19-Aug-2008
Form 10-Q for ALTERNATIVE CONSTRUCTION COMPANY, INC.
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Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2008
The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements under federal securities laws. Forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties. Our actual results could differ materially from those indicated by forward-looking statements as a result of various factors, including but not limited to those set forth under this Item, as well as those discussed in Part II - Item 1A, "Risk Factors," and elsewhere in this document and those that may be identified from time to time in our reports and registration statements filed with the Securities and Exchange Commission.
This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part I - Item 1 of this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and related Notes and the Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 7, 2008.
DESCRIPTION OF COMPANY:
Our corporate headquarters is located at 2910 Bush Drive, Melbourne, Florida 32935. Its website address is http://www.actechpanel.com. In addition, Alternative Construction by Revels, Inc., a subsidiary of ACCY maintains a website at www.acbyrevels.com. The website is not incorporated in this Form 10-Q.
ACCY operates under three divisions; a (i) Alternative Construction Manufacturing Division, (ii) Alternative Construction Development Division, and
(iii) Alternative Construction Ancillary Services Division. The Manufacturing Division currently contains two subsidiaries, ACMT, which manufactures the ACTech� Panel System, and ACMF, which will provide manufacturing services in Florida. The Development Division contains three subsidiaries; Alternative Construction by ProSteel Builders, Inc., Alternative Construction by Ionian, Inc., and Alternative Construction by Revels, Inc. The Alternative Construction Ancillary Services Division contains five subsidiaries; Alternative Construction Design, Inc., Alternative Construction Consulting Services, Inc., Alternative Construction Safe Rooms, Inc., Modular Rental and Leasing Corporation, and Solar 18 ACTech Panel, Inc. Future of Building Institute, Inc., as a non-profit entity, functions separately.
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OVERVIEW:
Alternative Construction Technologies, Inc., formerly known as Alternative Construction Company, Inc. (the "Company" or "ACCY"), is a Florida corporation organized in 2004 with corporate offices located in Melbourne, Florida. The Company's common stock is traded on the NASDAQ OTC Bulletin Board under the symbol "ACCY.OB."
The Company is a manufacturing company engaged in the research, development and marketing of proprietary products for the construction industry. We manufacture and distribute the ACTech� Panel, a structural insulated panel (SIP), throughout the United States. Our products are marketed through our internal sales staff and by manufacturer representatives.
The Company's primary product and service is the manufacturing, research, development and marketing of proprietary products for the construction industry. We manufacture and distribute the ACTech� Panel, a structural insulated panel (SIP), throughout the United States, with concentration in the southeast region. The Company has delivered its products and services internationally and believes that a huge portion of its future growth will be derived from those markets. The marketing of our products is through our internal sales staff and the use of manufacturer representatives. The Company currently licenses 21 manufacturer sales representatives.
Our corporate headquarters is located at 2910 Bush Drive, Melbourne, Florida 32935. Its website address is http://www.actechpanel.com. The website is not incorporated in this Form 10-Q.
In 2007, the Company experienced a 50.1% growth in sales to $12,960,008, as compared to 2006 sales of $8,634,349. Net income of $1,603,261, represents an increase of $3,642,555 in net income from 2006. The Company earned $0.22 per basic share in 2007. The potential dilutive effects of convertible debt and securities warrants and options in 2007, while providing a significant increase in available cash, would have had a negative effect on earnings by $0.08 per share outstanding during 2007. The Company performance is indicative of the management decisions made in 2006.
The growth of the Company was negatively impacted by the inability to obtain new financing in January 2008. As part of its financing in June 2007, the Company stated to its lenders that additional capital would be required within a short period of time to maintain the growth levels that the Company expected to achieve. The Company began negotiating with its financiers in December 2007 and January 2008 to secure such additional financing. Simultaneously with these discussions, the Company obtained commitments for additional equity and secured financing from third parties. In each case, such third parties required the debenture holders to waive or amend the terms of the "Green Shoe" option which they were granted in connection with the June 2007 debenture financing. A waiver or satisfactory amendment could not be agreed upon and the Company's cash needs were not met.
In May 2008 the Company entered into a $3,000,000 line of credit financing with the existing financiers. The line of credit is secured by "eligible" contracts and drawn down there under with interest at 13%. On June 30, 2008 the outstanding balance was $2,014,491, and there is currently $1,981,750 outstanding under this facility and $1,018,250 available for funding. On August 6, 2008 the Company provided the lenders with a notice of draw-down from the line of credit in the amount of $1,018,250 to maximize the line of credit. The Company provided the lenders with copies of existing contracts and purchase orders totaling an approximate $5.4 million. The Company authorized the lenders to apply $467,560 of the funding request against the outstanding debenture principal and interest, which would bring the Company current in all payments.
