - | |
| | | | | | | | | | | | | | | | | |
NET LOSS | | $ | (347,429 | ) | | $ | (530,392 | ) | | $ | (1,009,764 | ) | | $ | (1,030,783 | ) |
| | | | | | | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | | | | | |
Basic and Diluted | | | | | | | | | | $ | (2,133.329 | ) | | $ | (2,015.216 | ) |
| | | | | | | | | | | | | | | | | |
Weighted Average Outstanding Shares: | | | | | | | | | | | | | | | | |
Basic and Diluted | | | | | | | | | | | 496 | | | | 512 | |
| | | | | | | | | | | | | | | | | |
Net loss per share: | | | | | | | | | | | | | | | | |
Basic and Diluted | | $ | (0.010 | ) | | $ | (0.015 | ) | | $ | (0.029 | ) | | $ | (0.030 | ) |
| | | | | | | | | | | | | | | | | |
Weighted Average Outstanding Shares: | | | | | | | | | | | | | | | | |
Basic and Diluted | | | 34,144,861 | | | | 34,679,140 | | | | 34,476,757 | | | | 34,679,669 | |
| | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | |
| | 2010 | | | 2009 | |
| | | | | | |
CONTRACT REVENUES EARNED | | $ | 738,737 | | | $ | 1,673,185 | |
COST OF REVENUES | | | 932,825 | | | | 1,531,119 | |
Gross profit (loss) | | | (194,088 | ) | | | 142,066 | |
| | | | | | | | |
GENERAL AND ADMINISTRATIVE EXPENSES | | | | | | | | |
Payroll and related costs | | | 107,492 | | | | 188,938 | |
Insurance | | | 71,950 | | | | 53,856 | |
Marketing and advertising | | | 8,046 | | | | 44,531 | |
Office and technology expenses | | | 59,362 | | | | 35,587 | |
Professional fees | | | 107,088 | | | | 52,582 | |
Auto and truck expense | | | 18,308 | | | | 24,791 | |
Travel and entertainment | | | 6,528 | | | | 2,349 | |
Bad debt expense | | | 11,586 | | | | 7,829 | |
Depreciation and amortization | | | 10,514 | | | | 16,986 | |
Other operating expenses | | | 28,658 | | | | 3,793 | |
Total general and admistrative expenses | | | 429,532 | | | | 431,242 | |
Loss from operations | | | (623,620 | ) | | | (289,176 | ) |
| | | | | | | | |
OTHER INCOME (EXPENSES): | | | | | | | | |
Interest expense | | | (38,735 | ) | | | (28,320 | ) |
Interest income | | | 20 | | | | - | |
Other income | | | - | | | | 566 | |
Total other income (expenses), net | | | (38,715 | ) | | | (27,754 | ) |
| | | | | | | | |
LOSS BEFORE INCOME TAXES | | | (662,335 | ) | | | (316,930 | ) |
Income taxes | | | - | | | | - | |
NET LOSS | | $ | (662,335 | ) | | $ | (316,930 | ) |
| | | | | | | | |
Loss per share: | | | | | | | | |
Basic and Diluted | | $ | (0.019 | ) | | $ | (0.009 | ) |
| | | | | | | | |
Weighted Average Outstanding Shares: | | | | | | | | |
Basic and Diluted | | | 34,687,630 | | | | 34,679,140 | |
The accompanying notes are an integral part of these consolidated financial statements.
SSGI, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
SSGI, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Unaudited) |
| | | |
| | Six Months Ended June 30, | |
| | 2010 | | | 2009 | |
| | | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net loss | | $ | (1,009,764 | ) | | $ | (1,030,783 | ) |
Non-controlling interest in net loss of subsidiaries | | | (48,367 | ) | | | - | |
Loss before non-controlling interest in net loss of subsidiaries | | | | (1,030,783 | ) |
Adjustments to reconcile net loss to net cash and cash | | | | | | | | |
equivalents used in operating activities: | | | | | | | | |
Depreciation and amortization | | | 70,352 | | | | 62,330 | |
Gain on asset disposition | | | 285 | | | | - | |
Provision for bad debts | | | 11,586 | | | | - | |
Warrants issued for compensation | | | 89,731 | | | | 166,086 | |
Warrants issued as financing costs | | | - | | | | 181,201 | |
Estimated losses on contracts | | | - | | | | (59,354 | ) |
Loan forgiveness from stockholder loans | | | (866,055 | ) | | | - | |
Changes in operating assets and liabilities: | | | | | | | | |
(Increase) decrease in assets: | | | | | | | | |
Contracts receivable | | | 796,585 | | | | (166,106 | ) |
Costs and estimated earnings in excess of billings | | | | | | | | |
on uncompleted contracts | | | (13,698 | ) | | | (52,128 | ) |
Prepaid expenses and other current assets | | | 178,739 | | | | 44,508 | |
Cash surrender value of insurance and other assets | | | 12,607 | | | | 812 | |
Increase (decrease) in liabilities: | | | | | | | | |
Accounts payable and accrued expenses | | | (334,645 | ) | | | (152,929 | ) |
Billings in excess of costs and estimated earnings | | | | | | | | |
on uncompleted contracts | | | 309,889 | | | | 83,371 | |
Net cash used in operating activities | | | (802,755 | ) | | | (922,992 | ) |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Proceeds from sale of equipment | | | 6,200 | | | | 34,924 | |
Release (deposits of) restricted cash | | | 269,110 | | | | (367,036 | ) |
Purchase of subsidiary | | | (550,000 | ) | | | - | |
Purchase of equipment | | | (10,114 | ) | | | (20,354 | ) |
Net cash used in investing activities | | | (284,804 | ) | | | (352,466 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Borrowings under term note payable, related party and promissory note | | | | 925,000 | |
Issuance of common stock | | | 851,000 | | | | - | |
Payments for term note payable, related party and promissory note | | | | (322,825 | ) |
Advances from stockholders | | | - | | | | 696,007 | |
Net cash provided by financing activities | | | 1,069,825 | | | | 1,298,182 | |
| | | | | | | | |
CHANGE IN CASH AND CASH EQUIVALENTS | | | (17,734 | ) | | | 22,724 | |
| | | | | | | | |
Cash and cash equivalents at beginning of the period | | | 121,970 | | | | 64,988 | |
| | | | | | | | |
Cash and cash equivalents at end of period | | $ | 104,236 | | | $ | 87,712 | |
| | | | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION | | | | | | | | |
| | | | | | | | |
Interest paid during the period | | $ | 68,927 | | | $ | 73,983 | |
| | | | | | | | |
CHANGES IN NON-CASH FINANCING ACTIVITIES: | | | | | |
Common stock issued for acquisition of subsidiary | | $ | 3,974,773 | | | $ | - | |
Promissory note issued for acquisition of subsidiary | | $ | 1,173,473 | | | $ | - | |
Warrants issued for acquisition of subsidiary | | $ | 171,592 | | | $ | - | |
Note payable issued for acquisition of subsidiary | | $ | 700,000 | | | $ | - | |
Warrants issued for loan forgiveness | | $ | 244,898 | | | $ | - | |
| | | | | | | | |
| | Three Months Ended March 31, | |
| | 2010 | | | 2009 | |
| | | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net loss | | $ | (662,335 | ) | | $ | (316,930 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | |
Depreciation and amortization | | | 28,550 | | | | 32,838 | |
Stock and warrants issued as compensation and fees | | | 21,530 | | | | 13,827 | |
Estimated losses on contracts | | | - | | | | (59,354 | ) |
(Increase) decrease in: | | | | | | | | |
Restricted cash | | | 269,110 | | | | - | |
Contracts receivable | | | 742,942 | | | | (253,115 | ) |
Prepaid expenses | | | 29,670 | | | | 4,586 | |
Costs and estimated earnings in excess of billings on uncompleted contracts | | | 23,088 | | | | 79,609 | |
Other assets | | | 1,259 | | | | (6,851 | ) |
Increase (decrease) in: | | | | | | | | |
Accounts payable and accrued expenses | | | (167,853 | ) | | | 48,061 | |
Billings in excess of costs and estimated earnings on uncompleted contracts | | | (22,949 | ) | | | 16,824 | |
| | | | | | | | |
Net cash provided by (used in) in operating activities | | | 263,012 | | | | (440,505 | ) |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Purchase of equipment, net | | | - | | | | (18,759 | ) |
