KSSH Kingfish Holding Corporation (CE)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB

X	ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES ACT OF 1934
	TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-52375

KESSELRING HOLDING CORPORATION

(Name of small business issuer in its charter)

Delaware		20-4838580
(State or other jurisdiction of incorporation)		(I.R.S Employer Identification Number)
1956 Main Street Sarasota, Florida		34236
(Address of principal executive offices)		(Zip Code)

Issuer’s telephone number

(941) 953-5774

 

Securities registered under Section 12(b) of the Exchange Act: None

 

 

Securities registered under Section 12(g) of the Exchange Act: None

 

 

Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.) Yes [X] No [ ]

 

 

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of the 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-KSB. [ ]

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]

 

The Issuer's gross sales for the year ending September 30, 2008 were $10,141,078.

 

 

As of December 26, 2008 the number of shares outstanding of the Issuer's common stock was 38,308,669.

 

 

As of December 26, 2008 the aggregate number of shares held by non-affiliates was approximately 24,434,014.

 

 

As of December 26, 2008 the aggregate market value of the Issuer's common stock held by non-affiliates was $244,340, based on the average bid and asked price of $0.01 per share as of December 26, 2008.

 

 

 

 

KESSELRING HOLDING CORPORATION

FORM 10-KSB TABLE OF CONTENTS

Certain information included in this report and other Company filings (collectively, “SEC Filings”) under the Securities Exchange Act of 1934, as amended (as well as information communicated orally or in writing between the dates of such SEC Filings) contains or may contain forward looking information that is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from expected results. Among these risks, trends and uncertainties are the Company’s ability to raise capital, national and local economic conditions, the lack of an established operating history for the Company’s current business activities, conditions and trends in the restoration and general contracting industries in general, changes in interest rates, the impact of severe weather on the Company’s operations, the effects of governmental regulation on the Company and other factors described from time to time win our filings with the Securities and Exchange Commission.

 

 

 

 

 

 

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information:

Our common stock is traded on the OTC Bulletin Board, referred to herein as the OTCBB, under the symbol “KSSH”. The high and low trades for our shares for each quarter were:

Holders:

As of September 30, 2008, there were approximately 67 holders of record of our common stock. This number excludes individual stockholders holding stock under nominee security position listings.

Dividends:

We have never paid cash dividends and have no plans to do so in the foreseeable future. Our future dividend policy will be determined by our board of directors and will depend upon a number of factors, including our financial condition and performance, our cash needs and expansion plans, income tax consequences, and the restrictions that applicable laws and our credit arrangements then impose.

Securities authorized for issuance under equity compensation plans:

The following table sets forth information about shares of the Company’s common stock that may be issued upon the exercise of options granted to employees and/or consultants:

Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights			Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for issuance under equity compensation plan
Security Holder Approved		-			-		-
Security Holder Not Approved		2,450,200			.13		10,180,169

Sales of Unregistered Securities

On August 16, 2007, we entered into a Securities Purchase Agreement with the Marie Baier Foundation (the “Foundation”), pursuant to which we issued a convertible promissory note in the principal amount of $350,000 (the “Foundation Note”). The Foundation Note bears interest at 7.36%, matures one year from the date of issuance and is convertible into our common stock, at the Foundation’s option, at a conversion price of $0.48 per share (the trading market on that date was $0.30). The Foundation converted the note with interest for 733,725 shares of common stock on September 26, 2007.

 

 

 

PART II

ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Overview

Our Management’s Discussion and Analysis should be read in conjunction with our consolidated financial statements included in Item 7, herein.

The Company was organized as a Delaware corporation on April 11, 2006. Following our acquisition of the Kesselring Corporation, on May 18, 2007 (more fully discussed in this Item, below), we are engaged in (i) restoration services, principally to commercial property owners, (ii) the manufacture and sale of cabinetry and remodeling products, principally to contractors and (iii) multifamily and commercial remodeling and building services on customer-owned properties. Our business segments consist of (i) Construction Services (building and restoration services), and (ii) Manufactured Products . See Item 1(b) – Business of Issuer. We apply the “management approach” to the identification of our reportable operating segments as provided in Financial Accounting Standard No. 131 Disclosures about Segments of an Enterprise and Related Information . This approach requires us to report our segment information based on how our chief decision making officer internally evaluates our operating performance. As more fully discussed in Note 14 to our Consolidated Financial Statements included in Item 7 and Item 1(b), herein, our business segments consist of (i) Construction Services (building and restoration services), and (ii) Manufactured Products . Our building and restoration services are conducted in the State of Florida and principally serve the West Central Florida Area. Our Manufactured Products manufacturing facilities are located in the State of Washington and serve principally contractors in the Northwestern United States.

