See accompanying notes to consolidated financial statements.
ALTERNATIVE CONSTRUCTION COMPANY, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operation
The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim period. The results of operations for the six months ended June 30, 2007 are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements and footnotes have been condensed and, therefore, do not contain all required disclosures. Reference should be made to the Company’s annual audited financial statement for the year ended December 31, 2006.
On June 30, 2007, the Company completed the placement of Senior Secured Convertible Debentures with a group of private investors. The net proceeds of $4,000,000 were used to pay-off debt, pay down payables and to provide working capital to fund the Company’s marketing plan. See Note 4 - Long-Term Debt.
On May 16, 2007, ProSteel Builders Corporation (“PSB”) acquired 80% of the outstanding stock of Ionian Construction, Inc. (“Ionian”), a privately held company (see Note 5 - Related Parties). The purchase agreement was $800,000 payable in restricted common stock of the Company valued at the price of $6.90 per share.
On May 9, 2007, the Company formed a not-for-profit Florida corporation, Future Builders Institute, Inc., for the purposes of attracting and combining "greentech" environmental construction technologies. The FBII's intent is to seek, utilize and promote novel materials and technologies aimed at improving the quality of occupancy by offering total building solutions. The FBII will focus upon the economic and social benefits of certain combinations of these alternative technologies. The FBII will seek to include sustainable, socially responsible, energy efficient and environmentally friendly technologies and principals aimed at reducing the total monthly costs of living. The FBII will be funded by ACCY together with other Industry participants for the research, innovation and implementation of these combined solutions to the construction industry.
In accordance with SFAS No. 141, “Business Combinations”, the acquisition has been accounted for under the purchase method of accounting. The purchase price was allocated to Ionian’s tangible assets acquired and liabilities assumed based on their estimated fair values with any excess being ascribed to goodwill. Management is responsible for determining the fair value of these assets. The fair value of the assets acquired and liabilities assumed represent management’s estimate of fair values. The following table summarizes the components of the purchase price and the activity and balance sheet of the acquired company at May 16, 2007:
ALTERNATIVE CONSTRUCTION COMPANY, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
| | | | |
| Common Stock | | $ | 800,000 | |
| Total Purchase Price | | $ | 800,000 | |
| BALANCE SHEET and ACTIVITY at MAY 16, 2007: | | | | |
| Assets: | | | | |
| Cash | | $ | 11,282 | |
| Inventory | | | 1,272,605 | |
| Property, Plant and Equipment, net | | | 206,708 | |
| Total Assets | | $ | 1,490,595 | |
| Liabilities and Stockholders' Equity: | | | | |
| Accounts Payable and Accrued Expenses | | $ | 420,570 | |
| Debt | | | 1 ,739,583 | |
| Stockholders' Equity | | | (669,558 | ) |
| Total Liabilities and Stockholders' Equity | | $ | 1,490,595 | |
| STATEMENT of OPERATIONS for the Period JANUARY 1 - MAY 16, 2007: | | | | |
| Sales | | $ | 369,355 | |
| Cost of Sales | | | 573,908 | |
| Gross Profit | | | (204,553 | ) |
| Operating Expenses | | | 220,916 | |
| (Loss) from Operations | | | (425,469 | ) |
| | | (15,349 | ) |
| Net (Loss) | | | ($410,120 | ) |
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Alternative Construction Technologies Corporation (“ACT”), and its majority owned subsidiaries, Universal Safe Structures, Inc. (“USS”) (80%), PSB (80%) and its majority owned subsidiary, Ionian (80%). All significant inter-company transactions have been eliminated in consolidation. Inter-company transactions include the loans from the parent to its subsidiaries.
Accounts Receivable
Accounts receivable are uncollateralized customer obligations due for products sold. The accounts receivable are due under normal trade terms requiring payment within 30 days from the invoice date. Management reviews accounts receivable to determine if any receivables will potentially be uncollectible and any balances determined to be uncollectible are written off. Although no assurance can be given as to the collectibility of the accounts receivable, based on the information available, management has recorded a reserve for bad debt as a precautionary measure. As of June 30, 2007, the allowance for doubtful accounts receivable had a balance of $149,157. The reserve at December 31, 2006 was $149,157.
ACT utilized the accounts receivable factoring service provided by The Hamilton Group (“Hamilton”) for a significant percentage of its receivables. Under the terms of the Sale of Accounts Factoring and Security Agreement, Hamilton provided advances of 80% of the receivable they purchase for a fee compounded daily. The factoring fees for the six months ended June 30, 2007 was $81,589 and $169,901 for the six months ended June 30, 2006. As of June 30, 2007, Hamilton had purchased $300,061 of receivables, and they had advanced $240,049 to the Company, for a net due from factor of $60,012. The net balance due the factor, net, as of June 30, 2007 was repaid from the proceeds received at the Debenture Purchaser closing as disclosed in Note 4 - Long-Term Debt. Additionally, the agreement to utilize the factor and advances from accounts receivable was terminated.
PSB utilized the accounts receivable factoring service provided by Hamilton for a portion of its receivables. Under the terms of the Sale of Accounts Factoring and Security Agreement, Hamilton provides advances of 80% of the receivable they purchase for a fee compounded daily. The factoring fee for the year ended December 31, 2006 was $40,948. As of December 31, 2006, Hamilton had no outstanding activity as the Hamilton account was closed for new activity on July 5, 2006.
