f10q0612_sgblocksinc.htm

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below before making an investment decision. If any of the following risks or uncertainties occur, our business, prospects, financial condition or operating results could be materially adversely affected, the trading price of our common stock could decline, and you may lose all or part of your investment. In assessing the risks described below, you should also refer to the other information contained in this Quarterly Report on Form 10-Q, including our consolidated financial statements and the related notes and schedules, before deciding to purchase any shares of our common stock.

Risks Relating to the Company

If we are not successful in our efforts to increase sales or raise capital, we will experience a shortfall in cash over the next twelve months and our ability to raise capital may be limited.

As of June 30, 2012 and December 31, 2011, SG Building, our wholly-owned subsidiary and only operating business, had cash and cash equivalents of $401,760 and $561,759, respectively. However, over the six months ended June 30, 2012 and fiscal year ended December 31, 2011, we had a net loss of $930,767 and $1,909,575, respectively. We incurred additional losses during the quarter ended June 30, 2012. If we are not successful with our marketing efforts to increase sales, we will experience a shortfall in cash over the next twelve months. If necessary, we will implement a plan to fund such a deficit which could include, among other things, reducing operating expenses in an amount sufficient to operate the business for a reasonable period of time. During the six months ended June 30, 2012, we received net proceeds of $642,183 from a private placement. We may also seek to obtain debt or additional equity financing to address any shortfalls in our cash. The type, timing and terms of the financing we may select will depend on, among other things, our cash needs, the availability of other financing sources and prevailing conditions in the financial markets. However, there can be no assurance that we would be able to secure additional funds if needed and that if such funds are available, whether the terms or conditions would be acceptable to us. In such case, the further reduction in operating expenses might need to be substantial in order for us to ensure enough liquidity to sustain our operations. It will also be difficult for us to make any acquisitions unless we can raise additional capital. Any financing would be dilutive to our stockholders.

The Company has identified cost reduction measures which when implemented would result in a reduction in employee headcount, reduction in base salaries to senior executives and employees, and other cost savings measures. These actions are expected to result in annual cost savings which should start to be realized in the third quarter of 2012.

We have incurred net losses in certain prior periods and there can be no assurance that we will generate income in the future.

Our ability to achieve profitability will depend upon our ability to generate and sustain substantially increased revenues. We may incur operating losses in the future as we execute our growth strategy. We intend to make significant expenditures related to marketing, expansion of our website, hiring of additional personnel, and development of our technology and infrastructure. Although SG Building generated revenue from continuing operations during the fiscal year ended December 31, 2010 and the fiscal year ended December 31, 2011, it has incurred net losses of $1,247,644 and $1,909,575, respectively, during such periods. For the fiscal year ended December 31, 2010 and the fiscal year ended December 31, 2011, we (prior to giving effect to the Merger of CDSI Merger Sub with and into SG Building (formerly SG Blocks, Inc.)) incurred net losses of $35,204 and $118,460, respectively, during such periods. Over the six months ended June 30, 2012, we had a net loss of $930,767. The likelihood that we will generate net income in the future must be considered in light of the difficulties facing the construction and construction management industries as a whole, economic conditions, the competitive environment in which we operate and the other risks and uncertainties discussed in this Quarterly Report on Form 10-Q. Our operating results for future periods are subject to numerous uncertainties, and it may not achieve sufficient revenues to sustain or increase profitability on a quarterly or annual basis.

We have a history of losses.

We have reported an operating loss in each of our fiscal quarters since inception. There is a risk that we will continue to incur operating losses.

We are dependent on the services of key personnel, and the unexpected loss of their services may adversely affect its operations.

Our success depends highly upon the personal efforts and abilities of our senior management team, specifically the efforts of Paul Galvin, the Company’s Chief Executive Officer and Director, and Stevan Armstrong, the Company’s President and Chief Operating Officer and Director. The loss of the services of one or more of these individuals could have a material adverse effect on our business. Our ability to achieve profitability and generate increased revenue will depend upon our ability to retain, and attract if necessary, experienced management personnel.

An investor in our common stock must consider the uncertainties facing early stage companies in highly regulated industries.

An investor in our common stock must consider the uncertainties facing early stage companies in highly regulated industries. These uncertainties include:

●	an evolving business model that makes future success uncertain and an investment in our common stock highly speculative;

●	the lack of a well-developed brand that may limit our ability to attract customers;

●	the potential development of a comparable product and lack of barriers to entry by better funded competitors; and

●	our new corporate organization, regulatory requirements and its anticipated growth could lead to management distractions and higher than expected operating expenses.

Our business is susceptible to adverse weather conditions and natural disasters.

Our construction projects are susceptible to, and are significantly affected by, adverse weather conditions and natural disasters such as hurricanes, tornadoes, earthquakes, droughts, floods and fires. These adverse weather conditions and natural disasters can cause delays and increased costs in the construction of new buildings. If insurance is unavailable to us or is unavailable on acceptable terms, or if our insurance is not adequate to cover business interruption or losses resulting from adverse weather or natural disasters, our business and results of operations will be adversely affected. In addition, damage to new buildings caused by adverse weather or a natural disaster can cause our insurance costs to increase.