Net cash used in investing activities | | | - | | | | (18,759 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Payments of term note payable, related party and promissory note payable | | | (306,631 | ) | | | (168,953 | ) |
Advances from stockholders | | | 32,752 | | | | 693,500 | |
Net cash (used in) provided by financing activities | | | (273,879 | ) | | | 524,547 | |
| | | | | | | | |
CHANGE IN CASH AND CASH EQUIVALENTS | | | (10,867 | ) | | | 65,283 | |
| | | | | | | | |
Cash and cash equivalents at beginning of the period | | | 121,970 | | | | 64,988 | |
| | | | | | | | |
Cash and cash equivalents at end of the period | | $ | 111,103 | | | $ | 130,271 | |
| | | | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION | | | | | | | | |
| | | | | | | | |
Interest paid during the year | | $ | 56,229 | | | $ | 28,320 | |
The accompanying notes are an integral part of these consolidated financial statements.
SSGI, INC. AND SUBSIDIARIES
NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS (unaudited)
MARCH 31,
June 30, 2010
(Unaudited)
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
SSGI, Inc. (the “Company”) 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. (“Surge”). As a consequence of the latter exchange, which qualified as a reverse merger,merger; Surge became the accounting acquirer and the reporting entity prospectively.
On July 7, 2009,May 13, 2010, the Company filedacquired all of the outstanding common shares of B&M Construction Co., Inc. (“B&M”), a Form S-1 withFlorida construction company licensed to operate in the SecuritiesSoutheastern United States. This newly acquired subsidiary specializes in the design, construction and Exchange Commission to register a portionmaintenance of their 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.retail petroleum facilities.
The Company specializes in the design and construction of industrial and commercial buildings in the petroleum contractingindustry; and general constructionin the maintenance of retail petroleum facilities in Florida including insurance restoration and new commercial construction.Georgia. The Company's work is performed under cost-plus-feevarious fee arrangements including cost plus fee contracts, fixed-pricefixed price contracts, and fixed-pricefixed price contracts modified bywith incentive and penalty provisions.provisions, and straight hourly fee contracts. These contracts are undertaken by the Company alone or in conjunction with other contracts. The length of the Company's contracts typically range from three months or less to one year.
Interim Financial Statements
These financial statements have been prepared in accordance with the rules of interim financial statements stipulated in Regulation S-X. In the opinion of management, such financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair presentation of the financial position and the results of operations. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The balance sheet information as of December 31, 2009 was derived from the audited financial statements. The interim financial statements should be read in conjunction with those statements.
Company’s Ability to Continue as a Going Concern
At March 31,June 30, 2010, the Company had not yet achieved profitable operations, had insufficient working capital to fund ongoing operations and expects to incur further losses. These circumstances cast doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations.
These financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its
SSGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2010
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Company’s Ability to Continue as a Going Concern (continued)
obligations and continue its operations. Realization values may be substantially different from carrying values as shown in the financial statements and do not give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern.
Principles of Consolidation
These consolidated financial statements includes the accounts of the Company’s wholly owned subsidiary and its 70% majority-owned subsidiary. All significant inter-company transactions have been eliminated.
Non-controlling interest in subsidiaries
FASB ASC 810-10-65, Consolidations, requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. The non-controlling interest represents the minority interests not held by the Company. The Company has recorded a non-controlling interest in its Consolidated Financial Statements to reflect the minority interests.
Use of Estimates
Management usesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptionsthat 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 amounts of revenues and expenses.expenses during the reporting period. Actual results could varydiffer from the estimates that were used.those estimates. The most significant areas requiring management’s estimates and assumptions relatemanagement estimate relates to determining the fair value of stock-based compensation, fair value of shares issued for services and the determination of percentage of completion in connection with the recognition of profit on customer contracts.
Revenue and Cost Recognition
Revenues from fixed price or modified fixed price construction contracts are recognized on the percentage of completion method, measured by the costs incurred to date relative to estimated total costs for each contract. Where appropriate, certain contracts are segmented into major activities due to the particular scope of work and services to be performed. These methods are used because management considers costs incurred and possible segmentation of specific contracts to be the best available measure of progress. The length of the Company’s contracts varies, but is typically less than one year.
Contract costs include all direct material and labor costs, and those indirect costs related to contract performance such as insurance, employee benefits, supplies, small tools, repairs, and indirect labor. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated
SSGI, INC. AND SUBSIDIARIES
NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS (unaudited)
MARCH 31,
June 30, 2010
(Unaudited)
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue and Cost Recognition (continued)
The Company uses the cost to cost method to arrive at the percentage-of-completion for long-termlosses on uncompleted contracts, more than three months in duration. Revenue of individual long-term contractsif applicable, are included in operations as the project are completed by using costs incurred to date in relation to the estimated total costs of the contracts to measure the stage of completion. Original contract prices are adjusted for change ordersmade in the amounts thatperiod in which such losses are reasonablydetermined. Changes in job performance, job conditions and estimated based on the Company’s historical experience. The cumulative effects of changesprofitability, including those
arising from contract penalty provisions and final contract settlements, may result in estimated total contractrevisions to costs and revenues (change orders)income and are recordedrecognized in the period in which the facts requiring such revisions become known, and are accounted for using the percentage-of-completion method. At the time it is determined that a contract is expected to result in a loss; the entire estimated loss is recorded.determined.