On July 19, 2008 BridgePointe Master Fund, one of the lenders, notified the Company that it did not intend to fund any additional draw-downs under the line of credit until all current defaults had been corrected and a "field audit" conducted. On July 31, 2008 BridgePointe Master Fund notified the Company that it was in default in its debenture and that it must cure such defaults within five (5) days. On August 1, 2008 BridgePointe Master Fund notified the Company that it was in default in its line of credit and had five (5) days to cure it. The terms of the debentures called for principal amortization there under to commence on July 1, 2008, and monthly thereafter at a rate of 1/24 per month with a balloon payment due July 1, 2009 for any outstanding remaining balance. The Company is unable to make these payments without access to additional outside funding or in connection with draw-downs under the line of credit. The Company is working with its lenders and outside parties to reach agreement upon a satisfactory restructuring of this debt or payments to cure any defaults. While the Company is hopeful that a resolution can be achieved in the short term, if it is not, at least one lender has notified the Company that it will commence collection efforts, to include foreclosure on assets securing the debenture. On August 12, 2008 the lender requested additional information in order to consider the outstanding financing obligation. The Company responded on August 14, 2008.
The following Management Discussion and Analysis should be read in conjunction with the financial statements and accompanying notes included in this Form 10-Q.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2008 TO THE THREE MONTHS
ENDED JUNE 30, 2007
Manufacturing Division Ancillary Division Development Division ACT Corporate Eliminations Consolidated
For the
Three Months
Ended June
30: 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007
Revenue $ 1,047,836 $ 1,630,801 $ - $ - $ 477,726 $ 2,478,931 $ - $ - $ (14,832 ) $ (111,959 ) $ 1,510,730 $ 3,997,773
Cost of
Sales 799,601 1,045,400 13 - 497,661 1,798,992 - - (14,832 ) (148,329 ) 1,282,443 2,696,063
Gross Profit 248,235 585,401 (13 ) - (19,935 ) 679,939 - - - 36,370 228,287 1,301,710
Operating
Expenses 98,359 187,427 2,285 585 86,074 236,972 1,814,011 167,347 - - 2,000,729 592,331
Income
(Loss) from
Operations $ 149,876 $ 397,974 $ (2,298 ) $ (585 ) $ (106,009 ) $ 442,967 $ (1,814,011 ) $ (167,347 ) $ - $ 36,370 $ (1,772,442 ) $ 709,379
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Total revenues decreased to $1,510,730 for the three months ended June 30, 2008 from $3,997,773 for the three months ended June 30, 2007. The decrease of $2,522,793 or 62.2% resulted primarily from the Company's inability to reach financing terms and the lack of capital it needed to move forward with the contracts it had in place. The Company believes it lost significant business because of its inability to reach financing terms with its financing partners. Once financing was achieved, May 8, 2008, the Company began moving forward with its remaining contracts, currently valued at $5.4 million, of which approximately $372,000 was recognized this quarter.
Total revenues and as a percent of consolidated revenues for the three months ended June 30, 2008, were provided as follows: Manufacturing Division - $1,047,836 (62.8%) and Development Division - $477,726 (31.6%). The difference between the reported revenue and the individual subsidiaries is the result of consolidating eliminations and the cost associated with the Ancillary Division.
Cost of sales was $1,282,443 and $2,696,063, respectively for the three months ended June 30, 2008 and 2007. As a percent of revenue, the cost of sales increased from 77.0% to 84.9%, for the three months ended June 30, 2007 as compared to the three months ended June 30, 2008. The Manufacturing Division recognizes a lower cost of sales percent, 76.3%, than the consolidated total of the developing division at 104.2%, therefore, when the Development Division recognizes a greater percentage of the overall revenue, the cost of sales increase. In addition, the pricing of raw materials has had substantial increases during this reporting period, which create a negative impact on cost of sales.
Gross profit was $228,287 and $1,301,710, respectively for the three months ended June 30, 2008 and 2007. As a percent of revenue, gross profit was 15.1% and 23.0%, respectively for the three months ended June 30, 2008 and 2007. One cause of the decline in gross profit is a direct correlation to the revenue split between the Manufacturing Division and the Development Division as defined in cost of sales above. In addition, the loss of revenue caused by the lack of funding, had a direct impact on the gross profit as the Company's management had to consider the implications of laying off qualified staff that would look for work elsewhere. The Company elected to maintain the staff and as such gross profit declined.
Total operating expenses increased to $2,000,729 for the three months ended June 30, 2008 from $592,331 for the three months ended June 30, 2007. This $1,408,398 or 70.4% increase was attributed mostly to the write-off of financing fees associated with the debenture agreement of June 30, 2007 and the financing fees and costs associated with the Line of Credit agreement of May 9, 2008 of $1,403,055.
The operating expenses and the percent of consolidated operating expenses for the three months ended June 30, 2008, were contributed as follows: Manufacturing Division $98,359 (4.9%); Development Division $86,074 (4.3%); the Ancillary Division $2,285 (0.1%); and Corporate, $1,814,011(90.7%).
Adjusted Earnings Before Depreciation, Interest, Taxes, and Amortization
The Company presents Adjusted EBITDA as a financial measure as management believes it provides useful information to investors regarding the Company's liquidity and financial condition and because management, as well as the Company's lenders, uses this measure in evaluating the performance of the Company.
Management uses Adjusted EBITDA as a supplement to GAAP measures to further evaluate the Company's period-to-period operating performance and evaluate the Company's ability to meet future capital expenditure and working capital requirements. Management believes the exclusion of non-cash charges, including stock-based compensation, is useful in measuring the Company's cash available to operations and the performance of the Company. Management also believes that financing fees associated with the raising of capital is a one time fee that does not accurately reflect the overall performance of the Company. Because the Company finds Adjusted EBITDA useful, the Company believes its investors will also find Adjusted EBITDA useful in evaluating the Company's performance.
Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flows, or other consolidated income or cash flow data prepared in accordance with GAAP in the United States or as a measure of the Company's profitability or liquidity. Adjusted EBITDA is not in accordance with or an alternative for GAAP, and may be different from non-GAAP measures used by other companies. Unlike EBITDA which may be used by other companies or investors, Adjusted EBITDA does not include stock-based compensation charges and income from minority interest in the Company's subsidiaries, ACP, ACI, and ACSR. The Company believes that Adjusted EBITDA is of limited use in that it does not reflect all of the amounts associated with the Company's results of operations as determined in accordance with GAAP and does not accurately reflect real cash flow. In addition, other companies may not use Adjusted EBITDA or may use other non-GAAP measures, limiting the usefulness of Adjusted EBITDA. Therefore, Adjusted EBITDA should only be used to evaluate the Company's results of operations in conjunction with the corresponding GAAP measures. The presentation of Adjusted EBITDA is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP measures. The Company compensates for the limitations of Adjusted EBITDA by relying upon GAAP results to gain a complete picture of the Company's performance. Since Adjusted EBITDA is a non-GAAP financial measure as defined by the Securities and Exchange Commission, the Company includes in the tables below reconciliations of Adjusted EBITDA to the most directly comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the United States.
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Net Income (Loss) $ (1,942,600 ) $ 532,548 $ (2,050,021 ) $ 641,320
Minority Interest in
Income (Loss) of
Subsidiary (9,824 ) 126,525 (5,947 ) 149,737
Provision for Income
Taxes - - - -
Interest 124,583 50,306 241,556 85,510
Income from Operations (1,827,841 ) 709,379 (1,814,412 ) 876,567
Depreciation and
Amortization 56,425 45,038 111,406 96,319
Non-Cash Stock Based
Compensation 41,800 - 56,100 -
Financing Fees 1,403,055 - 1,403,055 -
1 Adjusted EBIDTA $ (326,561 ) $ 754,417 $ (243,851 ) $ 972,886
2 Adjusted EBIDTA Margin (21.6%) 18.90% (5.99%) 17.00%
Adjusted EBIDTA is defined as net income before minority interest in income of subsidiaries, interest expense and financing fees, provisions for income taxes, depreciation, amortization, and other non-cash
1 stock-based compensation.
Adjusted EBIDTA Margin is calculated as Adjusted EBIDTA divided by total revenues for
2 the period.
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Manufacturing Division
Manufacturing Division
ACMT ACMF Eliminations Consolidated
For the Three
Months Ended June
30: 2008 2007 2008 2007 2008 2007 2008 2007
Sales $ 674,086 $ 1,630,801 $ 373,750 $ - $ (14,832 ) $ (111,959 ) $ 1,033,004 $ 1,518,842
Cost of Sales 556,241 1,045,400 243,360 - (14,832 ) (148,329 ) 784,769 897,071
Gross Profit 117,845 585,401 130,390 - - 36,370 248,235 621,771
Operating
Expenses: 98,359 187,427 - - - - 98,359 187,427
Income From
Operations $ 19,486 $ 397,974 $ 130,390 $ - $ - $ 36,370 $ 149,876 $ 434,344
ACMF recognized $373,750 (33.9%) in revenue directly associated with the facilities for GulfStream Aerospace. As ACMF was incorporated in 2008 it has no historical financials in which to compare revenue. ACMT's revenue decreased from $1,630,801 to $674,086 (58.7%) for the three months ended June 30, 2007 and 2008, respectively. ACMT revenue decrease was directly associated with the inability of the Company to receive financing, which delayed the delivery of our raw materials. The cycle for obtaining raw materials, especially our steel requirements, has created shortfalls in production and our lack of performance on outstanding orders. All steel suppliers now require cash payment before delivery scheduling, which often can take up to two weeks for delivery. As the Company has been sporadically funded under the line of credit, and never on the schedule in which it was promised, the Company must often shut down production for weeks at a time while waiting on raw materials.
The manufacturing facility, ACMT, recognizes a cost of sales percent, 82.5%, (37.7% of the overall cost of sales), while ACMF recognizes a cost of sales percent, 65.1%, (29% overall cost of sales), respectively which represents an increase of 17.6% which is caused by two factors, (i) the increase cost of raw materials, and (ii) the Company is required to maintain certain levels of staffing and facility operations that increase overall cost of sales as a percentage when production levels decline. ACMT's cost of sales decreased from 1,045,400 to 556,241 (46.8%) for the three months ended June 30, 2007 and 2008, respectively as a direct result in the reduction of gross sales.
ACMT represents 4.9% of the overall operating expenses of the Company. Payroll, insurance, maintenance and marketing represent the majority cost of operations.
