We have financial statements ending December 31, 2023.
Liquidity and Capital Resources
While the cost of borrowing has increased because of interest rate increases intended to manage inflation and while the banking system has taken some initial liquidity impact from the Silicon Valley Bank and subsequent failures, the housing shortage, housing industry labor shortages, and more attainable pricing ZenniHome offers still make its products attractive in the current market conditions.
In early 2023, ZenniHome signed a contract for 90 ZenniHome units with Caliber Co. as developer. The contract is structured to provide cash advances consistent with the timing of materials acquisition and labor cost of production.
In addition to its 38,000 plus soft orders, the Company has several developers interested in securing production line time and will be charging 5% of the order value to schedule the time.
In 2022, the Company successfully completed a Series Seed capital raise for $6,000,000 at a $25,000,000 post money valuation. It is planning a Series A raise for up to $25 million in 2023.
To support any unplanned short term capital requirements, in early 2023, the Company signed an up $2MM multiple advance promissory note at prime + 2% with interest only payments and balloon principal repayment in one year with the Founder, Mr. Worsley.
The Company plans to raise up to $25,000,000 in total from the sale of its newly-authorized Series A Preferred Stock at a $75,000,000 pre-money valuation to support its future capital requirements. The Company will conduct three offerings concurrently: an offering under SEC Rule 506(c) for accredited investors seeking the tax benefits associated with Qualified Opportunity Zones; an offering under Rule 506(c) for accredited investors unable to take advantage of those tax benefits; and an offering under section 4(a)(6) of the Securities Act of 1933, aka Regulation Crowdfunding, conducted on the WeFunder portal and targeting non-accredited investors.
Results of Operations
In 2022, ZenniHome acquired and set up a production factory in Page, AZ on the Navajo Nation on the site of the largest decommissioned coal plant in America. Costs of approximately $600,000 incurred to set up water, waste, power, and internet connectivity were spent in 2022 but will be offset against lease payments after a lease is signed with the Navajo Nation. A 75 year lease is in negotiation.
Plant set up for manufacturing was completed in 2022 and in early 2023, the Company completed two model homes now on location in Mesa AZ.
Major equipment to support manufacturing was purchased in 2022 and equipment finance loans were secured. A FrameCad machine for steel stud manufacturing, a CombiLift to move completed homes onto transportation trucks, and factory forklifts were purchased in 2022.
Factory labor and management positions were staffed from local resources.
The bill of materials was simplified and over 50% reduction in cost was achieved from initial re-shoring of procurement and manufacturing from China.
The Company finalized and received approval for the design of its Citizen and Denizen models with the State of Arizona, Department of Housing
A Chief Revenue Officer was hired in November 2022 to manage a 38,000+ soft order pipeline.
The Financial Condition of the Crowdfunding Vehicle
The crowdfunding vehicle, ZenniHome CF LLC, was formed for the sole purpose of facilitating the offering of the Company. It has no assets and no liabilities and will not engage in any business.
You Might Lose Some or All of Your Money: When you buy a certificate of deposit from a bank, the Federal government (through the FDIC) guarantees you will get your money back. Buying our Series A Preferred Stock is not like that at all. The ability of the Company to make the profits you expect, and ultimately to give you your money back, depends on a number of factors, including many beyond our control. Nobody guarantees the Company will be successful and you might lose some or all of your money.
We are a Startup: Although the Company is producing houses and generating sales and revenue, in many important ways it is still a startup and, like all startups, faces significant challenges establishing a profitable business. Among other things, we must:
- Raise significant capital;- Hire and retain qualified personnel;- Develop effective and cost-effective marketing strategies;- Manage our growth;- Implement technology systems;- Create brand awareness; and- Develop and implement financial controls.
There is no guaranty we will be able to do any of those things successfully in the long term.
Risk of New Business Model: We believe the construction industry is in need of disruption and that our products fill an urgent need, i.e., that we are building a better mousetrap. The flip side of that coin, however, is that we will be successful only if we can change behavior that has not changed significantly in decades. Although a growing segment, modular construction represents only a small piece of theresidential construction market. Further, the houses the Company produces are very small, considered “tiny homes.” We must persuade homeowners, developers, municipalities, and other industry participants that our product is better, or at least not worse. Ingrained consumer behavior can be extremely hard to change and there is no guaranty we will be successful.
Competition: The Company will compete with many national, regional, and local companies, with new competitors coming to the market on a regular basis. In addition, large general contractors might developmodular construction expertise in-house. Some of these competitors could have far more resources and staying power than we have, and some might have products better aligned with the market. The fact thatwe have (we believe) a better mousetrap doesn’t mean we will have the best mousetrap, and even if we were to have the best mousetrap, it does not guaranty our business will succeed.