On May 18, 2007, we acquired Kesselring Corporation, a Florida Corporation (“Kesselring Florida”) pursuant to a Share Exchange Agreement (the “Exchange Agreement”). The Exchange Agreement provided for, among other things, the exchange of Kesselring Florida’s 26,773,800 outstanding common shares (representing 99.9% of their common shares) for 26,796,186 (or 80.28%) of our common shares. Considering that Kesselring Florida’s shareholders control the majority of the Company’s outstanding voting common stock, its management has actual operational control and Offline effectively succeeded its otherwise minimal operations to its operations, Kesselring Florida was considered the accounting acquirer in this reverse-merger transaction. A reverse-merger transaction is considered, and accounted for, as a capital transaction in substance. It is equivalent to the issuance of Kesselring Florida’s common stock for the net monetary assets of Offline, accompanied by a recapitalization. On the date of the merger, Offline had no assets and no liabilities. Financial statements included in Item 7 and other information presented herein reflect the consolidated assets and liabilities and operations of Kesselring Florida, giving effect to the recapitalization, as if it had been the Issuer during the periods presented.

On June 29, 2007, our Board of Directors and stockholders approved a 19.5 for one forward stock split of our issued and outstanding stock and a reduction in our authorized shares from 700,000,000 to 200,000,000, each of which were effective on July 8, 2007. All share and per share information has been restated to give effect to the forward split for all periods presented.

During our second fiscal quarter of our year ended September 30, 2008, our Board of Directors undertook a restructuring program focused on curtailing our cost structure, restructuring management and associated responsibilities, cutting our headcount, raising capital, and aggressively seeking acquisition opportunities. The initial measure was to substantially restructure our executive management. This restructured executive management team developed and implemented strategic and tactical plans to address the Board-Directed mandate to alleviate our liquidity shortfalls, improve gross profit margins, reduce expenses and, ultimately, achieve profitability. Since the first fiscal quarter, execution of this plan has included (i) the elimination of a substantial number of our Florida-based positions and the associated employment costs, (ii) the curtailment of operating costs and expenses, (iii) the refocus of construction services work away from less profitable homebuilding activities to more profitable restoration and renovation activities; and, (iv) the aggressive development of our manufactured products business.

We account for exit and termination activities arising from our restructuring program in accordance with Statement of Financial Accounting Standards No. 146   Accounting for Costs Associated with Exit of Disposal Activities .   Statement No. 146 represents a significant change from the prior practice by requiring that a liability for costs associated with an exit or disposal activity be recognized generally as they are incurred and initially measured at fair value only when the liability is incurred.

The following table illustrates the activity in our restructuring reserve:

 

Contract Termination Costs:  In March 2008, we exited a significant facility operating lease that has remaining non-cancellable payments of $748,787 (including executory costs). At that time, we recorded our best estimate of the fair value of the lease obligation, amounting to $425,040, which was net of estimated sublease collections, using a probability weighted, discounted forward cash flow valuation technique. As discussed in Note 13 in the accompanying financial statements, in July 2008, we entered into a settlement agreement and mutual release with the landlord. Based upon the terms of the settlement agreement, we revised our estimate of the lease exit reserve which reduced the reserve by $119,000.

Termination Benefits: We have terminated the employment of certain officers and employees since the commencement of our restructuring program. We record termination benefits when they are both approved by the appropriate level of management (or in some instance our Board of Directors) and the benefit is communicated to and committed to the employee. Our termination benefits do not include any on-going performance payments (such as stay-bonuses) or benefit (such as health insurance).

Other Associated Costs: These costs represent direct, incremental expenses associated with the exit or restructuring activities, such as legal expenses related to consultation and the drafting of agreements.

 

 

 

 

Growth Strategy

We believe that opportunities exist to acquire privately-owned businesses. As of this date, we have completed the acquisitions listed below. Further acquisitions are dependent upon our ability to identify acquisition targets, negotiate terms that are favorable to the Company and, if necessary, acquire the necessary financing to complete the acquisition. There can be no assurances that we will be able to achieve these conditions necessary to complete acquisitions.

On January 14, 2005, Kesselring Florida acquired the outstanding common stock of Kesselring Restoration for cash consideration of $80,000 and notes payable of $50,000; accordingly, our purchase price amounted to $130,000. We made this purchase for the purpose of commencing our Restoration Services business. The acquisition of Kesselring Restoration Corporation, Inc. was accounted for using the purchase method of accounting. Accordingly, the purchase price, plus the fair values of assumed liabilities, was allocated to the tangible and intangible assets acquired based upon their respective fair values. Since the fair values of the tangible and intangible assets acquired exceeded the purchase price, the fair values of long-lived assets acquired, including identifiable intangible assets, were reduced to zero and the excess of $12,504 was recorded as an extraordinary gain during the period the acquisition occurred. The operations of Kesselring Restoration Corporation, Inc. are included in our consolidated financial statements commencing on the date of this acquisition.