Development Division
Development Division
ACP ACI ACR Eliminations Consolidated
For the Three Months
Ended June 30: 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007
Sales $ - $ 1,196,756 $ 216,691 $ 1,282,175 $ 261,035 $ - $ - $ - $ 216,691 $ 2,478,931
Cost of Sales 30 783,981 117,564 1,015,011 380,067 - - - 117,594 1,798,992
Gross Profit (30 ) 412,775 99,127 267,164 (119,032 ) - - - 99,097 679,939
Operating Expenses: 16,519 220,784 26,421 16,188 43,134 - - - 42,940 236,972
Income From
Operations $ (16,549 ) $ 191,991 $ 72,706 $ 250,976 $ (162,166 ) $ - $ - $ - $ 56,157 $ 442,967
The revenue attributed by ACI and ACR for the period was $216,691 (14.3% of the overall revenue) and $261,035 (17.7% of the overall revenue), respectively. ACPSB's revenue decreased from $1,196,756 to $0 for the three months ended June 30, 2007 and 2008, respectively, as the office has been closed.
ACI and ACR, have a higher cost of sales percent (54.3% and 145.6%, respectively) as compared to the consolidated percent. The increase of cost of sales is directly related to the delays caused by the lack of financing. ACI cost of sales represents 9.2% of the overall cost of sales, and ACR represents 29.6% of the overall cost of sales, The cost of sales for ACR relates to cost overruns on a project that was inherited with the acquisition. The overrun cost was approximately $135K. The additional increase, as a percentage, of the cost of sales was directly related to the slow building process, caused by constant delays in cash availability.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2008 TO THE SIX MONTHS ENDED JUNE
30, 2007
Results of Operations
Manufacturing Division Ancillary Division Development Division ACT Corporate Eliminations Consolidated
For the Six
Months Ended
June 30: 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007
Revenue $ 2,553,529 $ 2,651,492 $ - $ - $ 1,526,291 $ 3,298,693 $ - $ - $ (14,832 ) $ (228,472 ) $ 4,064,988 $ 5,721,713
Cost of Sales 1,885,895 1,749,918 813 - 1,414,257 2,350,802 - - (14,832 ) (228,472 ) 3,286,133 3,872,248
Gross Profit 667,634 901,574 (813 ) - 112,034 947,891 - - - - 778,855 1,849,465
Operating
Expenses 234,091 364,717 3,319 1,885 209,035 387,853 2,099,178 218,443 - - 2,545,623 972,898
Income (Loss)
from
Operations $ 433,543 $ 536,857 $ (4,132 ) $ (1,885 ) $ (96,999 ) $ 560,038 $ (2,099,178 ) $ (218,443 ) $ - $ - $ (1,766,766 ) $ 876,567
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Total revenues decreased to $4,064,988 for the six months ended June 30, 2008 from $5,721,713 for the six months ended June 30, 2007. The decrease of $1,656,725 or 28.9% resulted primarily from the Company's inability to reach financing terms and the lack of capital it needed to move forward with the contracts it had in place. The Company lost $19 million in contracts due to its inability to reach financing terms with its financing partners. Once financing was achieved, May 8, 2008, the Company began moving forward with its remaining contracts, currently valued at $5.3M, of which approximately $1.1 million was recognized during the six month period.
Total revenues and as a percent of consolidated revenues for the three months ended June 30, 2008, were provided as follows: Manufacturing Division - $2,553,529 (62.8), and Development Division - $1,526,291 (37.5%). The difference between the reported revenue and the individual subsidiaries is the result of consolidating eliminations and the cost associated with the Ancillary Division.
Cost of sales was $3,286,132 and $3,872,248, respectively for the six months ended June 30, 2008 and 2007. As a percent of revenue, the cost of sales increased from 67.7% to 80.8%, for the six months ended June 30, 2007 as compared to the six months ended June 30, 2008. The manufacturing division recognizes a lower cost of sales percent, 73.9%, than the consolidated total of the developing division at 92.7%, therefore, when the developing division recognizes a greater percentage of the overall revenue, the cost of sales increase. In addition, the pricing of raw materials has had substantial increases during this reporting period, which create a negative impact on cost of sales.
Gross profit was $743,107 and $1,849,465, respectively for the six months ended June 30, 2008 and 2007. As a percent of revenue, gross profit was 19.2% and 32.3%, respectively for the six months ended June 30, 2008 and 2007. One cause of the decline in gross profit is a direct correlation to the revenue split between the Manufacturing Division and the Development Division as defined in cost of sales above. In addition, the loss of revenue caused by the lack of funding, had a direct impact on the gross profit as the Company's management had to consider the implications of laying off qualified staff that would look for work elsewhere. The Company elected to maintain the staff and as such, gross profit declined.
Total operating expenses increased to $2,545,623 for the six months ended June 30, 2008 from $972,898 for the six months ended June 30, 2007. This $1,572,725 or 61.8% increase was mainly attributable to the write-off of financing fees associated with the debenture agreement of June 30, 2007 and the Line of Credit agreement of May 9, 2008 of $1,403,055. The additional expenses represent stock-based compensation, and an increase in marketing expenses and legal fees.
The operating expenses and the percent of consolidated operating expenses for the six months ended June 30, 2008, were contributed as follows: Manufacturing Division $234,091 (9.20%); Development Division $209,035 (8.20%); the Ancillary Division $1,034 (0.1%); and Corporate, $2,099,178 (82.4%).
Manufacturing Division
Manufacturing Division
ACMT ACMF Eliminations Consolidated
For the Six Months
Ended June 30: 2008 2007 2008 2007 2008 2007 2008 2007
. . .
Form 10-Q for ALTERNATIVE CONSTRUCTION COMPANY, INC.