ALTERNATIVE CONSTRUCTION COMPANY, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Effective July 5, 2006, PSB contracted with CyberFactor, LLC (“CyberFactor”) to utilize their accounts receivable factoring service provided by CyberFactor for a portion of its receivables. Under the terms of the Sale of Accounts Factoring and Security Agreement, CyberFactor provides advances of 80% of the receivable they purchase for a fee compounded daily. The factoring fee for the six months ended June 30, 2007 was $93,010 of which $46,668 was billed back to two customers for reimbursement under their separate agreements. As of June 30, 2007, CyberFactor had purchased $304,061 of receivables, and they had advanced $243,249 to PSB, for a net due from factor of $45,612. The factoring service was discontinued as of June 29, 2007. Add advanced fees were reimbursed to CyberFactor on July 5, 2007. All advanced monies were reimbursed to CyberFactor on July 5, 2007 as the payment was in transit as of June 30, 2007.
NOTE 2 - NOTE RECEIVABLE
The Company had one note receivable with Peter Baker as of December 31, 2006. The original amount was $300,000. As of December 31, 2006, the principal balance was $275,000 as a payment in the amount of $25,000 was received. This amount was advanced to Mr. Baker as a loan commitment fee that was for a line of credit of $3,000,000 that never was finalized. The note was payable in full as of June 30, 2007 with interest at prime plus 3%. As of December 31, 2006, the Company determined that based upon certain factors, the balance may be uncollectible and wrote off the note.
On March 6, 2007, the Company modified the existing loan with Peter Baker that was previously written off as of December 31, 2006. The Company reestablished quarterly payments of $19,155.46 beginning May 15, 2007. The quarterly payment due on May 15, 2007 was paid on July 3, 2007.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment are summarized by major classification as follows:
| Useful lives | | June 30, 2007 | | December 31, 2006 | |
| Computer equipment - 5 years | | $ | 66,722 | | $ | 59,768 | |
Furniture and fixtures – 5 years | | | 7,284 | | | 6,487 | |
| Land, building and improvement – 20 years | | | 1,069,056 | | | 1,069,056 | |
| Machinery and equipment – 20 years | | | 2,514,067 | | | 2,297,286 | |
| Total | | | 3,657,129 | | | 3,432,597 | |
Less: Accumulated depreciation and amortization | | | 443,578 | | | 318,908 | |
| Total | | $ | 3,213,551 | | $ | 3,113,689 | |
| | Depreciation expense for the six months ended June 30, 2007 and the year ended December 31, 2006, are $96,319 and $174,677, respectively. |
NOTE 4 - LONG-TERM DEBT TABLE
On June 30, 2007, the Company agreed to sell $4,347,826 million aggregate principal amount of its Senior Secured Convertible Debentures due 2009 ("Debentures"), pursuant to the terms of a Securities Purchase Agreement dated as of June 30, 2007, among ACC and the purchasers named therein ("Debenture Purchasers"), with net funding of $4,000,000 (after an 8% original issue discount) received at closing.
ALTERNATIVE CONSTRUCTION COMPANY, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE 4 - LONG-TERM DEBT TABLE (continued)
In connection with the agreed issuance of Debentures, ACC also issued Common Stock Purchase Warrants ("Warrants") also dated June 30, 2007 to the Debenture Purchasers. The Warrants allow the purchasers to acquire up to one hundred and fifty percent (150%) of the shares issuable upon conversion of the Debentures, at an exercise price of $4.00 per share. ACC has agreed to file a registration statement with the Securities and Exchange Commission ("SEC") covering resales of ACC common stock issuable upon conversion of the Debentures or exercise of the Warrants. Also in connection with the Purchase Agreements, the Company entered into Lock-Up Agreements with certain of its stockholders, dated as of June 30, 2007, pursuant to which such stockholders have agreed not to sell or dispose of Company securities owned by them.
The Debentures will be convertible, at the option of the holder at any time on or prior to maturity, into shares of ACC common stock, at a conversion price of $4.00 per share, provided the Company meets its milestones as defined in the Debenture Purchase Agreement. Interest on $2,000,000 is payable monthly at the rate of ten percent (10%) per annum beginning July 30, 2007. The remaining $2,000,000 of the Debentures will accrue interest at the rate of ten percent (10%) which will be paid at maturity on June 30, 2009.
The Debentures are secured by all of the assets of ACC and its subsidiaries and will have priority in right of payment with all of its existing unsecured and unsubordinated indebtedness.