Our failure to successfully complete the integration of SG Building or any other businesses acquired in the future could have a material adverse effect on our business, financial condition and operating results.

Any financing required for acquisitions could dilute the interests of our existing holders of our common stock, result in an increase in our indebtedness or both. Acquisitions may entail numerous risks, including:

●	difficulties in assimilating acquired operations or products, including the loss of key employees from acquired businesses;

●	diversion of management’s attention from our core business;

●	adverse effects on existing business relationships with supplies and customers; and

●	risks of entering markets in which we have limited or no prior experience.

Our failure to successfully complete the integration of SG Building or any other acquired business could have a material adverse effect on our business, financial condition and operating results. In addition, there can be no assurance that we will be able to identify suitable acquisition candidates or consummate acquisitions on favorable terms.

We rely on ConGlobal Industries, Inc. to supply us with containers used in our business and the unexpected termination of our exclusive 10 year Collaboration and Supply contract with ConGlobal to provide these containers would have a negative impact on our business.

We rely on ConGlobal to supply us with containers and other resources used in our business and if this relationship were to unexpectedly end, or if the ConGlobal Agreement were to be unexpectedly terminated, such event could have a negative impact on our business while our alternate sources of supply are being implemented.

We rely on certain vendors to supply us with materials and products that if we were unable to obtain could adversely affect our business.

We have relationships with key materials vendors, and we rely on suppliers for our purchases of products from them. Any inability to obtain materials or services in the volumes required and at competitive prices from our major trading partners, the loss of any major trading partner, or the discontinuation of vendor financing (if any) may seriously harm our business because we may not be able to meet the demands of our customers on a timely basis in sufficient quantities or at all. Other factors, including reduced access to credit by our vendors resulting from economic conditions, may impair our vendors’ ability to provide products in a timely manner or at competitive prices. We also rely on other vendors for critical services such as transportation, supply chain and professional services. Any negative impacts to our business or liquidity could adversely impact our ability to establish or maintain these relationships.

Risks Relating to our Business

We depend on the availability and skill of subcontractors, their willingness to work with us, and their selection of suitable and quality building materials.

We rely on subcontractors to perform the actual construction of our building projects, and in many cases, to select and obtain raw materials. Despite our detailed specifications and quality control procedures, in some cases, improper construction processes or defective materials may be used to finish construction of our building projects. We may need to spend money to remediate such problems when they are discovered. Defective products widely used by the construction industry can result in the need to perform extensive repairs to large numbers of buildings. Though subcontracts are written to protect us from substandard performance or materials, pervasive problems could adversely affect our business. The cost to us in complying with its warranty obligations in these cases may be significant if it is unable to recover the cost of repair from subcontractors, materials suppliers and insurers. Further, the timing and quality of our construction depends on the availability and skill of subcontractors. Although we believe that our relationships with our suppliers and subcontractors are good, there can be no assurance that skilled subcontractors will continue to be available at reasonable rates and in the areas in which we conducts our operations. The inability to contract with skilled subcontractors or general contractors at reasonable costs on a timely basis could limit our ability to build and deliver buildings and could erode our profit margins and adversely affect our results of operations and cash flows.

We may have difficulty protecting our proprietary technology.

Intellectual property and proprietary technology are important to the success of our business. We rely primarily on trade secrets to protect our intellectual property and proprietary technology. While we intend to make the appropriate filings and protect our intellectual property and proprietary technology, there can be no assurance that we will be able to so. In addition, it is difficult to protect against or monitor all possible misappropriations and unauthorized access to our intellectual property and technology. To date, we have ordered prior art on five potential intellectual property claims. Significant challenges in protecting our intellectual property and technology are posed by (a) funding limitations and (b) our rapidly evolving adaptation to new product/market/technology challenges. Dissemination or dilution of the aforementioned intellectual property and technology could have an adverse effect on our business, financial condition, results of operations and liquidity.

Growth of operations may strain resources and if we fail to manage growth successfully, our business could be adversely affected.

Increased orders for our product have placed, and may continue to place, a strain on our operational, financial and managerial resources and personnel. Any failure to manage growth effectively could have a material adverse effect on our business, operating results, financial condition and liquidity.

Our exposure to foreign currency rate risks and inflation could materially and adversely affect our business, financial condition and results of operations.

We may be exposed to foreign currency exchange rate risks and inflation with respect to our sales, profits, and assets and liabilities denominated in currencies other than the U.S. dollar as a result of possible international operations. As a result, we may suffer losses as a result of foreign currency rate fluctuations.

Our revenue growth rate depends on our ability to execute our business plan.

We may not be able to identify and maintain the necessary relationships within the industries in which we participate. Our ability to execute our business plan also depends on other factors, including the ability to:

●	negotiate and maintain contracts and agreements with acceptable terms;

●	implement terms of contracts and agreements according to original specifications;

●	hire and train qualified personnel and retain key employees;

●	maintain an affordable labor force;

●	maintain marketing and development costs at affordable rates;

●	ensure the availability of project financing; and

●	effectively compete within domestic and international markets.

