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 September 30, 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 $.001 per share)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers’ classes of common equity, as of the latest practicable date:
| Class of Stock | | Outstanding October 31, 2006 | |
| Common Stock ($.001 par value) | | | 50,769,282 | |
| Preferred Stock Class A ($.001 par value) | | | 1,000,000 | |
| Preferred Stock Class B ($.001 par value) | | | 800,000 | |
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.
The rest of this page is left intentionally blank
HOUSERAISING, INC.
FORM 10-QSB
For the Quarter ended September 30, 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 - September 30, 2006 (unaudited) | 5 |
| | Statements of Operations - Three Months Ended September 30, 2006 and 2005 (unaudited) | 6 |
| | Statements of Operations - Nine Months Ended September 30, 2006 and 2005 (unaudited) | 7 |
| | Statements of Cash Flows - Nine Months Ended September 30, 2006 and 2005 (unaudited) | 8 |
| | Notes to Financial Statements (unaudited) | 9 |
| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Plan of Operations | 16 |
| ITEM 3. | Controls and Procedures | 24 |
| | | |
| PART II |
| | | |
| ITEM 1. | Legal Proceedings | 25 |
| ITEM 2. | Changes in Securities | 25 |
| ITEM 3. | Default Upon Senior Securities | 26 |
| ITEM 4. | Submission of Matters to a Vote of Security Holders | 26 |
| ITEM 5. | Other Information | 26 |
| ITEM 6. | Exhibits and Reports on Form 8-K | 27 |
| | | |
| | Signatures | 28 |
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 international, national and local economic and market conditions, especially 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, U.S. presence in Iraq and Afghanistan, potential conflict or crisis in North Korea or Middle East and potential avian flu pandemic, negatively affecting local homebuilding industry and adversely affecting new home installation market; |
| | · | the timing and extent of changes in interest rates and the shape of the yield curve; |
| | · | 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, membership and disaster relief services; |
| | · | 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, and Executive team; |
| | · | 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 September 30, 2006 |
ASSETS | | | |
| | | | |
| CURRENT ASSETS | | | |
| Cash and Cash Equivalents | | | 202,272 | |
| Excess costs over billings on uncompleted projects | | | 246,686 | |
| Prepaid Expenses | | | 50,025 | |
| Accounts Receivable | | | 23,075 | |
| TOTAL CURRENT ASSETS | | | 522,058 | |
| | | | | |
| PROPERTY AND EQUIPMENT | | | | |
| Property and Equipment | | | 422,441 | |
| Accumulated Depreciation | | | (148,354 | ) |
| Net Property and Equipment | | | 274,087 | |
| | | | | |
| OTHER ASSETS | | | | |
| Other Assets | | | 19,487 | |
| Capitalized Software | | | 13,286,293 | |
| Net Other Assets | | | 13,305,780 | |
| TOTAL ASSETS | | | 14,101,925 | |
| | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | |
| | | | | |
| LIABILITIES | | | | |
| Current Liabilities: | | | | |
| Accounts Payable and Accrued Expenses | | | 307,184 | |
| Interest Payable | | | 89,504 | |
| Notes Payable | | | 419,842 | |
| Bank Loan | | | 3,248,109 | |
| TOTAL LIABILITIES | | | 4,064,639 | |
| | | | | |
| STOCKHOLDERS' EQUITY | | | | |
| Preferred Stock Class A Convertible ($.001 par value, 1,000,000 authorized: | | | | |
| 1,000,000 issued and outstanding) | | | 1,000 | |
| Preferred Stock Class B Convertible ($.001 par value, 800,000 authorized: | | | | |
| 800,000 issued and outstanding) | | | 800 | |
| Common Stock ($.001 par value, 100,000,000 shares authorized: | | | | |
| 49,991,380 shares issued and outstanding) | | | 49,991 | |
| Common Stock Subscribed but not Issued | | | 1,807,262 | |
| Additional Paid-in-Capital | | | 16,782,601 | |
| Retained Deficit | | | (8,604,368 | ) |
| TOTAL STOCKHOLDERS' EQUITY | | | 10,037,286 | |
| | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | | 14,101,925 | |
The accompanying notes are an integral part of these consolidated financial statements.