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Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2008
The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements under federal securities laws. Forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties. Our actual results could differ materially from those indicated by forward-looking statements as a result of various factors, including but not limited to those set forth under this Item, as well as those discussed in Part II - Item 1A, "Risk Factors," and elsewhere in this document and those that may be identified from time to time in our reports and registration statements filed with the Securities and Exchange Commission.
This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes included in Part I - Item 1 of this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and related Notes and the Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 7, 2008.
DESCRIPTION OF COMPANY:
Our corporate headquarters is located at 2910 Bush Drive, Melbourne, Florida 32935. Its website address is http://www.actechpanel.com. In addition, Alternative Construction by Revels, Inc., a subsidiary of ACCY maintains a website at www.acbyrevels.com. The website is not incorporated in this Form 10-Q.
ACCY operates under three divisions; a (i) Alternative Construction Manufacturing Division, (ii) Alternative Construction Development Division, and
(iii) Alternative Construction Ancillary Services Division. The Manufacturing Division currently contains two subsidiaries, ACMT, which manufactures the ACTech� Panel System, and ACMF, which will provide manufacturing services in Florida. The Development Division contains three subsidiaries; Alternative Construction by ProSteel Builders, Inc., Alternative Construction by Ionian, Inc., and Alternative Construction by Revels, Inc. The Alternative Construction Ancillary Services Division contains five subsidiaries; Alternative Construction Design, Inc., Alternative Construction Consulting Services, Inc., Alternative Construction Safe Rooms, Inc., Modular Rental and Leasing Corporation, and Solar 18 ACTech Panel, Inc. Future of Building Institute, Inc., as a non-profit entity, functions separately.
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OVERVIEW:
Alternative Construction Technologies, Inc., formerly known as Alternative Construction Company, Inc. (the "Company" or "ACCY"), is a Florida corporation organized in 2004 with corporate offices located in Melbourne, Florida. The Company's common stock is traded on the NASDAQ OTC Bulletin Board under the symbol "ACCY.OB."
The Company is a manufacturing company engaged in the research, development and marketing of proprietary products for the construction industry. We manufacture and distribute the ACTech� Panel, a structural insulated panel (SIP), throughout the United States. Our products are marketed through our internal sales staff and by manufacturer representatives.
The Company's primary product and service is the manufacturing, research, development and marketing of proprietary products for the construction industry. We manufacture and distribute the ACTech� Panel, a structural insulated panel (SIP), throughout the United States, with concentration in the southeast region. The Company has delivered its products and services internationally and believes that a huge portion of its future growth will be derived from those markets. The marketing of our products is through our internal sales staff and the use of manufacturer representatives. The Company currently licenses 21 manufacturer sales representatives.
Our corporate headquarters is located at 2910 Bush Drive, Melbourne, Florida 32935. Its website address is http://www.actechpanel.com. The website is not incorporated in this Form 10-Q.
In 2007, the Company experienced a 50.1% growth in sales to $12,960,008, as compared to 2006 sales of $8,634,349. Net income of $1,603,261, represents an increase of $3,642,555 in net income from 2006. The Company earned $0.22 per basic share in 2007. The potential dilutive effects of convertible debt and securities warrants and options in 2007, while providing a significant increase in available cash, would have had a negative effect on earnings by $0.08 per share outstanding during 2007. The Company performance is indicative of the management decisions made in 2006.
The growth of the Company was negatively impacted by the inability to obtain new financing in January 2008. As part of its financing in June 2007, the Company stated to its lenders that additional capital would be required within a short period of time to maintain the growth levels that the Company expected to achieve. The Company began negotiating with its financiers in December 2007 and January 2008 to secure such additional financing. Simultaneously with these discussions, the Company obtained commitments for additional equity and secured financing from third parties. In each case, such third parties required the debenture holders to waive or amend the terms of the "Green Shoe" option which they were granted in connection with the June 2007 debenture financing. A waiver or satisfactory amendment could not be agreed upon and the Company's cash needs were not met.
In May 2008 the Company entered into a $3,000,000 line of credit financing with the existing financiers. The line of credit is secured by "eligible" contracts and drawn down there under with interest at 13%. On June 30, 2008 the outstanding balance was $2,014,491, and there is currently $1,981,750 outstanding under this facility and $1,018,250 available for funding. On August 6, 2008 the Company provided the lenders with a notice of draw-down from the line of credit in the amount of $1,018,250 to maximize the line of credit. The Company provided the lenders with copies of existing contracts and purchase orders totaling an approximate $5.4 million. The Company authorized the lenders to apply $467,560 of the funding request against the outstanding debenture principal and interest, which would bring the Company current in all payments.
On July 19, 2008 BridgePointe Master Fund, one of the lenders, notified the Company that it did not intend to fund any additional draw-downs under the line of credit until all current defaults had been corrected and a "field audit" conducted. On July 31, 2008 BridgePointe Master Fund notified the Company that it was in default in its debenture and that it must cure such defaults within five (5) days. On August 1, 2008 BridgePointe Master Fund notified the Company that it was in default in its line of credit and had five (5) days to cure it. The terms of the debentures called for principal amortization there under to commence on July 1, 2008, and monthly thereafter at a rate of 1/24 per month with a balloon payment due July 1, 2009 for any outstanding remaining balance. The Company is unable to make these payments without access to additional outside funding or in connection with draw-downs under the line of credit. The Company is working with its lenders and outside parties to reach agreement upon a satisfactory restructuring of this debt or payments to cure any defaults. While the Company is hopeful that a resolution can be achieved in the short term, if it is not, at least one lender has notified the Company that it will commence collection efforts, to include foreclosure on assets securing the debenture. On August 12, 2008 the lender requested additional information in order to consider the outstanding financing obligation. The Company responded on August 14, 2008.