On March 10, 2005, Kesselring Florida acquired the outstanding common stock of TBS Constructors, Inc. (“TBS”) for cash consideration of $10,000. We currently operate this subsidiary under the name Coastal Construction. We made this purchase principally for the purpose of engaging TBS’s then owner as our President, and entering into the residential home construction and remodeling business. The acquisition of TBS was accounted for using the purchase method of accounting. Accordingly, the purchase price, plus the fair values of assumed liabilities was allocated to the tangible and intangible assets acquired based upon their respective fair values. The operations of TBS Constructors, Inc. are included in our consolidated financial statements commencing on the date of this acquisition.

On July 1, 2006, Kesselring Florida acquired the outstanding common stock of the individual companies comprising the King Group for 7,446,218 shares of our common stock; face value $700,000 of notes payable, due December 31, 2006; and, up to $150,000 for certain direct, purchase-related reimbursements that were probable of payment at the time of the purchase. The King Group comprised individual companies that were under common shareholder control at the time of our purchase. We purchased the King Group for the purpose of commencing our Manufactured Products business. The common shares that we issued had a fair value of $1,680,723 on the acquisition date based upon a valuation of the share values using the Income Approach; accordingly, our purchase price amounted to $2,530,723. Our acquisition of the King Group was accounted for using the purchase method of accounting. Accordingly, the purchase price, noted above, plus the fair values of assumed liabilities, was allocated to the tangible and intangible assets acquired based upon their respective fair values. The operations of the King Group are included in our consolidated financial statements commencing on the date of this acquisition

 

Sensitive Accounting Estimates

The financial information contained in our comparative results of operations and liquidity disclosures has been derived from our consolidated financial statements included in Item 7 herein. The preparation of those consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes. The following significant estimates have made in the preparation of our consolidated financial statements and should be considered when reading our Management’s Discussion and Analysis:

·

Contract revenue: Our revenue recognition policies require us to estimate our total contract costs and revise those estimates for changes in the facts and circumstances. These estimates consider all available information including pricing quotes provided by our vendors for materials, projections of our direct labor costs and our past experience in providing contract services. Estimates, by their nature are subjective. Actual results could differ.

·

Intangible assets: Our intangible assets require us to make subjective estimates about our future operations and cash flows so that we can evaluate the recoverability of such assets. These estimates consider available information and market indicators including our operational history, our expected contract performance, and changes in the industries that we serve.

·

Share-based payment arrangements: The Black-Scholes-Merton and Trinomial Lattice valuation models that we use to value share-indexed contracts, such as warrants and options, requires that certain assumptions be made when calculating the compensation expense related to stock options. Of these assumptions, a volatility factor is required as part of the calculation. Due to the lack of significant stock history, the volatility of comparable companies (“peers”) was analyzed to determine the appropriate rate to be used in the calculation.

·

Common stock valuation: Estimating the fair value of our common stock is necessary in the preparation of computations related to share-based payments and financing transactions. We believe that the most appropriate and reliable basis for common stock value is trading market prices in an active market. Prior to May 31, 2007, we utilized the income approach to enterprise valuation coupled with our common shares outstanding to estimate the fair value of our common stock per share. The income approach requires us to develop subjective estimates about our future operating performance and cash flows. It also requires us to develop estimates related to the discount rate necessary to discount future cash flows. As with any estimates, actual results could be different. On May 31, 2007, some of our common stock became publicly traded under our newly acquired trading symbol. We continue to review and evaluate trading activity to determine whether such activity provides a reliable basis upon which to value our common stock. Commencing with our quarterly financial statements after May 31, 2007, we began using trading market information in the fair value of our per share common stock price.

·

We account for exit and termination activities arising from our restructuring program in accordance with Statement of Financial Accounting Standards No. 146   Accounting for Costs Associated with Exit of Disposal Activities .   Statement No. 146 represents a significant change from the prior practice by requiring that a liability for costs associated with an exit or disposal activity be recognized generally as they are incurred and initially measured at fair value only when the liability is incurred. Fair value measurements of these liabilities is particularly sensitive because they require us to make reasonable business projections of future outcomes. In making these estimations, we have considered multiple, probability-weighted outcomes. Since current accounting standards provide for the recognition of restructuring and exit activities when the related costs have been incurred, we may have additional charges in future periods as we continue our restructuring activities.

As of September 30, 2008, there have been no material additions to our critical accounting policies and there have been no changes in the application of existing accounting principles.

