UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
|
For
the quarterly period ended December 31, 2008
|
|
|
Or
|
|
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
|
For
the transition period from ____ to
|
Commission
file number: 000-23819
GREEN
BUILDERS, INC.
(Exact
name of registrant as specified in its charter)
|
|
|
Texas
|
|
76-0547762
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
8121
Bee Caves Road, Austin, Texas
|
|
78746
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(512)
732-0932
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
x
Yes
¨
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definitions of “accelerated
filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one)
Large
Accelerated Filer
|
|
¨
|
|
|
|
Accelerated
Filer
|
|
¨
|
|
|
Non-Accelerated
Filer
|
|
¨
|
|
|
|
Smaller
Reporting Company
|
|
x
|
|
|
Indicate
by check mark whether the registrant is a Shell Company (as defined in Rule
12b-2 of the Exchange Act).
¨
Yes
x
No
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
The
number of shares of common stock, par value of $0.001 per share, outstanding at
February 11, 2009 was 23,135,539.
INDEX
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
21
|
|
|
|
|
29
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
30
|
|
|
|
|
30
|
|
|
|
|
30
|
|
|
|
|
30
|
|
|
|
|
30
|
|
|
|
|
31
|
|
|
|
|
32
|
|
|
C
AUTIONARY NOTE
REGARDING FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-
Q
for Green Builders, Inc.
(“we,” “us,” or the “Company”) contains forward-looking
statements. You can identify these statements by forward-looking
words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,”
“estimate,” and “continue” or similar words. Forward-looking
statements include information concerning possible or assumed future business
success or financial results. You should read statements that contain
these words carefully because they discuss future expectations and plans, which
contain projections of future results of operations or financial conditions or
state other forward-looking information. We believe that it is important to
communicate future expectations to investors. However, there may be events in
the future that we are not able to accurately predict or control. Accordingly,
we do not undertake any obligation to update any forward-looking statements for
any reason, even if new information becomes available or other events occur in
the future.
By their
very nature, forward-looking statements involve inherent risks and
uncertainties, both general and specific, and risks that outcomes implied by
forward-looking statements will not be achieved. We caution readers not to place
undue reliance on these statements as a number of important factors could cause
the actual results to differ materially from the beliefs, plans, objectives,
expectations and anticipations, estimates and intentions expressed in such
forward-looking statements.
Copies of
our public filings are available at
www.greenbuildersinc.com
and
on EDGAR at www.sec.gov.
Whenever
we refer in this filing to “Green Builders,” “the Company,” “we,” “us,” or
“our,” we mean Green Builders, Inc., a Texas corporation, and, unless the
context indicates otherwise, its predecessors and subsidiaries, including its
wholly owned subsidiaries, Wilson Family Communities, Inc., a Delaware
corporation
(“WFC”),
and GB Operations, Inc., a Texas corporation (“Green
Builders”). All references in this report to “$” or “dollars” are to
United States of America currency. References to “fiscal 2008” means
our fiscal year ended September 30, 2008 and references to “fiscal 2009” means
our fiscal year ending September 30, 2009.
PART
I – FINANCIAL INFORMATION
ITEM 1
|
FIN
ANCIA
L STATEMENTS
|
GREEN
BUILDERS, INC.
|
|
Balance
Sheets
|
|
As
of December 31, 2008 and September 30, 2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
December
31, 2008
|
|
|
September
30, 2008
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,169,160
|
|
|
|
3,711,180
|
|
Inventory
|
|
|
|
|
|
|
|
|
Land
and land development
|
|
|
32,255,047
|
|
|
|
32,738,655
|
|
Homebuilding
inventories
|
|
|
6,504,624
|
|
|
|
8,204,129
|
|
Total
inventory
|
|
|
38,759,671
|
|
|
|
40,942,784
|
|
Other
assets
|
|
|
169,653
|
|
|
|
478,420
|
|
Debt
Issuance costs, net of amortization
|
|
|
968,953
|
|
|
|
1,028,206
|
|
Property
and equipment, net of accumulated depreciation and amortization of
$149,724
and $84,005, respectively
|
|
|
1,360,026
|
|
|
|
1,418,588
|
|
Total
assets
|
|
$
|
43,427,463
|
|
|
|
47,579,178
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
821,064
|
|
|
|
1,690,763
|
|
Accrued
real estate taxes payable
|
|
|
763,113
|
|
|
|
697,699
|
|
Accrued
liabilities and expenses
|
|
|
593,700
|
|
|
|
421,385
|
|
Accrued
interest
|
|
|
899,892
|
|
|
|
528,683
|
|
Deferred
revenue
|
|
|
27,074
|
|
|
|
31,135
|
|
Lines
of credit
|
|
|
13,371,647
|
|
|
|
15,779,310
|
|
Notes
payable
|
|
|
14,474,620
|
|
|
|
14,474,620
|
|
Subordinated
convertible debt, net of $2,547,285 and $2,686,872 discount,
respectively
|
|
|
13,952,715
|
|
|
|
13,813,128
|
|
Total
liabilities
|
|
|
44,903,825
|
|
|
|
47,436,723
|
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized and 23,135,539
shares
issued and outstanding, respectively
|
|
|
23,136
|
|
|
|
23,136
|
|
Additional
paid in capital
|
|
|
27,992,189
|
|
|
|
27,949,903
|
|
Retained
deficit
|
|
|
(29,491,687
|
)
|
|
|
(27,830,584
|
)
|
Total
stockholders' equity (deficit)
|
|
|
(1,476,362
|
)
|
|
|
142,455
|
|
Commitments
and contingencies
|
|
|
-
|
|
|
|
-
|
|
Total
liabilities and stockholders' equity
|
|
$
|
43,427,463
|
|
|
|
47,579,178
|
|
See
accompanying notes to the consolidated financial statements.
GREEN
BUILDERS, INC.
|
|
Statements
of Operations
|
|
Three
Months Ended December 31, 2008 and 2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
Three
Months
Ended
December
31,
2008
|
|
|
Three
Months
Ended
December
31,
2007
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Homebuilding
and related services
|
|
$
|
4,236,450
|
|
|
|
-
|
|
Land
sales
|
|
|
346,146
|
|
|
|
1,108,312
|
|
Remodeling
revenues
|
|
|
270
|
|
|
|
-
|
|
Total
revenues
|
|
|
4,582,866
|
|
|
|
1,108,312
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
Homebuilding
and related services
|
|
|
3,762,255
|
|
|
|
-
|
|
Land
sales
|
|
|
272,232
|
|
|
|
709,055
|
|
Remodeling
|
|
|
600
|
|
|
|
-
|
|
Inventory
impairments and land option cost write-offs
|
|
|
11,900
|
|
|
|
-
|
|
Total
cost of revenues
|
|
|
4,046,987
|
|
|
|
709,055
|
|
|
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
Homebuilding
and related services
|
|
|
474,195
|
|
|
|
-
|
|
Land
sales
|
|
|
73,914
|
|
|
|
399,257
|
|
Remodeling
sales
|
|
|
(330
|
)
|
|
|
-
|
|
Inventory
impairments and land option cost write-offs
|
|
|
(11,900
|
)
|
|
|
-
|
|
Total
gross profit
|
|
|
535,879
|
|
|
|
399,257
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
Corporate
general and administration
|
|
|
818,289
|
|
|
|
1,680,714
|
|
Sales
and marketing
|
|
|
493,914
|
|
|
|
255,299
|
|
Total
costs and expenses
|
|
|
1,312,203
|
|
|
|
1,936,013
|
|
Operating
loss
|
|
|
(776,324
|
)
|
|
|
(1,536,756
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
97,843
|
|
|
|
93,195
|
|
Interest
expense
|
|
|
(982,622
|
)
|
|
|
(913,577
|
)
|
Total
other expense
|
|
|
(884,779
|
)
|
|
|
(820,382
|
)
|
Income
before income taxes
|
|
|
(1,661,103
|
)
|
|
|
(2,357,138
|
)
|
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
Net
loss
|
|
$
|
(1,661,103
|
)
|
|
|
(2,357,138
|
)
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.07
|
)
|
|
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average common shares outstanding
|
|
|
23,135,539
|
|
|
|
23,135,539
|
|
See
accompanying notes to the financial statements.
GREEN
BUILDERS, INC.
|
|
Statements
of Cash Flows
|
|
Three
Months Ended December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
Three
Months Ended
December
31, 2008
|
|
|
Three
Months Ended
December
31, 2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,661,103
|
)
|
|
|
(2,357,138
|
)
|
Non
cash adjustments:
|
|
|
|
|
|
|
|
|
Amortization
of convertible debt discount
|
|
|
139,587
|
|
|
|
139,587
|
|
Amortization
of debt issuance costs
|
|
|
59,253
|
|
|
|
59,253
|
|
Stock-based
compensation expense
|
|
|
42,286
|
|
|
|
639,701
|
|
Services
provided without compensation by principal shareholders
|
|
|
-
|
|
|
|
30,000
|
|
Depreciation
and amortization
|
|
|
97,013
|
|
|
|
129,486
|
|
Inventory
impairments and land option cost write-offs
|
|
|
11,900
|
|
|
|
-
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in total inventory
|
|
|
2,171,213
|
|
|
|
(5,905,708
|
)
|
Decrease
(increase) in other assets
|
|
|
277,473
|
|
|
|
(425,854
|
)
|
Increase
(decrease) in accounts payable
|
|
|
(869,699
|
)
|
|
|
1,682,648
|
|
Increase
(decrease) in real estate taxes payable
|
|
|
65,414
|
|
|
|
(85,637
|
)
|
Increase
in accrued expenses
|
|
|
172,315
|
|
|
|
582,586
|
|
Decrease
in deferred revenue
|
|
|
(4,061
|
)
|
|
|
(159,181
|
)
|
Increase
(decrease) in accrued interest
|
|
|
371,209
|
|
|
|
(182,506
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
872,800
|
|
|
|
(5,852,763
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(7,157
|
)
|
|
|
(46,055
|
)
|
Net
cash used in investing activities
|
|
|
(7,157
|
)
|
|
|
(46,055
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Decrease
in restricted cash
|
|
|
-
|
|
|
|
(117,603
|
)
|
Issuances
of notes payable
|
|
|
-
|
|
|
|
1,053,450
|
|
Issuances
and repayments of lines of credit, net
|
|
|
(2,407,663
|
)
|
|
|
7,290,723
|
|
Repayments
of notes payable
|
|
|
-
|
|
|
|
(2,947,679
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(2,407,663
|
)
|
|
|
5,278,891
|
|
Net
decrease in cash and cash equivalents
|
|
|
(1,542,020
|
)
|
|
|
(619,927
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
3,711,180
|
|
|
|
13,073,214
|
|
Cash
and cash equivalents at end of period
|
|
$
|
2,169,160
|
|
|
|
12,453,287
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
464,745
|
|
|
|
935,539
|
|
See
accompanying notes to the consolidated financial statements.
(1) Organization
and Business Activity
Green
Builders, Inc., (the “Company”), is a Texas corporation formerly known as Wilson
Holdings, Inc. Effective April 4, 2008, Wilson Holdings, Inc, a
Nevada corporation, completed its reincorporation to the State of Texas pursuant
to the Plan of Conversion as ratified by the shareholders at the 2008 annual
meeting of shareholders held on April 3, 2008. As part of the
reincorporation, a new Certificate of Formation was adopted and Wilson Holdings,
Inc.’s corporate name was changed to Green Builders, Inc., and the Certificate
of Formation will now govern the rights of holders of the Company’s common
stock. The Company has been using the name “Green Builders” in its
regular business operations since June 2007 and will continue to do
so. Effective April 8, 2008, the Company’s common stock began trading
under the symbol “GBH” on the
NYSE Alternext US LLC (formerly the
American Stock Exchange
)
.
Effective
October 11, 2005 pursuant to an Agreement and Plan of Reorganization dated as of
September 2, 2005 by and among Wilson Holdings, Inc., a Delaware corporation, a
majority of its stockholders, Wilson Family Communities, Inc., a Delaware
corporation (“WFC”) and Wilson Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of the Company, WFC and Wilson Acquisition Corp. merged
and WFC became a wholly-owned subsidiary of the Company.
The
financial statements are presented on a going concern basis. The
Company has experienced significant losses and expects to continue to generate
negative cash flows from operations. This raises substantial doubt
about its ability to continue as a going concern. The Company’s
ability to continue as a going concern will depend upon its ability to
restructure its existing debt and obtain additional capital. Failure
to restructure and obtain additional capital would result in a depletion of its
available funds.
