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EX-32 - GREEN BUILDERS, INCex32.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q

 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended December 31, 2009
 
Or

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from                to
 
Commission file number: 000-23819


 
GREEN BUILDERS, INC.
(Exact name of registrant 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 Road, Austin, Texas
 
78746
(Address of principal executive offices)
 
(Zip Code)
 
(512) 732-0932
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
 
 
N/A

 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No   ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large Accelerated Filer
 
¨
 
 
 
Accelerated Filer
 
¨
   
Non-Accelerated Filer
 
¨
 
 
 
Smaller Reporting Company
 
x
   
 
Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act).     ¨   Yes     x   No
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

The number of shares of common stock, par value of $0.001 per share, outstanding at February 12, 2009 was 23,135,539.
 


 

 
 
 
 
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q 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.
 
Please see “Part I, Item 1A—Risk Factors” of our annual report on Form 10-K for the year ended September 30, 2009, for further discussion regarding our exposure to risks. Additionally, new risk factors emerge from time to time and it is not possible for us to predict all such factors, nor to assess the impact such factors might have on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

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, our predecessors and subsidiaries, including our wholly owned subsidiaries, Wilson Family Communities, Inc., a Delaware corporation (“WFC”), and  GB Operations, Inc., a Texas corporation (“GB Operations”).  All references in this report to “$” or “dollars” are to United States of America currency.  References to “fiscal 2009” means our fiscal year ended September 30, 2009 and references to “fiscal 2010” means our fiscal year ending September 30, 2010.
 
 
 
 
PART I – FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
GREEN BUILDERS, INC.
 
Balance Sheets
 
As of December 31, 2009 and September 30, 2009
 
             
   
December 31, 2009
   
September 30, 2009
 
 
           
Cash and cash equivalents
  $ 576,945       1,152,875  
Inventory
               
    Land and land development
    11,479,392       26,398,043  
    Homebuilding inventories
    1,032,259       2,079,143  
Total inventory
    12,511,651       28,477,186  
Other assets
    152,825       129,751  
Debt issuance costs, net of amortization
    731,941       791,194  
Property, and equipment, net of accumulated depreciation and amortization
    293,938       600,786  
Total assets
  $ 14,267,300       31,151,792  
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Accounts payable
  $ 571,796       685,397  
Accrued real estate taxes payable
    246,265       238,580  
Accrued liabilities and expenses
    369,304       404,043  
Accrued interest
    414,800       2,100,996  
Deferred revenue
    10,829       14,891  
Lines of credit
    7,842,491       9,397,258  
Notes payable
    -       13,872,995  
Subordinated convertible debt, net of $1,988,937 and $2,128,524 discount, respectively
    14,511,063       14,371,476  
Total liabilities
    23,966,548       41,085,636  
                 
STOCKHOLDERS' DEFICIT
               
                 
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
    28,142,691       28,110,945  
Retained deficit
    (37,865,075 )     (38,067,925 )
Total stockholders' deficit
    (9,699,248 )     (9,933,844 )
Commitments and contingencies
    -       -  
Total liabilities and stockholders' deficit
  $ 14,267,300       31,151,792  
 
 
See accompanying notes to the financial statements.
 
 
GREEN BUILDERS, INC.
 
Statements of Operations
 
Three Months Ended December 31, 2009 and 2008
 
             
             
   
Three Months Ended December 31, 2009
   
Three Months Ended December 31, 2008
 
             
Revenues:
           
Homebuilding and related services
  $ 2,377,624       4,236,720  
Land sales
    551,142       346,146  
Total revenues
    2,928,766       4,582,866  
                 
Cost of revenues:
               
Homebuilding and related services
    2,095,116       3,762,855  
Land sales
    445,789       272,232  
Inventory impairments and land option cost write-offs
    -       11,900  
Total cost of revenues
    2,540,905       4,046,987  
                 
Total gross profit
    387,861       535,879  
                 
Costs and expenses:
               
Corporate general and administration
    440,113       818,289  
Sales and marketing
    690,660       493,914  
Total costs and expenses
    1,130,773       1,312,203  
Operating loss
    (742,912 )     (776,324 )
Other income (expense):
               
Gain on restrucured debt
    1,672,353       -  
Interest and other income
    14,208       97,843  
Interest expense
    (740,799 )     (982,622 )
Total other expense
    945,762       (884,779 )
Income before income taxes
    202,850       (1,661,103 )
Provision for income taxes
    -       -  
Net income (loss)
  $ 202,850       (1,661,103 )
                 
Basic and diluted loss per share
  $ 0.01       (0.07 )
                 
Basic and diluted weighted average common shares outstanding
    23,135,539       23,135,539  
 
 
See accompanying notes to the financial statements.
 
 
GREEN BUILDERS, INC.
 
Statements of Cash Flows
 
Three Months Ended December 31, 2009 and 2008
 
             
             
   
Three Months Ended
December 31, 2009
   
Three Months Ended
December 31, 2008
 
Cash flows from operating activities:
           
Net income (loss)
  $ 202,850       (1,661,103 )
Non cash adjustments:
               
Amortization of convertible debt discount
    139,587       139,587  
Amortization of debt issuance costs
    59,253       59,253  
    Stock-based compensation expense
    31,746       42,286  
Depreciation and amortization
    70,346       97,013  
Inventory impairments and land option cost write-offs
    -       11,900  
Gain on troubled debt restructuring, net
    (1,672,353 )     -  
Impairment of sales office trailer
    208,740       -  
                 
Adjustments to reconcile net loss to net cash used in operating activities:
               
Decrease in total inventory
    1,638,525       2,171,213  
Decrease (increase) in other assets
    (23,074 )     277,473  
Decrease in accounts payable
    (113,601 )     (869,699 )
Increase in real estate taxes payable
    7,685       65,414  
Increase (decrease) in accrued expenses
    (34,739 )     172,315  
Decrease in deferred revenue
    (4,062 )     (4,061 )
Increase (decrease) in accrued interest
    440,172       371,209  
Net cash provided by (used in) operating activities
    951,075       872,800  
                 
Cash flows from investing activities:
               
Disposal of fixed assets, net
    27,762       (7,157 )
Net cash provided by (used in) investing activities
    27,762       (7,157 )
Cash flows from financing activities:
               
Issuances and repayments of lines of credit, net
    (1,554,767 )     (2,407,663 )
Net cash provided by (used in) financing activities
    (1,554,767 )     (2,407,663 )
Net decrease in cash and cash equivalents
    (575,930 )     (1,542,020 )
Cash and cash equivalents at beginning of period
    1,152,875       3,711,180  
Cash and cash equivalents at end of period
  $ 576,945       2,169,160  
                 
Cash paid for interest
  $ 136,976       464,745  
                 
Supplemental disclosure for non-cash activity:
               
   Reduction in inventory in connection with troubled debt restructuring
  $ 14,327,011       -  
   Reduction in notes payable in connection with troubled debt restructuring
  $ 13,872,996       -  
   Reduction in accrued interest in connection with troubled debt restructuring
  $ 2,126,368       -  
 
 
See accompanying notes to the financial statements.
 
 
(1)         Organization and Business Activity
 
Green Builders, Inc. (“we,” “us,” or the “Company”) is a Texas corporation formerly known as Wilson Holdings, Inc.  Effective April 4, 2008, Wilson Holdings, Inc, a Nevada corporation, 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 now governs 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 plans to continue to do so.
 
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 and expects to continue to generate negative cash flows.  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 and obtain additional capital would result in a depletion of its available funds.
 
Until October 12, 2009 our common stock was listed on the NYSE Amex (the “Exchange”).  On January 23, 2009, we received notice that we were not in compliance with the Exchange’s continued listing standards under Sections 1003(a)(i), 1003(a)(ii), 1003(a)(iii), and 1003(a)(iv) of the NYSE Amex Company Guide (the “Company Guide”).  On February 23, 2009 we submitted a plan of compliance to the Exchange.  On April 24, 2009 the Exchange notified us that it had accepted our plan for regaining compliance with the Exchange’s continued listing standards and granted us an extension until July 23, 2009 to regain compliance with Section 1003(a)(iv) and until July 23, 2010 to regain compliance with Section 1003(a)(i), Section 1003(a)(ii), and Section 1003(a)(iii) of the Company Guide.  We did not make satisfactory progress consistent with the plan presented to the Exchange and as such our Board of Directors (the “Board”) authorized the voluntary delisting of our common stock from the Exchange.  We filed a Form 25 with the SEC relating to the delisting of our common stock on October 2, 2009. The delisting became effective on October 12, 2009 and our common stock began trading on the Pink Sheets on October 12, 2009.
 