|
| Consolidated Statement of Operations (unaudited) |
| For the quarter ended September 30, 2006 and 2005 |
| | | | | | |
| | | 2006 | | 2005 | |
| SALES AND COST OF SALES: | | | | | |
| Sales | | $ | 185,450 | | $ | 0 | |
| Gross Profit | | | 10,122 | | | 0 | |
| | | | | | | | |
| OTHER REVENUES: | | | | | | | |
| Sales and service fees | | | 97,027 | | | 9,151 | |
| Other income | | | 5,528 | | | 47 | |
| | | | | | | | |
| NET REVENUES | | | 112,677 | | | 9,198 | |
| | | | | | | | |
| OPERATING EXPENSES: | | | | | | | |
| Selling, general and administrative | | | 1,373,039 | | | 684,246 | |
| Consulting fees | | | 110,924 | | | 215,688 | |
| | | | 1,483,963 | | | 899,934 | |
| | | | | | | | |
| OTHER EXPENSE: | | | | | | | |
| Interest expense | | | 63,055 | | | 26,186 | |
| | | | | | | | |
| | | | | | | | |
| NET LOSS | | $ | (1,434,341 | ) | $ | (916,922 | ) |
| | | | | | | | |
| Net Loss Per Common Share | | | | | | | |
| Basic & Fully Diluted | | | * | | | * | |
| | | | | | | | |
| Weighted Average Common | | | | | | | |
| Shares Outstanding (see Note G) | | | 49,983,066 | | | 41,666,935 | |
| | | | | | | | |
| * Less than ($.01) | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
HouseRaising, Inc. and Subsidiaries (A Development Stage Company) |
| Consolidated Statement of Operations (unaudited) |
| For the nine months ended September 30, 2006 and 2005 |
| | | 2006 | | 2005 | |
| SALES AND COST OF SALES: | | | | | |
| Sales | | $ | 636,791 | | $ | 1,590 | |
| Gross Profit | | | 80,016 | | | 342 | |
| | | | | | | | |
| OTHER REVENUES: | | | | | | | |
| Sales and service fees | | | 156,652 | | | 17,613 | |
| Other income | | | 5,528 | | | 188 | |
| | | | | | | | |
| NET REVENUES | | | 242,196 | | | 18,143 | |
| | | | | | | | |
| OPERATING EXPENSES: | | | | | | | |
| Selling, general and administrative | | | 2,337,456 | | | 1,558,230 | |
| Consulting fees | | | 542,392 | | | 1,878,817 | |
| | | | 2,879,848 | | | 3,437,047 | |
| | | | | | | | |
| OTHER EXPENSE: | | | | | | | |
| Interest expense | | | 141,380 | | | 51,959 | |
| | | | | | | | |
| | | | | | | | |
| NET LOSS | | $ | (2,779,032 | ) | $ | (3,470,863 | ) |
| | | | | | | | |
| Net Loss Per Common Share | | | | | | | |
| Basic & Fully Diluted | | | * | | | * | |
| | | | | | | | |
| Weighted Average Common | | | | | | | |
| Shares Outstanding (see Note G) | | | 47,983,066 | | | 39,331,559 | |
| | | | | | | | |
| * 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 nine months ended September 30, 2006 and 2005 |
| | | | | | |
| | | 2006 | | 2005 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
| Net loss | | $ | (2,779,032 | ) | $ | (3,470,863 | ) |
| Adjustments to reconcile net loss to net | | | | | | | |
| cash (used in) operating activities: | | | | | | | |
| Depreciation | | | 25,285 | | | 22,674 | |
| Common and Preferred stock issued for services and debt restructuring | | | 3,354,742 | | | 4,488,354 | |
| (Increase) decrease in operating assets: | | | - | | | - | |
| Accounts receivable | | | (157 | ) | | (2,237 | ) |
| Capitalized software | | | (2,566,593 | ) | | (1,720,387 | ) |
| Excess of costs over billings on uncompleted contracts | | | (60,314 | ) | | (69,371 | ) |
| Accounts payable and accrued expenses | | | 20,932 | | | 69,507 | |
| | | | | | | | |
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | | | (2,005,137 | ) | | (682,323 | ) |
| | | | | | | | |
| CASH FLOWS FROM INVESTMENT ACTIVITIES: | | | | | | | |
| Investment in subsidiary operations | | | (7,500 | ) | | (141,728 | ) |
| Purchase of property and equipment | | | (59,564 | ) | | (26,062 | ) |
| NET CASH (USED IN) INVESTMENT ACTIVITIES | | | (67,064 | ) | | (167,790 | ) |
| | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | |
| Proceeds from sale of common stock | | | 525,946 | | | - | |
| Borrowings on notes payable | | | 1,456,144 | | | 1,206,075 | |
| NET CASH PROVIDED BY FINANCING ACTIVITIES | | | 1,982,090 | | | 1,206,075 | |
| | | | | | | | |
| NET INCREASE IN CASH AND | | | | | | | |
| CASH EQUIVALENTS | | | (90,111 | ) | | 355,962 | |
| | | | | | | | |
| CASH AND CASH EQUIVALENTS: | | | | | | | |
| Beginning of period | | | 292,383 | | | 24,767 | |
| | | | | | | | |
| End of period | | $ | 202,272 | | $ | 380,729 | |
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 September 30, 2006 and the results of their operations for the nine months ended September 30, 2006 and 2005 and their cash flows for the nine months ended September 30, 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 Disaster Relief, 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 (zone operation) (2006) | owned 100% by HouseRaisingUSA, LLC |
| HouseRaising of the Carolinas, LLC (zone operation) (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 final development. HouseRaisingUSA, LLC is responsible for organizing and owning the zone and regional limited liability companies.
