UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON
,
D.C.
20549
FORM
10-KSB
x
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended September 30, 2008.
OR
o
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Commission
file number: 000-23819
GREEN
BUILDERS, INC.
(Exact
Name of Small Business Issuer as Specified in Its Charter)
|
Texas
|
|
76-0547762
|
|
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
(I.R.S
Employer Identification No.)
|
|
|
|
|
|
|
|
8121
Bee Caves Rd., Austin, TX
|
|
78746
|
|
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
|
|
512-732-0932
|
|
(Issuer’s
Telephone Number)
|
Securities
registered pursuant to Section 12(b) of the Act:
|
Title of Each Class
|
Name of Each Exchange on Which
Registered
|
|
Common
Stock, par value $0.001 per share
|
NYSE
Alternext
|
Securities
registered pursuant to Section 12(g) of the Act:
None
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act.
¨
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.
x
Yes No
¨
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-K.
¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
¨
Yes
x
No
State
issuers revenues for its most recent fiscal year. $8,993,205
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based upon the closing sale price of its
common stock on December 22, 2008 was approximately
$1,483,672
(affiliates
being, for these purposes only, directors, executive officers and holders of
more than 10% of the registrant’s common stock).
As of
December 22, 2008 the registrant had 23,135,539 outstanding shares of common
stock.
TABLE
OF C
ONT
ENTS
|
|
|
2
|
|
|
|
14
|
|
|
|
14
|
|
|
|
14
|
|
|
|
15
|
|
|
|
16
|
|
|
|
24
|
|
|
|
24
|
|
|
|
24
|
|
|
|
24
|
|
|
|
25
|
|
|
|
25
|
|
|
|
25
|
|
|
|
25
|
|
|
|
25
|
|
|
|
25
|
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-KSB for Green Builders, Inc. (“we,” “us,” or the
“Company”) contains forward-looking statements. You can identify
these statements by forward-looking words such as “may,” “will,” “expect,”
“intend,” “anticipate,” “believe,” “estimate,” and “continue” or similar
words. Forward-looking statements include information concerning
possible or assumed future business success or financial results. You
should read statements that contain these words carefully because they discuss
future expectations and plans, which contain projections of future results of
operations or financial conditions or state other forward-looking information.
We believe that it is important to communicate future expectations to investors.
However, there may be events in the future that we are not able to accurately
predict or control. Accordingly, we do not undertake any obligation to
update any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future.
By their
very nature, forward-looking statements involve inherent risks and
uncertainties, both general and specific, and risks that outcomes implied by
forward-looking statements will not be achieved. We caution readers not to place
undue reliance on these statements as a number of important factors could cause
the actual results to differ materially from the beliefs, plans, objectives,
expectations and anticipations, estimates and intentions expressed in such
forward-looking statements.
Copies of
our public filings are available at
www.greenbuildersinc.com
and
on EDGAR at www.sec.gov.
Whenever
we refer in this filing to “Green Builders,” “the Company,” “we,” “us,” or
“our,” we mean Green Builders, Inc., a Texas corporation, and, unless the
context indicates otherwise, its predecessors and subsidiaries, including its
wholly owned subsidiaries, Wilson Family Communities, Inc., a Delaware
corporation
(“WFC”), GB Operations,
Inc., a Texas corporation (“Green Builders”) and its predecessor company, Athena
Equity Partners (“Athena”). All references in this report to “$” or
“dollars” are to United States of America currency. References to
“fiscal 2008” means our fiscal year ended September 30, 2008 and references to
“fiscal 2009” means our fiscal year ending September 30, 2009.
P
AR
T I
Item
1. De
scrip
tion of Business
Overview
Green
Builders, Inc. is a real estate development and homebuilding
company. We commenced our homebuilding operations in June 2007 with
the purchase of Green Builders, Inc. We are currently building energy
efficient homes in Austin, Texas. We make it a priority to fully
embrace sustainable building practices and to use earth-friendly products and
materials whenever possible.
Effective
October 11, 2005 pursuant to an Agreement and Plan of Reorganization dated
as of September 2, 2005 by and among Green Builders, Inc., a Delaware
corporation, a majority of its stockholders, Wilson Family Communities, Inc., a
Delaware corporation (“WFC”) and Wilson Acquisition Corp., a Delaware
corporation and our wholly-owned subsidiary, WFC and Wilson Acquisition Corp.
merged and WFC became our wholly-owned subsidiary.
Our
financial statements are presented on a going concern basis. We have
experienced significant losses for the fiscal year ended September 30, 2008, and
continue to generate negative cash flows from operations. This raises
substantial doubt about our ability to continue as a going
concern. Our ability to continue as a going concern will depend upon
our ability to restructure our existing debt. Failure to restructure would
result in a depletion of our available funds.
Industry
Overview
The real
estate industry continued to deteriorate during fiscal 2008 as consumer
confidence declined, the availability of home mortgage credit tightened
significantly, the lines of credit available for businesses decreased, and the
economy continued to slow down. In addition, the supply of new and
resale homes in the marketplace remained excessive for the levels of consumer
demand. We believe that the homebuilding and land development market
will continue to be challenging throughout fiscal 2009.
The real
estate industry is fragmented and highly competitive. We compete with
numerous developers, builders and others for the acquisition of property and
with local, regional and national developers, homebuilders and others with
respect to the sale of residential lots. Additionally we compete with
local, regional and national homebuilders in the sale of new homes, and with
homebuilders and developers for raw materials, skilled labor, and to obtain
financing on commercially reasonable terms. Most of our competitors
have substantially greater financial resources than we do, as well as much
larger staffs.
Strategy
Our
business has been significantly impacted by the continued deterioration of the
real estate industry. We believe that real estate market conditions
will continue to be challenging and may deteriorate further in fiscal
2009. During this downtown our current strategy will be to strengthen
our financial condition and balance sheet by reducing debt where
possible. We are also working to reduce our costs where possible
through reductions in labor force, homebuilding direct costs, general and
administrative and sales and marketing costs. Our business strategy
is currently focused on the below segments:
|
·
|
Homebuilding
and related services;
|
|
·
|
Land
acquisition, development and related services;
and
|
Homebuilding
and Related Services
Our
strategy is to build affordable, sustainable homes that deliver significant
energy and cost savings in home maintenance and operation. Green building
today is most often thought of in terms of products and
technology. True green building demands an integrated approach to the
entire business from land planning and plan design to administration procedures
and field processes. We have been nationally recognized and won awards
including the 2008 NAHB Green Builder Award Winner for Single Family Affordable
Home of the Year and the 2008 Texas Association of Builder’s Star Award for
Green Builder Advocate of the Year. We start the homebuilding process
by implementing green practices and products that are both affordable, and work
together as a system to deliver a sustainable value for the
customer. In our homebuilding activities, we follow earth-friendly
and efficient processes such as:
|
·
|
considering
employees’ attitude and awareness of efficiency in their work space,
processes and daily routines;
|
|
·
|
day
to day operations are conducted by fully integrated systems that include
wireless field communications including real time scheduling updates,
auto-pay approval and variance purchase order
request;
|
|
·
|
system
set up to do centralized purchasing, estimating and accounting if
operations are expanded into additional
markets;
|
|
·
|
partnering
with vendors and trades in the field to eliminate waste, and create
earth-friendly processes and procedures for job sites that are efficient
and mutually beneficial;
|
|
·
|
incorporating
sustainable building practices and energy-saving systems that respond to
the demands of a particular environment in a specific
region;
|
|
·
|
emphasizing
job-site awareness, supervision and communication pursuing earth-friendly
procedures;
|
|
·
|
exploring
earth-friendly options for consumer choice, efficient applications and
implementations;
|
|
·
|
emphasizing
lot and site considerations, home orientations, sustainable lot
improvements, low-maintenance landscaping and energy, water, green
materials and methods;
|
|
·
|
verifying
our homes using third party certifications that includes Energy Star model
green home building; and
|
|
·
|
using
environmentally-friendly products.
|
Land
Acquisition and Development
Historically
our plan for land development was to secure land based on our understanding of
population growth patterns and infrastructure development. Due to the
current deterioration of the real estate industry and economy we are focusing on
improving our balance sheet and leverage by reducing land positions where
possible. We are in active negotiations to dispose of some of our
current assets, including but not limited to deed in lieu of foreclosure of some
land positions.
Our
anticipated land sales will include sections of lots that are ready for
immediate home construction with all infrastructures in place, as well as
sections of lots that have all necessary approvals to begin construction but
have yet to be physically improved.
While we
anticipate that the majority of our revenues will come from sales to national
and regional homebuilders, we also expect additional revenues from the sale of
lots and homebuilding services to smaller, local builders.
In tandem
with our land acquisition efforts and based upon our strategic market analysis,
we plan to subcontract for the preparation of land for development. We seek to
add value to the land through the process of development, which may include
permitting and constructing water and wastewater infrastructure, master-planning
of the community, and the construction of roads and community amenities. We also
plan to sell entitled land to others for development. Entitled land is land
subject to development agreements, tentative maps or recorded plats, depending
on the jurisdiction within which the land is located.
Green
Remodeling
In
November 2008 we expanded our services to include the “green” remodeling of
existing homes. We have taken a comprehensive approach to engaging in
the green remodeling business and offer customers a “one-stop” process for
updating their existing home with a focus on energy efficiency. Our green
remodeling program currently caters to existing homeowners in the Austin, Texas
area who want to reduce home energy demands and utility bills, lessen home
maintenance costs and increase the comfort of their home. According
to McGraw Hill, the green remodeling marketplace is projected to grow to $200
billion in the next two years. Initially we anticipate that a
substantial portion of our construction work will be performed by
subcontractors. By subcontracting out the work, there is limited
additional capital required to enter this business line. We also feel
that entering into remodeling will help us supplement revenue during this
slowdown in the real estate industry. To date we have received
numerous energy audit requests and are reviewing the results and discussing the
next steps with our customers. We have not received any revenues from
remodeling operations and we expect to see initial revenues from remodeling
operations in fiscal 2009.
Current
Market and Current Properties
Our
current activities are in the geographical central Texas area, which we define
as encompassing the Austin Metropolitan Statistical Area. This
geographic concentration makes our operations more vulnerable to local economic
downturns than those of larger, more diversified companies.
Details
of the properties we own or have options to purchase are set forth
below:
|
Name
of Project
|
Date
Purchased/
Optioned
|
Location
|
Finished
Lots
|
Approximate
Undeveloped
Acreage
|
Approximate
Acreage
Under
Option
|
|
Rutherford
West
|
June
30, 2005
|
Northern
Hays County, Texas, Hays Independent School
District
|
39
|
538
|
-
|
|
Georgetown Village
|
August
22, 2005
|
The
City of Georgetown, Texas, Georgetown Independent School
District
|
126
|
119
|
419
|
|
Villages
of New Sweden
|
October
18, 2005
|
Eastern
Travis County, Texas, Pflugerville Independent School
District
|
-
|
522
|
-
|
|
Elm
Grove
|
December
15, 2005
|
The
City of Buda, Texas, Hays Independent School
District
|
72
|
30
|
30
|
Rutherford West
– Rutherford
West is a residential community located southwest of Austin. Rutherford West is
planned as an “earth-friendly” acreage development and each lot includes a deed
restricted conservation easement. We commenced the development of
this project in October 2006. We have completed development on a
total of 58 lots in Phase 1. We currently have 39 lots remaining in
Phase 1. The developed finished lots are financed through a lot
development loan as part of our $30 million line of credit. We own
538 acres of undeveloped land. This land is financed through a land
loan. The loan is secured by the land and is guaranteed by Green
Builders. In September 2008 we stopped making interest payment for
this loan. We are currently in negotiations to dispose of the assets
including but not limited to deed in lieu of foreclosure of these
assets.
Georgetown
Village
–
Georgetown Village
is a mixed use master-planned development in Williamson County, located
north of Austin, Texas in Georgetown. We purchased the land for this
project
pursuant to
an option contract in August 2005. Under the option contract we are
required to purchase a minimum of 30 acres per year through 2017. We
own approximately 119 acres of undeveloped land as of September 30,
2008. We commenced the development of this project in January
2006. We have completed development on a total of 120 lots in Section
6 and 100 lots in Section 9. We have 126 lots remaining in Section 6
and Section 9. Both Section 6 and Section 9 developed lots are
financed through a lot development loan as part of our $30 million line of
credit. In addition the undeveloped land is financed through our
existing $30 million line of credit.
Villages of New Sweden
–
New Sweden is a master
planned, mixed-use community which includes single family residential homes,
commercial properties, an onsite school, an amenity center, a fire station, and
an open green space in the Pflugerville, Texas school district. We
purchased the land for this project in October 2005 with a combination of bank
financing, seller financing and cash on hand. The property is pledged
as collateral for a $4.7 million land loan and seller-financed notes
totaling $2.5 million. The $4.7 million land loan is guaranteed by Green
Builders. The interest rate on the land loan is 12.5% with interest
payable monthly. The interest payments on the seller-financed notes
are fixed at 7% for approximately $1.9 million of the notes and at the higher of
7% or prime plus 2% for the remaining $600 thousand. In September
2008 we stopped making interest payments for this project. We
are currently in negotiations to dispose of the assets including but not limited
to deed in lieu of foreclosure of these assets.
Elm Grove
– Elm Grove is a
residential project located south of Austin, Texas in the city of
Buda. The master plan includes single-family residential and open
green space all within walking distance to Elm Grove elementary
school. We acquired the first phase of land for this project in
December 2006 with a combination of bank financing and cash on
hand. Development of this project commenced May 2007. We
have completed development on a total of 105 lots in Phase 1. We have
72 lots remaining in Phase 1. The developed finished lots are
financed through a lot development loan as part of our $30 million line of
credit. We own 30 acres of undeveloped land. In addition
the undeveloped land is financed through our existing $30 million line of
credit.
Water
District Receivables
A Water
Control and Improvement District or a Municipal Utility District No. 1
(collectively a “District”), is a political subdivision of the State of Texas,
subject to the oversight of the Texas Environmental Quality Commission, or
TCEQ.
Districts,
by definition, may in engage in some, or all, of the following: residential and
commercial supply of water and wastewater services, solid waste disposal,
wastewater treatment, conservation, irrigation, drainage, fire fighting,
emergency services, and recreational facilities. Texas law gives a District the
power to incur debt, levy taxes, charge for specific services, and adopt rules
for those services, enter into contracts, obtain easements, and condemn
property.
Typically,
Districts are formed by real estate developers in areas where the provision of
utility services will not otherwise be furnished by another public or private
entity (e.g., an area outside the geographic confines of a city or village, or a
rural area). Funding for a District’s initial creation and operating costs and
for its infrastructure (e.g. pipelines, water storage plants, and treatments
facilities or payments for capacity in such facilities under wholesale supply
agreements with third parties) usually comes from the developer because the
District has no funds available for these purposes when it is first
created. In certain Districts (as further discussed below), a
developer may also fund, and receive payment from the District for, costs of
land set aside for endangered species protection. Once a critical
mass of taxable property (usually residential houses) is constructed in a
District, the District is able to provide its own financing for operating costs;
however, the developer often continues to provide funding for infrastructure
through the period of full build-out of the District.
Any
creation, operating and infrastructure costs of a District paid by the developer
are repaid by the District from time to time pursuant to a reimbursement
agreement whereby the District issues its bonds payable from ad valorem taxes on
property in the District and uses the bond proceeds to repay the developer’s
costs for these District items. Issuance of the District’s bonds is
subject to prior review and approval by the TCEQ and the Texas Attorney
General’s office.
The time
period for issuance of a District’s bonds (which are issued in installments over
a period of many years usually continuing through the period of full build out
of the District) and the consequent recovery period of the developer’s costs for
a District can be over either a long or short period of time. Residential
developments that grow more slowly will, accordingly, result in a more extended
period of time for the recovery of the District’s initial creation and operating
costs. And, since the full recovery of all the developer’s costs for
infrastructure during the full build out of the District goes on for the life of
the subdivision development, the pace at which the District issues its bond
installments from time to time (and the corresponding recovery of the
developer’s costs incurred for infrastructure from time to time during the build
out period) is closely related to the pace at which houses (and corresponding
taxable property value) are added in the District.
A
District typically charges its customers for the following
services:
|
·
|
an
initial tap fee ranging from approximately $600 to $2,000 to cover the
cost of installing the water and sewer
tap;
|
|
·
|
an
annual ad valorem tax to recover its annual operating costs and to pay
debt service on any District bonds which have been issued;
and
|
|
·
|
monthly
fees for water and wastewater services, based primarily on a consumption
model.
|
The costs
for these services are determined by the District. These tap fee and
monthly service costs are in addition to the developer-funded creation,
operating and infrastructure costs described above.
District
operations are usually geographically limited to the lands within the District
which pay District ad valorem property taxes. If a nearby area lacks any utility
service, a District could annex that area or otherwise provide service to it
subject to reaching an equitable agreement with the owner of the land to be
annexed or otherwise served and meeting certain state law requirements. However,
Districts rarely agree to expand their services unless the original developer is
agreeable and the owner of the annexed land is willing to enter into a
reimbursement agreement similar to the one the original developer signed with
the District.
We
currently have the community of Villages of New Sweden planned that is within
the boundaries of New Sweden Municipal Utility District No. 1 and the community
of Rutherford West planned in Greenhawe Water Control and Improvement District
No. 2. We incur development costs for the initial creation and operating costs
of these Districts and continuing costs for the water, sewer and drainage
infrastructure for these Districts. Also, in the case of Greenhawe Water Control
and Improvement District No. 2, we have paid for property set aside by us for
the preservation of endangered species and that District will reimburse those
costs from future District bond sales, too. Under reimbursement agreements with
each of these Districts, we expect to be reimbursed partially for the
above-described developments costs. The Districts will issue bonds from time to
time, in installments, to repay us as there is sufficient assessed value of
property in each District to enable it to issue bonds to raise funds to repay us
while maintaining a reasonable tax rate so as not to impair continued
development within the District. As homes are constructed within the District,
the assessed value increases. It can take several years before there is enough
assessed value to recapture the costs. At this time, we estimate that we will
recover approximately 50 to 100% of eligible initial creation and operating
costs spent through September 2008 at such time as each District issues its
first bond issue. Usually a District issues its first bond issue only after
completion of construction of approximately 200 houses. We have
completed Phase 1 for the Rutherford West project and have approximately $1.1
million of Water Control and Improvement District reimbursements included in
inventory that we anticipate we will collect from bond issuances made by the
district. When the reimbursements are received they will be
recorded as reductions in the related asset’s balance. To the extent that the
estimates are dramatically different from the actual facts, it could have a
material effect on the financial statements.
Regulation
The
residential homebuilding and land development industries are also subject to a
variety of local, state and federal statutes, ordinances, rules and regulations
concerning the protection of health and the environment. These environmental
laws include such areas as storm water and surface water management, soil,
groundwater and wetlands protection, subsurface conditions and air quality
protection and enhancement. Environmental laws and existing conditions may
result in delays, may cause us to incur substantial compliance and other costs
and may prohibit or severely restrict homebuilding activity in environmentally
sensitive regions or areas.
We must
obtain the approval of numerous governmental authorities that regulate such
matters as land use and level of density, the installation of utility services,
such as water and waste disposal, and the dedication of acreage for open space,
parks, schools and other community purposes. If these authorities determine that
existing utility services will not adequately support proposed development,
building moratoria may be imposed. As a result, we use substantial resources to
evaluate the impact of government restrictions imposed upon new residential
development. Furthermore, as local circumstances or applicable laws change, we
may be required to obtain additional approvals or modifications of approvals
previously obtained or we may be forced to stop work. These increasing
regulations may result in a significant increase in resources between our
initial acquisition of land and the commencement and the completion of
developments. In addition, the extent to which we participate in land
development activities subjects us to greater exposure to regulatory
risks.
Employees
On
September 30, 2008, we had 18 full time employees. None of our employees are
represented by a labor union and we consider our relations with our employees to
be good.
Company
History
We are a
Texas corporation formerly known as Wilson Holdings, Inc, a Nevada
corporation. Effective April 4, 2008, we completed our
reincorporation pursuant to the Plan of Conversion as approved by our
shareholders at our 2008 annual meeting. As part of the
reincorporation, a new Certificate of Formation was adopted and our corporate
name was changed to Green Builders, Inc., and the Certificate of Formation will
now govern the rights of holders of our common stock. We have been
using the name “Green Builders” in our regular business operations since June
2007 and will continue to do so. Effective April 8, 2008, our common
stock began trading under the symbol “GBH” on the NYSE Alternext, formerly the
American Stock Exchange.
Effective
October 11, 2005 pursuant to an Agreement and Plan of Reorganization dated
as of September 2, 2005 by and among Green Builders, Inc., a Delaware
corporation, a majority of its stockholders, Wilson Family Communities, Inc., a
Delaware corporation (“WFC”) and Wilson Acquisition Corp., a Delaware
corporation and our wholly-owned subsidiary, WFC and Wilson Acquisition Corp.
merged and WFC became our wholly-owned subsidiary.
RISK
FACTORS
Set forth
below and elsewhere in this Report and in other documents we file with the
Securities and Exchange Commission are risks and uncertainties that could cause
actual results to differ materially from the results contemplated by the forward
looking statements contained in this Report. Prospective and existing
investors are strongly urged to carefully consider the various cautionary
statements and risks set forth in this Report and our other public
filings.
Risks
Related to Our Business
Our
ability to sustain operations is dependent upon our ability to obtain additional
capital.
Our
independent registered public accounting firm has issued its report, which
includes an explanatory paragraph for a going concern uncertainty on our
financial statements as of September 30, 2008. Our ability to continue as a
going concern is heavily dependent upon our ability to restructure our existing
debt agreements and obtain additional capital to sustain operations.
Currently, we have no commitments to obtain additional capital, and there can be
no assurance that financing will be available in amounts or on terms acceptable
to us, if at all.
If we are
unsuccessful in obtaining adequate loans or raise additional capital, this could
require us to abandon some of our development activities, including the
development of subdivisions and entitling of land for development; forfeit
option fees and deposits; default on loans; violate covenants with our current
lenders and convertible note holders thereby putting us in default; and possibly
be forced to liquidate a substantial portion of our asset holdings at
unfavorable prices.
Our
current operating business has a limited operating history and
revenues
In
October 2005, we acquired Wilson Family Communities, Inc. which has a limited
operating history. In addition, we commenced our homebuilding
operations in June 2007. While members of our management team have
extensive experience in real estate development and homebuilding, our company
has a limited operating history and there is no assurance that we will be
successful. Accordingly, our business is subject to substantial risks
inherent in the commencement of a new business enterprise in an intensely
competitive industry. Through September 30, 2008, our company has
incurred cumulative net losses of approximately $28
million.
