U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the period ended March 31, 2006 |
| o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _______ to _______ |
Commission File No. 000-50701
HOUSERAISING, INC.
(Exact name of small business issuer as specified in its charter)
TECHNOLOGY CONNECTIONS, INC.
(Former name of registrant)
North Carolina | 56-2253025 |
| (State or other jurisdiction of | (IRS Employer identification No.) |
| incorporation or organization) | |
4801 East Independence Blvd., Suite 201, Charlotte, North Carolina 28212
(Address of principal executive offices)
(704) 532-2121
(Issuer's telephone number)
Securities registered under Section 12(b) of the Act:
NONE
Securities registered under Section 12(g) of the Act:
Common stock (par value $.001 per share)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers’ classes of common equity, as of the latest practicable date:
| Class of Stock | | Outstanding April 30, 2006 | |
| Common Stock ($.001 par value) | | | 47,744,729 | |
| Preferred Stock Class A ($.001 par value) | | | 1,000,000 | |
REPORTS TO SECURITY HOLDERS
We are a reporting company under the requirements of the Securities Exchange Act of 1934 and will file quarterly, annual and other reports with the Securities and Exchange Commission. This quarterly report contains the required audited financial statements. We are not required to deliver a quarterly report to security holders and will not voluntarily deliver a copy of the quarterly report to security holders, except in connection with our annual meeting of shareholders. The reports and other information filed by us will be available for inspection and copying at the public reference facilities of the Commission, 100 F Street, N.E., Washington, D.C. 20549.
Copies of such material may be obtained by mail from the Public Reference Section of the Commission at 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the Commission maintains a World Wide Website on the Internet at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission.
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HOUSERAISING, INC.
FORM 10-QSB
For the Quarter ended March 31, 2006
TABLE OF CONTENTS
| | | Page |
| Cautionary Statement and Risk Factors that May Affect Future Results | 4 |
| | | |
| PART I |
| | | |
| ITEM 1. | Selected Financial Statements | 5 |
| | Balance Sheet - March 31, 2006 (unaudited) | 5 |
| | Statements of Operations - Three Months Ended March 31, 2006 and 2005 (unaudited) | 6 |
| | Statements of Cash Flows - Three Months Ended March 31, 2006 and 2005 (unaudited) | 7 |
| | Notes to Financial Statements (unaudited) | 8 |
| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Plan of Operations | 14 |
| ITEM 3. | Controls and Procedures | 19 |
| | | |
| PART II |
| | | |
| ITEM 1. | Legal Proceedings | 20 |
| ITEM 2. | Changes in Securities | 20 |
| ITEM 3. | Default Upon Senior Securities | 20 |
| ITEM 4. | Submission of Matters to a Vote of Security Holders | 21 |
| ITEM 5. | Other Information | 21 |
| ITEM 6. | Exhibits and Reports on Form 8-K | 22 |
| | | |
| | Signatures | 23 |
Cautionary Statement and Risk Factors that May Affect Future Results
This report and other presentations made by HouseRaising, Inc. (“HRI” or “Company”) and its subsidiaries contain “forward-looking statements,” which include statements that are predictive in nature, depend upon or refer to future events or conditions, and usually include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “will,” “predicts,” “estimates,” “we believe,” “the Company believes,” “management believes” or similar expressions. In addition, any statements concerning future financial performance (including future revenues, expenses, earnings or losses or growth rates), ongoing business strategies or prospects and possible future actions are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning HRI and its subsidiaries, the performance of the industries in which it does business and economic and market factors, among other things. These forward-looking statements are not guarantees of future performance.
Risks, uncertainties and other important factors that could cause actual results to differ materially from those in forward-looking statements and from historical results include, but are not limited to, the following:
| · | the effect of changes in general and local economic and market conditions where our operations are conducted and where prospective purchasers of homes live; |
| · | the effects of weather and natural disasters or global developments, including the effects of terrorist acts and war on terrorism negatively affecting local homebuilding industry and adversely affecting new home installation market; |
| · | the timing and extent of changes in interest rates; |
| · | negative trends in residential homebuilding adversely affecting our business; |
| · | actions by competitors that negatively affect us—the homebuilding market is extremely competitive, characterized by competition from a number of homebuilders in each market in which we operate, and there are few barriers to entry; |
| · | no assurance that the Company will be able to recruit quality homebuilders and sales personnel in order to meet the goals set forth in its business plan and planned rollout of Zone operations; |
| · | no assurance that anticipated acquisitions will materialize and/or be successfully integrated into operations; |
| · | the risks of suffering losses that are uninsured—construction defect and home warranty claims arising in the ordinary course of business are common in the homebuilding industry and can be costly; if we are not able to obtain adequate insurance against these claims, we may experience losses that could hurt our business; |
| · | the effects of changes in accounting principles applicable to HRI and its subsidiaries; |
| · | given the prominence of the automated design/build system in HRI’s operations and business plan, there is a risk that the Company may not complete the automated design/build system or generate significant retail sales in the future; |
| · | while the company has filed a patent registration to protect its intellectual property, until patent pending has been issued, HRI’s technology and software are at risk of being copied by competitors; |
| · | HRI’s success is impacted by the continued participation of its President, Robert V. McLemore; |
| · | our common stock trades on the over-the-counter market and is subject to high volatility; future sales of common stock could adversely affect the stock price; |
| · | HRI provides S-8 shares as compensation for services rendered which could impact stock volatility and future issuance; |
| · | principal stockholders control business affairs which means investors will have little or no participation in business; |
| · | the risk that an investor in the Company will never see a return on investment and the stock may become worthless; |
| · | the risk that the Company will be unable to obtain needed capital or unable to establish credit arrangements or extend existing arrangements on satisfactory terms, which would require it to curtail operations; |
| · | to the extent additional capital is raised through the sale of equity and/or convertible debt securities, this could result in dilution to shareholders and/or increased debt service; |
| · | we have never paid dividends and do not intend to pay dividends for the foreseeable future given need to retain earnings to finance the development and expansion of the business; |
| · | federal and state governmental and regulatory actions, such as changes in laws, rules and regulations applicable to HRI and its subsidiaries (including changes in taxation, environmental laws and regulations, immigration laws, occupational safety and health acts, workmen’s compensation statutes, unemployment insurance and governmental fees and assessments); |
| · | HRI is a development stage company that has an independent auditor’s report for fiscal 2005 that raises doubt about its ability to continue as a going concern (see independent auditor’s report and notes on management’s plan for more details); |
| · | other risks or uncertainties described elsewhere in this report and in other periodic reports previously and subsequently filed by HRI or its predecessor company with the Securities and Exchange Commission (SEC). |
Forward-looking statements speak only as of the date of the report, presentation or filing in which they are made. Except to the extent required by the federal securities laws, HRI and its subsidiaries undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
PART I
ITEM 1. SELECTED FINANCIAL STATEMENTS
| |
Consolidated Condensed Balance Sheet (unaudited) | |
As of March 31, 2006 | |
ASSETS | | | |
| | | | |
| CURRENT ASSETS | | | | |
Cash and Cash Equivalents | | | 57,454 | |
Excess costs over billings on uncompleted projects | | | 216,955 | |
Prepaid Expenses | | | 125,025 | |
Accounts Receivable | | | 22,918 | |
TOTAL CURRENT ASSETS | | | 422,352 | |
| | | | | |
| PROPERTY AND EQUIPMENT | | | | |
Property and Equipment | | | 368,288 | |
Accumulated Depreciation | | | (131,511 | ) |
Net Property and Equipment | | | 236,777 | |
| | | | | |
| OTHER ASSETS | | | | |
Other Assets | | | 9,010 | |
Capitalized Software | | | 11,069,483 | |
Net Other Assets | | | 11,078,493 | |
TOTAL ASSETS | | | 11,737,622 | |
| | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | |
| | | | | |
| LIABILITIES | | | | |
Current Liabilities: | | | | |
Accounts Payable and Accrued Expenses | | | 224,072 | |
Interest Payable | | | 89,893 | |
Notes Payable | | | 657,457 | |
Bank Loan | | | 1,750,000 | |
TOTAL LIABILITIES | | | 2,721,422 | |
| | | | | |
| STOCKHOLDERS' EQUITY | | | | |
Preferred Stock ($.001 par value, 5,000,000 authorized: | | | | |
none issued and outstanding) | | | - | |
Preferred Stock Class A Convertible ($.001 par value, 5,000,000 authorized: | | | | |
1,000,000 issued and outstanding) | | | 1,000 | |
Common Stock Series A ($.001 par value, 90,000,000 shares authorized: | | | | |
45,927,852 shares issued and outstanding) | | | 45,928 | |
Common Stock Subscribed but not Issued | | | 1,807,262 | |
Additional Paid-in-Capital | | | 13,551,776 | |
Retained Deficit | | | (6,389,766 | ) |
TOTAL STOCKHOLDERS' EQUITY | | | 9,016,200 | |
| | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | | 11,737,622 | |
The accompanying notes are an integral part of these consolidated financial statements.