(2) Summary of Significant Accounting Policies (continued)
In 2006, the Company established four new limited liability companies (LLC) with the names HouseRaising of the Gulf Coast, LLC and HouseRaising of the Carolinas, LLC (which are 100% owned by HouseRaisingUSA, LLC and serve as the zone operations for the Company) and HouseRaising Disaster Relief, LLC and HouseRaisingMembership, LLC (which are 100% owned by HouseRaising, Inc.) The Company has also signed four separate agreements with independent homebuilders to form regional homebuilding operations in the Carolinas and Gulf Coast zones whereby HouseRaising of the Carolinas, LLC and HouseRaising of the Gulf Coast, LLC will own 50% of the new limited liability companies.
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.
(2) Summary of Significant Accounting Policies (continued)
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.
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 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.
In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 151, “Inventory Costs”, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The standard will not impact the Company’s financial statements.
(3) Recent Accounting Pronouncements (continued)
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 153, “Exchanges of Nonmonetary Assets”, which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The standard will not impact the Company’s financial statements.
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment”, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires an issuer to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under Accounting Principles Board (APB) Opinion No. 25. We do not believe the adoption of SFAS No. 123 (R) will have a material impact on our financial statements.
In May 2005, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 154 “Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3.” This Statement replaces APB Opinion No. 20, “Accounting Changes”, and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements” and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provision. When a pronouncement includes specific transition provisions, those provisions should be followed. The Company has no transactions that would be subject to SFAS 154.
In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 155, Accounting for Certain Hybrid Instruments-an amendment of FASB Statements No. 133 and 140. SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 eliminates the need to bifurcate the derivative from its host, as previously required under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedge Accounting. SFAS 155 also amends SFAS 133 by establishing a requirement to evaluate interests in securitized financial assets to determine whether they are free standing derivatives or whether they contain embedded derivatives that require bifurcation. SFAS 155 is effective for all hybrid financial instruments acquired or issued by the Company on or after January 1, 2007. The Company does not anticipate any material impact to its financial condition or results of operations as a result of the adoption of SFAS 155.
In March 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 156, “Accounting for Servicing of Financial Assets”. SFAS 156 addresses the accounting for recognized servicing assets and servicing liabilities related to certain transfers of the servicer’s financial assets and for acquisitions or assumptions of obligations to service financial assets that do not relate to the financial assets of the servicer and its related parties. SFAS 156 requires that all recognized servicing assets and servicing liabilities are initially measured at fair value, and subsequently measured at either fair value or by applying an amortization method for each class of recognized servicing assets and servicing liabilities. SFAS 156 is effective in fiscal years beginning after September 15, 2006. The adoption of SFAS 156 is not expected to have a material impact on our consolidated 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 September 30, 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 July 20, 2006, the Company adopted 2006 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 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 September 30, 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”), extendable by the Company, 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. HouseRaising of the Gulf Coast, LLC has established a small business office location in Gulfport, MS and is negotiating to establish an office and design-center in New Orleans, LA.
The Company also has one vehicle under leases that has been classified as an operating lease expiring in March 2007 as extended. Payment due under the lease is $1,384 per month. In December 2005, the Company entered into a lease agreement for computer equipment. The monthly payments are $2,227.03 per month for 48 months starting June, 2006. In October 2005, the Company entered into a lease agreement for computer hardware and software. The monthly payments are $560.68 per month for 24 months beginning December, 2005. In September 2005, the Company entered into a lease agreement for computer hardware and software. The monthly payments are $248.53 per month for 24 months beginning November, 2005. In May, 2006, the company entered into a lease agreement for computer hardware and software. The monthly payments are $107.20 per month for 48 months beginning June, 2006.
(12) Notes Payable
Notes payable at September 30, 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 | |
(12) Notes Payable (continued)
| Secured note payable to an unrelated party. | | | |
| Bearing 15% interest. | | $ | 155,000 | ** |
| | | | | |
| Unsecured note payable to an unrelated party. | | | | |
| Bearing 0% interest. | | $ | 1,851 | ** |
| | | | | |
| Secured demand note payable to a related party. | | | | |
| Bearing 6% interest. | | $ | 244,174 | |
| | | | | |
| Total Current Portion | | $ | 419,842 | |
** 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. In late March, 2006, the Registrant came to an agreement to this conversion with four bridge lenders, which resulted in 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. In the second quarter, the Registrant came to an agreement with a fifth bridge lender, which called for the issuance of 226,892 shares of common stock and an equal amount of warrants under this offering in exchange for a reduction of $113,446 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 has three separate lines of credit with Wachovia Bank, NA which total $4,100,000. The Company obtained a line of credit in the amount of $1,350,000 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 on demand. In addition, the Company obtained a line of credit in the amount of $1,000,000 with Wachovia Bank, NA with an interest rate equal to 1-month LIBOR plus 2.50% with all interest and principal due on May 31, 2007. In addition, the Company obtained a line of credit in the amount of $500,000 with Wachovia Bank, NA with an interest rate of 1-month LIBOR plus 2.35% with all interest and principal due on July 31, 2007. In addition, the Company obtained a line of credit in the amount of $1,250,000 with Wachovia Bank, NA with an interest rate of 1-month LIBOR plus 2.35% with all interest and principal due on September 30, 2007.