There can
be no assurance that we will be able to successfully acquire, develop and/or
market land, build homes, generate revenues, or ever operate on a profitable
basis. Any investment in our company should be considered a high-risk investment
because the investor will be placing funds at risk in a company with unknown
costs, expenses, competition, and other problems to which new ventures are often
subject. Investors should not invest in our company unless they can afford to
lose their entire investment.
We
are operating under a line of credit with our lenders that has expired pursuant
to its terms. In addition, we are not in compliance with certain
covenants under the line of credit and were required to obtain a waiver of such
non-compliance that has also expired. In the event that we are not
able to regain compliance with the covenant or the lender declines to waive
our non-compliance in the future, we may be required to repay amounts owed under
the line of credit and additional amounts owed under our securities purchase
agreements, which could harm our business.
Our line
of credit agreement has expired and we are negotiating a new line of credit with
certain lenders under the existing line of credit but there can be no assurance
that these negotiations will be successful. In addition, one of the
lenders under our existing line of credit was closed by the Texas Department of
Savings and Mortgage Lending and the FDIC
was named Receiver
therefore we do not know if we will be able to draw on our existing line from
this lender or be forced to accelerate payment of our existing indebtedness to
this lender. We are out of compliance with certain covenants under
the terms of the line of credit. We are seeking to obtain a waiver
for the non-compliance of the covenants. If we are unable to obtain a
waiver for the non-compliance, we could be precluded from incurring additional
borrowings and our obligation to repay indebtedness outstanding under the
facility could be accelerated in full. We may not have or may not be able to
obtain sufficient funds to satisfy all repayment obligations. If we are unable
to repay these obligations our business would suffer.
Our
non-compliance with the terms of the line of credit could trigger cross-defaults
under our Securities Purchase Agreements. In December 2005 and
September 2006, we entered into Securities Purchase Agreements with certain
investors for the sale of Convertible Promissory Notes. Pursuant
to the cross-default provisions of the Securities Purchase Agreements, a default
under our Credit Facility triggers defaults under the Securities Purchase
Agreements. In the event that our non-compliance with the Credit
Facility continues, the holders of a majority of the Notes issued under the
Securities Purchase Agreement could elect to demand the acceleration of all
amounts owed under these Notes. We do not have the cash available to
repay these amounts or the amounts owed under the Credit Facility. We
have discussed our non-compliance with certain investors under the Securities
Purchase Agreements but these Note holders have not
initiated the process under the Securities Purchase Agreements that would allow
them to accelerate our obligations under the Securities Purchase Agreements or
take any other remedial action. We intend to negotiate with all
investors under our Securities Purchase Agreements to reach a mutually
satisfactory resolution and we intend to cooperate with the Credit Facility
lenders to regain compliance with the terms of the credit facility and negotiate
a new credit facility. If we are unable to negotiate successfully
with the Securities Purchase Agreement investors and/or are unable to regain
compliance with the terms of the credit facility or enter into a replacement
facility, all amounts due under the Securities Purchase Agreements may be
accelerated. We would be unable to pay such amounts and our business
would suffer.
We
have incurred a significant amount of debt but will require additional
substantial capital to continue to pursue our operating strategy.
We had
approximately $3.7 million in cash and cash equivalents at September 30,
2008. We have $30.2 million in borrowings as of September 30,
2008. Approximately $16.4 million of this amount was borrowed at
interest rates of prime plus 0.50% to 2.00% that adjust in relation to the prime
rate. If the prime rate were to significantly increase, we will be required to
pay additional amounts in interest under these notes and line of credit and our
financial results could suffer.
We have
also issued and sold an aggregate of $16.5 million in principal amount of
convertible promissory notes since December 2005. These notes bear interest at a
fixed rate of 5.0% per annum, with the principal amount of such notes
convertible into shares of our common stock at the rate of one share per $2.00
of principal, which conversion rate is subject to proportionate adjustment for
stock splits, stock dividends and recapitalizations as well as an anti-dilution
adjustment which will apply if we sell shares of our common stock in the future
at a price per share of less than $2.00, provided that such conversion rate may
not be reduced below a rate of one share of common stock for each $1.00 of note
principal.
Our
growth plans will require substantial amounts of cash for earnest money
deposits, land purchases, development costs and interest payments, and
homebuilding costs. Until we begin to sell an adequate number of lots and homes
to cover our monthly operating expenses, costs associated with our sales,
marketing and general and administrative activities will deplete cash. Our
articles of incorporation contain no limits on the amount of indebtedness we may
incur.
Land and
homes under construction comprise the majority of our assets. These assets
have suffered devaluation due to the downturn in the housing and real
estate market. Our debt might then be called, requiring liquidation of assets to
satisfy our debt obligations or the use of our cash. A significant downturn has
also made it more difficult for us to liquidate assets, to raise cash and to pay
off debts, which could have a material adverse effect.
Demand
for new homes is sensitive to economic conditions over which we have no
control.
Demand
for homes is sensitive to changes in economic conditions such as the level of
employment, consumer confidence, consumer income, the availability of financing
and interest rate levels. Although the market has experienced some increase in
mortgage interest rates over the past year, mortgage interest rates remain lower
than their historical averages. If mortgage interest rates increase or if any of
these other economic factors adversely change nationally, or in the market in
which we operate, the ability or willingness of prospective buyers to purchase
new homes could be adversely affected.
Our
results of operations and financial condition are greatly affected by the
performance of the real estate industry.
Our real
estate activities are subject to numerous factors beyond our control, including
local real estate market conditions, substantial existing and potential
competition, general national, regional and local economic conditions,
fluctuations in interest rates and mortgage availability and changes in
demographic and environmental conditions. Real estate markets have historically
been subject to strong periodic cycles driven by numerous factors beyond the
control of market participants.
Real
estate investments often cannot easily be converted into cash and market values
may be adversely affected by these economic circumstances, market fundamentals,
competition and demographic conditions. Because of the effect these factors have
on real estate values, it is difficult to predict with certainty the level of
future sales or sales prices that will be realized for individual
assets.
Our real
estate operations are also dependent upon the availability and cost of mortgage
financing for potential customers, to the extent they finance their purchases,
and for buyers of the potential customers’ existing residences.
Increasing
interest rates could cause defaults for homebuyers who financed homes using
non-traditional financing products, which could increase the number of homes
available for resale.
During
the recent time of high demand in the homebuilding industry, many homebuyers
financed their purchases using non-traditional adjustable rate or interest only
mortgages or other mortgages, including sub-prime mortgages that involve
significantly lower initial monthly payments. As a result, new homes have been
more affordable in recent years. However, as monthly payments for these homes
increase either as a result of increasing adjustable interest rates or as a
result of principal payments coming due, some of these homebuyers have defaulted
on their payments and have had their homes foreclosed, which has increased
the inventory of homes available for resale. In addition, if lenders perceive
deterioration in credit quality among homebuyers, lenders may eliminate some of
the available non-traditional financing products or increase the qualifications
needed for mortgages or adjust their terms to address any increased credit risk.
In general, if mortgage rates increase or lenders make it more difficult for
prospective buyers to finance home purchases, it could become more difficult or
costly for customers to purchase our homes, which would have an adverse affect
on our sales volume.
Inflation
can adversely affect us, particularly in a period of declining home sale
prices.
Inflation
can have a long-term impact on us because increasing costs of land, materials
and labor may require us to attempt to increase the sale prices of homes in
order to maintain satisfactory margins.
We
face significant competition in our efforts to sell homes.
The
homebuilding industry is highly competitive. We compete with numerous national,
regional and local homebuilders. This competition with other homebuilders could
reduce the number of homes we deliver, or cause us to accept reduced margins in
order to maintain sales volume. Many of our competitors have greater
financial resources and are less leveraged than us, which may position them to
compete more effectively on price. We also compete with the resale of
existing homes, including foreclosed homes, sales by housing speculators and
available rental housing.
We
have incurred a significant amount of debt and our ability to repay this debt
could be significantly impacted by the market for new hones.
We have
incurred significant amounts of debt to finance the purchase of land for
development and to fund our operations. Land and homes under
construction comprise the majority of our assets and these assets are less
valuable due to the downturn in the housing and real estate
market. In addition, due to this downturn the rate at which we have
sold new homes has been significantly slower than we have
anticipated. The interest and principal repayment obligations of our
capital structure have required us to try to renegotiate our existing agreements
with certain of our lenders. If we are unable to renegotiate these
agreements and if the weakness in housing and real estate market continues, we
may be unable to repay our debt obligations on time or at all.
We
may seek additional credit lines to finance land purchases and development
costs.
Through
September 30, 2008, we have closed on four major land development projects. The
majority of our expenditures in the past have been for inventory, consisting of
land, land development and land options. To secure additional inventory, we will
be required to put up earnest money deposits, make cash down payments, and
acquire acreage tracts and pay for certain land development activities costing
several million dollars. This amount includes the development of land, including
costs for the installation of water, sewage, streets and common areas. In the
normal course of business, we enter into various land purchase option agreements
that require earnest money deposits.
Should
our financing efforts be insufficient to execute our business plan, we may be
required to seek additional sources of capital, which may include partnering
with one or more established operating companies that are interested in our
emerging business or entering into joint venture arrangements for the
development of certain of our properties. However, if we were required to resort
to partnering or joint venture relationships as a means to raise needed capital
or reduce our cost burden, we likely will be required to cede some control over
our activities and negotiate our business plan with our business or joint
venture partners.
We
are vulnerable to concentration risks because our initial operations have been
limited to the central Texas area and we have focused on the residential rather
than commercial market.
Our real
estate activities have to date been conducted almost entirely in the central
Texas region, which we define as encompassing the Austin Metropolitan
Statistical Area. This geographic concentration, combined with a limited number
of projects that we plan to pursue, make our operations more vulnerable to local
economic downturns and adverse project-specific risks than those of larger, more
diversified companies.
The
performance of the central Texas economy will affect our sales and,
consequently, the underlying values of our properties. For example, the economy
in the Austin MSA is heavily influenced by conditions in the technology
industries. During periods of weakness or instability in technology industries,
we may experience reduced sales, particularly with respect to “high-end”
properties, which can significantly affect our financial condition and results
of operations.
In
addition, we have focused our development efforts on residential rather than
commercial properties. Economic shifts affect residential and commercial
property markets, and thus our business, in different ways. A developer with
diversified projects in both sectors may be better able to survive a downturn in
the residential market if the commercial market remains strong. Our focus on the
residential sector can make us more vulnerable than a diversified
developer.
Fluctuations
in market conditions may affect our ability to sell our land at expected prices,
if at all, which could adversely affect our revenues, earnings and cash
flows.
We are
subject to the potential for significant fluctuations in the market value of our
land inventories. Our land and homes under development represent our
primary assets. There is a lag between the time we acquire control of
undeveloped land and the time that we can improve that land for sale to home
builders or begin building homes. This lag time varies from site to site as it
is impossible to determine in advance the length of time it will take to obtain
government approvals and permits. The risk of owning undeveloped land can be
substantial as the market value of undeveloped land can fluctuate significantly
as a result of changing economic and market conditions. Inventory carrying costs
can be significant and can result in losses in a poorly performing development
or market. Material write-downs of the estimated value of our land inventories
could occur if market conditions deteriorate or if we purchase land at higher
prices during stronger economic periods and the value of those land inventories
subsequently declines during weaker economic periods. We could also be forced to
sell land or lots for prices that generate lower profit than we anticipate, and
may not be able to dispose of an investment in a timely manner when we find
dispositions advantageous or necessary.
Homebuilding
is subject to warranty and liability claims in the ordinary course of business
that can be significant.
As a
homebuilder, we are subject to home warranty and construction defect claims
arising in the ordinary course of business. We are also subject to liability
claims arising in the course of construction activities. We record warranty and
other reserves for the homes we sell based on historical experience in our
markets and our judgment of the qualitative risks associated with the types of
homes built. We have, and many of our subcontractors have, general liability,
property, errors and omissions, workers compensation and other business
insurance. These insurance policies protect us against a portion of our risk of
loss from claims, subject to certain self-insured retentions, deductibles and
other coverage limits. However, because of the uncertainties inherent in these
matters, we cannot provide assurance that our insurance coverage or our
subcontractor arrangements will be adequate to address all warranty,
construction defect and liability claims in the future. Additionally, the
coverage offered by and the availability of general liability insurance for
construction defects are currently limited and costly. There can be no assurance
that coverage will not be further restricted and become even more
costly.
We
may be subject to risks as a result of our entry into joint
ventures.
We have
made the decision to be very selective in our immediate growth plans and we may
need to seek joint venture partners for both future and existing land
transactions. While joint ventures by their very nature tend to have a lower
pure dollar margin they also transfer risk to the joint venture entity thus
helping preserve the viability of our company. However, to the extent that we
undertake joint ventures to develop properties or conduct our business, we may
be liable for all obligations incurred by the joint venture, even though such
obligations may not have been incurred by us, and our share of the potential
profits from such joint venture may not be commensurate with our liability.
Moreover, we will be exposed to greater risks in joint ventures should our
co-ventures’ financial condition become impaired during the term of the joint
venture, as creditors will increasingly look to our company to support the
operations and fund the obligations of the joint venture.
Our
operations are subject to weather-related risks.
Our land
development operations and the demand for our homebuilder services may be
adversely affected from time to time by weather conditions that damage property.
The central Texas region is prone to tornados, hurricanes entering from the Gulf
of Mexico, floods, hail storms, severe heat and droughts. We maintain only
limited insurance coverage to protect the value of our assets against natural
disasters. Additionally, weather conditions can and have delayed our development
and construction projects by weeks or months, which could delay and decrease our
anticipated revenues. To the extent we encounter significant weather-related
delays, our business would suffer.
The availability of water could delay
or increase the cost of land development and adversely affect our future
operating results.
The
availability of water is becoming an increasingly difficult issue in the central
Texas region and other areas of the southwestern United States. Many
jurisdictions are now requiring that builders provide detailed information
regarding the source of water for any new community that they intend to develop.
Similarly, the availability of treatment facilities for sanitary sewage is a
growing concern. Many urban areas have insufficient resources to meet the demand
for waste-water and sanitary sewage treatment. To the extent we are unable to
find satisfactory solutions to these issues with respect to future development
projects, our operations could be adversely affected.
If
our customers are not able to obtain suitable financing, our business may
decline.
Our
business and earnings also depend on the ability of our potential customers to
obtain mortgages for the purchase of our homes. The uncertainties created by
recent events in the sub-prime mortgage market and their impact on the overall
mortgage market, including the tightening of credit standards, could adversely
affect the ability of our customers to obtain financing for a home purchase,
thus preventing our potential customers from purchasing our homes. If our
potential customers or the buyers of our customers’ current homes are not able
to afford or obtain suitable financing under such circumstances, our sales and
revenues could decline. Similar risks apply to those buyers who are in our
backlog of homes to be delivered. If our customers cannot obtain suitable
financing in order to purchase our homes, our sales and profitability could be
materially affected.
We
are a small company and have a correspondingly small financial and accounting
organization. Being a public company may strain our resources, divert
management’s attention and affect our ability to attract and retain qualified
directors.
We are a
small company with finance and accounting organization that we believe is of
appropriate size to support our current operations; however, the rigorous
demands of being a public reporting company may lead to a determination that our
finance and accounting group is undersized. In addition, our President and Chief
Executive Officer is our majority shareholder and controls the company. He also
has significant control over our daily operations and we are required to
implement proper and effective controls and procedures due to the extent of his
control over the company. As a public company, we are subject to the reporting
requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley
Act of 2002 and in fiscal 2008 we will be required to comply with the
Section 404 of the Sarbanes-Oxley Act which will require us and our
independent public accounting firm to report on the effectiveness of our
internal controls over financial reporting. The requirements of these laws
and the rules and regulations promulgated there under entail significant
accounting, legal and financial compliance costs, and have made, and will
continue to make, some activities more difficult, time consuming or costly
and may place significant strain on our personnel, systems and
resources. We may be required to increase the size of our finance and
accounting group or to retain consultants to assist us with our
Sarbanes-Oxley Section 404 compliance which may be a significant expense and we
will incur additional fees with our independent public accounting firm.
The
Securities Exchange Act requires, among other things, that we maintain effective
disclosure controls and procedures and internal control over financial
reporting. In order to maintain and improve the effectiveness of our disclosure
controls and procedures and internal control over financial reporting, and
in order to comply with the burden of Section 404 of the Sarbanes-Oxley
Act, significant resources and management oversight are required. As a
result, management’s attention may be diverted from other business concerns,
which could have a material adverse effect on our business, financial condition
and results of operations.
These
rules and regulations also have made it more difficult and more expensive
for us to maintain director and officer liability insurance, and in the
future we may be required to accept reduced coverage or incur
substantially higher costs to maintain such coverage. If we are unable to
maintain adequate director and officer insurance, our ability to recruit and
retain qualified officers and directors, especially those directors who may be
deemed independent, will be significantly curtailed.
We
depend on our key personnel to manage our business effectively.
We
believe our future success will depend in large part upon our ability to attract
and retain highly skilled managerial, sales, and marketing personnel. In
particular, due to the relatively early stage of our business, we believe that
our future success is dependent on Clark N. Wilson, our Chief Executive Officer
and the founder of WFC, to provide the necessary leadership to execute our
growth plans. Although we have a key-man life insurance policy for Mr. Wilson,
the loss of the services of Mr. Wilson or the inability to attract or retain
qualified personnel in the future or delays in hiring required personnel will
impede our ability to become profitable.
Our
growth strategy to expand into new geographic areas poses risks.
Our
current strategy is to expand our business into new geographic areas outside of
the central Texas region. We will face additional risks if we expand our
operations in geographic areas or climates in which we do not have experience,
including:
|
·
|
adjusting
our land development methods to different geographies and
climates;
|
|
·
|
obtaining
necessary entitlements and permits under unfamiliar regulatory
regimes;
|
|
·
|
attracting
potential customers in a market in which we do not have significant
experience; and
|
|
·
|
the
cost of hiring new employees and increased infrastructure
costs.
|
We may
not be able to successfully manage the risks of such an expansion, which could
have a material adverse effect on our revenues, earnings, cash flows and
financial condition. If we are not able to obtain additional capital
or financing we may not be able to expand into additional geographic
areas.
Regulatory
Risks
Our
operations are subject to an intensive regulatory approval process, including
governmental and environmental regulation, which may delay, increase the cost
of, prohibit or severely restrict our development projects and reduce our
revenues and cash flows.
We are
subject to extensive and complex laws and regulations that affect the land
development process. Before we can develop a property, we must obtain a variety
of approvals from local, state and federal governmental agencies with respect to
such matters as zoning, density, parking, subdivision, site planning and
environmental issues. Certain of these approvals are discretionary by nature.
Because certain government agencies and special interest groups have in the past
expressed concerns about development plans in or near the central Texas region,
our ability to develop these properties and realize future income from them
could be delayed, reduced, made more expensive or prevented
altogether.
Real
estate development is subject to state and federal regulations as well as
possible interruption or termination because of environmental considerations,
including, without limitation, air and water quality and the protection of
endangered species and their habitats. We are making and will continue to make
expenditures and other accommodations with respect to our real estate
development for the protection of the environment. Emphasis on environmental
matters may result in additional costs to us in the future or a reduction in the
amount of acreage that we can use for development or sales
activities.
We
are subject to risks related to environmental damages.
We may be
required to undertake expensive and time-consuming clean-up or remediation
efforts in the event that we encounter environmental hazards on the lots we own,
even if we were not originally responsible for or aware of such hazards. In the
event we are required to undertake any such remediation activities, our business
could suffer.
Federal
laws and regulations that adversely affect liquidity in the secondary mortgage
market could hurt our business.
Recent
federal laws and regulations could have the effect of curtailing the activities
of the Federal National Mortgage Association (Fannie Mae) and the Federal Home
Loan Mortgage Corporation (Freddie Mac). These organizations provide significant
liquidity to the secondary mortgage market. Any curtailment of their activities
could increase mortgage interest rates and increase the effective cost of our
homes, which could reduce demand for our homes and adversely affect our results
of operations.
The
federal financial institution agencies recently issued their final Interagency
Guidance on Nontraditional Mortgage Products. This guidance applies to credit
unions, banks and savings associations and their subsidiaries, and bank and
savings association holding companies and their subsidiaries. Although the
guidance does not apply to independent mortgage companies, it likely will affect
the origination operations of many mortgage companies that broker or sell
nontraditional mortgage loan products to such entities. This guidance could
reduce the number of potential customers who could qualify for loans to purchase
homes from us and others.
Compliance
with federal, state and local regulations related to our business could create
substantial costs both in time and money, and some regulations could prohibit or
restrict some homebuilding ventures.
We are
subject to extensive and complex laws and regulations that affect the land
development and homebuilding process, including laws and regulations related to
zoning, permitted land uses, levels of density, building design, elevation of
properties, water and waste disposal and use of open spaces. In addition, we are
subject to laws and regulations related to workers’ health and safety. We also
are subject to a variety of local, state and federal laws and regulations
concerning the protection of health and the environment. We may be required to
pay environmental impact fees, use energy-saving construction materials and give
commitments to municipalities to provide certain infrastructure such as roads
and sewage systems. We generally are required to obtain permits, entitlements
and approvals from local authorities to commence and carry out residential
development or home construction. Such permits, entitlements and approvals may,
from time-to-time, be opposed or challenged by local governments, neighboring
property owners or other interested parties, adding delays, costs and risks of
non-approval to the process. Our obligation to comply with the laws and
regulations under which we operate, and our obligation to ensure that our
employees, subcontractors and other agents comply with these laws and
regulations, could result in delays in construction and land development, cause
us to incur substantial costs and prohibit or restrict land development and
homebuilding activity in certain areas in which we operate.
Tax
law changes could make home ownership more expensive or less
attractive.
Significant
expenses of owning a home, including mortgage interest expense and real estate
taxes, generally are deductible expenses for the purpose of calculating an
individual’s federal, and in some cases state, taxable income, subject to
various limitations under current tax law and policy. If the federal government
or a state government changes income tax laws to eliminate or substantially
reduce these income tax deductions, then the after-tax cost of owning a new home
would increase substantially. This could adversely impact demand for, and/or
sales prices of, new homes.
Risks
Related to Investment in Our Securities
Our
company is a holding company, and the obligations of our company are subordinate
to those of our operating subsidiary.
Our
company is a holding company with no material assets other than our equity
interest in our wholly owned subsidiary, Wilson Family Communities, or WFC. WFC
conducts substantially all of our operations and directly owns substantially all
of our assets. WFC also has entered into a credit facility to finance the
purchase of some of our land holdings and this credit facility is secured by the
assets of WFC. The holding company structure places any obligations
of Green Builders subordinate to those of our operating subsidiary, WFC.