Challenge of Conducting a Profitable Business at Scale: The Company is currently operating at a loss and expects to continue to do so for at least a year. To become profitable the Company will have to operate at a significantly larger scale, and operating at a significantly larger scale involves many challenges,including gaining greater market acceptance and manufacturing at much greater volume withoutsignificantly increasing per-unit costs. Early investors have the potential to earn large rewards but they also take large risk.
Manufacturing Challenges: The COVID-19 pandemic both revealed and created many challenges in the manufacturing sector, many of which are still being felt today. Among other things: unforeseen bottlenecks and delays in the supply chain; constraints on the availability of raw materials and components; sudden and dramatic price increases; and the shortage of skilled labor.
Orders the Company Expects to Receive Might Not Materialize: Discussions with prospective customers have led the Company to report what it calls “soft orders,” meaning orders it expects to materialize. However, there is no guaranty that all or any of these “soft orders” will turn into actual orders.
Risks of Warranties: The Company will provide warranties to buyers, including warranties on the robotic elements of the homes. If there are material problems or warranty claims it will damage the profitabilityof the Company and returns to investors.
Risks of Sourcing Outside the U.S.: The Company currently manufactures finished houses at its facilities in Arizona but imports some components from abroad. As a result, the Company will incur substantial shipping charges and could be subject to the imposition of unfavorable tariffs and other unfavorable changes in laws, regulations and taxation.
Rising Interest Rates: Interest rates have risen significantly over the last 12 months as the Federal Reserve has tried to cool down the economy and thereby reduce inflation, which reached a 40-year high. Historically, rising interest have been associated with declines in real estate values and construction spending, as consumers face higher mortgage payments.
Difficulty of Enforcing Patent Protection: The Company has applied for a patent to protect its intellectual property from competitors. While a patent can provide protection, the protection can be illusory inpractice. For one thing, the patent might not be approved by the U.S. Patent and Trademark Office, or #200378 v5 might be narrowed to the point of insignificance. For another, competitors might avoid infringing on the Company’s patent with very slight modifications. For another, patents can be extremely expensive to enforce in court. If a competitor with deep pockets infringes the Company’s patent, the Company might simply be unable to afford to stop it.
Risks of Government Regulation: The residential construction business is highly regulated, from local zoning restrictions to environmental consideration to building codes and insurance regulation. Regulations could be issued that restrict use of modular systems or require costly changes to the Company’s designs or technology. Any regulation of this kind could have an adverse effect on theCompany.
Possible Infringement Claims: As far as we know, our business does not infringe on the rights of anyone else. However, it is possible that a claim will be made and that we will have to change something aboutour business to avoid infringement. We could also be subject to damages for the period of infringement.
Our Minimum Target Offering Amount is Arbitrary: We are trying to raise as much as $5,000,000 in this Offering but will begin to spend investor money if we raise as little as $50,000. This figure is arbitrary. If we raise only $50,000 we will not have enough money to achieve our business goals. Hence, earlier investors are taking a significantly greater risk than later investors.
We Rely on a Small Management Team: The Company relies on a small management team. If any of these individuals, especially Mr. Worsley, were to die, become disabled, leave the Company, or even spend less time on the Company’s business, the Company and its investors would suffer.
The Company will Need More Capital: The Company will need more capital to execute its business plans. There is no guarantee the Company will be able to raise such funds on acceptable terms or at all. If we are not able to raise sufficient capital in the future, we may not be able to execute our business plan or even to stay in business.
Future Securities Could Have Superior Rights: The Company could issue securities with rights superior to the rights associated with the Series A Preferred Stock.
Difficult Capital-Raising Environment: Over the last six months many venture capital funds and angel investors have pulled back and/or become more selective, making it more difficult to raise capital.
The Company Does Not Expect to Pay Dividends for the Foreseeable Future: For the foreseeable future, the Company expects to reinvest any free cash flow back into the business. Hence, investors should notexpect to see any cash returns for an extended period of time.
Uninsured Losses: The Company will carry insurance against certain risks, including fire. However, we may not carry insurance against the risk of natural disasters like earthquakes or floods, and there mightbe other risks that cannot be insured or cannot be insured at affordable premiums. Further, it is possible that we may accidentally allow our insurance to lapse. Accordingly, it is possible that the Company couldsuffer a significant uninsured loss.
Risks Associated with Preferred Stock: Convertible preferred stock is a useful instrument for startups and their investors, but also carries risks, including these:
- Unlike a debt instrument (e.g., a promissory note), there is no maturity date with convertiblepreferred stock, i.e., no date when the Company must give your money back.- Suppose your convertible preferred stock converts to common stock. The Company could later issue a type of stock or other security with rights superior to those of common stock.- In a liquidation, your convertible preferred stock would be entitled to payment only after allcreditors have been paid.