Management’s Discussion and Analysis of Financial Condition and Results of Operations for September 30, 2006
(The following discussion should be read in conjunction with the Financial Statements and related notes thereto included elsewhere in this section.)
HIGHLIGHTS OF RECENT ACTIVITIES
| | · | Year-to-date home and renovation project sales for our customers of $636,791, which exceeds all of last year; |
| | · | Year-to-date net revenues to HouseRaising, Inc. of $242,196 which is thirteen times year-to-date last year; |
| | · | Signed agreements for $5.1 million in custom homes expected to be built over the next 12 months, which is $3.1 million higher than year-end last year (the Company also several interested prospective home buyers from various marketing efforts that are not included in this figure as they have not yet signed an agreement nor is there any guarantee they will); |
| | · | Signed four operating agreements (series 200) with independent builders to build approximately 10-20 homes in total per each builder per year, whereby the builder operates a new jointly-owned limited liability company that uses our System-C technology and processes on which HouseRaising receives service fees and share equally profits on completed projects (these home sales are not included in the $5.1 million figure noted above); |
| | · | In past quarter the Company has cultivated a number of interested prospective Builder Associates or Builder-Partner relationships totaling more than 80 individuals which are at various stages of discussions with the Company on establishing a relationship (there is no guarantee, however, these individuals will sign agreements); |
| | · | Established business office in Gulfport, Mississippi and negotiating on office space in New Orleans, Louisiana for our disaster relief initiative. |
EXECUTIVE OVERVIEW & STRATEGY
HouseRaising, Inc. is a fully operational 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 started 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, started marketing Builder-memberships and affiliated 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 executives to implement its programs in this region. The Company is rapidly increasing home sales in these areas and has signed four operating agreements to establish regional operations with experienced homebuilders which is expected to rapidly increase custom homes sales in these regions. The Company fully expects to continue engaging homebuilders in this capacity as its marketing efforts with homebuilders expand.
How We Do It:
HouseRaising was created to take advantage of the invention its founder designed to revolutionize the way custom homebuilding conducts business. Custom homebuilding is where homeowners purchase a lot and later design and build their dream home utilizing custom builders. It is a generally accepted that about 9 out of every 10 companies that build custom homes eventually suffer financial losses and most of them fail. It is also commonly known that most homebuyers call the custom homebuilding experience a nightmare. Despite these terrible statistics, over 500,000 families design and build custom homes each year, selecting a builder from a pool of approximately 250,000 builders nationally.
The old way homebuilders and buyers operate within the design/build industry is flawed. Extensive research into the design build industry has exposed that during the designing and building stages, each and every custom home project confronts 1,269 critical problem points. HouseRaising owns these proprietary research materials. The issue is that builders and buyers are not aware of the critical problem areas and thus do little to nothing to prepare for handling them. Operating independently and on their own, experience has shown that builders and homebuyers cannot effectively solve these problems.
At a cost of over $11 million, HouseRaising developed 4 decades and thousands of custom homebuilding experiences into a management system and support process. The HouseRaising system represents a tried and proven method that provides users a way to manage the 1,269 critical problem points and 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. Through contracts, forms, reports and online educational components, the software automatically assigns precise steps and procedures that each party will follow. The 3,400 task process functions behind the scenes to address and solve issues that caused the problems, thus allowing homebuyers and builders to build homes in a financially sound manner and as an enjoyable experience. HouseRaising’s system helps builders and homebuyers work together to build a home without the normal misunderstandings and conflicts created by unaddressed problems.
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.
At the end of the day, HouseRaising creates revenues from managing custom home and renovation projects and those revenues are part of and included in the sales price of the homes. Portions of those revenues come from design/build and renovation projects, where we earn profits as the builder of the home. In projects where we act as general manager of the project and not the builder, we earn a set fee for providing management services. Additionally, we earn consulting fees on disaster relief projects. In addition to the revenues described above, our management platform vendors provide technical services such as sales and design consulting, architectural services, vendor coordinating services, financing and cash flow management services and managing construction and closing related issues. These platform vendors are compensated separately and are direct costs to the project. In providing these in-house vendors, HouseRaising is able to improve the quality of those services at lower costs compared to outside vendors.
(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 the Gulf Coast. HouseRaising has identified an additional 30 potential zone locations nationally. Revenues represent the sales price of these projects as completed. Operating outside of established zone territories, HouseRaising performs the role of general manager of projects through associate or independent builder relationships. On a national basis, associate and independent builders contract to have HouseRaising design, price and manage home projects with its system. The Company has established several operating programs that allow homebuilders to serve as builder partners as described below:
| | · | Series 100: Builder Associate Relationships (3-5 custom homes annually); |
| | · | Series 200: Local Builder-Partner Relationships (5-20 custom homes annually); |
| | · | Series 300: Regional Builder-Partner Relationships (30-50 custom homes annually); |
| | · | Series 400: Zone Builder-Partner Relationships (100-300 custom homes annually). |
The Company has recently signed four agreements with independent builders to develop local operations in Charlotte, NC, Wilmington, NC, Beaufort and Bluffton (near Charleston), SC and Gulfport, MS.