Results of Operations for the Year Ended September 30, 2008, compared to the Year Ended September 30, 2007

 

 

 

Revenues: Our consolidated revenues decreased $2,034,117, or 17%, to $10,141,078 in 2008 compared to $12,175,195 for the prior year.

Manufactured Products Segment : Revenues from our Manufactured Products Segment increased $283,365 in 2008 to $7,346,555, compared to $7,063,190 in the prior year.

Construction Services Segment : Revenues from our Construction Services Segment decreased $2,317,482 or 45% to $2,794,523 in 2008, compared to $5,112,005 in the prior year. The following table illustrates the revenue comparison for our homebuilding and renovation construction services:

We had two homes under construction in fiscal 2008, they are over 99% complete as of September 30, 2008. All of these homes were contracted for during 2005 and 2006. We did not contract to build any new homes during 2008 and do not anticipate building any other homes in the future. The increase in our restoration services resulted principally from the shift of emphasis from homebuilding to restoration services.

Cost of Revenues and Margins: Our consolidated cost of revenues decreased $2,478,480 or 25% to $7,315,603 in 2008, compared to $9,794,083 in the prior year. Our consolidated gross profit increased $444,363 or 19% to $2,825,475 in 2008, compared to $2,381,112 in the prior year.

Manufactured Products Segment : Cost of revenues in our Manufactured Products Segment decreased $689,711 to $5,074,760 in 2008, compared to $5,764,472 in the prior year.

Construction Services Segment : Cost of revenues arising from our Construction Services Segment decreased $1,788,768 or 44% to $2,240,843 in 2008, compared to $4,029,611 in the prior year. The following table illustrates the cost of revenues comparison for our homebuilding and restoration construction services:

Our homebuilding services experienced an increased gross profit percentage to 14% in 2008, compared to 12% in 2007.  Our restoration services experienced a decreased gross profit percentage to 21% from 34% in 2007. The lower gross profit is attributable to an increase in competition as the builders in new construction markets have repositioned themselves into the restoration market as a result of the declining economic conditions in the West Central Florida Area, which are currently being experienced across the United States.

Salaries and Benefits Expenses: Our salaries and benefits expense increased $931,120 or 48% to $2,858,103 in 2008, compared to $1,926,983 in the prior year. The increase resulted from (i) our acquisition of the King Group, and (ii) the increase in average head count during 2008.

Our salaries and benefits expense in 2008 includes $329,975 of compensation arising from share-based payment arrangements, compared to $340,834 in 2007. We have entered into employment contracts subsequent to our recent fiscal year end that include share-based awards. In addition, as we grow our business, we may use share-based payment arrangements to compensate and motivate our employees. Accordingly, share-based payments and the associated expense may increase in future periods.

Subsequent to our recent fiscal year end, we decreased our workforce principally involved in our  Construction Services Segment. These headcount reductions will result in lower compensation expense in future periods. However, as our operations grow and improve, we will add employees accordingly. In addition, a former officer of the company resigned on October 5, 2007. As a result, we will recognize $87,500 of severance in the first quarter of fiscal 2008. This severance will be paid over the first two quarters of fiscal 2008. We did not otherwise extend termination benefits to other employees who were dismissed.

Professional Fees: Our professional fees decreased $1,088,466 to $649,329  in 2008, compared to $1,737,795 in the prior year. This decrease was due to decreased legal, audit and consulting fees that were necessary to (i) prepare financial statements for the fiscal years ended September 30, 2006 and 2005, (ii) prepare filings to report financial and other information about our merger and (iii) provide the necessary consultancy support traditionally required by a publicly-traded company. We paid $33,780 of our professional fees in 2008 under share-based arrangements. We record share-based payments at fair values. We do not anticipate incurring professional fees of this magnitude in future periods.

Consulting Fees, Related Parties : Our consulting fees, related parties, decreased $341,564 to $87,625- in 2008, compared to $429,189 in the prior year.  Consulting fees, related parties, were paid in cash during 2007. Consulting fees, related parties, related to the services in connection with the merger and the going-public decision. We do not anticipate incurring consulting fees, related parties, at this level in future periods.

Rent and Occupancy : We rent the facilities used for our Corporate Headquarters and our Construction Services Segment under operating leases. We own the facilities used for our Manufactured Products Segment and, accordingly, rent and occupancy costs for that segment are minimal. Our rent and occupancy expense decreased $73,024 to $156,173 in 2008, compared to $229,197 in the prior year. This decrease is attributable to our moving the corporate headquarters into a more reasonably priced facility.

Repair and Maintenance : Our repair and maintenance expense decreased $116,457 to $83,813 in 2008, compared to $200,270 in the prior year.

Depreciation and Amortization: Depreciation and amortization net of amounts included in cost of sales, decreased $13,606 or 8% to $153,576 in 2008 compared to $167,182 in the prior year.