| | | | | | Balance at |
| Debt holder | | Due date | | | June 30, 2007 |
| Notes payable: | | | | | | |
| Dell Financial Services | | January 2010 | | $ | 15,945 | |
| Avante Holding Group, Inc. | | Open | | | 783,483 | |
| BB&T Bank | | Open Line of Credit | | | 820,539 | |
| BB&T Bank | | March 2009 | | | 14,207 | |
| CNH Capital | | September 2010 | | | 75,217 | |
| CNH Capital | | December 2009 | | | 43,699 | |
| BridgePointe | | June 2009 | | | 4,387,826 | |
| | | | | | | |
| Capitalized lease obligations: | | | | | | |
| Dell Financial Services | | March 2009 | | | 540 | |
| Dell Financial Services | | March 2009 | | | 10,680 | |
| Dell Financial Services | | July 2010 | | | 5,506 | |
| Dell Financial Services | | July 2010 | | | 1,875 | |
| Dell Financial Services | | June 2011 | | | 1,516 | |
| Dell Financial Services | | June 2011 | | | 2,132 | |
| Avante Leasing Corporation | | September 2011 | | | 82,682 | |
| | Total long-term debt | | | 6,245,847 | |
| | Less current portion | | | 1,677,427 | |
| | Long-term debt, net of current portion | | $ | 4,568,420 | |
NOTE 5 - RELATED PARTIES
On June 29, 2007, as a condition of the financing the Company completed with Debenture Purchaser, as discussed in Note 4 - Long-Term Debt; the Company’s Revolving Credit Agreement with Avante was to be closed out. As of June 30, 2007, due to the retirement of the Series B Preferred Stock and the open balance on the line of credit, the Company owed Avante $783,483. Avante issued the Company a Waiver of Default letter stating that the Company would not be required to pay the net balance as it would be detrimental of the Company’s working capital. The remaining balance due Avante would be paid could be paid in the future with proceeds from warrants being exercised.
ALTERNATIVE CONSTRUCTION COMPANY, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE 5 - RELATED PARTIES (continued)
On May 29, 2007, GAMI, LLC, a company owned by the CEO and a Director of the Company, acquired five houses from Ionian. Ionian was acquired by the Company on May 16, 2007 as discussed in Note 1 - Summary of Significant Accounting Policies. The sale of these houses was $1,054,500 and represented the listed sales price to the public. The balance due to Ionian in regards to this transaction was transferred to ACC as an offset to the balance due to GAMI from the retirement of the Series B Preferred Stock.
On May 16, 2007, PSB acquired 80% of Ionian, a contractor of residential homes in Cleveland, Tennessee. Ionian is owned by James Hawkins, the brother of Michael Hawkins, the CEO and a Director of the Company. The acquisition of Ionian at a purchase price of $800,000 was made with the issuance of 115,942 shares of the Company’s common stock, based on the closing price on May 16, 2007 of $6.90.
On May 16, 2007, the Company agreed with Avante and GAMI to acquire the outstanding 2,010,000 shares of Series B Preferred Stock (conversion value of 4,020,000 shares of Common Stock), split between Avante and GAMI, 950,000 and 1,060,000, respectively, at a reduced value of $2,000,000 (approximately $.95 per share, if converted to common stock, approximately $.4975 per share). At the date of the agreement, the calculated fair market value of the outstanding shares (average trading price) was $29,185,200.
On October 1, 2006, Avante Leasing Corporation, a wholly-owned subsidiary of Avante, leased a truss building system to Alternative Construction Technologies Corporation. The terms of the agreement include a five year term, 15.53% interest, with a $1 purchase price at the end of the period. This transaction was completed as the acquisition and financing of the truss system needed the financial guarantee of Avante and Michael W. Hawkins. As of June 30, 2007, the balance due to Avante Leasing Corporation under this Agreement was $82,612.
On July 1, 2006, GAMI, LLC (“GAMI”) contracted with PSB for the construction of an office building in Melbourne, Florida, which will have various tenants including Avante Holding Group, Inc. (“Avante”), a related party. and ACC. The contract was for $965,800. Contract amendments increased the price to $1,267,230. Work on the contract began in October 2006. As of June 30, 2007, the construction was 100% complete and was paid in full. As of December 31, 2006, PSB had no accounts receivable as the balance billed of $649,935 was paid in full. The contract was accounted for as an arms length transaction as costs to construct were comparable to competitive builders.
The Exclusive Investment Banking Services Agreement and the Finder Agreement, both dated October 24, 2004, and the Sales Commission Agreement, dated January 20, 2005, all between the Company and Avante, were terminated as of June 29, 2007 as a condition to the financing with Debenture Purchaser.
ALTERNATIVE CONSTRUCTION COMPANY, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2007
NOTE 6 - LEGAL PROCEEDINGS
On October 2, 2006, the Company was named in a lawsuit captioned New Millennium Enterprises, LLC and Phoenixsurf.com, LLC v. Michael W. Hawkins, et. al. U.S. District Court, Middle District of Georgia, 3: 06-CV-84 (CDC). The lawsuit alleges violations of the Georgia Securities Act, Georgia Fair Business Practices Act, Federal Securities laws and certain other unspecified laws in connection with the investment by Plaintiffs of $500,000 in ACC and seeks rescission of this investment. Plaintiffs amended their complaint on April 11, 2007. The Company filed an answer to the amended complaint denying all essential allegations of the complaint and asserting affirmative defenses showing why the plaintiffs are not entitled to the relief sought. In addition, the Company filed Counterclaims against the Plaintiffs and Third Party claims against individual officers and directors of Plaintiff, alleging a malicious interference with the Company’s business and business relations, conspiracy to interfere with our business, libel and slander, and violation of rights under Title IX of the Organized Crime Control Act of 1970 as amended. The Parties are to establish a consolidated plan of discovery by July 31, 2007. The Company believes it has meritorious defenses to the claims and intends to vigorously defend this lawsuit and to pursue its counterclaims.