Contract costs include all direct material, subcontractors and direct labor and those indirect costs related to contract performance, such as indirect labor and supplies. Selling, general, and administrative expenses are charged to operations as incurred.
Cash and Cash Equivalents
For the purpose of reporting cash flows, theThe Company has defined cash equivalents as thoseconsiders all highly liquid investments purchased with an originala maturity of three months or less.less when purchased to be cash equivalents. Cash and cash equivalents include money market accounts and investments in a repurchase agreement backed by government securities.
Concentration of Credit Risk
The Company is subject to some credit risk through short term cash investments which are placed with high credit quality financial institutions. The Company has entered into an overnight repurchase and cash management agreement with a financial institution to invest idle funds in US government securities. The Company maintains its cash accounts in several commercial banks located in Central Florida. The Federal Deposit Insurance Corporation (FDIC) guarantees accounts in the financial institution up to $250,000. At various times throughout the period, the Company had cash balances that exceeded the FDIC limit.
The Company provides construction services, parts sales and servicing and extends trade credit to the petroleum distribution industry. The customers are primarily to major oil companies and large
independent distributors in Florida and Georgia. The Company grants credit to its customers during the normal course of business. The Company performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral. Management believes that its contract acceptance, billing and collections policies are adequate to minimize potential risk. The Company does not believe that any single customer, industry, or concentration in any geographic area represents significant credit risk.
Contracts Receivable
Contracts receivable are customer obligations due under contractual terms. The Company sells its services to residential, commercial, government and retail customers. On most projects, the Company has liens rights under Florida law which are typically enforced on balances not collected within 90 days. The Company includes any balances that are determined to be uncollectible along with a general reserve in its overall allowance for doubtful accounts.
Net Loss Per Share
The Company follows ASC 260-10, “Earnings Per Share” in calculating the basic and diluted loss per share. The Company computes basic loss per share by dividing net loss and net loss attributable to common shareholders by the weighted average number of common shares outstanding. Diluted loss per share considers the effect of common share equivalent shares. There were no common share equivalents at June 30, 2010 and 2009.
SSGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2010
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Treasury Stock
The Company accounts for treasury stock at par value. Under this method, the treasury stock account is increased by the par value of each share of common stock reacquired. Any excess paid per share over the par value is debited to additional paid-in capital for the amount per share that was originally credited. Any remaining excess is charges to retained earnings.
Income Taxes
Income taxes are accounted for under the asset and liability method as stipulated by Accounting Standards Codification (“ASC”) 740 formerly Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes”. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities or a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced to estimated amounts to be realized by the use of a valuation allowance. A valuation allowance is applied when in management’s view it is more likely than not (50%) that such deferred tax will not be utilized.utilized
SSGI, INC.
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (continued)
Income Taxes (continued)
EffectiveIn January 1, 2009, the Company adopted certain provisions under ASC Topic 740, Income Taxes, (“ASC 740”), which provide interpretative guidance for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Effective with the Company’s adoption of these provisions, interest related to the unrecognized tax benefits is recognized in the financial statements as a component of income taxes. The adoption of ASC 740 did not have an impact on the Company’s financial position and results of operations.
In the unlikely event that an uncertain tax position exists in which the Company could incur income taxes, the Company would evaluate whether there is a probability that the uncertain tax position taken would be sustained upon examination by the taxing authorities. Reserves for uncertain tax positions would then be recorded if the Company determined it is probable that a position would not be sustained upon examination or if a payment would have to be made to a taxing authority and the amount is reasonably estimable. As of March 31,June 30, 2010, the Company does not believe it has any uncertain tax positions that would result in the Company having a liability to the taxing authorities. The Company’s tax returns are subject to examination by the federal and state tax authorities for the years ended 2007 through 2009.
Property and Equipment
Property and equipment are recorded at cost and depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, usually from three to forty years. Routine repairs and maintenance are expensed as incurred. Accelerated depreciation is used for tax reporting and straight-line depreciation is used for financial statement reporting.
SSGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2010
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Long-lived Assets
The Company reviews long-lived assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. If the undiscounted future cash flows attributable to the related assets are less than the carrying amount, the carrying amounts are reduced to fair value and an impairment loss is recognized in accordance with FASB ASC 360-10-05, Accounting for the Impairment or Disposal of Long-Lived Assets.
Marketing and Advertising Costs
Marketing and advertising costs are expensed as incurred. Marketing and advertising costs for the three months ended March 31,June 30, 2010 and 2009 were $8,046$24,056 and $44,531,$70,411, respectively.
Fair Value Measurements
In January 1, 2009, the Company adopted FASB ASC 820 “Fair Value Measurements”, (“FASB ASC 820”) for its non-financial assets and liabilities and for its financial assets and liabilities measured at fair value on a nonrecurring basis. This Standard provides a framework for measuring fair value in generally accepted accounting principles, expands disclosures about fair value measurements, and establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The adoption of FASB ASC 820 for the Company’s non-financial assets and liabilities did not have a material impact on the Company’s consolidated financial statements.
Financial Instruments
Financial instruments consist of cash and cash equivalents, restricted cash, contracts receivable, accounts payable and accrued expenses, borrowings under promissory note payable, due to stockholders, and term notes as well other debt incurred in the ordinary course of business.long-term debt. The carrying values of these instrumentscash and cash equivalents, contracts receivable, and accounts payable and accrued expenses, approximate their fair values due to their relatively short lives to maturity. The fair value of the promissory notes, term notes and otherlong-term debt approximatealso approximates fair market value, as these amounts are due at rates which are compatible to market interest rates.
Stock Based Compensation
The Company applies the fair value method of ASC 718, Share Based Payment, formerly Statement of Financial Accounting Standards ("SFAS”) No. 123R “Accounting for Stock Based Compensation", in accounting for its stock based compensation. This standard states that compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. As the Company does not have sufficient, reliable and readily determinable values relating to its common stock, the Company has used the stock value pursuant to its most recent sale of stock for purposes of valuing stock based compensation.compensation
Property and Equipment
Property and equipment is stated at cost net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the useful life of the related asset. Amortization of leasehold improvements is computed using the straight-line method over the term of the related lease. Capital expenditures that extend the useful life of an asset are capitalized and depreciated over the remaining useful life of such asset. Maintenance and repairs that do not extend the life of an asset are charged to expense when incurred.