Failure to properly perform any of the foregoing may have a material adverse effect on our business, operating results, financial condition and liquidity.

We face continuous pricing pressure from our customers and our competitors. This will affect our margins and therefore our profitability and cash flow unless we can efficiently manage our manufacturing costs and market our products based on superior quality.

Our customers often make purchase decisions based on product pricing. Many of our competitors have significantly greater financial resources than we have, and as a result may be able to withstand the adverse effect of discounted pricing and reduced margins in order to build market share. While one of our strategies is to offer competitive pricing in order to retain and increase market share, and to seek to manage its manufacturing efficiently to sustain acceptable margins, we may not be able to maintain appropriate prices or to manage product manufacturing costs sufficiently to sustain acceptable margins. Similarly, we also seek to compete based on product quality rather than just price, but we may not be successful in these efforts. This could adversely affect our profitability, liquidity and market share.

The sale and export of products to a foreign country involves inherent operational risks that may not be adequately covered by insurance.

We can give no assurance that we will be adequately insured against all risks or that our insurers will pay a particular claim. The cost of insurance on foreign business may be substantial and could decrease profitability. Furthermore, we may not be able to obtain adequate insurance coverage at reasonable rates in the future. We may also be subject to claims by our customers involving disputes or situations that are beyond its control. There is also a possibility of fraudulent claims or other illicit activities involving our transactions. Any of these potentialities may give rise to a loss for which we are not insured, or adequately insured.

Our liability for estimated warranties may be inadequate, which could materially and adversely affect our business, financial condition and results of operations.

As a construction manager, we are subject to construction defect and warranty claims arising in the ordinary course of its business. These claims are common in the construction management industry and can be costly. At this time, the third party providers offer guarantees and warranties in accordance with industry standards that flow through to our clients. Although we maintain reserves for such claims, which to date have been adequate, there can be no assurance that warranty expense levels will remain at current levels or that such reserves will continue to be adequate. A large number of warranty claims exceeding our current warranty expense levels could have a material adverse effect on our results of operations.

We can be adversely affected by failures of persons who act on our behalf to comply with applicable regulations and guidelines.

Although we expect all of our associates (i.e., employees), officers and directors to comply at all times with all applicable laws, rules and regulations, there are instances in which subcontractors or others through whom we do business may engage in practices that do not comply with applicable regulations or guidelines. It is possible that our associates may become aware of these practices but do not take steps to prevent them. If we learn of practices relating to buildings it constructs that do not comply with applicable regulations or guidelines, we will move actively to stop the non-complying practices as soon as possible and we will take disciplinary action with regard to our associates who were aware of the practices, including in some instances terminating their employment. However, regardless of the steps we take, we may be subject to fines or other governmental penalties, and our reputation may be injured.

The cyclical and seasonal nature of the construction and construction management industries causes our revenues and operating results to fluctuate, and we expect this cyclicality and seasonality to continue in the future.

The construction and construction management industries are highly cyclical and seasonal and is influenced by many international, national and regional economic factors including the availability of consumer and wholesale financing, seasonality of demand, consumer confidence, interest rates, income levels and general economic conditions, including inflation and recessions. As a result of the foregoing factors, our revenues and operating results fluctuate, and we currently expect them to continue to fluctuate in the future. Moreover, we have and may continue to experience operating losses during cyclical downturns in the construction and construction management market.

We may not be paid all amounts owed to us by our customers.

If the financial condition of our customers were to deteriorate, resulting in their inability or unwillingness to pay amounts owed to us, or if our customers are otherwise unable or unwilling to pay us, or if bankruptcy courts require us to refund amounts paid to us, our earnings and financial position could be negatively impacted.

Risks Relating to the Construction and Construction Management Industries

The construction management industry suffers from a lack of third-party financing, and our financial condition and results of operations could be negatively affected if additional third-party financing for the purchases of our buildings does not become available.

Our business and earnings depend substantially on our client’s ability to obtain financing for the development of their construction projects. The availability and cost of such financing is further dependent on the number of financial institutions participating in the industry, the departure of financial institutions from the industry, the financial institutions’ lending practices, the strength of the domestic and international credit markets generally, governmental policies and other conditions, all of which are beyond our control. In light of the current economic climate, some of our projects may not be successful in obtaining additional funds in a timely manner, on favorable terms or at all. The availability of borrowed funds, especially for construction financing, has been greatly reduced, and lenders may require project developers to invest increased amounts of equity in a project in connection with both new loans and the extension of existing loans. Unfavorable changes in the availability and terms of financing in the industry will have a material adverse effect on certain privately financed projects.

