UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2014
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from __________ to __________

 

Commission File No. 000-50331

 

REALSOURCE RESIDENTIAL, INC.

(Exact name of registrant as specified in its charter)

 

Nevada	98-0371433
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

2089 East Fort Union Blvd., Salt Lake City, Utah	84121
(Address of Principal Executive Offices)	(Zip Code)

 

(801) 601-2700

(Registrant’s telephone number, including area code)

 

Former Fiscal Year: September 30, 2013

(Former name, former address and former fiscal year, if changed since last report)

 

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.   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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

☐	Large accelerated filer	☐	Accelerated filer
☐	Non-accelerated filer	☒	Smaller reporting company

 

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

 

As of May 13, 2014, the registrant had 11,975,645 shares of common stock outstanding.

 

 

RealSource Residential, Inc.

 

Quarterly Report on Form 10-Q

 

TABLE OF CONTENTS

 

			Page
Cautionary Note Regarding Forward-Looking Statements			-ii-
PART 1-FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2014		F-2
	Condensed Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2014 and 2013		F-3
	Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited) for the period from inception (June 14, 2004) to March 31, 2014		F-4
	Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2014 and 2013		F-5
	Notes to Condensed Consolidated Financial Statements		F-6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		1
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		4
Item 4.	Control and Procedures		4
PART II-OTHER INFORMATION
Item 1.	Legal Proceedings		6
Item 1A.	Risk Factors		6
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		6
Item 3.	Defaults Upon Senior Securities		6
Item 4.	Mine Safety Disclosures		6
Item 5.	Other Information		6
Item 6.	Exhibits		7
SIGNATURES			8

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain information set forth in this Quarterly Report on Form 10-Q, including in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein may address or relate to future events and expectations and as such constitutes “forward-looking statements” within the meaning of the Private Securities Litigation Act of 1995. Statements which are not historical reflect our current expectations and projections about our future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to us and our management and their interpretation of what is believed to be significant factors affecting our business, including many assumptions regarding future events. Such forward-looking statements include statements regarding, among other things:

 

	·	our ability to implement our current stated business plan of acquiring, managing and holding real estate assets as a real estate investment trust;
	·	our ability to establish and maintain our brand;
	·	our ability to attract and retain key members of our management team;
	·	our future financing plans and our ability to consummate financing on favorable terms if at all;
	·	our anticipated needs for working capital;
	·	the anticipated trends in our industry;
	·	our ability to expand operational capabilities;
	·	competition existing today or that will likely arise in the future; and
	·	our ability to establish a market for our common stock and operate as a public company.

 

Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “would,” “could,” “scheduled,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “seek,” or “project” or the negative of these words or other variations on these words or comparable terminology. Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities could differ materially and perhaps substantially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors. These statements may be found under the section of our Transition Report on Form 10-K for the three month period ended December 31, 2013 (filed on March 27, 2014) entitled “Risk Factors” as well as in our other public filings.

 

In light of these risks and uncertainties, and especially given the pre-revenue, start-up nature of our business, there can be no assurance that the forward-looking statements contained herein will in fact occur. Readers should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.

 

 

RealSource Residential, Inc.

 

(A Development Stage Company)

 

March 31, 2014 and 2013

 

Index to the Consolidated Financial Statements

 

Contents		Page(s)
Consolidated Balance Sheets at March 31, 2014 (Unaudited) and December 31, 2013		F-2
Consolidated Statements of Operations for the Three Months ended March 31, 2014 and 2013, and for the Period from June 14, 2004 (Inception) through March 31, 2014 (Unaudited)		F-3
Consolidated Statement of Stockholders’ Equity (Deficit) for the Period from June 14, 2004 (Inception) through March 31, 2014 (Unaudited)		F-4
Consolidated Statements of Cash Flows for the Three Months ended March 31, 2014 and 2013, and for the Period from June 14, 2004 (Inception) through March 31, 2014 (Unaudited)		F-5
Notes to the Consolidated Financial Statements (Unaudited)		F-6

 

 

RealSource Residential, Inc.

