U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the period ended March 31, 2007 |
| 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)
North Carolina | | 56-2253025 |
| (State or other jurisdiction of incorporation or organization) | | (IRS Employer identification No.) |
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 $.001 per share)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers’ classes of common equity, as of the latest practicable date:
Class of Stock | | Outstanding April 30, 2007 | |
| Common Stock ($.001 par value) | | | 52,070,595 | |
| Preferred Stock Class A ($.001 par value) | | | 1,000,000 | |
| | | 800,000 | |
| Preferred Stock Class C ($.001 par value) | | | 700,000 | |
REPORTS TO SECURITY HOLDERS
We are a reporting company under the requirements of the Securities Exchange Act of 1934 and will file quarterly, annual and other reports with the Securities and Exchange Commission. This quarterly report contains the required audited financial statements. We are not required to deliver a quarterly report to security holders and will not voluntarily deliver a copy of the quarterly report to security holders, except in connection with our annual meeting of shareholders. The reports and other information filed by us will be available for inspection and copying at the public reference facilities of the Commission, 100 F Street, N.E., Washington, D.C. 20549.
Copies of such material may be obtained by mail from the Public Reference Section of the Commission at 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the Commission maintains a World Wide Website on the Internet at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission.
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HOUSERAISING, INC.
FORM 10-QSB
For the Quarter ended March 31, 2007
TABLE OF CONTENTS
| | | Page |
| | Cautionary Statement and Risk Factors that May Affect Future Results | 3 |
| | | |
| PART I | |
| | | |
| ITEM 1. | Selected Financial Statements | 4 |
| | Balance Sheet - March 31, 2007 (unaudited) | 4 |
| | Statements of Operations - Three Months Ended March 31, 2007 and 2006 (unaudited) | 5 |
| | Statements of Cash Flows - Three Months Ended March 31, 2007 and 2006 (unaudited) | 6 |
| | Notes to Financial Statements (unaudited) | 7 |
| 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 | 29 |
| | | |
| | Signatures | 30 |
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, realty/broker, 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; it is possible that we may not maintain adequate insurance against these claims and 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 automated design/build system may not completely fill builder needs 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 is an early stage company and 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 some 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; |
| · | 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); |
| · | 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 Balance Sheet | |
March 31, 2007 | |
| | | | |
ASSETS | | | |
| Current Assets: | | | |
| Cash | | $ | 182,512 | |
| Excess costs over billings on uncompleted projects | | | 238,899 | |
| Accounts Receivable | | | 1,603 | |
| Total Current Assets | | | 423,014 | |
| | | | | |
| Property and Equipment: | | | | |
| Property and Equipment | | | 572,527 | |
| Accumulated Depreciation | | | (197,084 | ) |
| Total Furniture and Equipment | | | 375,443 | |
| | | | | |
| Capitalized Software: | | | | |
| Capitalized Software | | | 14,240,643 | |
| Accumulated Depreciation | | | (228,716 | ) |
| Total Capitalized Software | | | 14,011,927 | |
| | | | | |
| Other Assets | | | 65,402 | |
| | | | | |
| TOTAL ASSETS | | $ | 14,875,786 | |
| | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | |
| Current Liabilities: | | | | |
| Line of Credit | | $ | 4,862,109 | |
| Current Maturities of Notes Payable | | | 241,703 | |
| Interest Payable | | | 11,732 | |
| Accounts Payable and Other Payables | | | 300,053 | |
| Total Liabilities | | | 5,415,597 | |
| | | | | |
| 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 | |
| Preferred Stock Class C-Convertible ($.001 par value; 700,000 authorized; | | | | |
| 700,000 issued and outstanding) | | | 700 | |
| Common Stock ($.001 par value; 100,000,000 authorized; | | | | |
| 52,007,884 issued and outstanding) | | | 52,008 | |
| Common Stock Subscribed but not Issued | | | 1,589,437 | |
| Paid in Capital | | | 18,317,811 | |
| Retained Deficit | | | (10,501,567 | ) |
| ` | | | 9,460,189 | |
| | | | | |
| Total Liabilities and Stockholders' Equity | | $ | 14,875,786 | |
| |
Consolidated Statement of Operations | |
For the three months ended March 31, 2007 and 2006 | |
| | | | | | |
| | | | | | |
| | | 2007 | | 2006 | |
SALES AND COST OF SALES | | | | | |
| Sales | | $ | 20,112 | | $ | 277,636 | |
| Gross Profit | | | 20,112 | | | 66,453 | |
| | | | | | | | |
OTHER REVENUES | | | | | | | |
| Other Income | | | 43,458 | | | 0 | |
| Total Other Revenues | | | 43,458 | | | 0 | |
| | | | | | | | |
| | | | | | | | |
EXPENSES | | | | | | | |
| Selling, general and administrative | | | 767,818 | | | 284,155 | |
| Consulting, professional fees, and salaries--stock based comp | | | 581,065 | | | 307,475 | |
| Interest | | | 145,978 | | | 30,831 | |
| Depreciation | | | 245,725 | | | 8,421 | |
| TOTAL EXPENSES | | | 1,740,586 | | | 630,882 | |
| | | | | | | | |
| Net Loss | | $ | (1,677,016 | ) | $ | (564,429 | ) |
| Net (loss) per share--basic and fully diluted | | | (0.03 | ) | | (0.01 | ) |
| Weighted average shares outstanding | | | 51,770,224 | | | 45,377,509 | |
The accompanying notes are an integral part of these consolidated financial statements.
| |
Consolidated Statements of Cash Flows | |
For the three months ended March 31, 2007 and 2006 | |
| | | | | | |
| | | | | | |
| | | 2007 | | 2006 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
| Net loss | | $ | (1,677,016 | ) | $ | (564,429 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in) | | | | | | | |
| operating activities: | | | | | | | |
| Depreciation | | | 245,724 | | | 8,421 | |
| Value of Common/Preferred Stock issued in exchange for services | | | 581,065 | | | 357,276 | |
| Value of Common Stock issued for debt and interest converted to stock | | | 212,401 | | | - | |
| Value of Common/Preferred Stock issued for Capitalized Software | | | 321,500 | | | 78,750 | |
| (Increase)/Decrease in Capitalized Software | | | (517,687 | ) | | (349,783 | ) |
| (Increase)/Decrease in Accounts Receivable | | | 498,397 | | | (30,583 | ) |
(Increase)/Decrease in Excess Costs Over Billings on Uncompleted Contracts | | | (18,389 | ) | | - | |
| (Increase)/Decrease in Other Assets | | | (11,202 | ) | | - | |
| Increase/(Decrease) in Interest payable, accounts Payable & other accruals | | | 53,732 | | | (136,770 | ) |
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | | | (311,475 | ) | | (637,118 | ) |
| | | | | | | | |
| CASH FLOWS FROM INVESTMENT ACTIVITIES: | | | | | | | |
| Investment in subsidiary operations | | | (15,000 | ) | | (550 | ) |
| Purchase of property and equipment | | | (138,489 | ) | | (5,411 | ) |
| NET CASH PROVIDED BY (USED IN) INVESTMENT ACTIVITIES | | | (153,489 | ) | | (5,961 | ) |
| | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | |
| Proceeds from sale of common stock | | | 100,000 | | | 212,500 | |
| Reduction in Common Stock Subscribed but not Issued | | | (217,825 | ) | | - | |
| Note and Interest Payable converted to stock | | | (212,401 | ) | | - | |
| Principal Reductions on Notes Payable | | | - | | | 195,650 | |
| Increase/(Decrease) in borrowings on Line of Credit | | | 810,000 | | | - | |
| NET CASH PROVIDED BY (USED IN) INVESTMENT ACTIVITIES | | | 479,774 | | | 408,150 | |
| | | | | | | | |
| NET INCREASE IN CASH AND | | | | | | | |
| CASH EQUIVALENTS | | | 14,810 | | | 234,929 | |
| | | | | | | | |
| CASH AND CASH EQUIVALENTS: | | | | | | | |
| Beginning of Period | | | 167,702 | | | 292,383 | |
| | | | | | | | |
| End of period | | $ | 182,512 | | $ | 57,454 | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity—HouseRaising, Inc. and Subsidiaries is in the business of selling, designing and managing design/build and renovation projects and home building 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 and the Gulf Coast.