Therefore, in the event of liquidation, creditors of WFC would be repaid prior
to any distribution to the stockholders of Green Builders. After the repayment
of all obligations incurred by WFC and the repayment of all obligations of Green
Builders, any remaining assets could then be distributed to Green Builders as
the holder of all shares of common stock of WFC and subsequently would be
distributed among the holders of our common stock.
Our
largest stockholder, who is also our President and Chief Executive Officer, will
continue to control our company.
Clark N.
Wilson, our President and Chief Executive Officer, owns or controls
approximately 59% of our issued and outstanding common stock. This
ownership position will provide Mr. Wilson with the voting power to
significantly influence the election of all members of our Board of Directors
and, thereby, to exert substantial control over all corporate actions and
decisions for an indefinite period.
We
issued $16.5 million in convertible notes and if these notes are converted into
shares of common stock, or if the warrants issued in conjunction with such notes
are exercised, our stockholders would suffer substantial dilution.
In
December 2005 and September 2006, we issued convertible promissory notes which
may be converted, at the election of the holders of the notes, into shares of
our common stock at a conversion price of $2.00 per share. In conjunction with
these note financings, we also issued warrants to the purchasers which have
vested and to the placement agent evidencing the right to purchase an aggregate
of 1,143,125 shares of our common stock at an exercise price of $2.00 per share.
While the holders of these notes and warrants have not indicated to us that they
plan to convert their notes into, or exercise their warrants for, shares of our
common stock, in the event they elect to do so we would be required to issue up
to 8,250,000 additional shares of our common stock in conversion of the notes
and 1,143,125 shares of our common stock upon exercise of the warrants, which
would be dilutive to our existing stockholders. Each convertible note is
convertible into shares of our common stock at the option of the holder. The
conversion price is subject to adjustment for stock splits, reverse stock
splits, recapitalizations and similar corporate actions. An anti-dilution
adjustment in the conversion price, and the corresponding rate at which the
convertible notes may be converted into shares of our common stock, also is
triggered upon the issuance of certain equity securities or equity-linked
securities with a conversion price, exercise price or share price of less than
$2.00 per share, provided that the conversion price cannot be lower than $1.00
per share.
Our
common stock is currently trading below $1.00 per share. The NYSE
Alternext (formerly the American Stock Exchange) may delist our common stock in
the event the closing bid price of our common stock continue to
be below $1.00 per share.
Although
the NYSE Alternext does not have specific requirements regarding the closing bid
price of shares traded on that exchange, in the event that the closing bid price
of our stock remains below $1.00 the NYSE Alternext has the discretion to
delisted our stock. Delisting could make our stock more difficult to
trade, reduce the trading volume of our stock and further depress our stock
price. In addition, delisting or the threat of delisting could impair our
ability to raise funds in the capital markets, which could materially impact our
business, results of operations and financial condition.
Our
stock price may make it difficult to raise capital through the sale of our
common stock.
Our
common stock has recently traded below $1.00 per share. Certain
investors are limited in their ability to purchase shares of common stock of
issuers that are below $1.00 per share which may limit our ability to raise
additional capital through the sale of common stock.
Future
sales or the potential for sale of a substantial number of shares of our common
stock could cause the trading price of our common stock to decline and could
impair our ability to raise capital through subsequent equity
offerings.
Sales of
a substantial number of shares of our common stock in the public markets, or the
perception that these sales may occur, could cause the market price of our stock
to decline and could materially impair our ability to raise capital through the
sale of additional equity securities. For example, the grant of a large number
of stock options or other securities under an equity incentive plan or the sale
of our equity securities in private placement transactions at a discount from
market value could adversely affect the market price of our common
stock.
We
have anti-takeover provisions that could discourage, delay or prevent our
acquisition.
Provisions
of our articles of incorporation and bylaws could have the effect of
discouraging, delaying or preventing a merger or acquisition that a stockholder
may consider favorable. Our authorized but unissued shares of common stock are
available for our Board to issue without stockholder approval. We may use these
additional shares for a variety of corporate purposes, including future public
offerings to raise additional capital, corporate acquisitions and employee
benefit plans. The existence of our authorized but unissued shares of
common stock could render it more difficult or discourage an attempt to obtain
control of us by means of a proxy contest, tender offer, merger or other
transaction. In the future, we may elect to amend our charter to provide for
authorized but unissued shares of preferred stock that would be issuable at the
discretion of the Board of Directors. We can amend and restate our charter by
action of the Board of Directors and the written consent of a majority of
stockholders.
Item
2. Des
crip
tion of Property
Our
corporate office, which we lease from a third party, contains approximately
5,000 square feet, and is located in Austin, Texas. We believe this
facility is adequate to meet our requirements at our current level of business
activity.
Item
3. L
ega
l Proceedings
We are
not a party to any legal proceedings.
Item
4. Su
bmiss
ion of Matters to a Vote of Security
Holders
None.
P
AR
T II
Item
5. M
arket
for Common Equity and Related Stockholder
Matters
Our
common stock is traded on the NYSE Alternext (formerly the American Stock
Exchange) under the symbol “GBH.”
The
following table represents the range of the high and low bid prices of our
common stock as reported by the NYSE Alternext (formerly the American Stock
Exchange) for prices since May 19, 2007 and the OTC Bulletin Board Historical
Data Service for prices before May 19, 2007. These quotations represent prices
between dealers and may not include retail markups, markdowns, or commissions
and may not necessarily represent actual transactions.
|
|
12
Months Ended Sept. 30, 2008
|
|
12
Months Ended Sept. 30, 2007
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
October
1st - December 31st
|
$2.00
|
|
$0.81
|
|
$6.00
|
|
$2.50
|
|
January
1st - March 31st
|
$1.35
|
|
$0.85
|
|
$6.25
|
|
$4.25
|
|
April
1st - June 30th
|
$1.50
|
|
$0.85
|
|
$5.25
|
|
$2.40
|
|
|
$1.20
|
|
$0.59
|
|
$2.65
|
|
$1.51
|
The last
reported sale price of our common stock on the American Stock Exchange on
December 22, 2008 was $0.23 per share. According to the records of our transfer
agent, there were approximately 330 record holders of our common stock as of
December 22, 2008.
Dividends
We have
not declared or paid any dividends, and do not intend to pay any dividends in
the foreseeable future, with respect to our common stock. Any future decision to
pay dividends on our common stock will be at the discretion of our Board of
Directors and will depend upon our financial condition, results of operations,
capital requirements and other factors our Board of Directors may deem
relevant.
Recent
Sales of Unregistered Securities
We did
not sell any unregistered securities in the period covered by this
report.
Issuer
Repurchases of Equity Securities
We did
not repurchase any shares of our common stock during the fourth quarter of the
year ended September 30, 2008.
The
following table provides information as of September 30, 2008 with respect to
compensation plans under which our equity securities are authorized for
issuance.
|
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
Category
|
|
Number
of
securities
to be
issued
upon
exercise
of
outstanding
warrants
|
|
|
Weighted
average
exercise
price
of
outstanding
options
|
|
|
Number
of
securities
remaining
available
for
future
issuance
under
equity
compensation
plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
|
|
1,474,083
|
|
|
|
|
|
|
|
1,025,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Item
6. Man
agemen
t’s Discussion and Analysis or Plan of
Operation.
This
discussion contains forward-looking statements reflecting our current
expectations that involve risks and uncertainties. When used herein, the words
“believes,” “plans,” “expects,” “anticipates,” “intends,” “continue,” “may,”
“will,” “could,” “should,” “future,” “potential,” “estimate,” or the negative of
such terms and similar expressions as they relate to us or our management are
intended to identify forward-looking statements. Actual results and
the timing of events may differ materially from those contained in these
forward-looking statements due to a number of factors, including those discussed
herein. These risks and uncertainties are beyond our control and, in
many cases, we cannot predict the risks and uncertainties that could cause our
actual results to differ materially from those indicated by the forward-looking
statements. Historical results and percentage relationships among any
amounts in our consolidated financial statements are not necessarily indicative
of trends in operating results for any future periods.
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with “Selected Consolidated Financial
Information” and our financial statements and accompanying notes included
elsewhere in this document.
Overview
We are a
real estate development and homebuilding company. We commenced our
homebuilding operations in June 2007 with the purchase of Green Builders,
Inc. We build energy efficient homes in Austin, Texas and we make it
a priority to fully embrace sustainable building practices and to use
earth-friendly products and materials.
Through
fiscal 2008 our business was significantly impacted by the continued
deterioration of the real estate and homebuilding industry. Although
central Texas has been less affected than other areas, national real estate
trends have had a significant impact on home buyers and lenders and we believe
that sales of new homes in our market will be stagnant or
will continue to decline in fiscal 2009. We believe this
slowdown is attributable to a decline in consumer confidence, the inability of
some buyers to sell their current homes and the direct and indirect impact of
the well-publicized turmoil in the mortgage and credit markets.
In June
2007 we purchased Green Builders, Inc. and commenced our homebuilding operations
under that name. Our strategy is to build homes that are environmentally
responsible, resource efficient and consistent with local
style. Substantially all of our construction work is performed by
subcontractors who are retained for specific subdivisions pursuant to contracts
entered in 2007 and 2008. We intend to build homes on some of the
lots we currently have completed and sell those as finished homes as well as
continue to sell lots to other builders. We
are currently exploring options with other developers to enter
into agreements that would give us the option to purchase additional finished
lots in the future. In November 2008 we updated our homebuilding services
to include “build on your lot”. “Build on your lot” allows
customers to build our existing plans on lots that they own.
Prior to
our acquisition of Green Builders, we were solely focused on the acquisition of
undeveloped land that we believed, based on our research of population growth
patterns and infrastructure development was strategically located. We
have funded these acquisitions primarily with bank debt and cash. We
currently have completed 220 lots in Georgetown Village, 105 lots in Elm Grove
and 58 lots in Rutherford West. This portion of our business
focus has required the majority of our financial resources. Due to
the continued deterioration of the homebuilding industry and based on our
current liquidity, we are currently in negotiations to dispose of some of our
land positions including but not limited to deed in lieu of foreclosure of these
assets.
In tandem
with our land acquisition efforts and based upon our strategic market analysis,
we also prepare land for homebuilding. A focus of our business had been
the sale of developed lots to homebuilders, including national
homebuilders. Due to deteriorating conditions in the homebuilding
industry both nationally and to a lesser extent locally, during the second
quarter of 2007 and continuing through December 2008, demand for finished lots
by national homebuilders is and we expect will continue to be significantly
reduced. As a result, orders placed for some of our finished lots
were cancelled. We elected to retain some of our lots for use in our
homebuilding business. We believe that retaining some of our lots for
use in homebuilding activities will allow us to generate homebuilding revenue to
replace some of the revenue from the loss of sales of these finished
lots. We will continue to pursue lot sales contracts with both
national and regional builders.
In
November 2008 we expanded our services to include “green” remodeling of existing
homes. We have taken a comprehensive approach to engaging in the
green remodeling business and offer customers a “one-stop” process for updating
their existing home with a focus on energy efficiency. Our green
remodeling program currently caters to existing homeowners in the Austin, Texas
area who want to reduce home energy demands and utility bills, lessen home
maintenance costs and increase the comfort of their home. Initially
we anticipate that substantially all of our construction work will be performed
by subcontractors. By subcontracting out the work, there is limited
additional capital required to enter this business line. We
also feel that entering into remodeling will help us supplement revenue during
this slowdown in the real estate industry. To date we have received some energy
audit requests and are reviewing the results and discussing the next steps with
our customers. We have not received any revenues from remodeling
operations and we expect to see initial revenues from these operations during
fiscal year 2009.
Comparison
of Year Ended September 30, 2008 and Nine Months Ended September 30,
2007
|
|
|
Year
Ended September 30, 2008
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
Change
|
|
|
Change
%
|
|
|
|
|
(in
thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
and related services revenues
|
|
$
|
6,042
|
|
|
$
|
1,295
|
|
|
$
|
4,747
|
|
|
|
366
|
%
|
|
Land
revenues
|
|
|
2,951
|
|
|
|
3,149
|
|
|
|
(198
|
)
|
|
|
-6
|
%
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
and related services gross profit
|
|
|
663
|
|
|
|
386
|
|
|
|
277
|
|
|
|
72
|
%
|
|
Land
gross profit
|
|
|
831
|
|
|
|
742
|
|
|
|
89
|
|
|
|
12
|
%
|
|
Inventory
impairments and land option cost write-offs
|
|
|
(5,888
|
)
|
|
|
(1,280
|
)
|
|
|
(4,608
|
)
|
|
|
360
|
%
|
|
Costs
& Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
6,987
|
|
|
|
4,468
|
|
|
|
2,519
|
|
|
|
56
|
%
|
|
Operating
Income (Loss)
|
|
|
(11,382
|
)
|
|
|
(4,620
|
)
|
|
|
(6,762
|
)
|
|
|
146
|
%
|
|
Net
Income (Loss)
|
|
$
|
(14,833
|
)
|
|
$
|
(6,556
|
)
|
|
$
|
(8,277
|
)
|
|
|
126
|
%
|
Results of
Operations
Homebuilding
and Related Services Revenues
Background –
Homebuilding and
related services revenue consists of revenue from home sales and from providing
services to our homebuilder customers. Prior to fiscal 2008, all home
sales were generated by our homebuilder customers utilizing our homebuilder
services. We consolidate our homebuilder customers into our operating
results based on accounting requirements according to FIN 46(R) and refer to
these homebuilder customers as Variable Interest Entities, or
VIEs. We ceased providing services to homebuilder customers in August
2007. In June 2007 we acquired Green Builders, Inc and have commenced
our homebuilding activities. We sell homes in the Austin, Texas area
for prices ranging from $180,000 to $600,000. For the year ended
September 30, 2008 we had 68 home sales and 13 cancellations. We had
26 home closings. We have 13 completed speculative units, 1
speculative unit under construction, seven completed models, and 29 units in
backlog. Backlog is defined as homes under contract but not yet
delivered to our home buyers. We believe that the turmoil in the
mortgage market combined with national publicity of a potential recession has
caused a lack of urgency for buyers. As such, sales and sales
revenues were lower than anticipated for the year ended September 30, 2008 and
we expect that they will continue to be slow throughout fiscal
2009. In accordance with these expected market conditions, our
strategy is to build a limited number of speculative units per community and
build the majority of our homes after a contract is entered into with a
homebuyer.
R
evenues -
During the year
ended September 30, 2008, home sales accounted for approximately 67% of
revenues. For the nine months ended September 30, 2007 all of the
homebuilding revenues were generated by one VIE consolidated into our operating
results. During the year ended September 30, 2008, home sales
increased by approximately 366% from the nine months ended September 30, 2007,
primarily due to the launch of our homebuilding division in June
2007.
Gross Profit
- During fiscal
year 2008 we reviewed our homebuilding inventory for impairments. We
determined that two communities, Rutherford West and Georgetown Village, had
impairments. Our assumption for revenue was based on current
incentives that have been offered on our speculative units. The
Company recorded impairments of $547,000 and $77,000 for Rutherford West and
Georgetown Village. In addition we wrote off approximately $224,000
for earnest money and capitalized costs for homebuilding communities that we no
longer plan to pursue. Gross profit percentage before impairments
decreased from 30% in 2007 to 11% in 2008 due to the additional incentives
offered on our homes and the lower margin for homebuilding versus homebuilding
services.
Land
and Land Development
Background –
Land sales
revenue consists of revenues from the sale of undeveloped land and developed
lots. Developing finished lots from raw land takes approximately one
to three years. In response to the slowdown in the national housing market and
the reduction in demand for finished lots, we changed our strategy and have
elected to use some of our developed lots for our own homebuilding
operations. We may still sell our lots to national, regional and
local homebuilders that may purchase anywhere from five to one hundred or more
lots at a time. The delivery of these lots would likely be scheduled over
periods of several months or years.
Revenues –
Revenue from the
sale of land decreased 6% during the year ended September 30, 2008, compared to
the nine months ended September 30, 2007. The decrease compared to
2007 was primarily due to the decrease in land sales in the Rutherford West
project. In addition revenues declined due to the defaulting of a
regional builder for an option contract in the Georgetown Village
project.
Gross Profit
- Gross profit on
land and land development includes impairment charges of approximately $5
million for the year ended September 30, 2008. Impairment charges
include:
|
·
|
$3.5
million for land and development expenses capitalized on approximately 522
acres of land in New Sweden;
|
|
·
|
$859,000
for land and development expenses capitalized on approximately 538 acres
of land in Rutherford West;
|
|
·
|
$838,000
for Rutherford West developed lots;
and
|
|
·
|
$50,000
for earnest money for a land option contract which we will not
pursue.
|
These
impairment charges are offset by $240,000 of expenses incurred for Bohls
Tract. The majority of these expenses represent LUE fees that were
reimbursed by the City. We recorded the impairment charges for New
Sweden and Rutherford West because we do not have the cash or a line of credit
to develop these projects and we no longer have the ability to service the
debt.
For
the nine months ended September 30, 2007 we wrote off pre-acquisition and
earnest money expenses of $1.3 million for the Bohls Tract land option purchase
of approximately 428 acres that we did not exercise. Based on the
deterioration in the real estate market, we concluded that we had adequate
single-family lots, excluding this tract of land.
General
and Administrative Expenses
|
Breakdown
of G&A Expenses
|
|
Year
Ended
September
30,
2008
|
|
|
Nine
Months
Ended
September
30,
2007
|
|
|
Change
|
|
|
Change
%
|
|
|
Salaries,
benefits, payroll taxes and related emp. exps.
|
|
$
|
1,615,182
|
|
|
$
|
1,196,630
|
|
|
$
|
418,551
|
|
|
|
26
|
%
|
|
Stock
compensation expense
|
|
|
834,599
|
|
|
|
540,900
|
|
|
|
293,700
|
|
|
|
35
|
%
|
|
Legal,
accounting, auditing, consultants, and investor relations
|
|
|
958,219
|
|
|
|
951,772
|
|
|
|
6,447
|
|
|
|
1
|
%
|
|
General
overhead, including office expenses, insurance, and travel
|
|
|
857,211
|
|
|
|
686,725
|
|
|
|
170,486
|
|
|
|
20
|
%
|
|
Loss
on deconsolidation of VIEs
|
|
|
|
|
|
|
176,012
|
|
|
|
(176,012
|
)
|
|
|
n/a
|
|
Amortization
of subordinated debt costs and transaction costs
|
|
|
237,012
|
|
|
|
319,548
|
|
|
|
(82,536
|
)
|
|
|
-35
|
%
|
|
Total
G&A
|
|
$
|
4,502,223
|
|
|
$
|
3,871,587
|
|
|
$
|
630,636
|
|
|
|
15
|
%
|
General
and administrative expenses are composed primarily of salaries of general and
administrative personnel and related employee benefits and taxes, accounting and
legal and general office expenses and insurance. During the year
ended September 30, 2008 and nine months ended September 30, 2007, salaries,
benefits, taxes and related employee expenses totaled approximately $1.6 million
and $1.1 million, respectively, and represented approximately 36% and 31%,
respectively, of total general and administrative expenses for the
periods. The increase for year ended is due to an increase in
expenses for additional headcount for the launching of the homebuilding division
through January 2008. In January 2008 we had a reduction in
force. In addition, we had another reduction in force in September
2008.
Stock
compensation expense was approximately $835,000 and $541,000 for the year ended
September 30, 2008 and nine months ended September 30, 2007,
respectively. The increase in stock compensation expense was due to
acceleration of the stock option expense for our former CFO.
Legal,
accounting, audit, consulting and investor relation expense totaled $958,000 and
$952,000 for the year ended September 30, 2008 and nine months ended September
30, 2007, respectively. There was a loss of $176,000 for
homebuilder services for the nine months ended September 30, 2007 due to
indirect operating losses of variable interest entities that we incurred in
2007.
Amortization
of subordinated convertible debt issuance costs was approximately $237,000 and
$320,000 for the year ended September 30, 2008 and 2007,
respectively. The decrease of this expense is attributable to a prior
year adjustment due to the adoption of FSP 00-19-2.
Sales
and Marketing Expenses
Sales and
marketing expenses include selling costs, commissions, salaries and related
taxes and benefits, finished inventory maintenance and property tax expense,
marketing activities including websites, brochures, catalogs, signage, and
billboards, and market research, all of which benefit our corporate presence and
are not included as homebuilding cost of sales. The increase was due
to increased marketing expenses to help develop our homebuilding business,
increase awareness of our brand through development of our website, advertising,
public relations, and community marketing initiatives and to sell our existing
inventory.
We expect
to see a decline in advertising, public relations, and marketing costs in the
next twelve months due to the fact that the major start-up costs of building our
brand through the website, through an advertising campaign, and public relations
have been completed.
Impairment
of Intangible Assets
We
account for intangible assets in accordance with Statement of Financial
Accounting Standards (“SFAS”) No 142, “Goodwill and Other Intangible Assets”
(“SFAS 142”). Definite-lived intangibles are amortized over their estimated
useful lives and are evaluated for impairment annually, or more frequently if
impairment indicators are present, using a process similar to that used to test
other long-lived assets for impairment. During the year ended
September 30, 2008 we recorded an impairment charge of approximately $293,000
related to the trademark name of Green Builders, Inc.
Interest
Expense and Income
|
|
|
Year
Ended
September
30,
2008
|
Nine
Months
Ended
September
30,
2007
|
Change
|
|
Change
%
|
|
Interest
expense - convertible debt
|
|
|
|
$630,313
|
|
$203,137
|
|
32%
|
|
Interest
discount expense - convertible debt
|
|
558,348
|
|
536,230
|
|
22,118
|
|
4%
|
|
Interest
expense - land and development loans
|
|
2,357,559
|
|
1,060,690
|
|
1,296,869
|
|
122%
|
|
Interest
income and misc income
|
|
(298,406)
|
|
(291,478)
|
|
(6,928)
|
|
2%
|
|
Total
interest and other expense and income
|
|
|
|
$1,935,755
|
|
$1,515,196
|
|
78%
|
Interest
expense for land and development loans increased by approximately $1.3 million
for the year ended September 30, 2008 over the same period in 2007.
The increase is attributable to expense of interest expense for property
not under development. In addition, discount expense for the convertible
debt and loss on fair value of derivatives decreased due to the adoption of
FSP 00-19-2.
Financial Condition and
Capital Resources
Financial
Condition and Capital Resources
Liquidity
On
September 30, 2008 we had approximately $3.7 million in cash and cash
equivalents. We completed a public offering of our common stock in May 2007,
resulting in net proceeds to us of approximately $14 million.