(2) Revenues from Disaster Relief Services: HouseRaising creates revenues by offering consulting services to governing agencies, as well as directly to families and builders involved in disaster rebuilding efforts. For a fee, our consultants develop sketches of workable plans, create detailed specifications, determine new building code requirements and assist in arranging financing for rebuilding homes. It is expected that a percentage of the consulting engagements will then become project management engagements whereby HouseRaising performs the role of general manager. This revenue stream represents consulting fees and fees charged as a percentage of the sales price of the project.
(3) 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.
(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 HouseRaising entities on all projects. HRA receives a service fee on the price of all design/build projects. There will also be opportunities 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. The dsign/build sector of the homebuilding market represents about 500,000 of the 1.6 million single-family homes built annually in the U.S. While the total number of single-family homes does fluctuate year-to-year depending on economic conditions, the design/build sector has remained very stable. 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. A 1% share of this market equals approximately $2.5 billion in home sales. HouseRaising’s software system was built to serve at least 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.”
Is HouseRaising a Technology Company or a Homebuilding Company?:
HouseRaising is the combination of a technology company and a homebuilding company that has developed into a service company that provides and manages projects through a proprietary process. In return for allowing HouseRaising to manage their projects, owners receive a home completed at a fair price…HR Economies of Scale™, designed and built to a higher degree of excellence…HR PowerHouse Specs™, and an experience that can be enjoyed by both the buyers and the builder…HRI Seal of Excellence Award™. Regardless of the price, style or location of the home under contract, the management process and quality demands are the same. Turning custom homebuilding into organized and manageable projects is aided by HouseRaising’s management platform vendors providing expert products and services.
Who Pays HRI?:
HouseRaising creates revenues from managing custom home and renovation projects and those revenues are part of and are included in the sales price of the homes. As builders and HR-USA join to co-manage pre-sold projects, HRI is paid by the homebuyers as part of the total price due the builder as specified in the design/build or renovation contract. All vendors operating in Management Platforms or providing products or service to the project are paid from the construction loan and down payment provided by homebuyers.
HouseRaising’s Business is its trademark “Straight, Level & Square®”:
HouseRaising, Inc.’s Trademark, “Straight, Level & Square®” stands for both the way the company deals with homebuyers, builders and vendors, and the quality of the products and services it provides. HouseRaising improves the quality of the home and provides better services. This combination reduces the cost of designing and building unique homes by up to 10%.
RESULTS OF OPERATIONS FOR QUARTER ENDED SEPTEMBER 30, 2006
COMPARED TO SEPTEMBER 30, 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 $185,450 for the period ended September 30, 2006, compared to $0 for the same period in 2005. Sales increased due to closing on a new construction project in the greater Charlotte area started in late 2005. All sales were from unrelated third parties and were made primarily to new home buyers and remodeling work. As of the end of the third quarter of 2006, the Company has new agreements totaling approximately $5,100,000 in sales that are projected to be completed over the next 12 months, which reflects a $3,100,000 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. In addition, the Company has signed four operating agreements to establish regional operations with experienced homebuilders in Charlotte, North Carolina, Wilmington, North Carolina, Beaufort and Bluffton (near Charleston), South Carolina and Gulfport, Mississippi which is expected to rapidly increase custom homes sales in these regions and consistent with implementing our business plan. On average new home construction projects are completed within 9 months and remodeling projects are completed within 3 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 $10,122 for the period ended September 30, 2006 compared to $0 for the same period in 2005. The increase is principally due to the higher sales volume. We expect gross profits will continue to 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 $97,027 recorded in the third quarter of 2006 associated with new and on-going projects that are expected to be completed in the next 12 months. These projects are included in the $5,100,000 in new agreements previously reported. There were $9,151 in sales and service fees recorded in the third 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 $5,528 in other income for the period ending September 30, 2006, principally from marketing fees associated with the Company’s contractual relationship with SunTrust Mortgage and membership fees from new Builder-members that have decided to work with HouseRaising, compared to $47 for the same period in 2005. The Company will earn approximately $12,000 a year from its agreement with SunTrust and does expect membership fees will increase substantially as the company continues to implement its Builder-Membership program as part of its business plan.
Net Revenues
HouseRaising’s net revenues were $112,677 for the third quarter ended September 30, 2006 compared to $9,198 for 2005. The net revenues generated in 2006 were due to profits from new home construction and renovation projects that were completed in the year and also sales and service fees for new projects that have been started. 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, independent builder operations and disaster relief operations.