Concentration of Credit Risk
The Company maintains its cash balances with a high quality financial institution which the Company believes limits its risk. The balances are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000.
The Company has accounts receivable from customers engaged in various industries. These industries may be affected by economic factors, which may impact the customer’s ability to pay. The Company does not believe that any single customer, industry, or concentration in any geographic area represents significant credit risk..
SSGI, INC.
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (continued)
Common Stock Purchase Warrants
The Company accounts for common stock purchase warrants at fair value in accordance with ASC 815-40 Derivatives and Hedging, formerly Emerging Issues Task Force Issue (“EITF”) No. 00-19, “Accounting for Derivative Financial Instruments Indexed to and Practically Settled in a Company’s Own Stock”. The Black-Scholes option pricing valuation method is used to determine fair value of these warrants consistent with ASC 718, Share Based Payment, formerly Statement of Financial Accounting Standards ("SFAS”) No. 123R “Accounting for Stock Based Compensation. Use of this method requires
SSGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2010
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Common Stock Purchase Warrants (continued)
that the Company make assumptions regarding stock volatility, dividend yields, expected term of the warrants and risk-free interest rates.
The Company accounts for transactions in which services are received in exchange for equity instruments based on the fair value of such services received from non-employees, in accordance with ASC 505-50 Equity Based Payments to Non-employees, formerly EITF No. 96-18, Accounting for Equity Instruments that are Issued to other than Employees for Acquiring, or in Conjunction with Selling Goods or Services.
Recent Accounting Pronouncements
In January 2010, The FASB issued Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements which amends ASC 820-10, Fair Value Measurement and Disclosures. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement. The object of the amendment is to improve disclosures and increase the transparency in financial reporting. The amendment now requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. When reconciling fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements. For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities and should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. The amendment is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this amendment did not have a material impact on the Company’s financial statements.
In February 2010, the FASB issued ASU No. 2010-09, Amendments to Certain Recognition and Disclosure Requirements and which amends Subtopic ASC 855-10 Subsequent Events, removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC’s literature. The adoption of this amendment did not have a material impact on the Company’s financial statements.
NOTE 2 – RESTRICTED CASH DEPOSITS
In some instances the Company is required to post performance bonds on contracts awarded by certain state agencies and municipalities to guarantee performance in accordance with the terms of the contracts. The Company deposits cash equal to a percentage of the contract price with an independent third party bonding agency that holds the deposits for the benefit of the state agency or municipality that has awarded the contract to the Company. The Company also pays a fee to guarantee performance on the percentage of the contract not covered by the cash deposit. Following successful completion of the contract, the bonding agency has up to 90 days to return the deposited cash along with interest in accordance with the contract.
Upon successful completion of the contract, cash deposits are released by the bonding agency. Such proceeds are used to pay the note holders as mentioned in Note 6.7. If the Company fails to perform, these deposits could be claimed by the party that suffers the loss pursuant to non-performance. At March 31,June 30, 2010, the Company had $237,918 on deposit.
SSGI, INC. AND SUBSIDIARIES
NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS (unaudited)
MARCH 31,
June 30, 2010
(Unaudited)
NOTE 3 – CONTRACTS RECEIVABLE
Contracts receivable are as follows Contracts receivable are as follows: | | March 31, | | | December 31, | |
| | 2010 | | | 2009 | |
| | | | | | |
Completed contracts | | $ | 218,959 | | | $ | 528,504 | |
Contracts in progress | | | 167,236 | | | | 744,284 | |
Allowance for doubtful accounts | | | (37,794 | ) | | | (181,445 | ) |
| | $ | 348,401 | | | $ | 1,091,343 | |
| | June 30, 2010 | | | December 31, 2009 | |
Contract billings | | $ | 1,813,478 | | | $ | 1,272,788 | |
Allowance for doubtful accounts | | | (93,225 | ) | | | (181,445 | ) |
Total | | $ | 1,720,253 | | | $ | 1,091,343 | |
Management used the allowance method of recording bad debts and has reviewed all outstanding accounts for collectability. Credit losses have been minimal and have consistently been within management’s expectation. No additional allowance was considered necessary at June 30, 2010 and December 31, 2009, respectively.
NOTE 4 – COSTCOSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS UNDER THE PERCENTAGE OF COMPLETION METHOD
| | March 31, | | | December 31, | |
| | 2010 | | | 2009 | |
| | | | | | |
Costs incurred on uncompleted contracts | | $ | 326,716 | | | $ | 1,072,453 | |
Estimated earnings | | | 73,380 | | | | 269,282 | |
Less: Billings to date | | | (594,621 | ) | | | (1,536,121 | ) |
| | $ | (194,525 | ) | | $ | (194,386 | ) |
Costs and estimated earnings on uncompleted contracts consist of the following at:
Included | | June 30, 2010 | | | December 31, 2009 | |
Costs incurred on uncompleted contracts | | $ | 4,846,097 | | | $ | 1,072,453 | |
Estimated earnings | | | 490,320 | | | | 269,282 | |
| | | 5,336,417 | | | | 1,341,735 | |
Less billings to date | | | 5,379,480 | | | | 1,536,121 | |
Total | | $ | (43,063 | ) | | $ | (194,386 | ) |
These amounts are included in the accompanyingCompany’s consolidated balance sheetssheet under the following captions:
| | June 30, 2010 | | | December 31, 2009 | |
Costs and estimated earnings in excess of | | | | | | |
billings on uncompleted contracts | | $ | 704,060 | | | $ | 57,411 | |
| | | | | | | | |
Billings in excess of costs and estimated | | | | | | | | |
earnings on uncompleted contracts | | | (747,123 | ) | | | (251,797 | ) |
Total | | $ | (43,063 | ) | | $ | (194,386 | ) |
NOTE 5– ACQUISITION AND GOODWILL
On May 13, 2010, the Company completed the acquisition of B&M.
The following information summarizes the allocation of fair value assigned to the assets and liabilities at the acquisition date:
| | March 31, | | | December 31, | |
| | 2010 | | | 2009 | |
| | | | | | |
Costs and estimated earnings in excess of billings on uncompleted contracts | | $ | 34,323 | | | $ | 57,411 | |
Billings in excess of costs and estimated on uncompleted contracts | | | (228,848 | ) | | | (251,797 | ) |
| | $ | (194,525 | ) | | $ | (194,386 | ) |
SSGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2010
NOTE 5– ACQUISITION AND GOODWILL (continued)
| | | | |
Current Assets | | $ | 2,221,217 | |
Property and Equipment | | | 265,209 | |
Other Assets | | | 785,798 | |
Goodwill | | | 5,062,144 | |
Liabilities Assumed | | | (2,314,540 | ) |
| | $ | 6,019,838 | |
Consideration paid was comprised of the following:
Warrants | | $ | 171,592 | |
Stock | | | 3,674,773 | |
Cash | | | 1,000,000 | |
Note Payable | | | 1,173,473 | |
| | $ | 6,019,838 | |
The fair value of the assets and liabilities acquired have been determined on a provisional basis and will be completed by August 31, 2010.