 

 

 

 

Restructuring and Exit Activities: We commenced a restructuring program during the second quarter that included termination of employees, exiting contracts and certain other exit costs. We account for our restructuring and exit activities under the guidelines of Statement 146 Accounting for Costs Associated with Exit or Disposal Activities. Generally, costs arising from exit and restructuring activities are recorded when they are incurred. In the case of contract terminations, costs are incurred upon contract termination or exit. In the case of termination benefits, costs are incurred when the benefit has been fixed and disclosed to the employee.

We incurred restructuring expenses of $776,600 during the year ended September 30, 2008.  Of this amount, $452,040 represents the termination and exit of a material lease (see Note 13), $299,560 represents termination benefits disclosed to former employees, and $25,000 was for legal fees that we have incurred. In July 2008, we entered into a settlement agreement and mutual release with the landlord.  Based upon the terms of the settlement agreement, we revised our estimate of the lease exit reserve which reduced the reserve by $119,000.  We recorded the contract termination at its fair value, using estimated future cash flows. Actual cash flows from this activity could be different. In addition, because restructuring and exit activities are recorded as they are incurred, we may record additional charges in future periods as the expense associated with the activity are incurred. The following table illustrates the activity in our restructuring reserve:

Other Operating Expenses : Other operating expenses increased $132,600 to $602,770 in 2008 compared to $470,170 in the prior year. This increase is primarily due to recognition of approximately $62,000 in additional bad debts arising from homebuilding services.

Interest Expense: Our interest expense increased from $107,715 in 2007 to $233,437 in 2008 due to increased average borrowings. During our current fiscal year we generated proceeds from the issuance of interest-bearing debt in the amount of $3,819,142. We paid debt in the amount of $2,647,077 during the same year. Considering that a large balance of our new indebtedness arose late in the year (i.e. during the June to August timeframe) we expect our average outstanding balances to increase, which, in turn, will result in an increase in interest expense. In addition, we are amortizing approximately $55,000 in deferred financing costs over the terms of our loans with charges to interest expense. These charges will continue while balances are outstanding.

Interest Income: We received $5,799 and $1,062 in interest income in 2007 and 2008, respectively. The decrease in interest income was a result of lower average deposited balances. Currently, cash is being used in operating activities and, accordingly, interest income is expected to decline during fiscal 2009.

Income Tax Benefit: We recorded an income tax benefit of $-0- during the year ended September 30, 2008 compared to $254,829 in 2007. We recognize income tax benefits from net operating losses only in instances where future revenue sources, as outlined in Statements on Financial Accounting Standards No. 109 Accounting for Income Taxes , are present. During each period, we recognized the benefits against future reversing temporary differences; that is, deferred tax credits. During the year ended September 30, 2007, we exhausted all future income sources and, accordingly, do not expect to record income tax benefits in our next fiscal year.

Loss Applicable to Common Stockholders : Loss applicable to common stockholders amounting to ($3,304,664) represents our net loss of ($3,149,185) less preferred stock dividends and accretions of ($155,479). Our preferred stock dividends and accretion arose in connection with our Series A Preferred Stock and Warrant Sale in May of 2007. In connection with this financing transaction, we recorded a deemed dividend to the benefit of the preferred stockholders in the amount of $1,479,104. See the discussion of this accounting under our Liquidity and Capital Resources section, below. We do not anticipate any further deemed dividends on this financial instrument. However, the financial instrument has a cumulative dividend feature and those dividends, declared or undeclared, will continue to be reflected in our loss applicable to common shareholders until the preferred shares are converted, if ever. We have not declared dividends on the Series A Preferred Stock. However, for purposes of computing our net loss per common share, we are required to include dividends in arrearage that amounts to $155,479.

 

 

 

 

Loss Per Common Share : Our loss per common share decreased from ($0.14) in 2007 to ($0.09) in 2008. The decrease in the loss per common share is attributable to (i) our increased net loss during 2007 coupled with (ii) the preferred stock dividends and accretions that are required to be reflected as reductions to our net loss solely for this computation. Our diluted loss per common share does not include the effects of (i) our Convertible Series A Preferred Stock, (ii) warrants and (iii) employee stock options, because the effects of these financial instruments on our diluted loss per share is anti-dilutive. The following table illustrates the number of indexed shares in each of these categories:

We apply the Treasury Stock Method to compute the dilutive effects of options and warrants. We apply the If-Converted Method to compute the dilutive effects of convertible securities, such as the Series A Preferred Stock. In future periods, these financial instruments may have a dilutive effect on our loss per common share and, accordingly, may be included in the computation at that time.

Condensed Unaudited Quarterly Results during the Restructuring Period:

The following unaudited condensed quarterly amounts and trends are the key performance indicators that our executive management reviews with our Board:

(a)	These results should be read in conjunction with our consolidated financial statements and Management’s Discussion and Analysis included elsewhere in this Annual Report.