On January 29, 2010 the Company filed a definitive information statement to inform our shareholders of (i) the approval by the Board at a meeting held on November 13, 2009 of amendments to our Certificate of Formation to effect a reverse stock split of our Common Stock followed immediately by a forward stock split of our Common Stock (the “Reverse/Forward Stock Split”), and (ii) our receipt of a written consent dated January 28, 2010, approving such amendment by shareholders holding 53.9% of the voting power of all of our shareholders entitled to vote on the matter as of November 17, 2009 (the “Record Date”).  The Certificates of Amendment shall be filed with the Secretary of State of the State of Texas on or after February 19, 2010, (20 calendar days following the date the information statement was first mailed to our shareholders) and will become effective immediately thereafter.  As a result of the Reverse/Forward Stock Split, shareholders owning fewer than 500 shares of our Common Stock will be cashed out at a price of $0.26 per share, and the holdings of all other shareholders will remain unchanged.   The Board may elect to terminate the Reverse/Forward Stock Split prior to the effective date.
 
The intended effect of the Reverse/Forward Stock Split is to reduce the number of record holders of our Common Stock to fewer than 300 so that we will be eligible to terminate the public registration of our Common Stock under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Provided that the Reverse/Forward Stock Split has the intended effect, we will file to deregister our Common Stock with the Securities and Exchange Commission (the “Commission”).  In such case the Company will no longer be required to file periodic reports with the Commission, although the Company intends to continue to provide sufficient information, including annual audited and quarterly unaudited financial statements, through the Pink Sheets News Service to allow its Common Stock to continue trading on the Pink Sheets.
 
 
(2)         Going Concern Liquidity and Capital Resources
 
Liquidity and Capital Resources
 
On December 31, 2009, the Company had approximately $577,000 in cash and cash equivalents.  The Company’s current operations and future 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 expenses, general and administrative costs, and interest payments, cash will continue to be depleted.  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.  The Company can not provide any assurance that it will be successful in obtaining additional capital.
 
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 cash.
 
Line of Credit
 
On June 29, 2007, the Company 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 pursuant to a Borrowing Base Loan Agreement (the “Loan Agreement”).  International Bank of Commerce, Laredo, Texas (“IBC Bank”) and LNV Corporation are the other two banks that make up the syndicate of banks.  The Company’s obligations under the Credit Facility are secured by the assets of each subdivision to be developed.  Green Builders has guaranteed the obligations of WFC under the Credit Facility.
 
In June 2008 the Credit Facility was reduced to $30 million.  On May 14, 2009, the Company entered into a Fourth Agreement to Modify Loan Documents (the “Modification”) of the Credit Facility.  The Modification modified the terms of the Loan Agreement by reducing the loan commitment amount pursuant to the Loan Agreement from $30 million to $10.8 million.  The Modification extended the maturity of the master line of credit issued pursuant to the Loan Agreement (the “Master Line”) until March 31, 2011.  The modification agreement amended the interest rate of the facility from prime plus .25%, with a floor of 5.5%, to libor plus 3.5%, with a floor of 6%.  At December 31, 2009 the Company had $7.6 million outstanding under the Master Line and has drawn all the remaining loan commitments from the Credit Facility.
 
The Modification also revised certain covenants contained in the Loan Agreement.  The terms of the Modification:
 
·     
require WFC to maintain a minimum net worth of $7,000,000, including subordinated debt,  although the minimum net worth may be reduced to an amount not less than $5,000,000 upon the sale and close of escrow any land owned by WFC which causes WFC to be in violation of the $7,000,000 minimum net worth covenant;
 
·     
prohibit WFC’s ratio of debt to equity from exceeding 3.00 to 1.00;
 
·     
require WFC to maintain working capital of at least $5,000,000;
 
·     
require WFC to make certain quarterly principal reduction payments; and
 
·     
require WFC to maintain cash of not less than $500,000.
 
 
The Modification also contains a waiver for certain inventory covenants contained in the original Loan Agreement with which WFC was not in compliance prior to the date of the Modification.  This includes a waiver of the following covenants until the dates noted below:
 
·     
the spec home limitation covenant until March 31, 2011;
 
·     
the developed lot limitation covenant until March 31, 2011;
 
·     
the land, lots under development and developed lot limitation covenant until March 31, 2011;
 
·     
the entitled land and pods limitation covenant until March 31, 2011;
 
·     
the entitled land, pods, lots under development, and developed lots limitation covenant until March 31, 2011; and
 
·     
the land, pods lots under development, developed lots and spec home limitation covenant until March 31, 2011.
 
Pursuant to the Modification, WFC will be required to reduce the outstanding principal amount under the Master Line to approximately $6 million by December 31, 2010 and to repay the Master Line in full by March 31, 2011.
 
At December 31, 2009 WFC was not in compliance with the net worth covenant and working capital covenant.  If the Company is unable to regain compliance with these covenants or to obtain forbearance for these covenants, WFC’s obligation to repay indebtedness outstanding under the Credit 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, it would have, or be able to obtain, sufficient funds to pay all debt required to be repaid.  It is anticipated by the Company’s management that the Company will no longer have access to this line of credit to construct homes for sale.
 
LNZCO Line
 
On March 12, 2009 the Company entered into an agreement with LNZCO, LLC (“LNZCO”) pursuant to which LNZCO agreed to provide it with between $1 and $2 million  of  financing for the construction of single family residences.  Each promissory note issued thereunder bears interest at a rate of prime plus 5.0%, has a one point origination fee, and matures one year from the date of issuance.  In aggregate the Company has issued promissory notes for home construction loans totaling approximately $2.9 million to LNZCO.  At December 31, 2009 the Company had promissory notes in the principal amount of $816,000 held by LNZCO issued for home construction loans, with $148,000 drawn on these notes.  In addition to the construction line, LNZCO has loaned the Company an aggregate of $365,000 to purchase land in the Georgetown Village community, with $117,000 of that amount outstanding at December 31, 2009.  Each promissory note issued thereunder bears interest at a rate of 10%,  has a two point origination fee, and  a maturity date of one year from the date of issuance  which can be extended for an additional 12 months for an additional two point extension fee.  The Company can not provide any assurances that it will receive additional promissory notes for financing construction of new single family residences from LNZCO.  The Company can give no assurance that in such an event, the Company would have adequate capital to construct homes.   
 
Convertible Promissory Notes
 
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 the 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 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.
 
 
On December 1, 2009 the Company was required to make its semi-annual interest payments due to the holders of its 2005 Convertible Promissory Notes.  The Company did not make the required $250,000 interest payments on December 1, 2009.  The Company is currently in negotiations with the noteholders to forbear from exercising the remedies under the agreement due the Company’s failure to make the interest payments when due on December 1, 2009.  The Company can not make any assurances that it will reach an agreement with these noteholders.
 
(3)           Summary of Significant Accounting Policies
 
(a)           Revenue Recognition
 
Revenues from homebuilding and land development sales 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.  Revenues from remodeling contracts will be recognized under the completed contract method or percentage of completion method.  Homebuilding revenues will be categorized as homebuilding revenues, revenues from property sales or options will be categorized as land sales, and revenues from remodeling contracts will be categorized as remodeling revenues.
 
(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 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)           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 fair value of warrants and options.  To the extent that the estimates are dramatically different from the actual amounts, such differences could have a material effect on the financial statements.
 
(e)           Water District Receivables
 
The Company owns 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 agreements with the WCID, the Company expects to be reimbursed partially for the above development costs. The WCID will issue bonds to repay the Company, once the property has sufficient assessed value for the WCID 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 December 31, 2009.  The Company has completed Phase 1 for the Rutherford West (as defined herein) project and has approximately $1 million of WCID 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 district 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 from the actual reimbursements, such differences could have a material effect on the Company’s financial statements.  In July 2009, the WCID for the Rutherford West project had its first bond issuance, the Company received reimbursements of approximately $470,000.
 