| |
| Consolidated Statement of Operations (unaudited) | |
| For the quarter ended March 31, 2006 and 2005 | |
| | | | | | |
| | | | | | |
| | | 2006 | | 2005 | |
| SALES AND COST OF SALES: | | | | | | | |
| Sales | | $ | 218,011 | | $ | 1,590 | |
| Gross Profit | | | 6,828 | | | 342 | |
| | | | | | | | |
| OTHER REVENUES: | | | | | | | |
| Sales and service fees | | | 59,625 | | | 8,462 | |
| Other income | | | 0 | | | 94 | |
| | | | | | | | |
| NET REVENUES | | | 66,453 | | | 8,898 | |
| | | | | | | | |
| OPERATING EXPENSES: | | | | | | | |
| Selling, general and administrative | | | 458,102 | | | 467,114 | |
| Consulting fees | | | 141,949 | | | 513,349 | |
| | | | 600,051 | | | 980,463 | |
| | | | | | | | |
| OTHER EXPENSE: | | | | | | | |
| Interest expense | | | 30,831 | | | 9,247 | |
| | | | | | | | |
| | | | | | | | |
| NET LOSS | | $ | (564,429 | ) | $ | (980,812 | ) |
| | | | | | | | |
| Net Loss Per Common Share | | | | | | | |
| Basic & Fully Diluted | | | * | | | * | |
| | | | | | | | |
| Weighted Average Common | | | | | | | |
| Shares Outstanding (see Note G) | | | 45,377,509 | | | 37,010,437 | |
| | | | | | | | |
| * Less than ($.01) | | | | | | | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
HouseRaising, Inc. and Subsidiaries (A Development Stage Company) | |
Statements of Cash Flows (unaudited) | |
For the quarter ended March 31, 2006 and 2005 | |
| | | | | | |
| | | 2006 | | 2005 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | |
| Net loss | | $ | (564,429 | ) | $ | (980,812 | ) |
Adjustments to reconcile net loss to net cash (used in) operating activities: | | | | | | | |
| Depreciation | | | 8,442 | | | 7,558 | |
| Common stock issued for services and debt restructuring | | | 436,026 | | | 1,086,047 | |
| (Increase) decrease in operating assets: | | | - | | | (88,000 | ) |
| Accounts receivable | | | (30,583 | ) | | (59 | ) |
| Capitalized software | | | (349,783 | ) | | (233,050 | ) |
| Excess of costs over billings on uncompleted contracts | | | - | | | (4,204 | ) |
| Accounts payable and accrued expenses | | | (136,791 | ) | | (5,343 | ) |
| | | | | | | | |
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | | | (637,118 | ) | | (217,863 | ) |
| | | | | | | | |
| CASH FLOWS FROM INVESTMENT ACTIVITIES: | | | | | | | |
| Investment in subsidiary operations | | | (550 | ) | | - | |
| Purchase of property and equipment | | | (5,411 | ) | | (25,515 | ) |
| NET CASH (USED IN) INVESTMENT ACTIVITIES | | | (5,961 | ) | | (25,515 | ) |
| | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | |
| Proceeds from sale of common stock | | | 212,500 | | | - | |
| Borrowings on notes payable | | | 195,650 | | | 230,865 | |
| NET CASH PROVIDED BY FINANCING ACTIVITIES | | | 408,150 | | | 230,865 | |
| | | | | | | | |
| NET INCREASE IN CASH AND | | | | | | | |
| CASH EQUIVALENTS | | | 234,929 | | | (12,513 | ) |
| | | | | | | | |
| CASH AND CASH EQUIVALENTS: | | | | | | | |
| Beginning of period | | | 292,383 | | | 24,767 | |
| | | | | | | | |
| End of period | | $ | 57,454 | | $ | 12,254 | |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared in conformity with Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to SEC Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the financial statements, management is required 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 balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto incorporated by reference in HRI’s Annual Report on SEC Form 10-KSB for the year ended December 31, 2005.
In the opinion of HRI’s management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the financial position of HRI and its subsidiaries as of March 31, 2006 and the results of their operations for the three months ended March 31, 2006 and 2005 and their cash flows for the three months ended March 31, 2006 and 2005. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-QSB or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year.
When required, certain reclassifications are made to the prior period’s consolidated financial statements to conform to the current presentation.
(2) Summary of Significant Accounting Policies
Business Activity—HouseRaising, Inc. (a Development Stage Company) and Subsidiaries is in the business of selling, designing and managing design/build and renovation projects and homebuilding solutions in the residential homebuilding market for homebuyers and homebuilders. HouseRaising, Inc. merged into Technology Connections, Inc. and changed the name to HouseRaising, Inc. (The Company).
The Company provides a proprietary turnkey home design and build management system that it markets to regional homebuilders. Its customers are principally located in the Southeast USA with a current concentration in North and South Carolina.
The following is a list of all subsidiaries of the Company:
| HouseRaisingAcademy, LLC | owned 100% by HouseRaising, Inc. |
| HouseRaisingManagement, LLC | owned 100% by HouseRaising, Inc. |
| HouseRaisingUSA, LLC | owned 100% by HouseRaising, Inc. |
| HouseRaisingMembership, LLC (2006) | owned 100% by HouseRaising, Inc. |
| HouseRaising of Greater Charlotte, LLC | owned 100% by HouseRaisingUSA, LLC |
| HouseRaising of Greenville, LLC | owned 100% by HouseRaisingUSA, LLC |
| HouseRaising of Columbia, LLC | owned 100% by HouseRaisingUSA, LLC |
| HouseRaising of Asheville, LLC | owned 100% by HouseRaisingUSA, LLC |
| HouseRaising of Wilmington, LLC | owned 100% by HouseRaisingUSA, LLC |
| HouseRaising of Myrtle Beach, LLC | owned 100% by HouseRaisingUSA, LLC |
| HouseRaising of Charleston, LLC | owned 100% by HouseRaisingUSA, LLC |
| HouseRaising of the Gulf Coast, LLC (2006) | owned 100% by HouseRaisingUSA, LLC |
These limited liability companies provide managerial services to the Company’s homebuilding operations. These limited liability companies operate within specific guidelines and operating procedures established by HouseRaising, Inc. documents. The Company enters into a fee based management contract with each homebuilder that is required to be properly licensed. Each custom, design and built home is financed in the name of the homebuyer.