Our results of operations also depend on the ability of our potential privately financed customers to obtain loans for the purchase of new buildings. Over the past few years, lenders have tightened the credit underwriting standards which have reduced lending volumes. If this trend continues, it would negatively impact our sales. Our sales depend in large part on the availability and cost of financing. In addition, where our potential customers must sell their existing buildings or real estate in order to develop the new buildings, increases in mortgage costs and/or lack of availability of mortgages could prevent buyers of potential customers’ existing buildings from obtaining the mortgages they need to complete their purchases, which would result in our potential customers’ inability to make purchases from us. If our potential buyers cannot obtain suitable financing, our sales and results of operations would be adversely affected.

The construction and construction management industries are highly competitive, and competition may increase the adverse effects of industry conditions.

We operate in a very competitive environment, which is characterized by competition from numerous local, regional and national builders and others in the real estate development business around the world. We may compete for financing, raw materials and skilled management and labor resources. We also compete with the rental market, as well as with the resale, or “previously owned,” building market, which has increased significantly due to the large number of foreclosures due to the current economic downturn. An oversupply of buildings available for sale and the heavy discounting of building prices by some of our competitors could adversely affect demand for our buildings and our results of operations. Increased competition could require us to further increase our selling incentives and/or reduce our prices which could negatively affect our profits.

Government regulations and legal challenges may delay the start or completion of our projects, increase our expenses or limit our building activities, which could have a negative impact on our operations.

Various domestic and international rules and regulations concerning building, zoning, sales and similar matters apply to and/or affect the construction and construction management industries. Governmental regulation affects construction activities as well as sales activities, mortgage lending activities and other dealings with consumers. These industries also have experienced an increase in domestic state and local legislation and regulations that limit the availability or use of land. Municipalities may also restrict or place moratoriums on the availability of utilities, such as water and sewer taps. In some areas, municipalities may enact growth control initiatives, which will restrict the number of building permits available in a given year. In addition, we may be required to apply for additional approvals or modify our existing approvals because of changes in local circumstances or applicable law. If governments in locations in which we operate take actions like these, it could have an adverse effect on our business by causing delays, increasing our costs or limiting our ability to operate in those areas. Further, we may experience delays and increased expenses as a result of legal challenges to our proposed projects, whether brought by governmental authorities or private parties. Failure to comply with laws or regulations applicable to or affecting us, or the passage in the future of new and more stringent laws affecting us, may adversely affect our financial condition or results of operations.

Supply risks and shortages relating to labor and materials can harm our business by delaying construction and increasing costs.

Though the availability of talented consultants and subcontractors is high in the current economic environment, the construction and construction management industries from time to time have experienced significant difficulties with respect to:

●	shortages of qualified trades people and other labor;

●	changes in laws relating to union organizing activity;

●	inadequately capitalized or uninsured local subcontractors;

●	shortages of materials;

●	volatile or sustained increases in the cost of raw materials, including containers, traditional finish materials which are significant components of its construction costs;

●	lack of availability of adequate utility infrastructure and services; and

●	transportation cost increases.

These difficulties can, and often do, cause unexpected short-term increases in construction costs and cause construction delays. In addition, to the extent our subcontractors incur increased costs associated with higher insurance premiums and compliance with regulations, these costs may be passed on to us. We are generally unable to pass on any unexpected increases in construction costs to those customers who have already entered into sales contracts, as those contracts generally fix the price of the building at the time the contract is signed. Pricing competition, oversupply of new and existing buildings and tightening mortgage qualifications, among other factors may restrict our ability to pass on any additional costs, and may negatively impact its profit margins.

We have not experienced any work stoppages due to strikes by unionized workers, but there is no assurance that there will not be any work stoppages due to strikes or other job actions in the future.

Risks Relating to the Merger

As a result of the merger between a wholly-owned subsidiary of the Company and SG Building in November 2011, we have become subject to more reporting requirements of federal securities laws, which can be expensive.

As a result of the merger between a wholly-owned subsidiary of the Company and SG Building in November 2011, we have become an operating company. Accordingly, we may be subject to more information and reporting requirements of the Securities Exchange Act of 1934 and other Federal securities laws, including compliance with the Sarbanes-Oxley Act. The costs of preparing and filing annual and quarterly reports, proxy statements and other information with the Securities and Exchange Commission (including reporting of the Merger) and furnishing audited reports to stockholders may increase and may cause our expenses to be higher.

In addition, it may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance personnel in order to develop and implement appropriate internal controls and reporting procedures. If we are unable to comply with the internal controls requirements of the Sarbanes-Oxley Act, we may not be able to obtain the independent registered public accountant certifications required by the Sarbanes-Oxley Act.

Because we were previously a shell company and acquired an operating entity by means of a reverse merger with one of our subsidiaries, we may not be able to attract the attention of major brokerage firms.

There may be risks associated with us formerly being a shell company and acquiring an operating entity through a “reverse merger”. Securities analysts of major brokerage firms may not provide coverage of us since there is no incentive to brokerage firms to recommend the purchase of our common stock. No assurance can be given that brokerage firms will, in the future, want to conduct any secondary offerings on our behalf.

Risks Relating to our Common Stock

Our stock price may be volatile.