Expenses
Total expenses for the quarter ended September 30, 2006 was $1,483,963 compared to $899,934 for the same period in 2005. Selling, general and administrative expenses were higher for the period ending September 30, 2006 versus 2005, increasing from $684,246 in the third quarter of 2005 to $1,373,039 for the third quarter of 2006. The increase in expenses was due principally to a one time administrative cost associated with the issuance of 200,000 preferred stock shares to Management as described under Part II Item 2: Changes in Securities. Selling, General and Administrative expenses reflect costs related to developing HouseRaising’s Carolinas and Gulf Coast zone operations, the Company membership program and disaster relief operations, 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 and Gulf Coast regions, builder-memberships nationally and disaster relief services in the Gulf Coast region. These expenses also include general business and executive management to raise capital for implementation of its business plan as well as previously committed payments for services provided to the company. Consulting fees reflect business consulting services and investor relations expenses which decreased to $110,924 in the third quarter 2006 from $215,688 in the third quarter 2005.
Due to our start up efforts, we have previously 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 continue to roll out our business plan in 2006, including the Company’s new builder membership and disaster relief services.
Other Expense
HouseRaising had interest expense of $63,055 for the quarter ended September 30, 2006 compared to $26,186 for the same period in 2005. The interest recorded in the third 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 September 30, 2006 was $1,434,341 versus a net loss of $916,922 in the same period in 2005, an increase of $517,419. The increase in net losses is directly attributable to a one time administrative expense, offset by an increase in sales associated with new construction and remodeling 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 $5,100,000 of new home construction work in process for 2006 which is a $3,100,000 increase from year-end and has signed four operating agreements to establish regional operations with experienced homebuilders in Charlotte, North Carolina, Wilmington, North Carolina, Beaufort and Bluffton (near Charleston), South Carolina and Gulfport, Mississippi which is expected to rapidly increase custom homes sales in these regions 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.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
COMPARED TO SEPTEMBER 30, 2005
Sales
HouseRaising had new home and renovation sales of $636,791 for the nine month period ended September 30, 2006, compared to $1,590 for the same period in 2005. The sales for the first nine months of 2006 have surpassed the same sales level for all of 2005. Sales increased due to closing on new construction and remodeling projects in the greater Charlotte area started in late 2005 or early 2006. All sales were from unrelated third parties and were made primarily to new home buyers and remodeling work. As of the end of the third quarter of 2006, the Company has new contracts totaling approximately $5,100,000 in sales that are projected to be completed over the next 12 months, which reflects a $3,100,000 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. In addition, the Company has signed four operating agreements to establish regional operations with experienced homebuilders in Charlotte, North Carolina, Wilmington, North Carolina, Beaufort and Bluffton (near Charleston), South Carolina and Gulfport, Mississippi which is expected to rapidly increase custom homes sales in these regions and consistent with implementing our business plan. On average new home construction projects are completed within 9 months and remodeling projects are completed within 3 months.
Gross Profits
The Company earns profits as the net difference of project’s sales price and total costs including fees (see third quarter results for further details). HouseRaising had gross profits of $80,016 for the nine month period ended September 30, 2006 compared to $342 for the same period in 2005. The gross profits for the first nine months of 2006 are more than double the gross profits incurred in all of 2005. The increase is principally due to the higher sales volume. We expect gross profits will continue to 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 $156,652 recorded in the first nine months of 2006 associated with new and on-going projects that are expected to be completed in next 12 months. These projects are included in the $5,100,000 in new agreements noted earlier. There were sales and service fees of $17,613 recorded for the first nine months of 2005. The substantial increase reflects the increase in sales volume and expected sales over the next 12 months. 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 $5,528 in other income for the nine months ended September 30, 2006, principally from marketing fees associated with the Company’s contractual relationship with SunTrust Mortgage and membership fees from new Builder-members that have decided to work with HouseRaising compared to $188 for the same period in 2005. The Company will earn approximately $12,000 a year from its agreement with SunTrust and does expect membership fees will increase substantially as the company continues to implement its Builder-Membership program as part of its business plan.
Net Revenues
HouseRaising’s net revenues were $242,196 for the nine months ended September 30, 2006 compared to $18,143 for 2005. The substantial increase in net revenues for the first nine months of 2006 compared to the same period in 2005 (more than 13 fold increase) reflects the substantial increase in new home construction and renovation projects and on-going marketing efforts the past year. We would expect our net revenues to continue to grow as we obtain new construction and remodeling work in 2006 and continue the roll-out of the Company’s membership and disaster relief operations.
Expenses
Total expenses for the nine months ended September 30, 2006 was $2,879,848 compared to $3,437,047 for the same period in 2005. The decrease in expenses was due to a substantial decrease in consulting fees from the second quarter of 2005 to 2006. Consulting fees reflects business consulting services and investor relations expenses which decreased to $289,519 in the second quarter, 2006 and $542,392 for the first nine months of 2006 from $1,149,180 in the second quarter 2005 and $1,878,817 for the first nine months of 2005. This is principally because the company incurred consulting fees in the second quarter, 2005 in an effort to maintain our stock price in response to what we believe was a “wave of coordinated naked short selling” which we reported to the NASD as described in our filing with the SEC on Form 8-K on May 9, 2005. These fees were principally investor relations and related consulting services which was substantially funded through the issuance of restricted shares of common stock. The Company does not expect such expenses to reoccur as its expenditures since that time period has been substantially less.