In July 2003, the Company formed 2 subsidiaries, HouseRaisingAcademy, LLC and HouseRaisingUSA, LLC. HouseRaisingAcademy, LLC develops and manages the Company’s internet based E-Learning and Homebuilder Management System (named System C) currently in development. HouseRaisingUSA, LLC is responsible for organizing and owning the regional limited liability companies. In 2006, the Company established two new limited liability companies (LLC) with the name HouseRaising of the Gulf Coast, LLC and HouseRaisingMembership, LLC. The Company is the 100% owner of all these LLCs.
(2) Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents—For purposes of the Consolidated Statement of Cash Flows, the Company considers liquid investments with an original maturity of three months or less to be cash equivalents.
Management’s Use of Estimates—The preparation of consolidated 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 disclosures of contingent assets and liabilities at the date of consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition—The Company’s revenue is derived primarily from 1) providing general management of construction for new homes and renovation projects which reflect the home’s contract price, and 2) design and build management services (sales and service fee) to homebuilders and homebuyers on a percentage of such home’s contract price. In no event would the company record more than the home’s contract price for consolidation purposes in the event the company provides both general management and design/build services to the same project. Approximately 60% of the sales and service fee (which is typically 10% of the home’s contract price) is recognized in the initial construction stage. The balance of the Company’s management fee, approximately 40% of the sales and service fee is recognized at closing. Revenues and profits from general management of construction contracts are recognized on the completed-contract method and therefore when the project is completed (or closed). This method is used because financial position and results of operations do not vary significantly from those which would result from use of percentage-of-completion method and is conservative. A contract is considered complete when all costs except insignificant items have been incurred and the installation is operating according to specifications or has been accepted by the customer. Contract costs include all direct materials and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. General and administrative costs are charged to expense as incurred. Costs in excess of amounts billed are classified as current assets under costs in excess of billings on uncompleted contracts. Billings in excess of costs are classified under current liabilities as billings in excess of costs on uncompleted contracts.
Comprehensive Income (Loss)—The Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive Income”, which establishes standards for the reporting and display of comprehensive income and its components in the consolidated financial statements. There were no items of comprehensive income (loss) applicable to the Company during the periods covered in the consolidated financial statements.
Capitalized Software—Certain capitalized software assets have been contributed to the Company from related entities under common ownership and control. The capitalized software assets include certain external direct costs of materials and services consumed in developing internal-use software (System C) for home plans and designs, and operating systems and policies for homebuilders. These costs include payroll and payroll-related costs for employees and contractors who are directly associated with and who devote time to the internal-use computer software project (to the extent of the item spent directly on the project) during the application development stage. Training costs, data conversion costs, internal costs for upgrades and enhancements, and internal costs incurred for maintenance are all expensed as incurred. General and administrative costs and overhead costs are also expensed as incurred. The assets will commence amortization when the asset is considered to be in the post-implementation phase (i.e. when the development of internal use software is completed) which was originally projected to be in 2005, but has been changed to 2006. At such time, the capitalized software costs will be amortized on a straight-line basis over the estimated economic life of the asset to be determined.
S-8 Share Payments—The Company currently provides S-8 registered shares as compensation for some services rendered as a means of conserving cash until it obtains adequate debt or equity financing. The Company accrues the value of services rendered as an expense or capital expenditure (when it is readily determinable and meets the tests under FASB No. 123) instead of the stock price at the time the shares are transferred. Contract personnel, consultants and vendors that receive such shares understand that there is risk associated with the volatility of the share price. In some cases there are “true-up” provisions which would result in more or less shares to be issued; however, the expense or capital expenditure would have already been reflected on the company’s financial statements at the time services were rendered.
Advertising Costs—Advertising costs are expensed as incurred. The Company does not incur any direct-response advertising costs.
Net Loss per Common Share—Statement of Financial Accounting Standard (SFAS) No. 128 requires dual presentation of basic and diluted earnings per share (EPS) with a reconciliation of the numerator and denominator of the EPS computations. Basic earnings per share amounts are based on the weighted average shares of common stock outstanding. If applicable, diluted earnings per share would assume the conversion, exercise or issuance of all potential common stock instruments such as options, warrants and convertible securities, unless the effect is to reduce a loss or increase earnings per share. This presentation has been adopted for the period presented. There were no adjustments required to net loss for the period presented in the computation of diluted earnings per share.
(2) Summary of Significant Accounting Policies (continued)
Income Taxes—Income taxes are provided in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.” A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss-carryforwards.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that, and some portion or the entire deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.
Fair Value of Financial Instruments—The carrying amounts reported in the consolidated balance sheet for cash, accounts receivable and payable approximate fair value based on the short-term maturity of these instruments.
Accounts Receivable—Accounts deemed uncollectible are written off in the year they become uncollectible.
Impairment of Long-Lived Assets—The Company evaluated the recoverability of its property and equipment, and other assets in accordance with Statements of Financial Accounting Standards (SFAS) No. 121, “Accounting for the Impairment of Long-Lived Assets to be Disposed of” which requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the estimated future undiscounted cash flows attributable to such assets or the business to which such intangible assets relate.
Property and Equipment—Property and equipment is stated at cost. Depreciation is provided by the straight-line method over the estimated economic life of the property and equipment remaining from five to seven years.
(3) Recent Accounting Pronouncements
Recent Accounting Pronouncements—In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations” which addresses the accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value cannot be made. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not expect SFAS No. 143 to have a material effect on its consolidated financial condition or consolidated cash flows.
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 generally establishes a standard framework to measure the impairment of long-lived assets and expands the Accounting Principles Board (“APB”) 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” to include a component of the entity (rather than a segment of the business). SFAS No.144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company does not expect SFAS No. 144 to have a material effect on its consolidated financial condition and consolidated cash flows.
In April of 2002, Statement of Financial Accounting Standards (SFAS) No. 145 was issued which rescinded SFAS Statements 4, 44, and 64, amended No. 13 and contained technical corrections. As a result of SFAS No. 145, gains and losses from extinguishments of debt will be classified as extraordinary items only if they meet the criteria in APB Opinion No. 30, that they are unusual and infrequent and not part of an entity’s recurring operations. The Company does not expect SFAS No. 145 to have a material effect on its financial condition or cash flows. The Company will adopt SFAS on January 1, 2004.
In July of 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 146, which addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)”. SFAS No. 146 revises the accounting for certain lease termination costs and employee termination benefits, which are generally recognized in connection with restructuring charges. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect SFAS No. 146 to have an impact its financial statements.
(3) Recent Accounting Pronouncements (continued)
In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantee, Including Indirect Guarantees or Indebtedness of Others”, which addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. FIN 45 also requires the recognition of a liability by a guarantor at the inception of certain guarantees that are entered into or modified after December 31, 2002. The adoption of this standard will not have an impact on the Company’s financial statements.
In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure”—an amendment to SFAS No. 123 (SFAS No. 148), which provides alternative methods of transition for companies voluntarily planning on implementing the fair value recognition provisions of SFAS No. 123. SFAS No. 148 also revises the disclosure provisions of SFAS No. 123 to require more prominent disclosure of the method of accounting for stock-based compensation, and requiring disclosure of pro forma net income and earnings per share as if the fair value recognition provisions of SFAS No. 123 had been applied from the original effective date of SFAS No. 123. The Company adopted the disclosures provisions of SFAS No. 148 for the quarters ending after December 15, 2002.