 
 (f)           Subordinated Convertible Debt
 
The convertible promissory notes and the related warrants have been accounted for in accordance with appropriate accounting guidance.  The relative fair value of the warrants have been recorded at a discount to the related convertible debt.  The discount is amortized over the life of the note.
 
(g)           Loss per Common Share
 
Earnings per share is accounted for in accordance with authoritative guidance which requires 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 three months ended December 31, 2009 and 2008 because the effect would be anti-dilutive as summarized in the table below:
 
 
             
   
Three Months Ended December 31, 2009
   
Three Months Ended December 31, 2008
 
             
Stock options
    485,979       1,090,000  
Common stock warrants
    1,837,191       1,143,125  
Convertible promissory note warrants
    8,250,000       8,250,000  
Total
    10,573,170       10,483,125  
 
(h)         Property and Equipment
 
Property and equipment, which included model home furnishings and sales office costs is carried at cost less accumulated depreciation. Depreciation and amortization is recorded over the estimated useful life of the asset.  For the three months ended December 31, 2009 the Company recorded a $209,000 impairment for its sales office.
 
(i)           Adoption of New Accounting Pronouncements
 
Effective October 1, 2008, we adopted the FASB’s authoritative guidance for fair value measurements of certain financial instruments.  The guidance provides a framework for measuring fair value under GAAP. The guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:
 
 
 
 
Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 assets and liabilities include debt and equity securities traded in an active exchange market, as well as U.S. Treasury securities.
 
 
 
Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
 
 
Level 3 – Valuation is determined using model-based techniques with significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of third party pricing services, option pricing models, discounted cash flow models and similar techniques.
 
In October 2008, FASB issued authoritative guidance for the fair value of a financial asset when the market for that asset is not active.  This guidance clarifies the application of fair value in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Even in times of market dislocation, it is not appropriate to conclude that all market activity represents forced liquidations or distressed sales. However, it is also not appropriate to automatically conclude that any transaction price is determinative of fair value. Determining fair value in a dislocated market depends on the facts and circumstances and may require the use of significant judgment about whether individual transactions are forced liquidations or distressed sales. In determining fair value for a financial asset, the use of a reporting entity's own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available. Regardless of the valuation technique used, an entity must include appropriate risk adjustments that market participants would make for nonperformance and liquidity risks.

The initial adoption of the provisions the authoritative guidance did not have a material effect on the Company’s financial statements.

The fair values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined.  Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed.  Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for securities categorized in Level 3.  In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement.

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure.  Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date.  The Company uses prices and inputs that are current as of the measurement date, including periods of market dislocation.  In periods of market dislocation, the observability of prices and inputs may be reduced for many securities.  This condition could cause a security to be reclassified to a lower level within the fair value hierarchy.
 
 
Inventory is initially recorded at cost and is subsequently recorded at lower of cost or fair value.  Fair value is determined by the Company based on a number of factors, including: sales to unrelated new investors, comparable sales, and discounted cash flow models. Because of the inherent uncertainty of these valuations, the estimated values may differ from the actual fair values that may or may not be ultimately realized.

In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements,” which requires additional disclosures related to transfers between levels in the hierarchy of fair value measurement.
 
 (4)         Inventory
 
The Company’s land and land development inventory includes land costs, prepaid development costs, development costs, option money and earnest money on land purchase options.  Homebuilding inventory represents model homes, speculative homes, and units sold and under construction.  Earnest money deposits for land costs and development costs on land under option, not owned, totaled approximately $175,000 at December 31, 2009 and September 30, 2009 respectively, all of which is non-refundable if the Company does not exercise the option and purchase the land.  The $175,000 of earnest money is for the Georgetown Village (as defined herein) option contract which requires the Company to takedown 30 acres of land each year from May 2010 through May 2017.  The earnest money will be applied to the purchase price for the final takedown of land.
 
As of December 31, 2009 the Company owned approximately 181 unfinished acres of property.  The following is a description of the property completed, owned or under contract by the Company as of December 31, 2009:
 
Rutherford West – Rutherford West is a residential community located southwest of Austin, Texas in the city of Driftwood. Rutherford West is planned as an “earth-friendly” acreage development and each lot includes a deed restricted conservation easement.  The Company commenced the development of this project in October 2006 and has completed development on a total of 58 lots.
 
Georgetown Village – Georgetown Village is a mixed use master-planned development in Williamson County, located north of Austin, Texas in Georgetown.  The Company purchased the land for this project pursuant to an option contract in August 2005.  Under the option contract the Company is required to purchase a minimum of 30 acres during May of each year through 2017.   The Company commenced the development of this project in January 2006.  The Company completed development on a total of 220 lots in Georgetown Village.
 
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 lots and open green space all within walking distance of Elm Grove elementary school.  The Company acquired the first phase of land for this project in December 2006.  The Company has completed development on a total of 105 lots in Phase 1.
 
In January 2009, the Company entered into an agreement with Graham Mortgage Capital (“Graham”)  to modify the debt agreement for the $7.3 million loan for property in Rutherford West and the $4.7 million loan for New Sweden.  Effective January 1, 2009, the Company began paying 2% interest on each loan (“Modified Interest Payment”) and accrued an additional 12% interest on the loan.  Per the agreement, in the event that the property was not sold by December 31, 2009 and provided that all Modified Interest Payments and real estate taxes for 2009 had been paid,  the Company and Graham would exchange mutual releases, the corporate guaranty would be returned, and the Deed (in Lieu of Foreclosure) would be released.   On December 31, 2009 the Company and Graham exchanged mutual releases.  The property was deeded (in Lieu of Foreclosure) back to Graham.   The Company issued two separate warrants for the purchase 347,033 shares of the Company’s commons stock for each tract of land that was deeded back.  The warrants have a $5.00 strike price and can be exercised from January 1, 2010 through December 31, 2012.  The Company recorded a gain from the deed at December 31, 2009 (see note 11).
 
 
In November 2009, the Company received a notice of foreclosure sale from each of the three remaining lenders for the New Sweden tract.  The promissory notes are secured by a deed of trust creating a lien upon the 166.47 acres of tract of land in the Company’s New Sweden project.  The foreclosure sale for each of these notes occurred on December 1, 2009.  The note was a nonrecourse note and a gain was recorded when the acreage was foreclosed (see note 11).
 
The Company performs an inventory impairment analysis on a quarterly basis.  If impairment indicators are present, impairment charges are required to be recorded if the fair value is less than the cost recorded.  The Company’s determination of fair value is primarily based on discounting the estimated cash flows.  The Company utilized a 14% discount rate for determining fair value for the three months ended December 31, 2009.  Estimated cash flows are based on recent offers and comparable sales of real estate under existing and anticipated market conditions.  The Company did not record any impairments for the three months ended December 31, 2009.

Below is a summary of the property completed, owned or under contract by the Company at December 31, 2009.  Land and land development inventory includes land costs, prepaid development costs, development costs, option money and earnest money on land purchase options.  Homebuilding inventory represents model homes, speculative homes under construction, units sold and under construction, and capitalized indirect costs.
 
 
Property
Unsold
Finished
Lots/Homes
Owned
Unfinished
Acreage
Approximate
Acreage Under
Option
Inventory Costs at
December 31, 2009
(In thousands)
Land and Land Development
94
167
394
$11,479
Homebuilding
1
                           -
                           -
$1,032
Total Inventory
95
167
394
$12,512

 
Below is a summary of the property completed, owned or under contract by the Company at September 30, 2009:
 

 
Property
Unsold
Finished
Lots/Homes
Owned
Unfinished
Acreage
Approximate
Acreage Under
Option
Inventory Costs at
September 30, 2009
(In thousands)
Land and Land Development
216
1,158
394
$26,398
Homebuilding
8
                           -
                           -
$2,079
Total Inventory
224
1,158
394
$28,477

 
(5)         Operating and Reporting Segments
 
The Company has three reporting segments: (i) homebuilding and related services, (ii) land sales and (iii) remodeling 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.  Land sales consist of land in various stages of development sold, including finished lots.  Remodeling includes remodeling products and services.  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.  Remodeling segment revenues and expenses is included in the homebuilding and related services segment and is immaterial.
 