The following is a list of all subsidiaries of the Company:
HouseRaisingAcademy, LLC (N.C. LLC)—8/9/2005 owned 100% by HouseRaising, Inc.
HouseRaisingMembership, LLC (N.C. LLC)—6/23/2006 owned 100% by HouseRaising, Inc.
HouseRaisingRealty, LLC (N.C. LLC)—12/12/2006 owned 100% by HouseRaising, Inc.
HouseRaising Disaster Relief, LLC (N.C. LLC)—6/15/2006 owned 100% by HouseRaising, Inc.
HouseRaisingUSA, LLC (Delaware LLC)—7/22/2003 owned 100% by HouseRaising, Inc.
HouseRaising of Georgia, LLC (G.A. LLC)—11/20/2006 owned 100% by HouseRaisingUSA, LLC
HouseRaising of Independence, LLC (N.C. LLC)—10/17/2006 owned 100% by HouseRaisingUSA, LLC [formerly known as
HouseRaising of the Carolinas, LLC]
HouseRaising of the Gulf Coast, LLC (M.S. LLC)—10/24/2006 owned 100% by HouseRaisingUSA, LLC
HouseRaising of Louisiana, LLC (L.A. LLC)—1/13/2006 owned 100% by HouseRaisingUSA, LLC
Trojan Custom Homes, LLC (L.A. LLC)—2/2/2007 owned 50% by HouseRaising of Louisiana, LLC
HouseRaising of the Carolinas, LLC (N.C. LLC)—5/23/2003 owned 100% by HouseRaising, Inc. [formerly known as
HouseRaising of Greater Charlotte, LLC]
Barrow-Hundley Homes, LLC (N.C. LLC)—1/30/2007 owned 50% by HouseRaising of the Carolinas, LLC
David Steele Homes, LLC (S.C. LLC)—3/22/07 owned 50% by HouseRaising of the Carolinas, LLC
Freeman Custom Homes, LLC (S.C. LLC)—3/12/07 owned 50% by HouseRaising of the Carolinas, LLC
Goodin Homes, LLC (N.C. LLC)—11/27/2006 owned 50% by HouseRaising of the Carolinas, LLC
Harris Homes, LLC (N.C. LLC)—1/30/2007 owned 50% by HouseRaising of the Carolinas, LLC
Hawn Homes, LLC (N.C. LLC)—1/30/2007 owned 50% by HouseRaising of the Carolinas, LLC
HouseRaising of Charleston, LLC (S.C. LLC)—2/23/2005 owned 100% by HouseRaising of the Carolinas, LLC
HouseRaising of Columbia, LLC (S.C. LLC)—2/23/2005 owned 100% by HouseRaising of the Carolinas, LLC
HouseRaising of Greenville, LLC (S.C. LLC)—2/23/2005 owned 100% by HouseRaising of the Carolinas, LLC
HouseRaising of Myrtle Beach, LLC (S.C. LLC)—2/23/2005 owned 100% by HouseRaising of the Carolinas, LLC
J. Stanley Homes, LLC (S.C. LLC)—PENDING owned 50% by HouseRaising of the Carolinas, LLC
McClennan Homes, LLC (N.C. LLC)—PENDING owned 50% by HouseRaising of the Carolinas, LLC
R.A. Lawrence Homes, LLC (S.C. LLC)—4/24/07 owned 50% by HouseRaising of the Carolinas, LLC
Robinson Custom Homes LLC (N.C. LLC)—3/9/07 owned 50% by HouseRaising of the Carolinas, LLC
R.S. Stover Homes, LLC (N.C. LLC)—PENDING owned 50% by HouseRaising of the Carolinas, LLC
West Custom Homes, LLC (N.C. LLC)—2/9/2007 owned 50% by HouseRaising of the Carolinas, LLC
White Homes, LLC (S.C. LLC)—2/13/2007 owned 50% by HouseRaising of the Carolinas, 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 2003, the Company formed 2 subsidiary companies, HouseRaising of Greater Charlotte, LLC (which subsequently changed its name to HouseRaising of the Carolinas, LLC) and HouseRaisingUSA, LLC for organizing and owning the regional limited liability companies which have been formed from 2005 to present. In 2005, the Company formed HouseRaisingAcademy, LLC to develop and manage the Company’s internet based E-Learning and Homebuilder Management System (named System C) which was completed at the end of 2006. In mid-2006, the Company formed two companies: HouseRaising Disaster Relief, LLC in response to the needs of various financial, insurance and government entities to respond to the rebuilding needs following disaster situations, such as occurred in the Gulf Coast, and HouseRaisingMembership, LLC as a means of providing custom home builders various services, including insurance, as part of their affiliation with HouseRaising. In late-2006, the Company formed HouseRaisingRealty, LLC in response to the need of homebuyers to not only build a new home, but also be able to secure a lot for the new home and sell their existing home. In late-2006, the Company formed HouseRaising of the Gulf Coast, LLC which serves as the zone operation for the Louisiana, Mississippi and Gulf Coast region. Numerous agreements have also been signed as 50% partnerships under the zone entities of HouseRaising of the Carolinas, LLC and HouseRaising of the Gulf Coast, LLC.
NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
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 Company commenced amortizing Capitalized Software (System-C) during the first quarter of 2007. The Capitalized Software will be amortized on a straight-line basis over the estimated economic life of the asset (determined to be 15 years) at a quarterly expense of approximately $229,000.
S-8 Share Payments—The Company currently provides S-8 registered shares as compensation for many 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 123) instead of the stock price at the time the shares are transferred. Employees, consultants and vendors that receive such shares understand that there is risk associated with the volatility of the share price.
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.
NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
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. During 2006, Accounts Receivable in the amount of $22,918 were deemed uncollectible and written off to bad debt expense.
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.
Recent Accounting Pronouncements—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.
In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB No. 109. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB No. 109, “Accounting for Income Taxes”. This interpretation prescribes recognition of threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation is effective for fiscal years beginning after December 15, 2006. Earlier application is permitted if the entity has not yet issued interim or annual financial statements for that fiscal year. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.
NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Recent Accounting Pronouncement (cont’d)
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require any new fair value measurements. However, for some entities, the application of SFAS No. 157 will change current practice. This Statement is effective for fiscal years beginning after November 15, 2007, and all interim periods within those fiscal years. Earlier application is permitted if the entity has not yet issued interim or annual financial statements for that fiscal year. Early adoption of this standard is not expected to have a material effect on the Company’s results of operations or its financial position, but the Company is evaluating the Statement to determine what impact, if any, it will have on the Company.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”). This statement requires balance sheet recognition of the funded status, which is the difference between the fair value of plan assets and the benefit obligation, of pension and postretirement benefit plans as a net asset or liability, with an offsetting adjustment to accumulate other comprehensive income in shareholders’ equity. In addition, the measurement date, the date at which plan assets and the benefit obligation are measured, is required to be the company’s fiscal year end. The Company currently Company is currently evaluating the Statement to determine what impact, if any, it will have on the Company.
NOTE B—SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information for the years ended December 31, 2006 and 2005 are summarized as follows:
CASH PAID DURING THE YEARS FOR INTEREST AND INCOME TAXES:
| | | 2006 | | 2005 | |
| Income Tax | | $ | - | | $ | - | |
| Interest | | $ | 224,212 | | $ | 96,180 | |
NON-CASH FINANCING ACTIVITIES:
| | | 2006 | | 2005 | |
| Common stock issued for services | | $ | 2,172,653 | | $ | 2,944,726 | |
NOTE C—INCOME TAXES
Due to the operating loss and the inability to recognize an income tax benefit there from, there is no provision for current or deferred federal or state income taxes for the years ended December 31, 2006 and 2005.
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, 2006 is as follows:
| Total Deferred Tax Asset | | $ | 1,277,000 | |
| Valuation Allowance | | | (1,277,000 | ) |
| Net Deferred Tax Asset | | $ | - | |
NOTE C—INCOME TAXES (CONT’D)
The reconciliation of income taxes computed at the federal statutory income tax rate to total income taxes for the years ended December 31, 2006 and 2005 is as follows:
| | | 2006 | | 2005 | |
| Income tax computed at the federal statutory rate | | | 34 | % | | 34 | % |
| State income tax, net of federal tax benefit | | | 4 | % | | 4 | % |
| Total | | | 38 | % | | 38 | % |
| 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 $314,000 and $447,000 in 2006 and 2005, respectively. No tax benefits have been recorded for the nondeductible (tax) expenses (stock for services) totaling $5,467,379.
The Company has the following carryforwards available at December 31, 2006:
| | | Amount | | Expiration | |
| | | | | | |
| | | $ | 729,624 | | | | 2022 | | | |
| | | | 51,002 | | | | 2023 | | | |
| | | | 577,196 | | | | 2024 | | | |
| | | | 1,176,315 | | | | 2025 | | | |
| | | | 826,705 | | | | 2026 | | | |
| | | $ | 3,360,842 | | | | | | | |
NOTE D—INSURANCE PROCEEDS AND RELATED ACCOUNTS RECEIVABLE
In November 2006, the Company realized $500,000 in insurance proceeds payment as a result of the death of Robert V. McLemore, former President and founder of the Company. The payment was not received in 2006, so the Company booked an Accounts Receivable as the offset to the income realized. The cash payment was received in January 2007.
NOTE E—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 December 31, 2006 and 2005.
NOTE F—EQUITY
During 2006, the Company issued 6,183,992 shares of its 100,000,000 authorized, $.001 par Common Stock for various services, additions to Capitalized Software, and debt converted to equity, valued at $2,157,785.
During 2006, the Company issued 800,000 shares of its 800,000 authorized, $.001 par stock Class B Preferred Stock for various services to 2 major shareholders, valued at $2,000,000.
During 2005, the Company issued 8,125,652 shares of its 100,000,000 authorized, $.001 par Common Stock for various services, valued at $5,151,871.
NOTE G—WARRANTS
The following table shows warrants that have been issued by the Company:
# shares | | Price per Share | | Exercise Date | | Expiration Date | |
PPM warrants issued: | | | | | | | |
| 500,000 | | $ | 0.50 | | | 08/18/06 | | | 08/18/10 | |
| 250,000 | | $ | 0.50 | | | 09/09/06 | | | 09/09/10 | |
| 190,000 | | $ | 0.50 | | | 03/17/07 | | | 03/17/12 | |
| 75,000 | | $ | 0.50 | | | 03/14/07 | | | 03/14/11 | |
| 100,000 | | $ | 0.50 | | | 03/14/07 | | | 04/30/11 | |
| 60,000 | | $ | 0.50 | | | 03/23/07 | | | 03/23/11 | |
| 100,000 | | $ | 0.50 | | | 04/20/07 | | | 04/20/11 | |
| 226,892 | | $ | 0.50 | | | 05/15/07 | | | 05/15/11 | |
| 500,000 | | $ | 0.50 | | | 06/19/07 | | | 06/19/11 | |
| 200,000 | | $ | 0.50 | | | 01/08/08 | | | 01/08/12 | |
2,201,892 | | | | | | | | | | |
Various warrants issued: | | | | | | | | | | |
| 300,000 | | $ | 0.90 | | | 05/13/05 | | | 05/13/09 | |
| 20,000 | | $ | 0.50 | | | 06/13/05 | | | 06/13/10 | |
| 750,000 | | $ | 0.50 | | | 06/23/06 | | | 06/23/16 | |
| 750,000 | | $ | 0.50 | | | 06/23/07 | | | 06/23/17 | |
| 750,000 | | $ | 0.50 | | | 06/23/08 | | | 06/23/18 | |
| 750,000 | | $ | 0.50 | | | 06/23/09 | | | 06/23/19 | |
| 20,000 | | $ | 0.60 | | | 07/13/05 | | | 07/13/09 | |
| 950,000 | | $ | 0.90 | | | 05/13/05 | | | 05/13/10 | |
| 2,584 | | $ | 1.24 | | | 04/15/05 | | | 04/15/10 | |
| 2,584 | | $ | 1.24 | | | 04/15/05 | | | 04/15/10 | |
| 6,000 | | $ | 1.24 | | | 03/04/05 | | | 03/04/10 | |
| 6,000 | | $ | 1.24 | | | 03/04/05 | | | 03/04/10 | |
4,307,168 | | | | | | | | | | |
NOTE G—WARRANTS (CONT’D)
The following table shows the future warrants to consultants, independent contractors and employees that the Company will issue as of 3/31/07:
# shares | | Price per Share | | Exercise Date | | Expiration Date | | Vesting Term (yrs) | | Warrants vesting per year | | Warrants Vested as of 12/31/06 | | Warrants Vesting as of 3/31/07 | |
| 300,000 | | $ | 1.00 | | | 01/08/03 | | | 01/08/08 | | | 5 | | | 60,000 | | | 240,000 | | | 0 | |