On June
29, 2007, Wilson Family Communities entered into a $55 million revolving credit
facility (the “Credit Facility”) with a syndicate of banks led by RBC Bank
(formerly RBC Centura Bank), as administrative agent. IBC Bank and
Franklin Bank, S.S.B. (“Franklin Bank”) are the other two banks that make up the
syndicate of banks. The Credit Facility was reduced to $30 million in
June 2008. The initial maturity date for the Credit Facility was June
29, 2008. We entered into an agreement to extend the maturity date to
October 1, 2008. On October 1, 2008, the Credit Facility expired
pursuant to its terms. Although WFC is currently out of compliance with
certain covenants set forth in the Borrowing Base Agreement under the Loan
Agreement, the syndicate of banks has continued to make amounts available to WFC
pursuant to the Loan Agreement for loans made prior to the expiration of the
facility. We were notified on November 7, 2008 that Franklin Bank was
closed by the Texas Department of Savings and Mortgage Lending and the Federal
Deposit Insurance Corporation (the “FDIC”) was named Receiver.
Green
Builders has guaranteed the obligations of Wilson Family Communities under the
Credit Facility. The amount available at any time under the Credit
Facility for revolving credit loans or the issuance of letters of credit is
determined by a borrowing base. The borrowing base is calculated as the sum of
the values for homes and lots in the subdivision to be developed as agreed by us
and the agent. Our obligations under the Credit Facility are secured
by the assets of each subdivision that was to be developed with the proceeds of
loans available under the Credit Facility.
Outstanding
borrowings under the Credit Facility bear interest at the prime rate plus
0.25%, with a floor of 5.5%. We are charged a letter of credit fee
equal to 1.10% of each letter of credit issued under the Credit Facility. We may
elect to prepay the Credit Facility at any time without premium or
penalty. Quarterly principal reductions are required during the final 12
months of the term.
The
Credit Facility contains customary covenants limiting our ability to take
certain actions, including covenants that:
|
·
|
affect
how we can develop our properties;
|
|
·
|
limit
the ability to pay dividends and other restricted
payments;
|
|
·
|
limit
the ability to place liens on its
property;
|
|
·
|
limit
the ability to engage in mergers and acquisitions and dispositions of
assets;
|
|
·
|
require
us to maintain a minimum net worth of $20,000,000, including subordinated
debt (although the minimum net worth may be $17,000,000 for one
quarter);
|
|
·
|
prohibit
the ratio of debt (excluding convertible debt) to equity (including
convertible debt) from exceeding (A) 1.75 to 1.0 prior to September 30,
2007, (B) 1.85 to 1.0 from September 30, 2007 until March 30, 2008 and (C)
2.0 to 1.0 thereafter;
|
|
·
|
require
us to maintain working capital of at least $15,000,000;
and
|
|
·
|
limit
the number of completed speculative homes to 12% of the total borrowing
base available for homes.
|
An event
of default will occur under the Credit Facility if certain events occur,
including the following:
|
·
|
a
failure to pay principal or interest on any loan under the Credit
Facility;
|
|
·
|
the
inaccuracy of a representation or warranty when
made;
|
|
·
|
the
failure to observe or perform covenants or
agreements;
|
|
·
|
an
event of default beyond any applicable grace period with respect to any
other indebtedness;
|
|
·
|
the
commencement of proceedings under federal, state or foreign bankruptcy,
insolvency, receivership or similar
laws;
|
|
·
|
any
loan document, or any lien created thereunder, ceases to be in full force
and effect;
|
|
·
|
the
entry of a judgment greater than $1,000,000 that remains undischarged;
or
|
If an
event of default occurs under the Credit Facility, then the lenders may: (1)
terminate their commitments under the Credit Facility; (2) declare any
outstanding indebtedness under the Credit Facility to be immediately due and
payable; and (3) foreclose on the collateral securing the
obligations. We are currently out of compliance with the terms of the
Borrowing Base Agreement under the Credit Facility. We are not in
compliance with the tangible net worth, the ratio of debt to equity, working
capital, number of completed speculative homes and number of land and developed
lot loans covenants. If we are unable to obtain a waiver for the
noncompliance our obligation to repay indebtedness outstanding under the
facility, our term loans, and our outstanding note indentures could be
accelerated in full. We can give no assurance that in such an event, we would
have, or be able to obtain, sufficient funds to pay all debt required to
repay.
In
December 2005 and September 2006, we entered into Securities Purchase Agreements
with certain investors for the sale of Convertible Promissory
Notes. Pursuant to the cross-default provisions of the Securities
Purchase Agreements, a default under our Credit Facility triggers defaults
under the Securities Purchase Agreements. In the event that our
non-compliance with the Credit Facility continues, the holders of a majority of
the Notes issued under the Securities Purchase Agreement could elect to demand
the acceleration of all amounts owed under these Notes. We do not
have the cash available to repay these amounts or the amounts owed under the
Credit Facility. We have discussed our non-compliance with certain
investors under the Securities Purchase Agreements but these Note
holders have not initiated the process under the Securities Purchase
Agreements that would allow them to accelerate our obligations under the
Securities Purchase Agreements or take any other remedial action. We
intend to negotiate with all investors under our Securities Purchase Agreements
to reach a mutually satisfactory resolution and we intend to cooperate with the
Credit Facility lenders to regain compliance with the terms of the Credit
Facility.
Our
growth will require substantial amounts of cash for earnest money deposits,
development costs, interest payments and homebuilding costs. Until we begin to
sell an adequate number of lots and homes to cover our monthly operating
expenses, our sales, marketing, general and administrative costs will deplete
cash. Due to current market conditions and slow home and land sales,
we may need to obtain additional capital. We are currently in
negotiations to dispose of some of our current land positions, but there is no
assurance that we will be successful in selling these land positions at an
acceptable price or at all. In addition we are seeking additional
capital in the form of debt or equity and to support future growth and current
operations for the next twelve months.
Capital
Resources
We have
raised approximately $16.5 million of subordinated convertible debt, and
approximately $14 million in a public offering of our common stock completed in
May 2007. We entered into a $55 million revolving Credit Facility
that was reduced to $30 million in June 2008. The initial maturity date for
the Credit Facility was June 29, 2008. We entered into an agreement to
extend the maturity date to October 1, 2008. On October 1, 2008, the
Credit Facility expired pursuant to its terms. Although WFC is currently
out of compliance with certain covenants set forth in the Borrowing Base
Agreement under the Loan Agreement, RBC and IBC have continued to make amounts
available to WFC pursuant to the Loan Agreement for loans made prior to the
expiration of the facility. We were notified on November 7, 2008 that
Franklin Bank was closed by the Texas Department of Savings and Mortgage Lending
and the Federal Deposit Insurance Corporation (the “FDIC”) was named
Receiver. The Company is in current negotiations to obtain a new line
of credit for homebuilding from RBC, but there is no assurance that we will be
able to obtain a new line of credit on acceptable terms or at all.
Land and
homes under construction comprise the majority of our assets. These assets have
suffered devaluation due to the downturn in the housing and real estate market
for central Texas. We are considering selling tracts of commercial
and residential land in order to increase sales revenues and increase
cash. We are also in negotiation to deed in lieu of foreclosure some
of our land positions. We expect that we will incur losses in
2009. Due to current market conditions and slow home and land sales,
we anticipate that we will need additional capital to support operations for the
next twelve months.
Off-Balance Sheet
Arrangements
As of
September 30, 2008, we had no off-balance sheet arrangements.
Critical
Accounting Policies and Estimates
The SEC
defines “critical accounting policies” as those that require application of
management’s most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods. Our accounting
policies are more fully described in the notes to our consolidated financial
statements.
As
discussed in the notes to the consolidated financial statements, the preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions about future events that affect the amounts reported in our
consolidated financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
could differ from those estimates, and such differences may be material to our
consolidated financial statements. Listed below are those policies and estimates
that we believe are critical and require the use of significant judgment in
their application.
Consolidation
of Variable Interest Entities
We offer
certain homebuilder clients surety for their interim construction loans and cash
advances to facilitate sales of our residential lots. We may be considered the
primary beneficiary as defined under FASB Interpretation No. 46(R) (“FIN
46(R)”), “Consolidation of Variable Interest Entities” (VIE), and we may have a
significant, but less than controlling, interest in the entities. We account for
each of these entities in accordance with FIN 46(R). Management uses its
judgment when determining if we are the primary beneficiary of, or have a
controlling interest in, any of these entities. Factors considered in
determining whether we have significant influence or has control include risk
and reward sharing, experience and financial condition of the other partners,
voting rights, involvement in day-to-day capital and operating decisions and
continuing involvement.
Inventory
Inventory
is stated at cost unless it is determined to be impaired, in which case the
impaired inventory would be written down to the fair market
value. Inventory costs include land, land development costs, deposits
on land purchase contracts, model home construction costs, homebuilding costs,
interest and real estate taxes incurred during development and construction
phases.
Revenue
Recognition
Revenues
from property sales are recognized in accordance with SFAS No. 66, “Accounting
for Sales of Real Estate.” Revenues from land development services to builders
are recognized when the properties associated with the services are sold, when
the risks and rewards of ownership are transferred to the buyer and when the
consideration has been received, or the title company has processed payment. For
projects that are consolidated, homebuilding revenues and services will be
categorized as homebuilding revenues and revenues from property sales or options
will be categorized as land sales.
Use
of Estimates
We have
estimated and accrued liabilities for real estate property taxes on our
purchased land in anticipation of development, and other liabilities including
the beneficial conversion liability and the fair value of warrants and
options. To the extent that the estimates are different than the
actual amounts, it could have a material effect on the financial
statements.
Municipal
Utility and Water District Receivables
We
currently have planned the community of Villages of New Sweden within the
boundaries of New Sweden Municipal Utility District No. 1 and the community of
Rutherford West in Greenhawe Water Control and Improvement District No.
2. We incur development costs for the initial creation and operating
costs of these Districts and continuing costs for the water, sewer and drainage
infrastructure for these Districts. The Districts will issue bonds to
repay us, once the property has sufficient assessed value for the District taxes
to repay the bonds. As the project is completed and homes are sold within the
District, the assessed value increases. It can take several years
before the assessed value is sufficient to provide sufficient tax revenue for us
to recapture its costs. We estimate that we will recover approximately 50 to
100% of eligible initial creation and operating costs spent through September
30, 2008. We have completed Phase 1 for the Rutherford West project
and have approximately $1.1million of water district reimbursements included in
inventory that we anticipate will be collected from bond issuances made by the
District. When the reimbursements are received we will record them as
reductions of the related asset’s balance. Usually, a District issues its first
bond issue only after completion of construction of approximately 200
houses. The Districts will pay for property set aside for the
preservation of endangered species, greenbelts and similar uses. To
the extent that the estimates are dramatically different from the actual facts,
it could have a material effect on our financial statements.
Concentrations
Our
current activities are currently in the geographical area of central Texas,
which we define as encompassing the Austin Metropolitan Statistical Area. This
geographic concentration makes our operations more vulnerable to local economic
downturns than those of larger, more diversified companies.
Convertible
Debt
The
subordinated convertible debt and the related warrants have been accounted for
in accordance with Emerging Issues Task Force (EITF) No. 98-5, “Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios”, EITF No. 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock,” EITF 00-27, “Application of issue 98-5 to Certain Convertible
Instruments”, EITF 05-02 “Meaning of ‘Conventional Convertible Debt Instrument’
in Issue No. 00-19”, and EITF 05-04 “The Effect of a Liquidated Damages Clause
on a Freestanding Financial Instrument Subject to Issue No. 00-19” updated with
FSP EITF 00-19-2”, Accounting for Registration Payment
Arrangements.
Recent
Accounting Pronouncements
In
January 2007, we adopted FASB Staff Position (FSP) No. EITF 00-19-2 (“FSP EITF
00-19-2”), Accounting for Registration Payment Arrangements. This addresses an
issuer’s accounting for registration payment arrangements and specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement, should be separately recognized and measured in accordance with FASB
Statement No. 5, Accounting for Contingencies. The guidance in FSP EITF 00-19-2
amends FASB Statements No. 133, Accounting for Derivative Instruments and
Hedging Activities, and No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity, and FASB Interpretation No.
45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, to include scope exceptions for
registration payment arrangements. The FSP EITF 00-19-2 further clarifies that a
financial instrument subject to a registration payment arrangement should be
accounted for in accordance with other applicable generally accepted accounting
principles (GAAP) without regard to the contingent obligation to transfer
consideration pursuant to the registration payment arrangement. This
pronouncement shall be effective immediately for registration payment
arrangements and the financial instruments subject to those arrangements that
are entered into or modified subsequent to the date of issuance of this
pronouncement, or for financial statements issued for fiscal years beginning
after December 15, 2006, and interim periods within those fiscal
years.
The
cumulative effect of the re-characterization of the derivative liabilities is
shown in the table below:
|
|
|
As
filed
December
31, 2006
|
|
|
Cumulative
effect
of re-characterization
of
derivative
liabilities
|
|
|
Net
effect of re-characterization
|
|
|
LIABILITY
ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
Subordinated
convertible debt, net of discount, respectively
|
|
$
|
8,395,876
|
|
|
$
|
4,572,674
|
|
|
$
|
12,968,550
|
|
|
Derivative
liability, convertible note compound embedded derivative
|
|
|
7,462,659
|
|
|
|
(7,462,659
|
)
|
|
|
-
|
|
|
Derivative
liability, contingent warrants issued to subordinated convertible debt
holders
|
|
|
1,883,252
|
|
|
|
(1,883,252
|
)
|
|
|
-
|
|
|
Total
debt, net of discount and derivative liabilities
|
|
|
17,741,787
|
|
|
|
(4,773,237
|
)
|
|
|
12,968,550
|
|
|
STOCKHOLDERS’
EQUITY ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
18,056
|
|
|
|
-
|
|
|
|
18,056
|
|
|
Additional
paid in capital
|
|
|
16,809,885
|
|
|
|
(4,577,938
|
)
|
|
|
12,231,947
|
|
|
Retained
deficit
|
|
|
(16,053,143
|
)
|
|
|
9,351,175
|
|
|
|
(6,701,968
|
)
|
|
Total
stockholders’ equity
|
|
$
|
774,798
|
|
|
$
|
4,773,237
|
|
|
$
|
5,548,035
|
|
In July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - An Interpretation of FASB Statement 109” (“FIN 48”) which
prescribes a recognition 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. In addition, FIN 48 provides guidance on
derecognition, classification, accounting in interim periods and disclosure
requirements for uncertain tax positions. The accounting provisions of FIN 48
were effective beginning with our fiscal year 2008. As a result of the adoption
of FIN 48 and as of September 30, 2008, no material adjustments to our financial
position and results of operations were required.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”), which defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements.
SFAS 157 applies under other accounting pronouncements that require or permit
fair value measurements and does not require any new fair value measurements.
The provisions of SFAS 157 are effective beginning with our fiscal year 2009. We
are currently evaluating the impact this standard will have on our financial
position and results of operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — Including an amendment of
FASB Statement No. 115.” The statement permits entities to choose to
measure certain financial assets and liabilities at fair value. Unrealized gains
and losses on items for which the fair value option has been elected are
reported in earnings. SFAS 159 is effective for our fiscal year
2009. The standard is not expected to have a material impact on the
Company’s financial position and results of operations.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (FAS
141(R)), which establishes accounting principles and disclosure requirements for
all transactions in which a company obtains control over another
business. We are evaluating the impact of the adoption of
SFAS No. 141; however, it is not expected to have a material impact on
our consolidated financial position, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (FAS 160), which prescribes the accounting by
a parent company for minority interests held by other parties in a subsidiary of
the parent company. We are evaluating the impact of the adoption of
SFAS No. 160; however, it is not expected to have a material impact on
our consolidated financial position, results of operations or cash
flows.
Item
7. Fin
anc
ial Statements
The
Financial Statements required by this item are included in Part III, Item 13 and
are presented beginning on Page F-1.
Item
8. Ch
ang
es in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
Item
8A. Controls and Procedures.
Evaluation
of Effectiveness of Disclosure Controls and Procedures
Our
management, including our Chief Executive Officer and our Principal Financial
Officer, have evaluated our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended), as of the period ended September 30, 2008, the period covered by this
Annual Report on Form 10-KSB. Based upon that evaluation, our principal
executive officer and principal financial officer have concluded that our
disclosure controls and procedures were not effective as of September 30, 2008
due to the significant deficiency described below.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934. Internal control over financial
reporting is a process to provide reasonable assurance regarding the reliability
of our financial reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally accepted accounting
principles.
Our
management conducted an assessment of the effectiveness of our internal control
over financial reporting as of September 30, 2008 based on the framework set
forth in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process
that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures. Because of
such limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over financial
reporting. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
A
material weakness in internal control over financial reporting is defined by the
Public Company Accounting Oversight Board’s Audit Standard No. 5 as a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of the company's annual or interim financial statements will not be
prevented or detected on a timely basis. A significant deficiency is
a deficiency, or a combination of deficiencies, in internal control over
financial reporting that is less severe than a material weakness, yet important
enough to merit attention by those responsible for oversight of our financial
reporting.
Our
management conducted an evaluation of the effectiveness of our internal control
over financial reporting. Based on our evaluation, management concluded
that our internal control over financial reporting was not effective as of
September 30, 2008. Management’s assessment identified the following
significant deficiency in internal control over financial
reporting:
Our
management determined that our company does not have sufficient dedicated
accounting and finance staff to keep abreast of developing U.S. GAAP and SEC
reporting matters in order to proactively assess the impact of business
developments on financial reporting.
Remediation
Plans
In
order to address and correct the deficiency identified above, our management has
taken and will continue to take corrective actions including, where appropriate:
(i) strengthening the expertise in critical accounting and financial reporting
positions and (ii) implementing new controls and procedures to assure the
effectiveness of our internal control over financial
reporting.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in our internal controls over financial reporting during
our most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial
reporting.
Item
8B. O
the
r Information.
None.
PART
III
Items 9
through 12 and Item 14 will be included in our proxy statement for our 2009
Annual Meeting of Shareholders, and are incorporated herein by
reference.
Item
9. D
irecto
rs, Executive Officers, Promoters and
Control Persons and Corporate Governance; Compliance with Section 16(a) of the
Exchange Act
The
information required by this Item will be included under the section captioned
“Election of Directors “ in our Proxy Statement for the 2009 Annual Meeting of
Shareholders, which information is incorporated into this Annual Report by
reference.
Item
10. E
xec
utive Compensation
The
information required by this Item will be included under the sections captioned
“Executive Compensation” and “Certain Relationships and Related Transactions” in
our Proxy Statement for the 2009 Annual Meeting of Shareholders, which
information is incorporated into this Annual Report by reference.
Item
11. Se
curi
ty Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
The
information required by this Item will be included under the section captioned
“Security Ownership of Certain Beneficial Owners and Management” in our Proxy
Statement for the 2009 Annual Meeting of Shareholders, which information is
incorporated into this Annual Report by reference.
Item
12. C
ertai
n Relationships and Related Transactions,
and Director Independence
The
information required by this Item will be included under the section captioned
“Certain Relationships and Related Transactions” in our Proxy Statement for the
2009 Annual Meeting of Shareholders, which information is incorporated into this
Annual Report by reference.
Item
13. E
xhi
bits
The
Exhibit Index set forth below is incorporated herein by reference.
Item
14. P
rinc
ipal Accountant Fees and
Services
Information
required by this Item will be included under the section captioned “Ratification
of the Appointment of the Independent Auditors” in our Proxy Statement for the
2009 Annual Meeting of Shareholders, which information is incorporated into this
Annual Report by reference.
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.
|
|
GREEN
BUILDERS, INC.
|
|
|
|
|
|
|
By:
|
/s/
Clark
N.
Wilson
|
|
|
|
Clark
N.
Wilson
|
|
Date:
December 23, 2008
|
|
President
and Chief Executive Officer
|
Power
of Attorney
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
severally constitutes and appoints, Clark Wilson and Cindy Hammes , and each or
any of them, his true and lawful attorney-in-fact and agent, each with the power
of substitution and resubstitution, for him in any and all capacities, to sign
any and all amendments to this Annual Report on Form 10-KSB and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof. Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
indicated on December 23, 2008.
|
Name
|
|
Title
|
|
|
|
|
|
/s/
Clark N.
Wilson
|
|
|
|
Clark
N.