In contemplation of the acquisition, the Company and the former Chairman of the Board, President and Chief Executive Officer entered into a Modification Agreement that required the former officer to surrender to the Company all shares of common stock held with the exception of 4,000,000 shares. The former officer also forgave the Company for all except for $125,000 of remaining principal and accrued interest of previous loans made by the former officer to the Company. The $125,000 not forgiven is evidenced by a promissory note bearing interest at 5% and payable in full on December 31, 2011. The Modification Agreement also requires the former officer to provide certain transitional consulting services to the Company, on a limited basis, for 12 months in exchange for a consulting fee of $9,333 per month as well as the issuance of 500,000 warrants to purchase the Company’s common stock at $0.60 per share exercisable for five years.
In addition, a former officer and director and current employee to the Company was issued 500,000 warrants to purchase the Company’s common stock at $0.60 per share exercisable for five years. The Company also agreed, as part of the Modification Agreement, to use its best efforts to repay outstanding credit card indebtedness incurred by the Company and personally guaranteed by the former officer and director. The former officer also forgave the Company for all remaining principal and accrued interest of previous loans made by the employee to the Company.
Total debt forgiveness was $866,055 and has been included as other income in the consolidated statements of operations for the period ended June 30, 2010. The remaining $143,800 of other income resulted from adjustments to outstanding liabilities held by the Company.
SSGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2010
NOTE 5–6– PROMISSORY NOTE PAYABLE
In November of 2007, a financial institution extended the Company a line of credit in the amount of $750,000. In November of 2008, the Company converted the line of credit to a promissory note payable which required monthly principal and interest payments of $35,000 commencing January 2009. The interest rate for the promissory note was 1.5% above the published prime rate. On June 3, 2009, the promissory note was extended until December 2009. On February 26, 2010, the promissory note was extended for an additional year at the same monthly payment with the interest rate fixed at 7% with the first monthly payment due in April 2010. The Company has made all required payments due under the terms of the promissory note.
At June 30, 2010, a financial institution converted an additional line of credit to a promissory note payable due to the bank withdrawing B&M’s line of credit. There is no set principal payment required at the current time, interest only. It is the intent of management to place the balance with another financial institution. The balancebalances on the promissory notenotes at March 31,June 30, 2010 and December 31, 2009 was $353,691.were $893,160 and $353,691, respectively. The Company paid $6,190$39,580 and $8,683$63,677 in interest for the threesix months ended March 31,June 30, 2010 and 2009, respectively.
SSGI, INC.
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)
NOTE 67 –TERM NOTE PAYABLE, RELATED PARTY
In April 2009, the Company borrowed against a line of credit from an existing shareholder in the amount of $500,000. In June 2009, the Company paid the principal amount of the line of credit with proceeds from a new term note from a Nevada limited partnership in the principal amount of $925,000. The term note bears interest at 9% per annum with $425,000 in principal due on October 27, 2009 and $500,000 on April 27, 2010. The Company has not made all payments as required by the terms of note. In April, the Nevada limited partnership extended the term note to April 2011. A director of the company and a stockholder are limited partners in the Nevada limited partnership. The Company used a portion of the proceeds to pay premiums on performance bonds, escrow deposits required by performance bonds and working capital. Once the performance bonds for the government construction contracts are completed, the escrow deposits are returned to the Company with accrued interest. The terms of the note require the Company to use the proceeds from the deposits to repay the term note.
For the threesix months ended March 31,June 30, 2010, the Company has not paid $17,493 in interest on the term loanloan. At June 30, 2010 and allocated the interest to the contracts that required the bonding. The interest expense is included in cost of revenues earned in the Company’s statement of operations. At March 31, 2010,2009, the balance due on the term note is $707,116.$707,116 and $965,458, respectively.
NOTE 8 – LONG TERM DEBT
A summary of long-term debt as of June 30, 2010 and December 31, 2009 is as follows:
| | June 30, 2010 | | | December 31, 2009 | |
| | | | | | |
5.00% note payable to a former stockholder, $9,317 principal and interest payments monthly, through June 2015 | | $ | 491,748 | | | $ | - | |
| | | | | | | | |
5.00% note payable to a former stockholder, $2,097 principal and interest payments monthly, through June 2015 | | | 111,125 | | | | - | |
| | | | | | | | |
3.25% note payable to a former stockholder, | | | | | | | | |
$2,357 principal and interest payments monthly, | | | | | | | | |
through January 2016. | | | 144,600 | | | | - | |
| | | | | | | | |
4.00% note payable to a former stockholder, $26,496 principal and interest payable monthly, through May 2014. | | | 1,150,889 | | | | - | |
| | | | | | | | |
7.99% note payable to Chrysler Financial collateralized by vehicle and guaranteed by founding stockholders. Due in monthly installments of $293 including interest through May 2012. | | | 6,240 | | | | 15,435 | |
| | | | | | | | |
8.75% to 8.99% notes payable to Ford Credit collateralized by vehicles and guaranteed by founding stockholders. Due in monthly installments of $2,918 including interest through 2013. | | | 38,931 | | | | 47,002 | |
| | | | | | | | |
6.50% to 7.15% notes payable to Wachovia Bank collateralized by vehicles and guaranteed by founding stockholders. Due in monthly installments of $5,654 including interest through 2012. | | | 86,509 | | | | 113,170 | |
| | | | | | | | |
7.50% note payable to Wells Fargo collateralized by a vehicle and equipment. Due in monthly installments of $967 including interest through 2012. | | | 22,320 | | | | 28,759 | |
| | | | | | | | |
5.40% note payable to Premium Financing Specialists. Due in monthly installments of $11,952 including interest through 2010 paid in June. | | | - | | | | 23,743 | |
| | | | | | | | |
7.65% note payable to SunTrust Bank collateralized by a vehicle. Due in monthly installments of $349 including interest through 2014. | | | 15,871 | | | | 17,322 | |
| | | | | | | | |
| | | 2,068,233 | | | | 245,431 | |
Less current portion | | | 491,984 | | | | 111,891 | |
Total | | $ | 1,576,249 | | | $ | 133,540 | |
SSGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2010
NOTE 8 – LONG TERM DEBT (continued)
Interest paid on long term debt for the six month periods ended June 30, 2010 and 2009 was $29,337 and $10,306, respectively.