 
The following table presents segment operating results before taxes for the three months ended December 31, 2009 and 2008.
 
   
Three Months Ended December 31, 2009
   
Three Months Ended December 31, 2008
 
   
Homebuilding Sales
   
Land Sales
   
Total
   
Homebuilding Sales
   
Land Sales
   
Total
 
Revenues from external customers
    2,377,624     $ 551,142     $ 2,928,766     $ 4,236,720       346,146       4,582,866  
Costs and expenses:
                                               
Cost of revenues
    2,095,116       445,789       2,540,905       3,762,855       272,232       4,035,087  
Impairment and write-offs
    -       -       -       11,900       -       11,900  
Selling, general and administrative
    890,411       240,362       1,130,773       857,200       455,003       1,312,203  
Foreclosure of Assets
    -       (1,672,353 )     (1,672,353 )     -       -       -  
Interest & other income
    (12,787 )     (1,421 )     (14,208 )     (53,814 )     (44,029 )     (97,843 )
Interest expense
    204,628       536,171       740,799       258,062       724,560       982,622  
Total costs and expenses
    3,177,368       (451,452 )     2,725,916       4,836,203       1,407,766       6,243,969  
Profit or Loss before taxes
    (799,744 )   $ 1,002,594     $ 202,850     $ (599,483 )     (1,061,620 )     (1,661,103 )
Segment Assets
    2,085,863     $ 12,181,437     $ 14,267,300     $ 9,585,203       33,842,260       43,427,463  
Capital expenditures
    -     $ -     $ -     $ 7,157       -       7,157  
 
 
(6)         Related Party Transactions
 
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 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.  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.  On May 13, 2008, the Company entered into a new agreement with Ms. Wilson in which she 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 continued to provide consulting services at no cost to the Company. The Company paid Ms. Wilson $30,000 for services performed in the three months ended December 31, 2008 and has not paid her since that time.
 
Financing with LNZCO, LLC

On March 12, 2009 the Company entered into an agreement with LNZCO, LLC (“LNZCO”) pursuant to which LNZCO agreed to provide it with between $1 and $2 million  of  financing for the construction of single family residences.  Each promissory note issued thereunder bears interest at a rate of prime plus 5.0%, has a one point origination fee, and matures one year from the date of issuance.  In aggregate the Company has issued promissory notes for home construction loans totaling approximately $2.9 million to LNZCO.  At December 31, 2009 the Company had promissory notes in the principal amount of $816,000 held by LNZCO issued for home construction loans, with $148,000 drawn on these notes.  In addition to the construction line, LNZCO has loaned the Company an aggregate of $365,000 to purchase land in the Georgetown Village community, with $117,000 of that amount outstanding at December 31, 2009.  Each promissory note issued thereunder bears interest at a rate of 10%,  has a two point origination fee, and  a maturity date of one year from the date of issuance  which can be extended for an additional 12 months for an additional two point extension fee.  The Company can not provide any assurances that it will receive additional promissory notes for financing construction of new single family residences from LNZCO.  LNZCO is wholly-owned by the Lindsey May Kathryn Wilson 1995 Trust, the beneficiaries of which are the minor children of Clark Wilson, the President and Chief Executive Officer of the Company.  The Company’s Audit Committee reviewed the proposed terms from LNZCO and compared them to the terms of other financing arrangements available to WFC at this time.  The Audit Committee of the Company’s Board of Directors determined that LNZCO could provide the most favorable financing terms to WFC and approved the LNZCO terms as being fair as to the Company and WFC as of the time of authorization.
 
 
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 $55,000 and $101,000 for the three months ended December 31, 2009 and 2008, respectively.   Management believes that services were provided at fair market value.
 
(7)         Commitments and Contingencies
 
Options Purchase Agreements
 
In order to ensure the future availability of land for development and homebuilding, the Company may 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 do they 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
 
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:
 
 
 
2010
 
 
2011
 
2012
2013
2014
                   
Lease obligations
 
$
67,186
     
740
 
240
240
240
 
 
Employment Agreement with Clark Wilson
 
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 of 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.
 
 
 
(8)         Indebtedness
 
The following schedule lists the Company’s notes payable and lines of credit balances at December 31, 2009 and September 30, 2008.
               
   
Rate
Status
Maturity
Date
 
Balance at 12/31/2009
Balance at 9/30/2009
           
(In thousands)
a
Notes payable, land
14.00%
 
Dec-31-09
$
                 -
          4,700
b
Notes payable, land
14.00%
 
Dec-31-09
 
                 -
          7,300
c
Notes payable, seller financed
7.00%
 
Dec-1-09
 
                 -
          1,873
d
Line of Credit, $10.8 million facility, land, land development, and homebuilding
Prime+.25%
Default
Mar-31-11
 
             7,578
          9,317
e
$1-2 million in financing, homebuilding and land
Prime+5% & 10%
Entered March 2009
   
               265
               80
f
2005 $10 million, Subordinated convertible notes, net of discount of $284 thousand and $372 thousand, respectively
5.00%
Default as of December 1, 2009
Dec-1-12
 
             9,737
          9,716
g
2006 $6.50 million, Subordinated convertible notes, net of discount of $1,844 and $2,314 thousand respectively
5.00%
Default as of December 1, 2009
Sep-1-13
 
             4,774
          4,656
   
Total
 
 
$
22,354
37,642
 
 
(a)           In March 2007, the Company secured a $4.7 million term land loan with Graham to finance 522 acres of land in Travis Country for the New Sweden development.  In January 2009, the Company entered into an agreement with Graham to modify the debt agreement.  Effective January 1, 2009, the Company began paying 2% interest on each loan (“Modified Interest Payment”) and accrued an additional 12% interest on the loan.  Per the agreement, in the event that the property was not sold by December 31, 2009 and provided that all Modified Interest Payments and real estate taxes for 2009 had been paid,  the Company and Graham would exchange mutual releases, the corporate guaranty would be returned, and the Deed (in Lieu of Foreclosure) would be released.   At December 31, 2009 the Company and Graham exchanged mutual releases.  The property was deeded (in Lieu of Foreclosure) back to Graham.   The Company issued a warrant for the purchase of 347,033 shares of the Company’s common stock.  The warrant has a $5.00 strike price and can be exercised from January 1, 2010 through December 31, 2012.   The warrant was valued based on the fair value of the Company’s common stock on the issuance date of  $0.10 per share, using a Black-Scholes approach, risk free interest rate of 2.69%; dividend yield of 0%; weighted-average expected life of the warrant of 3 years; and a 60% volatility factor, resulting in an immaterial value.
 
(b)           In February 2007 the Company secured a $7.3 million land loan to finance the Rutherford West project which is approximately 538 acres in Hays County.  In January 2009, the Company entered into an agreement with Graham to modify the debt agreement.  Effective January 1, 2009, the Company began paying 2% interest on each loan (“Modified Interest Payment”) and accrued an additional 12% interest on the loan.  Per the agreement, in the event that the property was not sold by December 31, 2009 and provided that all Modified Interest Payments and real estate taxes for 2009 had been paid, the Company and Graham would exchange mutual releases, the corporate guaranty would be returned, and the Deed (in Lieu of Foreclosure) would be released.   At December 31, 2009 the Company and Graham exchanged mutual releases.  The property was deeded (in Lieu of Foreclosure) back to Graham.   The Company issued a warrant for the purchase of 347,033 shares of the Company’s common stock.  The warrant has a $5.00 strike price and can be exercised from January 1, 2010 through December 31, 2012.   The warrant was valued based on the fair value of the Company’s common stock on the issuance date of  $0.10 per share, using a Black-Scholes approach, risk free interest rate of 2.69%; dividend yield of 0%; weighted-average expected life of the warrant of 3 years; and a 60% volatility factor, resulting in an immaterial value.
 
 
(c)           As part of the purchase of the New Sweden project in Travis County described above, the Company entered into four notes payable, seller financed with a cumulative balance of approximately $2.5 million.  At September 30, 2009 three of the notes payable were remaining.  The notes have a cumulative balance of $1.9 million and are at an interest rate of 7%.  In November 2009, the Company received a notice of foreclosure sale from each of the three remaining lenders.  The promissory notes are secured by a deed of trust creating a lien upon the 166.47 acres of tract of land in the Company’s New Sweden project.  The foreclosure sale for each of these notes occurred on December 1, 2009.  Each of the promissory notes described above are non-recourse notes.
 