Wilson
|
|
President,
Chief Executive Officer and Director
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
/s/
Cindy Hammes
|
|
Principal
Financial Officer
|
|
Cindy
Hammes
|
|
|
|
|
|
|
|
/s/
Victor Ayad
|
|
Director
|
|
Victor
Ayad
|
|
|
|
|
|
|
|
/s/
Jay Gouline
|
|
Director
|
|
Jay
Gouline
|
|
|
|
|
|
|
|
/s/
William E Weber
|
|
Director
|
|
William
E Weber
|
|
|
|
|
|
|
EXHIBIT
INDEX
LIST
OF EXHIBITS
|
|
|
|
|
1.1
|
|
Underwriting
Agreement, dated May 14, 2007, by and between Wilson Holdings, Inc. and
Capital Growth Financial, LLC (filed as Exhibit 1.1 to the Registrant’s
Current Report on Form 8-K dated May 15, 2007 and incorporated herein by
reference)
|
|
3.1
|
|
Bylaws
of Registrant (filed as Exhibit 3.1 to Registrant’s Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31, 2008 (the "Q2 2008
10-Q") and incorporated herein by reference)
|
|
3.2
|
|
Certificate
of Formation of Registrant (filed as Exhibit 3.1 to Registrant’s Current
Report in Form 8-K dated April 4. 2008 (the “April 8-K”) and incorporated
herein by reference)
|
|
3.3
|
|
Certificate
of Amendment of Registrant (filed as Exhibit 3.2 to the April 8-K and
incorporated herein by reference)
|
|
4.1
|
|
Specimen
certificate for shares of Common Stock of Registrant (filed as Exhibit 4.1
to the Q2 2008 10-Q and incorporated herein by
reference)
|
|
4.2
|
|
Underwriter
Warrant issued by Registrant to Capital Growth Financial, LLC (filed as
Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1 (File
No. 333-140747) (the “2007 S-1”) and incorporated herein by
reference)
|
|
10.1
|
|
Lease
Agreement dated September 14, 2006 by and between Registrant and TI
Building Partnership, Ltd. (filed as Exhibit 10.4 to Registrant’s
Quarterly Report on Form 10-QSB for the quarter ended September 30, 2006
and incorporated herein by reference)
|
|
10.2+
|
|
Wilson
Family Communities, Inc. 2005 Stock Option/Stock Issuance Plan (filed as
Exhibit 10.3 to Registrant’s Current Report on Form 8-K dated October 11,
2005 and incorporated herein by reference)
|
|
10.3+
|
|
Amendment
No. 1 to Wilson Holdings, Inc. 2005 Stock Option/Stock Issuance Plan
(filed as Exhibit 10.2 to the 2007 S-1 and incorporated herein by
reference)
|
|
10.4
|
|
Registration
Rights Agreement by and among the Registrant and the purchasers of
Registrant’s Convertible Notes issued December 19, 2005 (filed as Exhibit
10.2 to Registrant’s Current Report on Form 8-K dated December 19, 2005
and incorporated herein by reference)
|
|
10.5
|
|
Form
of Warrant issued to Purchasers of Convertible Notes dated December 19,
2005 (filed as Exhibit 10.3 to Registrant’s Current Report on Form 8-K
dated December 19, 2005 and incorporated herein by
reference)
|
|
10.6
|
|
Registration
Rights Agreement dated September 29, 2006 by and among the Registrant and
the purchasers of the Registrant’s Convertible Notes issued September 29,
2006 (filed as Exhibit 10.2 to Registrants Current Report on Form 8-K
dated October 4, 2006 and incorporated herein by
reference)
|
|
10.7
|
|
Form
of Warrant issued to Purchasers of Convertible Notes dated September 29,
2006 (filed as Exhibit 10.3 to Registrants Current Report on Form 8-K
dated October 4, 2006 and incorporated herein by
reference)
|
|
10.8+
|
|
Employment
Letter Agreement dated February 14, 2007 by and between Registrant and
Clark Wilson (filed as Exhibit 10.10 to Registrant’s Annual Report on Form
10-KSB for the year ended December 31, 2006 and incorporated herein by
reference)
|
|
10.9
|
|
Borrowing
Base Loan Agreement by and between Wilson Family Communities, Inc and RBC
Centura Bank, with Franklin Bank SSB and International Bank of Commerce as
co-lenders dated June, 30, 2007 (filed as Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-KQSB for the quarter ended June 30, 2007 and
incorporated herein by reference)
|
|
10.10
|
|
Agreement
to Modify Loan Documents (filed as Exhibit 10.1 to Registrant’s Current
Report on Form 8-K dated June 23, 2008 and incorporated herein by
reference)
|
|
10.11+
|
|
Consulting
Agreement dated May 13, 2008 by and between the Company and Audrey Wilson
(filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2008 and incorporated herein by
reference)
|
|
21*
|
|
Subsidiaries
of Registrant
|
|
24*
|
|
Power
of Attorney (included in signature page)
|
|
31.1*
|
|
Certification
of Principal Executive Officer
|
|
31.2*
|
|
Certification
of Principal Financial Officer
|
|
32*
|
|
Certification
of Principal Executive Officer and Principal Financial
Officer
|
* Filed herewith
+ Indicates a management contract or compensatory plan or
arrangement.
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Stockholders
Green
Builders, Inc.
We have
audited the accompanying consolidated balance sheets of Green Builders, Inc. as
of September 30, 2008 and 2007, and the related consolidated statements of
operations, and stockholders’ equity, and cash flows for the year ended
September 30, 2008 and nine months ended September 30, 2007. These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of September
30, 2008 and 2007 and the consolidated results of their operations and their
cash flows for the year ended September 30, 2008 and the nine months ended
September 30, 2007 in conformity with generally accepted accounting principles
in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a
going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
PMB
HELIN DONOVAN, LLP
/s/ PMB Helin Donovan,
LLP
Austin,
Texas
December
23, 2008
|
GREEN
BUILDERS, INC.
|
|
|
Consolidated
Balance Sheets
|
|
|
As
of September 30, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2008
|
|
|
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,711,180
|
|
|
|
13,073,214
|
|
|
Inventory
|
|
|
|
|
|
|
|
|
|
Land
and land development
|
|
|
32,738,655
|
|
|
|
32,463,411
|
|
|
Homebuilding
inventories
|
|
|
8,204,129
|
|
|
|
2,843,704
|
|
|
Total
inventory
|
|
|
40,942,784
|
|
|
|
35,307,115
|
|
|
Other
assets
|
|
|
478,420
|
|
|
|
729,471
|
|
|
Debt
Issuance costs, net of amortization
|
|
|
1,028,206
|
|
|
|
1,265,218
|
|
|
Plant,
property, and equipment, net of accumulated depreciation and
amortization
of $84,005 and $32,294, respectively
|
|
|
1,418,588
|
|
|
|
232,357
|
|
|
Total
assets
|
|
|
47,579,178
|
|
|
|
50,607,375
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
1,690,763
|
|
|
|
1,404,151
|
|
|
Accrued
real estate taxes payable
|
|
|
697,699
|
|
|
|
405,060
|
|
|
Accrued
liabilities and expenses
|
|
|
421,385
|
|
|
|
215,372
|
|
|
Accrued
interest
|
|
|
528,683
|
|
|
|
464,809
|
|
|
Deferred
revenue
|
|
|
31,135
|
|
|
|
159,381
|
|
|
Lines
of credit
|
|
|
15,779,310
|
|
|
|
3,221,058
|
|
|
Notes
payable
|
|
|
14,474,620
|
|
|
|
17,417,300
|
|
|
Subordinated
convertible debt, net of $2,686,872 and $3,245,220 discount,
respectively
|
|
|
13,813,128
|
|
|
|
13,254,780
|
|
|
Total
liabilities
|
|
|
47,436,723
|
|
|
|
36,541,911
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized and
23,135,539
shares issued and outstanding, respectively
|
|
|
23,136
|
|
|
|
23,136
|
|
|
Additional
paid in capital
|
|
|
27,949,903
|
|
|
|
27,040,304
|
|
|
Retained
deficit
|
|
|
(27,830,584
|
)
|
|
|
(12,997,976
|
)
|
|
Total
stockholders' equity
|
|
|
142,455
|
|
|
|
14,065,464
|
|
|
Commitments
and contingencies
|
|
|
-
|
|
|
|
-
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
47,579,178
|
|
|
|
50,607,375
|
|
See
accompanying notes to the consolidated financial statements.
|
GREEN
BUILDERS, INC.
|
|
|
Consolidated
Statements of Operations
|
|
|
Year
Ended September 30, 2008 and
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
September
30, 2008
|
|
|
Nine
Months Ended
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Homebuilding
and related services
|
|
$
|
6,042,311
|
|
|
|
1,295,406
|
|
|
Land
sales
|
|
|
2,950,894
|
|
|
|
3,149,093
|
|
|
Total
revenues
|
|
|
8,993,205
|
|
|
|
4,444,499
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
Homebuilding
and related services
|
|
|
5,379,707
|
|
|
|
909,793
|
|
|
Land
sales
|
|
|
2,120,270
|
|
|
|
2,407,257
|
|
|
Inventory
impairments and land option cost write-offs
|
|
|
5,887,924
|
|
|
|
1,279,968
|
|
|
Total
cost of revenues
|
|
|
13,387,901
|
|
|
|
4,597,018
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
Homebuilding
and related services
|
|
|
662,604
|
|
|
|
385,613
|
|
|
Land
sales
|
|
|
830,624
|
|
|
|
741,836
|
|
|
Inventory
impairments and land option cost write-offs
|
|
|
(5,887,924
|
)
|
|
|
(1,279,968
|
)
|
|
Total
gross profit
|
|
|
(4,394,696
|
)
|
|
|
(152,519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
Corporate
general and administration
|
|
|
4,502,223
|
|
|
|
3,871,587
|
|
|
Sales
and marketing
|
|
|
2,192,046
|
|
|
|
596,028
|
|
|
Impairment
of intangible assets
|
|
|
292,692
|
|
|
|
-
|
|
|
Total
costs and expenses
|
|
|
6,986,961
|
|
|
|
4,467,615
|
|
|
Operating
loss
|
|
|
(11,381,657
|
)
|
|
|
(4,620,134
|
)
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
298,406
|
|
|
|
291,478
|
|
|
Interest
expense
|
|
|
(3,749,357
|
)
|
|
|
(2,227,233
|
)
|
|
Total
other expense
|
|
|
(3,450,951
|
)
|
|
|
(1,935,755
|
)
|
|
Income
before income taxes
|
|
|
(14,832,608
|
)
|
|
|
(6,555,889
|
)
|
|
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
Net
loss
|
|
$
|
(14,832,608
|
)
|
|
|
(6,555,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.64
|
)
|
|
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the consolidated financial statements.
|
GREEN
BUILDERS, INC.
|
|
|
Statements
of Stockholders' Equity
|
|
|
For
the Year Ended September 30, 2008
|
|
|
And
for Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional
Paid In Capital
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
|
Balances
at December 31, 2006
|
|
|
18,055,539
|
|
|
$
|
18,056
|
|
|
$
|
16,809,885
|
|
|
$
|
(16,053,142
|
)
|
|
$
|
774,799
|
|
|
Cumulative
adjustment for restatement per FSP 00-19-2
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,577,938
|
)
|
|
|
9,351,175
|
|
|
|
4,773,237
|
|
|
Stock-based
compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
540,900
|
|
|
|
-
|
|
|
|
540,900
|
|
|
Sale
of common stock, net of transaction costs
|
|
|
5,000,000
|
|
|
|
5,000
|
|
|
|
14,031,377
|
|
|
|
-
|
|
|
|
14,036,377
|
|
|
Issuance
of common stock for purchase of Green Builders, Inc., net of transaction
costs
|
|
|
80,000
|
|
|
|
80
|
|
|
|
216,080
|
|
|
|
-
|
|
|
|
216,160
|
|
|
Services
provided without compensation by principal shareholder
|
|
|
-
|
|
|
|
-
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
20,000
|
|
|
Effect
of deconsolidation of variable interest entity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
259,880
|
|
|
|
259,880
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,555,889
|
)
|
|
|
(6,555,889
|
)
|
|
Balances
at September 30, 2007
|
|
|
23,135,539
|
|
|
$
|
23,136
|
|
|
$
|
27,040,304
|
|
|
$
|
(12,997,976
|
)
|
|
$
|
14,065,464
|
|
|
Stock-based
compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
834,599
|
|
|
|
-
|
|
|
|
834,599
|
|
|
Services
provided without compensation by principal shareholder
|
|
|
-
|
|
|
|
-
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
75,000
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,832,608
|
)
|
|
|
(14,832,608
|
)
|
|
Balances
at September 30, 2008
|
|
|
23,135,539
|
|
|
$
|
23,136
|
|
|
$
|
27,949,903
|
|
|
$
|
(27,830,584
|
)
|
|
$
|
142,455
|
|
See
accompanying notes to the financial statements.
|
GREEN
BUILDERS, INC.
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
For
the Year Ended September 30, 2008
|
|
|
And
Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
September
30, 2008
|
|
|
Nine
Months Ended
September
30, 2007
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(14,832,608
|
)
|
|
|
(6,555,889
|
)
|
|
Non
cash adjustments:
|
|
|
|
|
|
|
|
|
|
Amortization
of convertible debt discount
|
|
|
558,348
|
|
|
|
536,230
|
|
|
Amortization
of debt issuance costs
|
|
|
237,012
|
|
|
|
192,832
|
|
|
Stock-based
compensation expense
|
|
|
834,599
|
|
|
|
540,900
|
|
|
Services
provided without compensation by principal shareholders
|
|
|
75,000
|
|
|
|
20,000
|
|
|
Depreciation
and amortization
|
|
|
407,072
|
|
|
|
55,309
|
|
|
Inventory
impairments and land option costs write-offs
|
|
|
5,887,924
|
|
|
|
1,279,968
|
|
|
Impairment
of intangible aseets
|
|
|
292,692
|
|
|
|
-
|
|
|
Effect
of deconsolidation of variable interest entity
|
|
|
-
|
|
|
|
259,880
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
Increase
in total inventory
|
|
|
(11,523,593
|
)
|
|
|
(5,831,105
|
)
|
|
Increase
in other assets
|
|
|
(372,416
|
)
|
|
|
(272,341
|
)
|
|
Increase
in accounts payable
|
|
|
286,612
|
|
|
|
28,034
|
|
|
Increase
(decrease) in real estate taxes payable
|
|
|
292,639
|
|
|
|
(49,704
|
)
|
|
Increase
(decrease) in accrued expenses
|
|
|
206,013
|
|
|
|
(313,718
|
)
|
|
(Decrease)
increase in deferred revenue
|
|
|
(128,246
|
)
|
|
|
148,158
|
|
|
Increase
(decrease) in accrued interest
|
|
|
63,874
|
|
|
|
162,254
|
|
|
Net
cash used in operating activities
|
|
|
(17,715,078
|
)
|
|
|
(9,799,192
|
)
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(1,262,528
|
)
|
|
|
(201,565
|
)
|
|
Cash
paid for Green Builders, Inc
|
|
|
-
|
|
|
|
(32,919
|
)
|
|
Net
cash used in investing activities
|
|
|
(1,262,528
|
)
|
|
|
(234,484
|
)
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Decrease
in restricted cash
|
|
|
-
|
|
|
|
2,192,226
|
|
|
Repayments
to related parties
|
|
|
-
|
|
|
|
(279,800
|
)
|
|
Issuances
of notes payable
|
|
|
4,923,728
|
|
|
|
15,340,364
|
|
|
Issuances
and repayments of lines of credit, net
|
|
|
12,558,252
|
|
|
|
371,405
|
|
|
Repayments
of notes payable
|
|
|
(7,866,408
|
)
|
|
|
(10,976,738
|
)
|
|
Common
stock sales, net of transaction costs
|
|
|
-
|
|
|
|
13,786,377
|
|
|
Net
cash provided by financing activities
|
|
|
9,615,572
|
|
|
|
20,433,834
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(9,362,034
|
)
|
|
|
10,400,158
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
13,073,214
|
|
|
|
2,673,056
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
3,711,180
|
|
|
|
13,073,214
|
|
|
Cash
paid for interest
|
|
$
|
3,251,047
|
|
|
|
1,872,716
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash in financing activities:
|
|
|
|
|
|
|
|
|
|
Assets
and Liabilities acquired from Green Builders, Inc.
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
$
|
-
|
|
|
|
2,900
|
|
|
Accounts
Payable
|
|
$
|
-
|
|
|
|
6,190
|
|
|
Issuance
of common stock for notes payable, cancellation
of
notes payable in exchange for cancellation of subordinated
debt
|
|
$
|
-
|
|
|
|
250,000
|
|
See
accompanying notes to the consolidated financial statements.
1.
Organization and Business Activity
Green
Builders, Inc., (the “Company”), is a Texas corporation formerly known as Wilson
Holdings, Inc. Effective April 4, 2008, Wilson Holdings, Inc.
completed its reincorporation to the State of Texas pursuant to the Plan of
Conversion as ratified by the shareholders at the 2008 annual meeting of
shareholders held on April 3, 2008. As part of the reincorporation, a
new Certificate of Formation was adopted and Wilson Holdings, Inc.’s corporate
name was changed to Green Builders, Inc., and the Certificate of Formation will
now govern the rights of holders of the Company’s common stock. The
Company has been using the name “Green Builders” in its regular business
operations since June 2007 and will continue to do so. Effective
April 8, 2008, the Company’s common stock began trading under the symbol “GBH”
on the American Stock Exchange.
Effective
October 11, 2005 pursuant to an Agreement and Plan of Reorganization dated
as of September 2, 2005 by and among Wilson Holdings, Inc., a Delaware
corporation, a majority of its stockholders, Wilson Family Communities, Inc., a
Delaware corporation (“WFC”) and Wilson Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of the Company, WFC and Wilson
Acquisition Corp. merged and WFC became a wholly-owned subsidiary of the
Company.
The
financial statements are presented on a going concern basis. The
Company has experienced significant losses for the fiscal year ended September
30, 2008, and expects to continue to generate negative cash flows from
operations. This raises substantial doubt about its ability to
continue as a going concern. The Company’s ability to continue as a
going concern will depend upon its ability to restructure its existing debt
and obtain additional capital. Failure to restructure would result in a
depletion of its available funds.
2.
Liquidity and Capital Resources
Liquidity
The
Company’s growth will require substantial amounts of cash for earnest money
deposits, development costs, interest payments and homebuilding costs. Until the
Company begins to sell an adequate number of lots and homes to cover its monthly
operating expenses, sales and marketing, general and administrative costs will
deplete cash. Due to current market conditions and slow home
and land sales, the Company may need to obtain additional
capital. The Company is currently in negotiations to dispose of some
of its current land positions. In addition the Company is seeking
additional capital to support future growth and current operations for the next
twelve months.
On
September 30, 2008 the Company had approximately $3.7 million in cash and cash
equivalents. The Company completed a public offering of its common stock in May
2007, resulting in net proceeds of approximately $14 million.
On June
29, 2007, Wilson Family Communities entered into a $55 million revolving credit
facility (the “Credit Facility”) with a syndicate of banks led by RBC Bank
(formerly RBC Centura Bank), as administrative agent. International Bank
of Commerce, Laredo, Texas (“IBC Bank”) and Franklin Bank, S.S.B. (“Franklin
Bank”) are the other two banks that make up the syndicate of
banks. The Credit Facility was reduced to $30 million in June
2008. The initial maturity date for the Credit Facility was June 29,
2008. The Company entered into an agreement to extend the maturity date to
October 1, 2008. On October 1, 2008, the Credit Facility expired
pursuant to its terms. Although the Company is currently out of compliance
with certain covenants set forth in the Borrowing Base Agreement under the Loan
Agreement, the syndicate of banks has continued to make amounts available to WFC
pursuant to the Loan Agreement for loans made prior to the expiration of the
facility. The Company received notification on November 7, 2008
that Franklin Bank was closed by the Texas Department of Savings and Mortgage
Lending and the Federal Deposit Insurance Corporation (the “FDIC”) was named
Receiver.
Green
Builders has guaranteed the obligations of Wilson Family Communities under the
Credit Facility. The amount available at any time under the Credit
Facility for revolving credit loans or the issuance of letters of credit is
determined by a borrowing base. The borrowing base is calculated as the sum of
the values for homes and lots in the subdivision to be developed as agreed by
WFC and the agent. The Company’s obligations under the Credit
Facility will be secured by the assets of each subdivision to be developed with
the proceeds of loans available under the Credit Facility.
Outstanding
borrowings under the Credit Facility bear interest at the prime rate plus
0.25%, with a floor of 5.5%. The Company is charged a letter of
credit fee equal to 1.10% of each letter of credit issued under the Credit
Facility. The Company may elect to prepay the Credit Facility at any time
without premium or penalty. Quarterly principal reductions are
required during the final 12 months of the term.
The
Credit Facility contains customary covenants limiting the ability to take
certain actions, including covenants that:
|
·
|
affect
how the Company can develop its
properties;
|
|
·
|
limit
the ability to pay dividends and other restricted
payments;
|
|
·
|
limit
the ability to place liens on its
property;
|
|
·
|
limit
the ability to engage in mergers and acquisitions and dispositions of
assets;
|
|
·
|
require
the Company to maintain a minimum net worth of $20,000,000, including
subordinated debt (although the minimum net worth may be $17,000,000 for
one quarter);
|
|
·
|
prohibit
the ratio of debt (excluding convertible debt) to equity (including
convertible debt) from exceeding (A) 1.75 to 1.0 prior to September 30,
2007, (B) 1.85 to 1.0 from September 30, 2007 until March 30, 2008 and (C)
2.0 to 1.0 thereafter;
|
|
·
|
require
the Company to maintain working capital of at least $15,000,000;
and
|
|
·
|
limit
the number of completed speculative homes to 12% of the total borrowing
base available for homes.
|
An event
of default will occur under the Credit Facility if certain events occur,
including the following:
|
·
|
a
failure to pay principal or interest on any loan under the Credit
Facility;
|
|
·
|
the
inaccuracy of a representation or warranty when
made;
|
|
·
|
the
failure to observe or perform covenants or
agreements;
|
|
·
|
an
event of default beyond any applicable grace period with respect to any
other indebtedness;
|
|
·
|
the
commencement of proceedings under federal, state or foreign bankruptcy,
insolvency, receivership or similar
laws;
|
|
·
|
any
loan document, or any lien created thereunder, ceases to be in full force
and effect;
|
|
·
|
the
entry of a judgment greater than $1,000,000 that remains undischarged;
or
|
If an
event of default occurs under the Credit Facility, then the lenders may: (1)
terminate their commitments under the Credit Facility; (2) declare any
outstanding indebtedness under the Credit Facility to be immediately due and
payable; and (3) foreclose on the collateral securing the
obligations. The Company is currently out of compliance with the
terms of the Borrowing Base Agreement under the Credit Facility. The
Company is not in compliance with the tangible net worth, the ratio of debt to
equity, working capital, number of completed speculative homes and number of
land and developed lot loans covenants. If the Company is unable to
obtain a waiver for the noncompliance its obligation to repay indebtedness
outstanding under the facility, its term loans, and its outstanding note
indentures could be accelerated in full. The Company can give no assurance that
in such an event, the Company would have, or be able to obtain, sufficient funds
to pay all debt required to repay.
In
December 2005 and September 2006, the Company entered into Securities Purchase
Agreements with certain investors for the sale of Convertible Promissory
Notes. Pursuant to the cross-default provisions of the Securities
Purchase Agreements, a default under its Credit Facility triggers defaults
under the Securities Purchase Agreements. In the event that the
Company’s non-compliance with the Credit Facility continues, the holders of a
majority of the Notes issued under the Securities Purchase Agreement could elect
to demand the acceleration of all amounts owed under these Notes. The
Company does not have the cash available to repay these amounts or the amounts
owed under the Credit Facility. The Company has discussed its
non-compliance with certain investors under the Securities Purchase
Agreements but these note holders have not initiated the
process under the Securities Purchase Agreements that would allow them to
accelerate the Company’s obligations under the Securities Purchase Agreements or
take any other remedial action. The Company intends to negotiate with
all investors under the Securities Purchase Agreements to reach a mutually
satisfactory resolution and the Company intends to cooperate with the Credit
Facility lenders to regain compliance with the terms of the Credit
Facility.
Capital
Resources
The
Company has raised approximately $16.5 million of subordinated convertible debt,
and approximately $14 million in a public offering of its common stock completed
in May 2007. The Company entered into a $55 million revolving Credit
Facility that was reduced to $30 million in June 2008.
Land
and homes under construction comprise the majority of the Company’s assets.
These assets have suffered devaluation due to the downturn in the housing and
real estate market for central Texas. The Company is
considering selling tracts of commercial and residential land in order to
increase sales revenues and increase cash. The Company is also
in negotiation to deed in lieu of foreclosure some of its land
positions. The Company expects to incur losses in
2009. Due to current market conditions and slow home and land sales,
it is anticipated that the Company will need additional capital to support
operations for the next twelve months.
3.
Summary of Significant Accounting Policies
a.