(2) Liquidity
and Capital Resources
Liquidity
The
Company’s growth will require substantial amounts of cash for earnest money
deposits, development costs, interest payments and homebuilding costs. Until the
Company begins to sell an adequate number of lots and homes to cover its monthly
operating expenses, sales and marketing, general and administrative costs will
deplete cash. Due to current market conditions and slow home
and land sales, the Company will need to obtain additional
capital. In addition the Company is seeking additional capital to
support future growth and current operations for the next twelve
months.
On
December 31, 2008 the Company had approximately $2.2 million in cash and cash
equivalents. The Company completed a public offering of its common stock in May
2007, resulting in net proceeds of approximately $14 million.
On June
29, 2007, Wilson Family Communities entered into a $55 million revolving credit
facility (the “Credit Facility”) with a syndicate of banks led by RBC Bank
(formerly RBC Centura Bank), as administrative agent. International
Bank of Commerce, Laredo, Texas (“IBC Bank”) and Franklin Bank, S.S.B.
(“Franklin Bank”) are the other two banks that make up the syndicate of
banks. The Credit Facility was reduced to $30 million in June
2008. The initial maturity date for the Credit Facility was June 29,
2008. The Company entered into an agreement to extend the maturity
date to October 1, 2008. On October 1, 2008, the Credit Facility
expired pursuant to its terms. Although the Company is currently out
of compliance with certain covenants set forth in the Borrowing Base Agreement
under the Loan Agreement, RBC and IBC have continued to make amounts available
to WFC pursuant to the Loan Agreement for loans made prior to the expiration of
the facility. The Company received notification on November 7,
2008 that Franklin Bank was closed by the Texas Department of Savings and
Mortgage Lending and the FDIC was named Receiver.
Green
Builders has guaranteed the obligations of Wilson Family Communities under the
Credit Facility. The amount available at any time under the Credit
Facility for revolving credit loans or the issuance of letters of credit is
determined by a borrowing base. The borrowing base is calculated as the sum of
the values for homes and lots in the subdivision to be developed as agreed by
WFC and the agent. The Company’s obligations under the Credit
Facility will be secured by the assets of each subdivision to be developed with
the proceeds of loans available under the Credit Facility.
Outstanding
borrowings under the Credit Facility bear interest at the prime rate plus 0.25%,
with a floor of 5.5%. The Company is charged a letter of credit fee
equal to 1.10% of each letter of credit issued under the Credit Facility. The
Company may elect to prepay the Credit Facility at any time without premium or
penalty. Quarterly principal reductions are required during the final
12 months of the term.
The
Credit Facility contains customary covenants limiting the ability to take
certain actions, including covenants that:
·
|
affect
how the Company can develop its
properties;
|
·
|
limit
the ability to pay dividends and other restricted
payments;
|
·
|
limit
the ability to place liens on its
property;
|
·
|
limit
the ability to engage in mergers and acquisitions and dispositions of
assets;
|
·
|
require
the Company to maintain a minimum net worth of $20,000,000, including
subordinated debt (although the minimum net worth may be $17,000,000 for
one quarter);
|
·
|
prohibit
the ratio of debt (excluding convertible debt) to equity (including
convertible debt) from exceeding 2.0 to 1.0
thereafter;
|
·
|
require
the Company to maintain working capital of at least $15,000,000;
and
|
·
|
limit
the number of completed speculative homes to 12% of the total borrowing
base available for homes.
|
An event
of default will occur under the Credit Facility if certain events occur,
including the following:
·
|
a
failure to pay principal or interest on any loan under the Credit
Facility;
|
·
|
the
inaccuracy of a representation or warranty when
made;
|
·
|
the
failure to observe or perform covenants or
agreements;
|
·
|
an
event of default beyond any applicable grace period with respect to any
other indebtedness;
|
·
|
the
commencement of proceedings under federal, state or foreign bankruptcy,
insolvency, receivership or similar
laws;
|
·
|
any
loan document, or any lien created thereunder, ceases to be in full force
and effect;
|
·
|
the
entry of a judgment greater than $1,000,000 that remains undischarged;
or
|
If an
event of default occurs under the Credit Facility, then the lenders may: (1)
terminate their commitments under the Credit Facility; (2) declare any
outstanding indebtedness under the Credit Facility to be immediately due and
payable; and (3) foreclose on the collateral securing the
obligations. The Company is currently out of compliance with the
terms of the Borrowing Base Agreement under the Credit Facility. The
Company is not in compliance with the tangible net worth, the ratio of debt to
equity, working capital, number of completed speculative homes and number of
land and developed lot loans covenants. If the Company is unable to
obtain a waiver for the noncompliance its obligation to repay indebtedness
outstanding under the facility, its term loans, and its outstanding note
indentures could be accelerated in full. The Company can give no assurance that
in such an event, the Company would have, or be able to obtain, sufficient funds
to pay all debt required to repay.
In
December 2005 and September 2006, the Company entered into Securities Purchase
Agreements with certain investors for the sale of Convertible Promissory
Notes. Pursuant to the cross-default provisions of the Securities
Purchase Agreements, a default under its Credit Facility triggers defaults under
the Securities Purchase Agreements. In the event that the Company’s
non-compliance with the Credit Facility continues, the holders of a majority of
the Notes issued under the Securities Purchase Agreement could elect to demand
the acceleration of all amounts owed under these Notes. The Company
does not have the cash available to repay these amounts or the amounts owed
under the Credit Facility. The Company has discussed its
non-compliance with certain investors under the Securities Purchase Agreements
but these note holders have not initiated the process under the Securities
Purchase Agreements that would allow them to accelerate the Company’s
obligations under the Securities Purchase Agreements or take any other remedial
action. The Company intends to negotiate with all investors under the
Securities Purchase Agreements to reach a mutually satisfactory resolution and
the
Company intends to
cooperate with the Credit Facility lenders to regain compliance with the terms
of the Credit Facility.
Capital
Resources
The
Company has raised approximately $16.5 million of subordinated convertible debt,
and approximately $14 million in a public offering of its common stock completed
in May 2007. The Company entered into a $55 million revolving Credit
Facility that was reduced to $30 million in June 2008. The initial
maturity date for the Credit Facility was June 29, 2008. We entered
into an agreement to extend the maturity date to October 1, 2008. On
October 1, 2008, the Credit Facility expired pursuant to its
terms. Although WFC is currently out of compliance with certain
covenants set forth in the Borrowing Base Agreement under the Loan Agreement,
RBC and IBC have continued to make amounts available to WFC pursuant to the Loan
Agreement for loans made prior to the expiration of the facility. We
were notified on November 7, 2008 that Franklin Bank was closed by the Texas
Department of Savings and Mortgage Lending and the Federal Deposit Insurance
Corporation (the “FDIC”) was named Receiver. Land and homes under
construction comprise the majority of the Company’s assets. These assets have
suffered devaluation due to the downturn in the housing and real estate market
for central Texas. The Company is considering selling tracts of
commercial and residential land in order to increase sales revenues and increase
cash. The Company is also in negotiation to deed in lieu of
foreclosure some of its land positions. The Company expects to incur
losses in 2009. Due to current market conditions and slow home and
land sales, it is anticipated that the Company will need additional capital to
support operations for the next twelve months.
(3) Summary
of Significant Accounting Policies
(a) Revenue
Recognition
Revenues
from property sales are recognized in accordance with SFAS No. 66, “Accounting
for Sales of Real Estate.” Revenues from land development services to
builders are recognized when the properties associated with the services are
sold, when the risks and rewards of ownership are transferred to the buyer and
when the consideration has been received, or the title company has processed
payment. For projects that are consolidated, homebuilding revenues
and services will be categorized as homebuilding revenues and revenues from
property sales or options will be categorized as land sales.
(b) Cash
and Cash Equivalents
For
purposes of the statements of cash flows, the Company considers all short term,
highly liquid investments with an original maturity of three months or less to
be cash and cash equivalents.
(c) Inventory
Inventory
is stated at cost unless it is determined to be impaired, in which case the
impaired inventory would be written down to the fair market
value. Inventory costs include land, land development costs, deposits
on land purchase contracts, model home construction costs, homebuilding costs,
interest and real estate taxes incurred during development and construction
phases.
(d) Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Accordingly, actual results could differ
from those estimates.
The
Company has estimated and accrued liabilities for real estate property taxes on
its purchased land in anticipation of development, and other liabilities
including the beneficial conversion liability, the fair value of warrants and
options. To the extent that the estimates are dramatically different
to the actual amounts, it could have a material effect on the financial
statements.
(f) Municipal
Utility and Water District Receivables
The
Company owns one property located in a Municipal Utility District (MUD) and one
property located in a Water Control and Improvement District (WCID
) (collectively, the
“Districts”
). The Company incurs development costs for water, sewage
lines and associated treatment plants and other development costs and fees for
these properties. Under the agreement with the
Districts
, the Company expects
to be reimbursed partially for the above developments costs. The Districts will
issue bonds to repay the Company, once the property has sufficient assessed
value for the District taxes to repay the bonds. As the project is completed and
homes are sold within the
Districts
, the assessed value
increases. It can take several years before the assessed value is sufficient to
provide sufficient tax revenue for the Company to recapture its
costs. The Company has estimated that it will recover approximately
50% to 100% of eligible costs spent through December 31, 2008. The
Company has completed Phase 1 for the Rutherford West project and has
approximately $1.1 million of Water Control and Improvement District
reimbursements included in inventory that it anticipates it will collect from
bond issuances made by the district. When the reimbursements are
received they will be recorded as reductions in the related asset’s balance. The
Districts will pay for property set aside for the preservation of endangered
species, greenbelts and similar uses. To the extent that the
estimated reimbursements are dramatically different to the actual
reimbursements, it could have a material effect on the Company’s financial
statements.
(f) Subordinated
Convertible Debt
The
Company’s subordinated convertible debt and the related warrants have been
accounted for in accordance with Emerging Issues Task Force (EITF) No. 98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios,” EITF No. 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock,” EITF 00-27, “Application of issue 98-5 to Certain
Convertible Instruments”, EITF 05-02 “Meaning of ‘Conventional Convertible Debt
Instrument’ in Issue No. 00-19”, and EITF 05-04 “The Effect of a Liquidated
Damages Clause on a Freestanding Financial Instrument Subject to Issue No. 00-19
updated with FSP EITF 00-19-2, “Accounting for Registration Payment
Arrangements”.
(g) Debt
Restructuring
The Company’s debt restructuring
agreement has been accounted for in accordance with accordance with SFAS 15,
“Accounting by Debtors and Creditors for Troubled Debt
Restructuring”. The Company has treated the related warrants issued
in accordance with APB 14, “Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants”.
(h) Loss
per Common Share
Earnings
per share are accounted for in accordance with SFAS No. 128, “Earnings per
Share,” which requires a dual presentation of basic and diluted earnings per
share on the face of the statements of earnings. Basic loss per share
is based on the weighted effect of common shares issued and outstanding, and is
calculated by dividing net loss by the weighted average shares outstanding
during the period. Diluted loss per share is calculated by dividing net loss by
the weighted average number of common shares used in the basic loss per share
calculation plus the number of common shares that would be issued assuming
exercise or conversion of all potentially dilutive common shares
outstanding.
The
Company has issued stock options and warrants convertible into shares of common
stock. These shares and warrants have been excluded from loss per share at
December 31, 2008 and 2007 because the effect would be
anti-dilutive. The stock options and warrants are convertible into
common stock as summarized in the table below:
|
|
Year
Ended
September
30, 2008
|
|
|
Nine
Months Ended
September
30, 2007
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
1,090,000
|
|
|
|
1,835,000
|
|
Common
stock warrants
|
|
|
1,143,125
|
|
|
|
1,143,125
|
|
Subordinated
convertible debt warrants
|
|
|
8,250,000
|
|
|
|
8,250,000
|
|
Total
|
|
|
10,483,125
|
|
|
|
11,228,125
|
|
(i) Adoption
of New Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”), which defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. SFAS 157 applies
under other accounting pronouncements that require or permit fair value
measurements and does not require any new fair value measurements. The
provisions of SFAS 157 are effective for the Company beginning with its fiscal
year 2009. The adoption of this standard did not have a material
impact on the Company’s financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities — including an amendment of FASB
Statement No. 115.” The statement permits entities to choose to measure certain
financial assets and liabilities at fair value. Unrealized gains and losses on
items for which the fair value option has been elected are reported in earnings.