Maturities of long-term debt for the years subsequent to June 30, 2010 are as follows:
| | | | |
2011 | | $ | 491,984 | |
2012 | | | 494,199 | |
2013 | | | 457,274 | |
2014 | | | 446,134 | |
2015 and thereafter | | | 178,642 | |
| | $ | 2,068,233 | |
NOTE 79 – COMMON STOCK PURCHASE WARRANTS
During 2008, the Company completed private placements resulting in the issuance of units consisting of one share of Company restricted common stock and one warrant (each warrant is exercisable into one share of Company restricted common stock). As part of the transaction, the Company also issued common stock purchase warrants to certain individuals who assisted with the private placement. There was no value assigned to these warrants when they were granted.
During the threesix months ended March 31,June 30, 2010, the Company issued 22,50045,000 warrants in payment for legal fees, 500,000 warrants to the former Chairman of the Board, President and Chief Executive Officer, 500,000 warrants to a founding shareholder, former director, and current employee and 250,000 warrants to employee shareholders of the acquired company which resulted in a total of 3,547,5534,820,053 warrants outstanding at that date. These warrants vested immediately and were recorded in the Company’s financial statements as a $5,286 charge to professional fees. The Company also amortizes the value of warrants previously issued to employees beginning with the date of issue through the vesting period. During the three months ended March 31, 2010, the Company charged to payroll and related expenses $16,244. The Company used the Black Scholes option pricing method to value the warrants. These non-cash expenses were offset by a corresponding increase to additional paid-in-capital on the balance sheet.
A summary of the change in common stock purchase warrants for the threesix months ended March 31,June 30, 2010 is as follows:
| | | | | | | | Weighted Average | |
| | Number of | | | | | | Remaining | |
| | Warrants | | | Weighted Average | | | Contractual Life | |
| | Outstanding | | | Exercise Price | | | (Years) | |
Balance, December 31, 2009 | | | 3,525,053 | | | $ | 0.60 | | | | 4.47 | |
Warrants Issued | | | 1,295,000 | | | $ | 0.63 | | | | 4.88 | |
Balance, June 30, 2010 | | | 4,820,053 | | | $ | 0.61 | | | | 4.39 | |
| | Number of Warrants Outstanding | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life (Years) | |
Balance, December 31, 2009 | | | 3,525,053 | | | $ | 0.60 | | | | 4.47 | |
Warrants issued | | | 22,500 | | | $ | 0.60 | | | | 6.84 | |
Balance, March 31, 2010 | | | 3,547,553 | | | $ | 0.60 | | | | 4.47 | |
SSGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2010
NOTE 9 – COMMON STOCK PURCHASE WARRANTS (continued)
The balance of outstanding and exercisable common stock warrants as at March 31,June 30, 2010 is as follows:
Number of | | | Remaining | | | | |
Warrants | | | Contractual Life | | | | |
Outstanding | | | Exercise Price | | | (Years) | |
| | | | | | | |
| 4,820,053 | | | $ | 0.61 | | | | 1.0 – 9.0 | |
| Number of Warrants Outstanding | | | Exercise Price | | | Remaining Contractual Life (Years) | |
| | 3,547,553 | | | $0.60 | | | 1.2 – 9.3 | |
| | | | | | | | | | | |
SSGI, INC.
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)
NOTE 7 – COMMON STOCK PURCHASE WARRANTS (continued)
The fair value of stock purchase warrants granted using the Black-Scholes option pricing model was calculated using the following assumptions:
| | March 31, | | December31, | | June 30, | | | December31, | |
| | 2010 | | 2009 | | 2010 | | | 2009 | |
Risk free interest rate | | 1.3% - 1.7% | | .5% - 1.8% | | | 1.12% - 1.63 | % | | | .5% - 1.8 | % |
Expected volatility | | 173% - 181% | | 20% - 86% | | | 231% - 297 | % | | | 20% - 86 | % |
Expected term of stock warrant in years | | 3.5 | | 1.5 – 5.0 | | | 2.5 - 3.5 | | | | 1.5 – 5.0 | |
Expected dividend yield | | 0% | | 0% | | | 0 | % | | | 0 | % |
Average value per option | | .26 - .44 | | .13 - .73 | | | .02 - .69 | | | | .13 - .73 | |
Expected volatility is based on historical volatility of the Company and other comparable companies. Short Term U.S. Treasury rates were utilized. The expected term of the options was calculated using the alternative simplified method newly codified as ASC 718, formerly Staff Accounting Bulletin (“SAB”) 107, which defines the expected life as the average of the contractual term of the options and the weighted average vesting period for all option tranches. Since trading volumes and the number of unrestricted shares are very small compared to total outstanding shares, the value of the warrants was decreased for lack of marketability.
NOTE 810 – INCOME TAXES
A reconciliation of the differences between the effective income tax rate and the statutory federal tax rate for March 31,June 30, 2010 and 2009 are as follows:
| | 2010 | | | 2009 | |
Tax benefit at U.S. statutory rate | | | 34.00 | % | | | 34.00 | % |
State taxes, net of federal benefit | | | 3.63 | | | | 3.63 | |
Change in valuation allowance | | | (37.63 | ) | | | (37.63 | ) |
| | | - | % | | | - | % |
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at March 31,June 30, 2010 and December 31, 2009 consisted of the following:
| | June 30, | | | December 31, | |
Deferred Tax Assets | | 2010 | | | 2009 | |
| | | | | | |
Net Operating Loss Carryforward | | $ | 2,365,000 | | | $ | 1,958,000 | |
Other | | | 88,000 | | | | 173,000 | |
Total Deferred Tax Assets | | | 2,453,000 | | | | 2,131,000 | |
Deferred Tax Liabilities | | | ( 313,000 | ) | | | (278,000 | ) |
Net Deferred Tax Assets | | | 2,140,000 | | | | 1,853,000 | |
Valuation Allowance | | | (2,140,000 | ) | | | (1,853,000 | ) |
Total Net Deferred Tax Assets | | $ | - | | | $ | - | |
| | March 31, | | | December 31, | |
Deferred Tax Assets | | 2010 | | | 2009 | |
| | | | | | |
Net Operating Loss Carryforward | | $ | 2,255,000 | | | $ | 1,958,000 | |
Other | | | 136,000 | | | | 173,000 | |
Total Deferred Tax Assets | | | 2,391,000 | | | | 2,131,000 | |
Deferred Tax Liabilities | | | ( 290,000 | ) | | | (278,000 | ) |
Net Deferred Tax Assets | | | 2,101,000 | | | | 1,853,000 | |
Valuation Allowance | | | (2,101,000 | ) | | | (1,853,000 | ) |
Total Net Deferred Tax Assets | | $ | - | | | $ | - | |
SSGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2010
NOTE 10 – INCOME TAXES (continued)
As of March 31,June 30, 2010, the Company had a net operating loss carry forward for income tax reporting purposes of approximately $6,000,000$11,000,000 that may be offset against future taxable income through 2029. Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited. No tax asset has been reported in the financial statements, because the Company believes there is a 50% or greater chance the carry-forwards will expire unused. Accordingly, the potential tax benefits of the loss carry forwards are offset by a valuation allowance of the same amount.