In January 2003, the EITF released Issue No. 00-21, (EITF 00-21), “Revenue Arrangements with Multiple Deliveries”, which addressed certain aspects of the accounting by a vendor for arrangement under which it will perform multiple revenue-generating activities. Specifically, EITF 00-21 addresses whether an arrangement contains more than one unit of accounting and the measurement and allocation to the separate units of accounting in the arrangement. EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of this standard will not have an impact on the Company’s financial statements.
In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company does not believe that there will be any impact on its financial statements.
In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how companies classify and measure certain financial with characteristics of both liabilities and equity. It requires companies to classify a financial instrument that is within its scope as a liability (or an asset in some characteristics). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003. The standard will not impact the Company’s financial statements.
(4) Income Taxes
Due to the operating loss and the inability to recognize an income tax benefit therefrom, there is no provision for current or deferred federal or state income taxes for the years ended December 31, 2005 and 2004.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for federal and state income tax purposes.
The Company’s total deferred tax asset, calculated using federal and state effective tax rates, as of December 31, 2005 is as follows:
| Total deferred tax assets | | $ | 2,200,000 | |
| Valuation allowance | | | (2,200,000 | ) |
| | | | | |
Net deferred tax asset | | $ | ---- | |
(4) Income Taxes (continued)
The reconciliation of income taxes computed at the federal statutory income tax rate to total income taxes for the years ended December 31, 2005 and 2004 is as follows:
| | | 2005 | | 2004 | |
| Income tax computed at the federal statutory rate | | | 34 | % | | 34 | % |
| State income taxes, net of federal tax benefit | | | 4 | % | | 4 | % |
| Valuation allowance | | | (38 | %) | | (38 | %) |
| Total deferred tax asset | | | 0 | % | | 0 | % |
| | | | | | | | |
Because of the Company’s lack of earnings history, the deferred tax asset has been fully offset by a valuation allowance. The valuation allowance increased (decreased) by $1,550,000 and $351,000 in 2005 and 2004, respectively.
As of December 31, 2005, the Company had federal and state net operating loss carryforwards in the amount of approximately $5,800,000, which expire at various times through the year 2025.
(5) Going Concern
As shown in the accompanying financial statements, the Company has recurring losses from operations to date. During 2005, the Company had a net loss of $4,120,994, a net deficiency of $5,828,863 and a net working capital deficit of $2,035,865. In the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005, the Company’s independent auditor noted in her opinion that ‘the Company has recurring losses and has yet to generate an internal cash flow that raises substantial doubt about its ability to continue as a going concern.” This is commonly known as a “going concern” qualification to an audit opinion.
Management believes that actions presently being taken to raise equity capital, seek strategic relationships and alliances, and build its marketing efforts to generate positive cash flow provide the means for the Company to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
(6) Acquisition and related reorganization
On August 4, 2005, the Company, LearnBytes, LLC, a North Carolina limited liability company (“LearnBytes”), and Grant Neerings, a resident of the state of North Carolina and sole member of LearnBytes (“Neerings”), simultaneously executed and closed the transactions contemplated by an Asset Purchase Agreement, dated as of August 1, 2005 (the “Agreement”), pursuant to which the Company acquired substantially all of the assets used and useful in the business of LearnBytes and assumed certain of its liabilities. LearnBytes was engaged in the Learning System Design and Implementation Business (the “Business”), and was an independent contractor of the Company whose responsibilities included the development and implementation of the Company’s System C software system that was designed to manage the homebuilding process for the Company’s customers.
The aggregate purchase price (the “Purchase Price”) for the Business under the Agreement was 500,000 shares of restricted common stock of the Company, payable to LearnBytes as soon as practicable following the Closing. These shares are subject to complete forfeiture by LearnBytes in the event that Neerings does not remain a full-time consultant or an employee of the Company for a one-year period of time from the date of issuance. The shares are entitled to piggy-back registration rights that commence one year from the date of Closing. As additional consideration for the purchase of the Business, the Company assumed $6,490 in accounts payable of LearnBytes and a total of $5,260 in accounts receivable of LearnBytes.
As part of the Agreement, Neerings and the Company entered into a Consultant Agreement, dated as of August 1, 2005 (the “Consultant Agreement”), pursuant to which Neerings agreed to provide the services outlined in Exhibit A to the Consultant Agreement for a five-year period of time commencing on the date of the Consultant Agreement. In consideration for such services, Neerings will be compensated at a rate of $120,000 per year in cash or S-8 stock. When the Company obtains and closes on a Qualified Financing (as defined), Neerings’ compensation will increase to $200,000 per year. In addition, among other things, Neerings will be entitled to warrants to purchase 2,000,000 shares of common stock of the Company exercisable for a ten year term, 1,000,000 of which are exercisable at $0.50 per share, and 1,000,000 of which are exercisable at $1.00 per share. The warrants will be earned and vested in an amount equal to one-fifth on each anniversary date of the Agreement.
(7) Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.” This statement requires companies to report information about operating segments in interim and annual consolidated financial statements. It also requires segment disclosures about products and services, geographic areas and major customers. The Company determined that it did not have any separately reportable operating segments as of March 31, 2006 and 2005.
(8) Equity
During 2005, the Company issued 8,125,652 common shares for services (consulting, marketing, legal fees, salaries, capitalized software system). During 2004, the Company issued 19,299,064 common shares—7,512,034 for cash, services and debt to equity conversions and 11,787,030 pertaining to the merger.
(9) Non-Qualified Stock Compensation Plan
On November 23, 2005, the Company adopted Amendment Number 3 to its 2004 Non-qualified Stock Compensation Plan (Stock Plan) where the Company may compensate key employees, advisors, and consultants by issuing them shares of its capital stock or options to purchase shares of its capital stock in exchange for services rendered and to be rendered and thereby conserve the Company’s cash resources. The Company has reserved an additional 2,000,000 shares of its $.001 par value Common Stock for these purposes. The Stock Plan will not exceed 30% of its outstanding common stock at any given time.
(10) Development Stage Company
The Company is in the development stage as of March 31, 2006 and to date has had no significant operations. Recovery of the Company’s assets is dependent on future events, the outcome of which is indeterminable. In addition, successful completion of the Company’s development program and its transition, ultimately, to attaining profitable operations is dependent upon obtaining adequate financing to fulfill its development activities and achieving a level of sales adequate to support the Company’s cost structure.
(11) Commitments/Leases
On November 1, 2005, HouseRaising entered into a Lease Agreement (“Lease”) whereby the Company agreed to lease the entire second floor at Independence Tower (approximately 11,000 square feet) located at 4801 E. Independence Boulevard, Charlotte, NC for an annual rent obligation of approximately $100,000. HouseRaising will utilize this additional space for estimators and designers recruited to support the Company’s Gulf Coast initiative and a sales and product display center to support operations in North and South Carolina. The space will continue to serve as corporate headquarters for HouseRaising, Inc. and HouseRaisingAcademy, which include the Company’s recent consolidation of its acquisition of LearnBytes, LLC.
The Company also has one vehicle under leases that has been classified as an operating lease expiring in September 2006. Payment due under the lease is $1,384 per month. In December 2005, the Company entered into a lease agreement. The agreement is for the lease of computer equipment. The monthly payments are $2,227.03 per month for 48 months. Monthly payments will begin in 2006. In October 2005, the Company entered into a lease agreement. The agreement is for the lease of computer hardware and software. The monthly payments are $560.68 per month for 24 months. In September 2005, the Company entered into a lease agreement. The agreement is for the lease of computer hardware and software. The monthly payments are $248.53 per month for 24 months.