The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:

●	technological innovations or new products by us or our competitors;

●	intellectual property disputes;

●	additions or departures of key personnel;

●	sales of our common stock;

●	our ability to execute our business plan;

●	operating results that fall below expectations;

●	loss of any strategic relationship;

●	industry developments;

●	economic and other external factors; and

●	period-to-period fluctuations in our financial results.

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.

Our limited operating history makes evaluating our common stock more difficult, and therefore, investors have limited information upon which to rely.

We have limited historical data upon which to forecast operating expenses or future needs and operating results. Our limited operating history will make it difficult for investors to evaluate our business and prospects. Investors must consider our prospects in light of the risks, expenses and difficulties we face as an early stage company with a limited operating history, new organizational structure and operating in a highly regulated and competitive industry.

Our directors, executive officers and affiliated persons beneficially own a substantial number of shares of our common stock, which gives them significant control over certain major decisions upon which its stockholders may vote and may discourage an acquisition of the Company.

Our executive officers, directors and affiliated persons beneficially own a substantial number of shares of our common stock. The interests of our officers, directors and affiliated persons (as stockholders) may differ from the interests of other stockholders. As a result, these officers, directors and affiliated persons will have significant influence over all corporate actions requiring stockholder approval, irrespective of how other stockholders may vote, including the following actions:

●	elect or defeat the election of the our directors;

●	amend or prevent amendment the our Amended and Restated Certificate of Incorporation or By-Laws;

●	effect or prevent a merger, sale of assets or other corporate transaction; and

●	control the outcome of any other matter submitted to the stockholders for vote.

Management’s ownership of a substantial number of shares of our common stock may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company, which in turn could reduce its stock price or prevent our stockholders from realizing a premium over its stock price.

Trading of our common stock may be restricted by Blue Sky eligibility and our common stock may be deemed a “penny stock”, which would make it more difficult for the Company’s investors to sell their shares.

We currently are not Blue Sky eligible in certain states so trading of the Company’s stock in such states may be restricted. In addition, our common stock is subject to the “penny stock” rules adopted under section 15(g) of the Securities Exchange Act. The penny stock rules apply to non-Nasdaq companies whose common stock trades at less than $5.00 per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain subject to the penny stock rules for any significant period, that could have an adverse effect on the market, if any, for our securities. If our securities are subject to the penny stock rules, investors will find it more difficult to dispose of the common stock. In addition, the Blue Sky eligibility rules may discourage investor interest in and limit the marketability of, the common stock.

Furthermore, for companies whose securities are quoted on the OTC Bulletin Board of the National Association of Security Dealers, Inc., it is more difficult (1) to obtain accurate quotations, (2) to obtain coverage for significant news events because major wire services generally do not publish press releases about such companies, and (3) to obtain needed capital.

Sale of a substantial number of shares of the common stock may cause the price of our common stock to decline.

If our stockholders sell substantial amounts of the common stock in the public market, the market price of our common stock could fall. These sales also may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that it deems reasonable or appropriate.

The exercise of outstanding warrants and options will dilute the percentage ownership of then-existing stockholders.

As of June 30, 2012, there are outstanding Warrants to purchase 1,160,607 shares of common stock and options to purchase 8,032,500 shares of common stock. Options to purchase 7,817,500 shares were granted under our 2011 Incentive Stock Plan. The exercise of such outstanding warrants and options would dilute the then-existing stockholders’ percentage ownership of the Company’s stock, and any sales in the public market of common stock underlying such securities could adversely affect prevailing market prices for the common stock. Moreover, the terms upon which the Company would be able to obtain additional equity capital could be adversely affected since the holders of such securities can be expected to exercise them at a time when the Company would, in all likelihood, be able to obtain any needed capital on terms more favorable to the Company than those provided by such securities.

The issuance of additional securities by the Board will dilute the ownership interests of our current stockholders and could discourage the acquisition of the Company.

Our Board, without any action by our stockholders, is authorized to designate and issue additional classes or series of capital stock (including classes or series of preferred stock) as it deems appropriate and to establish the rights, preferences and privileges of such classes or series. The issuance of any new class or series of capital stock would not only dilute the ownership interest of our current stockholders but may also adversely affect the voting power and other rights of holders of common stock. The rights of holders of preferred stock and other classes of common stock that may be issued may be superior to the rights of the holders of the existing class of common stock in terms of the payment of ordinary and liquidating dividends and voting rights.

In addition, the ability of the Board to designate and issue such undesignated shares could impede or deter an unsolicited tender offer or takeover proposal regarding the Company and the issuance of additional shares having preferential rights could adversely affect the voting power and other rights of holders of common stock and render more difficult the removal of current management, even if such removal may be in the stockholders’ best interests.

Additional equity offerings may dilute current stockholders.

As a result of acquisitions or additional capital raisings, we may issue additional securities or instruments that may by convertible into or exercisable or exchangeable for, or otherwise entitle the holder thereof to receive common stock. The issuance of such additional securities will dilute the ownership of our then current stockholders.