(A Development Stage Company)

Consolidated Balance Sheets

 

		March 31, 2014				December 31, 2013
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash		$	687,742			$	524,417
Subscription receivable			—				200,000
Interest receivable			57,633				11,071
Total Current Assets			745,375				735,488
DEPOSIT			1,537,636				1,537,636
Total Assets		$	2,283,011			$	2,273,124
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities		$	91,295			$	30,627
Total Current Liabilities			91,295				30,627
LONG-TERM LIABILILTIES:
Convertible notes payable			2,310,000				2,310,000
Total Long Term Liabilities			2,310,000				2,310,000
Total Liabilities			2,401,295				2,340,627
STOCKHOLDERS’ DEFICIT:
Preferred stock par value $0.001: 100,000,000 shares authorized; none issued or outstanding			—				—
Common stock par value $0.001: 100,000,000 shares authorized; 11,974,630 shares issued and outstanding			11,975				11,975
Additional paid-in capital			7,215,770				7,215,770
Deficit accumulated during the development stage			(7,334,191	)			(7,283,410	)
Accumulated other comprehensive income (loss):
Foreign currency translation gain (loss)			(11,838	)			(11,838	)
Total Stockholders’ Deficit			(118,284	)			(67,503	)
Total Liabilities and Stockholders’ Deficit		$	2,283,011			$	2,273,124

 

See accompanying notes to the consolidated financial statements.

 

 

RealSource Residential, Inc.

(A Development Stage Company)

Consolidated Statements of Operations

 

										For the Period from
		For the Three Months				For the Three Months				June 14, 2004 (inception)
		Ended				Ended				through
		March 31, 2014				March 31, 2013				March 31, 2014
		(Unaudited)				(Unaudited)				(Unaudited)
Revenue earned during the development stage		$	—			$	—			$	67,600
Operating expenses:
Amortization			—				—				133,600
Consulting fees			—				—				12,598
Investor and corporate communications			—				—				258,349
License fees and royalties			—				—				114,384
Management compensation			—				—				1,526,086
Research and development			—				—				1,421,530
Stock-based compensation			—				—				2,090,632
Loss on foreign exchange translations			—				—				15,544
Professional fees			23,539				2,721				743,206
General and administrative expenses			5,539				2,027				534,155
Total operating expenses			29,078				4,748				6,850,084
Loss from operations			(29,078	)			(4,748	)			(6,782,484	)
Other (income) expense:
Asset impairment loss			—				—				59,010
Compensation shares			—				—				25,000
Interest and finance charges			68,351				—				683,948
Interest income			(46,648	)			—				(142,390	)
Loss on sale of intellectual property			—				—				78,570
(Gain) loss on sale of subsidiary			—				—				(126,515	)
Forgiveness of debt			—				—				(32,079	)
Other (income) expense			—				—				(34,122	)
Other (income) expense, net			21,703				—				511,422
Loss before income tax provision			(50,781	)			(4,748	)			(7,293,906	)
Income tax provision			—				—				57,415
Net loss		$	(50,781	)		$	(4,748	)		$	(7,236,491	)
Net loss per common share:
- Basic and diluted		$	(0.00	)		$	(0.00	)
Weighted average common shares outstanding:
- Basic and diluted			11,974,630				2,308,645

 

See accompanying notes to the consolidated financial statements.

 

 

RealSource Residential, Inc.

( A Development Stage Company)

Consolidated Statement of Stockholders’ Equity (Deficit)

For the Period from June 14, 2004 (Inception) through March 31, 2014

(Unaudited)

 