Basis of Accounting
These
financial statements are presented on the accrual basis of accounting in
accordance with U.S. generally accepted accounting principles whereby revenues
are recognized in the period earned and expenses when incurred.
b. Cash
and Cash Equivalents
For
purposes of the statements of cash flows, the Company considers all short term,
highly liquid investments with an original maturity of three months or less to
be cash and cash equivalents.
c. Inventory
Inventory
is stated at cost unless it is determined to be impaired, in which case the
impaired inventory would be written down to the fair market
value. Inventory costs include land, land development costs, deposits
on land purchase contracts, model home construction costs, homebuilding costs,
interest and real estate taxes incurred during development and construction
phases.
d. Consolidation
of Variable Interest Entities
The
Company has offered certain homebuilder clients surety for their interim
construction loans and cash advances to facilitate sales of the Company’s
residential lots. The Company may be considered the primary beneficiary as
defined under FASB Interpretation No. 46(R) (“FIN 46(R)”), “Consolidation of
Variable Interest Entities” (VIE), and the Company may have a significant, but
less than controlling, interest in the entities. The Company accounts for each
of these entities in accordance with FIN 46(R). Management uses its judgment
when determining if the Company is the primary beneficiary of, or has a
controlling interest in, any of these entities. Factors considered in
determining whether the Company has significant influence or has control include
risk and reward sharing, experience and financial condition of the other
partners, voting rights, involvement in day-to-day capital and operating
decisions and continuing involvement.
The
Company terminated its relationship with its homebuilder service clients in FY
2007.
e. Land
Held Under Option Agreements, Not Owned
In order
to ensure the future availability of land for development, the Company enters
into lot option purchase agreements with unaffiliated third parties. Under the
agreements, the Company pays a stated deposit in consideration for the right to
purchase land at a future time, usually at predetermined prices or percentage of
proceeds as homes are sold. These options generally do not contain performance
requirements from the Company nor obligate the Company to purchase the land. Lot
option payments are initially capitalized as inventory costs. If the
lot option is exercised the option cost is included in the cost of the land
acquired. At the earlier of the time that it is determined that the
lot option will not be exercised or, at the date the lot option expires, the
cost of the lot option will be expensed. Earnest money deposits for
land costs and development costs on land under option, not owned, totaled
approximately $575,000 and $695,000 at September 30, 2008 and 2007,
respectively, of which approximately $575,000 and $645,000 is non-refundable if
the Company does not exercise the option and purchase the land.
f. Interest
and Real Estate Taxes
Interest
and real estate taxes attributable to land and homes are capitalized as
inventory while they are being actively developed. As of
September 30, 2008 and 2007 there was approximately $557,000 and $405,000 of
real estate taxes in inventory. As of September 30, 2008 and 2007
there was approximately $971,000 and $816,000 of interest in
inventory.
g. Warranty
Costs
The
Company provides homebuyers with a one-year limited warranty for workmanship and
materials, a two-year warranty for mechanicals, and a ten-year limited warranty
for structural items. Since the Company subcontracts its homebuilding work to
subcontractors who typically provide it with an indemnity and a certificate of
insurance prior to receiving payments for their work, claims relating to
workmanship and materials are generally the primary responsibility of the
subcontractors. Warranty liabilities have been established by charging cost of
sales for each home delivered. The amount reserved is based on industry wide
historical experience. The Company had no warranty accrual in
2007. Below is a summary of the warranty accrual account for the year
ended September 30, 2008.
|
|
|
Year Ended
|
|
|
|
|
September 30,
2008
|
|
|
Warranty reserve, beginning of
year
|
|
|
-
|
|
|
Warranties issued
|
|
|
61,126
|
|
|
Payments for warranty
work
|
|
|
(146
|
)
|
|
Warranty reserve, end of
year
|
|
|
60,980
|
|
h. Revenue
Recognition
Revenues
from property sales are recognized in accordance with SFAS No. 66, “Accounting
for Sales of Real Estate.” Revenues from land development services to
builders are recognized when the properties associated with the services are
sold, when the risks and rewards of ownership are transferred to the buyer and
when the consideration has been received, or the title company has processed
payment. For projects that are consolidated, homebuilding revenues
and services will be categorized as homebuilding revenues and revenues from
property sales or options will be categorized as land sales.
i. Income
Taxes
Prior to
the merger of Athena with WFC at May 31, 2005, Athena was a partnership and
therefore did not have income taxes as the income and losses passed through to
the partners. Also, the VIEs income and losses were passed through entities.
Since the merger, income taxes are accounted for in accordance with SFAS No.
109, “Accounting for Income Taxes,” deferred tax assets and liabilities are
determined based on temporary differences between financial reporting carrying
amounts of existing assets and liabilities and their respective tax bases and
net operating loss and credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates will be recognized in the period that includes the enactment
date. A valuation allowance is recorded for the entire deferred tax
assets due to the uncertainty of the net realizable value of the
asset.
j.
Advertising
The
Company has incurred advertising and marketing costs as part of the sales
efforts to market the real estate for sale and services offered. The costs,
include the cost of developing the Company’s website (greeenbuildersinc.com),
public relations, media advertising, and brochures and mail out
documents. For the year ended September 30, 2008 the Company incurred
approximately $1.3 million of advertising expenses. For the nine
months ended September 30, 2007 the Company incurred approximately $173,000 in
advertising expenses.
k. Property
and Equipment
Property
and equipment, which included model home furnishings and sales office costs of
approximately $1.2 million at September 30, 2008 is carried at cost less
accumulated depreciation. The Company did not have any model home furnishings or
sales office costs capitalized at September 30, 2007. Depreciation
and amortization is recorded using the straight-line method over the estimated
useful life of the asset except for model home furnishings and sales office cost
which are amortized over the life of the community as homes are
closed.
l. Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Accordingly, actual results could differ
from those estimates.
The
Company has estimated and accrued liabilities for real estate property taxes on
its purchased land in anticipation of development, and other liabilities
including the beneficial conversion liability, the fair value of warrants and
options. To the extent that the estimates are dramatically different
to the actual amounts, it could have a material effect on the financial
statements.
m. Municipal
Utility and Water District Receivables
The
Company owns one property located in a Municipal Utility District (MUD) and one
property located in a Water Control and Improvement District (WCID). The Company
incurs development costs for water, sewage lines and associated treatment plants
and other development costs and fees for these properties. Under the agreement
with the districts, the Company expects to be reimbursed partially for the above
developments costs. The Districts will issue bonds to repay the Company, once
the property has sufficient assessed value for the District taxes to repay the
bonds. As the project is completed and homes are sold within the District, the
assessed value increases. It can take several years before the assessed value is
sufficient to provide sufficient tax revenue for the Company to recapture its
costs. The Company has estimated that it will recover approximately
50% to 100% of eligible costs spent through September 30, 2008 for Phase 1 of
the Rutherford West project. The Company completed Phase 1 for the
Rutherford West project and has approximately $1.1 million of Water Control and
Improvement District reimbursements included in inventory that it anticipates it
will collect from bond issuances made by the district. When the
reimbursements are received they will be recorded as reductions in the related
asset’s balance. The Districts will pay for property set aside for the
preservation of endangered species, greenbelts and similar uses. To
the extent that the estimated reimbursements are dramatically different to the
actual reimbursements, it could have a material effect on the Company’s
financial statements.
n. Impairment
of Long-Lived Assets
The
Company reviews its long-lived assets, which consist primarily of equipment,
software, and real estate inventory for impairment according to whenever events
or changes in
circumstances
indicate.
Inventory
is stated at the lower of cost (including direct construction costs, capitalized
interest and real estate taxes) or fair value less cost to sell. Equipment and
software is carried at cost less accumulated depreciation. The Company assesses
these assets for recoverability in accordance with the provisions of statement
of Financial Accounting Standards No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” or SFAS No. 144. SFAS No. 144 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets is measured by comparing the carrying
amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. These evaluations for impairment are significantly
impacted by estimates of revenues, costs and expenses and other factors. If
long-lived assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. The Company recorded inventory impairments
and write-offs of land option contracts of $5.9 million in the year ended
September 30, 2008. For the nine months ended September 30, 2007 the
Company recorded impairment and write-offs of $1.3 million.
o.
Intangible Assets
The
Company accounts for intangible assets in accordance with Statement of Financial
Accounting Standards (“SFAS”) No 142, “Goodwill and Other Intangible Assets”
(“SFAS 142”). Definite-lived intangibles are amortized over their estimated
useful lives and are evaluated for impairment annually, or more frequently if
impairment indicators are present, using a process similar to that used to test
other long-lived assets for impairment. During the year ended
September 30, 2008 the Company recorded an impairment charge of approximately
$293,000 related to the trademark name of Green Builders,
Inc.
p. Loss
per Common Share
Earnings
per share is accounted for in accordance with SFAS No. 128, “Earnings per
Share,” which require a dual presentation of basic and diluted earnings per
share on the face of the statements of earnings. Basic loss per share
is based on the weighted effect of common shares issued and outstanding, and is
calculated by dividing net loss by the weighted average shares outstanding
during the period. Diluted loss per share is calculated by dividing net loss by
the weighted average number of common shares used in the basic loss per share
calculation plus the number of common shares that would be issued assuming
exercise or conversion of all potentially dilutive common shares
outstanding.
The
Company has issued stock options and warrants convertible into shares of common
stock. These shares and warrants have been excluded from loss per share for the
year ended September 30, 2008 and 2007, and nine months ended September 30, 2007
because the effect would be anti-dilutive as summarized in the table
below:
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
September
30, 2008
|
|
|
Nine
Months Ended
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
1,474,083
|
|
|
|
1,835,000
|
|
|
Common
stock warrants
|
|
|
1,143,125
|
|
|
|
1,143,125
|
|
|
Subordinated
convertible debt warrants
|
|
|
8,250,000
|
|
|
|
8,250,000
|
|
|
Total
|
|
|
10,867,208
|
|
|
|
11,228,125
|
|
q. Financial
Instruments and Credit Risk
Financial
instruments that potentially subject the Company to credit risk include cash and
cash equivalents. Cash is deposited in demand accounts in federally
insured domestic institutions to minimize risk. Although the balances
in these accounts exceed the federally insured limit by $3.2 million at
September 30, 2008, the Company has not incurred losses related to these
deposits. Cash equivalents consist of money market accounts and are typically
held in accounts with investment brokers or banks which are secured with high
quality short maturity investment securities.
The
amounts reported for cash and cash equivalents, notes payable, accounts payable,
accrued liabilities, and line of credit are considered to approximate their
market values based on comparable market information available at the respective
balance sheet dates and their short-term nature.
r. Concentrations
The
Company’s activities are currently in the geographical area of central Texas,
which is defined as encompassing the Austin Metropolitan Statistical
Area. This geographic concentration makes its operations more
vulnerable to local economic downturns than those of larger, more diversified
companies.
In prior
periods the Company has been dependent upon a limited number of homebuilder
services customers which were subject to numerous uncertainties related to
homebuilding including weather delays and damage, labor and material shortages,
insufficient capital, materials theft or poor workmanship. Revenues from one
homebuilder customer accounted for 100% of the Company’s total homebuilding
revenue for the nine months ended September 30, 2007. At September
30, 2008 the Company no longer has homebuilder services customers.
s. Subordinated
Convertible Debt
The
subordinated convertible debt and the related warrants have been accounted for
in accordance with Emerging Issues Task Force (EITF) No. 98-5, “Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios”, EITF No. 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock,” EITF 00-27, “Application of issue 98-5 to Certain Convertible
Instruments”, EITF 05-02 “Meaning of ‘Conventional Convertible Debt Instrument’
in Issue No. 00-19”, and EITF 05-04 “The Effect of a Liquidated Damages Clause
on a Freestanding Financial Instrument Subject to Issue No. 00-19” updated with
FSP EITF 00-19-2”, Accounting for Registration Payment
Arrangements.
t. Derivative
Financial Instruments
The
company accounts for all derivative financial instruments in accordance with
SFAS No. 133. Derivative financial instruments are recorded as liabilities in
the consolidated balance sheet, measured at fair value. When available, quoted
market prices are used in determining fair value.
However,
if quoted market prices are not available, Green Builders estimates fair value
using either quoted market prices of financial instruments with similar
characteristics or other valuation techniques.
The value
of the derivative liabilities relating to the convertible note in the
consolidated financial statements are subject to the changes in the trading
value of Green Builders common stock and other assumptions. As a result, the
Company’s quarterly financial statements may fluctuate from quarter to quarter
based on factors, such as the trading value of Green Builders common stock, the
amount of shares converted by subordinated convertible debt holders in
connection with the subordinated convertible notes and exercised in connection
with the subordinated convertible debt holders’ penalty warrants. Consequently,
the consolidated financial position and results of operations may vary from
quarter to quarter based on conditions other than Green Builders operating
revenues and expenses. See Note 10 regarding valuation methods used for
derivative liabilities.
Derivative
financial instruments that are not designated as hedges or that do not meet the
criteria for hedge accounting under SFAS No. 133 are recorded at fair value,
with gains or losses reported currently in earnings. All derivative financial
instruments held by the Company as of September 30, 2008 and 2007 were
designated as hedges.
u. Stock-Based
Compensation
The
Company applies the provisions of SFAS No. 123 (revised 2004), Share-Based
Payment, (“SFAS 123R”). Under this method, compensation expense
recognized during the periods included: (a) compensation expense for all
share-based awards granted prior to, but not yet vested as of December 31,
2005, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123, and (b) compensation expense for all
share-based awards granted subsequent to January 1, 2006, based on the
grant date fair value estimated in accordance with the provisions of SFAS
123R.
v. Recent
Accounting Pronouncements
In
January 2007, the Company adopted FASB Staff Position (FSP) No. EITF 00-19-2
(“FSP EITF 00-19-2”), Accounting for Registration Payment Arrangements. This
addresses an issuer’s accounting for registration payment arrangements and
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and
measured in
accordance with FASB Statement No. 5, Accounting for Contingencies. The guidance
in FSP EITF 00-19-2 amends FASB Statements No. 133, Accounting for Derivative
Instruments and Hedging Activities, and No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity, and
FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to
include scope exceptions for registration payment arrangements. The FSP EITF
00-19-2 further clarifies that a financial instrument subject to a registration
payment arrangement should be accounted for in accordance with other applicable
generally accepted accounting principles (GAAP) without regard to the contingent
obligation to transfer consideration pursuant to the registration payment
arrangement. This pronouncement shall be effective immediately for registration
payment arrangements and the financial instruments subject to those arrangements
that are entered into or modified subsequent to the date of issuance of this
pronouncement, or for financial statements issued for fiscal years beginning
after December 19, 2006, and interim periods within those fiscal
years.
The
cumulative effect of the re-characterization of the derivative liabilities is
shown in the table below:
|
|
|
As
filed
December
31,
2006
|
|
|
Cumulative
effect
of re-characterization
of
derivative
liabilities
|
|
|
Net
effect of re-characterization
|
|
|
LIABILITY
ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
Subordinated
convertible debt, net of discount, respectively
|
|
$
|
8,395,876
|
|
|
|
4,572,674
|
|
|
|
12,968,550
|
|
|
Derivative
liability, convertible note compound embedded derivative
|
|
|
7,462,659
|
|
|
|
(7,462,659
|
)
|
|
|
-
|
|
|
Derivative
liability, contingent warrants issued to subordinated
convertible
debt holders
|
|
|
1,883,252
|
|
|
|
(1,883,252
|
)
|
|
|
-
|
|
|
Total
debt, net of discount and derivative liabilities
|
|
|
17,741,787
|
|
|
|
(4,773,237
|
)
|
|
|
12,968,550
|
|
|
STOCKHOLDERS’
EQUITY ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
18,056
|
|
|
|
-
|
|
|
|
18,056
|
|
|
Additional
paid in capital
|
|
|
16,809,885
|
|
|
|
(4,577,938
|
)
|
|
|
12,231,947
|
|
|
Retained
deficit
|
|
|
(16,053,143
|
)
|
|
|
9,351,175
|
|
|
|
(6,701,968
|
)
|
|
Total
stockholders’ equity
|
|
$
|
774,798
|
|
|
|
4,773,237
|
|
|
|
5,548,035
|
|
In July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes -- An Interpretation of FASB Statement 109” (“FIN 48”) which
prescribes a recognition 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. In addition, FIN 48 provides guidance on
derecognition, classification, accounting in interim periods and disclosure
requirements for uncertain tax positions. The accounting provisions of FIN 48
were effective for the Company beginning with its fiscal year 2008. As a result
of the adoption of FIN 48 and as of September 30, 2008, no material adjustments
to the Company’s financial position and results of operations were
required.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”), which defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements.
SFAS 157 applies under other accounting pronouncements that require or permit
fair value measurements and does not require any new fair value measurements.
The provisions of SFAS 157 are effective for the Company beginning with its
fiscal year 2009. The Company is currently evaluating the impact this standard
will have on its financial position and results of operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — Including an amendment of
FASB Statement No. 115.” The statement permits entities to choose to
measure certain financial assets and liabilities at fair value. Unrealized gains
and losses on items for which the fair value option has been elected are
reported in earnings. SFAS No. 159 is effective for fiscal years
beginning with its fiscal year 2009. The standard is not expected to
have a material impact on the Company’s financial position and results of
operations.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (FAS
141(R)), which establishes accounting principles and disclosure requirements for
all transactions in which a company obtains control over another
business. The Company is currently evaluating the impact of the
adoption of SFAS No. 141; however, it is not expected to have a
material impact on the Company’s consolidated financial position, results of
operations or cash flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (FAS 160), which prescribes the accounting by
a parent company for minority interests held by other parties in a subsidiary of
the parent company. The Company is currently evaluating the impact of
the adoption of SFAS No. 160; however, it is not expected to have a
material impact on the Company’s consolidated financial position, results of
operations or cash flows.
4
.
Inventory
The
Company’s land and land development inventory includes land costs,
prepaid development cots, development costs, option money and earnest money
on land purchase options. Homebuilding inventory represents model
homes, speculative homes under construction and units sold and under
construction.
Earnest
money deposits for land costs and development costs on land under option, not
owned, totaled approximately $575,000 and $695,000 at September 30, 2008 and
2007 respectively, of which approximately $575,000 and $625,000 is
non-refundable if the Company does not exercise the option and purchase the
land.
Of the
earnest money capitalized, $400,000 is for the remaining 30 acres under option
in Elm Grove. The Company’s land purchase contract calls for a
purchase of the acreage in December 2008. The purchase price is
approximately $1.3 million less the outstanding earnest money. Due to
existing drainage issues that were created by another developer, the Company
does not anticipate that it will purchase the remaining land in December
2008. The developer installed a drainage channel on the Company’s
property with a temporary easement. This drainage channel in its
current location alters the plat and how the land was sold to the
Company. The Company is in negotiations with the seller and the
developer regarding these issues. The city will not issue any new
permits to the developer, until the Company and the other developer have agreed
on a solution to fix the drainage issue. The Company anticipates that
it will get its earnest money back due to the drainage issues created, but there
is no assurance an acceptable agreement will be reached or we will receive the
earnest money back.
As of
September 30, 2008 the Company owned approximately 1,209 acres of unfinished
acreage. The Company completed Section 9 of Georgetown Village in
June 2008 and Section 1 of Elm Grove in March 2008. In addition, the
Company completed Phase 1 in Rutherford West in 2007 and Phase 6 in Georgetown
Village in 2006.
The
Company recorded impairment charges of the following:
|
·
|
$3.5
million for land and development expenses capitalized on approximately 522
acres of land in New Sweden;
|
|
·
|
$859,000
for land and development expenses capitalized on approximately 538 acres
of land in Rutherford West
|
|
·
|
$838,000
for Rutherford West developed lots;
|
|
·
|
$50,000
for earnest money for a land option contract which will not be
pursued;
|
|
·
|
$691,000
for Rutherford West homebuilding impairment charges including write-offs
for capitalized indirect expenses;
|
|
·
|
$77,000
for Georgetown Village homebuilding impairment charges;
and
|
|
·
|
$80,000
for earnest money for a lot purchase contract which will not be
pursued.
|
These
impairment charges are offset by $240,000 for expenses incurred in prior year
for Bohls Tract. The majority of these expenses represent LUE fees
that were reimbursed by the City in 2008.
The
Company is currently in negotiations to sell or dispose of the 522 acres of land
in New Sweden and 538 acres in Rutherford West. The Company does not
have the cash to continue making interest payments. The Company has
written off all capitalized assets in excess of the debt and accrued
expenses.
On
October 6, 2008 the Company received notice of an affidavit for a mechanic’s and
materialman’s lien for disputed work for $177,000 for the New Sweden
project.
During
2007, the Company elected not to exercise the option on Bohl’s
tract. The Company recorded approximately $1.3 million of cost of
sales during the nine months ended September 30, 2007 to reflect the development
costs which accumulated on this property.
In April
2007, 10 acres of the Company’s Highway 183 project was condemned by the State
of Texas. In July 2007 the Company received final judgment from the
State of Texas and received proceeds of approximately $410,000 for the condemned
land. The Company sold and closed the remaining 5 acres in December
2007 for approximately $190,000.
Below is
a summary of the property completed, owned or under contract by the Company at
September 30, 2008:
|
Property
|
Finished
Lots/Homes
|
Owned
Unfinished
Acreage
|
Approximate
Acreage
Under
Option
|
Land
and Project
Costs
at September 30,
2008
(thousands)
|
Texas
County
|
|
Rutherford
West
|
39
|
538
|
-
|
$
10,179
|
Hays
|
|
Georgetown
Village
|
126
|
119
|
419
|
10,127
|
Williamson
|
|
Villages
of New Sweden
|
-
|
522
|
-
|
7,478
|
Travis
|
|
Elm
Grove
|
72
|
30
|
31
|
4,875
|
Hays
|
|
Other
land
|
-
|
-
|
-
|
80
|
|
|
Sub-total
land
|
237
|
1,209
|
450
|
32,739
|
|
|
Homebuilding
inventory
|
14
|
-
|
-
|
8,204
|
|
|
Total
inventory
|
251
|
1,
209
|
450
|
$
40,943
|
|
Below is
a summary of the property completed, owned or under contract by the Company at
September 30, 2007:
|
Property
|
Finished
Lots/Homes
|
Owned
Unfinished
Acreage
|
Approximate
Acreage
Under
Option
|
Land
and Project
Costs
at September 30,
2007
(thousands)
|
Texas
County
|
|
Rutherford
West
|
54
|
538
|
-
|
$
12,369
|
Hays
|
|
Highway
183
|
-
|
5
|
-
|
113
|
Travis
|
|
Georgetown
Village
|
50
|
149
|
419
|
6,199
|
Williamson
|
|
Villages
of New Sweden
|
-
|
522
|
-
|
10,716
|
Travis
|
|
Elm
Grove
|
-
|
30
|
61
|
3,011
|
Hays
|
|
Other
land projects
|
-
|
-
|
-
|
55
|
|
|
Sub-total
land
|
104
|
1,244
|
480
|
32,463
|
|
|
Homebuilding
inventory
|
-
|
-
|
-
|
2,844
|
|
|
Total
inventory
|
104
|
1,244
|
480
|
$ 35,307
|
|
5.