| 100,000 | | $ | 0.50 | | | 04/19/04 | | | 04/19/09 | | | 5 | | | 20,000 | | | 40,000 | | | 0 | |
| 100,000 | | $ | 1.50 | | | 11/01/04 | | | 11/01/09 | | | 5 | | | 20,000 | | | 40,000 | | | 0 | |
| 100,000 | | $ | 1.50 | | | 11/01/04 | | | 11/01/09 | | | 5 | | | 20,000 | | | 40,000 | | | 0 | |
| 5,000 | | $ | 1.24 | | | 03/04/05 | | | 03/04/10 | | | 5 | | | 1,000 | | | 1,000 | | | 1,000 | |
| 5,000,000 | | $ | 0.50 | | | Special | | | 06/23/15 | | | 4 | | | 1,250,000 | | | 1,250,000 | | | 0 | |
| 500,000 | | $ | 1.75 | | | 04/07/05 | | | 04/07/15 | | | 5 | | | 100,000 | | | 100,000 | | | 0 | |
| 833,333 | | $ | 0.50 | | | 02/01/07 | | | 02/01/17 | | | 2 | | | — | | | 833,333 | | | 0 | |
| 2,000,000 | | $ | 0.50 | | | 02/01/07 | | | 02/01/17 | | | 3 | | | 666,667 | | | 0 | | | 0 | |
| 800,000 | | $ | 0.50 | | | 02/01/07 | | | 02/01/17 | | | 2 | | | | | | 800,000 | | | 0 | |
| 1,200,000 | | $ | 0.50 | | | 02/01/07 | | | 02/01/17 | | | 3 | | | 400,000 | | | 0 | | | 0 | |
| 400,000 | | $ | 0.50 | | | 02/01/07 | | | 02/01/17 | | | 2 | | | | | | 400,000 | | | 0 | |
| 1,200,000 | | $ | 0.50 | | | 02/01/07 | | | 02/01/17 | | | 3 | | | 400,000 | | | 0 | | | 0 | |
| 80,000 | | $ | 0.50 | | | 10/31/05 | | | 10/31/15 | | | 5 | | | 16,000 | | | 16,000 | | | 0 | |
| 200,000 | | $ | 0.50 | | | 01/03/05 | | | 01/13/15 | | | 5 | | | 40,000 | | | 40,000 | | | 40,000 | |
| 25,000 | | $ | 0.50 | | | 01/01/05 | | | 01/01/15 | | | 5 | | | 5,000 | | | 10,000 | | | 0 | |
| 25,000 | | $ | 1.00 | | | 01/01/05 | | | 01/01/15 | | | 5 | | | 5,000 | | | 10,000 | | | 0 | |
| 250,000 | | $ | 0.50 | | | 01/01/05 | | | 01/01/15 | | | 5 | | | 50,000 | | | 100,000 | | | 0 | |
| 250,000 | | $ | 1.00 | | | 01/01/05 | | | 01/01/15 | | | 5 | | | 50,000 | | | 100,000 | | | 0 | |
| 250,000 | | $ | 0.50 | | | 01/01/05 | | | 01/01/15 | | | 5 | | | 50,000 | | | 100,000 | | | 0 | |
| 250,000 | | $ | 1.00 | | | 01/01/05 | | | 01/01/15 | | | 5 | | | 50,000 | | | 100,000 | | | 0 | |
| 250,000 | | $ | 0.50 | | | 08/01/06 | | | 08/01/16 | | | 5 | | | 50,000 | | | 0 | | | 0 | |
| 200,000 | | $ | 0.50 | | | 05/08/06 | | | 05/08/16 | | | 4 | | | 50,000 | | | 0 | | | 0 | |
| 40,000 | | $ | 0.00 | | | 07/24/00 | | | N/A | | | 4 | | | | | | 40,000 | | | 0 | |
| 50,000 | | $ | 1.20 | | | 2003 | | | N/A | | | 5 | | | 10,000 | | | 40,000 | | | 0 | |
| 250,000 | | $ | 0.50 | | | 11/08/06 | | | 11/08/16 | | | 5 | | | 50,000 | | | 0 | | | 0 | |
| 100,000 | | $ | 0.50 | | | 01/02/07 | | | 01/02/17 | | | 5 | | | 20,000 | | | 0 | | | 0 | |
| 500,000 | | $ | 0.50 | | | 01/02/07 | | | 01/02/17 | | | 5 | | | 100,000 | | | 0 | | | 0 | |
| 200,000 | | $ | 0.50 | | | 12/02/06 | | | 12/02/16 | | | 5 | | | 40,000 | | | 0 | | | 0 | |
| 10,000 | | | N/A | | | 12/02/06 | | | 12/02/16 | | | 5 | | | 2,000 | | | 0 | | | 0 | |
16,568,333 | | | | | | | | | | | | | | | | | | | | | | |
The fair value of each award is estimated on the date of vesting using the Black-Scholes option valuation model which uses the principal assumptions: expected volatility of 7%, expected dividends of 0%, expected terms of 10 years and risk-free interest rate of 4.5%. The expected volatility rate was estimated based on the daily historical volatility of the Company’s common stock over the previous 12 month period. The expected term was estimated based on a simplified method, as allowed under SEC Staff Accounting Bulletin No. 107, averaging the vesting term and original contractual terms. The risk-free interest rate for periods within the contractual life of the option is based on U.S. Treasury securities. The pre-vesting forfeiture rate used for the period ended March 31, 2007 was assumed to be zero. As required under SFAS No. 123(R), we will adjust the estimated forfeiture rate to our actual experience. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies, and thereby materially impact our fair value determination.
NOTE H--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.
NOTE I—COMMITMENTS/LEASES
On November 1, 2005, HouseRaising entered into a Lease Agreement, 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 consolidation of its acquisition of LearnBytes, LLC, and the operations of HouseRaisingUSA, LLC (and its various subsidiaries), HouseRaisingMembership, LLC, HouseRaising Disaster Relief, LLC and HouseRaisingRealty, LLC.
On November 27, 2006, HouseRaising of the Gulf Coast, LLC (“HR-Gulf Coast”), a subsidiary of HouseRaising, Inc., entered into a Lease Agreement with CSC Investments, LLC whereby HR-Gulf Coast agreed to lease space at 4024 and 4030 (A-C) Canal Street, New Orleans, Louisiana to accommodate the Company’s new design center and continue its expansion efforts for its Gulf Coast operations in New Orleans. The Company entered into a five year agreement, commencing December 1, 2006 and expiring November 30, 2011 with a five year option to lease approximately 10,000 square feet for an annual rent of approximately $144,000. After the 36th month of the lease, the Landlord can increase rent up to 2% annually. The Company will utilize this space for sales and product design center to support building and disaster relief operations in Louisiana, and provide space for builders, estimators and designers recruited to support the Company’s Gulf Coast operations. HouseRaising of the Gulf Coast, LLC also has established a small business office location in Gulfport, MS.
In December 2005, the Company entered into a lease agreement for computer equipment. The monthly payments are $2,298.75 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 $121.00 per month for 48 months beginning June, 2006.
NOTE J—NOTES PAYABLE
Notes payable at March 31, 2007 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 | |
| | | | | |
| Unsecured note payable to an unrelated party. | | | | |
| Bearing 0% interest. | | $ | 1,851 | ** |
| | | | | |
| Secured demand note payable to a related party. | | | | |
| Bearing 6% interest. | | $ | 221,035 | * |
| | | | | |
| | $ | 241,703 | |
| | | | | |
* The note payable (including accrued interest through 3/31/07) was paid-off after the close of business for the quarter and thus is still reflected on the books as of 3/31/07, but will be deducted in the second quarter business.