NOTE 7 - SUBSEQUENT EVENT
On July 27, 2007, as part of the Company’s marketing plan and to enhance efforts to more clearly define its various operating divisions, the names of the Company, and four of its subsidiaries, were changed. In addition, the Company incorporated two new subsidiaries which will provide consulting and design services, respectively. These changes are summarized as follows:
NAME CHANGES |
OLD NAME | | NEW NAME |
| Alternative Construction Company, Inc. | (1) | Alternative Construction Technologies, Inc. |
| Alternative Construction Technologies Corporation | | Alternative Construction Manufacturing of Tennessee, Inc. |
| ProSteel Builders Corporation | | Alternative Construction by ProSteel Builders, Inc. |
| Ionian Construction, Inc. | (2) | Alternative Construction by Ionian, Inc. |
| Universal Safe Structures, Inc. | | Alternative Construction Safe Rooms, Inc. |
| |
| | NEW SUBSIDIARY COMPANIES FORMED | |
| | Alternative Construction Consulting Services, Inc. | |
| | Alternative Construction Design, Inc. | |
(1) Parent company - ACCY.OB
(2) Currently, subsidiary of ProSteel Builders Corporation. After name change, will become subsidiary of Alternative Construction Companies.
NOTE: Future Builders Institute, Inc. remains unchanged.
NOTE 8 - RESTATEMENT
The Company's consolidated financial statements included in the 2006 annual report on form 10-KSB were restated, whereby the stock warrants receivable reflect as an asset instead of as a reduction of equity. All references to the annual report on Form 10-KSB/A in this quarterly report on Form 10-QSB/A, have been changed to reflect this restatement. Also, unaudited interim financial information for the quarters ended September 30, 2006 and March 31, 2007 have been restated.
This report on Form 10-QSB contains forward-looking statements within the meaning of Rule 175 of the Securities Act of 1933, as amended, and Rule 3b-6 of the Securities Act of 1934, as amended, that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our industry, our beliefs and our assumptions. Words such as “anticipate”, “expects”, “intends”, “plans”, “believes”, “seeks” and “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-QSB. Investors should carefully consider all of such risks before making an investment decision with respect to the Company’s stock. The following discussion and analysis should be read in conjunction with our financial statements and summary of selected financial data for Alternative Construction Company, Inc. Such discussion represents only the best present assessment from our Management.
DESCRIPTION OF COMPANY:
The Company is a management company that currently operates one wholly-owned subsidiary, Alternative Construction Technologies Corporation (“ACT”), an entity, which manufactures the ACTech Panel™, and two other subsidiaries, Universal Safe Structures, Inc. (“USS”) and ProSteel Builders Corporation (“PSB”), a seller of the patented Universal Safe Room™ and a general contractor offering building solutions utilizing the ACTech Panel™, respectively. Ionian Construction, Inc. (“Ionian”), a residential developer, is a subsidiary of PSB.
OVERVIEW:
The Company is a manufacturing company engaged in the research, development and marketing of proprietary products for the construction industry. We manufacture and distribute the ACTech Panel™, a structural insulated panel (SIP), throughout the United States. The marketing of our products is through our internal sales staff and the use of distributors.
In 2004, all of the Company’s Predecessors' revenues were derived from the sale of our ACTech Panel™ in the United States. In 2004, the primary customers were Nelson, LC, Enerloc, Sam Kelly and Advanced Building Company; combined equaling 86% of total sales. In 2005, under the new ownership after the acquisition of ACT by ACC in January 2005, the Company expanded its distribution network to include the additional builders of classrooms in Florida.
Alternative Construction Company, Inc., a Florida Corporation ("ACC"), was formed on October 26, 2004. ACT, a Delaware corporation, was formed in 1997 by Mr. Paul Janssens, sole shareholder and beneficial owner, and was acquired by ACC on January 21, 2005 (the "Transaction") for the purchase price of One Million Two Hundred and Fifty Thousand ($1,250,000.00) Dollars. After the transaction was completed, continued due diligence determined that an agreed upon reduction in the purchase price for ACT was required to reflect various adjustments resulting in an adjusted purchase price of Eight Hundred and Seventy-Nine Thousand Eight Hundred and Ninety-Four Dollars ($879,894). ACC also acquired certain assets from Quality Metal Systems, LLC, a Florida limited liability company ("QMS"), which was also owned by Paul Janssens for One Million Two Hundred and Fifty Thousand ($1,250,000.00) Dollars. After the acquisition of ACT by ACC, the operational and marketing personnel continued employment with the Company. Subsequently, Avante Holding Group, Inc. incorporated Safe Rooms, Inc. on April 27, 2005. After the incorporation, the company changed its name to USS. On June 28, 2005 ACC acquired 80% of the Company stock for Eight Hundred Dollars ($800.00). Prior to the time of acquisition by ACC, USS conducted no business. USS has two shareholders, ACC and Avante Holding Group, Inc. Avante Holding Group, Inc. incorporated PSB on April 28, 2005 with the initial shareholders being ACC (80%) and Avante Holding Group, Inc. (20%). PSB was incorporated to function utilizing the ACC products in the commercial and residential construction marketplaces. On May 17, 2007, PSB acquired 80% of Ionian, which will incorporate the ACTech Panel™ in its continued residential development. James Hawkins retains the minority 20% of Ionian.