																		Accumulated Other
		Common Stock Par Value $0.001												Deficit Accumulated				Comprehensive Income (Loss)				Total
		Number of								Additional Paid-in				during the Development				Foreign Currency Translation				Stockholders’ Equity
		Shares				Amount				Capital				Stage				Gain (Loss)				(Deficit)
Balance, June 14, 2004 (Inception)			1,694,286			$	1,694			$	47,306			$	(77,105	)		$	—			$	(28,105	)
Forward stock split			847,143				847				(847	)											—
Comprehensive income (loss)
Net loss															(50,205	)							(50,205	)
Foreign currency translation gain (loss)																			(3,472	)			(3,472	)
Balance, December 31, 2005			2,541,429				2,541				46,459				(127,310	)			(3,472	)			(81,782	)
Shares issued to former shareholders of Upstream Canada			685,714				686				23,314												24,000
Shares cancelled on acquisition			(1,961,429	)			(1,961	)			(66,689	)											(68,650	)
Recapitalization adjustment											(4,005	)			(49,045	)							(53,050	)
Issuance of common stock to consultant at $1.20 per share			14,286				14				599,986												600,000
Amortization of fair value of stock options granted											100,150												100,150
Fair value of detachable warrants											360,964												360,964
Embedded beneficial conversion feature											268,108												268,108
Common stock issued for future services			500				—				17,768												—
Less amount expensed																							14,986
Issuance of stock for BCCA license fee			845				1				17,746												17,747
Partial forfeiture of convertible debenture											141,844												141,844
Comprehensive income (loss)
Net loss															(1,843,529	)							(1,843,529	)
Foreign currency translation gain (loss)																			(5,707	)			(5,707	)
Balance, September 30, 2006			1,281,345				1,281				1,505,645				(2,019,884	)			(9,179	)			(524,919	)
Amortization of fair value of stock options granted											771,809												771,809
Amortization of stock issued for operating expenses																							2,782
Common stock issued for future services			1,381				1				34,721												—
Less amount expensed																							31,600
Common stock issued for cash at $1.50 per share			38,095				38				1,999,962												2,000,000
Cash payment for unsuccesful due diligence											(5,000	)											(5,000	)
Convertible debentures converted to common stock			22,857				23				799,977												800,000
Interest on convertible debt converted to common stock			1,542				2				53,971												53,973
Common stock issued for acquisition of PPT			14,857				15				244,385												244,400
Common stock issued as performance based escrow shares			6,429				7				105,743												—
Obligation to issue shares under contract																							4,842
Comprehensive income (loss)
Net loss															(1,796,981	)							(1,796,981	)
Foreign currency translation gain (loss)																			36,035				36,035
Balance, September 30, 2007			1,366,506				1,367				5,511,213				(3,816,865	)			26,856				1,618,541
Amortization of fair value of stock options granted											424,128												424,128
Amortization of stock issued for operating expenses																							3,122
Common stock issued for future services ending January 31, 2008 at $0.30 per share			2,377				2				24,953												20,113
Common stock issued for amended and restated contract at $0.25 per share			11,525				12				100,836												135,570
Common stock issued for future services ending January 31, 2008 at $0.30 per share			6,106				6				47,049												81,777
Common stock issued for achieving Malaria milestone at $0.3624 per share			26,429				26				335,194												335,220
Release of 75,000 shares from escrow																							27,180
Obligation to issue shares under contract																							14,391
Comprehensive income (loss)
Net loss															(2,034,502	)							(2,034,502	)
Foreign currency translation gain (loss)																			(7,657	)			(7,657	)
Balance, September 30, 2008			1,412,943				1,413				6,443,373				(5,851,367	)			19,199				548,439
Amortization of fair value of stock options granted											194,545												194,545
Forgiveness of related party debt											300,000												300,000
Obligation to issue shares under contract																							85,346
Comprehensive income (loss)
Net loss															(1,099,854	)							(1,099,854	)
Foreign currency translation gain (loss)																			(29,237	)			(29,237	)
Balance, September 30, 2009			1,412,943				1,413				6,937,918				(6,951,221	)			(10,038	)			(761	)
Forgiveness of related party debt											271,984												271,984
Issuance of common stock per agreement			28,571				29				24,971												25,000
Common stock returned to treasury			(466,884	)			(467	)			467												—
Forgiveness of obligation to issue shares under contract																							(99,737	)
Forgiveness of deferred compensation due to cancellation of escrow shares											(78,570	)											—
Comprehensive income (loss)
Net loss															(323,544	)							(323,544	)
Foreign currency translation gain (loss)																			(16,015	)			(16,015	)
Balance, September 30, 2010			974,630				975				7,156,770				(7,274,765	)			(26,053	)			(143,073	)
Comprehensive income (loss)
Net income															68,857								68,857
Foreign exchange translation adjustment																			15,701				15,701
Balance, September 30, 2011			974,630				975				7,156,770				(7,205,908	)			(10,352	)			(58,515	)
Share issued for cash			1,000,000				1,000				34,000												35,000
Comprehensive income (loss)
Net loss															(1,763	)							(1,763	)
Foreign currency translation gain (loss)																			(1,486	)			(1,486	)
Balance, September 30, 2012			1,974,630				1,975				7,190,770				(7,207,671	)			(11,838	)			(26,764	)
Common stock issued for debt			10,000,000				10,000				25,000												35,000
Net loss															(35,818	)							(35,818	)
Balance, September 30, 2013			11,974,630				11,975				7,215,770				(7,243,489	)			(11,838	)			(27,582	)
Net loss															(39,921	)							(39,921	)
Balance, December 31, 2013			11,974,630				11,975				7,215,770				(7,283,410	)			(11,838	)			(67,503	)
Net loss															(50,781	)							(50,781	)
Balance, March 31, 2014			11,974,630			$	11,975			$	7,215,770			$	(7,334,191	)		$	(11,838	)		$	(118,284	)