NOTE J—NOTES PAYABLE (CONT’D)
** 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 February, 2007 the Company came to an debt to equity conversion agreement with its final bridge lender, which resulted in the issuance of 424,801 shares of common stock in exchange for a reduction of $212,401 in bridge loans and accumulated interest (this will eliminate the Secured note payable to an unrelated part in the amount of $155,000 bearing interest rate of 15%--as shown above—which will be reflected in the first quarter 2007 results.)
NOTE K—LINE OF CREDIT
The Company has five separate lines of credit with Wachovia Bank, NA which total $8,100,000. The Company obtained a line of credit in the amount of $1,350,000 with Wachovia Bank, NA. 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. In addition, the Company obtained an annually renewable line of credit in the amount of $4,000,000 with Wachovia Bank, NA with an interest rate of 1-month LIBOR plus 1.55% with a no-call provision and with all interest and principal due on February 8, 2008. The Company’s total Line of Credit outstanding as of March 31, 2007 was $4,862,109.
Management’s Discussion and Analysis of Financial Condition and Results of Operations for March 31, 2007
(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
| · | Signed agreements for $8.0 million in new homes and remodeling contracts expected to be built over the next 12 months, which is $5.0 million higher than a year ago and $2.0 million higher than year-end; |
| · | Signed operating agreements with more than ten (10) experienced homebuilders (Series 200 level) to develop local operations to build approximately 10-20 homes each; the builder operates a new jointly-owned limited liability company that uses our System C system on which HouseRaising receives service fees and shares profits equally on completed projects (these home sales are not included in the $8.0 million figure noted above); |
| · | Successfully launched HouseRaisingRealty, LLC to assist homebuyers in disposing of their existing homes or acquiring lots for their new custom homes. The company closed sales transactions over $1,390,000 generating $39,000 in new revenues for the quarter versus none in the same period last year. As of the filing of this report, HouseRaisingRealty has: |
| · | Closed additional sales transactions totaling $1,324,576 which will generate approximately $33,500 in commission income to the Company; |
| · | Pending sales transactions totaling approximately $5,600,000 which will generate approximately $175,000 in commission income to the Company; and |
| · | Active listings for sales of approximately $6.5 million. |
| · | As a result of the company fully implementing its business plan and starting to depreciate its Capitalized Software (System-C), the company had a net loss for the quarter of $1.67 million, up from $564,000 for the same period last year: |
| · | For the quarter, the Company had $229,000 in additional depreciation expense for its Capitalized Software and $350,000 in one-time expenses that will not be repeated going forward; |
| · | The company is fully operational in the Gulf Coast, having leased and built out 10,000 square feet for the New Orleans Design Center/Offices and secured its builder’s license. |
| · | Cultivated pipeline of interested prospective Builder Associate relationships (Series 100 level to build approximately 3 custom homes a year) totaling more than 80 individuals which are at various stages of discussions with the Company on establishing a relationship (there is no guaranty; however, these individuals will sign agreements). |
| | | As of May 15, 2007 | | As of May 15, 2006 |
HouseRaising Zone Operations | | | | |
| Closed contracts | | $20,000 (3-31-07) | | $277,000 (3-31-06) |
| Signed contracts (new and remodel) | | $8.0 million | | $3.0 million |
HouseRaisingMembership | | | | |
| Series 200 builders (10-20 homes each) | | 10+ | | 0 |
HouseRaisingRealty | | | | |
| Commission Income | | $39,000 (3-31-07) | | 0 (3-31-06) |
| Closed sales transactions | | $2.7 million ($72k commissions) | | 0 (0) |
| Pending sales transactions | | $5.6 million (~$175k commissions) | | 0 (0) |
| Active listings | | $6.5 million | | 0 |
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 US and International 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 offices in Gulfport, Mississippi and New Orleans, Louisiana, where it has built out a design center and engaged executives to implement its programs in this region. In late 2006, the Company formed a real estate brokerage operation to help customers sell their home and purchase a lot to build a new home. The Company is rapidly increasing home sales in the Carolinas and Gulf Coast region and has signed more than ten operating agreements with experienced homebuilders to establish partnerships which are expected to rapidly increase custom homes sales in these regions (each partnership will seek to build ten to twenty custom homes annually). The company also has engaged numerous independent builder relationships that seek to build approximately three custom homes annually. 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 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 $14 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 five 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. 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. Similarly HouseRaising also creates revenues by offering services to governing agencies as well as directly to families and builders involved in disaster rebuilding efforts. Our realty brokerage operation earns commissions in helping customers sell their home, buy vacant land and/or buy a new home.
(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 builder relationships. On a national level, associate 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 operating agreements with experienced homebuilders to develop local operations in Charlotte, Wilmington, Albemarle, Calabash, Harrisburg and Mooresville, North Carolina; Beaufort and Sunset (near Charleston), Columbia and Greenville, South Carolina; Gulfport, Mississippi and Abita Springs, Baton Rouge and Kenner, Louisiana
(2) Revenues from Realty Services: Operating within zone territories through a wholly-owned subsidiary, HouseRaisingRealty, LLC, HRI provides complete real estate brokerage services to help customers sell their existing home and secure a vacant lot as necessary and then build a new home through other HRI subsidiaries. HRI will generate additional income through commissions on such transactions.
(3) 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.
(4) 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.
(5) 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.
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 design/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 Specifications™, 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 services to the project are paid from the construction loan and down payment provided by homebuyers.
HouseRaising’s 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%.
Competition:
The homebuilding business is highly competitive and fragmented. However, HouseRaising’s competition is not the large national home builders; we compete with the small craftsman or craftswoman builders that bid against other small builders for projects provided by customers. Currently, we know of no companies developing the type affiliations and support structure HouseRaising offers small builders.
Regulation and Environmental Matters:
Since HouseRaising does not develop subdivisions or communities, the company is less effected by environmental and regulation matters. We are subject to various local, state and federal statutes, ordinances, rules and regulations concerning zoning, building designs, construction and similar matters. In addition, we are subject to various licensing, registration and filing requirements in connection with construction, advertising and sale of design/build projects in our regional operations. We are also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning protection of public health and the environment. We maintain a policy of engaging engineers and environmental consultants to evaluate certain sites located in environmental sensitive areas.
Outlook for Homebuilding is Positive:
The homebuilding industry is has moderated the past couple years after enjoying record sales for close to a decade. Moderate interest rates coupled with population growth, forming millions of new households created record profits for the nation’s largest builders. HouseRaising’s research indicates that despite the recent decline in home sales nationally, that the custom homebuilding sector of the industry has shown resounding resilience of constructing about 500,000 homes a year regardless of whether or not the overall industry has gone up or down. Furthermore, the markets HouseRaising serve (namely, the Carolinas and the Gulf Coast) remain very attractive. Whatever the outcome of interest rates and the economy, it is obvious that custom homebuilding should remain brisk for the foreseeable future.