(d)           In June 2007 the Company established the Credit Facility with a syndicate of banks in the amount of $55 million.  On May 14, 2009, the Company entered into a Modification of the Credit Facility.   The Modification modified the terms of the Loan Agreement by reducing the loan commitment amount pursuant to the Loan Agreement from $30 million to $10.8 million.  As of December 31, 2009, the Company has approximately $7.6 million in borrowings. The Company is currently out of compliance with certain covenants under the loan agreement (as described in Note 2 above).
 
(e)           On March 12, 2009 the Company entered into an agreement with LNZCO, LLC (“LNZCO”) pursuant to which LNZCO agreed to provide it with between $1 and $2 million  of  financing for the construction of single family residences.  Each promissory note issued thereunder bears interest at a rate of prime plus 5.0%, has a one point origination fee, and matures one year from the date of issuance.  In aggregate the Company has issued promissory notes for home construction loans totaling approximately $2.9 million to LNZCO.  At December 31, 2009 the Company had promissory notes in the principal amount of $816,000 held by LNZCO issued for home construction loans, with $148,000 drawn on these notes.  In addition to the construction line, LNZCO has loaned the Company an aggregate of $365,000 to purchase land in the Georgetown Village community, with $117,000 of that amount outstanding at December 31, 2009.  Each promissory note issued thereunder bears interest at a rate of 10%,  has a two point origination fee, and  a maturity date of one year from the date of issuance  which can be extended for an additional 12 months for an additional two point extension fee.  The Company can not provide any assurances that it will receive additional promissory notes for financing construction of new single family residences from LNZCO.  The Company can give no assurance that in such an event, the Company would have adequate capital to construct homes.   
 
(f)           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 June 1 and December 1 of each year. The subordinated convertible debt is due on December 1, 2012 and is convertible, at the option of the holder, into shares of our 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. The subordinated convertible debt has a registration rights agreement whereby the Company filed a registration statement registering the resale of the underlying shares with the Commission.  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 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 Commission 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 of which vested and remain exercisable and the remaining shares will never vest.   The warrants were valued based on the fair value of the Company’s common stock on the issuance date of $1.60 per share.  The 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.
 
Subordinated Convertible Notes Issued December 19, 2005 at December 31, 2009 and September 30, 2009:
 
   
December 31,
2009
 
   
September 30,
2009
 
 
Notional balance
  $ 10,000,000       10,000,000  
                 
Unamortized discount
    (262,516 )     (284,392 )
                 
Subordinated convertible debt balance, net of unamortized discount
  $ 9,737,484       9,715,608  
 
On December 1, 2009 the Company was required to make its semi-annual interest payments due to the noteholders of its 2005 Subordinated Convertible Debt.  The Company did not make the required $250,000 interest payments on December 1, 2009.  The Company is currently in negotiations with the noteholders to forbear from exercising the remedies under the agreement due the Company’s failure to make the interest payments when due on December 1, 2009.  The Company can not make any assurances that it will reach an agreement with these noteholders.
 
(g)           On September 29, 2006, the Company issued capital of $6.5 million in aggregate principal amount of 5% subordinated convertible debt due September 1, 2013.  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 March 1 and September 1 of each year. 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. The subordinated convertible debt has a registration rights agreement whereby the Company filed a registration statement registering the resale of the underlying shares with the SEC.  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, 379,688 shares of which vested and remain exercisable and the remaining shares will never vest.   The warrants were valued based on the fair value of the Company’s common stock on the issuance date of $1.91 per share.
 
Subordinated Convertible Notes Issued September 29, 2006 at December31, 2009 and September 30, 2009
 
   
December 31, 
2009
 
   
September 30,
2009
 
 
Notional balance
  $ 6,500,000       6,500,000  
                 
Unamortized discount
    (1,726,421 )     (1,844,132 )
                 
Subordinated convertible debt balance, net of unamortized discount
  $ 4,773,579       4,655,868  
 
(9)         Common Stock
 
The Company is authorized to issue 100,000,000 shares of common stock.  Each shareholder is entitled to one vote per share of common stock owned.
 
(10)         Common Stock Option / Stock Incentive Plan
 
In August 2005, the Company adopted the Wilson Family Communities, Inc. 2005 Stock Option/Stock Issuance Plan (the “Plan”). The Plan contains two separate equity programs: (i) the Option Grant Program under which eligible persons may, at the discretion of the plan administrator, be granted options to purchase shares of common stock and (ii) 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 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 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 Plan shall not exceed 2,500,000 shares. Unless terminated at an earlier date by action of the Board, the Plan terminates upon the earlier of (i) the expiration of the ten year period measured from the date the Plan was adopted by the Board or (ii) the date on which all shares available for issuance under the Plan have been issued as fully-vested shares.
 
The Company had 2,014,021 shares of common stock available for future grants under the Plan at December 31, 2009.  Compensation expense related to the Company’s share-based awards for the three months ended December 31, 2009 and 2008 was approximately $32,000 and $42,000, respectively.   At December 31, 2009, there was approximately $103,000 of unrecognized compensation expense related to unvested share-based awards granted under the Company’s Stock Option Plan.  These options are issued pursuant to the Plan and are reflected in the disclosures below.
 
 
The Company did not issue any options to purchase common stock during the three months ended December 31, 2009.  A summary of activity in common stock options for the three months ended December 31, 2009 is as follows:
 
 
                   
Share Roll
   
Ranges Of
   
Weighted-Average
 
     
Forward
   
Exercise Prices
   
Exercise Price
 
 
          Balance September 30, 2009
    566,563     $0.19 - $3.25     $2.04  
 
Granted 
    -      -     -  
 
Forfeited 
    (80,584   $0.19 - $3.25     $2.45  
 
Balance December 31, 2009
    485,979     $0.23 - $3.25     $2.14  
 
The following is a summary of options outstanding and exercisable at December 31, 2009:
       
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 
485,979
6.69
$2.14
         380,083
6.39
$2.24
 
 
(11)         Troubled Debt Restructuring
 
In November 2009, the Company received a notice of foreclosure sale from each of the three remaining lenders for the New Sweden tract.  The promissory notes are secured by a deed of trust creating a lien upon the 166.47 acres of tract of land in the Company’s New Sweden project.  The foreclosure sale for each of these notes occurred on December 1, 2009.  The note was a nonrecourse note and the gain resulting from the foreclosure was calculated as follows:
 
Carrying amount of debt settled in full
  $ 1,872,996  
Cancellation of accrued interest
    181,368  
Debt settlement amount
    2,054,364  
Carrying amount of asset
    1,635,323  
Gain on restructured debt
  $ 419,041  
 
In January 2009, the Company entered into an agreement with Graham to modify the debt agreement for the $7.3 million loan for property in Rutherford West and the $4.7 million loan for New Sweden.  Effective January 1, 2009, the Company began paying 2% interest on each loan (“Modified Interest Payment”) and accrued an additional 12% interest on the loan.  Per the agreement, in the event that the property was not sold by December 31, 2009 and provided that all Modified Interest Payments and real estate taxes for 2009 had been paid,  the Company and Graham would exchange mutual releases, the corporate guaranty would be returned, and the Deed (in Lieu of Foreclosure) would be released.   As of December 31, 2009 the Company and Graham exchanged mutual releases and the property was deeded (in Lieu of Foreclosure) back to Graham.
 
The gain resulting from the deed (in Lieu of Foreclosure) from the Rutherford West project was calculated as follows:
 
 
Carrying amount of debt
  $ 7,300,000  
Carrying amount of accrued interest
    1,183,208  
Debt settlement amount
    8,483,208  
Carrying amount of asset
    7,453,388  
Gain on restructured debt
  $ 1,029,820  
 
The gain resulting from the deed (in Lieu of Foreclosure) from the New Sweden project was calculated as follows:
 
Carrying amount of debt
  $ 4,700,000  
Carrying amount of accrued interest
    761,792  
Debt settlement amount
    5,461,792  
Carrying amount of asset
    5,238,300  
Gain on restructured debt
  $ 223,492  

 
 

 
 
 
 

 
 
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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 our financial statements and accompanying notes included in Item 1 of this report.
 