(12) Notes Payable
Notes payable at March 31, 2006 consist of the following:
| Unsecured note payable to an unrelated party. | | | | |
| Bearing 8% interest. | | $ | 5,640 | |
| | | | | |
| Unsecured note payable to an unrelated party. | | | | |
| Bearing 8% interest. | | $ | 13,177 | |
| | | | | |
| Secured note payable to an unrelated party. | | | | |
| Bearing 15% interest. | | $ | 155,000 ** | |
| | | | | |
| Secured note payable to an unrelated party. | | | | |
| Bearing 18% interest. Note matures April 2005. | | $ | 91,500 ** | |
| | | | | |
| Unsecured note payable to an unrelated party. | | | | |
| Bearing 0% interest. | | $ | 1,851 ** | |
| | | | | |
| Secured demand note payable to a related party. | | | | |
| Bearing 6% interest. | | $ | 401,402 | |
| | | | | |
| Total Current Portion | | $ | 668,570 | |
** On the 0% interest bearing notes, the Company imputed interest on the notes using a rate of 6%. The effects of these notes are included in the consolidated financial statements therein. In March, 2006 the Registrant offered its bridge lenders the opportunity to convert their outstanding notes payable into shares of common stock and warrants on the same terms as the Registrant’s private placement offering. Between March 13, 2006 and March 23, 2006, the Registrant came to an agreement to this conversion with four bridge lenders, which would call for the issuance of 425,000 shares of common stock and an equal amount of warrants under this offering in exchange for a reduction of $212,500 in bridge loans and accumulated interest. (See Part II, Item 2: “Changes in Securities” for further details on this transaction.)
(13) Line Of Credit
The Company obtained a line of credit with Wachovia Bank, NA. The line of credit has been secured with 6,704,040 shares of the Company’s stock as collateral. The shares being used as collateral are owned by the trust of one of the Company’s officers and major shareholders. The interest rate on the line of credit is equal to 1-month LIBOR plus 2.75%. All interest and principal are due July 31, 2006.
Management’s Discussion and Analysis of Financial Condition and Results of Operations for March 31, 2006
(The following discussion should be read in conjunction with the Financial Statements and related notes thereto included elsewhere in this section.)
EXECUTIVE OVERVIEW & STRATEGY
HouseRaising, Inc. is a development stage company in the business of selling, designing and managing design/build and renovation projects and homebuilding solutions in the residential homebuilding market for homebuyers and homebuilders. HouseRaising’s core business is to create revenues and profits from use of its proprietary software functioning exclusively within the custom homebuilding arena. The Company owns a proprietary invention created to alter and improve the way custom homes are designed and built. The invention serves to connect hundreds of small builders and thousands of vendors to homebuyers in a revolutionary process. The invention has been developed into internal-use software. This management software is used as a tool to define 3,400 tasks in the designing and building process and as a school to cause precise steps to be performed in each task. In early 2005, the company filed patent applications on its invention and expects to begin producing revenues utilizing the software in 2006.
On February 19, 2004, HouseRaising executed an Agreement and Plan of Merger (“the Merger”) to which HRI agreed to merge with and into Technology Connections, Inc. This transaction was structured as a reverse acquisition whereby the existing shareholders of HouseRaising obtained control of Technology Connections, Inc. and the resulting entity agreed to change its name to HouseRaising, Inc.. On August 31, 2004, the Merger was consummated when Articles of Merger were filed by the parties with the Secretary of State of North Carolina.
HouseRaising’s principal focus is implementing its business plan. Beginning in 2004, HouseRaising commenced sales of new home and renovation projects utilizing a manual version of the system through an operating subsidiary which confirmed its business model. In 2005, the Company focused its attention on completing its management software system, starting to use the system to manage new home and renovation projects and develop an operating team to implement its business plan. In 2006, the Company has commenced rolling out its Custom Homebuilding Operations in the Carolinas and Gulf Coast region and started marketing Builder-memberships and Satellite Homebuilding Services. In addition, the Company customized a version of its software to facilitate managing disaster relief projects for the Gulf Coast region. The Company has established an office in Gulfport, Mississippi and engaged an executive to implement its programs.
How We Do It:
At a cost of over $10 million, HouseRaising developed 4 decades and thousands of custom homebuilding experiences into a management system and support process. Builders are provided access to the Internet-based operation through fee structured memberships. HouseRaising converts a portion of the HR builder-members into HouseRaising affiliated relationships. The affiliated builders and their customers contract with HouseRaising to manage the building of their dream home.
The HouseRaising system represents a tried and proven method that provides users a way to manage emotional issues faced in every design/build project. Regardless of the price, style or location of the home under contract, the management process is the same. Turning a complicated custom home project into an organized and manageable project becomes a process of HouseRaising’s staff importing required data into the system. Through contracts, forms, reports and online educational components, the software automatically assigns precise steps and procedures that each party will follow. This process allows homebuyers and builders to conduct business fairly and enjoyably, building complicated projects at fair prices.
Customer Value Proposition:
HouseRaising reduces the cost of unique homes through its patent-pending Design & Price Module™ and management system. Additional savings occur from HouseRaising’s network of affiliated vendors on the national, zone and local levels. By combining the needs of thousands of small builders and homebuyers, HRI produces economies of scale that reduce direct and indirect costs of the project. Depending on the design structure selected by the homeowners, System C can lower the home’s total costs by up to 10%.
HRI Revenue Streams:
Due to technological advantages designed into its software, HouseRaising is a multi-faceted company with operating revenues from four separate sources and marketing strategies. Each revenue source serves the design/build segment of the homebuilding industry.
(1) Revenues from Custom Homebuilding Operations: Operating within zone territories through a wholly-owned subsidiary, HouseRaisingUSA, LLC, HRI designs and builds custom homes and renovations for homeowners. The company has sales efforts underway in the Carolinas and has recently initiated sales efforts in the Gulf Coast area. HouseRaising has identified an additional 30 potential zone locations nationally. Revenues represent the sales price of these projects as completed.
(2) Revenues from Builder-Memberships: HouseRaising creates revenues by offering membership opportunities to the approximate 250,000 licensed homebuilders operating in the United States through a wholly-owned subsidiary, HouseRaisingMembership, LLC. HouseRaising believes that 25,000 homebuilders could reasonably become members and benefit from educational materials and financial advantages. Members receive savings through insurance programs and from economies of scale created by HouseRaising’s vendor relationships. This Internet-based revenue stream represents the price builders pay HouseRaising for memberships.
(3) Revenues from Satellite Homebuilding Services: Operating outside of established zone territories, HouseRaising performs the role of general manager of projects through satellite or independent builder relationships. On a national basis, satellite and independent builders contract to have HouseRaising design, price and manage home projects with its software. This revenue stream represents fees charged independent builders as a percentage of the sales price of the project.
(4) Revenues from HouseRaisingAcademy (“HRA”): HRA is a wholly-owned subsidiary that was formed through the acquisition of assets and intellectual capital of LearnBytes, LLC in mid-2005. HRA is focused on developing and managing HouseRaising’s unique managed service software. The Academy’s team of specialists and IT experts manage the Academy as a “tool” and a “school” utilized by HRI entities on all projects. HRA receives a service fee on the price of all design/build projects. There will be opportunity to earn fees through certifying builders and through seminar fees from both homebuyers and homebuilders who want to learn more about the custom homebuilding industry via the Internet.
HRI Market Potential:
Management estimates that there is a substantial market for its design/build services, which will be accessed through affiliated relationships with small, hands-on builders who commit to conduct the business of building homes the HouseRaising way. Management believes this market exists based on the size of the current design/build market and its anticipated growth over the next five years. Of the 500,000 custom-home projects built by approximately 250,000 small builders in America each year, every one of them could benefit from HouseRaising’s managed services. Routinely, design/build projects begin as contracts with small-to-medium sized homebuilding contractors who commit to build these complicated projects. However, these builders fail at alarming rates and their homebuyers claim the building experiences were nightmares. HouseRaising’s proprietary process allows small builders to predict outcomes of their pre-sold projects. A 1% share of this market equals approximately $2.5 billion in home sales. HouseRaising is developing the first version of its software to target a 1% market share of custom home projects.