RESULTS OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 2007
COMPARED TO MARCH 31, 2006
SALES AND COST OF SALES
Sales
The Company had Sales (new home and renovation sales) of $20,112 for the three months ending March 31, 2007, compared to $277,636 for the same period in 2006. The sales decrease is principally due to a number of in-process new construction and remodeling projects that will not be completed until after the end of the first quarter of 2007 and an unanticipated delay in obtaining the Company’s builder’s license in Louisiana. The sales recorded in the first quarter of 2007 were from service fees generated from future projects. As of the filing of this report, the Company has new contracts totaling approximately $8,000,000 in sales that are projected to be completed over the next 12 months, which reflects a $5,000,000 increase from the number reported in our Quarterly Report on 10-QSB for the period ending March 31, 2006 and reflects $2,000,000 increase from the Annual Report on 10-KSB for the period ending December 31, 2006 filed on March 31, 2007. All sales were from unrelated third parties and were made primarily to new home buyers and remodeling work.
Included in the sales are service fee revenues from pre-sold projects including 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. Going forward we would expect sales and service fee revenue to continue to grow commensurate with increases in new contract sales.
In addition, the Company has recently signed operating agreements with experienced homebuilders to develop local operations in Charlotte, Wilmington, Albemarle, Calabash, Harrisburg, Pineville and Hickory, North Carolina; Beaufort and Summerville/Sunset (near Charleston), Charleston, Columbia and Greenville, South Carolina; Abita Springs, Baton Rouge and Kenner, Louisiana 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. The Company reports total project sales based on the contract amount due to design and build projects, in the quarter in which the sale is approved and closed.
Cost of Sales
The cost of real estate sales represents all direct costs in building a new home or remodeling project, including sticks and bricks, labor and builder costs and management fees charged to the project (as described under sales and service fees above).
Gross Profit
HouseRaising’s gross profit represents the difference between sales and service fee revenue and cost of sales. 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 for as a cost to the project.
HouseRaising’s gross profit was $20,112 for the three months ending March 31, 2007 compared to $66,453 for the same period in 2006 which reflects that in-process new home construction and remodeling projects for 2007 will not be completed until after the end of the first quarter of 2007 whereas for the same period in 2006 the company did complete a project and achieved more than a 20% profit margin. Management would expect the Company’s gross profits to grow as we obtain and complete new construction and remodeling work in the Carolinas and Gulf Coast in 2007 and continue the roll-out of the Company’s membership, disaster relief and new real estate brokerage operation.
OTHER REVENUES
The Company earned $43,458 in other income for the period ending March 31, 2007, principally as a result of successfully lauching HouseRaisingRealty, LLC to assist homebuyers in disposing of their existing homes or acquiring lots for their new custom homes and thus generating realty commissions. The company also receives marketing fees associated with the Company’s contractual relationship with SunTrust Mortgage.
The company closed realty sales transactions of over $1,390,000 generating $39,000 in new revenues for the first quarter versus none in the same period last year. As of the filing of this report, HouseRaisingRealty has closed additional sales transactions totaling over $1,300,000 and generating approximately $33,500 in commission income which will be reported in the next quarter, pending sales transactions totaling approximately $5,600,000 which will generate approximately $175,000 in commission income to the Company and has active listings for sales of approximately $6,500,000. Management expects these sales levels to continue to increase as the company builds its brokerage operation.
The company will also earn approximately $12,000 a year from its agreement with SunTrust and expects membership fees will increase substantially as the company continues to implement its design/build and renovation sales program as part of its business plan.
EXPENSES
Total expenses for the year ended March 31, 2007 was $1,740,586 compared to $630,882 for the same period in 2006. The increase in expenses was due principally to the company implementing its business plan and incurring $229,000 in depreciation for its Capitalized Software (which reflects full-implementation of its System-C management system) and one-time expense of approximately $350,000 for securing financing and long-term management agreements. The Company has expanded operations in the Carolinas (North and South Carolina), launched new operations in the Gulf Coast, launched new brokerage operations in the Carolinas and expanded its membership program which has attracted a substantial number of new builder partnerships.
Selling, general and administrative expenses were higher for the three months ending March 31, 2007 versus 2006, increasing from $284,155 in 2006 to $767,818 in 2007. These expenses reflect costs related to developing HouseRaising’s Carolinas and Gulf Coast zone operations, the Company’s realty brokerage operation, 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 Carolinas and Gulf Coast regions, commission sales personnel for its realty brokerage operation in the Carolinas and builder-memberships nationally and disaster relief services in the Gulf Coast region. These expenses also include general business and executive management services 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.
The company also paid a portion of its consulting, professional and salaries in stock-based compensation which increased from $307,475 in the first quarter of 2006 to $581,065 for the same period in 2007. This includes a one-time payment of Convertible Preferred Stock Class C valued at approximately $286,000 as compensation to two executive personnel in exchange for signing a long-term management agreement as reported on January 11, 2007 on SEC Form 8-K and $72,222 as 2/36th amortization of compensation to a principal executive in exchange for a personal guarantee with Wachovia that extended an additional $4 million line of credit to the Company on February 9, 2007 as reported on SEC Form 8-K (as further described under Other Events in this filing). The Company does not expect to issue any additional convertible preferred stock in the foreseeable future. Without the one time payment, stock based compensation would be lower for the period. In addition, these expenses also include consulting fees for business consulting services and investor relations expenses.
The Company had depreciation expense in the amount of $245,725 in the first quarter of 2007 compared to 8,421 in 2006. The large increase from prior year reflects the company commencing depreciation on its Capitalized Software (System-C) at a rate of approximately $229,000 per quarter and an increase in the company’s investment in property and equipment, particularly its design center in Charlotte. The Company expects to depreciate the company’s System-C over a 15-year period.
The Company had interest expense of $145,978 for the period ending March 31, 2007 compared to $30,831 for the same period in 2006. The increase includes a one-time payment of $60,000 for a back-up standby letter of credit for the financing with Wachovia (as further described under Other Events in this filing) and interest related to equity for debt swap with our final bridge lender. In 2003, HouseRaising completed a debt offering to a select group of accredited investors, which provided cash of $507,727 to HouseRaising, Inc. In November, 2004, the Company completed an equity-for-debt swap which reimbursed these investors for their debts and converted much of the outstanding debt to restricted shares in the company. In the first quarter of 2007, the company completed equity for debt swap with its final bridge lender in the amount of $155,000 plus accrued interest of $57,401. The interest recorded in 2007 was principally for the company’s line of credit with Wachovia Bank, the standby letter of credit and additional accrued interest associated with the equity for debt swap. The interest recorded in 2006 was principally to reimburse bridge lenders to HouseRaising. Going forward the level of interest expense will be based principally on the Wachovia line of credit drawn.
INCOME / LOSSES
The net loss for the quarter ended March 31, 2007 was $1,677,016 versus a net loss of $564,429 in the same period in 2006. The increase in net losses is directly attributable to commencing depreciation for its Capitalized Software (System-C) in the amount of $229,000, one-time expenditures totaling about $350,000 to secure a line of credit for financing and long-term management agreements and fully implementing its business plan: expanding operations in the Carolinas (North and South Carolina), launching new operations in the Gulf Coast, launching new brokerage operations in the Carolinas and expanding its membership program which has attracted a substantial number of new builder partnerships.