SFAS No. 159 is effective in fiscal year 2009. The adoption of this
standard did not have a material impact on the Company’s financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (FAS
141(R)), which establishes accounting principles and disclosure requirements for
all transactions in which a company obtains control over another
business. The Company is currently evaluating the impact of the
adoption of SFAS No. 141; however, it is not expected to have a material impact
on the Company’s consolidated financial position, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (FAS 160), which prescribes the accounting by
a parent company for minority interests held by other parties in a subsidiary of
the parent company. The Company is currently evaluating the impact of
the adoption of SFAS No. 160; however, it is not expected to have a material
impact on the Company’s consolidated financial position, results of operations
or cash flows.
(4) Inventory
The
Company’s land and land development inventory includes land costs,
prepaid development costs, development costs, option money and earnest money on
land purchase options. Homebuilding inventory represents model homes,
speculative homes under construction and units sold and under
construction. Earnest money deposits for land costs and development
costs on land under option, not owned, totaled approximately $575,000 at
December 31, 2008 and September 30, 2008 respectively, of which all $575,000 is
non-refundable if the Company does not exercise the option and purchase the
land.
Of the
earnest money capitalized, $400,000 is for the remaining 30 acres under option
in Elm Grove. The Company’s land purchase contract called for a
purchase of the acreage in December 2008. The purchase price is
approximately $1.3 million less the outstanding earnest money. A drainage
issue created by another developer has altered the recorded plat and the manner
in which the land was represented to the Company. A temporary
easement was utilized so the developer could install a drainage channel on the
Company’s property; however, the current location of the drainage channel does
not allow the Company to develop the land in accordance with the
plat. The Company is in negotiations with the seller and the
developer regarding these issues. The city will not issue any new
permits to the developer, until the Company and the other developer have agreed
on a solution to fix the drainage issue. Pending the resolution of
the drainage issues the Company will maintain the earnest money on its balance
sheet.
As of
December 31, 2008 the Company owned approximately 1,209 acres of unfinished
acreage. Below is a description of the property completed, owned or
under contract by the Company at December 31, 2008:
Rutherford West
– Rutherford
West is a residential community located southwest of Austin. Rutherford West is
planned as an “earth-friendly” acreage development and each lot includes a deed
restricted conservation easement. The Company commenced the
development of this project in October 2006 and has completed development on a
total of 58 lots in Phase 1.
Georgetown
Village
–
Georgetown Village
is a mixed use master-planned development in Williamson County, located
north of Austin, Texas in Georgetown. The Company purchased the land
for this project pursuant to an option contract in August 2005. Under
the option contract the Company is required to purchase a minimum of 30 acres
per year through 2017. The Company commenced the development of this
project in January 2006. The Company completed development on a total
of 120 lots in Section 6 and 100 lots in Section 9.
Villages of New Sweden
–
New Sweden is a master
planned, mixed-use community which includes single family residential homes,
commercial properties, an onsite school, an amenity center, a fire station, and
an open green space in the Pflugerville, Texas school district. The
Company purchased the land for this project in October 2005 with a combination
of bank financing, seller financing and cash on hand.
Elm Grove
– Elm Grove is a
residential project located south of Austin, Texas in the city of
Buda. The master plan includes single-family residential lots and
open green space all within walking distance of Elm Grove elementary
school. The Company acquired the first phase of land for this project
in December 2006. The Company has completed development on a total of
105 lots in Phase 1.
In
January 2009, the Company entered into an agreement with Graham Mortgage Capital
to modify the debt agreement for the $7.3 million loan for Rutherford West and
the $4.7 million loan for New Sweden. As of December 31, 2008 the Company had
$380,823 in accrued interest for Rutherford West and $244,792 in accrued
interest for New Sweden. The agreement allows deferral of the $380,823 and
$244,792 of accrued interest until December 31, 2009 or until the property is
sold. Effective January 1, 2009, the Company will begin paying 2% interest on
each loan (Modified Interest Payment) and will accrue an additional 12% interest
on the loan. In exchange for entering into the agreement the Company will issue
a warrant for the purchase of 1.5% of the issued and outstanding shares at
December 31, 2009. The warrants call for a $5.00 strike price and can be
exercised from January 1, 2010 through December 31, 2012. The Company will be
required to make monthly payments for 1/12th of the estimated 2009 property
taxes. The agreement calls for the Company to list the property and retain a
broker to market the property. In the event the Company receives an offer for a
price less than sufficient to satisfy the note payment, the Company must notify
the Lender who will at its sole discretion accept or reject the offer. In the
event that the property is not sold by December 31, 2009, the Deed (in Lieu of
Foreclosure) will be released, and provided that all Modified Interest Payments
and real estate taxes for 2009 which are due on January 31, 2010 have been paid,
the Corporate Guaranty will be returned, and the Borrower and Holder shall
exchange mutual releases.
Below is
a summary of the property completed, owned or under contract by the Company at
December 31, 2008:
Property
|
Unsold
Finished
Lots/Homes
|
Owned
Unfinished
Acreage
|
Approximate
Acreage
Under
Option
|
Land
and
Homebuilding
Costs
at December
31,
2008
(In
thousands)
|
Texas
County
|
Rutherford
West
|
34
|
538
|
-
|
$9,970
|
Hays
|
Georgetown
Village
|
125
|
119
|
419
|
9,820
|
Williamson
|
Villages
of New Sweden
|
-
|
522
|
-
|
7,478
|
Travis
|
Elm
Grove
|
73
|
30
|
31
|
4,899
|
Hays
|
Other
land
|
-
|
-
|
-
|
88
|
|
Sub-total
land
|
232
|
1,209
|
450
|
$32,255
|
|
Rutherford
West
|
2
|
-
|
-
|
1,154
|
Hays
|
Georgetown
Village
|
2
|
-
|
-
|
2,851
|
Williamson
|
Elm
Grove
|
6
|
-
|
-
|
2,462
|
Hays
|
Other
homebuilding
|
-
|
-
|
-
|
37
|
|
Sub-total
homebuilding
|
10
|
-
|
-
|
$6,505
|
|
Total
inventory
|
242
|
1,209
|
450
|
$38,760
|
|
Below is
a summary of the property completed, owned or under contract by the Company at
September 30, 2008:
Property
|
Unsold
Finished
Lots/Homes
|
Owned
Unfinished
Acreage
|
Approximate
Acreage
Under
Option
|
Land
and
Homebuilding
Costs
at
September
30,
2008
(In
thousands)
|
Texas
County
|
Rutherford
West
|
39
|
538
|
-
|
$10,179
|
Hays
|
Georgetown
Village
|
126
|
119
|
419
|
10,127
|
Williamson
|
Villages
of New Sweden
|
-
|
522
|
-
|
7,478
|
Travis
|
Elm
Grove
|
72
|
30
|
31
|
4,875
|
Hays
|
Other
land
|
-
|
-
|
-
|
80
|
|
Sub-total
land
|
237
|
1,209
|
450
|
$32,739
|
|
Rutherford
West
|
3
|
-
|
-
|
1,885
|
Hays
|
Georgetown
Village
|
5
|
-
|
-
|
2,943
|
Williamson
|
Elm
Grove
|
6
|
-
|
-
|
3,346
|
Hays
|
Other
homebuilding
|
-
|
-
|
-
|
30
|
|
Sub-total
homebuilding
|
14
|
-
|
-
|
$8,204
|
|
Total
inventory
|
251
|
1,209
|
450
|
$40,943
|
|
(6) Operating
and Reporting Segments
The
Company has three reporting segments: homebuilding and related services, land
sales and remodeling sales. The Company’s reporting segments are strategic
business units that offer different products and services. The homebuilding and
related services segment includes home sales. Land sales consist of
land in various stages of development sold, including finished
lots. Remodeling includes remodeling products and
services. The Company charges identifiable direct expenses and
interest to each segment and allocates corporate expenses and interest based on
an estimate of each segment’s relative use of those expenses. Depreciation
expense is included in selling, general and administrative and is
immaterial.
The
following table presents segment operating results before taxes for the three
months ended December 31, 2008 and 2007:
|
|
Three
Months Ended December 31, 2008
|
|
|
|
Homebuilding
and
Related
Services
|
|
|
Land
Sales
|
|
|
Remodeling
Sales
|
|
|
Total
|
|
Revenues
from external customers
|
|
$
|
4,236,450
|
|
|
$
|
346,146
|
|
|
$
|
270
|
|
|
$
|
4,582,866
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
3,762,255
|
|
|
|
272,232
|
|
|
|
600
|
|
|
|
4,035,087
|
|
Impairment
and write-offs
|
|
|
11,900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,900
|
|
Selling,
general and administrative
|
|
|
844,323
|
|
|
|
455,003
|
|
|
|
12,877
|
|
|
|
1,312,203
|
|
Interest
& other income
|
|
|
(53,814
|
)
|
|
|
(44,029
|
)
|
|
|
-
|
|
|
|
(97,843
|
)
|
Interest
expense
|
|
|
258,062
|
|
|
|
724,560
|
|
|
|
-
|
|
|
|
982,622
|
|
Total
costs and expenses
|
|
|
4,822,726
|
|
|
|
1,407,766
|
|
|
|
13,477
|
|
|
|
6,243,969
|
|
Loss
before taxes
|
|
$
|
(586,276
|
)
|
|
$
|
(1,061,620
|
)
|
|
$
|
(13,207
|
)
|
|
$
|
(1,661,103
|
)
|
Segment
Assets
|
|
$
|
9,585,176
|
|
|
$
|
33,842,260
|
|
|
$
|
27
|
|
|
$
|
43,427,463
|
|
Capital
expenditures
|
|
$
|
7,157
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,157
|
|
|
|
Three Months Ended
December 31, 2007
|
|
|
|
|
Homebuilding
and Related
Services
|
|
|
Land
Sales
|
|
|
Total
|
|
|
Revenues
from external customers
|
|
$
|
-
|
|
|
$
|
1,108,312
|
|
|
$
|
1,108,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
709,055
|
|
|
|
709,055
|
|
|
Impairment
and write-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Selling,
general and administrative
|
|
|
1,273,058
|
|
|
|
662,955
|
|
|
|
1,936,013
|
|
|
|
|
|
(51,257
|
)
|
|
|
(41,938
|
)
|
|
|
(93,195
|
)
|
|
|
|
|
190,210
|
|
|
|
723,367
|
|
|
|
913,577
|
|
|
|
|
|
1,412,011
|
|
|
|
2,053,439
|
|
|
|
3,465,450
|
|
|
|
|
$
|
(1,412,011
|
)
|
|
$
|
(945,127
|
)
|
|
$
|
(2,357,138
|
)
|
|
|
|
$
|
14,810,802
|
|
|
$
|
41,483,130
|
|
|
$
|
56,293,931
|
|
|
Capital
expenditures
|
|
$
|
41,450
|
|
|
$
|
4,606
|
|
|
$
|
46,055
|
|
|
(7) Related
Party Transactions
Issuance
of Convertible Debt
In
connection with the placement of an additional $6.75 million of the Company’s
convertible promissory notes in September 2006, it entered into an additional
agreement with Tejas Securities Group, Inc. pursuant to which Tejas Securities
Group, Inc. served as the Company’s Placement Agent in connection with the
offering. Pursuant to this agreement, the Company paid Tejas Securities Group,
Inc. commissions of $70,000, issued 750,000 warrants, and reimbursed the
Placement Agent for its expenses. John J. Gorman is the Chairman of the Board of
the Placement Agent and of Tejas Incorporated, the parent company of the
Placement Agent. Mr. Gorman is the beneficial owner of approximately 4.1 million
shares of the Company’s common stock. Clark N. Wilson, who serves as the
Company’s President and Chief Executive Officer and is a director of the
Company, served on the board of directors of Tejas Incorporated from October
1999 through March 2008, and was compensated for such service. Mr.
Wilson owns 1,000 shares of Tejas Incorporated common stock. Mr.
Wilson is the Company’s largest stockholder and its President and
Chief Executive Officer.
In
September 2006, the Company entered into an agreement to lease approximately
5,000 square feet for its corporate offices, which it began occupying on October
1, 2006. The lease requires monthly payments of approximately $12,000 per month
for 36 months. The lease was with a subsidiary of Tejas Incorporated until
January 2008. In January 2008 the building being leased was bought by
an unrelated party. The Company believes that the lease is paid at
fair market value for similar space in the Austin, Texas commercial real estate
market.