The HR Builder Story:
Throughout the country, custom homebuyers will continue to purchase lots and build primary and secondary homes. They are building in resort areas, on special lots purchased in the mountains and in coastal areas where they design and build the home of their dreams. Additionally, families living in urban and suburban areas throughout America will continue to locate further and further away from large metropolitan areas. Developers are finding customers to purchase lots in golf course communities developed in rural areas, which entail drives of close to an hour from the city.
If you help a builder of custom homes save money on purchasing materials, you assist him in reducing the costs of a project. However, in addition to those savings, if you help him learn how to embrace and overcome the many obstacles in the custom-home business you have provided the builder a pathway to success. By combining the needs of many small builders into a national membership organization, business opportunities occur that were never available before. When these things occur, HouseRaising has helped a small builder create a career that can last a lifetime.
A Builder’s Home:
HouseRaising is a place where builders go to find solutions, to get support, to share ideas and to gain knowledge. Creative builders seeking to build special homes for caring families come to HouseRaising for support and assistance. Today, HouseRaising is that team leader- operating as a 21st Century company focused on recreating the proud tradition of organizing groups of experts helping customers design and build unique homes “for all the right reasons.”
Who Pays HRI?:
Builders pay HouseRaising to join as a member and pay monthly membership fees. If members in good standing convert to satellite or associate builder relationships, HouseRaising is paid for support and services from the total amount due builder in the contract price of the project. In other words, other than membership fees, homebuyers pay HouseRaising through designing and building quality projects with the assistance of affiliated vendors and builders. Key to HouseRaising’s success, the contract price of the home, including the amount paid to HR for management platform services provided directly to the project, represents a savings to the buyers of close to 10% over comparable prices from independent builders.
RESULTS OF OPERATIONS FOR YEAR ENDED MARCH 31, 2006 COMPARED TO MARCH 31, 2005
Sales
The Company reports total project sales based on the contract amount due to design and build project, in the quarter in which the sale is completed and closed. HouseRaising had new home and renovation sales of $218,011 for the period ended March 31, 2006, compared to $1,590 for the same period in 2005. This represents almost one hundred fold increase in sales. Sales increased due to closing on new construction and remodeling projects in the greater Charlotte area started in the second half of 2005. All sales were from unrelated third parties and were made primarily to new home buyers and remodeling work. In the first quarter of 2006, the Company has already obtained new contracts totaling approximately $3,000,000 in sales that are projected to be completed over the next 12 months, which reflects a $1,000,000 increase from the number reported in our Annual Report on 10-KSB for the period ending December 31, 2005 as filed on March 31, 2006. On average these new construction projects are completed within 9 months.
Gross Profits
The Company earns profits as the net difference of project’s sales price and total costs including fees. The company conducts design/build projects with various affiliated builder relationships. Costs associated with in-house builder relationships are part of the projects total costs and HouseRaising’s profit is the difference in the sales price and all direct costs and fees. In a builder partnership relationship the company divides profits with the builder, which is accounted as a cost to the project. HRI’s profit represents the sales price less all costs, with the builder share of the profits listed as a cost to the project. HouseRaising had gross profits of $6,828 for the period ended March 31, 2006 compared to $342 for the same period in 2005. The increase is principally due to the higher sales. We expect gross profits will increase commensurate with new contract sales.
Sales and Service Fee Revenues
Sales and service fee revenues from pre-sold projects consist of sales commissions, architectural design fees, engineering fees, and a series of project coordinating expenses charged to each design/build project. These fees are built into the projects total price with homebuyers paying these charges at the beginning of construction. The fees are a direct cost to the project. The sales and service fees of $59,625 recorded in the first quarter of 2006 associated with new and on-going projects that are expected to be completed in 2006. This compared to sales and service fees of $8,462 recorded in the first quarter of 2005. Going forward we would expect sales and service fee revenue to continue to grow commensurate with increases in new contract sales.
Other Income
The Company earned $0 in consulting income for the period ending March 31, 2006, compared to $94 for the same period in 2005. We would not expect this to increase in 2006 as we implement our business plan.
Net Revenues
HouseRaising’s net revenues were $66,453 for the first quarter ended March 31, 2006 compared to $8,898 for 2005. The net revenues generated in 2006 were solely due to new home construction and renovation projects. We would expect our net revenues to continue to grow as we obtain new construction and remodeling work in 2006 and commence roll-out of the Company’s membership and satellite builder operations.
Expenses
Total expenses for the quarter ended March 31, 2006 was $600,051 compared to $980,463 for the same period in 2005. The decrease in expenses was due to a substantial decrease in consulting fees from the first quarter of 2005 to 2006. Consulting fees reflects business consulting services and investor relations expenses which decreased to $141,949 in the first quarter, 2006 from $513,349 in the first quarter 2005. This is principally because the company had already extended considerable efforts in investor relations and business consulting services in subsequent quarters in 2005 and is not expected to reoccur.
Selling, general and administrative expenses were roughly the same for the period ending March 31, 2006 versus 2005. These expenses reflect costs related to developing HouseRaising’s Carolinas zone and design/build operations in Charlotte, NC, including advertising, costs for personnel and contractors who are directly associated with and who devote time to selling, designing and building pre-sold homes and renovation projects in the Greater Charlotte region. These expenses also include general business and executive management to raise capital for implementation of its business plan.
Due to our start up efforts, we issued shares of common stock to professionals and consultants for their marketing, investor relations and general business consulting. All of our accounts payable and accrued expenses are trade payables in connection within the course of business. We expect to develop additional revenue sources consistent with these expense levels as we roll out our business plan in 2006, including the Company’s new membership and satellite builder operations.
Other Expense
HouseRaising had interest expense of $30,831 for the quarter ended March 31, 2006 compared to $9,247 for the same period in 2005. The interest recorded in the first quarter of 2006 was principally for the company’s line of credit with Wachovia Bank and some interest associated with the bridge lenders. The interest recorded in 2005 was principally to reimburse bridge lenders of HouseRaising as well as to the Technology Connections predecessor entity. The Company has offered bridge lenders an opportunity to enter into an equity-for-debt swap as part of the company’s private placement offering and several bridge lenders have agreed to do this. Going forward we would expect this level of interest expense to subside as those debt obligations are retired, unless the company cannot obtain additional equity financing and must resort to borrowing additional funds.
Income / Losses
The net loss for the quarter ended March 31, 2006 was $564,429 versus a net loss of $980,812 in the same period in 2005, a decrease of over 40% or $416,383. The decrease in net losses is directly attributable to an increase in sales associated with new construction and remodeling projects, sales and service fees associated with those same projects and a decrease in consulting fees. Future income/losses will depend on the success of implementing the company’s business plan in 2006. The company does already have approximately $3,000,000 of new home construction work in process for 2006 which is a $1,000,000 increase from year-end and consistent with implementing our business plan. The actual sales will be recorded upon completion of each project while sales and service revenue will be recorded as earned. There is no guarantee that all of these projects will be completed in 2006.
Impact of Inflation
We believe that inflation has had a negligible effect on operations since inception. We believe that we can offset inflationary increases in the cost of labor by increasing sales and improving operating efficiencies.