Terms of Series A Preferred Stock Could be Changed: The terms of your Series A Preferred Stock can be changed with the consent of the Company and the holders of a majority of Series A Preferred Stock. Hence, the terms could be changed against your wishes and without your consent.
Securities Laws Risks: This Offering is being conducted under SEC Regulation Reg CF (“Reg CF”). We have conducted other offerings under SEC Regulation D or other securities law “exemptions.” Reg CF and allother exemptions are complicated, and it is possible that we will fail to comply with one or more requirements. In that case we could be subject to fines and penalties and be required to refund all themoney we have raised from investors.
Legal Risks Associated with Crowdfunding Vehicles: Investors will invest not in the Company directly but in ZenniHome CF LLC, which is intended to qualify as a “crowdfunding vehicle” (see the discussion in Form C). Because the Company is a corporation and ZenniHome CF LLC is a limited liability company, there is some risk this arrangement does not comply with the SEC’s rules. In the case the offering itself would beillegal, the Company could be subject to significant penalties.
Risk of Inaccurate Financial Projections: The Company might provide prospective investors with financial projections, based on current information and our current assumptions about future events. Inevitably, some of our assumptions will prove to have been incorrect, and unanticipated events and circumstances may occur. The actual financial results for the Company will be affected by many factors, most of whichare outside of our control, including but not limited to those describe here. Therefore, there are likely to be differences between projected results and actual results, and the differences could be material(significant), for better or for worse.
Risk of Forward-Looking Statements: The term “forward-looking statements” means any statements, including financial projections, that relate to events or conditions in the future. Often, forward-looking statements include words like “we anticipate,” “we believe,” “we expect,” “we intend,” “we plan to,” “this might,” or “we will.” The statement “We believe the demand for modular housing will increase” is an example of a forward-looking statement.
Forward-looking statements are, by their nature, subject to uncertainties and assumptions. The statement “We believe the demand for modular housing will increase” is not like the statement “We believe the sunwill rise in the East tomorrow.” It is impossible for us to know exactly what is going to happen in the future, #200378 v5or even to anticipate all the things that could happen. Our business could be subject to many unanticipated events, including all of the things described here.
Consequently, the actual financial results of investing in the Company could and almost certainly will differ from those anticipated or implied in any forward-looking statement, and the differences could be bothmaterial and adverse. We do not undertake any obligation to revise, or publicly release the results of any revision to, any forward-looking statements, except as required by applicable law. GIVEN THE RISKS ANDUNCERTAINTIES, PLEASE DO NOT PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS.
No Registration Under Securities Laws: Neither the Company nor the Series A Preferred Stock will be registered with the SEC or the securities regulator of any state. Hence, neither the Company nor the Series A Preferred Stock are subject to the same degree of regulation and scrutiny as if they were registered.
No Right to Participate in Management of the Company: Investors will have no right to participate in the day-to-day management of the Company. You should consider investing only if you are willing to entrustall aspects of the Company’s business to our management team.
Restrictions Imposed by Voting Agreement: Every investor will be bound by a Voting Agreement entered into by the Company and its stockholders. Pursuant to the Voting Agreement, investors will be required to vote their shares of Series A Preferred Stock to elect certain individuals as directors, among otherthings.
Rights Other Investors Might Conflict with Your Interests: The Company has entered into an “Investor Rights Agreement” and a “Right of First Refusal and Co-Sale Agreement” with some of its stockholders. Both those agreements give the stockholders who are party to the agreements certain rights, including the right to certain information from the Company, the right to have their shares “registered” with the SEC in the event the Company undertakes an underwritten public offering of its stock, and the right toparticipate in certain sales of stock by the principals of the Company. Investors who acquire Series A Preferred Stock in the Reg CF offering do not have any of these rights, and the exercise of these rights by the stockholders who do have them could, in some circumstances, conflict with the interests of Reg CF investors.
Incomplete Offering Information: The Series A Preferred Stock is being offered pursuant to Reg CF. Although Reg CF does require us to provide some information (in Form C), it does not require us to provide you with nearly all the information that would be required in some other kinds of securities offerings, such as a public offering of securities. It is possible that you would make a different investment decisionif you had more information.
Lack of Ongoing Information: While we will provide you with periodic statements concerning the Company and its business, as required by Reg CF, we will not provide nearly all of the information that would be required of a public reporting company. And our reporting obligations under Reg CF could stop under some circumstances.
No Market for the Shares; Limits on Transferability: There are significant obstacles to selling or otherwise transferring your Series A Preferred Stock:
- Most important, there will be no public market, meaning you could have a hard time finding abuyer.- By law, you may not sell your shares for one year except in very limited circumstances.- To sell your shares you must satisfy certain conditions. For example, you would not be allowed to sell your shares if the sale would violate the laws around crowdfunding.