If we do not implement necessary internal control over financial reporting in an efficient and timely manner, or if we discover deficiencies and weaknesses in existing systems and controls, we could be subject to regulatory enforcement and investors may lose confidence in our ability to operate in compliance with existing internal control rules and regulations, either of which could result in a decline in our stock price.

It may be difficult to design and implement effective internal control over financial reporting for combined operations as the Company integrates the business of SG Building it acquired as a result of the Merger, and perhaps other acquired businesses in the future. In addition, differences in existing controls of acquired businesses may result in weaknesses that require remediation when internal controls over financial reporting are combined.

If we fail to maintain an effective system of internal control, we may be unable to produce reliable financial reports or prevent fraud. If we are unable to assert that its internal control over financial reporting is effective at any time in the future, or if our independent registered public accounting firm is unable to attest to the effectiveness of internal controls, is unable to deliver a report at all or can deliver only a qualified report, we could be subject to regulatory enforcement and investors may lose confidence in our ability to operate in compliance with existing internal control rules and regulations, either of which could result in a decline in the our stock price.

We do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock.

We have never paid nor do we expect in the foreseeable future to pay any dividends.

There is a limited trading market for our common stock.

Our common stock has been quoted on the OTC Bulletin Board since 1999 and is currently quoted under the symbol “SGBX”. Prior to November 9, 2011, our common stock was quoted under the symbol “CDSI.” There is a limited trading market in our shares and a stockholder could likely find it difficult to sell or to obtain quotations as to prices of our common stock. During 2010, the average daily trading volume of our common stock was approximately 1,209 shares, with 207 days of 252 trading days having no trading activity. Since the consummation of the Merger on November 4, 2011 there has been limited trading volume of our common stock, and on many days there has been no trading activity in our common stock.

No assurances can be given that our common stock will continue to be quoted on the OTC Bulletin Board or that an orderly trading market will be maintained for our common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the first fiscal quarter of 2012, the Company conducted a best efforts private placement of the Company’s common stock at a valuation of $0.35 per share (the March Private Placement). On March 28, 2012, we received net proceeds of $433,608 from the private placement. We issued 1,463,572 shares of our common stock in connection with this March Private Placement. On May 23, 2012, we received additional proceeds of $208,585 from the March Private Placement. We issued 702,872 shares of our common stock in connection with this offering. The proceeds from this offering will be used to support the Company’s business growth and for general working capital requirements. As additional consideration for services by Ladenburg, the placement agent in the March Private Placement, the Company issued warrants to purchase 86,323 shares of our common stock for $0.35 per share to Ladenburg (the “March Warrants”). The March Warrants expire on March 27, 2017. Ladenburg also received warrants to purchase 29,700 shares our common stock for $0.35 per share on May 23, 2012 (the “May Warrants”). The May Warrants expire on May 22, 2017. The March Warrants and May Warrants have registration rights and contain redemption provisions that make them redeemable for cash by the holder of the warrant under certain circumstances that are not within the control of the Company. The Warrants are governed by the terms of a Warrant Agreement between the Company the Ladenburg. The warrants are exercisable, at the option of the holder, at any time prior to their expiration. The issuance of the shares and March Warrants and May Warrants in March Private Placement was exempt from the registration requirements under the Securities Act, pursuant to Section 4(2) thereof, because the transaction did not involve a public offering.

During the three months ended June 30, 2012, the Company issued the following options to purchase the Company’s common stock to consultants, directors, officers and employees of the Company:

Recipient	Date	Exercise Price		Amount
Edmund P. Giambastiani, Jr. - Consultant	04/30/2012	$	0.45		10,000
	05/31/2012	$	0.42		10,000
	06/30/2012	$	0.40		10,000
Jennie Enterprise - Consultant	06/20/2012	$	0.28		60,000
Dangene Enterprise - Consultant	06/20/2012	$	0.28		60,000
William Rogers - Consultant	06/20/2012	$	0.28		50,000
Richard Yevoli - Consultant	06/20/2012	$	0.28		25,000

TOTAL					225,000

Options to purchase 30,000 shares of the Company's common stock were awarded pursuant to the Company’s 2011 Incentive Stock Plan. One third of the options vest upon grant, the second third vests on the first anniversary of the grant date, and the remaining third vests on the second anniversary of the grant date. The remaining 195,000 options were awarded by approval of the Company’s board of directors. These options generally have the same terms and conditions as provided under the 2011 Incentive Stock Plan (See Note 10). The issuance of such options was exempt from the registration requirements under the Securities Act, pursuant to Section 4(2) thereof, because the transaction did not involve a public offering.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

See “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds" regarding the unregistered sale of equity securities, which is incorporated herein by reference.

Item 6. Exhibits

10.1	Form of Subscription/Registration Rights Agreement between the Company and each of J. Bryant Kirkland III, effective as of May 24, 2012; and Christopher Melton and Brian A. Wasserman, effective as of March 27, 2012. Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K as filed by SG Blocks, Inc. with the Securities and Exchange Commission on May 31, 2012.
31.2+	Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2+	Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1+	Certification by Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS#+	XBRL Instance Document.
101.SCH#+	XBRL Taxonomy Extension Schema Document.
101.CAL#+	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF#+	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB#+	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE#+	XBRL Taxonomy Extension Presentation Linkbase Document.