 

See accompanying notes to the consolidated financial statements.

 

 

RealSource Residential, Inc.

(A Development Stage Company)

Consolidated Statements of Cash Flows

 

										For the Period from
		For the Three Months				For the Three Months				June 14, 2004 (inception)
		Ended				Ended				through
		March 31, 2014				March 31, 2013				March 31, 2014
		(Unaudited)				(Unaudited)				(Unaudited)
Cash flows from operating activities:
Net loss		$	(50,781	)		$	(4,748	)		$	(7,236,491	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Forgiveness of debt			—				—				(32,079	)
Amortization			—				—				133,600
Accretion of convertible debenture			—				—				302,808
Shares issued or to be issued for services			—				—				1,487,236
Stock-based compensation			—				—				1,658,590
Compensation shares			—				—				25,000
Deferred income tax			—				—				(57,415	)
Asset impairment			—				—				59,010
Gain on sale of subsidiary			—				—				(126,515	)
Loss from sale of intellectual property			—				—				78,570
Changes in operating assets and liabilities:							—
Prepaid expenses			—				1,375				(2,781	)
Subscription receivable			—				—				(10,259	)
Other receivables			(46,562	)			—				(57,633	)
Accounts payable and accrued liabilities			60,668				(10,128	)			336,958
Due to related parties			—				—				271,984
Net cash provided by (used in) operating activities			(36,675	)			(13,501	)			(3,169,417	)
Cash flows from investing activities:
Cash paid for acquisition of PPT shares			—				—				(51,507	)
Proceeds from the sale of subsidiary			—				—				1
Deposit			—				—				(1,537,636	)
Purchase of equipment			—				—				(22,764	)
Net cash used in investing activities			—				—				(1,611,906	)
Cash flows from financing activities:
Proceeds from issuance of convertible notes payable			200,000				—				3,310,000
Proceeds from issuance of common shares, net			—				—				2,030,345
Advances from (repayment made to) related party			—				20,000				131,310
Net cash provided by financing activities			200,000				20,000				5,471,655
Effect of foreign exchange rate change on cash			—				—				(2,590	)
Net change in cash			163,325				6,499				687,742
Cash at beginning of reporting period			524,417				1,065				—
Cash at end of reporting period		$	687,742			$	7,564			$	687,742
Supplemental disclosure of cash flows information:
Interest paid		$	—			$	—			$	—
Income tax paid		$	—			$	—			$	—
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for debt		$	—			$	—			$	35,000

 

See accompanying notes to the consolidated financial statements.

 

 

RealSource Residential, Inc.

(A Development Stage Company)

March 31, 2014 and 2013

Notes to the Consolidated Financial Statements

(Unaudited)

 

Note 1 - Organization and Operations

 

Upstream Biosciences, Inc.

 

Upstream Biosciences, Inc. (“Upstream Biosciences”) was incorporated on March 20, 2002 under the laws of the State of Nevada. Upstream Biosciences engaged in developing technology relating to biomarker identification, disease susceptibility and drug response areas of cancer.