Future income/losses will depend on the success of implementing the company’s business plan in 2007. The company does already have approximately $8,000,000 of new home and remodeling construction work in process for 2007 which is a $5,000,000 increase from last year at this time and $2,000,000 increase from the end of year. The Company also has a new realty brokerage operation which will generate fee income for helping customers sell their existing home and buy vacant land to build a new home, and has signed operating agreements with experienced homebuilders to develop local operations in Charlotte, Wilmington, Albemarle, Calabash, Harrisburg, \Pineville and Hickory, North Carolina; Beaufort and Summerville/Sunset (near Charleston), Charleston, Columbia and Greenville, South Carolina; Abita Springs, Baton Rouge and Kenner, Louisiana which is expected to rapidly increase custom homes sales in these regions and consistent with implementing our business plan.
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 $311,475 for the three months ended March 31, 2007 versus $637,118 for the same period in 2006. This reflects a net decrease in cash used by operations of $325,643 principally due to the collection of a key-man life insurance policy in the amount of $500,000 and an increase in the value of stock issued for services for the three months which more than offset the increase in net loss for the period and slight increase in expenditures on capitalized software.
Cash flows used in investment activities were $153,489 and $5,961 for the year ended March 31, 2007 and 2006, respectively. This was principally due to investments in property and equipment for the company, including the company’s design center in Charlotte and New Orleans, and an investment a principal subsidiary for start-up expenses.
Cash flows provided by financing activities were $479,774 and $408,150, respectively, for the three months ended March 31, 2007 and 2006. The increase is principally to an increase in borrowings on the line of credit with Wachovia Bank which was reduced by an issuance of common stock associated with an equity-for-debt swap with the company’s final bridge lender for principal and interest in the amount of $212,401 (see Note J of Notes to Consolidated Financial Statements) and a decrease in common stock subscribed but not issued as a result of the issuance or other settlement of such obligations. The company no longer has any debt obligations to outside bridge lenders and has paid off its secured demand note payable to a related party after the end of the first quarter which will be reflected in the second quarter business.
We had cash on hand of $182,512 and a working capital deficit of $4,992,583 as of March 31, 2007, although most of this deficit is from the bank loan with Wachovia which on February 9, 2007 extended an additional line of credit in the amount of $4 million to the Company (as further described under Other Events in this filing) which can be extended and has a no-call provision which is sufficient to fund our operations through the next twelve months.
Overall, we have funded our cash needs from inception through March 31, 2007 with a series of debt and equity transactions. The Company’s principal source of working capital in 2007 was 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 and have the line of credit from Wachovia bank to sustain our business for the next twelve months. The company has approximately $8,000,000 of new home and remodeling construction work in process for 2007, a new real estate brokerage operation that has already generated new income and a pipeline of prospective customers which is consistent with implementing our business plan. The Company has signed operating agreements with more than ten (10) experienced homebuilders to develop local operations in Charlotte, Wilmington, Albemarle, Calabash, Harrisburg, \Pineville and Hickory, North Carolina; Beaufort and Summerville/Sunset (near Charleston), Charleston, Columbia and Greenville, South Carolina; Abita Springs, Baton Rouge and Kenner, Louisiana 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. 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.
The Company expects to use funds from operations and bank funding 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, implementing marketing and sales for its realty brokerage operations and on-going software development to improve its system. The Company may also consider selective acquisition opportunities that may assist in the successful implementation of its business plan (see Part II Item 5 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, particularly in the markets we serve. 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 does believe that is principle operations are in attractive markets, the Carolinas and Gulf Coast region, and that the custom home building sector is less impacted by overall economic conditions, but there is not guarantee this will remain so going forward. 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, Chief Executive Officer and President, Gregory J. Wessling (“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 annual report, as Exhibits 31.1 through 31.3, 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 annual 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 inconformity 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, the late 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. The case currently pending in the Nineteenth Judicial Circuit for Lake County, Illinois is in the discovery phase.
Until his death, Mr. McLemore maintained 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 were disputed by the Defendants, and HouseRaising reports that it was not even a party to the alleged contract. The Defendants have engaged 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 intend 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. It is unclear what will happen as a result of the recent death of Mr. McLemore, other than that Mr. McLemore’s representative has been substituted as a defendant for him.
Background:
In November 2004, Robert V. McLemore, the late 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 was 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. These matters have yet to be determined by a court of law.
ITEM 2. CHANGES IN SECURITIES.
On April 11, 2007, the Company announced that the company’s board of directors authorized management to purchase up to $100,000 of the company’s shares of common stock over the next six months. The Company will work with Wachovia Securities, Inc., the broker-dealer subsidiary of Wachovia Bank, on all repurchases which will be made strictly pursuant to the requirements of Rule 10b-18. The source of funding for the purchases will come from cash flow. As of the filing of this report, the company has not yet repurchased any shares.
In February, 2007, the Company agreed to an equity-for-debt conversion in which its final bridge lender converted its outstanding notes payable into shares of common stock. The Company issued 424,801 shares of common stock in exchange for a reduction of $155,000 in debt and $57,400.62 in accrued interest. The bridge lender is an accredited investor as defined in Rule 501(a) of Regulation D under the Act. This conversion will be reflected on the Company’s 1st quarter, 2007 financial statements. The Company believes that such offering is exempt from registration pursuant to Rule 506 under Regulation D.
On January 11, 2007, the Board of Directors of the Registrant met and authorized the entry into three amendments to existing management agreements with Christine M. Carriker, Director, Secretary/Treasurer and Chief Administrative Officer, Richard A. von Gnechten, Chief Financial Officer and Grant Neerings, Director, Chief Technology Officer and President of HouseRaisingAcademy, LLC. Ms. Carriker and Mr. Neerings, since they are Directors, abstained from voting on the matters affecting them considered by the Board of Directors. The amendments described herein with respect to Ms. Carriker and Mr. Neerings were approved by the unanimous vote of the six remaining directors, and the amendments described herein with respect to Mr. von Gnechten were approved by a unanimous vote of all seven directors.
Ms. Carriker and Mr. von Gnechten agreed to an amendment to their management agreements which increased the term to five years.
The Board of Directors authorized the issuance of a bonus to Ms. Carriker of 100,000 shares of Class C Convertible Preferred Stock and 400,000 options in consideration of her agreement to amend her management agreement. The options have an exercise price of $0.50 and a 10-year exercise period. All previously granted options, which had an exercise price of $1.25, were withdrawn. The Board also cited as additional consideration Ms. Carriker’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. von Gnechten of 100,000 shares of Class C Convertible Preferred Stock and 833,334 options in consideration of his agreement to amend his management agreement. The options have an exercise price of $0.50 and a 10-year exercise period. All previously granted options, which had an exercise price of $1.00, were withdrawn. The Board also cited as additional consideration Mr. von Gnechten’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. Grant Neerings of 800,000 options. The options have an exercise price of $0.50 and a 10-year exercise period. All previously granted options, which had a range of exercise prices from $0.50 to $1.00, were withdrawn. The Board also cited as additional consideration Mr. Neering’s continued record of exceptional service to the Registrant as further consideration for the bonus.
The Class C 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 C Convertible Preferred Stock has a class vote.