+	Transmitted herewith.

This exhibit will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that the Company specifically incorporates it by reference.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SG BLOCKS, INC.
	(Registrant)

Date: August 20, 2012		By:	/s/Brian Wasserman
		Brian Wasserman
		Chief Financial Officer
		(Duly Authorized Officer and Principal Financial and Chief Accounting Officer

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Delaware		95-4463937
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

400 Madison Avenue, Suite 16C New York, NY		10017
(Address of principal executive offices)		(Zip Code)

Large accelerated filer o	Accelerated filer o

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

	June 30, 2012			December 31,
	(Unaudited)			2011
Assets

Current assets:
Cash and cash equivalents	$	401,760		$	561,759
Short-term investment		39,178			39,110
Accounts receivable, net		293,846			143,320
Costs and estimated earnings in excess of billings on uncompleted contracts		8,789			66,454
Prepaid expenses and other current assets		1,405			-
Total current assets		744,978			810,643

Equipment, net		6,797			8,058

Totals	$	751,775		$	818,701

Liabilities and Stockholders’ Deficiency

Current liabilities:
Accounts payable and accrued expenses	$	494,782		$	558,277
Accrued compensation and related costs		-			73,888
Accrued interest, related party		16,306			12,219
Related party accounts payable and accrued expenses		2,768			86,885
Related party notes payable		73,500			73,500
Billings in excess of costs and estimated earnings on uncompleted contracts		1,714			-
Warrant liabilities		184,537			198,471
Total current liabilities		773,607			1,003,240

Commitments

Stockholders’ deficiency:
Preferred stock, $0.01 par value, 5,000,000 shares authorized; 0 issued and outstanding at June 30, 2012 and December 31, 2011		-			-
Common stock, $0.01 par value, 100,000,000 shares authorized; 41,985,950 issued and outstanding at June 30, 2012, 39,779,506 issued and outstanding at December 31, 2011		419,860			397,795
Additional paid-in capital		5,760,460			4,688,417
Accumulated deficiency		(6,201,518	)		(5,270,751	)
Accumulated other comprehensive loss		(634	)		-
Total stockholders’ deficiency		(21,832	)		(184,539	)

Totals	$	751,775		$	818,701
The accompanying notes are an integral part of these condensed consolidated financial statements.

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2012			2011			2012			2011
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenue:
SG Block sales	$	482,893		$	705,474		$	904,843		$	2,523,599
Engineering services		523,959			-			594,754			4,190
Project management		76,203			64,894			107,473			64,894
		1,083,055			770,368			1,607,070			2,592,683

Cost of revenue:
SG Block sales		349,974			502,971			686,769			2,178,696
Engineering services		430,522			-			503,650			713
Project management		77,476			37,904			97,459			37,904
		857,972			540,875			1,287,878			2,217,313

Gross profit		225,083			229,493			319,192			375,370

Operating expenses:
Payroll and related expenses		387,417			223,803			714,890			468,597
General and administrative expenses		279,152			226,273			536,018			311,537
Marketing and business development expense		33,100			101,802			53,059			165,600
Pre-project expenses		12,431			27,042			22,393			45,165
Total		712,100			578,920			1,326,360			990,899

Operating loss		(487,017	)		(349,427	)		(1,007,168	)		(615,529	)

Other income (expense):
Interest expense		(2,043	)		(1,017	)		(4,087	)		(2,034	)
Interest income		41			27			68			27
Change in fair value of warrant liabilities		22,618			1,929			33,064			1,929
Cancellation of trade liabilities and unpaid interest		8,294			13,000			31,447			30,498
Other income		-			-			25,000			-
Total		28,910			13,939			85,492			30,420

Loss before income taxes		(458,107	)		(335,488	)		(921,676	)		(585,109	)

Income tax expense		9,091			-			9,091			-

Net loss	$	(467,198	)	$	(335,488	)	$	(930,767	)	$	(585,109	)

Comprehensive loss
Foreign currency translation adjustment		(607	)		-			(634	)		-
Total comprehensive loss	$	(467,805	)	$	(335,488	)	$	(931,401	)	$	(585,109	)

Net loss per share - basic and diluted:
Basic and diluted	$	(.01	)	$	(.01	)	$	(.02	)	$	(.02	)

Weighted average shares outstanding:
Basic and diluted		41,570,600			35,291,626			40,709,019			33,538,768

The accompanying notes are an integral part of these condensed consolidated financial statements.