 

Change in Control

 

On May 24, 2013, Charles El-Moussa and Six Capital Limited (“Six Capital”)(collectively, the “Sellers”), as majority stockholders of Upstream Biosciences and RealSource Acquisitions Group, LLC, a Utah limited liability company, and Chesterfield Faring Ltd., a New York corporation (collectively, the “Purchasers”), entered into a Securities Purchase Agreement (the “Agreement”) pursuant to which the Sellers agreed to sell to the Purchasers an aggregate of 10,778,081 shares (representing approximately 90% of the issued and outstanding voting securities of the Company) of common stock of the Company (the “Common Stock”) for $175,000 in cash from the personal funds of the Purchasers (the “Transaction”).

 

RealSource Residential, Inc.

 

On July 11, 2013, Upstream Biosciences entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which Upstream Biosciences merged with its newly formed, wholly owned subsidiary, RealSource Residential, Inc., a Nevada corporation (“Merger Sub” and such merger transaction, the “Merger”) with the Company remaining as the surviving corporation under the name “RealSource Residential, Inc.” (the “Surviving Company” or the “Company”). Upon the consummation of the Merger, the separate existence of Merger Sub ceased and shareholders of the Company became shareholders of the surviving company named RealSource Residential, Inc. The Merger was effective on Monday, July 15, 2013 (the “Effective Date”) and was approved by the Financial Industry Regulatory Authority on August 5, 2013.

 

Since the Transaction, the Company has been engaged in establishing a business focused on acquiring, managing and holding multi-family residential properties, with the ultimate goal of engaging in such activities as a real estate investment trust. Since the Transaction, the Company has only contracted to acquire one such property. See Note 5.

 

Note 2 - Significant and Critical Accounting Policies and Practices

 

The Management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness of accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. The Company’s significant and critical accounting policies and practices are disclosed below as required by generally accepted accounting principles.

 

Basis of Presentation - Unaudited Interim Financial Information

 

The accompanying unaudited interim financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the financial statements of the Company for the transition period ended December 31, 2013 and notes thereto contained in the Company’s Transitional Report on Form 10-K as filed with the SEC on March 27, 2014.

 

 

Development Stage Company

 

The Company is a development stage company as defined by section 915-10-20 of the FASB Accounting Standards Codification. Although the Company recognized nominal amount of revenues, it is still devoting substantially all of its efforts on establishing the business and its planned principal operations have not commenced. All losses accumulated since inception have been considered as part of the Company’s development stage activities.

 

Fiscal Year-End

 

The Company elected September 30th as its fiscal year-end date upon formation

 

On July 9, 2013, the Company’s board of directors voted to change the Company’s fiscal year end from September 30th to December 31st. The Company’s 2014 fiscal year began on January 1, 2014 and will end on December 31, 2014.

 

Use of Estimates and Assumptions and Critical Accounting Estimates and Assumptions

 

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(s) of the financial statements and the reported amounts of revenues and expenses during the reporting period(s).

 

Critical accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates and assumptions affecting the financial statements were:

 

	(i)	Assumption as a going concern: Management assumes that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business;
	(ii)	Valuation allowance for deferred tax assets: Management assumes that the realization of the Company’s net deferred tax assets resulting from its net operating loss (“NOL”) carry-forwards for Federal income tax purposes that may be offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company has incurred recurring losses, (b) general economic conditions, and (c) its ability to raise additional funds to support its daily operations by way of a public or private offering, among other factors.
	(iii)	Estimates and assumptions used in valuation of equity instruments: Management estimates expected term of share options and similar instruments, expected volatility of the Company’s common shares and the method used to estimate it, expected annual rate of quarterly dividends, and risk free rate(s) to value share options and similar instruments.

 

These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.

 

Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

 

Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly.

 

Actual results could differ from those estimates.

 

 

Reclassification

 

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported income or losses.

 

Principles of Consolidation

 

The Company applies the guidance of Topic 810 “Consolidation” of the FASB Accounting Standards Codification (“ASC”) to determine whether and how to consolidate another entity. Pursuant to ASC Paragraph 810-10-15-10 all majority-owned subsidiaries—all entities in which a parent has a controlling financial interest—shall be consolidated except (1) when control does not rest with the parent, the majority owner; (2) if the parent is a broker-dealer within the scope of Topic 940 and control is likely to be temporary; (3) consolidation by an investment company within the scope of Topic 946 of a non-investment-company investee. Pursuant to ASC Paragraph 810-10-15-8 the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree. The Company consolidates all less-than-majority-owned subsidiaries, if any, in which the parent’s power to control exists.