Effective January 21, 2005, ACC acquired ACT and certain assets of QMS. Prior to January 21, 2005, ACC had only immaterial administrative activity. Prior to the acquisition, ACT had operations but, accordingly, the following discussion and analysis of operations is not indicative of future comparisons of ACC as the new ownership projects a different marketing and expansion program as has already been evident in 2005.
In 2004, the Predecessor did not invest in building the ACTech Panel™ brand and infrastructure. Management believes that not spending in these two categories negatively affected the growth of the Company as evidenced by the 2005 change post-acquisition.
The following Management Discussion and Analysis should be read in conjunction with the financial statements and accompanying notes included in this Form 10-QSB.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2007 TO THE THREE MONTHS ENDED JUNE 30, 2006
Results of Operations
Total revenues increased to $3,997,773 for the three months ended June 30, 2007 from $1,564,759 for the three months ended June 30, 2006. The increase resulted primarily from the Company’s acquisition of Ionian, a subsidiary of PSB, on May 16, 2007 accounting for $1,282175 of the total increase of $2,430,014. The other increases related to revenue were from ACT, a 7% increase from the prior period, and PSB with revenue for the three months ended June 30, 2007 of $1,196,756 compared to $67,776 for the prior period. The ACTech Panel™ was responsible for 9.4% of the revenue for PSB. The increases are indicative of the diversification by ACC to manufacture the proprietary ACTech Panel™ and the complementary subsidiaries building with SIPs while providing a full service construction solution.
Total revenues for the three months ended June 30, 2007, were provided as follows: ACT, $1,630,801, PSB, $1,196,756, USS, $0, and Ionian, $1,282,175. The difference between the reported revenue and the individual subsidiaries is the result of consolidating eliminations.
Cost of sales was $2,696,063 and $1,204,814, respectively for the three months ended June 30, 2007 and the three months ended June 30, 2006. As a percent of revenue, the cost of sales decreased from 77.0% to 67.4%, for the three months ended June 30, 2006 as compared to the three months ended June 30, 2007. ACT has diversified its supplier base while achieving lower raw material pricing as steel prices escalated in the marketplace while this resulted in a reduced percent of cost of revenues. PSB’s cost of sales decreased from 70.2% to 65.5% of revenue for the three months ended June 30, 2006 and 2007, respectively. The PSB cost of sales is typically at a higher percent than ACT, dependent on the sale being a higher percent of ACTech Panels™ or other related construction solutions. ACT’s cost of sales decreased from 75.5% to 64.1% for the three months ended June 30, 2006 and 2007, respectively. Ionian had a 79.2% cost of sales for the period.
The cost of sales for the three months ended June 30, 2007, by subsidiary, is as follows: ACT, $1,045,400, PSB, $783,981, USS, $0, and Ionian, $1,015,011. The difference between the reported cost of sales and the individual subsidiaries is the result of consolidating eliminations.
Gross profit was $1,301,710 and $359,945, respectively for the three months ended June 30, 2007 and the three months ended June 30, 2006. As a percent of revenue, gross profit was 23.0% and 32.6%, respectively for the three months ended June 30, 2006 and the three months ended June 30, 2007.
Total operating expenses decreased to $592,331 for the three months ended June 30, 2007 from $790,156 for the three months ended June 30, 2006. This 25.0% decrease was mainly attributable primarily to the reduction in certain professional fees ($140,480 and $168,466, respectively), marketing costs ($17,034 and $32,874, respectively) and cash procurement fees ($0 and $24,000, respectively).
The operating expenses for the three months ended June 30, 2007, were contributed as follows: ACC, $167,347, ACT, $187,427, PSB, $220,784, USS, $585, and Ionian, $16,188.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2007 TO THE SIX MONTHS ENDED JUNE 30, 2006
Results of Operations
Total revenues decreased to $5,721,713 for the six months ended June 30, 2007 from $3,614,599 for the six months ended June 30, 2006. The increase of $2,107,114 or 58.3% resulted primarily from the Company’s acquisition of Ionian, a subsidiary of PSB, on May 16, 2007. The revenue attributed by Ionian for the period was $1,282,175 or 60.8% of the increase. The remaining increase is due to PSB increasing its revenue from $164,667 to $2,016,518 for the six months ended June 30, 2006 and 2007, respectively, offset by the decrease in revenue for ACT from $3,551,972 to $2,651,492 for the six months ended June 30, 2006 and 2007, respectively. The main attributable factor for the decrease at ACT was that the manufacturing line was being restructured in the first quarter of 2007 due to the transition from a single supplier of raw materials to a diverse group of vendors to assure the Company of stability of its supply. This restructuring required the line to not be operational the full quarter even though orders from customers continued to be received. The change in the method of acquiring raw materials will result in decreased unit costs due to long-term commitments with increasing quantities coupled with the arrangements being with the actual provider of the material, not a broker. The transition required operations to be reduced at various times during the entire three months as testing was required to maintain compliance with the certifications by independent third parties as associated with the ACTech Panel™ related to the new raw materials vendors.