Consolidation of Variable Interest Entities
The
Company exercises significant influence over, but holds no controlling interest
in, the Company’s homebuilder client. It bears the majority of the rewards and
risk of loss. At December 31, 2006, the Company determined it was the
primary beneficiary in certain homebuilder agreements as defined under FASB
Interpretation No. 46(R) (“FIN 46(R)”), “Consolidation of Variable Interest
Entities” (VIEs), that it has a significant, but less than controlling, interest
in the entity. The results of this client have been consolidated into its
financial statements.
Below is
a summary of the effect of the consolidation of these entities for the nine
months ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
|
WFC
|
|
|
VIEs
|
|
|
|
Consolidating
entries
|
|
Consolidated
|
|
|
Revenues
|
|
$
|
3,233,232
|
|
|
|
1,295,406
|
|
(a)
|
|
|
(84,139
|
)
|
|
|
4,444,499
|
|
|
Cost
of Revenues
|
|
|
3,687,225
|
|
|
|
993,932
|
|
(a)
|
|
|
(84,139
|
)
|
|
|
4,597,018
|
|
|
General,
administrative, sales and
marketing
expenses
|
|
|
4,186,307
|
|
|
|
281,308
|
|
|
|
|
-
|
|
|
|
4,467,615
|
|
|
Costs
and expenses before interest
|
|
|
7,873,532
|
|
|
|
1,275,240
|
|
|
|
|
(84,139
|
)
|
|
|
9,064,633
|
|
|
Operating
income/(loss)
|
|
$
|
4,640,300
|
)
|
|
|
20,166
|
|
|
|
|
-
|
|
|
|
(4,620,134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Eliminates WFC revenues in VIE expenses, eliminates VIE revenues in
WFC Expenses
|
|
On June
19, 2007, the Company purchased one of its variable interest entities, Green
Builders, Inc, now a wholly owned subsidiary of Green Builders.
The
Company terminated its relationship with its final homebuilder client on August
2, 2007 subsequent to the sale of all the homes for which the Company had
guaranteed the loans. As a result of the termination of the
relationship, the Company recorded approximately a $260,000 increase in
stockholders equity.
6.
Operating and Reporting Segments
The
Company has two reporting segments: homebuilding and related services, and land
sales. The Company’s reporting segments are strategic business units that offer
different products and services. The homebuilding and related services segment
includes home sales and services provided to homebuilders. The Company is
required to consolidate its homebuilder services clients per FIN 46(R). The
Company identifies the clients it consolidates as “VIEs”. Land sales consist of
land in various stages of development sold, including finished lots. The Company
eliminates land sales to its homebuilder clients. The Company charges
identifiable direct expenses and interest to each segment and allocates
corporate expenses and interest based on an estimate of each segment’s relative
use of those expenses. Depreciation expense is included in selling, general and
administrative and is immaterial.
The
following table presents segment operating results before taxes for the year
ended September 30, 2008 and nine months ended September 30, 2007
|
|
|
|
|
|
|
Year
Ended September 30, 2008
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
|
Homebuilding
and
Related
Services
|
|
|
Land
Sales
|
|
|
Total
|
|
|
Homebuilding
and
Related
Services
|
|
|
Land
Sales
|
|
|
Total
|
|
|
Revenues
from external customers
|
|
$
|
6,042,311
|
|
|
|
2,950,894
|
|
|
|
8,993,205
|
|
|
|
1,295,407
|
|
|
|
3,149,092
|
|
|
|
4,444,499
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
5,379,707
|
|
|
|
2,120,270
|
|
|
|
7,499,977
|
|
|
|
909,793
|
|
|
|
2,407,257
|
|
|
|
3,317,050
|
|
|
Impairment
and write-offs
|
|
|
847,770
|
|
|
|
5,040,154
|
|
|
|
5,887,924
|
|
|
|
-
|
|
|
|
1,279,968
|
|
|
|
1,279,968
|
|
|
Selling,
general and administrative
|
|
|
4,542,941
|
|
|
|
2,151,328
|
|
|
|
6,694,269
|
|
|
|
2,762,334
|
|
|
|
1,705,281
|
|
|
|
4,467,615
|
|
|
Loss
on intangible assets
|
|
|
292,692
|
|
|
|
-
|
|
|
|
292,692
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
Interest
& other income
|
|
|
(164,123
|
)
|
|
|
(134,283
|
)
|
|
|
(298,406
|
)
|
|
|
(151,239
|
)
|
|
|
(140,239
|
)
|
|
|
(291,478
|
)
|
|
Interest
expense
|
|
|
912,440
|
|
|
|
2,836,917
|
|
|
|
3,749,357
|
|
|
|
1,585,634
|
|
|
|
641,599
|
|
|
|
2,227,233
|
|
|
Total
costs and expenses
|
|
|
11,811,427
|
|
|
|
12,014,386
|
|
|
|
23,825,813
|
|
|
|
5,106,522
|
|
|
|
5,893,866
|
|
|
|
11,000,388
|
|
|
Loss
before taxes
|
|
$
|
(5,769,116
|
)
|
|
|
(9,063,492
|
)
|
|
|
(14,832,608
|
)
|
|
|
(3,811,116
|
)
|
|
|
(2,744,773
|
)
|
|
|
(6,555,889
|
)
|
|
Segment
Assets
|
|
$
|
12,498,672
|
|
|
|
35,080,506
|
|
|
|
47,579,178
|
|
|
|
11,236,511
|
|
|
|
39,370,864
|
|
|
|
50,607,375
|
|
|
Capital
expenditures
|
|
$
|
1,252,757
|
|
|
|
9,771
|
|
|
|
1,262,528
|
|
|
|
181,408
|
|
|
|
20,157
|
|
|
|
201,565
|
|
7.
Related Party Transactions
Notes
Payable
In March
of 2005, some of the trusts belonging to the Wilson family purchased a note for
approximately $280,000 from a third party that is secured by approximately 15
acres of land. At the time of purchase, the terms of the note payable to the
trusts belonging to family members of Clark Wilson remained the same at 8% per
annum but the maturity date was changed from October 7, 2005 to
April 4, 2006 when the entire principal and interest would be due and
payable. On March 29, 2006 the note was extended till April 4,
2008. In August 2007 all outstanding principal and interest was
paid.
Issuance
of Convertible Debt
In
connection with the placement of an additional $6.75 million of the Company’s
convertible promissory notes in September 2006, it entered into an additional
agreement with Tejas Securities Group, Inc. pursuant to which Tejas Securities
Group, Inc. served as the Company’s Placement Agent in connection with the
offering. Pursuant to this agreement, the Company paid Tejas Securities Group,
Inc. commissions of $70,000, issued 750,000 warrants, and reimbursed the
Placement Agent for its expenses. John J. Gorman is the Chairman of the Board of
the Placement Agent and of Tejas Incorporated, the parent company of the
Placement Agent. Mr. Gorman is the beneficial owner of approximately $4.1
million shares of the Company’s common stock. Clark N. Wilson, who serves
as the Company’s President and Chief Executive Officer and is a
director of the Company, has served on the board of directors of Tejas
Incorporated from October 1999 through March 2008, and was compensated for such
service. Mr. Wilson owns 1,000 shares of Tejas Incorporated
common stock and options to purchase an additional 60,000 shares of common
stock. The Company’s largest stockholder, who is also its President
and Chief Executive Officer, will continue to control the Company.
In
September 2006, the Company entered into an agreement to lease approximately
5,000 square feet for its corporate offices, which it began occupying on
October 1, 2006. The lease requires monthly payments of approximately
$11,000 per month for 36 months. The lease was with a subsidiary of Tejas
Incorporated until January 2008. In January 2008 the building being
leased was bought by an unrelated party. The Company believes that
the lease is paid at fair market value for similar space in the Austin, Texas
commercial real estate market.
Consulting
Arrangement with Audrey Wilson
In
February 2007 the Company entered into a consulting agreement with Audrey
Wilson, the wife of Clark N. Wilson, its President and Chief Executive Officer.
Pursuant to the consulting agreement, the Company has agreed to pay Ms. Wilson
$10,000 per month for a maximum of six months. Ms. Wilson agreed to
devote at least twenty-five hours per week assisting the Company with the
following activities: (i) the establishment of “back-office” processes for
homebuilding activities, including procurement, sales and marketing and other
related activities, and (ii) developing the Company’s marketing strategy for
marketing and sale of land to homebuilders. Subsequent to the
completion of the six month period in July 2007, Ms. Wilson continued to provide
consulting services to the Company at no cost to the Company. In
accordance with Staff Accounting Bulletin 5A, for the year ended 2008, the
Company recorded $75,000 as compensation expense and credited equity for
services recorded at fair market value. On May 13, 2008, the consulting
agreement was re-instated and Ms. Wilson was to be paid $10,000 per month for a
maximum of 12 months. In an effort to reduce Company expenditures as
of December 31, 2008, Ms. Wilson will no longer be paid for any consulting
services she provides to the Company. The company paid Audrey Wilson $35,000 and
$60,000 for the year ended September 30, 2008 and nine months ended September
30, 2007.
Vendor
Payments
The
Company has entered into contractual work agreements with Wilson
Roofing. Wilson Roofing is owned by relatives of Clark N. Wilson, the
Company’s President and Chief Executive Officer. The company paid
Wilson Roofing approximately $360,000 for the year ended September 30,
2008. Management believes that services were provided at fair
market value.
8.
Commitments and Contingencies
Options
Purchase Agreements
In order
to ensure the future availability of land for development and homebuilding, the
Company plans to enter into lot-option purchase agreements with unaffiliated
third parties. Under the proposed option agreements, the Company pays a stated
deposit in consideration for the right to purchase land at a future time,
usually at predetermined prices or a percentage of proceeds as homes are sold.
These options generally do not contain performance requirements from the Company
nor obligate the Company to purchase the land. In order for the Company to start
or continue the development process on optioned land, it may incur development
costs on land it does not own before it exercises its option
agreement.
Lease
Obligations
In
September 2006, the Company entered into an agreement to lease approximately
5,000 square feet for its corporate offices, which it began occupying on
October 1, 2006. The lease requires monthly payments of
approximately $10,000 per month for 36 months. In September 2008, the Company
subleased out approximately 1,626 square feet of the property. The
sublease requires monthly payments to Green Builders, Inc for $5,000 per month
for 12 months. The Company entered into sale/leaseback agreements for
three of its model homes. Two of the contracts were entered into in
August 2008 and one in September 2008. The leasebacks of the three
model homes require monthly payments of approximately $7,300 per month for 24
months. The Company also has office equipment leases and job
trailer leases. The Company’s future minimum lease payments for future fiscal
years are as follows:
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
2012
|
2013
|
|
Lease
obligations
|
|
$
|
195,746
|
|
|
|
98,842
|
|
|
|
240
|
|
240
|
240
|
Employment
Agreements with Executive Officers
On
February 14, 2007, the Company entered into an employment agreement with Clark
N. Wilson, its President and Chief Executive Officer. In the event of the
involuntary termination of Mr. Wilson’s service with the Company, the
agreement provides for monthly payments equal to Mr. Wilson’s monthly
salary payments to continue for 12 months. The agreement contains a provision
whereby Mr. Wilson is not permitted to be employed in any position in which
his duties and responsibilities comprise residential land development and
homebuilding in Texas or in areas within 200 miles of any city in which the
Company is conducting land development or homebuilding operations at the time of
such termination of employment for a period of one year from the termination of
his employment, if such termination is voluntary or for cause, or involuntary
and in connection with a corporate transaction.
Consulting
Arrangement with Arun Khurana
On
September 18, 2007, the Company entered into a consulting agreement with Arun
Khurana, its Vice President and Chief Financial Officer, pursuant to which Mr.
Khurana will transition from his position as an executive officer of the Company
into a consulting role, beginning December 31, 2007 and ending on October 31,
2008. The transition into a consulting role is a part of the
Company’s efforts to reduce its expenditures through fiscal 2008 as the Company
has decided to focus its efforts on commencing its homebuilding
operations.
Pursuant
to the consulting agreement, during the consulting term Mr. Khurana will (i)
review and provide comments on the Company’s periodic filings with the
Securities and Exchange Commission, (ii) advise the Company on its
Sarbanes-Oxley Act compliance and implementation efforts, (iii)
advise the Company regarding financing and joint venture matters, and (iv)
transition his responsibilities to the Vice President of Finance of the
Company. During the consulting term, Mr. Khurana will receive a
consulting fee of $11,500 per month. All of his unvested options to purchase the
Company’s common stock vested in full on October 31, 2007 and were expensed to
stock compensation expense.
9.
Income Taxes
The
Company’s provision for income taxes for the tax year ended September 30, 2008
consists of approximately $18,305 of Texas gross margin tax. A
reconciliation of expected income tax benefit (computed by applying a statutory
income tax rate of 34% to income before income tax expense) to total tax expense
(benefit) in the accompanying consolidated statements of operations
follows:
|
|
|
Year
Ended
September
30, 2008
|
|
|
Nine
Months Ended
September
30, 2007
|
|
|
Tax
benefit at Statutory Rate (34%)
|
|
$
|
5,043,087
|
|
|
|
2,229,002
|
|
|
State
income tax benefit
|
|
|
11,898
|
|
|
|
-
|
|
|
Impairment
of Intangible Assets
|
|
|
(99,515
|
)
|
|
|
-
|
|
|
Other
|
|
|
4,490
|
|
|
|
6,846
|
|
|
Impact
of Change in Texas tax law
|
|
|
-
|
|
|
|
(379,977
|
)
|
|
Net
decrease in valuation allowance
|
|
|
(4,941,655
|
)
|
|
|
(1,844,495
|
)
|
|
Provision
for Income Taxes
|
|
$
|
18,305
|
|
|
|
11,376
|
|
The
effect of the change in Texas tax law represents a decrease in the state rate
applied to the temporary differences, and the exclusion of the deferred tax
assets related to Texas loss carryforwards. The state rate applied to
the temporary difference has been reduced as the temporary differences do not
affect the Company’s Texas gross margin tax and thus, do not represent a future
tax benefit or liability for the Texas tax.
The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities at September 30, 2008 and September 30, 2007
are as follows:
|
|
|
Year
Ended
September
30, 2008
|
|
|
Nine
Months Ended
September
30, 2007
|
|
|
Deferred
tax assets (liabilities)
|
|
|
|
|
|
|
|
Deferred
stock compensation
|
|
$
|
652,924
|
|
|
|
369,160
|
|
|
Accrued
expenses
|
|
|
-
|
|
|
|
34,000
|
|
|
Inventory
Adjustment
|
|
|
1,957,805
|
|
|
|
-
|
|
|
Other
temporary differences
|
|
|
(11,712
|
)
|
|
|
12,966
|
|
|
Net
operating loss crryforwards
|
|
|
7,002,252
|
|
|
|
4,243,488
|
|
|
Valuation
allowance
|
|
|
(9,601,269
|
)
|
|
|
(4,659,614
|
)
|
|
Net
deferred tax asset (liability)
|
|
$
|
-
|
|
|
|
-
|
|
In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the lack of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not the Company will not realize the benefits of these
deductible differences. The Company has provided a 100% valuation allowance on
its deferred tax assets.
For the
years ended September 30, 2008 and September 30, 2007, the Company had net
operating loss carryforwards of approximately $20.6 million and $12.5 million,
respectively, which begin to expire in 2025 if not utilized. The Internal
Revenue Code Section 382 limits net operating loss carryforwards when an
ownership change of more than fifty percent of the value of the stock in a loss
corporation occurs within a three-year period. Accordingly, the ability to
utilize net operating loss carryforwards may be significantly
restricted.
Effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an interpretation of
FASB Statement No. 109.” FIN 48 prescribes a comprehensive model for
recognizing, measuring, presenting and disclosing in the financial statements
tax positions taken or expected to be taken on a tax return, including the
minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. The cumulative effect of
adopting FIN 48 had no impact on the Company’s beginning retained earnings as of
January 1, 2007. The company has analyzed its tax positions and
concluded that there is no current effect from the application of the provisions
of FIN 48. The Company’s income tax returns are not currently under
examination by the Internal Revenue Service or other tax
authorities. The Company does not foresee any recognition of any
unrecognized tax benefits during the next twelve months.
10. Indebtedness
The
following schedule lists the Company’s notes payable and lines of credit
balances at September 30, 2008 and 2007.
|
|
In
Thousands
|
Rate
|
Status
|
Maturity
Date
|
|
9/30/2008
|
9/30/2007
|
|
a
|
Line
of Credit, $3 million, development
|
Prime+.50%
|
|
Mar-1-08
|
$
|
-
|
472
|
|
b
|
Notes
payable, land
|
12.50%
|
Default
as of
September
2008
|
Mar-1-09
|
|
4,700
|
4,700
|
|
c
|
Notes
payable, seller financed
|
7%
& Prime + 2%
|
Default
as of
October
2008
|
Oct.
2010/11
|
|
2,475
|
2,475
|
|
d
|
Notes
payable, land
|
12.50%
|
Default
as of
September
2008
|
Mar-1-09
|
|
7,300
|
7,300
|
|
e
|
Notes
payable, development
|
Prime+.50%
|
|
Feb-1-10
|
|
-
|
1,502
|
|
f
|
Notes
payable, land and development
|
Prime+3.00%
|
|
Feb-1-09
|
|
-
|
1,440
|
|
g
|
Line
of Credit, $30 million facility, land, land development, and
homebuilding
|
Prime+.25%
|
Expired
as
October
2008
|
Oct-1
08
|
|
15,779
|
2,749
|
|
h
|
2005
$10 million, Subordinated convertible notes, net of discount of $372
thousand
and
$459 thousand, respectively
|
5.00%
|
Cross-default
as of
March
2008
|
Dec-1-12
|
|
9,628
|
9,541
|
|
i
|
2006
$6.50 million, Subordinated convertible notes, net of discount of $2,314
and
$2,786
thousand respectively
|
5.00%
|
Cross-default
as of
March
2008
|
Sep-1-13
|
|
4,185
|
3,714
|
|
|
|
Total
|
|
|
$
|
44,067
|
33,893
|
|
|
(a)
|
In
March 2006 the Company secured a $3.0 million line of credit development
loan, maturing on March 30, 2008, at prime plus 0.50% with a minimum
floor of 7.00%, and interest payable monthly. The loan was secured by
property being developed totaling approximately 32.6 acres located in
Williamson County. The loan was paid in December 2007 and the
lots were refinanced as a developed lot loan with the $30 million Credit
Facility
|
|
|
(b)
|
In
March 2007, the Company secured a $4.7 million term land loan to finance
approximately 522 acres in Travis County. The interest rate is
12.5% annually and requires monthly interest payments, with a maturity of
two years and is renewable for an additional year for a 1% loan
fee. The Company is currently past due on its interest
payments. The Company has not made interest payments since
August 2008 and is currently in default on the loan. The
loan has no financial covenants. The loan is secured by
the underlying land and is guaranteed by the Company. The
Company is currently in negotiations to dispose of the assets including
but not limited to deed in lieu of foreclosure of these
assets.
|
|
|
(c)
|
As
part of the purchase of 522 acres in Travis County described above, the
Company entered into four notes payable, seller financed with a cumulative
balance of approximately $2.5 million. Three of the notes payable with a
cumulative balance of $1.9 million are at an interest rate of 7.0% and the
fourth note payable issued for approximately $600,000 is at an interest
rate of prime rate with an anniversary date of October 28 of each year
plus 2.0%. The terms of the note were modified in October 2007 with the
principal payments extended for one year. The revised terms of
the notes payable now call for quarterly interest payments commencing
October 12, 2007 and principal payments of $1.4 million in October 2010
and $1.0 million due in October 2011. The Company has not made
interest payments since October 2008 and is currently in default on the
loan.. The Company is currently in negotiations to dispose of
the assets including but not limited to deed in lieu of foreclosure of
these assets.
|
|
|
(d)
|
In
February 2007 the company secured a $7.3 million land loan to finance
approximately 538 acres in Hays County. The interest rate is 12.5%
annually and requires monthly interest payments, with a maturity of two
years and is renewable for an additional year for a 1% loan fee. The
Company has not made interest payments since August 2008 and is currently
in default on the loan. The loan has no financial
covenants. The loan is secured by the underlying land and
is guaranteed by the Company. The Company is currently in
negotiations to dispose of the assets including but not limited to deed in
lieu of foreclosure of these
assets.
|
|
|
(e)
|
In
February 2007 the Company obtained a development loan of approximately
$4.6 million. The loan matures on February 1, 2010 and requires quarterly
interest payments and principal pay downs as lots are sold. The loan is
secured by the property being developed at an interest rate of prime plus
0.50%. The loan was paid in December 2007 and the lots were
refinanced as a developed lot loan with the $30 million Credit
Facility
|
|
|
(f)
|
In
February 2007 the Company obtained a development loan of approximately
$3.1 million to develop approximately 30 acres. The loan has an interest
rate of prime plus 3.00%, with interest payable monthly. The loan was paid
in December 2007 and the lots were refinanced as a developed lot loan with
the $30 million Credit Facility.
|
|
|
(g)
|
In
June 2007 the Company established a $55 million Credit Facility with a
syndicate of banks. In June 2008 the Credit Facility was
reduced to $30 million. The Company has been out of compliance
with certain covenants under the loan agreement since March
2008. On October 1, 2008 the line expired. The
Company currently has approximately $15.8 million in borrowings for land
and home construction.
|
Subordinated
Convertible Debt
Derivatives
Associated with Subordinated Convertible Debt
Prior to
2007, derivative financial instruments were recorded as liabilities in the
consolidated balance sheet and measured at fair value. The Company accounted for
the various embedded derivative features as being bundled together as a single,
compound embedded derivative instrument that was bifurcated from the debt host
contract, referred to as the “single compound embedded
derivatives.” The single compound embedded derivative features
include the conversion feature within the convertible note, the early redemption
option and the fixed price conversion adjustment. The initial value of the
single compound embedded derivative liability was bifurcated from the debt host
contract and recorded as a derivative liability, which resulted in a reduction
of the initial carrying amount (as unamortized discount) of the convertible
notes. The unamortized discount was amortized using the straight-line method
over the life of the convertible note, or 7 years. The penalty warrants were
valued based on the fair value of the Company’s common stock on the issuance
date using a Black-Scholes valuation model and the unamortized discount was to
be amortized as interest expense over the 7-year life of the notes using the
straight-line method.