(b)	We have provided further analysis of these key indicators in Management’s Discussion and Analysis.

(c)	See our accounting policy and details of our restructuring charges below and in Note 8 to our consolidated financial statements.

(d)

EBITDA is a non-GAAP measure, but it is a performance indicator that our Board has found useful. A reasonably comparable GAAP measure is cash flow from operations, also provided above. The principal difference in these two measures is that cash flow from operating activities includes the effects of changes in operating assets and operating liabilities.

 

 

 

 

In addition to the restructuring of our operations, our executive management is currently performing due diligence procedures on certain acquisition candidates and carefully considering other strategic initiatives to bring the Company into a state of profitability and continued growth. However, any acquisition will be predicated on our ability to obtain acquisition financing in order to complete the acquisition. The current capital markets have been slow, and in some instances unresponsive, to our proposals for financing. Accordingly and in particular given the unprecedented dislocation in the financial and credit markets, we cannot provide any guarantee or level of probability with respect to our ability to close on the acquisition of these candidates.

We account for exit and termination activities arising from our restructuring program in accordance with Statement of Financial Accounting Standards No. 146   Accounting for Costs Associated with Exit of Disposal Activities .   Statement No. 146 represents a significant change from the prior practice by requiring that a liability for costs associated with an exit or disposal activity be recognized generally as they are incurred and initially measured at fair value only when the liability is incurred.

The following table illustrates the activity in our restructuring reserve:

 

Contract Termination Costs:  In March 2008, we exited a significant facility operating lease that has remaining non-cancellable payments of $748,787 (including executory costs). At that time, we recorded our best estimate of the fair value of the lease obligation, amounting to $425,040, which was net of estimated sublease collections, using a probability weighted, discounted forward cash flow valuation technique. As discussed in Note 13 in the accompanying financial statements, in July 2008, we entered into a settlement agreement and mutual release with the landlord. Based upon the terms of the settlement agreement, we revised our estimate of the lease exit reserve which reduced the reserve by $119,000.

Termination Benefits: We have terminated the employment of certain officers and employees since the commencement of our restructuring program. We record termination benefits when they are both approved by the appropriate level of management (or in some instance our Board of Directors) and the benefit is communicated to and committed to the employee. Our termination benefits do not include any on-going performance (such as stay-bonuses) or benefit (such as health) requirements.

Other Associated Costs: These costs generally include direct, incremental expenses associated with the exit or restructuring activities, such as legal expenses.

Since current accounting standards provide for the recognition of restructuring and exit activities when the related costs have been incurred, we may have additional charges in future periods as we continue our restructuring activities.

Revenues: Within the Manufactured Products segment, we took steps to increase our Door and Hardware volume by inserting new management, intensifying our business development activities, and broadening our geographic reach. By shifting our focus from smaller “transactional” type sales to aggressively securing larger “contract” type projects, we have been able to increase the backlog of projects which has resulted in accelerated revenue growth within the category type.

In our Construction Services segment, after shrinking our headcount and inserting new management and business development expertise, we went back to what made us successful over three decades ago by concentrating on medium size painting, waterproofing, and concrete restoration type projects. As a result, we were able to quickly secure several new projects with past customers and increase our revenues.

Gross Profit: We implemented several initiatives across both segments designed to instill discipline within the project estimation process to ensure that every project meets a minimum profit hurdle or falls into a broader plan which does. In the Manufactured Products segment, for example, we re-engineered our installation process which translated into higher margins on certain larger projects. In our Construction Services segment, we shifted our strategy from out-sourcing to in-sourcing, By doing the work with our own in-house crews who are expert in their painting, waterproofing, and concrete restoration fields, we were able to better control the projects versus subcontracting the work out to others. This increased our gross profits and improved customer satisfaction levels.

EBITDA: The goal of the restructuring initiatives implemented since the early part of the second quarter were to remove as much costs as possible while at the same create a scalable, externally focused platform capable of delivering positive EBITDA and growth. In the quarterly period ended March 31, when a $789,100 largely non-cash charge was taken, EBITDA has improved significantly since the first quarter. Maintaining positive EBITDA in the near term will be difficult, however, given the challenges facing our Construction Services segment (see Subsequent Events note).

 

 

 

 

Liquidity and Capital Resources

As reflected in our consolidated financial statements, we have incurred losses of ($3,149,185) and ($3,106,621) during the years ended September 30, 2008 and 2007, respectively. As discussed above, in the operating results comparison, our 2008 loss included, among other items, significant increases in salaries and benefits and professional fees that substantially depressed our operating income. In addition, our current working capital level of $(1,870,888)  is insufficient in our view to sustain our current levels of operations without substantial cost reductions and additional financing. During our most recent fiscal year ended September 30, 2008, our financing activities resulted in net cash proceeds of $1,172,065.