Liquidity and Capital Resources
Cash flows used in operations were $637,118 for the period ended March 31, 2006 versus $217,863 for the same period in 2005. This reflects a net increase in cash used by operations of $419,255 principally due to an increase in payments for capitalized software for the quarter and decrease in common stock issued for services offset by a decrease in net operating loss.
Cash flows used in investment activities were $5,961 and $25,515 for the quarter ended March 31, 2006 and 2005, respectively. This was principally due to investments in property and equipment for the company.
Cash flows provided by financing activities were $408,150 and $230,865, respectively, for the quarter ended March 31, 2006 and 2005. The increase was principally due to issuance of common stock associated with the equity-for-debt swap with the company’s bridge lenders that occurred in the first quarter, 2006 (see Note 12 of Notes to Consolidated Financial Statements and Part II, Item 2 Changes in Securities for more information).
We had cash on hand of $57,454 and a working capital deficit of $2,299,070 as of March 31, 2006 which is not sufficient to fund our operations through the next twelve months. Our working capital deficit is due to current obligations in accounts payable and notes payable from the bridge lenders and line of credit from Wachovia Bank. In early 2006, the Company entered into agreements with some of the bridge lenders to convert their debt obligations into restricted stock of the company and warrants for future purchase of restricted stock of the company through our Private Placement Memorandum which is further described under Note 12 of the Notes to Consolidated Financial Statements and Part II, Item 2 Changes in Securities.
Overall, we have funded our cash needs from inception through March 31, 2006 with a series of debt and equity transactions. The Company’s principal source of working capital in 2005 and 2006 was a loan made by the Company’s founder, a line of credit established with Wachovia Bank, the sales of the company’s Private Placement Memorandum to accredited investors, commitments from vendors to develop HouseRaising’s software system in exchange for shares of stock, and fee revenues and profits from existing new home and renovation sales. In addition, some Management and independent contractors providing services to the company have agreed to accept shares as a means of paying for critical services to implement its business plan. The Company has limited plans to hire additional employees until Management is successful in securing a capital infusion. We have not entered into any commitments for significant capital expenditures, except the on-going software development project previously mentioned.
Going forward we will rely substantially on new revenue from our business development efforts; however, we have no current or projected capital reserves that will sustain our business for the next twelve months. The company does have approximately $3,000,000 of new home construction work in process for 2006 and a pipeline of prospective customers which is consistent with implementing our business plan. Actual sales will be recorded upon completion of each project while sales and service revenue will be recorded as earned. If the projected revenues fall short of needed capital we may not be able to sustain our cash needs for the next twelve months. To date, the company has had investors willing to contribute equity to finance on-going operations. However, such parties are under no legal obligation to provide us with future capital infusions. If we are unable to receive additional cash infusions from these parties, we will need to obtain additional capital through equity or debt financing to sustain operations. Failure to obtain such financing could have a material adverse effect on operations and financial condition.
Accordingly, the company is seeking additional debt or equity financing or funding from third parties, in exchange for which the company might be required to issue a substantial equity position. There is no assurance that the company will be able to obtain additional financing on terms acceptable to its Management. If Management is successful in obtaining additional funding, these funds will be used primarily to expand sales and marketing efforts of its homebuilding operations (new home and renovation sales) in the Carolinas (covering North and South Carolina) and the Gulf Coast region, implementing marketing and sales for its membership and satellite builder programs in the southeast and eventually nationally, on-going software development to improve its system and to provide working capital needed for repayment of outstanding notes payable. The Company also continues to explore acquisition opportunities that may assist in the successful implementation of its business plan (see Note 9B Other Matters for further discussion on this item).
Demand for our services will be dependent on, among other things, market acceptance of our services, the real estate market in general, and general economic conditions, which are cyclical in nature. Inasmuch as a major portion of our activities is the receipt of revenues from the sales of new home services, our business operations may be adversely affected by our competitors and prolonged recessionary periods. The company has provided a detailed list of risks and cautionary statements at the beginning of this document.
ITEM 3. CONTROLS AND PROCEDURES
QuarterlyEvaluation of Controls. As of the end of the period covered by this quarterly report on Form 10-QSB, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures ("Disclosure Controls"). This evaluation (“Evaluation”) was performed by our Chairman and Chief Executive Officer, Gregory J. Wessling, and President and Founder, Robert V. McLemore (jointly known as “CEO”), our Chief Financial Officer, Richard A. von Gnechten (“CFO”) and our Chief Administrative Officer, Christine M. Carriker. In addition, we have discussed these matters with our securities counsel. In this section, we present the conclusions of our CEO and CFO based on and as of the date of the Evaluation with respect to the effectiveness of our Disclosure Controls.
CEO and CFO Certifications. Attached to this quarterly report, as Exhibits 31.1 through 31.4, are certain certifications of the CEO and CFO, which are required in accordance with the Exchange Act and the Commission's rules implementing such section (the "Rule 13a-14(a)/15d-14(a) Certifications"). This section of the quarterly report contains the information concerning the Evaluation referred to in the Rule 13a-14(a)/15d-14(a) Certifications. This information should be read in conjunction with the Rule 13a-14(a)/15d-14(a) Certifications for a more complete understanding of the topic presented.
Disclosure Controls. Disclosure Controls are procedures designed with the objective of ensuring that information required to be disclosed in our reports filed with the Commission under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time period specified in the Commission's rules and forms. Disclosure Controls are also designed with the objective of ensuring that material information relating to us is made known to the CEO and the CFO by others, particularly during the period in which the applicable report is being prepared.
Limitations on the Effectiveness of Controls. Our management does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well developed and operated, can provide only reasonable, but not absolute assurance that the objectives of the control system are met. Further, the design of the control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their design and monitoring costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of a system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or because the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Scope of the Evaluation. The CEO and CFO's evaluation of our Disclosure Controls included a review of the controls' (i) objectives, (ii) design, (iii) implementation, and (iv) the effect of the controls on the information generated for use in this quarterly report. In the course of the Evaluation, the CEO and CFO sought to identify data errors, control problems, acts of fraud, and they sought to confirm that appropriate corrective action, including process improvements, was being undertaken. This type of evaluation is done on a quarterly basis so that the conclusions concerning the effectiveness of our controls can be reported in our quarterly reports on Form 10-QSB and annual reports on Form 10-KSB. The overall goals of these various evaluation activities are to monitor our Disclosure Controls, and to make modifications if and as necessary. Our intent in this regard is that the Disclosure Controls will be maintained as dynamic systems that change (including improvements and corrections) as conditions warrant.
Conclusions. Based upon the Evaluation, our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives. Our CEO and CFO have concluded that our disclosure controls and procedures are effective at that reasonable assurance level to ensure that material information relating to the Company is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared, and that our Internal Controls are effective at that assurance level to provide reasonable assurance that our financial statements are fairly presented in conformity with accounting principals generally accepted in the United States. Additionally, there has been no change in our Internal Controls that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to affect, our Internal Controls.
PART II
ITEM 1. LEGAL PROCEEDINGS.
In the matter of Nite Capital, LP, Plaintiff v. Robert V. McLemore and HouseRaising, Inc., Defendants, 05C 3757:
On April 12, 2006, HouseRaising received notice that the U.S. District Court for the Northern District of Illinois, Eastern Division granted the motion of Nite Capital LP for a voluntary dismissal without prejudice of its complaint filed on June 27, 2005 against Robert V. McLemore and HouseRaising.