Consulting
Arrangement with Audrey Wilson
In
February 2007 the Company entered into a consulting agreement with Audrey
Wilson, the wife of Clark N. Wilson, its President and Chief Executive Officer.
Pursuant to the consulting agreement, the Company has agreed to pay Ms. Wilson
$10,000 per month for a maximum of six months. Ms. Wilson agreed to
devote at least twenty-five hours per week assisting the Company with the
following activities: (i) the establishment of “back-office” processes for
homebuilding activities, including procurement, sales and marketing and other
related activities, and (ii) developing the Company’s marketing
strategy. Subsequent to the completion of the six month period in
July 2007, Ms. Wilson continued to provide consulting services to the Company at
no cost to the Company. In accordance with Staff Accounting Bulletin
5A, for the three months ended December 31, 2007, the Company recorded $30,000
as compensation expense and credited equity for services recorded at fair market
value. On May 13, 2008, the Company entered into a new agreement with Ms. Wilson
in which she was to be paid $10,000 per month for a maximum of 12
months. In an effort to reduce Company expenditures as of December
31, 2008, Ms. Wilson will no longer be paid for any consulting services she
provides to the Company. The company paid Audrey Wilson $30,000 for services
performed in the three months ended December 31, 2008.
Vendor
Payments
The
Company has entered into contractual work agreements with Wilson
Roofing. Wilson Roofing is owned by relatives of Clark N. Wilson, the
Company’s President and Chief Executive Officer. The Company paid
Wilson Roofing approximately $101,000 and $89,000 for the three months ended
December 31, 2008 and 2007. Management believes that services
were provided at fair market value.
(8) Commitments
and Contingencies
Options
Purchase Agreements
In order
to ensure the future availability of land for development and homebuilding, the
Company plans to enter into lot-option purchase agreements with unaffiliated
third parties. Under the proposed option agreements, the Company pays a stated
deposit in consideration for the right to purchase land at a future time,
usually at predetermined prices or a percentage of proceeds as homes are sold.
These options generally do not contain performance requirements from the Company
nor obligate the Company to purchase the land. In order for the Company to start
or continue the development process on optioned land, it may incur development
costs on land it does not own before it exercises its option
agreement.
Lease
Obligations
In
September 2006, the Company entered into a 36 month agreement to lease
approximately 5,000 square feet for its corporate offices, which it began
occupying on October 1, 2006. The lease requires monthly payments of
approximately $12,000 per month. In September 2008, the Company
subleased out approximately 1,626 square feet of the property. The
sublease requires monthly payments to Green Builders, Inc. for $5,000 per month
for 12 months. The Company entered into sale/leaseback agreements for
three of its model homes. Two of the contracts were entered into in
August 2008 and one in September 2008. The leasebacks of the three
model homes require monthly payments of approximately $7,300 per month for 24
months. The Company also has office equipment leases and job
trailer leases. The Company’s future minimum lease payments for future fiscal
years are as follows:
|
|
2009
|
|
2010
|
|
2011
|
2012
|
2013
|
Lease
obligations
|
|
$
|
158,848
|
|
87,534
|
|
240
|
240
|
240
|
Employment
Agreements with Executive Officers
On
February 14, 2007, the Company entered into an employment agreement with Clark
N. Wilson, its President and Chief Executive Officer. In the event of the
involuntary termination of Mr. Wilson’s service with the Company, the agreement
provides for monthly payments equal to Mr. Wilson’s monthly salary payments to
continue for 12 months. The agreement contains a provision whereby Mr. Wilson is
not permitted to be employed in any position in which his duties and
responsibilities comprise of residential land development and homebuilding in
Texas or in areas within 200 miles of any city in which the Company is
conducting land development or homebuilding operations at the time of such
termination of employment for a period of one year from the termination of his
employment, if such termination is voluntary or for cause, or involuntary and in
connection with a corporate transaction.
Consulting Arrangement with Arun
Khurana
On
September 18, 2007, the Company entered into a consulting agreement with Arun
Khurana, its Vice President and Chief Financial Officer, pursuant to which Mr.
Khurana transitioned from his position as an executive officer of the Company
into a consulting role. The agreement began on December 31, 2007 and
ended on October 31, 2008. The transition into a consulting role was
part of the Company’s efforts to reduce its expenditures as the Company has
decided to focus its efforts on commencing its homebuilding
operations. During the consulting term, Mr. Khurana received a
consulting fee of $11,500 per month. All of his unvested options to purchase the
Company’s common stock vested in full on October 31, 2007 and were expensed to
stock compensation expense.
(9)
Indebtedness
The
following schedule lists the Company’s notes payable and lines of credit
balances at December 31, 2008 and September 30, 2008:
|
|
Rate
|
Status
|
Maturity
Date
|
|
12/31/2008
|
9/30/2008
|
|
|
|
|
|
|
(In
Thousands)
|
a
|
Notes
payable, land
|
12.50%
|
Modification
Agreement entered January 2009
|
Dec-31-09
|
$
|
4,700
|
4,700
|
b
|
Notes
payable, seller financed
|
7%
& Prime + 2%
|
Default
as of October 2008
|
Oct.
2010/11
|
|
2,475
|
2,475
|
c
|
Notes
payable, land
|
12.50%
|
Modification
Agreement entered January 2009
|
Dec-31-09
|
|
7,300
|
7,300
|
d
|
Line
of Credit, $30 million facility, land, land development, and
homebuilding
|
Prime+.25%
|
Expired
as
October
2008
|
Oct-1
08
|
|
13,371
|
15,779
|
e
|
2005
$10 million, Subordinated convertible notes, net of discount of $350
thousand and $372 thousand, respectively
|
5.00%
|
Cross-default
as of March 2008
|
Dec-1-12
|
|
9,650
|
9,628
|
f
|
2006
$6.50 million, Subordinated convertible notes, net of discount of $2,197
and $2,314 thousand respectively
|
5.00%
|
Cross-default
as of March 2008
|
Sep-1-13
|
|
4,303
|
4,185
|
|
|
Total
|
|
|
$
|
41,799
|
44,067
|
(a) In
March 2007, the Company secured a $4.7 million term land loan to finance
approximately 522 acres in Travis County. The interest rate is
12.5% annually and requires monthly interest payments, with a maturity of two
years and is renewable for an additional year for a 1% loan fee. The
loan is secured by the underlying land and is guaranteed by the
Company. The Company is currently in negotiations to dispose of the
assets including but not limited to deed in lieu of foreclosure of these
assets. In January 2009, the Company entered into an agreement with
Graham Mortgage Capital to modify the debt agreement for the the
loan. As of December 31, 2008 the Company had $244,792 in accrued
interest for New Sweden. The agreement allows deferral of the accrued
interest until December 31, 2009 or until the property is
sold. Effective January 1, 2009, the Company will begin paying
2% interest on each loan (Modified Interest Payment) and will accrue an
additional 12% interest on the loan. In exchange for entering into
the agreement the Company will issue a warrant for the purchase of 1.5% of the
issued and outstanding shares at December 31, 2009. The warrants call
for a $5.00 strike price and can be exercised from January 1, 2010 through
December 31, 2012. The warrants were valued based on the fair value
of the Company’s common stock on the issuance date of $0.23, using a
Black-Scholes approach, risk free interest rate of 3.04%; dividend yield of 0%;
weighted-average expected life of the warrants of 4 years; and a 60% volatility
factor, resulting in an immaterial value. The Company will be required to make
monthly payments for 1/12th of the estimated 2009 property taxes. The
agreement calls for the Company to list the property and retain a broker to
market the property. In the event the Company receives an offer
for a price less than sufficient to satisfy the note payment, the Company must
notify the Lender who will at its sole discretion accept or reject the
offer. In the event that the property is not sold by December 31,
2009, the Deed (in Lieu of Foreclosure) will be released, and provided that all
Modified Interest Payments and real estate taxes for 2009 which are due on
January 31, 2010 have been paid, the Corporate Guaranty will be returned, and
the Borrower and Holder shall exchange mutual releases.
(b) As
part of the purchase of 522 acres in Travis County described above, the Company
entered into four notes payable, seller financed with a cumulative balance of
approximately $2.5 million. Three of the notes payable with a cumulative balance
of $1.9 million are at an interest rate of 7.0% and the fourth note payable
issued for approximately $600,000 is at an interest rate of prime rate with an
anniversary date of October 12 of each year plus 2.0%. The terms of the note
were modified in October 2007 with the principal payments extended for one
year. The revised terms of the notes payable now call for quarterly
interest payments commencing October 12, 2007 and principal payments of $1.4
million in October 2010 and $1.0 million due in October 2011. The
Company has not made interest payments since October 2008 and is currently in
default on the loan. The Company is currently in negotiations to
dispose of the assets including but not limited to deed in lieu of foreclosure
of these assets.
(c) In
February 2007 the company secured a $7.3 million land loan to finance
approximately 538 acres in Hays County. The interest rate is 12.5% annually and
requires monthly interest payments, with a maturity of two years and is
renewable for an additional year for a 1% loan fee. The Company has not made
interest payments since August 2008 and is currently in default on the
loan. The loan has no financial covenants. The loan is secured by
the underlying land and is guaranteed by the Company. In January
2009, the Company entered into an agreement with Graham Mortgage Capital to
modify the debt agreement for the loan for Rutherford West. As of
December 31, 2008 the Company had $380,823 in accrued interest for Rutherford
West. The agreement allows deferral of the accrued interest until
December 31, 2009 or until the property is sold. Effective January
1, 2009, the Company will begin paying 2% interest on each loan (Modified
Interest Payment) and will accrue an additional 12% interest on the
loan. In exchange for entering into the agreement the Company will
issue a warrant for the purchase of 1.5% of the issued and outstanding shares at
December 31, 2009. The warrants call for a $5.00 strike price and can
be exercised from January 1, 2010 through December 31, 2012. The
warrants were valued based on the fair value of the Company’s common stock on
the issuance date of $0.23, using a Black-Scholes approach, risk free
interest rate of 3.04%; dividend yield of 0%; weighted-average expected life of
the warrants of 4 years; and a 60% volatility factor, resulting in an immaterial
value. The Company will be required to make monthly payments for
1/12th of the estimated 2009 property taxes. The agreement calls for
the Company to list the property and retain a broker to market the
property. In the event the Company receives an offer for a
price less than sufficient to satisfy the note payment, the Company must notify
the Lender who will at its sole discretion accept or reject the
offer. In the event that the property is not sold by December 31,
2009, the Deed (in Lieu of Foreclosure) will be released, and provided that all
Modified Interest Payments and real estate taxes for 2009 which are due on
January 31, 2010 have been paid, the Corporate Guaranty will be returned, and
the Borrower and Holder shall exchange mutual releases.
(d) In
June 2007 the Company established a $55 million Credit Facility with a syndicate
of banks. In June 2008 the Credit Facility was reduced to $30
million. The Company has been out of compliance with certain covenants
under the loan agreement since March 2008. On October 1, 2008 the
line expired. The Company currently has approximately $13.4 million
in borrowings for land and home construction. The Company is in
negotiations with the banks to extend the payoff of the current
borrowings. The Company has continued to receive draws for its
homebuilding loans.
Subordinated
Convertible Debt
The
Company accounts for all derivative financial instruments in accordance with
SFAS No. 133. Prior to 2007, derivative financial instruments were recorded as
liabilities in the consolidated balance sheet and measured at fair value. The
Company accounted for the various embedded derivative features as being bundled
together as a single, compound embedded derivative instrument that was
bifurcated from the debt host contract, referred to as the “single compound
embedded derivatives.” The single compound embedded derivative
features include within the convertible note the conversion feature, the early
redemption option and the fixed price conversion adjustment. The initial value
of the single compound embedded derivative liability was bifurcated from the
debt host contract and recorded as a derivative liability, which resulted in a
reduction of the initial carrying amount (as unamortized discount) of the
convertible notes. The unamortized discount was amortized using the
straight-line method over the life of the convertible note, or 7 years. The
penalty warrants were valued based on the fair value of the Company’s common
stock on the issuance date using a Black-Scholes valuation model and the
unamortized discount was to be amortized as interest expense over the 7-year
life of the notes using the straight-line method. In January 2007, the Company
adopted FSP EITF 00-19-2. Prior to adoption of FSP EITF 00-19-2, the
uncertainty of a successful registration of the shares underlying the
subordinated convertible debt required that the freestanding and embedded
derivatives be characterized as derivative liabilities. FSP EITF 00-19-2
specifically addressed the accounting for a registration rights agreement and
the requirement to classify derivative instruments subject to registration
rights agreements as liabilities was withdrawn. The Company
re-evaluated its accounting for the subordinated debt transaction and determined
that the liability for the penalty warrants be included in the allocation of the
proceeds to the various components of the transaction according to paragraph 16
of APB Opinion No. 14, “Accounting
for Convertible Debt
and Debt issued with Stock Purchase Warrants.”