Cost of sales was $3,872,248 and $2,481,316, respectively for the six months ended June 30, 2007 and the six months ended June 30, 2006. As a percent of revenue, the cost of sales decreased from 68.6% to 67.7%, for the six months ended June 30, 2006 as compared to the six months ended June 30, 2007. ACT has diversified its supplier base while achieving lower raw material pricing as steel prices escalated in the marketplace while this resulted in a reduced percent of cost of revenues, the decrease was offset by the effect of the downtime as discussed due to the restructuring and modifications required by the testing of new raw materials. During the downtime, the fixed costs associated with the manufacturing process; payroll, depreciation and other applicable expenses, continued while not being offset by revenue. PSB’s cost of sales decreased from 75.5% to 66.2% of revenue for the six months ended June 30, 2006 and 2007, respectively. The PSB cost of sales is typically at a higher percent than ACT, dependent on the sale being a higher percent of ACTech Panels™ or other related construction solutions. ACT’s cost of sales decreased from 67.4% to 66.0% for the six months ended June 30, 2006 and 2007, respectively. Ionian had a 79.2% cost of sales for the period.
The cost of sales for the six months ended June 30, 2007, by subsidiary, is as follows: ACT, $1,749,918, PSB, $1,335,791, USS, $0, and Ionian, $1,015,011. The difference between the reported cost of sales and the individual subsidiaries is the result of consolidating eliminations.
Gross profit was $1,849,465 and $1,133,283, respectively for the six months ended June 30, 2007 and the six months ended June 30, 2006. As a percent of revenue, gross profit was 31.4% and 32.3%, respectively for the six months ended June 30, 2006 and the six months ended June 30, 2007. The increase in the gross profit was primarily attributable due to the decrease in raw material costs in 2007 for ACT offset by the higher cost of sales for Ionian for the six months ended June 30, 2007.
Total operating expenses decreased to $972,898 for the six months ended June 30, 2007 from $1,474,514 for the six months ended June 30, 2006. This 34.0% decrease was mainly attributable to the reduction in the cost of accounts receivable factoring fees ($127,930 and $169,901, respectively), marketing expenses ($18,426 and $79,368, respectively), cash procurement fees ($0 and $24,000, respectively), and certain professional fees ($185,298 and $326,927, respectively).
The operating expenses for the six months ended June 30, 2007, were contributed as follows: ACC, $218,443, ACT, $364,717, PSB, $371,665, USS, $1,885, and Ionian, $16,188.
Liquidity and Capital Resources
As of June 30, 2007, the Company had a working capital surplus of $1,460,152. Net income was $641,320 for the six months ended June 30, 2007. The Company generated a negative cash flow from operations of $559,956 for the six months ended June 30, 2007. The negative cash flow from operating activities for the period is primarily attributable to the Company's increase in inventories, $858,585, accounts receivables, $382,166, prepaid expenses and other current assets, $733,412 offset by the increase in accounts payable of $1,018,111.
Cash flows used in investing activities for the six months ended June 30, 2007 consisted of the acquisition of $196,181 of manufacturing equipment and computers used in operations and goodwill of $1,335,646 associated with the acquisition of Ionian.
Cash flows provided by financing activities for the six months ended June 30, 2007 was $4,228,558 primarily due to the financing completed on June 30, 2007.
The Company had a net increase in cash of $2,138,776 for the six months ended June 30, 2007 compared to $3,847 for the six months ended June 30, 2006.
On June 30, 2007, the Company completed the placement of Senior Secured Convertible Debentures with a group of private investors. The net proceeds of $4,000,000 were used to pay-off debt, pay down payables and to provide working capital to fund the Company’s marketing plan. See Note 4 - Long-Term Debt.
By adjusting its operations and development to the level of capitalization, management believes it has sufficient capital resources to meet projected cash flow needs through the next twelve months. However, if thereafter, the pricing of commodities and other raw materials increase dramatically, sales grow rapidly, and we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations, liquidity and financial condition.
The effect of inflation on the Company's revenue and operating results was not significant. The Company's operations are located in North America and there are no seasonal aspects that would have a material effect on the Company's financial condition or results of operations.
Critical Accounting Policies
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements; we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:
Revenue Recognition
Inventories
Allowance for doubtful accounts
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, the price to the customer is fixed, collectibility is reasonably assured and title and risk of ownership is passed to the customer, which is usually upon delivery. However, in limited circumstances, certain customers traditionally have requested to take title and risk of ownership prior to shipment. Revenue for these transactions is recognized only when:
(1) Title and risk of ownership have passed to the customer;
(2) The Company has obtained a written fixed purchase commitment;
(3) The customer has requested in writing the transaction be on a bill and hold basis;
(4) The customer has provided a delivery schedule;
(5) All performance obligations related to the sale have been completed;
(6) The modular unit has been processed to the customer’s specifications, accepted by the customer and made ready for shipment; and
(7)The modular unit is segregated and is not available to fill other orders.
The remittance terms for these “bill and hold” transactions are consistent with all other sales by the Company.
In the event that the Company’s arrangements with its customers include more than one product or service, the Company determines whether the individual revenue elements can be recognized separately in accordance with Financial Accounting Standards Board (FASB) Emerging Issues Task Force No. 00-21 (EITF 00-21), Revenue Arrangements with Multiple Deliverables , EITF 00-21 addresses the determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting.
Product Warranty Reserve
Currently, there are no warranties provided with the purchase of the Company’s products. The cost of replacing defective products and product returns have been immaterial and within management’s expectations. In the future, when the company deems warranty reserves are appropriate that such costs will be accrued to reflect anticipated warranty costs.