SSGI, INC.
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)
NOTE 911 – RELATED PARTY TRANSACTIONS
In order to procure vehicle financing and leased facilities, at various times the founding stockholders of the Company have acted as guarantors under such financing arrangements.
FoundingThe Company has amounts due to the founding stockholders have also loaned the Company a total of $1,229,238totaling $125,000 and $1,196,486 as of March 31,June 30, 2010 and December 31, 2009, respectively. Beginning in November 2008, these stockholder loansThe founding stockholders forgave the Company for all except for $125,000 of remaining principal and accrued interest of previous loans as of April 20. The $125,000 not forgiven is evidenced by a promissory note bearing interest at rates ranging from 7.5%5% and payable in full on December 31, 2011.
The Company also has amounts due to 8.5%. Interest accrued on these loans at March 31, 2010 was $84,910.the majority stockholder of B&M of $450,000 as of June 30, 2010.
In addition, the Company purchased insurance through the spouse of a corporate officerstockholder and consultant via an arm’s length transaction.
The Company leases office facilities from three entities related to Company stockholders. The lease payments for the facilities were $130,353 for the six month period ended June 30, 2010. The leases provide for minimum annual rental payments plus sales tax.
NOTE 1012– 401(k) RETIREMENT PLAN
The acquired Company sponsors a 401(k) plan for eligible employees. The Company’s contributions to the Plan are determined annually by the Board of Directors. The allocation of the Company’s contribution to the Plan among eligible employees was based upon formulas stated within the Plan. The contribution for the six month period ended June 30, 2010 was $10,874. The Company matches up to 3% of compensation that a participant contributes to the Plan.
SSGI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2010
NOTE 13 – LEGAL MATTERS
The Company is a party in legal proceedings in the ordinary course of business. At March 31,June 30, 2010, there were no legal proceedings against the Company. The Company has filed a lawsuit against several customers for non-payment of contract revenues and has been awarded summary judgments in various cases. While the outcome of continuing collection efforts is unknown, it is the opinion of management that the Company will be successful in collecting a majority of court ordered awards.
NOTE 1114 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date the financial statements were available for issuance. There were no other reportable subsequent events.
On April 10, 2010, the Chairman of the Board, President and Chief Executive Officer resigned these positions and remained as director of the Company. In connection with the resignation, the Company and the former Chairman of the Board, President and Chief Executive Officer entered into a Modification Agreement that required the former officer to surrender to the Company all shares of common stock held with the exception of 4,000,000 shares. The former officer also forgave the Company for all except for $125,000 of remaining principal and accrued interest of previous loans made by the former officer to the Company. The $125,000 not forgiven is evidenced by a promissory note bearing interest at 5% and payable in full on December 31, 2011. The Modification Agreement also requires the former officer to provide certain transitional consulting services to the Company, on a limited basis, for 12 months in exchange for a consulting fee of $9,333 per month as well as the issuance of 500,000 warrants to purchase the Company’s common stock at $0.60 per share exercisable for five years. The Company also agreed, as part of the Modification Agreement, to use its best efforts to repay outstanding credit card indebtedness incurred by the Company and personally guaranteed by the former officer and director.
On April 27, 2010, the maturity date of the term note payable, related party, was extended to April 30, 2011.
On May 13, 2010, the Company acquired all of the outstanding common shares of a Florida construction company licensed to operate in the Southeastern United States. This newly acquired subsidiary specializes in the design, construction and maintenance of retail petroleum facilities. The Company believes that this acquisition will allow the Company to add experienced personnel in the petroleum industry and existing relationships with large petroleum companies. The Company will also be able to expand its operations in the Southeastern United States. As consideration for the acquisition, the Company paid $1,000,000 in cash, $300,000 due at closing, $250,000 within 30 days of the closing date, $250,000 within 60 days of the closing date, and $200,000 within 90 days of the closing date. In addition the Company issued a Promissory Note in the amount of $1,173,473 bearing interest at 4% per annum and payable in 48 equal monthly installments commencing on the 30th day following the closing date and issued 6,124,622 shares of the Company’s common stock. The Company has valued the transaction at $6,460,708 utilizing $0.70 as the market value of the Company’s stock at the date of acquisition as listed on the OTC market and cash paid. The Company pledged the shares of the acquired company to secure payment of the remaining cash installments. The Company also issued warrants to certain employee shareholders of the acquired company to purchase 250,000 shares of the Company’s common stock at $0.75 per share exercisable for five years.
SSGI, INC.
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)
NOTE 11 – SUBSEQUENT EVENTS (continued)
Audited financial statements of the acquired company were not available at the time of acquisition. If the company had been combined for the years ended December 31, 2009 and 2008, the combined revenues would have been $26,399,000 and $31,631,000, respectively. The pre-tax results of operations for the same periods would have been losses of $1,438,000 and $1,325,000, respectively. The acquired company has operated as an S Corporation since its inception.
May 13, 2010, the Company commenced a private offering to accredited investors of up to 15 million shares of the Company’s common stock at $0.10 per share. On that date, the Company accepted subscriptions for 2.9 million shares of common stock from 12 accredited investors for $0.29 million in cash. On May 25, 2010 the Company accepted $0.18 million in cash for 1.8 million shares from 5 accredited investors. From May 27 to June 2, 2010, the Company accepted subscriptions for 1.69 million shares of common stock from 6 accredited investors for $0.169 million in cash. There were no warrants attached to these shares sold. There were no underwriting discounts or commissions. The securities were sold in a private placement only to accredited investors in reliance on an exemption provided by Regulation D promulgated under the Securities Act of 1933, as amended.
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
Overview
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.
Resignation of Chairman of the Board, President and Chief Executive Officer.