 

Fair Value of Financial Instruments

 

The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

 

Level 1	Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2	Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3	Pricing inputs that are generally observable inputs and not corroborated by market data.

 

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

 

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash, interest receivable and accounts payable and accrued liabilities, approximate their fair values because of the short maturity of these instruments.

 

The Company’s convertible notes payable approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at March 31, 2014.

 

Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated.

 

Cash Equivalents

 

The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.

 

Related Parties

 

The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.

 

Pursuant to Section 850-10-20 the related parties include (a) affiliates of the Company; (b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity; (c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; (d) principal owners of the Company; (e) management of the Company; (f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

 

The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: a. the nature of the relationship(s) involved; b. a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c. the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d. amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

 

Commitment and Contingencies

 

The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

 

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe, based upon information available at this time, that these matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows.

 

 

Revenue Recognition

 

The Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.

 

Stock-Based Compensation for Obtaining Employee Services

 

The Company accounts for its stock based compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.

 

The fair value of options and similar instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions for inputs are as follows:

 

•	Expected term of share options and similar instruments: The expected life of options and similar instruments represents the period of time the option and/or warrant are expected to be outstanding. Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and employees’ expected exercise and post-vesting employment termination behavior into the fair value (or calculated value) of the instruments. Pursuant to paragraph 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected term = ((vesting term + original contractual term) / 2), if (i) A company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded; (ii) A company significantly changes the terms of its share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term; or (iii) A company has or expects to have significant structural changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses the simplified method to calculate expected term of share options and similar instruments as the company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
•	Expected volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
•	Expected annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected contractual life of the option and similar instruments.
•	Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the contractual life of the option and similar instruments.

 

The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.

 

 

Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services

 

The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of Sub-topic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).

 

Pursuant to ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.

 

The fair value of option or warrant award is estimated on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions for inputs are as follows:

 

•	Expected term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2 of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s expected exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data to estimate holder’s expected exercise behavior. The contractual term of share options or similar instruments is used as expected term of share options or similar instruments for the Company if it is a newly formed corporation.
•	Expected volatility of the entity’s shares and the method used to estimate it. An entity that uses a method that employs different volatilities during the contractual term shall disclose the range of expected volatilities used and the weighted-average expected volatility. A thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
•	Expected annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected contractual life of the option and similar instruments.
•	Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the contractual life of the option and similar instruments.

 

Pursuant to ASC paragraph 505-50-25-7, if fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee enter into an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments), then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement is entered into). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized as contra-equity under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances. Pursuant to ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return for fully vested, non-forfeitable equity instruments that are issued at the date the grantor and grantee enter into an agreement for goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra-equity by the grantor of the equity instruments. The transferability (or lack thereof) of the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited to transactions in which equity instruments are transferred to other than employees in exchange for goods or services. Section 505-50-30 provides guidance on the determination of the measurement date for transactions that are within the scope of this Subtopic.

 

Pursuant to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a stock option that the counterparty has the right to exercise expires unexercised.

 

 

Pursuant to ASC paragraph 505-50-30-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should be recorded.

 

Income Tax Provision

 

The Company accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.

 

The Company adopted section 740-10-25 of the FASB Accounting Standards Codification (“Section 740-10-25”). Section 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under Section 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Section 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

 

The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its balance sheets and provides valuation allowances as management deems necessary.

 

Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.

 

Uncertain Tax Positions

 

The Company did not take any uncertain tax positions and had no adjustments to its income tax liabilities or benefits pursuant to the provisions of Section 740-10-25 for the reporting period ended March 31, 2014 or 2013.

 

Limitation on Utilization of NOLs due to Change in Control

 

Pursuant to the Internal Revenue Code Section 382 (“Section 382”), certain ownership changes may subject the NOL’s to annual limitations which could reduce or defer the NOL. Section 382 imposes limitations on a corporation’s ability to utilize NOLs if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. In the event of an ownership change, utilization of the NOLs would be subject to an annual limitation under Section 382 determined by multiplying the value of its stock at the time of the ownership change by the applicable long-term tax-exempt rate. Any unused annual limitation may be carried over to later years. The imposition of this limitation on its ability to use the NOLs to offset future taxable income could cause the Company to pay U.S. federal income taxes earlier than if such limitation were not in effect and could cause such NOLs to expire unused, reducing or eliminating the benefit of such NOLs.