The Company also
determined the notes contained a beneficial conversion feature under Issues 98-5
and 00-27, and used the effective conversion price based on the proceeds
allocated to the convertible instrument to compute the intrinsic value of the
embedded conversion option. The Company recalculated the discount on the
convertible debt at its intrinsic value and re-characterized the freestanding
and embedded derivatives as equity. The previous valuation adjustments of the
derivative liabilities were reversed and the amortization of the discounts was
adjusted based upon the recalculation. Per FSP EITF 00-19-2, the Company was
permitted to adjust the previous amounts as a cumulative accounting
adjustment.
The net
effect of the change increased the net carrying amount of the subordinated
convertible debt and eliminated the derivative liabilities. There was also an
increase of $4.8 million in total stockholders’ equity. During the
year ended December 31, 2006, the Company recognized approximately $8.5 million
of loss on fair value of derivatives related to the subordinated convertible
debt. Under the new FSP EITF 00-19-2 the derivatives were eliminated and hence
there will no longer be gains and losses related to the current subordinated
convertible debt.
2005,
$10MM, 5%, Subordinated Convertible Debt
On
December 19, 2005, the Company issued $10 million in aggregate principal amount
of 5% subordinated convertible debt due December 1, 2012 to certain purchasers.
The following are the key features of the subordinated convertible debt:
interest accrues on the principal amount of the subordinated convertible debt at
a rate of 5% per annum and the debt is payable semi-annually on May 1 and
December 1 of each year, with interest payments beginning on June 1, 2006. The
subordinated convertible debt is due on December 1, 2012 and is convertible, at
the option of the holder, into shares of our common stock at a conversion price
of $2.00 per share. The conversion price is subject to adjustment for stock
splits, reverse stock splits, recapitalizations and similar corporate actions.
An adjustment in the conversion price is also triggered upon the issuance of
certain equity or equity-linked securities with a conversion price, exercise
price, or share price less than $2.00 per share. The anti-dilution provisions
state the conversion price cannot be lower than $1.00 per share.
The
Company may redeem all or a portion of the subordinated convertible debt after
December 1, 2008 at a redemption price that incorporates a premium that ranges
from 3% to 10% during the period beginning December 1, 2008 and ending on the
due date. In addition, the redemption price will include any accrued but unpaid
interest on the subordinated convertible debt. Upon a change in control event,
each holder of the subordinated convertible debt may require us to repurchase
some or all of its subordinated convertible debt at a purchase price equal to
100% of the principal amount of the subordinated convertible debt plus accrued
and unpaid interest. The due date may accelerate in the event the Company
commences any case relating to bankruptcy or insolvency, or related events of
default. The Company’s assets will be available to pay obligations on the
subordinated convertible debt only after all senior indebtedness has been
paid.
The
subordinated convertible debt has a registration rights agreement whereby the
Company filed a registration statement registering the resale of the underlying
shares with the SEC. The Company must maintain the registration
statement in an effective status until the earlier to occur of (i) the date
after which all the registrable shares registered thereunder shall have been
sold and (ii) the second anniversary the date on which each warrant has been
exercised in full and after which by the terms of such Warrant there are no
additional warrant shares as to which the warrant may become exercisable;
provided that in either case, such date shall be extended by the amount of time
of any suspension period. Thereafter the Company shall be entitled to withdraw
the registration statement, and upon such withdrawal and notice to the
investors, the investors shall have no further right to offer or sell any of the
registrable shares pursuant to the registration statement. The registration
statement filed pursuant to the registration rights agreement was declared
effective by the SEC on August 1, 2006.
The
Company also issued warrants to purchase an aggregate of 750,000 shares of
common stock to the purchasers of the subordinated convertible debt, 562,500
shares which vested and the remaining shares will never vest. The
warrants were exercisable only upon the occurrence of certain events and then
only in the amount specified as follows: (i) with respect to 25% of the warrant
shares, on February 3, 2006 if the registration statement shall not have been
filed with the SEC by such date (the Company filed a Form SB-2 registration
statement on February 2, 2006); (ii) with respect to an additional 25% of the
warrant shares, on April 19, 2006 if the registration statement shall not have
been declared effective by the SEC by such date; (iii) with respect to an
additional 25% of the warrant shares, on May 19, 2006 if the registration
statement shall not have been declared effective by the SEC by such date; and
(iv) with respect to the final 25% of the warrant shares, on June 18, 2006 if
the registration statement shall not have been declared effective by the SEC by
such date. Management has recorded the fair value of these warrants due to the
uncertainty surrounding the timeline of getting the registration statement
effected and the high probability that these warrants would be
issued. The shelf registration statement relating to these warrants
was declared effective on August 1, 2006 and 562,500 of these warrants have
vested and the remaining 187,500 warrants will never vest.
The
penalty warrants were valued based on the fair value of the Company’s common
stock on the issuance date of $1.60, using a Black-Scholes approach, risk free
interest rate of 4.25%; dividend yield of 0%; weighted-average expected life of
the warrants of 10 years; and a 60% volatility factor, resulting in an allocated
value of approximately $613,000. The penalty warrants are recorded as part of
the debt discount and an increase in additional paid in capital, and amortized
over the 7-year life of the notes using the straight-line rate
method.
The
Company also incurred closing costs of $588,000 which included placement agent
fees of $450,000 plus reimbursement of expenses to the placement agent of
$125,000, plus 750,000 fully vested warrants to purchase Company’s common stock
at $2.00 per share with a 10 year exercise period, valued at $829,000, for a
total of $1.4 million, recorded as debt issuance costs, to be amortized over the
7-year life of the notes using the straight line method. These warrants were
valued based on the fair value of the Company’s common stock of $1.60, using a
Black-Scholes valuation model, at a $2.00 exercise price, risk free interest
rate of 4.25%; dividend yield of 0%; weighted-average expected life of warrants
of 10 years; and a 60% volatility factor.
Subordinated
Convertible Note at December 31, 2008 and September 30, 2008:
|
|
December
31,
2008
|
|
|
September
30,
2008
|
|
Notional
balance
|
|
$
|
10,000,000
|
|
|
|
10,000,000
|
|
Unamortized
discount
|
|
|
(350,020
|
)
|
|
|
(371,986
|
)
|
Subordinated
convertible debt balance, net of unamortized discount
|
|
$
|
9,649,980
|
|
|
|
9,628,014
|
|
2006,
$6.5MM, 5%, Subordinated Convertible Debt
On
September 29, 2006, the Company raised capital of $6.75 million in aggregate
principal amount of 5% subordinated convertible debt due September 1, 2013, to
certain purchasers. As of December 31, 2006, $6.75 million had been received in
cash, the remaining $250,000 was a receivable from an owner of land that the
Company had under option to purchase. During the quarter ended June
2007, the Company did not exercise its option to purchase the land and therefore
does not expect to receive the additional $250,000. In
addition, during the quarter ended June 30, 2007, one of our convertible debt
holders who is also the seller of Bohl’s tract purchased common stock with a
promissory note. Under the terms of the promissory note, should the
Company not exercise the option to purchase the Bohl’s tract the convertible
debt would be used for repayment of the promissory note. As the
Company did not exercise the option to purchase Bohl’s tract the promissory note
was repaid from the repayment of the convertible debt. The following
are the key features of the subordinated convertible debt: interest accrues on
the principal amount of the subordinated convertible debt at a rate of 5% per
annum, payable semi-annually on March 1 and September 1 of each year, with
interest payments beginning on March 1, 2006. The subordinated convertible debt
is due on September 1, 2013 and is convertible, at the option of the holder,
into shares of common stock at a conversion price of $2.00 per share. The
conversion price is subject to adjustment for stock splits, reverse stock
splits, recapitalizations and similar corporate actions. An adjustment in the
conversion price is also triggered upon the issuance of certain equity or
equity-linked securities with a conversion price, exercise price, or share price
less than $2.00 per share. The anti-dilution provisions state the conversion
price cannot be lower than $1.00 per share.
The
Company may redeem all or a portion of the subordinated convertible debt after
September 1, 2009 at a redemption price that incorporates a premium that ranges
from 3% to 10% during the period beginning September 1, 2009 and ending on the
due date. In addition, the redemption price will include any accrued but unpaid
interest on the subordinated convertible debt. Upon a change in control event,
each holder of the subordinated convertible debt may require us to repurchase
some or all of its subordinated convertible debt at a purchase price equal to
100% of the principal amount of the subordinated convertible debt plus accrued
and unpaid interest. The due date may accelerate in the event the Company
commences any case relating to bankruptcy or insolvency, or related events of
default. The Company’s assets will be available to pay obligations on the
subordinated convertible debt only after all senior indebtedness has been
paid.
The
subordinated convertible debt has a registration rights agreement whereby the
Company filed a registration statement registering the resale of the underlying
shares with the SEC. The Company must maintain the registration
statement in an effective status until the earlier to occur of (i) the date
after which all the registrable shares registered thereunder shall have been
sold and (ii) the second anniversary of the later to occur of (a) the closing
date, and (b) the date on which each warrant has been exercised in full and
after which by the terms of such warrant there are no additional warrant shares
as to which the warrant may become exercisable; provided that in either case,
such date shall be extended by the amount of time of any suspension period.
Thereafter the Company shall be entitled to withdraw the registration statement,
and upon such withdrawal and notice to the investors, the investors shall have
no further right to offer or sell any of the registrable shares pursuant to the
registration statement.
The
Company also issued warrants to purchase an aggregate of 506,250 shares of
common stock to the purchasers of the subordinated convertible debt. The
warrants are exercisable only upon the occurrence of certain events and then
only in the amount specified as follows: (i) with respect to 25% of the warrant
shares, on November 13, 2006 if the registration statement shall not have been
filed with the SEC by such date (the Company filed a Form SB-2 registration
statement on October 16, 2006); (ii) with respect to an additional 25% of the
warrant shares, on January 27, 2007 if the registration statement shall not have
been declared effective by the SEC by such date; (iii) with respect to an
additional 25% of the warrant shares, on February 26, 2007 if the registration
statement shall not have been declared effective by the SEC by such date; and
(iv) with respect to the final 25% of the warrant shares, on March 28, 2007 if
the registration statement shall not have been declared effective by the SEC by
such date. The Company met certain of these milestones and has recorded 75% of
the fair value of these warrants but the registration statement was not declared
effective by the SEC prior to March 28, 2007 and therefore 75% of the warrant
shares have vested and remain exercisable. The Company also incurred closing
costs of $140,000, including placement agent fees of approximately $70,000 plus
reimbursement of expenses to the placement agent of $25,000, for a total of
$95,000 to the placement agent, recorded as debt issuance costs, to be amortized
over the 7-year life of the notes using the straight-line rate
method.
The
issuance of the debt resulted in an embedded beneficial conversion feature
valued at approximately $2.5 million, which will be recorded as part of the debt
discount and an increase in additional paid in capital, and amortized over the
7-year life of the notes using the straight-line rate method.
The
penalty warrants were based on the fair value of the Company’s common stock on
the issuance date of $1.91, using a Black-Scholes approach, risk free interest
rate of 4.64%; dividend yield of 0%; weighted-average expected life of the
warrants of 10 years; and a 60% volatility factor. The allocated value of the
penalty warrants totaled approximately $846,000 and are recorded as part of the
debt discount and an increase in additional paid in capital, and amortized over
the 7-year life of the notes using the straight-line rate method.
Subordinated
Convertible Note at December 31, 2008 and September 30, 2008:
|
|
December
31,
2008
|
|
|
September
30,
2008
|
|
Notional
balance
|
|
$
|
6,500,000
|
|
|
|
6,500,000
|
|
Unamortized
discount
|
|
|
(2,197,265
|
)
|
|
|
(2,314,976
|
)
|
Subordinated
convertible debt balance, net of unamortized discount
|
|
$
|
4,302,735
|
|
|
|
4,185,024
|
|
(10) Common
Stock
The
Company is authorized to issue 100,000,000 shares of common
stock. Each common stockholder is entitled to one vote per share of
common stock owned.