		Page
PART I. FINANCIAL INFORMATION		3

Item 1. Financial Statements		3

	Condensed Consolidated Balance Sheets June 30, 2012 (Unaudited) and December 31, 2011	3

	Condensed Consolidated Statements of Operations and Comprehensive Loss Three Months and Six Ended June 30, 2012 and 2011 (Unaudited)	4

	Condensed Consolidated Statement of Changes in Stockholders' Deficiency Six Months Ended June 30, 2012 (Unaudited)	5

	Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2012 and 2011 (Unaudited)	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

Item 3. Quantitative and Qualitative Disclosures About Market Risk		31

Item 4. Controls and Procedures		31

PART II. OTHER INFORMATION		33

Item 1. Legal Proceedings		33

Item 1A. Risk Factors		33

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		45

Item 3. Defaults Upon Senior Securities		46

Item 4. Mine Safety Disclosures		46

Item 5. Other Information		46

Item 6. Exhibits		47

SIGNATURE		48

	$0.01 Par Value Common Stock				Additional Paid-in Capital		Accumulated Deficiency			Accumulated Other Comprehensive Loss			Total
	Shares		Amount		Additional Paid-in Capital		Accumulated Deficiency			Accumulated Other Comprehensive Loss			Total
Balance - December 31, 2011		39,779,506	$	397,795	$	4,688,417	$	(5,270,751	)	$	-		$	(184,539	)

Stock issued in private offering, net of warrant liabilities in the amount of $19,130, and closing costs in the amount of $36,072		2,166,444		21,665		681,388		-			-			703,053

Stock-based compensation		-		-		249,385		-			-			249,385

Issuance of common stock issued
for settlement of related party
accounts payable		40,000		400		67,382		-			-			67,782

Forgiveness of related party accrued compensation		-		-		73,888		-			-			73,888

Foreign currency translation adjustment		-		-		-		-			(634	)		(634	)

Net loss		-		-		-		(930,767	)		-			(930,767	)

Balance - June 30, 2012		41,985,950	$	419,860	$	5,760,460	$	(6,201,518	)	$	(634	)	$	(21,832	)

Level 1	Quoted prices in active markets for identical assets or liabilities
Level 2	Quoted prices for similar assets and liabilities in active markets or inputs that are observable.
Level 3	Inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).

	June 30, 2012		Quoted prices in active market for identical assets (Level l)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Warrant Liabilities	$	184,537	$	-	$	-	$	184,537

	December 31, 2011		Quoted prices in active market for identical assets (Level l)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Warrant Liabilities	$	198,471	$	-	$	-	$	198,471

	For the six months ended June 30, 2012			For the six months ended June 30, 2011
Beginning balance	$	198,471		$	112,349
Aggregate fair value of conversion option liabilities and warrants issued		19,130			-
Change in fair value of conversion option liabilities and warrants		(33,064	)		(1,929	)
Settlement of conversion option liabilities included in additional paid in capital		-			-
Ending balance	$	184,537		$	110,420

	2012			2011
Billed:
SG Block sales	$	155,416		$	137,560
Engineering services		52,558			33,317
Project management		96,020			19,578
Unbilled:
Engineering services		92,978			-
Project management		-			2,880
Total gross receivables		396,972			193,335
Less: allowance for doubtful accounts		(103,126	)		(50,015	)
Total net receivables	$	293,846		$	143,320

	2012			2011
Costs incurred on uncompleted contracts	$	10,384		$	424,477
Estimated earnings		17,484			41
		27,868			424,518
Less: billings to date		(20,793	)		(358,064	)

	$	7,075		$	66,454

Stock price	$	0.35
Term	3.33-4.90 Years
Volatil Volability		50	%
Risk-free interest rate		0.41 – 0.72	%
Exercise prices	$	0.25-0.35
Dividend yield		0.00	%

	Shares		Weighted Average Fair Value Per Share		Weighted Average Exercise Price Per Share		Weighted Average Remaining Terms (in years)		Aggregate Intrinsic Value
Outstanding – December 31, 2011		5,407,500	$	0.09	$	0.20
Granted		2,625,000		0.11		0.67
Exercised		-		-		-
Cancelled		-		-		-
Outstanding – June 30, 2012		8,032,500	$	0.10	$	0.36		9.43	$	818,275
Exercisable – December 31, 2011		1,719,167	$	0.09	$	0.20		9.86	$	307,083
Exercisable – June 30, 2012		2,594,167	$	0.10	$	0.36		9.43	$	260,258

Expected dividend yield		0.00%
Expected stock volatility		50%
Risk-free interest rate		0.67 – 1.22%
Expected life	5.25 - 5.5 years

2013	$	111,469
2014		115,483
2015		121,312
2016		103,535
	$	451,799

	Number of Shares
SG Building shares outstanding prior to the Merger		1,786,000
Share exchange ratio (20.1851851852 to 1)		20.1851851852	x
		36,050,764
SG Blocks shares outstanding prior to the Merger		3,269,992
Shares issued in connection with the Merger		408,750
		39,729,506

	2012			2011			Change
Loss from operations		(1,007,168	)		(615,529	)		(391,639	)
Other income		85,492			30,420			55,072
Income tax expense		(9,091	)		–			(9,091	)
Net Loss		(930,767	)		(585,109	)		(345,658	)