The following Management Discussion and Analysis should be read in conjunction with the financial statements and accompanying notes included in this Form 10-Q.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2008 TO THE THREE MONTHS
ENDED JUNE 30, 2007
Manufacturing Division Ancillary Division Development Division ACT Corporate Eliminations Consolidated
For the
Three Months
Ended June
30: 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007
Revenue $ 1,047,836 $ 1,630,801 $ - $ - $ 477,726 $ 2,478,931 $ - $ - $ (14,832 ) $ (111,959 ) $ 1,510,730 $ 3,997,773
Cost of
Sales 799,601 1,045,400 13 - 497,661 1,798,992 - - (14,832 ) (148,329 ) 1,282,443 2,696,063
Gross Profit 248,235 585,401 (13 ) - (19,935 ) 679,939 - - - 36,370 228,287 1,301,710
Operating
Expenses 98,359 187,427 2,285 585 86,074 236,972 1,814,011 167,347 - - 2,000,729 592,331
Income
(Loss) from
Operations $ 149,876 $ 397,974 $ (2,298 ) $ (585 ) $ (106,009 ) $ 442,967 $ (1,814,011 ) $ (167,347 ) $ - $ 36,370 $ (1,772,442 ) $ 709,379
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Total revenues decreased to $1,510,730 for the three months ended June 30, 2008 from $3,997,773 for the three months ended June 30, 2007. The decrease of $2,522,793 or 62.2% resulted primarily from the Company's inability to reach financing terms and the lack of capital it needed to move forward with the contracts it had in place. The Company believes it lost significant business because of its inability to reach financing terms with its financing partners. Once financing was achieved, May 8, 2008, the Company began moving forward with its remaining contracts, currently valued at $5.4 million, of which approximately $372,000 was recognized this quarter.
Total revenues and as a percent of consolidated revenues for the three months ended June 30, 2008, were provided as follows: Manufacturing Division - $1,047,836 (62.8%) and Development Division - $477,726 (31.6%). The difference between the reported revenue and the individual subsidiaries is the result of consolidating eliminations and the cost associated with the Ancillary Division.
Cost of sales was $1,282,443 and $2,696,063, respectively for the three months ended June 30, 2008 and 2007. As a percent of revenue, the cost of sales increased from 77.0% to 84.9%, for the three months ended June 30, 2007 as compared to the three months ended June 30, 2008. The Manufacturing Division recognizes a lower cost of sales percent, 76.3%, than the consolidated total of the developing division at 104.2%, therefore, when the Development Division recognizes a greater percentage of the overall revenue, the cost of sales increase. In addition, the pricing of raw materials has had substantial increases during this reporting period, which create a negative impact on cost of sales.
Gross profit was $228,287 and $1,301,710, respectively for the three months ended June 30, 2008 and 2007. As a percent of revenue, gross profit was 15.1% and 23.0%, respectively for the three months ended June 30, 2008 and 2007. One cause of the decline in gross profit is a direct correlation to the revenue split between the Manufacturing Division and the Development Division as defined in cost of sales above. In addition, the loss of revenue caused by the lack of funding, had a direct impact on the gross profit as the Company's management had to consider the implications of laying off qualified staff that would look for work elsewhere. The Company elected to maintain the staff and as such gross profit declined.
Total operating expenses increased to $2,000,729 for the three months ended June 30, 2008 from $592,331 for the three months ended June 30, 2007. This $1,408,398 or 70.4% increase was attributed mostly to the write-off of financing fees associated with the debenture agreement of June 30, 2007 and the financing fees and costs associated with the Line of Credit agreement of May 9, 2008 of $1,403,055.
The operating expenses and the percent of consolidated operating expenses for the three months ended June 30, 2008, were contributed as follows: Manufacturing Division $98,359 (4.9%); Development Division $86,074 (4.3%); the Ancillary Division $2,285 (0.1%); and Corporate, $1,814,011(90.7%).
Adjusted Earnings Before Depreciation, Interest, Taxes, and Amortization
The Company presents Adjusted EBITDA as a financial measure as management believes it provides useful information to investors regarding the Company's liquidity and financial condition and because management, as well as the Company's lenders, uses this measure in evaluating the performance of the Company.
Management uses Adjusted EBITDA as a supplement to GAAP measures to further evaluate the Company's period-to-period operating performance and evaluate the Company's ability to meet future capital expenditure and working capital requirements. Management believes the exclusion of non-cash charges, including stock-based compensation, is useful in measuring the Company's cash available to operations and the performance of the Company. Management also believes that financing fees associated with the raising of capital is a one time fee that does not accurately reflect the overall performance of the Company. Because the Company finds Adjusted EBITDA useful, the Company believes its investors will also find Adjusted EBITDA useful in evaluating the Company's performance.
Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flows, or other consolidated income or cash flow data prepared in accordance with GAAP in the United States or as a measure of the Company's profitability or liquidity. Adjusted EBITDA is not in accordance with or an alternative for GAAP, and may be different from non-GAAP measures used by other companies. Unlike EBITDA which may be used by other companies or investors, Adjusted EBITDA does not include stock-based compensation charges and income from minority interest in the Company's subsidiaries, ACP, ACI, and ACSR. The Company believes that Adjusted EBITDA is of limited use in that it does not reflect all of the amounts associated with the Company's results of operations as determined in accordance with GAAP and does not accurately reflect real cash flow. In addition, other companies may not use Adjusted EBITDA or may use other non-GAAP measures, limiting the usefulness of Adjusted EBITDA. Therefore, Adjusted EBITDA should only be used to evaluate the Company's results of operations in conjunction with the corresponding GAAP measures. The presentation of Adjusted EBITDA is not meant to be considered in isolation or as a substitute for the most directly comparable GAAP measures. The Company compensates for the limitations of Adjusted EBITDA by relying upon GAAP results to gain a complete picture of the Company's performance. Since Adjusted EBITDA is a non-GAAP financial measure as defined by the Securities and Exchange Commission, the Company includes in the tables below reconciliations of Adjusted EBITDA to the most directly comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the United States.
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Net Income (Loss) $ (1,942,600 ) $ 532,548 $ (2,050,021 ) $ 641,320
Minority Interest in
Income (Loss) of
Subsidiary (9,824 ) 126,525 (5,947 ) 149,737
Provision for Income
Taxes - - - -
Interest 124,583 50,306 241,556 85,510
Income from Operations (1,827,841 ) 709,379 (1,814,412 ) 876,567
Depreciation and
Amortization 56,425 45,038 111,406 96,319
Non-Cash Stock Based
Compensation 41,800 - 56,100 -
Financing Fees 1,403,055 - 1,403,055 -
1 Adjusted EBIDTA $ (326,561 ) $ 754,417 $ (243,851 ) $ 972,886
2 Adjusted EBIDTA Margin (21.6%) 18.90% (5.99%) 17.00%
Adjusted EBIDTA is defined as net income before minority interest in income of subsidiaries, interest expense and financing fees, provisions for income taxes, depreciation, amortization, and other non-cash
1 stock-based compensation.
Adjusted EBIDTA Margin is calculated as Adjusted EBIDTA divided by total revenues for
2 the period.
--------------------------------------------------------------------------------
Manufacturing Division
Manufacturing Division
ACMT ACMF Eliminations Consolidated
For the Three
Months Ended June
30: 2008 2007 2008 2007 2008 2007 2008 2007
Sales $ 674,086 $ 1,630,801 $ 373,750 $ - $ (14,832 ) $ (111,959 ) $ 1,033,004 $ 1,518,842
Cost of Sales 556,241 1,045,400 243,360 - (14,832 ) (148,329 ) 784,769 897,071
Gross Profit 117,845 585,401 130,390 - - 36,370 248,235 621,771
Operating
Expenses: 98,359 187,427 - - - - 98,359 187,427
Income From
Operations $ 19,486 $ 397,974 $ 130,390 $ - $ - $ 36,370 $ 149,876 $ 434,344
ACMF recognized $373,750 (33.9%) in revenue directly associated with the facilities for GulfStream Aerospace. As ACMF was incorporated in 2008 it has no historical financials in which to compare revenue. ACMT's revenue decreased from $1,630,801 to $674,086 (58.7%) for the three months ended June 30, 2007 and 2008, respectively. ACMT revenue decrease was directly associated with the inability of the Company to receive financing, which delayed the delivery of our raw materials. The cycle for obtaining raw materials, especially our steel requirements, has created shortfalls in production and our lack of performance on outstanding orders. All steel suppliers now require cash payment before delivery scheduling, which often can take up to two weeks for delivery. As the Company has been sporadically funded under the line of credit, and never on the schedule in which it was promised, the Company must often shut down production for weeks at a time while waiting on raw materials.
The manufacturing facility, ACMT, recognizes a cost of sales percent, 82.5%, (37.7% of the overall cost of sales), while ACMF recognizes a cost of sales percent, 65.1%, (29% overall cost of sales), respectively which represents an increase of 17.6% which is caused by two factors, (i) the increase cost of raw materials, and (ii) the Company is required to maintain certain levels of staffing and facility operations that increase overall cost of sales as a percentage when production levels decline. ACMT's cost of sales decreased from 1,045,400 to 556,241 (46.8%) for the three months ended June 30, 2007 and 2008, respectively as a direct result in the reduction of gross sales.
ACMT represents 4.9% of the overall operating expenses of the Company. Payroll, insurance, maintenance and marketing represent the majority cost of operations.