(11) Common
Stock Option / Stock Incentive Plan
In August
2005, the Company adopted the Wilson Family Communities, Inc. 2005 Stock
Option/Stock Issuance Plan or the Stock Option Plan. The plan contains two
separate equity programs: 1) the Option Grant Program for eligible persons at
the discretion of the plan administrator, be granted options to purchase shares
of common stock and 2) the Stock Issuance Program under which eligible persons
may, at the discretion of the plan administrator, be issued shares of common
stock directly, either through the immediate purchase of such shares or as a
bonus for services rendered to the Company or any parent or subsidiary. The
market value of the shares underlying option issuance prior to the merger of the
Company and WFC was determined by the Board of Directors (the “Board”) as of the
grant date. This plan was assumed by Green Builders, Inc. The fair value of the
options granted under the plan was determined by the Board prior to the merger
of the Company and WFC.
The Board
is the plan administrator and has full authority (subject to provisions of the
plan) and it may delegate a committee to carry out the functions of the
administrator. Persons eligible to participate in the plan are employees,
non-employee members of the Board or members of the board of directors of any
parent or subsidiary.
The stock
issued under the Stock Option Plan shall not exceed 2,500,000 shares. Unless
terminated at an earlier date by action of the Board, the Stock Option Plan
terminates upon the earlier of (1) the expiration of the ten year period
measured from the date the Stock Option Plan is adopted by the Board or (2) the
date on which all shares available for issuance under the Stock Option Plan
shall have been issued as fully-vested shares.
The
Company had 1,410,000 shares of common stock available for future grants under
the Stock Option Plan at December 31, 2008. Compensation
expense related to the Company’s share-based awards for the three months ended
December 31, 2008 and 2007 was approximately $42,000 and $640,000,
respectively. Before January 1, 2006, options granted to
non-employees were recorded at fair value in accordance with SFAS No. 123 and
EITF 96-18. These options are issued pursuant to the Stock Option Plan and are
reflected in the disclosures below.
During
the three months ended December 31, 2008, the Company issued options to purchase
shares of common stock at an exercise prices at $0.23 per share. Using the
Black-Scholes pricing model with the following weighted-average assumptions:
interest rate of 3.76%; dividend yields of 0%; weighted average expected life of
options of 5 years; and a 60% volatility factor, management estimated the fair
market value of the grants to be $0.13 per share. Management estimated the
volatility factor based on an average of comparable companies due to its limited
trading history.
A summary
of activity in common stock options for the three months ended December 31, 2008
is as follows:
|
|
Share
Roll
Forward
|
|
|
Ranges
Of
Exercise
Prices
|
|
|
Weighted-Average
Exercise
Price
|
|
Balance
September 30, 2008
|
|
|
1,474,083
|
|
|
$0.80
- $3.25
|
|
|
$2.52
|
|
Granted
|
|
|
25,000
|
|
|
$0.23
|
|
|
$0.23
|
|
Forfeited
|
|
|
(409,083
|
)
|
|
$0.44
- $3.25
|
|
|
$2.45
|
|
Balance
December 31, 2008
|
|
|
1,090,000
|
|
|
$0.23
- $3.25
|
|
|
$2.50
|
|
The
following is a summary of options outstanding and exercisable at December 31,
2008:
Outstanding
|
Vested
|
Number
of Shares
|
Weighted
Average
|
|
|
Weighted
Average
|
|
Subject
to
|
Remaining
|
|
|
Remaining
|
|
Options
|
Contractual
Life
|
Weighte
Average
|
Number
of Vested
|
Contractual
Life
|
Weighted
Average
|
Outstanding
|
(in
years)
|
Exercise
Price
|
Shares
|
(in
years)
|
Exercise
Price
|
1,090,000
|
4.51
|
2.50
|
826,009
|
3.22
|
2.70
|
At
December 31, 2008, there was approximately $365,000 of unrecognized compensation
expense related to unvested share-based awards granted under the Company’s Stock
Option Plan.
(12)
Subsequent Events
On
January 23, 2009, the Company received notice from the staff of the NYSE
Alternext US LLC (the "Exchange") that, based on their review of publicly
available information, the Company does not currently meet certain of the
Exchange's continued listing standards as set forth in Part 10 of the Exchange's
Company Guide (the “Company Guide”). In particular, the Exchange noted that the
Company is not considered to be in compliance with Section 1003(a)(i) of the
Company Guide because it reported stockholders' equity of less than $2,000,000
and losses from continuing operations and net losses in two of its three most
recent fiscal years; it is not considered to be in compliance with Section
1003(a)(ii) of the Company Guide because it reported stockholders’ equity of
less than $4,000,000 and losses from continuing operations and net losses in
three of its four most recent fiscal years; it is not considered to be in
compliance with Section 1003(a)(iii) of the Company Guide because it reported
stockholders’ equity of less than $6,000,000 and losses from continuing
operations and net losses in its five most recent fiscal years; and is not
considered to be in compliance with Section 1003(a)(iv) of the Company Guide
because it had sustained losses which are so substantial in relation to its
overall operations or its existing financial resources, or its financial
condition has become so impaired that it appeared questionable, in the opinion
of the Exchange, as to whether the Company would be able to continue operations
and/or meet its obligations as they mature.
In order
to maintain listing of the Company's common stock on Exchange, the Company must
submit a plan by February 23, 2009, advising the Exchange of the actions the
Company has taken, or will take, that would bring it into compliance with
Section 1003(a)(iv) of the Company Guide by July 23, 2009, and Sections
1003(a)(i), 1003(a)(ii) and 1003(a)(iii) of the Company Guide within a maximum
of eighteen months (the “Plan”). The Company will evaluate whether or not it
will submit a Plan. Assuming a Plan is submitted, if the Exchange accepts the
Plan, then the Company may be able to continue its listing during the plan
period, during which time the Company will be subject to periodic review to
determine whether it is making progress consistent with the Plan. If the Company
fails to submit a Plan acceptable to the Exchange, or even if accepted, if the
Company is not in compliance with the continued listing standards at the end of
the plan period or the Company does not make progress consistent with the Plan
during such period, then the Exchange would be expected to initiate delisting
proceedings.
The
Company's common stock continues to trade on the Exchange. The Exchange has
advised the Company that the Exchange is utilizing the financial status
indicator fields in the Consolidated Tape Association's Consolidated Tape System
and Consolidated Quote Systems Low Speed and High Speed Tapes to identify
companies that are in noncompliance with the Exchange's continued listing
standards. Accordingly, the Company will become subject to the trading symbol
extension ".BC" to denote such noncompliance. The Company intends to
explore all of its options and at this time does not know whether it will be
able to take the steps to regain compliance with the Exchange’s continued
listing standards within the time frame noted above.
ITEM 2.
|
M
ANAG
EMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This
discussion contains forward-looking statements reflecting our current
expectations that involve risks and uncertainties. When used herein, the words
“believes,” “plans,” “expects,” “anticipates,” “intends,” “continue,” “may,”
“will,” “could,” “should,” “future,” “potential,” “estimate,” or the negative of
such terms and similar expressions as they relate to us or our management are
intended to identify forward-looking statements. Actual results and
the timing of events may differ materially from those contained in these
forward-looking statements due to a number of factors, including those discussed
herein. These risks and uncertainties are beyond our control and, in
many cases, we cannot predict the risks and uncertainties that could cause our
actual results to differ materially from those indicated by the forward-looking
statements. Historical results and percentage relationships among any
amounts in our consolidated financial statements are not necessarily indicative
of trends in operating results for any future periods.
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with “Selected Consolidated Financial
Information” and our financial statements and accompanying notes included
elsewhere in this document.
Overview
We are a
real estate development and homebuilding company. We commenced our
homebuilding operations in June 2007 with the purchase of Green Builders,
Inc. We build energy efficient homes in Austin, Texas and we make it
a priority to fully utilize sustainable building practices and to use
earth-friendly products and materials.
From late
2007 through December 31, 2008 our business has been significantly impacted by
the continued deterioration of the real estate and homebuilding
industry. Although central Texas has been less affected than other
areas, national real estate trends and global economic conditions have had a
significant impact on home buyers and lenders and we believe that sales of new
homes in our market may continue to decline in fiscal 2009. We
believe this slowdown is attributable to a decline in consumer confidence, the
inability of some buyers to sell their current homes and the direct and indirect
impact of the well-publicized turmoil in the mortgage and credit
markets.
In June
2007 we purchased Green Builders, Inc. and commenced our homebuilding operations
under that name. Our strategy is to build homes that are
environmentally responsible, resource efficient and consistent with local
style. Substantially all of our construction work is performed by
subcontractors who are retained for specific subdivisions pursuant to contracts
entered in. We intend to build homes on some of the lots we currently
have completed and sell those as finished homes as well as continue to sell lots
to other builders. We are currently exploring options with other
developers to enter into agreements that would give us the option to purchase
additional finished lots in the future. In November 2008 we updated our
homebuilding services to include “build on your lot”. “Build on your lot”
allows customers to build our existing plans on lots that they own.
Prior to
our acquisition of Green Builders, we were solely focused on the acquisition of
undeveloped land that we believed, based on our research of population growth
patterns and infrastructure development, was strategically
located. We have funded these acquisitions primarily with bank debt
and cash we raised from financing activities. We currently have completed
220 lots in Georgetown Village, 105 lots in Elm Grove and 58 lots in Rutherford
West. This portion of our business focus has required the majority of our
financial resources. Due to the continued deterioration of the
homebuilding industry and based on our current liquidity, we are currently in
negotiations to dispose of some of our land positions including but not limited
to deed in lieu of foreclosure of these assets.
In tandem
with our land acquisition efforts and based upon our strategic market analysis,
we also prepare land for homebuilding. A focus of our business had
been the sale of developed lots to homebuilders, including national
homebuilders. Due to deteriorating conditions in the homebuilding
industry both nationally and to a lesser extent locally, during the second
quarter of 2007 and continuing through December 2008, demand for finished lots
by national homebuilders is, and we expect will continue to be, significantly
reduced. As a result, orders placed for some of our finished lots
were cancelled. We elected to retain some of our lots for use in our
homebuilding business. We believe that retaining some of our lots for
use in homebuilding activities will allow us to generate homebuilding revenue to
replace some of the revenue from the loss of sales of these finished
lots. We will continue to pursue lot sales contracts with both
national and regional builders.
In
November 2008 we expanded our services to include “green” remodeling of existing
homes. We have taken a comprehensive approach to engaging in the
green remodeling business and offer customers a “one-stop” process for updating
their existing home with a focus on energy efficiency. Our green
remodeling program currently caters to existing homeowners in the Austin, Texas
area who want to reduce home energy demands and utility bills, lessen home
maintenance costs and increase the comfort of their home. Initially
we anticipate that substantially all of our construction work will be performed
by subcontractors. By subcontracting out the work, there is limited
additional capital required to enter this business line. We also feel that
entering into remodeling will help us supplement revenue during this slowdown in
the real estate industry. To date we have received some energy audit requests
and are reviewing the results and discussing the next steps with our
customers. We have received immaterial amounts of revenue from
remodeling operations. We expect to see additional revenues from these
operations during fiscal 2009.