Taking the obstacles into account, you should plan to own your Series A Preferred Stock until the Companyis sold or dissolved.
Conflicts of Interest: Conflicts of interest could arise between the Company and investors. For example:
- It might be in the best interest of investors if our management team devoted their full time andattention to the Company. However, members of our management time might devote themselves to other endeavors at the same time.- Members of our management team might prefer higher levels of compensation, while investorsmight prefer lower levels.- Members of our management team might want to sell the Company before or after investors believe it is prudent to do so.- The interests of investors could also conflict with the interests of other shareholders of theCompany
The Investment Agreement Limits Your Rights: The Investment Agreement will limit your rights in several important ways if you believe you have claims against us arising from the purchase of your Series A Preferred Stock. For example:Your claims would be resolved through arbitration, rather than through thecourt system. Any such arbitration would be conducted in Wilmington, Delaware, which might not be convenient for you. Additionally:
- You would not be entitled to a jury trial.- You would not be entitled to recover any lost profits or special, consequential, or punitive damages.- If you lost your claim against us, you would be required to pay our expenses, including reasonableattorneys’ fees. If you won, we would be required to pay yours.
Limited Right to Sue Management: Our Certificate of Incorporation and Bylaws limit your ability to sue members of our management team, even if they make decisions you disagree with or make mistakes that cost you money.
Risks Associated with Qualified Opportunity Zone Status: Some investors have invested, and will invest, in the Company because of its status as a “qualified opportunity zone business” under section 1400Z-#200378 v52(d)(3) of the Internal Revenue Code, and the associated tax benefits available to investors. While the Company’s status as a qualified opportunity zone business makes it more attractive to some investors, it also creates several risks:
- To remain a qualified opportunity zone business the Company must continue to satisfy certainrequirements, such as operating within a designated geographic radius. Operating the business inthe manner required to satisfy these requirements might not always be in the best interests ofthe Company, if it weren’t for the tax benefits to investors.- For investors to obtain the full tax benefits associated with qualified opportunity zones, theCompany will be required to remain in business for at least 10 years after the date of investment. As a result, the Company might forego the chance to be sold at an earlier time.- The Company has agreed to pay damages to the investors who anticipated qualified opportunity zone tax benefits if it fails to remain a qualified opportunity zone business, effectively reimbursing those investors for their lost tax benefits.
NOTE: Investors who purchase Series A Preferred Stock in the Reg CF offering on WeFunder will not be eligible for the tax benefits associated with qualified opportunity zone businesses. For them, the status of the Company as a qualified opportunity zone businesses creates risk without the associated tax benefits.Of course, they do benefit, indirectly, to the extent that its status as a qualified opportunity zone businesses allows the Company to raise capital that it would not have been able to raise otherwise.
Trevor Barger is a part-time officer. As such, it is likely that the company will not make the same progress as it would if that were not the case.
Our future success depends on the efforts of a small management team. The loss of services of the members of the management team may have an adverse effect on the company. There can be no assurance that we will be successful in attracting and retaining other personnel we require to successfully grow our business.
Description of Transaction | Date of Transaction | Name | Relationship to Company | Value of Insider's Interest in Transaction
Salary & Benefits | Annual | Bob Worsley | See Above | $287,500*
Bonus Arrangement | N/A | Bob Worsley | See Above | 1.5% of Multi-Family Sales
Operating Line of Credit | 03/2023 | Bob Worsley | See Above | Credit Line of $2,000,000** |
Purchase of Truck | TBD | NZ Legacy | Controlled by Bob Worsley | $43,000
Purchase of Product (Homes) by Caliber | 01/2023 | Caliber | See Above | $10,500,000
Salary and Benefits | Annual | Trevor Barger | See Above | $276,000*for Half-Time
Bonus Arrangement | N/A | Trevor Barger | See Above | 1.5% of Multi-Family Sales
Stock Options - 135,000 Shares of Common Stock Per Year for Three Years | N/A | Trevor Barger | See Above | Unknown Consulting Arrangement | Current | Connie Carras | See Above | $63,000
Consulting Agreement | Current | Espiritu Loci | Affiliated with Trevor Barger | Unknown Opportunity Zone Compliance and Indemnification Agreement | N/A | Caliber | See Above | $150,000 Letter Agreement | N/A | Caliber | See Above | Unknown
Director and Officer Indemnification Agreements | Current | Each Director | Directors | Unknown
*These figures are approximate for 2023. Salaries, bonuses, and benefits are subject to change. **After accounting for the cost of borrowing, Mr. Worsley does not expect to obtain any net financial benefit from this transaction. NOTE: Employees, consultants, and others also receive equity-based compensation under the Company’s stock incentive plan.
The Securities and Exchange Commission hosts the official Form C on their EDGAR web site.
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