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 utilize sustainable building practices and to use earth-friendly products and materials.
 
From late 2007 through December 31, 2009 our business has been significantly impacted by the deterioration of the real estate and homebuilding industry.  Deteriorating market conditions, turmoil in the mortgage and credit markets and increased price competition have negatively impacted us from late 2007 through fiscal year 2010.   Although there have been some indictors of stabilization within the real estate and homebuilding market we have continued to see slow sales due to capital resource constraints (discussed below).
 
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 we have entered into with the subcontractors.  We intend to build homes on some of the lots we currently have completed that are ready for homebuilding activities and sell those as finished homes as well as continue to sell lots to other builders.
 
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 raised from financing activities.  As of December 31, 2009 we have completed 220 lots in Georgetown Village, 105 lots in Elm Grove and 58 lots in Rutherford West.  We have purchased approximately 184 acres in Georgetown Village, 522 acres in New Sweden, 60 acres in Elm Grove, and 736 acres in Rutherford West.  We sold 522 acres in New Sweden via a combination of foreclosure and deed in lieu of foreclosure.  We sold 538 acres in Rutherford West via deed in lieu of foreclosure.  We plan to continue to sell and develop the remaining properties.  This portion of our business focus has required the majority of our financial resources.
 
In January 2009, we entered into an agreement with Graham to modify the debt agreement for the $7.3 million loan for property in Rutherford West and the $4.7 million loan for New Sweden.  Effective January 1, 2009, we began paying 2% interest on each loan (“Modified Interest Payment”) and accrued an additional 12% interest on the loan.  Per the agreement, in the event that the property was not sold by December 31, 2009 and provided that all Modified Interest Payments and real estate taxes for 2009 had been paid, we would exchange mutual releases with Graham, the corporate guaranty would be returned, and the Deed (in Lieu of Foreclosure) would be released.   As of December 31, 2009 we exchanged mutual releases with Graham and the property was deeded (in Lieu of Foreclosure) back to Graham.
 
 
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, beginning in the second quarter of 2007 and continuing through December 31, 2009, demand and pricing for finished lots by national homebuilders has been, and we expect will continue to be, significantly reduced.  We elected to retain some of our lots for use in our homebuilding business.  We believed that retaining some of our lots for use in homebuilding activities would have allow us to generate homebuilding revenue to replace some of the revenue from the loss of sales of these finished lots.  Our current focus is to pursue lot sales contracts with both national and regional builders to pay down debt and improve our balance sheet.
 
Reverse/Forward Split
 
On January 29, 2010 we mailed a definitive information statement to inform our shareholders of (i) the approval by the Board at a meeting held on November 14, 2009 of amendments to our Certificate of Formation to effect a reverse stock split of our common stock followed immediately by a forward stock split of our common stock (the “Reverse/Forward Stock Split”), and (ii) our receipt of a written consent dated January 28, 2010 approving such amendment by shareholders holding 53.9% of the voting power of all of our shareholders entitled to vote on the matter as of November 13, 2009.  The Certificates of Amendment shall be filed with the Secretary of State of the State of Texas on or after February 19, 2010, (20 calendar days following the date the information statement was first mailed to our shareholders) and will become effective immediately thereafter.  As a result of the Reverse/Forward Split shareholders owning fewer than 500 shares of our common stock will be cashed out at a price of $0.26 per share, and the holdings of all other shareholders will remain unchanged.
 
The intended effect of the Reverse/Forward Stock Split is to reduce the number of record holders of our common stock to fewer than 300 so that we will be eligible to terminate the public registration of our common stock under the Exchange Act.  Provided that the Reverse/Forward Stock Split has the intended effect, we will file to deregister our common stock with the Commission. We will in such case no longer be required to file periodic reports with the Commission, although we intend to continue to provide sufficient information, including annual audited and quarterly unaudited financial statements, through the Pink Sheets News Service to allow our common stock to continue trading on the Pink Sheets.
 
 
 
 
 
Comparison of Three Months Ended December 31, 2009 and 2008
 
   
Three Months Ended December 31, 2009
   
Three Months Ended December 31, 2008
   
Change
   
Change %
 
Revenues
                       
Homebuilding and related services revenues
  $ 2,377,624     $ 4,236,720     $ (1,859,096 )     -44 %
Land revenues
    551,142       346,146       204,996       59 %
Gross Profit
                               
Homebuilding and related services gross profit
    282,508       473,865       (191,357 )     -40 %
Land gross profit
    105,353       73,914       31,439       43 %
Inventory impairments and land option cost write-offs
    -       (11,900 )     11,900       100 %
Costs & Expenses
                               
Operating expenses
    1,130,773       1,312,203       (181,430 )     -14 %
Operating Loss
    (742,912 )     (776,324 )     33,412       4 %
Net Profit (Loss)
  $ 202,850     $ (1,661,103 )   $ 1,863,953       112 %
 
 
Results of Operations
 
Homebuilding and Related Services Revenues
 
Background – Homebuilding and related services revenues consists of revenues from home sales.  In June 2007 we acquired Green Builders, Inc. and commenced our homebuilding activities.  We sell homes in the Austin, Texas area for prices ranging from $170,000 to $450,000.
 
For the three months ended December 31, 2009 we had twelve home sales and three cancellations, for a total of nine net sales.  We had ten home closings.  Revenue is not recognized until a home closing is finalized.  At December 31, 2009 we had one completed model and eleven units in backlog.  For the three months ended December 31, 2008 we had twelve home sales and seven cancellations for a total of five net sales.  We had seventeen home closings.  At December 31, 2008, we had eight completed speculative units, two speculative units under construction, seven completed models, and 19 units in backlog.   Backlog is defined as homes under contract but not yet delivered to our home buyers.
 
Deteriorating market conditions, turmoil in the credit markets and increased price competition have continued to negatively impact us in fiscal 2010.  It is our opinion that this is in large part due to decreased consumer confidence in the economy and the real estate market.  We believe that the turmoil in the credit and mortgage market combined with national publicity of significantly deteriorating general and economic conditions has caused a lack of urgency for buyers.  We expect that home sales will continue to be slow throughout fiscal 2010.  In accordance with these anticipated 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.
 
Revenues - During the three months ended December 31, 2009, home sales accounted for approximately 81% of revenues.  For the three months ended December 31, 2009 we had ten home closings at an average sales price of $237,000.  During the three months ended December 31, 2008, home sales accounted for approximately 93% of revenues.  For the three months ended December 31, 2008 there were seventeen home closings with an average sales price of $249,000.
 
Impairments – We did not record any impairments for homebuilding for the three months ended December 31, 2009.  We recorded $11,900 of impairments for homebuilding for the three months ended December 31, 2008.   In accordance with authoritative guidance, we perform an inventory impairment analysis on a quarterly basis.  If impairment indicators are present, impairment charges are required to be recorded if the fair value of the inventory is less than the cost recorded.  Our determination of fair value is primarily based on discounting the estimated future cash flows.  Estimated cash flows are based on recent offers and comparable sales of lots and land under existing and anticipated market conditions.
 
 
Gross Profit - Gross profit percentage before impairments was 12% for the year ended December 31, 2009 compared to 11% for the three months ended December 31, 2008.
 
Land and Land Development Revenues
 
Background – Land sales revenues 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 believed that retaining some of our lots for use in homebuilding activities would have allowed us to generate homebuilding revenue to replace some of the revenue from the loss of sales of these finished lots.  Our current focus is to pursue lot sales contracts with both national and regional builders to pay down debt and improve our balance sheet.
 
Revenues – Revenues from the sale of land increased by 59% during the three months ended December 31, 2009 compared to the three months ended December 31, 2008.  During the three months ended December 31, 2009 we closed thirteen finished lots as compared to six finished lots for the three months ended December 31, 2008.
 
Impairments – We did not record impairments for land and land development for the three months ended December 31, 2009 and 2008.  In accordance with authoritative guidance, we perform an inventory impairment analysis on a quarterly basis.  If impairment indicators are present, impairment charges are required to be recorded if the fair value is less than the cost recorded.  Our determination of fair value is primarily based on discounting the estimated cash flows.  Estimated cash flows are based on recent offers and comparable sales of lots and land under existing and anticipated market conditions.
 