Selling, general and administrative expenses were higher for the nine months period ending September 30, 2006 versus 2005, increasing from $1,558,230 in 2005 to $2,337,456 in 2006. These expenses reflect costs related to developing HouseRaising’s Carolinas and Gulf Coast zone operations, the Company membership program and disaster relief operations, 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 and Gulf Coast regions, builder-memberships nationally and disaster relief services in the Gulf Coast region. These expenses also include general business and executive management to raise capital for implementation of its business plan, a one time issuance of Preferred Stock Shares to management and previously committed payments for services provided to the company.
Other Expense
HouseRaising had interest expense of $141,380 for the quarter ended September 30, 2006 compared to $51,959 for the same period in 2005. The interest recorded in the third 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 September 30, 2006 was $2,779,032 versus a net loss of $3,470,863 in the same period in 2005, a decrease of approximately 20% or $691,831. The decrease in net losses is directly attributable to an increase in sales associated with new construction and remodeling projects and a decrease in consulting fees in the nine months ended 2006 versus 2005. Future income/losses will depend on the success of implementing the company’s business plan in 2006. The company does already have approximately $5,100,000 of new home construction work in process for 2006 which is a $3,100,000 increase from year-end and has signed four operating agreements to establish regional operations with experienced homebuilders in Charlotte, North Carolina, Wilmington, North Carolina, Beaufort and Bluffton (near Charleston), South Carolina and Gulfport, Mississippi which is expected to rapidly increase custom homes sales in these regions 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.
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 $2,005,137 for the nine month period ended September 30, 2006 versus $682,323 for the same period in 2005. This reflects a net increase in cash used by operations of $1,322,814 principally due to a decrease in common stock issued for services for the nine months offset by a decrease in net operating loss and expenditures on capitalized software.
Cash flows used in investment activities were $67,064 and $167,790 for the nine months ended September 30, 2006 and 2005, respectively. This was principally due to investments in property and equipment for the company.
Cash flows provided by financing activities were $1,982,090 and $1,206,075, respectively, for the nine months ended September 30, 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 nine months of 2006 (see Note 12 of Notes to Consolidated Financial Statements and Part II, Item 2 Changes in Securities of Form 10-QSB filed with the SEC on August 14, 2006 for more information) and the increase in borrowings on notes payable, principally draws on a bank loan with Wachovia.
We had cash on hand of $202,272 and a working capital deficit of $3,515,613 as of September 30, 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.
Overall, we have funded our cash needs from inception through September 30, 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. 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 capital reserves that will sustain our business for the next twelve months. The company does have approximately $5,100,000 of new home construction work in process for 2006 and a pipeline of prospective customers which is consistent with implementing our business plan. The Company has also signed four operating agreements to establish regional operations with experienced homebuilders in Charlotte, North Carolina, Wilmington, North Carolina, Beaufort and Bluffton (near Charleston), South Carolina and Gulfport, Mississippi which is expected to rapidly increase custom homes sales in these regions and 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 independent builder programs in the southeast and eventually nationally, implementing marketing and sales for its disaster relief services, 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 May 3, 2006, Nite Capital, LP (“Nite”) re-filed its complaint against Robert V. McLemore, President of HouseRaising (“McLemore”) and HouseRaising, in the Circuit Court of the Nineteenth Judicial Circuit for Lake County, Illinois. The re-filed complaint essentially makes the same allegations and demands the same relief as an earlier complaint filed in federal court in Illinois. HouseRaising filed a motion for dismissal based on lack of jurisdiction, but this filing was denied on October 18, 2006. Consistent with time requirements of Illinois law, HouseRaising filed a response to the complaint in Circuit Court on November 7, 2006. A copy of a Form 8-K, filed with the Commission on July 19, 2005, reporting the filing of the initial complaint by Nite in the U.S. District Court for the Northern District of Illinois, Eastern Division, against McLemore and HouseRaising, describes the litigation in more detail and is hereby incorporated by reference. That complaint was voluntarily dismissed on a motion made by Nite on April 12, 2006.
Mr. McLemore maintains his previously stated position that Nite Capital defaulted on the underlying contract and that he and HouseRaising are not at fault. As previously stated, the terms of the contract at issue are disputed by the Defendants, and HouseRaising reports that it was not even a party to the alleged contract. The Defendants continue to engage Sugar, Friedberg and Felsenthal, LLP, counsel admitted to practice law in state court in Illinois and the U.S. District Court for the Northern District of Illinois, and intends to vigorously defend this action. The Company believes the claims against it amount to a thinly disguised effort to insert HouseRaising into a dispute over a contract between two private parties.
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.
ITEM 2. CHANGES IN SECURITIES.
On August 10, 2006, the Board of Directors of the Registrant met and authorized the entry into three amendments to existing employment agreements with Gregory J. Wessling, Director, Chairman and Chief Executive Officer, Robert V. McLemore, Director, President and Founder, and Grant S. Neerings, Director, Chief Technology Officer and President of HouseRaisingAcademy, LLC. All of the three directors abstained from voting on the matters considered by the Board of Directors described herein, and the amendments and all additional matters described herein were approved by the unanimous vote of the five remaining directors. The Company filed a Form 8-K with the SEC on August 16, 2006 describing this matter which included a copy of the Articles of Amendment establishing the Class B Convertible Preferred Stock which is incorporated herein by reference.