Comparison
of Three Months Ended December 31, 2008 and 2007
|
|
Three
Months
Ended
December
31,
2008
|
|
|
Three
Months
Ended
December
31,
2007
|
|
|
Change
|
|
|
Change
%
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
and related services revenues
|
|
$
|
4,236,450
|
|
|
$
|
-
|
|
|
$
|
4,236,450
|
|
|
|
n/a
|
|
Land
revenues
|
|
|
346,146
|
|
|
|
1,108,312
|
|
|
|
(762,166
|
)
|
|
|
-69
|
%
|
Remodeling
revenues
|
|
|
270
|
|
|
|
-
|
|
|
|
270
|
|
|
|
n/a
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
and related services gross profit
|
|
|
474,195
|
|
|
|
-
|
|
|
|
474,195
|
|
|
|
n/a
|
|
Land
gross profit
|
|
|
73,914
|
|
|
|
399,257
|
|
|
|
(325,343
|
)
|
|
|
-81
|
%
|
Remodeling
gross profit
|
|
|
(330
|
)
|
|
|
-
|
|
|
|
(330
|
)
|
|
|
n/a
|
|
Inventory
impairments and land option cost write-offs
|
|
|
(11,900
|
)
|
|
|
-
|
|
|
|
(11,900
|
)
|
|
|
n/a
|
|
Costs
& Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
1,312,203
|
|
|
|
1,936,013
|
|
|
|
(623,810
|
)
|
|
|
-32
|
%
|
Operating
Loss
|
|
|
(776,324
|
)
|
|
|
(1,536,756
|
)
|
|
|
760,432
|
|
|
|
-49
|
%
|
Net
Loss
|
|
$
|
(1,661,103
|
)
|
|
$
|
(2,357,138
|
)
|
|
$
|
696,035
|
|
|
|
-30
|
%
|
Homebuilding
and Related Services Revenues
Background –
Homebuilding and
related services revenue consists of revenue from home sales. Prior
to fiscal 2008, all home sales were generated by our homebuilder customers
utilizing our homebuilder services. In June 2007 we acquired Green
Builders, Inc and commenced our homebuilding activities. We sell
homes in the Austin, Texas area for prices ranging from $180,000 to
$600,000. For the three months ended December 31, 2008 we had twelve
home sales and seven cancellations for a total of five net sales. We
had seventeen home closings. Revenue is not recognized until the home
closing is finalized. At December 31, 2008, we had eight completed
speculative units, two speculative units under construction, seven completed
models, and 19 units in backlog. Backlog is defined as homes under
contract but not yet delivered to our home buyers. We believe that
the turmoil in the mortgage market combined with national publicity of
significantly deteriorating general and economic conditions has caused a lack of
urgency for buyers. We expect that they will continue to be slow
throughout fiscal 2009. In accordance with these anticipated market
conditions, our strategy is to build a limited number of speculative units per
community and build the majority of our homes after a contract is entered into
with a homebuyer.
Revenues -
During the three
months ended December 31, 2008, home sales accounted for approximately 93% of
revenues. For the three months ended December 31, 2008 there were
seventeen home closings at an average sales price of $249,000. During
the three months ended December 31, 2007, we had no revenue from homebuilding or
homebuilding services.
Gross Profit
- Gross profit
percentage before impairments was 11% for the three months ended December 31,
2008. During fiscal year 2008 we reviewed our homebuilding inventory
for impairments. We determined that we had $11,900 in impairments on
speculative units. The impairment analysis for each of our
communities generally assumed that sales prices in future periods would be equal
to current sold unit’s prices.
Land
and Land Development
Background –
Land sales
revenue consists of revenues from the sale of undeveloped land and developed
lots. Developing finished lots from raw land takes approximately one
to three years. In response to the slowdown in the national housing market and
the reduction in demand for finished lots, we changed our strategy and have
elected to use some of our developed lots for our own homebuilding
operations. We may still sell our lots to national, regional and
local homebuilders that may purchase anywhere from five to one hundred or more
lots at a time. The delivery of these lots would likely be scheduled over
periods of several months or years.
Revenues –
Revenue from the
sale of land decreased by 69% during the three months ended December 31, 2008,
compared to the three months ended December 31, 2007. During the
three months ended December 31, 2008 we closed six finished lots as compared to
eleven finished lots for the three months ended December 31, 2007. In
addition for the three months ended December 31, 2007 we had $349,000 in land
revenues for the sale of five acres of Highway 183.
Gross Profit
- Gross profit as
a percentage of sales decreased from 36% to 21% for the three months ended
December 31, 2008. The decrease in margin percentage is due to the
higher margin earned on the Highway 183 sale.
General
and Administrative Expenses
Breakdown
of G&A Expenses
|
|
Three
Months
Ended
December
31,
2008
|
|
|
Three
Months
Ended
December
31,
2007
|
|
|
Change
|
|
|
Change
%
|
|
Salaries,
benefits, payroll taxes and related emp. exps.
|
|
$
|
283,963
|
|
|
$
|
502,749
|
|
|
$
|
(218,786
|
)
|
|
|
-77
|
%
|
Stock
compensation expense
|
|
|
42,286
|
|
|
|
639,700
|
|
|
|
(597,414
|
)
|
|
|
-1413
|
%
|
Legal,
accounting, auditing, consultants, and investor relations
|
|
|
122,721
|
|
|
|
221,674
|
|
|
|
(98,953
|
)
|
|
|
-81
|
%
|
General
overhead, including office expenses, insurance, and travel
|
|
|
140,580
|
|
|
|
254,205
|
|
|
|
(113,625
|
)
|
|
|
-81
|
%
|
Restructuring
expenses
|
|
|
169,486
|
|
|
|
-
|
|
|
|
169,486
|
|
|
|
n/a
|
|
Amortization
of subordinated debt costs and transaction costs
|
|
|
59,253
|
|
|
|
62,385
|
|
|
|
(3,132
|
)
|
|
|
-5
|
%
|
Total
G&A
|
|
$
|
818,289
|
|
|
$
|
1,680,713
|
|
|
$
|
(862,424
|
)
|
|
|
15
|
%
|
General
and administrative expenses are composed primarily of salaries of general and
administrative personnel and related employee benefits and taxes, accounting and
legal and general office expenses and insurance. During the three
months ended December 31, 2008 and December 31, 2007, salaries, benefits, taxes
and related employee expenses totaled approximately $284,000 and $503,000,
respectively, and represented approximately 35% and 30%, respectively, of total
general and administrative expenses for the periods. The decrease for
the year is due to a decrease in headcount.
Stock
compensation expense was approximately $42,000 and $640,000 for the three months
ended December 31, 2008 and 2007, respectively. The decrease in stock
compensation expense was due to acceleration of the stock option expense for our
former CFO expensed for the three months ended December 31, 2007. In
addition, the decrease is also due to a decrease in headcount from 25 employees
at December 31, 2007 to 16 employees at December 31, 2008.
Legal,
accounting, audit, consulting and investor relation expense totaled $123,000 and
$222,000 for the three months ended December 31, 2008 and 2007,
respectively. General overhead, including office expenses, insurance,
and travel totaled $141,000 and $254,000 for the three months ended December 31,
2008 and 2007, respectively. The decrease in these general and
administrative costs resulted from our initiative to control costs.
Restructuring
expenses relates to expenses incurred to restructure our debt agreement with
Graham Mortgage Capital and our syndicate of banks. In the prior year
we incurred no expenses for restructuring.
Amortization
of subordinated convertible debt issuance costs was approximately $60,000 and
$62,000 for the three months December 31, 2008 and 2007,
respectively.
Sales
and Marketing Expenses
Sales and
marketing expenses include selling costs, commissions, salaries and related
taxes and benefits, finished inventory maintenance and property tax expense,
marketing activities including websites, brochures, catalogs, signage, and
billboards, and market research, all of which benefit our corporate presence and
are not included as homebuilding cost of sales. The increase was due
to an increase in commissions and closing costs due to an increase in
homebuilding revenue for the three months ended December 31, 2008.
Interest
Expense and Income
|
|
Three
Months
Ended
December
31,
2008
|
|
|
Three
Months
Ended
December
31,
2007
|
|
|
Change
|
|
|
Change
%
|
|
Interest
expense - convertible debt
|
|
$
|
206,250
|
|
|
$
|
206,250
|
|
|
|
-
|
|
|
|
0
|
%
|
Interest
discount expense - convertible debt
|
|
|
139,587
|
|
|
|
139,587
|
|
|
|
-
|
|
|
|
0
|
%
|
Interest
expense - land and development loans
|
|
|
636,785
|
|
|
|
567,740
|
|
|
|
69,045
|
|
|
|
12
|
%
|
Interest
income and misc income
|
|
|
(97,843
|
)
|
|
|
(93,195
|
)
|
|
|
(4,648
|
)
|
|
|
5
|
%
|
Total
interest and other expense and income
|
|
$
|
884,779
|
|
|
$
|
820,382
|
|
|
|
64,397
|
|
|
|
8
|
%
|
Interest
expense for land and development loans increased by approximately $69,000 for
the three months ended December 31, 2008 over the same period in
2007. The increase is attributable to expense of interest expense for
property not under development.
Financial
Condition and Capital Resources
Liquidity
On
December 31, 2008 we had $2.2 million in cash and cash
equivalents. We will need to raise additional cash to continue our
business, whether through the sale of debt, equity, or combination thereof or
through the sale of certain of our assets. We completed a public offering of our
common stock in May 2007, resulting in net proceeds to us of approximately $14
million.
On June
29, 2007, Wilson Family Communities entered into a $55 million revolving credit
facility (the “Credit Facility”) with a syndicate of banks led by RBC Bank
(formerly RBC Centura Bank), as administrative agent. IBC Bank and
Franklin Bank, S.S.B. (“Franklin Bank”) are the other two banks that make up the
syndicate of banks. The Credit Facility was reduced to $30 million in
June 2008. The initial maturity date for the Credit Facility was June
29, 2008. We entered into an agreement to extend the maturity date to
October 1, 2008. On October 1, 2008, the Credit Facility expired
pursuant to its terms. Although WFC is currently out of compliance
with certain covenants set forth in the Borrowing Base Agreement under the Loan
Agreement, the syndicate of banks has continued to make amounts available to WFC
pursuant to the Loan Agreement for loans made prior to the expiration of the
facility. We were notified on November 7, 2008 that Franklin Bank was
closed by the Texas Department of Savings and Mortgage Lending and the Federal
Deposit Insurance Corporation (the “FDIC”) was named Receiver.
Green
Builders has guaranteed the obligations of Wilson Family Communities under the
Credit Facility. The amount available at any time under the Credit
Facility for revolving credit loans or the issuance of letters of credit is
determined by a borrowing base. The borrowing base is calculated as the sum of
the values for homes and lots in the subdivision to be developed as agreed by us
and the agent. Our obligations under the Credit Facility are secured
by the assets of each subdivision that was to be developed with the proceeds of
loans available under the Credit Facility.
Outstanding
borrowings under the Credit Facility bear interest at the prime rate plus 0.25%,
with a floor of 5.5%. We are charged a letter of credit fee equal to
1.10% of each letter of credit issued under the Credit Facility. We may elect to
prepay the Credit Facility at any time without premium or
penalty. Quarterly principal reductions are required during the final
12 months of the term.
The
Credit Facility contains customary covenants limiting our ability to take
certain actions, including covenants that:
·
|
affect
how we can develop our properties;
|
·
|
limit
the ability to pay dividends and other restricted
payments;
|
·
|
limit
the ability to place liens on its
property;
|
·
|
limit
the ability to engage in mergers and acquisitions and dispositions of
assets;
|
·
|
require
us to maintain a minimum net worth of $20,000,000, including subordinated
debt (although the minimum net worth may be $17,000,000 for one
quarter);
|
·
|
prohibit
the ratio of debt (excluding convertible debt) to equity (including
convertible debt) from exceeding 2.0 to
1.0;
|
·
|
require
us to maintain working capital of at least $15,000,000;
and
|
·
|
limit
the number of completed speculative homes to 12% of the total borrowing
base available for homes.
|
An event
of default will occur under the Credit Facility if certain events occur,
including the following:
·
|
a
failure to pay principal or interest on any loan under the Credit
Facility;
|
·
|
the
inaccuracy of a representation or warranty when
made;
|
·
|
the
failure to observe or perform covenants or
agreements;
|
·
|
an
event of default beyond any applicable grace period with respect to any
other indebtedness;
|
·
|
the
commencement of proceedings under federal, state or foreign bankruptcy,
insolvency, receivership or similar
laws;
|
·
|
any
loan document, or any lien created thereunder, ceases to be in full force
and effect;
|
·
|
the
entry of a judgment greater than $1,000,000 that remains undischarged;
or
|
If an
event of default occurs under the Credit Facility, then the lenders may: (1)
terminate their commitments under the Credit Facility; (2) declare any
outstanding indebtedness under the Credit Facility to be immediately due and
payable; and (3) foreclose on the collateral securing the
obligations. We are currently out of compliance with the terms of the
Borrowing Base Agreement under the Credit Facility. We are not in
compliance with the tangible net worth, the ratio of debt to equity, working
capital, number of completed speculative homes and number of land and developed
lot loans covenants. If we are unable to obtain a waiver for the
noncompliance our obligation to repay indebtedness outstanding under the
facility, our term loans, and our outstanding note indentures could be
accelerated in full. We can give no assurance that in such an event, we would
have, or be able to obtain, sufficient funds to pay all debt required to
repay.