Gross Profit – Gross profit percentage before impairments was 19% for the three months ended December 31, 2009 compared to 21% for the same period in 2008.
 
General and Administrative Expenses
 
Breakdown of G&A Expenses
 
Three Months Ended December 31, 2009
   
Three Months
Ended December
31, 2008
 
Salaries, benefits, payroll taxes and related emp. exps.
  $ 181,398     $ 283,963  
Stock compensation expense
    31,746       42,286  
Legal, accounting, auditing, consultants, and investor relations
    60,014       122,721  
General overhead, including office expenses, insurance, and travel
    107,702       140,580  
Restructuring expenses
    -       169,486  
Amortization of subordinated debt costs and transaction costs
    59,253       59,253  
Total G&A
  $ 440,113     $ 818,289  
 
General and administrative expenses are composed primarily of salaries of general and administrative personnel and related employee benefits and taxes, accounting and legal expenses, and general office expenses and insurance.  During the three months ended December 31, 2009 and 2008, salaries, benefits, taxes and related employee expenses totaled approximately $181,000 and $284,000, respectively, and represented approximately 41% and 35%, respectively, of total general and administrative expenses.  The decrease for the year is due to a decrease in approximately 50% of personnel from December 31, 2009 to December 31, 2008.
 
Legal, accounting, audit, consulting and investor relations expense totaled $60,000 and $123,000 for the three months ended December 31, 2009 and 2008, respectively.  General overhead, including office expenses, insurance, and travel totaled $107,000 and $141,000 for the three months ended December 31, 2009 and 2008, respectively.  The decrease in these general and administrative costs primarily resulted from our initiative to control costs.
 
 
Restructuring expenses incurred for the three months ended December 31, 2008 related to restructuring our debt agreement with Graham and our credit facility.
 
Sales and Marketing Expenses
 
Sales 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, billboards, and market research, all of which benefit our corporate presence and are not included as homebuilding cost of sales.  During the three months ended December 31, 2009 we impaired approximately $209,000 for our sales office trailer costs.  Sales and marketing expenses as a percentage of revenues before the impairment of the sales office was 17% and 11% for the three months ended December 31, 2009 and 2008, respectively.
 
Troubled Debt Restructuring

In November 2009, we received a notice of foreclosure sale from each of our three remaining lenders for the New Sweden tract.  The promissory notes are secured by a deed of trust creating a lien upon the 166.47 acres of tract of land in the New Sweden project.  The foreclosure sale for each of these notes occurred on December 1, 2009.  The note was a nonrecourse note and the gain resulting from the foreclosure was calculated as follows:
 
Carrying amount of debt settled in full
  $ 1,872,996  
Cancellation of accrued interest
    181,368  
Debt settlement amount
    2,054,364  
Carrying amount of asset
    1,635,323  
Gain on restructured debt
  $ 419,041  
 
In January 2009, we entered into an agreement with Graham to modify the debt agreement for the $7.3 million loan for property in Rutherford West and the $4.7 million loan for New Sweden.  Effective January 1, 2009,we began paying 2% interest on each loan (“Modified Interest Payment”) and accrued an additional 12% interest on the loan.  Per the agreement, in the event that the property was not sold by December 31, 2009 and provided that all Modified Interest Payments and real estate taxes for 2009 had been paid, we would exchange mutual releases with Graham, the corporate guaranty would be returned, and the Deed (in Lieu of Foreclosure) would be released.   As of December 31, 2009 we exchanged mutual releases with Graham and the property was deeded (in Lieu of Foreclosure) back to Graham.
 
The gain resulting from the deed (in Lieu of Foreclosure) from the Rutherford West project was calculated as follows:
 
Carrying amount of debt
  $ 7,300,000  
Carrying amount of accrued interest
    1,183,208  
Debt settlement amount
    8,483,208  
Carrying amount of asset
    7,453,388  
Gain on restructured debt
  $ 1,029,820  
 
The gain resulting from the deed (in Lieu of Foreclosure) from the New Sweden project was calculated as follows:
 

Carrying amount of debt
  $ 4,700,000  
Carrying amount of accrued interest
    761,792  
Debt settlement amount
    5,461,792  
Carrying amount of asset
    5,238,300  
Gain on restructured debt
  $ 223,492  

 
Interest Expense and Income
 
   
Three Months Ended December 31, 2009
   
Three Months Ended December 31, 2008
   
Change
   
Change %
 
Interest expense - convertible debt
  $ 206,250     $ 206,250       -       0 %
Interest discount expense - convertible debt
    139,587       139,587       -       0 %
Interest expense - land and development loans
    423,378       636,785       (213,407 )     -34 %
Interest income and misc income
    (14,208 )     (97,843 )     83,635       85 %
Total interest and other expense and income
  $ 755,007     $ 884,779       (129,772 )     -15 %
 
Interest expense for land and development loans decreased primarily to our decrease in debt outstanding from December 31, 2008 to December 31, 2009.   During the three months ended December 31, 2009 we retired approximately $14 million in debt for the New Sweden and Rutherford West projects.   In addition, we decreased our debt outstanding by approximately $6 million from December 31, 2008 to December 31, 2009.
 
           Interest and other income decreased $84,000 for the three months ended December 31, 2009, as compared to the same period of 2008.  During the three months ended December 31, 2008, we recognized $81,000 in other income for the forfeiture of an earnest money deposit from the cancellation of a lot sales contract in Georgetown Village.
 
Going Concern Liquidity and Capital Resources
 
On December 31, 2009, we had approximately $576,000 in cash and cash equivalents.  Our current operations and future 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, sales and marketing expenses, general and administrative costs, and interest payments, cash will continue to be depleted.  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.  We can not provide any assurance that we will be successful in obtaining additional capital on acceptable terms or at all.  We do not have access to capital under our Credit Facility (described below).
 
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.
 
On June 29, 2007, we 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 pursuant to a Borrowing Base Loan Agreement (the “Loan Agreement”).  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.  Our obligations under the Credit Facility are secured by the assets of each subdivision to be developed.  Green Builders has guaranteed the obligations of WFC under the Credit Facility.

On May 14, 2009, we entered into a Fourth Agreement to Modify Loan Documents (the “Modification”) of the Credit Facility.  The Modification modified the terms of the Loan Agreement by reducing the loan commitment amount pursuant to the Loan Agreement to $10,846,163.  The Modification extended the maturity of the master line of credit issued pursuant to the Loan Agreement (the “Master Line”) until March 31, 2011.  The Modification revised the interest rate of the Credit Facility from prime plus .25%, with a floor of 5.5%, to libor plus 3.5%, with a floor of 6%.   At December 31, 2009 we had $7.6 million outstanding under the Master Line and have drawn all the remaining loan commitments from the Credit Facility.

 
The Modification also revised certain covenants contained in the Loan Agreement.  The terms of the Modification:
 
·     
require WFC to maintain a minimum net worth of $7,000,000, including subordinated debt,  although the minimum net worth may be reduced to an amount not less than $5,000,000 upon the sale and close of escrow any land owned by WFC which causes WFC to be in violation of the $7,000,000 minimum net worth covenant;
 
·     
prohibit WFC’s ratio of debt to equity from exceeding 3.00 to 1.00;
 
·     
require WFC to maintain working capital of at least $5,000,000;
 
·     
require WFC to make certain quarterly principal reduction payments; and
 
·     
require WFC to maintain cash of not less than $500,000.
 
The Modification also contains a waiver for certain inventory covenants contained in the original Loan Agreement with which WFC was not in compliance prior to the date of the Modification.  This includes a waiver of the following covenants until the dates noted below:
 
·     
the spec home limitation covenant until March 31, 2011;
 
·     
the developed lot limitation covenant until March 31, 2011;
 
·     
the land, lots under development and developed lot limitation covenant until March 31, 2011;
 
·     
the entitled land and pods limitation covenant until March 31, 2011;
 
·     
the entitled land, pods, lots under development, and developed lots limitation covenant until March 31, 2011; and
 
·     
the land, pods lots under development, developed lots and spec home limitation covenant until March 31, 2011.
 
Pursuant to the Modification, WFC is required to reduce the outstanding principal amount under the Master Line to $6 million by December 31, 2010 and to repay the Master Line in full by March 31, 2011.
 