Development Division
Development Division
ACP ACI ACR Eliminations Consolidated
For the Three Months
Ended June 30: 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007
Sales $ - $ 1,196,756 $ 216,691 $ 1,282,175 $ 261,035 $ - $ - $ - $ 216,691 $ 2,478,931
Cost of Sales 30 783,981 117,564 1,015,011 380,067 - - - 117,594 1,798,992
Gross Profit (30 ) 412,775 99,127 267,164 (119,032 ) - - - 99,097 679,939
Operating Expenses: 16,519 220,784 26,421 16,188 43,134 - - - 42,940 236,972
Income From
Operations $ (16,549 ) $ 191,991 $ 72,706 $ 250,976 $ (162,166 ) $ - $ - $ - $ 56,157 $ 442,967
The revenue attributed by ACI and ACR for the period was $216,691 (14.3% of the overall revenue) and $261,035 (17.7% of the overall revenue), respectively. ACPSB's revenue decreased from $1,196,756 to $0 for the three months ended June 30, 2007 and 2008, respectively, as the office has been closed.
ACI and ACR, have a higher cost of sales percent (54.3% and 145.6%, respectively) as compared to the consolidated percent. The increase of cost of sales is directly related to the delays caused by the lack of financing. ACI cost of sales represents 9.2% of the overall cost of sales, and ACR represents 29.6% of the overall cost of sales, The cost of sales for ACR relates to cost overruns on a project that was inherited with the acquisition. The overrun cost was approximately $135K. The additional increase, as a percentage, of the cost of sales was directly related to the slow building process, caused by constant delays in cash availability.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2008 TO THE SIX MONTHS ENDED JUNE
30, 2007
Results of Operations
Manufacturing Division Ancillary Division Development Division ACT Corporate Eliminations Consolidated
For the Six
Months Ended
June 30: 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007
Revenue $ 2,553,529 $ 2,651,492 $ - $ - $ 1,526,291 $ 3,298,693 $ - $ - $ (14,832 ) $ (228,472 ) $ 4,064,988 $ 5,721,713
Cost of Sales 1,885,895 1,749,918 813 - 1,414,257 2,350,802 - - (14,832 ) (228,472 ) 3,286,133 3,872,248
Gross Profit 667,634 901,574 (813 ) - 112,034 947,891 - - - - 778,855 1,849,465
Operating
Expenses 234,091 364,717 3,319 1,885 209,035 387,853 2,099,178 218,443 - - 2,545,623 972,898
Income (Loss)
from
Operations $ 433,543 $ 536,857 $ (4,132 ) $ (1,885 ) $ (96,999 ) $ 560,038 $ (2,099,178 ) $ (218,443 ) $ - $ - $ (1,766,766 ) $ 876,567
--------------------------------------------------------------------------------
Total revenues decreased to $4,064,988 for the six months ended June 30, 2008 from $5,721,713 for the six months ended June 30, 2007. The decrease of $1,656,725 or 28.9% resulted primarily from the Company's inability to reach financing terms and the lack of capital it needed to move forward with the contracts it had in place. The Company lost $19 million in contracts due to its inability to reach financing terms with its financing partners. Once financing was achieved, May 8, 2008, the Company began moving forward with its remaining contracts, currently valued at $5.3M, of which approximately $1.1 million was recognized during the six month period.
Total revenues and as a percent of consolidated revenues for the three months ended June 30, 2008, were provided as follows: Manufacturing Division - $2,553,529 (62.8), and Development Division - $1,526,291 (37.5%). The difference between the reported revenue and the individual subsidiaries is the result of consolidating eliminations and the cost associated with the Ancillary Division.
Cost of sales was $3,286,132 and $3,872,248, respectively for the six months ended June 30, 2008 and 2007. As a percent of revenue, the cost of sales increased from 67.7% to 80.8%, for the six months ended June 30, 2007 as compared to the six months ended June 30, 2008. The manufacturing division recognizes a lower cost of sales percent, 73.9%, than the consolidated total of the developing division at 92.7%, therefore, when the developing division recognizes a greater percentage of the overall revenue, the cost of sales increase. In addition, the pricing of raw materials has had substantial increases during this reporting period, which create a negative impact on cost of sales.
Gross profit was $743,107 and $1,849,465, respectively for the six months ended June 30, 2008 and 2007. As a percent of revenue, gross profit was 19.2% and 32.3%, respectively for the six months ended June 30, 2008 and 2007. One cause of the decline in gross profit is a direct correlation to the revenue split between the Manufacturing Division and the Development Division as defined in cost of sales above. In addition, the loss of revenue caused by the lack of funding, had a direct impact on the gross profit as the Company's management had to consider the implications of laying off qualified staff that would look for work elsewhere. The Company elected to maintain the staff and as such, gross profit declined.
Total operating expenses increased to $2,545,623 for the six months ended June 30, 2008 from $972,898 for the six months ended June 30, 2007. This $1,572,725 or 61.8% increase was mainly attributable to the write-off of financing fees associated with the debenture agreement of June 30, 2007 and the Line of Credit agreement of May 9, 2008 of $1,403,055. The additional expenses represent stock-based compensation, and an increase in marketing expenses and legal fees.
The operating expenses and the percent of consolidated operating expenses for the six months ended June 30, 2008, were contributed as follows: Manufacturing Division $234,091 (9.20%); Development Division $209,035 (8.20%); the Ancillary Division $1,034 (0.1%); and Corporate, $2,099,178 (82.4%).
Manufacturing Division
Manufacturing Division
ACMT ACMF Eliminations Consolidated
For the Six Months
Ended June 30: 2008 2007 2008 2007 2008 2007 2008 2007
. . .
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