Inventories
We value our inventories, which consists of raw materials, work in progress, finished goods, at the lower of cost or market. Cost is determined on the first-in, first-out method (FIFO) and includes the cost of merchandise and freight. A periodic review of inventory quantities on hand is performed in order to determine if inventory is properly positioned at the lower of cost or market. Factors related to current inventories such as future consumer demand and trends in the Company's core business, current aging, current and anticipated wholesale discounts, and class or type of inventory is analyzed to determine estimated net realizable values. A provision is recorded to reduce the cost of inventories to the estimated net realizable values, if required. Any significant unanticipated changes in the factors noted above could have a significant impact on the value of our inventories and our reported operating results.
Allowance for Uncollectible Accounts
We are required to estimate the collectibility of our trade receivables. A considerable amount of judgment is required in assessing the realization of these receivables including the current creditworthiness of each customer and related aging of the past due balances. In order to assess the collectibility of these receivables, we perform ongoing credit evaluations of our customers' financial condition. Through these evaluations we may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. The reserve requirements are based on the best facts available to us and are reevaluated and adjusted as additional information is received. Our reserves are also based on amounts determined by using percentages applied to certain aged receivable categories. These percentages are determined by a variety of factors including, but are not limited to, current economic trends, historical payment and bad debt write-off experience. We are not able to predict changes in the financial condition of our customers and if circumstances related to our customers deteriorate, our estimates of the recoverability of our receivables could be materially affected and we may be required to record additional allowances. Alternatively, if we provided more allowances than are ultimately required, we may reverse a portion of such provisions in future periods based on our actual collection experience. As of June 30, 2007, we determined that there was no need for an additional reserve.
Employees
As of June 30, 2007 the Company had 30 employees. The Company anticipates that this number of employees will be sufficient to satisfy its production during the next six months. The Company does not currently have, nor does it expect to have, any collective bargaining agreements covering any of its employees.
Properties
The Company’s principal executive offices are located at 2910 Bush Drive, Melbourne, Florida. This leased office space is used by the Company’s executive management team as well as the administrative staff. It has a five year lease at $4,000 per month. The Company’s manufacturing facility for Alternative Construction Technologies Corporation is located 1033 Lake Street, Bolivar, Tennessee. The property consists of approximately 10 acres of real estate including a 154,000 square foot structure of usable space. The structure is utilized for the manufacturing of the ACTech Panel™. The Company owns this property. ProSteel Builders Corporation office is located at 1485 Highway 34 East, Suite A-1, Newnan, Georgia. It has entered into a three-year lease expiring June 2009 for the property at a rate of $900 per month for a 1,413 square foot office. Ionian Construction, Inc. is located at 5318 Dalton Pike, Cleveland, TN. It has a lease for a 900 square foot office for $575 per month expiring May 2008. The Company believes that the current facilities are suitable for its current needs.
We have sought to identify what we believe to be the most significant risks to our business, but we cannot predict whether, or to what extent, any of such risks may be realized nor can we guarantee that we have identified all possible risks that might arise. Investors should carefully consider all of such risk factors before making an investment decision with respect to our Common Stock.
Cautionary Factors that May Affect Future Results and Market Price of Stock
On September 26, 2006, our registration statement on Form SB-2 was declared effective by the Securities and Exchange Commission. The Registration Statement includes a detailed list of cautionary factors that may affect future results. Management believes that there have been no material changes to those factors listed, however other factors besides those listed could adversely affect us. That report can be accessed on EDGAR at www.sec.gov .
LIMITED OPERATING HISTORY; ANTICIPATED LOSSES; UNCERTAINTY OF FUTURE RESULTS.
The Company has only a limited operating history upon which an evaluation of its operations and its prospects can be based. The Company's prospects must be evaluated with a view to the risks encountered by a company in an early stage of development, particularly in light of the uncertainties relating to the new and evolving manufacturing methods with which the Company intends to operate and the acceptance of the Company's business model. The Company will be incurring costs to develop, introduce and enhance its products, to establish marketing relationships, to acquire and develop product lines that will compliment each other and to build an administrative organization. To the extent that such expenses are not subsequently followed by commensurate revenues, the Company's business, results of operations and financial condition will be materially adversely affected. There can be no assurance that the Company will be able to generate sufficient revenues from the sale of their modular buildings and related products. If cash generated by operations is insufficient to satisfy the Company's liquidity requirements, the Company may be required to sell additional equity or debt securities. The sale of additional equity or convertible debt securities would result in additional dilution to the Company's stockholders.
POTENTIAL FLUCTUATIONS IN ANNUAL OPERATING RESULTS.
The Company's annual operating results may fluctuate significantly in the future as a result of a variety of factors, most of which are outside the Company's control, including: the demand for manufactured modular buildings; seasonal trends; introduction of new government regulations and building standards; local, state and federal government procurement delays; general economic conditions, and economic conditions specific to the modular building industry. The Company's annual results may also be significantly impacted by the impact of the accounting treatment of acquisitions, financing transactions or other matters. Particularly at the Company's early stage of development, such accounting treatment can have a material impact on the results for any quarter. Due to the foregoing factors, among others, it is likely that the Company's operating results will fall below the expectations of the Company or investors in some future quarter.
LIMITED PUBLIC MARKET, POSSIBLE VOLATILITY OF SHARE PRICE.