In
December 2005 and September 2006, we entered into Securities Purchase Agreements
with certain investors for the sale of Convertible Promissory
Notes. Pursuant to the cross-default provisions of the Securities
Purchase Agreements, a default under our Credit Facility triggers defaults under
the Securities Purchase Agreements. In the event that our
non-compliance with the Credit Facility continues, the holders of a majority of
the Notes issued under the Securities Purchase Agreement could elect to demand
the acceleration of all amounts owed under these Notes. We do not
have the cash available to repay these amounts or the amounts owed under the
Credit Facility. We have discussed our non-compliance with certain
investors under the Securities Purchase Agreements but these Note holders have
not initiated the process under the Securities Purchase Agreements that would
allow them to accelerate our obligations under the Securities Purchase
Agreements or take any other remedial action. We intend to negotiate
with all investors under our Securities Purchase Agreements to reach a mutually
satisfactory resolution and we intend to cooperate with the Credit Facility
lenders to regain compliance with the terms of the Credit Facility.
Our
growth will require substantial amounts of cash for earnest money deposits,
development costs, interest payments and homebuilding costs. Until we begin to
sell an adequate number of lots and homes to cover our monthly operating
expenses, our sales, marketing, general and administrative costs will deplete
cash. Due to current market conditions and slow home and land sales,
we will need to obtain additional capital. We are currently in
negotiations to dispose of some of our current land positions, but there is no
assurance that we will be successful in selling these land positions at an
acceptable price or at all. In addition we are seeking additional
capital in the form of debt or equity to support future growth and current
operations. We do not have sufficient cash to continue operations for
the next twelve months. We will need to raise additional cash to
continue our business, whether through the sale of debt, equity, or combination
thereof or through the sale of certain of our assets.
Capital
Resources
We have
raised approximately $16.5 million of subordinated convertible debt, and
approximately $14 million in a public offering of our common stock completed in
May 2007. We entered into a $55 million revolving Credit Facility
that was reduced to $30 million in June 2008. The initial maturity date for the
Credit Facility was June 29, 2008. We entered into an agreement to
extend the maturity date to October 1, 2008. On October 1, 2008, the
Credit Facility expired pursuant to its terms. Although WFC is
currently out of compliance with certain covenants set forth in the Borrowing
Base Agreement under the Loan Agreement, RBC and IBC have continued to make
amounts available to WFC pursuant to the Loan Agreement for loans made prior to
the expiration of the facility. We were notified on November 7, 2008
that Franklin Bank was closed by the Texas Department of Savings and Mortgage
Lending and the FDIC was named Receiver. Land and homes under
construction comprise the majority of our assets. These assets have suffered
devaluation due to the downturn in the housing and real estate market for
central Texas. We are considering selling tracts of commercial and
residential land in order to increase sales revenues and increase
cash. We are also in negotiation to deed in lieu of foreclosure some
of our land positions. We expect that we will incur losses in
2009. Due to current market conditions and slow home and land sales,
we anticipate that we will need additional capital to support operations for the
next twelve months.
Off-Balance
Sheet Arrangements
As of
December 31, 2008, we had no off-balance sheet arrangements.
Critical
Accounting Policies and Estimates
The SEC
defines “critical accounting policies” as those that require application of
management’s most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods. Our accounting
policies are more fully described in the notes to our consolidated financial
statements.
As
discussed in the notes to the consolidated financial statements, the preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions about future events that affect the amounts reported in our
consolidated financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
could differ from those estimates, and such differences may be material to our
consolidated financial statements. Listed below are those policies and estimates
that we believe are critical and require the use of significant judgment in
their application.
Inventory
Inventory
is stated at cost unless it is determined to be impaired, in which case the
impaired inventory would be written down to the fair market
value. Inventory costs include land, land development costs, deposits
on land purchase contracts, model home construction costs, homebuilding costs,
interest and real estate taxes incurred during development and construction
phases.
Revenue
Recognition
Revenues
from property sales are recognized in accordance with SFAS No. 66, “Accounting
for Sales of Real Estate.” Revenues from land development services to builders
are recognized when the properties associated with the services are sold, when
the risks and rewards of ownership are transferred to the buyer and when the
consideration has been received, or the title company has processed payment. For
projects that are consolidated, homebuilding revenues and services will be
categorized as homebuilding revenues and revenues from property sales or options
will be categorized as land sales.
Use
of Estimates
We have
estimated and accrued liabilities for real estate property taxes on our
purchased land in anticipation of development, and other liabilities including
the beneficial conversion liability and the fair value of warrants and
options. To the extent that the estimates are different than the
actual amounts, it could have a material effect on the financial
statements.
Municipal
Utility and Water District Receivables
We
currently have planned the community of Villages of New Sweden within the
boundaries of New Sweden Municipal Utility District No. 1 and the community of
Rutherford West in Greenhawe Water Control and Improvement District No.
2. We incur development costs for the initial creation and operating
costs of these Districts and continuing costs for the water, sewer and drainage
infrastructure for these Districts. The Districts will issue bonds to
repay us, once the property has sufficient assessed value for the District taxes
to repay the bonds. As the project is completed and homes are sold within the
District, the assessed value increases. It can take several years
before the assessed value is sufficient to provide sufficient tax revenue for us
to recapture its costs. We estimate that we will recover approximately 50 to
100% of eligible initial creation and operating costs spent through December 31,
2008 for costs spent for Rutherford West Phase 1. We have completed
Phase 1 for the Rutherford West project and have approximately $1.1million of
water district reimbursements included in inventory that we anticipate will be
collected from bond issuances made by the District. When the
reimbursements are received we will record them as reductions of the related
asset’s balance. Usually, a District issues its first bond issue only after
completion of construction of approximately 200 houses. The Districts
will pay for property set aside for the preservation of endangered species,
greenbelts and similar uses. To the extent that the estimates are
dramatically different from the actual facts, it could have a material effect on
our financial statements.
Convertible
Debt
The
subordinated convertible debt and the related warrants have been accounted for
in accordance with Emerging Issues Task Force (EITF) No. 98-5, “Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios”, EITF No. 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock,” EITF 00-27, “Application of issue 98-5 to Certain Convertible
Instruments”, EITF 05-02 “Meaning of ‘Conventional Convertible Debt Instrument’
in Issue No. 00-19”, and EITF 05-04 “The Effect of a Liquidated Damages Clause
on a Freestanding Financial Instrument Subject to Issue No. 00-19” updated with
FSP EITF 00-19-2”, Accounting for Registration Payment
Arrangements.
Debt
Restructuring
The debt restructuring agreement has
been accounted for in accordance with accordance with SFAS 15, “Accounting by
Debtors and Creditors for Troubled Debt Restructuring”. The related
warrants issued have been treated in accordance with “APB 14, “Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants”.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”), which defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. SFAS 157 applies
under other accounting pronouncements that require or permit fair value
measurements and does not require any new fair value measurements. The
provisions of SFAS 157 are effective beginning with our fiscal year 2009. The
adoption of this standard did not have a material impact on our financial
statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities — including an amendment of FASB
Statement No. 115.” The statement permits entities to choose to measure certain
financial assets and liabilities at fair value. Unrealized gains and losses on
items for which the fair value option has been elected are reported in
earnings. SFAS 159 is effective for our fiscal year
2009. The adoption of this standard did not have a material
impact on our financial statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (FAS
141(R)), which establishes accounting principles and disclosure requirements for
all transactions in which a company obtains control over another
business. We are evaluating the impact of the adoption of SFAS No.
141; however, it is not expected to have a material impact on our consolidated
financial position, results of operations or cash flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (FAS 160), which prescribes the accounting by
a parent company for minority interests held by other parties in a subsidiary of
the parent company. We are evaluating the impact of the adoption of
SFAS No. 160; however, it is not expected to have a material impact on our
consolidated financial position, results of operations or cash
flows.
ITEM 3.
|
QU
ANTI
TATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
|
We are
subject to interest rate risk on our long-term debt. We monitor our exposure to
changes in interest rates and utilize both fixed and variable rate debt. For
fixed rate debt, changes in interest rates generally affect the value of the
debt instrument, but not our earnings or cash flows. Conversely, for variable
rate debt, changes in interest rates generally do not impact the fair value of
the debt instrument, but may affect our future earnings and cash
flows. We currently had approximately $16 million in variable
interest debt at December 31, 2008.
ITEM 4T.
|
C
ONTR
OLS AND
PROCEDURES
|
Evaluation
of Effectiveness of Disclosure Controls and Procedures
Our
management, including our Chief Executive Officer and our Principal Financial
Officer, have evaluated our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended), as of the period ended December 31, 2008, the period covered by this
Quarterly Report on Form 10-Q. Based upon that evaluation, our
principal executive officer and principal financial officer have concluded that
our disclosure controls and procedures were not effective as of December
31, 2008 due to the significant deficiency described in our annual report filed
December 23, 2008.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in our internal controls over financial reporting during
our most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial
reporting.
PART II
-
OTHE
R INFORMATION
ITEM 1.
|
L
EGA
L
PROCEEDINGS
|
We are
involved in lawsuits and other contingencies in the ordinary course of business.
While the outcome of such contingencies cannot be predicted with certainty, we
believe that the liabilities arising from these matters will not have a material
adverse effect on our consolidated financial position, results of operations or
cash flows. However, to the extent the liability arising from the ultimate
resolution of any matter exceeds our estimates reflected in the recorded
reserves relating to such matter, we could incur additional charges that could
be significant.
In
addition to the risk factors previously identified in our annual report on Form
10-KSB for the year ended September 30, 2008, we add the following risk
factor:
We have received notice from the
NYSE Alternext notifying us of our failure to satisfy several continued listing
rules or standards, which could result us being subject to delisting
procedures.
Our
common stock is listed on the NYSE Alternext (formerly the American Stock
Exchange) under the symbol "GBH." All companies listed on NYSE Alternext are
required to comply with certain continued listing standards, including
maintaining stockholders' equity at required levels, share price requirements
and other rules and regulations of the NYSE Alternext. On January 23, 2009, we
received notice from the staff of the NYSE Alternext indicating that we were not
in compliance with certain continued listing standards under Section
1003(a) of the NYSE Alternext's Company Guide (the "Company Guide")
relating to the level of our stockholders' equity and our losses from continuing
operations and net losses. The NYSE Alternext may seek to suspend or
delist our common stock if we are unable to gain compliance with the
Company Guide. In addition, the NYSE Alternext has advised us that
we should consider effecting a reverse stock split to address our low
stock price. Failure to effect a reverse split within a reasonable amount of
time could result in suspension or delisting of our common stock. If our
common stock were suspended or delisited it could materially adversely
affect its market value and liquidity.
ITEM
2.
|
UN
REGIST
ERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
ITEM
3.
|
D
EFAU
LTS UPON
SENIOR SECURITIES
|
ITEM
4.
|
S
UBMI
SSION OF
MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
ITEM 5.
|
O
THER
INFORMATION
|
None.
ITEM
6.
E
XHIB
ITS
Exhibit
No.
|
Description
|
10.1
|
Modification
and Forbearance Agreement for Graham Mortgage Capital (filed as Exhibit
10.1 to Registrants Current Report on Form 8-K dated January 15, 2009 and
incorporated herein by reference)
|
10.2
|
Modification
and Forbearance Agreement for Graham Mortgage Capital (filed as Exhibit
10.2 to Registrants Current Report on Form 8-K dated January 15, 2009 and
incorporated herein by reference)
|
31.1
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
31.2
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
32
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
SIG
NA
TURE
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 thereto
duly authorized.
GREEN
BUILDERS, INC.
Date:
February 13, 2009
|
By:
|
/s/ Clark
Wilson
|
|
|
|
Clark
Wilson
|
|
|
President
and Chief Executive Officer
|
EXHIBIT
INDEX
Exhibit
No.
|
Description
|
10.1
|
Modification
and Forbearance Agreement for Graham Mortgage Capital (filed as Exhibit
10.1 to Registrants Current Report on Form 8-K dated January 15, 2009 and
incorporated herein by reference)
|
10.2
|
Modification
and Forbearance Agreement for Graham Mortgage Capital (filed as Exhibit
10.2 to Registrants Current Report on Form 8-K dated January 15, 2009 and
incorporated herein by reference)
|
31.1
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
31.2
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
32
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
33