The Board of Directors also emphasized that the issuance of 200,000 shares of Class C 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 offering of the Class C 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 issuances were isolated private transactions which did not involve a public offering; (2) there were only two offerees, (3) the offerees have agreed to the imposition of a restrictive legend on the face of the stock certificate representing their shares, to the effect that they will not convert the shares of Class C Convertible Preferred Stock into common stock, and resell the stock unless their shares are registered or an exemption from registration is available; (4) the offerees were sophisticated investors; (5) there were no subsequent or contemporaneous public offerings of the stock; (6) the certificate for the shares of Class C 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 offerees 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 relese. It is possible that no transactions will take place at all.
Affiliation Agreements
On June 28, 2006, the Registrant and SunTrust Mortgage (“SunTrust Mortgage”) entered into a Strategic Agreement pursuant to which SunTrust will be the mortgage lender of choice to the Registrant for the making and/or refinancing of construction loans in connection with the building of custom homes for the Registrant’s customers and for the making of permanent residential mortgage loans in connection with the financing of those homes. In addition, the Registrant will provide selected marketing services to Sun Trust Mortgage related to the co-marketing arrangement In return, SunTrust has agreed to develop a fixed rate product for qualifying customers of the Registrant and has granted the Registrant a non-exclusive license to use the SunTrust name and logo in the Registrant’s advertising for the purpose of indicating the availability of loan financing by SunTrust to qualified applicants. In addition, SunTrust has agreed to identify and/or create a group of SunTrust employees who will be tasked with assisting the Registrant’s sales staff in providing Registrant’s customers with all aspects of the mortgage loan process.
Under the Strategic Agreement, the Registrant is responsible for, among other things, paying for marketing, services and goods related to the Strategic Agreement and SunTrust, in return, will compensate Registrant with a nominal amount equivalent to the fair market value of such marketing, services and goods.
The Strategic Agreement commences on the effective date and will continue thereafter in six (6) month increments, subject to termination by either party, with or without cause, upon delivery of thirty (30) days written notice to the other party.
Each party to the Strategic Agreement has agreed to indemnify and hold harmless the other party, it’s affiliates and their respective directors, officers, employees, agents and subcontractors from and against, among other things, any action or threatened action, suit or proceeding arising out of or as a result of, the indemnifying party’s performance under the Agreement and against any and all claims, expenses, losses or damages (including reasonable attorneys’ fees) that result from the actions or inaction of the indemnifying party.
Other Events
On November 27, 2006, HouseRaising of the Gulf Coast, LLC (the “Company”), a subsidiary of HouseRaising, Inc. (the “Registrant”), entered into a Lease Agreement (“Lease”) with CSC Investments, LLC (“Lessor”) whereby the Company agreed to lease space at 4024 and 4030 (A-C) Canal Street, New Orleans, Louisiana to accommodate the Company’s new design center and continue its expansion efforts for its Gulf Coast operations in New Orleans.
The Company entered into a five year agreement, commencing December 1, 2006 and expiring November 31, 2011 with a five year option to lease 9,828 square feet for an annual rent of approximately $144,000. After the 36th month of the lease, the Landlord can increase rent up to 2% annually. The Company will utilize this space for sales and product design center to support building and disaster relief operations in Louisiana, and provide space for builders, estimators and designers recruited to support the Company’s Gulf Coast initiative.
On February 9, 2007, HouseRaising and Wachovia Bank, N.A. (“Wachovia”), entered into a loan agreement (the “Agreement”) pursuant to which Wachovia agreed to make a new operating line of credit in the amount of $4 million available to the Registrant. The new operating line of credit will be secured by a standby letter of credit procured by a pledge of securities having a value of not less than $5.4 million by Gregory J. Wessling, Chairman, Chief Executive Officer and President of the Registrant.
As an inducement for Mr. Wessling to agree to enter into the standby letter of credit, the Registrant agreed to issue Mr. Wessling 500,000 shares of the Registrant’s Series C Convertible Preferred Stock, which have a ten to one conversion rate into whole shares of restricted common stock three years after issuance. As a further inducement for Mr. Wessling to enter into the standby letter of credit, eight shareholders (including Wessling), who are affiliates of the Registrant holding 52,472,835 of the Registrant’s total combined voting power of 70,769,282 shares, or 74.1% of the Registrant’s total combined voting power, entered into a shareholders’ agreement, dated February 9, 2007 (the “Shareholders’ Agreement”). The Shareholders’ Agreement provides that the shareholders will not, for a period of three years, vote their shares in favor of any issue that could have an “adverse effect” (as defined) on any other party to the agreement without the prior written consent of the other party. In addition, the shareholders agreed, for a period of three years, to grant each other and the Registrant certain rights of first refusal in connection with any proposed sale of their shares to a third party. Finally, the shareholders agreed for a period of three years to give each other shareholder the right to sell their shares on a pro rata basis in the event that any shareholder proposes to enter into certain private sale transactions. Lastly, the Robert V. McLemore Family, the Robert V. McLemore Family Trust and the Estate of Robert V. McLemore have agreed, for a period of three years, to continue a pledge arrangement with Wachovia with respect to 6,704,040 shares which have been pledged to Wachovia as collateral security for certain of the operating lines of credit.
The Shareholders’ Agreement is intended to provide, among other things, stability to the Registrant’s management during the period that Mr. Wessling is a party to the standby letter of credit and has exposed his assets to considerable financial risk in order to procure the new operating line of credit for the Registrant with Wachovia. Nonetheless, certain provisions of the Shareholders’ Agreement could have an anti-takeover effect and could impede a change in control of the Registrant as a result of the voting agreement and the buy-sell provisions contained therein. All of the shares that are subject to the Shareholders’ Agreement are owned by affiliates.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
Subsequent to December 31, 2006, the Company filed the following Current Reports on Forms 8-K with the SEC as follows:
| Dated (filing date) | | Items Reported |
| | | |
| January 11, 2007 (January 22, 2007) | | Form 8-K Entry into a Material Definitive Agreement, Amendments to Articles of |
| | | Incorporation or By-laws |
| February 2, 2007 (February 12, 2007) | | Form 8-K Unregistered Sales of Equity Securities |
| February 9, 2007 (February 13, 2007) | | Form 8-K Entry into a Material Definitive Agreement |
| April 11, 2007 (April 11, 2007) | | Form 8-K Other Events |
(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
| 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 Richard A. von Gnechten, Chief Financial Officer* |
| | | |
| 31.3 | | 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* |
| | | |
| | Section 1350 Certification of Richard A. von Gnechten, Chief Financial Officer* |
| | | |
| 32.3 | | Section 1350 Certification of Christine M. Carriker, Secretary/Treasurer, SVP and Chief Administrative Officer* |
-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) |
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|
| Date: May 15, 2007 | | /s/ Gregory J. Wessling |
| |
Gregory J. Wessling Chairman of the Board and Chief Executive Officer (Principal Executive Officer) |
| | |
| | | |
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|
| Date: May 15, 2007 | | /s/ Richard A. von Gnechten |
| |
Richard A. von Gnechten Chief Financial Officer (Principal Financial Officer) |
| | |
| | | |
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| Date: May 15, 2007 | | /s/ Christine M. Carriker |
| |
Christine M. Carriker Secretary/Treasurer, SVP & Chief Administrative Officer (Principal Accounting Officer) |
| | |