The Company’s common stock is quoted and traded on the NASD OTC Electronic Bulletin Board under the ticker symbol ACCY. As of July 27, 2007, there were 7,028,347 shares of common stock issued and outstanding. There are 1,071,753 shares which were registered under the Company’s SB-2 filing and are currently tradable. In addition, there are 3,120,000 shares underlying warrants which have been registered of which 930,000 have been exercised. There can be no assurance that a broad based trading market for the Company’s shares will develop or, once developed, will be sustained in the future. Factors such as, but not limited to, technological innovations, new products, acquisitions or strategic alliances entered into by the Company or its competitors, failure to meet security analysts' expectations, government regulatory action, patent or proprietary rights developments, and market conditions for manufacturing stocks in general could have a material effect on the volatility of the Company's stock price.
MANAGEMENT OF GROWTH
The Company expects to experience growth in the number of employees and the scope of its operations. In particular, the Company intends to hire additional engineering, sales, marketing, and administrative personnel. Additionally, acquisitions could result in an increase in the number of employees and business activity. Such activities could result in increased responsibilities for management. The Company believes that its ability to increase its customer support capability and to attract, train, and retain qualified engineering, sales, marketing, and management personnel, will be a critical factor to its future success. In particular, the availability of qualified sales engineering and management personnel is quite limited, and competition among companies to attract and retain such personnel is intense. During strong business cycles, the Company may experience difficulty in filling its needs for qualified sales, engineering and other personnel.
The Company's future success will be highly dependent upon its ability to successfully manage the expansion of its operations. The Company's ability to manage and support its growth effectively will be substantially dependent on its ability to implement adequate improvements to financial and management controls, reporting and order entry systems, and other procedures and hire sufficient numbers of financial, accounting, administrative, and management personnel. The Company's expansion and the resulting growth in the number of its employees have resulted in increased responsibility for both existing and new management personnel. The Company is in the process of establishing and upgrading its financial accounting and procedures. There can be no assurance that the Company will be able to identify, attract, and retain experienced accounting and financial personnel. The Company's future operating results will depend on the ability of its management and other key employees to implement and improve its systems for operations, financial control, and information management, and to recruit, train, and manage its employee base. There can be no assurance that the Company will be able to achieve or manage any such growth successfully or to implement and maintain adequate financial and management controls and procedures, and any inability to do so would have a material adverse effect on the Company's business, results of operations, and financial condition.
The Company's future success depends upon its ability to address potential market opportunities while managing its expenses to match its ability to finance its operations. This need to manage its expenses will place a significant strain on the Company's management and operational resources. If the Company is unable to manage its expenses effectively, the Company's business, results of operations, and financial condition will be materially adversely affected.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements
ITEM 3. CONTROLS AND PROCEDURES
The Company’s management including the Chief Executive Officer and Chief Financial Officer, have evaluated, as of June 30, 2007, the effectiveness of the design, maintenance and operation of the Company’s disclosure controls and procedures. These officers determined that (i) the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports that it files under the Exchange Act is accurate and is recorded, processed, and summarized and reported within the time periods specified in the Commission’s rules and regulations, and (ii) that such controls and procedures are designed to ensure that information required to be disclosed by the Company in its reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its Principal Executive and Principal Financial Officers, as appropriate to allow timely decisions regarding required disclosures.
Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision making can be fully faulty and that breakdowns in internal control can occur because of human failures such as errors or mistakes or intentional circumvention of the established process. The Company’s principal executive and financial officers concluded that the Company’s disclosure controls and procedures were effective at that reasonable assurance level.
There have been no changes in internal controls or in other factors that could significantly affect these controls during the quarter ended June 30, 2007 or subsequent to the date of the evaluation thereof, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
On October 2, 2006, the Company was named in a lawsuit captioned New Millennium Enterprises, LLC and Phoenixsurf.com, LLC v. Michael W. Hawkins, et. al. U.S. District Court, Middle District of Georgia, 3: 06-CV-84 (CDC). The lawsuit alleges violations of the Georgia Securities Act, Georgia Fair Business Practices Act, Federal Securities laws and certain other unspecified laws in connection with the investment by Plaintiffs of $500,000 in ACC and seeks rescission of this investment. Plaintiffs amended their complaint on April 11, 2007. The Company filed an answer to the amended complaint denying all essential allegations of the complaint and asserting affirmative defenses showing why the plaintiffs are not entitled to the relief sought. In addition, the Company filed Counterclaims against the Plaintiffs and Third Party claims against individual officers and directors of Plaintiff, alleging a malicious interference with the Company’s business and business relations, conspiracy to interfere with our business, libel and slander, and violation of rights under Title IX of the Organized Crime Control Act of 1970 as amended. The Parties are to establish a consolidated plan of discovery by July 31, 2007. The Company believes it has meritorious defenses to the claims and intends to vigorously defend this lawsuit and to pursue its counterclaims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits
| No. | | Description |
| 31.1 | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
Alternative Construction Company, Inc.
| Date: November 16, 2007 | | | |
| By: | /s/ Michael W. Hawkins
Chief Executive Officer(Principal Executive Officer) | | | |
| Date: November 16, 2007 | | | |
| By: | /s/ Bruce Harmon
Interim Chief Financial Officer (Principal
Accounting and Financial Officer) | | | |