At December 31, 2009 WFC was not in compliance with the net worth covenant and working capital covenant.  If WFC continues to be out compliance with these covenants and does not receive forbearance for these covenants, WFC’s obligation to repay indebtedness outstanding under the Credit Facility, its term loans, and its outstanding note indentures could be accelerated in full. WFC 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 be repaid.   It is anticipated by our management that we will no longer have access to this line of credit to construct homes for sale.
 
We are not aware of any financial issues with RBC Bank or IBC Bank, two of our syndicate banks.
 
 
LNZCO line
 
On March 12, 2009 we entered into an agreement with LNZCO, LLC (“LNZCO”) pursuant to which LNZCO agreed to provide us with between $1 and $2 million of financing for the construction of single family residences.  Each promissory note issued thereunder bears interest at a rate of prime plus 5.0%, has a one point origination fee, and matures one year from the date of issuance.  In aggregate we have issued promissory notes for home construction loans totaling approximately $2.9 million to LNZCO.  At December 31, 2009 we had promissory notes in the principal amount of $816,000 held by LNZCO issued for home construction loans, with $148,000 drawn on these notes.  In addition to the construction line, LNZCO has loaned us an aggregate of $365,000 to purchase land in the Georgetown Village community, with $117,000 of that amount outstanding at December 31, 2009.  Each promissory note issued thereunder bears interest at a rate of 10%, has a two point origination fee, and a maturity date of one year from the date of issuance which can be extended for an additional 12 months for an additional two point extension fee.  We can not provide any assurances that we will receive financing for the construction of new single family residences from LNZCO.  We can give no assurance that in such an event, we would have adequate capital to construct homes.
 
Convertible Promissory Notes
 
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 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.
 
On December 1, 2009 we were required to make our semi-annual interest payments to the noteholders of the 2005 Convertible Promissory Notes.  We did not make the required $250,000 interest payments on December 1, 2009.  We are currently in negotiations with the noteholders to forbear from exercising the remedies under the agreement due the our failure to make the interest payments when due on December 1, 2009.  We can not make any assurances that we will reach an agreement with these noteholders.
 
Graham Mortgage Capital Notes
 
In January 2009, we entered into an agreement with Graham to modify the debt agreement for the $7.3 million loan for property in Rutherford West and the $4.7 million loan for New Sweden.  Effective January 1, 2009,we began paying 2% interest on each loan (“Modified Interest Payment”) and accrued an additional 12% interest on the loan.  Per the agreement, in the event that the property was not sold by December 31, 2009 and provided that all Modified Interest Payments and real estate taxes for 2009 had been paid,  we would exchange mutual releases with Graham, the corporate guaranty would be returned, and the Deed (in Lieu of Foreclosure) would be released.   As of December 31, 2009 we exchanged mutual releases with Graham.  The property was deeded (in Lieu of Foreclosure) back to Graham.   See footnote 11.
 
Off-Balance Sheet Arrangements
 
As of December 31, 2009, 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.
 
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 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 for land and homebuilding sales are recognized when the properties 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.  Revenues from remodeling contracts will be recognized under the completed contract method or percentage of completion method.  Homebuilding revenues will be categorized as homebuilding revenues, revenues from property sales or options will be categorized as land sales, and revenues from remodeling contracts will be categorized as remodeling revenues.
 
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.
 
Water District Receivables
 
Rutherford West project is located in Greenhawe Water Control and Improvement District No. 2 (“District”).  We incurred development costs for the initial creation and operating cost of the District and continuing costs for the water, sewer and drainage infrastructure for the District.  The District 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 able 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 December 31, 2009 for costs spent for Rutherford West Phase 1.  We have completed Phase 1 for the Rutherford West project, and we have approximately $1 million of water district reimbursements included in inventory that we anticipate will collect from bond issuances made by such District.  When the reimbursements are received we will record them as reductions of the related asset’s balance. Usually, a District issues its first bonds issue only after completion of construction of approximately 200 houses.  The District 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, such differences could have a material effect on our financial statements.   In July 2009, the WCID for the Rutherford West project had its first bond issuance; we received reimbursements of approximately $470,000.  We expect to recover costs from Rutherford West Phase 1.
 
 
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.
 
Recent Accounting Pronouncements
 
 We have incorporated authoritative guidance issued by the Financial Accounting Standard Board (“FASB”) for fair value measurement, except as it applies to the nonfinancial assets and nonfinancial liabilities as discussed further in the authoritative guidance.  The guidance provides a framework for measuring fair value under GAAP. The guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:
 
 
Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 assets and liabilities include debt and equity securities traded in an active exchange market, as well as U.S. Treasury securities.
 
 
Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
 
Level 3 – Valuation is determined using model-based techniques with significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of third party pricing services, option pricing models, discounted cash flow models and similar techniques.
 
In October 2008, FASB issued authoritative guidance for the fair value of a financial asset when the market for that asset is not active.  This guidance clarifies the application of fair value in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Even in times of market dislocation, it is not appropriate to conclude that all market activity represents forced liquidations or distressed sales. However, it is also not appropriate to automatically conclude that any transaction price is determinative of fair value. Determining fair value in a dislocated market depends on the facts and circumstances and may require the use of significant judgment about whether individual transactions are forced liquidations or distressed sales. In determining fair value for a financial asset, the use of a reporting entity's own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available. Regardless of the valuation technique used, an entity must include appropriate risk adjustments that market participants would make for nonperformance and liquidity risks.
 
The initial adoption of the provisions the authoritative guidance did not have a material effect on our financial statements.

The fair values do not necessarily represent the amounts that we may ultimately realize due to the occurrence of future circumstances that cannot be reasonably determined.  Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed.  Accordingly, the degree of judgment exercised by us in determining fair value is greatest for securities categorized in Level 3.  In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement.
 
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure.  Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date.  We uses prices and inputs that are current as of the measurement date, including periods of market dislocation.  In periods of market dislocation, the observability of prices and inputs may be reduced for many securities.  This condition could cause a security to be reclassified to a lower level within the fair value hierarchy.

Inventory is initially recorded at cost and is subsequently recorded at lower of cost or fair value.  Fair value is determined by us based on a number of factors, including: sales to unrelated new investors, comparable sales, and discounted cash flow models. Because of the inherent uncertainty of these valuations, the estimated values may differ from the actual fair values that may or may not be ultimately realized.

In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements,” which requires additional disclosures related to transfers between levels in the hierarchy of fair value measurement.
 
 
 ITEM 3.                     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK
 
  Not applicable.

 
ITEM 4T.                   CONTROLS AND PROCEDURES
 
Evaluation of Effectiveness of Disclosure Controls and Procedures
 
Our management, including our principal 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 December 31, 2009, the period covered by this Quarterly Report on Form 10-Q.  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, 2009 due to the significant deficiency described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009 filed December 17, 2009.
 
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.
 
 
PART II - OTHER INFORMATION
 
ITEM 1.                   LEGAL PROCEEDINGS
 
We are involved in lawsuits and other contingencies in the ordinary course of business. While the outcome of such contingencies cannot be predicted with certainty, we believe that the liabilities arising from these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, to the extent the liability arising from the ultimate resolution of any matter exceeds our estimates reflected in the recorded reserves relating to such matter, we could incur additional charges that could be significant.
 
ITEM 1A.                  RISK FACTORS
 
           We previously disclosed risk factors under in our annual report on Form 10-K for the year ended September 30, 2009.  There have been no material changes to these risk factors.
 
ITEM 2.                     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.
 
ITEM 3.                     DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4.                     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None.
 
ITEM 5.                     OTHER INFORMATION
 
None.
 
 
 
ITEM 6.   EXHIBITS
 
Exhibit No.
Description
31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
 
SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
 
    GREEN BUILDERS, INC.  
       
       
Date: February 12, 2010
By:
/s/  Clark Wilson
 
 
 
Clark Wilson
 
 
President and Chief Executive Officer
(Principal Executive Officer)
 
 
Date: February 12, 2010
By:
/s/  Cindy Hammes
 
 
 
Cindy Hammes
 
 
VP of Finance
(Principal Financial Officer)
 
 
 
 

 
 
EXHIBIT INDEX
 
Exhibit No.
Description
31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
 
 34