Mr. Wessling, Mr. McLemore and Mr. Neerings all agreed to an amendment to their employment agreements which increased the term to five years. In return, the Board of Directors authorized the issuance of a bonus to Mr. Wessling of 200,000 shares of a new series of Class B Convertible Preferred Stock in consideration of his agreement to amend his employment agreement. The Board also cited as additional consideration the fact that Mr. Wessling had recently co-signed a $1,000,000 promissory note with Wachovia Bank in favor of the Registrant. The Board finally noted Mr. Wessling’s record of exceptional service to the Registrant as further consideration for the bonus.
The Board of Directors authorized the issuance of a bonus to Mr. McLemore of 500,000 shares of Class B Convertible Preferred Stock in consideration of his agreement to amend his employment agreement. The Board also cited as additional consideration the fact that Mr. McLemore had recently co-signed a $1,000,000 promissory note with Wachovia Bank in favor of the Registrant. In addition, Mr. McLemore agreed to assign all right, title and interest that he owned in two copyrighted applications for System C, the custom design-build computer management software that is at the heart of the Registrant’s business plan. The Board further noted Mr. McLemore’s record of exceptional service as further consideration for the bonus.
The Board of Directors authorized the issuance of a bonus to Mr. Neerings of 100,000 shares of Class B Convertible Preferred Stock in consideration of his agreement to amend his employment agreement. The Board also cited as additional consideration Mr. Neerings’ record of exceptional service to the Registrant, in particular, his instrumental role in developing the Registrant’s System C.
The Class B Convertible Preferred Stock is convertible after three years from the date of issuance into ten (10) shares of common stock, and it votes on an “as converted” basis with the common stock on all matters except to approve any merger, sale of assets, combination or reorganization involving the Registrant, or other fundamental corporate transaction involving the Registrant, in which case the Class B Convertible Preferred Stock has a class vote. In addition to any other rights provided by law, the Registrant shall not without first obtaining the affirmative vote or written consent of the holders of a majority of the outstanding shares of Class B Convertible Preferred, make any payment of dividends or other distributions or any redemption or repurchase of common stock or options or warrants to purchase common stock of the Registrant.
The Board of Directors also emphasized that the issuance of 800,000 shares of Class B Convertible Preferred Stock to the Registrant’s insiders would tend to have an anti-takeover effect, and enable management to focus on implementing its business plan without losing control of the Registrant. The issuance would also lessen the dilutive impact on management’s stake of certain financings that were under consideration.
The Registrant had 48,785,230 shares of common stock and 1,000,000 shares of Class A Convertible Preferred Stock outstanding as of July 31, 2006, for a total of 58,785,230 shares of total outstanding combined voting power. After the issuance of the 800,000 shares of Class B Convertible Preferred Stock described herein, the Registrant will have 66,785,230 shares of total outstanding combined voting power.
The offering of the Class B Convertible Preferred Stock is intended to be exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The facts relied on by the issuer to make the exemption available include: (1) the issuance was an isolated private transaction which did not involve a public offering; (2) there was only one offeree, (3) the offeree has agreed to the imposition of a restrictive legend on the face of the stock certificate representing its shares, to the effect that it will not convert the shares of Class B Convertible Preferred Stock into common stock, and resell the stock unless its shares are registered or an exemption from registration is available; (4) the offeree was a sophisticated investor; (5) there were no subsequent or contemporaneous public offerings of the stock; (6) the certificate for the shares of Class B Convertible Preferred Stock were not broken down into smaller denominations; and (7) the negotiations for the sale of the stock took place directly between the offeree and our management.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 June 30, 2006, the Company filed the following Current Reports on Forms 8-K with the SEC as follows:
| Dated (filing date) | | Items Reported |
| | | |
| August 10, 2006 (August 17, 2006) | | Form 8-K Entry into a Material Definitive Agreement |
| June 28, 2006 (July 5, 2006) | | Form 8-K Entry into a Material Definitive Agreement |
(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) |
| | |
| | |
| | /s/ Gregory J. Wessling |
| Date: November 14, 2006 | Gregory J. Wessling |
| | Chairman of the Board and |
| | Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
| | |
| | /s/ Robert V. McLemore |
| Date: November 14, 2006 | Robert V. McLemore |
| | President and Founder |
| | (Principal Executive Officer) |
| | |
| | |
| | /s/ Richard A. von Gnechten |
| Date: November 14, 2006 | Richard A. von Gnechten |
| | Chief Financial Officer |
| | (Principal Financial Officer) |
| | |
| | |
| | /s/ Christine M. Carriker |
| Date: November 14, 2006 | Christine M. Carriker |
| | Secretary/Treasurer, SVP & |
| | Chief Administrative Officer |
| | (Principal Accounting Officer) |