In
January 2007, the Company adopted “FSP EITF 00-19-2” as discussed in Note
3.
Prior to
adoption of FSP EITF 00-19-2, the uncertainty of a successful registration of
the shares underlying the subordinated convertible debt required that the
freestanding and embedded derivatives be characterized as derivative
liabilities. FSP EITF 00-19-2 specifically addressed the accounting for a
registration rights agreement and the requirement to classify derivative
instruments subject to registration rights agreements as liabilities was
withdrawn. The Company re-evaluated its accounting for the
subordinated debt transaction and determined that the liability for the penalty
warrants be included in the allocation of the proceeds to the various components
of the transaction according to paragraph 16 of APB Opinion No. 14,
Accounting for Convertible Debt and
Debt issued with Stock Purchase Warrants.
The Company also determined the
notes contained a beneficial conversion feature under Issues 98-5 and 00-27, and
used the effective conversion price based on the proceeds allocated to the
convertible instrument to compute the intrinsic value of the embedded conversion
option. The Company recalculated the discount on the convertible debt at its
intrinsic value and re-characterized the freestanding and embedded derivatives
as equity. The previous valuation adjustments of the derivative liabilities were
reversed and the amortization of the discounts was adjusted based upon the
recalculation. Per FSP EITF 00-19-2, the Company was permitted to adjust the
previous amounts as a cumulative accounting adjustment.
The net
effect of the change increased the net carrying amount of the subordinated
convertible debt and eliminated the derivative liabilities. There was also an
increase of $4.8 million in total stockholders’ equity. Under the new FSP
EITF 00-19-2 the derivatives were eliminated and hence there will no longer be
gains and losses related to the current subordinated convertible
debt.
2005,
$10MM, 5%, Subordinated Convertible Debt.
On
December 19, 2005, the Company issued $10 million in aggregate principal
amount of 5% subordinated convertible debt due December 1, 2012 to certain
purchasers. The following are the key features of the subordinated convertible
debt: interest accrues on the principal amount of the subordinated convertible
debt at a rate of 5% per annum and the debt is payable semi-annually on
May 1 and December 1 of each year, with interest payments beginning on
June 1, 2006. The subordinated convertible debt is due on December 1,
2012 and is convertible, at the option of the holder, into shares of common
stock at a conversion price of $2.00 per share. The conversion price is subject
to adjustment for stock splits, reverse stock splits, recapitalizations and
similar corporate actions. An adjustment in the conversion price is also
triggered upon the issuance of certain equity or equity-linked securities with a
conversion price, exercise price, or share price less than $2.00 per share. The
anti-dilution provisions state the conversion price cannot be lower than $1.00
per share.
The
Company may redeem all or a portion of the subordinated convertible debt after
December 1, 2008 at a redemption price that incorporates a premium that
ranges from 3% to 10% during the period beginning December 1, 2008 and
ending on the due date. In addition, the redemption price will include any
accrued but unpaid interest on the subordinated convertible debt. Upon a change
in control event, each holder of the subordinated convertible debt may require
the Company to repurchase some or all of its subordinated convertible debt at a
purchase price equal to 100% of the principal amount of the subordinated
convertible debt plus accrued and unpaid interest. The due date may accelerate
in the event the Company commences any case relating to bankruptcy or
insolvency, or related events of default. The Company’s assets will be available
to pay obligations on the subordinated convertible debt only after all senior
indebtedness has been paid.
The
subordinated convertible debt has a registration rights agreement whereby the
Company must use its best efforts to have its associated registration statement
effective not later than 120 days after the closing (December 19, 2005).
Further, the Company must maintain the registration statement in an effective
status until the earlier to occur of (i) the date after which all the
registrable shares registered thereunder shall have been sold and (ii) the
second anniversary of the later to occur of (a) the closing date, and (b) the
date on which each warrant has been exercised in full and after which by the
terms of such Warrant there are no additional warrant shares as to which the
warrant may become exercisable; provided that in either case, such date shall be
extended by the amount of time of any suspension period. Thereafter the Company
shall be entitled to withdraw the registration statement, and upon such
withdrawal and notice to the investors, the investors shall have no further
right to offer or sell any of the registrable shares pursuant to the
registration statement. The registration statement filed pursuant to the
registration rights agreement was declared effective by the SEC on
August 1, 2006.
The
Company also issued warrants to purchase an aggregate of 750,000 shares of
common stock to the purchasers of the subordinated convertible debt, 562,500
shares which vested and the remaining shares will never vest. The
warrants were exercisable only upon the occurrence of certain events and then
only in the amount specified as follows: (i) with respect to 25% of the warrant
shares, on February 3, 2006 if the registration statement shall not have
been filed with the SEC by such date (the Company filed a Form SB-2 registration
statement on February 2, 2006); (ii) with respect to an additional 25% of
the warrant shares, on April 19, 2006 if the registration statement shall
not have been declared effective by the SEC by such date; (iii) with respect to
an additional 25% of the warrant shares, on May 19, 2006 if the
registration statement shall not have been declared effective by the SEC by such
date; and (iv) with respect to the final 25% of the warrant shares, on
June 18, 2006 if the registration statement shall not have been declared
effective by the SEC by such date. Management recorded the fair value of these
warrants at the time of the subordinated convertible debt issuance due to the
uncertainty surrounding the timeline of getting the registration statement
effected and the high probability that these warrants would be
issued. The shelf registration statement relating to these warrants
was declared effective on August 1, 2006 and 562,500 of these warrants have
vested and the remaining 187,500 warrants will never vest.
The
penalty warrants were valued based on the fair value of the Company’s common
stock on the issuance date of $1.60, using a Black-Scholes approach, risk free
interest rate of 4.25%; dividend yield of 0%; weighted-average expected life of
the warrants of 10 years; and a 60% volatility factor, resulting in an allocated
value of approximately $613 thousand. The penalty warrants are recorded as part
of the debt discount and an increase in additional paid in capital, and
amortized over the 7-year life of the notes using the straight-line rate
method.
The
Company also incurred closing costs of $588 thousand which included placement
agent fees of $450,000 plus reimbursement of expenses to the placement agent of
$125 thousand, plus 750,000 fully vested warrants to purchase the Company’s
common stock at $2.00 per share with a 10 year exercise period, valued at $829
thousand, for a total of $1.4 million, recorded as debt issuance costs, to be
amortized over the 7-year life of the notes using the straight line method.
These warrants were valued based on the fair value of the Company’s common stock
of $1.60, using a Black-Scholes valuation model, at a $2.00 exercise price, risk
free interest rate of 4.25%; dividend yield of 0%; weighted-average expected
life of warrants of 10 years; and a 60% volatility factor.
Subordinated
Convertible Note at September 30, 2008 and 2007:
|
|
|
September
30,
2008
|
|
|
September
30,
2007
|
|
|
Notional
balance
|
|
$
|
10,000,000
|
|
|
|
10,000,000
|
|
|
Unamortized
discount
|
|
|
(371,896
|
)
|
|
|
(459,400
|
)
|
|
Subordinated
convertible debt balance, net of unamortized discount
|
|
$
|
9,628,104
|
|
|
|
9,540,600
|
|
2006,
$6.5 MM, 5%, Subordinated Convertible Debt
On
September 29, 2006, the Company raised capital of $6.75 million in
aggregate principal amount of 5% subordinated convertible debt due
September 1, 2013, to certain purchasers. As of December 31, 2006,
$6.75 million had been received in cash, the remaining $250,000 was a receivable
from an owner of land that the Company had under option to
purchase. During the quarter ended June 2007, the Company did not
exercise its option to purchase the land and therefore does not expect to
receive the additional $250,000. In addition, during the
quarter ended June 30, 2007, one of the convertible debt holders who is also the
seller of Bohls tract purchased common stock with a promissory
note. Under the terms of the promissory note, should the Company not
exercise the option to purchase the Bohls tract the convertible debt would be
used for repayment of the promissory note. As the Company did not
exercise the option to purchase Bohls tract the promissory note was repaid from
the proceeds of the convertible debt. The following are the key
features of the subordinated convertible debt: interest accrues on the principal
amount of the subordinated convertible debt at a rate of 5% per annum, payable
semi-annually on February 1 and September 1 of each year, with
interest payments beginning on February 1, 2006. The subordinated
convertible debt is due on September 1, 2013 and is convertible, at the
option of the holder, into shares of common stock at a conversion price of $2.00
per share. The conversion price is subject to adjustment for stock splits,
reverse stock splits, recapitalizations and similar corporate actions. An
adjustment in the conversion price is also triggered upon the issuance of
certain equity or equity-linked securities with a conversion price, exercise
price, or share price less than $2.00 per share. The anti-dilution provisions
state the conversion price cannot be lower than $1.00 per share.
The
Company may redeem all or a portion of the subordinated convertible debt after
September 1, 2009 at a redemption price that incorporates a premium that
ranges from 3% to 10% during the period beginning September 1, 2009 and
ending on the due date. In addition, the redemption price will include any
accrued but unpaid interest on the subordinated convertible debt. Upon a change
in control event, each holder of the subordinated convertible debt may require
the Company to repurchase some or all of its subordinated convertible debt at a
purchase price equal to 100% of the principal amount of the subordinated
convertible debt plus accrued and unpaid interest. The due date may accelerate
in the event the Company commences any case relating to bankruptcy or
insolvency, or related events of default. The Company’s assets will be available
to pay obligations on the subordinated convertible debt only after all senior
indebtedness has been paid.
The
subordinated convertible debt has a registration rights agreement, whereby the
Company must use its best efforts to have its associated registration statement
effective not later than 120 days after the closing (January 27, 2007).
Further, the Company must maintain the registration statement in an effective
status until the earlier to occur of (i) the date after which all the
registrable shares registered thereunder shall have been sold and (ii) the
second anniversary of the later to occur of (a) the closing date, and (b) the
date on which each warrant has been exercised in full and after which by the
terms of such warrant there are no additional warrant shares as to which the
warrant may become exercisable; provided that in either case, such date shall be
extended by the amount of time of any suspension period. Thereafter the Company
shall be entitled to withdraw the registration statement, and upon such
withdrawal and notice to the investors, the investors shall have no further
right to offer or sell any of the registrable shares pursuant to the
registration statement.
The
Company also issued warrants to purchase an aggregate of 506,250 shares of
common stock to the purchasers of the subordinated convertible debt. The
warrants are exercisable only upon the occurrence of certain events and then
only in the amount specified as follows: (i) with respect to 25% of the warrant
shares, on November 13, 2006 if the registration statement shall not have
been filed with the SEC by such date (the Company filed a Form SB-2 registration
statement on October 16, 2006); (ii) with respect to an additional 25% of
the warrant shares, on January 27, 2007 if the registration statement shall
not have been declared effective by the SEC by such date; (iii) with respect to
an additional 25% of the warrant shares, on February 26, 2007 if the
registration statement shall not have been declared effective by the SEC by such
date; and (iv) with respect to the final 25% of the warrant shares, on
March 28, 2007 if the registration statement shall not have been declared
effective by the SEC by such date. Management has recorded 75% of the fair value
of these warrants since its timely filed registration statement but such
registration statement was not declared effective prior to March 28,
2007.
The
Company also incurred closing costs of $140,000, including placement agent fees
of approximately $70,000 plus reimbursement of expenses to the placement agent
of $25 thousand, for a total of $95 thousand to the placement agent, recorded as
debt issuance costs, to be amortized over the 7-year life of the notes using the
straight-line rate method.
The
issuance of the debt resulted in an embedded beneficial conversion feature
valued at approximately $2.5 million, which will be recorded as part of the debt
discount and an increase in additional paid in capital, and amortized over the
7-year life of the notes using the straight-line rate method.
The
penalty warrants were valued were based on the fair value of the Company’s
common stock on the issuance date of $1.91, using a Black-Scholes approach, risk
free interest rate of 4.64%; dividend yield of 0%; weighted-average expected
life of the warrants of 10 years; and a 60% volatility factor. The allocated
value of the penalty warrants totaled approximately $846 thousand and are
recorded as part of the debt discount and an increase in additional paid in
capital, and amortized over the 7-year life of the notes using the straight-line
rate method.
Subordinated
Convertible Note at September 30, 2008 and 2007:
|
|
|
September
30,
2
008
|
|
|
September
30,
2007
|
|
|
Notional
balance
|
|
$
|
6,500,000
|
|
|
|
6,500,000
|
|
|
Unamortized
discount
|
|
|
(2,314,976
|
)
|
|
|
(2,785,820
|
)
|
|
Subordinated
convertible debt balance, net of unamortized discount
|
|
$
|
4,185,024
|
|
|
|
3,714,180
|
|
11. Common
Stock
The
Company is authorized to issue 100,000,000 shares of common stock. Each common
stockholder is entitled to one vote per share of common stock
owned. The Company has 23,135,539 shares outstanding and has reserved
for 10,867,208 options and warrants.
The
Company sold 5,000,000 shares of common stock in a public offering at $3.25 per
share that closed on May 19, 2007 and concurrently began trading on the American
Stock Exchange under the symbol “WIH”. The stock is now being traded under the
ticker symbol “GBH.” The Company incurred the following transaction
costs related to the financing:
|
(In
thousands)
|
|
|
|
|
Cash
paid to investment banker for underwriting and other fees
|
|
$
|
1,219
|
|
|
Legal,
printing, accounting and stock exchange registration fees
|
|
|
544
|
|
|
Travel
and selling related costs
|
|
|
503
|
|
|
Warrants
to purchase 500,000 shares at $4.06 with a fair value based on the
Black-Scholes option pricing model with a risk free interest rate of
4.64%; dividend yield of 0%; weighted-average expected life of the
warrants of 1 year; and a 60% volatility factor at $0.56 per
warrant.
|
|
|
280
|
|
|
Total
expenses
|
|
$
|
2,546
|
|
During
June 2007, the Company issued 80,000 shares of common stock for the purchase of
Green Builders, Inc.
12. Common
Stock Option / Stock Incentive Plan
In August
2005, the Company adopted the Wilson Family Communities, Inc. 2005 Stock
Option/Stock Issuance Plan or the Stock Option Plan. The plan contains two
separate equity programs: 1) the Option Grant Program for eligible persons at
the discretion of the plan administrator, be granted options to purchase shares
of common stock and 2) the Stock Issuance Program under which eligible persons
may, at the discretion of the plan administrator, be issued shares of common
stock directly, either through the immediate purchase of such shares or as a
bonus for services rendered to the Company or any parent or subsidiary. The
market value of the shares underlying option issuance prior to the merger of the
Company and WFC was determined by the Board of Directors as of the grant date.
This plan was assumed by Green Builders, Inc. The fair value of the options
granted under the plan was determined by the Board of Directors or the Board
prior to the merger of the Company and WFC.
The Board
is the plan administrator and has full authority (subject to provisions of the
plan) and it may delegate a committee to carry out the functions of the
administrator. Persons eligible to participate in the plan are employees,
non-employee members of the Board or members of the board of directors of any
parent or subsidiary.
The stock
issued under the Stock Option Plan shall not exceed 2,500,000 shares. Unless
terminated at an earlier date by action of the Board of Directors, the Stock
Option Plan terminates upon the earlier of (1) the expiration of the ten year
period measured from the date the Stock Option Plan is adopted by the Board or
(2) the date on which all shares available for issuance under the Stock Option
Plan shall have been issued as fully-vested shares.
The
Company had 1,025,917 shares of common stock available for future grants under
the Stock Option Plan at September 30, 2008. Compensation
expense related to the Company’s share-based awards for the year ended
September 30, 2008 and nine months ended September 30, 2007 was
approximately $835,000 and $541,000, respectively. Before
January 1, 2006, options granted to non-employees were recorded at fair
value in accordance with SFAS No. 123 and EITF 96-18. These options are issued
pursuant to the Stock Option Plan and are reflected in the disclosures
below.
During
the year ended September 30, 2008, the Company issued options to purchase shares
of common stock at exercise prices ranging from $0.80 to $1.78 per share. Using
the Black-Scholes pricing model with the following weighted-average assumptions:
interest rate of 4.64%; dividend yields of 0%; weighted average expected life of
options of 5 years; and a 60% volatility factor, management estimated the fair
market value of the grants to range from $0.44 to $0.99 per share. Management
estimated the volatility factor based on an average of comparable companies due
to its limited trading history.
A summary
of activity in common stock options for the year ended September 30, 2008 and
nine months ended September 30, 2007 are as follows:
|
|
Share
Roll
|
|
|
Ranges
Of
|
|
Weighted-Average
|
|
|
|
Forward
|
|
|
Exercise
Prices
|
|
Exercise
Price
|
|
|
Balance
December 31,2006
|
925,000
|
|
|
$
2.00
- $2.26
|
|
|
|
|
Granted
|
1,370,000
|
|
|
$
1.65
- $3.25
|
|
|
|
|
Forfeited
|
(460,000
|
)
|
|
$
2.00
- $3.25
|
|
$
2.45
|
|
|
Balance
September 30, 2007
|
1,835,000
|
|
|
$
1.65
- $3.25
|
|
|
|
|
Grants
|
290,000
|
|
|
$
0.80
- $1.78
|
|
|
|
|
Forfeited
|
(650,917
|
)
|
|
$
0.86
- $3.25
|
|
|
|
|
Balance
September 30, 2008
|
1,474,083
|
|
|
$
0.80
- $3.25
|
|
|
|
The
following is a summary of options outstanding and exercisable at September 30,
2008:
|
Outstanding
|
Vested
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Number of
|
Average
|
|
|
Average
|
|
|
Shares Subject to
|
Remaining
|
Weighted
|
|
Remaining
|
Weighted
|
|
Options
|
Contractual Life
|
Average Exercise
|
Number of
|
Contractual Life
|
Average Exercise
|
|
Outstanding
|
(in years)
|
Price
|
Vested Shares
|
(in years)
|
Price
|
|
1,474,083
|
4.72
|
$ 2.52
|
1,168,794
|
3.83
|
$ 2.69
|
At
September 30, 2008, there was approximately $398,000 of unrecognized
compensation expense related to unvested share-based awards granted under the
Company’s Stock Option Plan. In February 2007, the Company’s
Board approved an 819,522 share increase in the number of shares issuable
pursuant to its option plan for a total of 2,500,000 shares issuable under the
plan.
13. Employee
Benefits
In 2006,
the Company instituted a defined contribution plan under section 401(k) of the
Internal Revenue Code. The plan allows all employees who are over 21 years old
to defer a predetermined portion of their compensation for federal income tax
purposes. The Company will match 100% up to the first 4% of the employee’s
contribution subject to Internal Revenue Service limitations. The
Company contributed approximately $42,000 for the year ended September 30,
2008 and $9,000 for the nine months ended September 30,
2007.
14. Purchase
of Green Builders
On June
19, 2007, the Company purchased Green Builders, Inc. for $65,000 in cash and
80,000 shares of the Company’s common stock valued at $2.70 per share on the
date of the transaction. The total purchase price for the acquisition was
approximately $281,000. The Company allocated the purchase price and legal
fees to trademark with indefinite life in accordance with SFAS 142.
In
conjunction with the acquisition, the Company appointed Victor Ayad as a
director of the Company. Mr. Ayad was the President and sole shareholder of
Green Builders, Inc. prior to the acquisition. The pro forma effect of the
acquisition on the Company’s income was not material and is already consolidated
into the Company’s results as a VIE under FIN 46.
I
n accordance with
SFAS 142 the Company reviews intangible assets for
impairment. Due to the fact that the Company has had a history
of losses and the overall business is threatened by the unprecedented downtown
in the economy the company took a full impairment for the trademark name of
Green Builders, Inc. for the year ended September 30, 2008.
15. Quarterly
Results (Unaudited)
The
following tables set forth selected quarterly consolidated statements of
operations information for the quarters ended March 31, 2007 through
September 30, 2008.
|
|
|
March
31,
|
|
|
June
30,
|
|
|
Sept.
30,
|
|
|
Dec.
31,
|
|
|
March
31,
|
|
|
June
30,
|
|
|
Sept.
30,
|
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
|
(In
thousands)
|
|
|
Sales
|
|
$
|
1,767
|
|
|
|
1,384
|
|
|
|
1,293
|
|
|
|
1,108
|
|
|
|
1,142
|
|
|
|
3,464
|
|
|
|
3,279
|
|
|
Gross
profit
|
|
$
|
384
|
|
|
|
(823
|
)
|
|
|
286
|
|
|
|
399
|
|
|
|
514
|
|
|
|
378
|
|
|
|
(5,686
|
)
|
|
Operating
expenses
|
|
$
|
1,167
|
|
|
|
1,831
|
|
|
|
1,469
|
|
|
|
1,536
|
|
|
|
1,450
|
|
|
|
1,602
|
|
|
|
2,399
|
|
|
Operating
loss
|
|
$
|
(783
|
)
|
|
|
(2,654
|
)
|
|
|
(1,183
|
)
|
|
|
(1,537
|
)
|
|
|
(937
|
)
|
|
|
(1,224
|
)
|
|
|
(7,684
|
)
|
|
Net
loss
|
|
$
|
(1,354
|
)
|
|
|
(3,316
|
)
|
|
|
(1,886
|
)
|
|
|
(2,357
|
)
|
|
|
(1,646
|
)
|
|
|
(2,023
|
)
|
|
|
(8,807
|
)
|
|
Basic
and diluted loss per share
|
|
$
|
(0.07
|
)
|
|
|
(0.16
|
)
|
|
|
(0.08
|
)
|
|
|
(0.10
|
)
|
|
|
(0.07
|
)
|
|
|
(0.09
|
)
|
|
|
(0.38
|
)
|
16. Subsequent
Events
On
October 1, 2008, the Company’s Credit Facility with RBC Bank expired pursuant to
its terms. Although the Company is currently out of compliance with certain
covenants set forth in the Borrowing Base Agreement under the Loan Agreement,
RBC and IBC have continued to make amounts available to WFC pursuant to the Loan
Agreement for loans made prior to the expiration of the
facility. The Company received notification on November 7, 2008
that Franklin Bank was closed by the Texas Department of Savings and Mortgage
Lending and the Federal Deposit Insurance Corporation (the “FDIC”) was named
Receiver.
On
December 10, 2008 the Company received notification from Graham Mortgage
Corporation regarding the default in the payment of accrued interest for the
Rutherford West loan of $7,300,000 and New Sweden loan of $4,700,000
. The Company has not received notification of acceleration of the
notes and is in currently in negotiations to modify the loan agreement.
There is
no assurance that the Company will be able to reach an agreement to modify the
loan agreement.
F-25