In response to these trends and conditions, our Board of Directors has substantially restructured our executive management. This restructured executive management team has been implementing a strategic plan to alleviate our liquidity shortfalls, improve gross profit margins, reduce expenses and, ultimately, achieve profitability. Since August 2007, execution of this plan has included (i) the elimination of a substantial number of our Florida-based positions and the associated employment costs, (ii) the curtailment of operating costs and expenses, (iii) the refocus of construction services work away from less profitable homebuilding activities to more profitable restoration and renovation activities; and, (iv) the aggressive development of our manufactured products business.

As a result of our executive management’s efforts, we have (i) increased our revenues in the fourth quarter to $3,038,525 compared to $2,697,874, $2,407,881 and $1,996,799 during our first, second, and third quarters, respectively, (ii) increased our consolidated gross profits to 30% and 35% for our third and fourth quarters, respectively, compared to 18% and 26% during our first and second quarters, respectively, (iii) increased our operating profit to $175,841 in the fourth quarter compared to operating losses of ($1,307,628), ($1,551,085), and ($466,317), in the first, second, and third quarters, respectively. (iv) reduced our cash-based compensation expenditures to $575,000 and $570,000 for our third and fourth quarters, respectively, compared to $840,000 and $538,000 during our first and second quarters, respectively, and (v) reduced our total operating expenses to $1,084,000 and $895,000 for our third and fourth quarters, respectively, compared to $1,760,000 and $2,135,000 during our first and second quarters, respectively.

 

Notwithstanding the operating performance improvements, our negative liquidity conditions have worsened from reporting working capital of $613,551 at September 30, 2007 to a deficiency of working capital of ($1,870,888)  at September 30, 2008.  The reduction in liquidity is due to our preservation of cash reserves to sustain our operations while working closely with our creditors and vendors to extend terms of payment, the later having the effect of increasing our liabilities. Our management will continue these efforts while seeking other permanent sources of equity. However, there can be no assurance that additional capital arrangements, at terms suitable to our management, will present themselves.

 

On May 18, 2007, we entered into a financing arrangement with Vision Opportunity Master Fund Ltd. (“Vision”) pursuant to which we sold various securities in consideration of an aggregate purchase price of $1,500,000 (the “Preferred Financing”). In connection with the Preferred Financing, we issued the following securities to Vision:

·	1,000,000 shares of Series A Preferred Stock (the “Series A Preferred”);

·	Series A Common Stock Purchase Warrants to purchase 3,091,959 shares of common stock at $.49 per share for a period of five years (“Series A Warrants”);

·	Series B Common Stock Purchase Warrants to purchase 3,091,959 shares of common stock at $.54 per share for a period of five years (“Series B Warrants”); and,

·	Series J Common Stock Purchase Warrants to purchase 3,091,959 shares of common stock at $.54 per share for a period of one year from the effective date of the registration statement (“Series J Warrants”).

The shares of Series A Preferred Stock are convertible, at any time at the option of the holder, into an aggregate of 3,091,959 shares of our common stock. Holders of the Series A Preferred Stock are entitled to receive, when declared by our board of directors, annual dividends of $0.12 per share of Series A Preferred Stock paid semi-annually on June 30 and December 31. Such dividends may be paid, at the election of the Company, either (i) in cash if legally able to do so, or (ii) in restricted shares of our common stock with piggyback registration rights.

In the event of any liquidation or winding up of our company, the holders of Series A Preferred Stock will be entitled to receive, in preference to holders of common stock, an amount equal to 115% of the original purchase price per share. There are no other net-cash settlement provisions embodied in the Series A Preferred Stock that are not within our control.

The Series A Warrants and the Series B Warrants are exercisable for five years at an exercise price of $0.49 and $0.54 per share, respectively. In the event that the shares of common stock underlying the Series A Warrants and the Series B Warrants are not registered by May 2009, then the Series A Warrants and the Series B Warrants are exercisable on a cashless basis; however, the provision is contractually defined to provide for an explicit limit on the number of common shares indexed to these warrants. The Series J Warrants are exercisable for one year from the date of the registration statement registering the shares of common stock underlying the Series J Warrants is declared effective at an exercise price of $.54 per share.