On April 10, 2010, the Chairman of the Board, President and Chief Executive Officer resigned these positions and remained as director of the Company. In connection with the resignation, the Company and the former Chairman of the Board, President and Chief Executive Officer entered into a Modification Agreement that required the former officer to surrender to the Company all shares of common stock held with the exception of 4,000,000 shares. The former officer also forgave the Company for all except for $125,000 of remaining principal and accrued interest of previous loans made by the former officer to the Company. The $125,000 not forgiven is evidenced by a promissory note bearing interest at 5% and payable in full on December 31, 2011. The Modification Agreement also requires the former officer to provide certain transitional consulting services to the Company, on a limited basis, for 12 months in exchange for a consulting fee of $9,333 per month as well as the issuance of 500,000 warrants to purchase the Company’s common stock at $0.60 per share exercisable for five years. The Company also agreed, as part of the Modification Agreement, to use its best efforts to repay outstanding credit card indebtedness incurred by the Company and personally guaranteed by the former officer and director.
Recent Acquisition of B&M Construction Co., Inc.
On May 13, 2010, we acquired all of the outstanding shares of capital stock of B&M Construction Co., Inc., a Florida corporation (“B&M”), from Bobby L. Moore, Jr. (the “Majority B&M Shareholder”), Phillip A. Lee, William H. Denmark and Evan D. Finch (Messrs. Lee, Denmark and Finch are collectively referred to as the “Minority B&M Shareholders”). B&M is a construction company operating in the Southeastern United States that specializes in the design, construction and maintenance of retail petroleum facilities. The consideration paid by the Company to the Majority B&M Shareholder consisted of (a) $1,000,000 in cash, payable $300,000 at closing, $250,000 within 30 days of the closing date, $250,000 within 60 days of the closing date, and $200,000 within 90 days of the closing date, plus (b) $1,173,473 represented by a Promissory Note bearing interest at 4% per annum and payable in forty-eight (48) equal monthly installments, commencing on the 30th day following the closing date, plus (c) 4,124,622 shares of the Company’s common stock. The consideration paid by the Company to the Minority B&M Shareholders consisted of (in the aggregate) (a) 2,000,000 shares of the Company’s common stock, and (b) warrants to purchase 250,000 shares of the Company’s common stock exercisable for five years at an exercise price of $0.75 per share. In addition, at the closing of the acquisition, the Minority B&M Shareholders became employees of Surge.SSGI, Inc.
ThreeSix months ended March 31,June 30, 2010 as compared to threesix months ended March 31,June 30, 2009
Revenue
The Company’s revenue of $0.74$3.66 million for the threesix months ended March 31,June 30, 2010 decreased $.93increased $0.97 million or 56%35.9%, compared to $1.67$2.70 million for the threesix months ended March 31,June 30, 2009. This decreaseincrease was in revenues was primarily due to our lackacquisition of cash reserves needed to commence construction on new contracts. While government contracts increased significantly from $0.03 million forB&M Construction Co., Inc., and the threebacklog between the two companies. Significant time was spent during the six months ended March 31, 2009 to $0.28 million forJune 30, 2010 finalizing the same period in 2010, the private sector revenues fell from $1.28 million for the three months ended March 31, 2009 to $0.50 million or 61% for the same period in 2010. The Company earned $.12 million for the three months ended March 31, 2009 from small restorationacquisition and installation contracts with a large national retail chain while for the same period in 2010, we earned -0- revenues from this source. We did, however, begin construction on a $1.08 million contract. We spent significant time during the three months ended March 31, 2010 seeking additional capital. (See “Recent Financings” )
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.
Depreciation expense remained constant between the three month periods ended March 31, 2010 Office and 2009. We allocated $.02 million and $0.01 million of depreciation expense for the three month periods ended March 31, 2010 and 2008, respectively, to cost of revenues earned. Amortizationtechnology expense increased slightly81.0%, from the three months ended March 31, 2009$0.10 million to the same period in 2010$0.18 million due to the amortizationclosing of costs associated with updating ofone office and obtaining thee offices in the our website.
Foracquisition. Overall, the three monthsconsolidated general and administrative expenses increased 150.6% from the periods ended March 31, 2010, we recorded bad debt expense of $0.01 million from our bad debt reserve amount of $0.04 million. Our bad debt expense was 2% of contract revenues earned and approximately 3% of our contracts receivable balance of $0.39 million at March 31, 2010. During the three month period ended March 31, 2010, we recovered $0.03 million from delinquent contracts.
Contracts receivable are customer obligations due under contractual terms. We sells our services to residential, commercial, and retail customers as well as municipalities. On most projects, we have liens rights under Florida law which are typically enforced on balances not collected within 90 days. The Company includes any balances that are determined to be uncollectible along with a general reserve in its overall allowance for doubtful accounts. Collectability of our accounts receivable allowance is reviewed on a monthly basis. Municipalities pay the Company based on a percentage completion formula less a 10% retainage that is paid upon successful completion of a contract.
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.
Allocated to cost of revenues earned and not shown under the other income and expense classification in our statement of operations is an additional $.02 million in interest paid on term notes payable to related parties. The interest cost associated with this loan is directly related to loans made to fund restricted cash deposits held by a third party bonding agency for contracts requiring performance bonds. Each contracted job is charged an interest cost based on the amount of proceeds from the term note payable that funded the cash deposits held as collateral by the bonding agency. The Company did not have a term note payable to related parties for the three months ended March 31, 2009.
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.
Other income increased $1.01 million over the six month period for 2009. This is due to the resignation of the former Chairman of the Board, President and Chief Executive Officer. In connection with the resignation, the Company and the former Chairman of the Board, President and Chief Executive Officer entered into a Modification Agreement that required the former officer to forgive the Company for all except for $125,000 of remaining principal and accrued interest of previous loans made by the former officer to the Company.
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.
acquisition of B&M Construction Co., Inc’s fixed assets compared to the same period in 2009. In connection with the acquisition, other assets increased to $4.79 in 2010 from $0.02 million for the same period in 2009. The primary increases are a company owned whole-life policy with a cash surrender value of $0.79 million and $4.00 million recognized as Goodwill.
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.
At March 31, 2010, billings in excess of costs and estimated earnings on uncompleted contracts had a balance of $0.23 million which was a decrease of approximately 8% over the balance of $0.25 million at December 31, 2009. This decrease was a result of lower billings by the Company due to decreased construction activity.
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):
| | For the three months ended March 31, | | | For the six months ended June 30, | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| | | | | | | | | | | | |
Net cash provided (used) in operating activities | | $ | 263 | | | $ | (441 | ) | |
Net cash used in operating activities | | | $ | ( 802 | ) | | $ | ( 923 | ) |
Net cash used in investing activities | | | - | | | | (19 | ) | | | ( 284 | ) | | | ( 352 | ) |
Net cash provided (used) by financing activities | | | (274 | ) | | | 525 | | |
Net cash provided by financing activities | | | | 1,069 | | | | 1,298 | |
Net increase (decrease) in cash | | $ | (11 | ) | | $ | 65 | | | $ | ( 17 | ) | | $ | 23 | |