Background:
In November 2004, Robert V. McLemore, President and Founder of HouseRaising, entered into a personal contract whereby he agreed to sell Nite Capital, LP, an investment firm based in Chicago, Illinois, a certain number of shares of his personal stock in return for Nite Capital’s agreement not to sell the shares for a set period of time and not to short sell the shares. It is Mr. McLemore’s belief that Nite Capital defaulted on this contract, and, as a result, McLemore refused to complete the transaction until a review of the short selling activities of Nite Capital and its principals could be completed. In connection with such review, HouseRaising filed a complaint with the NASD which requested an investigation into what management termed a “wave of coordinated naked short selling” in HouseRaising’s common stock over a three month period of time. Management of HouseRaising believes that this coordinated effort may have violated NASD rules, as well as applicable federal securities laws.
As a result of Mr. McLemore’s and HouseRaising’s actions, on June 27, 2005 Nite Capital filed a complaint in the U.S. District Court for the Northern District of Illinois, Eastern Division, against Robert V. McLemore and HouseRaising, in a matter captioned as Nite Capital, LP, Plaintiff v. Robert V. McLemore and HouseRaising, Inc., Defendants, 05C 3757. The complaint alleged, among other things, a breach of contract by the Defendants and sought damages, jointly and severally, in an amount at least equal to $353,320, as well as punitive damages.
The terms of the contract at issue were disputed by the Defendants, and HouseRaising reported that it was not even a party to the alleged contract. Mr. McLemore and HouseRaising retained Sugar, Friedberg and Felsenthal, LLP, counsel admitted to practice in the U.S. District Court for the Northern District of Illinois, and vigorously defend this action. The Company filed for a dismissal of the claims against it on August 23, 2005 and was awaiting a decision on this matter when the voluntary dismissal was filed. The Company believes the claims against it amounted to a thinly disguised effort to insert HouseRaising into a dispute between two private parties. The complaint was first served on the Defendants on July 13, 2005.
ITEM 2. CHANGES IN SECURITIES.
As previously reported, HouseRaising commenced a private offering of common stock and warrants in an amount equal to approximately $3.5 million that is intended to be exempt from registration pursuant to Rule 506 of Regulation D under the Securities Act of 1933, as amended (‘the Act’). In March, 2006 HouseRaising offered its bridge lenders the opportunity to convert their outstanding notes payable into shares of common stock and warrants on the same terms as HouseRaising’s private placement offering.
HouseRaising reports that between March 13, 2006 and March 23, 2006, HouseRaising came to an agreement to this conversion with four bridge lenders, which would call for the issuance of 425,000 shares of common stock and an equal amount of warrants under this offering in exchange for a reduction of $212,500 in bridge loans and accumulated interest. Each of the bridge lenders is an accredited investor as defined in Rule 501(a) of Regulation D under the Act. Each Unit, consisting of one share of common stock and one five year warrant to purchase one share of common stock at an exercise price of $0.50 per warrant, was priced at $0.50 per Unit. The impact on the Registrant’s financial statements of these conversions from debt to stock and warrants will be reflected on the Registrant’s 1st quarter 2006 financial statements. Neither the shares of common stock sold nor the shares underlying the warrants are entitled to any registration rights, and the investor will rely on Rule 144 under the Act in order to sell the shares of
common stock on the Over-the-Counter Bulletin Board after satisfying the Rule’s one-year holding period and other requirements. There are no underwriting discounts or commissions in this transaction.
The conversions of debt for common stock and warrants, and the issuance of common stock and the common stock underlying warrants, are intended to be exempt from registration pursuant to Rule 506 under Regulation D on the same basis as the Registrant’s private offering referred to above.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At HouseRaising’s 2006 Annual Meeting held on May 11, 2006, shareholders elected our eight directors to serve for an additional term of one year and thereafter until their successors are qualified and elected, and also ratified management’s choice of Traci J. Anderson, CPA, as the company’s auditor for fiscal 2006. A total of 31,136,943 shares voted for each of these two items and 0 voted against. We filed a Definitive Information Statement on Schedule 14C with the Commission on April 7, 2006, in connection with the 2006 Annual Meeting.
ITEM 5. OTHER MATTERS
Part of HouseRaising, Inc.’s strategy is to build its business through the merger or acquisition of existing homebuilders and technology companies that will benefit our application service business. It is reasonable to expect that such activity is an ongoing part of HRI’s business development efforts. At any given time the company could be in process of analyzing or negotiating an offer in connection with such a transaction. However, any discussion or speculation on specific transactions is only conjecture until such time that a definite agreement is signed and announced in an SEC filing and press release. It is possible that no transactions will take place at all.
Current Status of Announced Transactions
All previously announced transactions have been completed, brought to resolution or have no further update. These items were previously described in the Company’s Annual Report on Form 10-KSB filed on March 31, 2006 and are incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
Subsequent to December 31, 2005, the Company filed the following Current Reports on Forms 8-K with the SEC as follows:
| Dated (filing date) | | Items Reported |
| | | |
| March 13, 2006 (April 14, 2006) | | Form 8-K Unregistered Sale of Equity Securities/Other Events |
| March 2, 2006 (March 13, 2006) | | Form 8-K Change in Directors or Principal Officers |
(b) Exhibits
Exhibits for HouseRaising and its subsidiaries are listed below.
INDEX TO EXHIBITS
The exhibits designated by an asterisk (*) are filed herein. The exhibits not so designated are incorporated by reference to the indicated filing.
| Exhibit No. | | Descriptions |
| 2.1.1 | | Agreement and Plan of Merger, dated February 19, 2004 (incorporated by reference from Exh. 2 to the Definitive Information Statement filed on August 10, 2004) |
| 3.1 | | Articles of Incorporation (incorporated by reference from Exh.3 of Form SB-2 filed April 11, 2002) |
| 3.2 | | Articles of Amendment to Articles of Incorporation to Change Name (incorporated by reference from Exh. 3 to the Definitive Information Statement filed August 10, 2004) |
| 3.3 | | Bylaws of HouseRaising, Inc. (incorporated by reference from Exh.3 to Form SB-2 filed April 11, 2002) |
| 3.4 | | Articles of Amendment for Class A Voting Convertible Preferred Stock (incorporated by reference from Exh. 4 to the Definitive Information Statement filed August 10, 2002) |
| 31.1 | | Rule 13a-14(a)/15d-14(a) Certification of Gregory J. Wessling, Chairman and Chief Executive Officer* |
| 31.2 | | Rule 13a-14(a)/15d-14(a) Certification of Robert V. McLemore, President and Founder* |
| 31.3 | | Rule 13a-14(a)/15d-14(a) Certification of Richard A. von Gnechten, Chief Financial Officer* |
| 31.4 | | Rule 13a-14(a)/15d-14(a) Certification of Christine M. Carriker, Secretary/Treasurer, SVP & Chief |
| | | Administrative Officer* |
| 32.1 | | Section 1350 Certification of Gregory J. Wessling, Chairman and Chief Executive Officer* |
| 32.2 | | Section 1350 Certification of Robert V. McLemore, President and Founder* |
| 32.3 | | Section 1350 Certification of Richard A. von Gnechten, Chief Financial Officer* |
| 32.4 | | Section 1350 Certification of Christine M. Carriker, Secretary/Treasurer, SVP and Chief Administrative Officer* |
_________________________________
*-Filed herewith
-signature page follows-
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HOUSERAISING, INC.
(Registrant)
Date: May 15, 2006 /s/ Gregory J. Wessling
Gregory J. Wessling
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2006 /s/ Robert V. McLemore
Robert V. McLemore
President and Founder
(Principal Executive Officer)
/s/ Richard A. von Gnechten
Date: May 15, 2006 Richard A. von Gnechten
Chief Financial Officer
(Principal Financial Officer)
/s/ Christine M. Carriker
Date: May 15, 2006 Christine M. Carriker
Secretary/Treasurer, SVP &
Chief Administrative Officer
(Principal Accounting Officer)