We granted the investor registration rights with respect to the Series A Preferred Stock and the warrants. We were required to file a registration statement within 60 days from closing and have such registration statement declared effective within 150 days from closing if the registration statement is not reviewed or, in the event that the registration statement is reviewed, within 180 days from closing. If we fail to have the Registration Statement filed or declared effective by the required dates, which is the case, the dividend rate associated with the Series A Preferred Stock, as applicable, is increased from 8% to 10%. Otherwise, there are no required cash payments (such as registration payments or penalties) that accrued to the benefit of the investors. Additionally, Vision has the right of first refusal on subsequent funding opportunities along with the right to reset the conversion price and exercise price associated with the Series A Preferred and the Warrants in the event that the purchase price for the subsequent funding rounds is less than the conversion price or the exercise price in the Preferred Financing.

 

 

 

On March 2, 2007, we entered into a face value, $1,255,500, ten-year, adjustable rate mortgage note payable which was and continues to be secured by real estate that we own in Yakima, Washington. See Item 2 for additional information about our real estate holdings.

On August 16, 2007, we entered into a Securities Purchase Agreement with the Marie Baier Foundation (the “Foundation”), pursuant to which we issued a convertible promissory note in the principal amount of $350,000 (the “Foundation Note”). The Foundation Note bears interest at 7.36%, matures one year from the date of issuance and is convertible into our common stock, at the Foundation’s option, at a conversion price of $0.48 per share (the trading market on that date was $0.30). The Foundation converted the note with interest for 733,725 shares of common stock on September 26, 2007.

In October, November and December, 2007 and January, June and July, 2008, certain members of our Board of Directors, or organizations with which they are affiliated, funded an aggregate $945,000 to us pursuant to notes payable. These notes bear interest at 7.0% and mature as follows: April 18, 2009 – $250,000; April 23, 2009 - $50,000; May 8, 2009 - $25,000; November 6, 2009 - $25,000 and June 18, 2009 – $250,000; June 27, 2009 - $30,000; June 30, 2009 - $45,000; July 3, 2009 - $20,000.  In addition an additional $250,000 was added in three tranches bearing interest of 12% and mature as follows: June 26, 2009 - $40,000; July 3, 2009 - $21,000; July 8, 2009 - $189,000.

Ultimately, the Company’s ability to continue for a reasonable period is dependent upon management’s continued successful reduction of costs and expenses to a level that our current operations can support and obtaining additional financing to augment our working capital requirements and support our acquisition plans. There can be no assurance that management will be successful in achieving sufficient cost reductions or obtain additional financing under terms and conditions that are suitable.

For further analysis, we are providing information on the cash flows associated with our financial activities as follows:

Operating Activities

 

Net cash used in operating activities was $1,021,985 for the year ended September 30, 2008 as compared to net cash provided by operating activities of $2,319,759 for the year ended September 30, 2007. The principle reason for the change was the Accounts payable and accrued expenses increased from $1,488,155 in fiscal year ended September 30, 2007 to $2,528,726 in fiscal year ended September 30, 2008. Our non-cash operating expense in 2008 included $414,425 of share-based payments, $232,212 in depreciation and amortization, $-0- in bad debts, and a deferred tax benefit of $-0-. Comparable amounts in 2007 were $515,478, $262,621, $101,227, and ($254,829), respectively.  We intend to continue to use share-based payment arrangements to compensate our employees, which will reduce operating cash outflows.  We experienced bad debts in our Construction Services Segment as a result of customer disputes of $163,068 and $101,227 in 2008 and 2007, respectively.  Our non-cash tax benefit from net losses was limited to $-0- under current accounting standards. We will not recognize further tax benefits from net losses until we generate taxable income.

 

Investing Activities

Capital expenditures were $187,936 in fiscal year ended September 30, 2008 and $682,911 in fiscal year ended September 30, 2007. The decrease was substantially due to the acquisition of adjacent land and an associated building at our Washington manufacturing facility in 2007. We currently have no material commitments for the purchase of property and equipment.

 

Financing Activities

During the year ended September 30, 2008, we repaid $2,647,077 of notes payable and borrowed $3,819,142 on our operating LOC, pursuant to the following:

On April 29, 2008, we entered into an agreement with a financial institution to provide up to $1,000,000 in secured credit, subject to certain limitations. This facility will replace a previous facility with another bank that had a limit of $300,000. Under this new facility, we are permitted to draw on an advance line of up to 80% of certain eligible accounts receivable arising from our manufactured products segment. The interest rate is Prime plus 4.5%. The line is secured by the accounts receivable, inventory, and the unencumbered fixed assets of that segment. As part of the transaction, the lender was granted 150,000 shares of common stock having a fair market value of $15,000.

 

Off-balance Sheet Arrangements

We operate certain facilities under operating leases, as follows:

We entered into a three-year operating lease for 2,030 square feet of office space in Sarasota, Florida. Non-cancelable annual lease payments for each year ending September 30 are as follows:  2009--$29,825; and, 2010--$25,575.

 

 

PART II

ITEM 7. FINANCIAL STATEMENTS