 

Net Income (Loss) per Common Share

 

Net income (loss) per common share is computed pursuant to Section 260-10-45 of the FASB Accounting Standards Codification. Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and potentially dilutive outstanding shares of common stock during the period to reflect the potential dilution that could occur from common shares issuable through contingent share arrangements, stock options and warrants.

 

 

The following table shows the potentially outstanding dilutive common shares excluded from the diluted net income (loss) per common share calculation as they were anti-dilutive:

 

		Potentially Outstanding Dilutive Common Shares
		For the Reporting Period Ended March 31, 2014				For the Reporting Period Ended March 31, 2013
Convertible Notes Payable Shares and Related Warrant Shares
On December 9, 2013, the Company consummated the closing (the “Closing”) of a private placement offering (the “Offering”) of 231 units (“Units”) for $10,000 per Unit, for aggregate gross proceeds of $2,310,000. No placement agents or brokers were utilized by the Company in connection with the Offering. Each Unit consists of: (i) a $10,000 face value 12% Series A Senior Unsecured Convertible Promissory Note of the Company (collectively, the “Notes”) convertible into shares of Common Stock at $0.50 per share, and (ii) one detachable Common Stock Purchase Warrant (collectively, the “Warrants”) to purchase 10,000 shares (the “Warrant Shares”) of common stock of the Company (the “Common Stock”) with an exercise price of $1.00 per share expiring five years from the date of issuance.			(i) 4,620,000 (ii) 2,310,000				—
Sub-total: convertible notes payable shares and related warrant shares			6,930,000				—
Total potentially outstanding dilutive common shares			6,930,000				—

 

Cash Flows Reporting

 

The Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (“Indirect method”) as defined by paragraph 230-10-45-25 of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments. The Company reports the reporting currency equivalent of foreign currency cash flows, using the current exchange rate at the time of the cash flows and the effect of exchange rate changes on cash held in foreign currencies is reported as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents and separately provides information about investing and financing activities not resulting in cash receipts or payments in the period pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards Codification.

 

Subsequent Events

 

The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements were issued. Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.

 

Recently Issued Accounting Pronouncements

 

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in this Update change the requirements for reporting discontinued operations in Subtopic 205-20.

 

Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The ASU states that a strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity. Although “major” is not defined, the standard provides examples of when a disposal qualifies as a discontinued operation.

 

 

The ASU also requires additional disclosures about discontinued operations that will provide more information about the assets, liabilities, income and expenses of discontinued operations. In addition, the ASU requires disclosure of the pre-tax profit or loss attributable to a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements.

 

The ASU is effective for public business entities for annual periods beginning on or after December 15, 2014, and interim periods within those years.

 

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.

 

Note 3 – Going Concern

 

The financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.

 

As reflected in the consolidated financial statements, the Company had a deficit accumulated during the development stage at March 31, 2014, a net loss and net cash used in operating activities for the reporting period then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company is attempting to commence operations and generate sufficient revenue; however, the Company’s cash position may not be sufficient to support the Company’s daily operations. While the Company believes in the viability of its strategy to generate sufficient revenue and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds.

 

The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Note 4 – Convertible Notes

 

On December 9, 2013, the Company consummated the closing (the “Closing”) of a private placement offering (the “Offering”) of 231 units (“Units”) for $10,000 per Unit, for aggregate gross proceeds of $2,310,000. No placement agents or brokers were utilized by the Company in connection with the Offering. Each Unit consists of: (i) a $10,000 face value 12% Series A Senior Unsecured Convertible Promissory Note of the Company convertible into common shares at $0.50 per share (collectively, the “Notes”), and (ii) one detachable Common Stock Purchase Warrant (collectively, the “Warrants”), each to purchase 10,000 shares (the “Warrant Shares”) of common stock of the Company (the “Common Stock”) with an exercise price of $1.00 per share expiring five years from the date of issuance. In connection with the Closing, the Company entered into definitive subscription agreements (the “Subscription Agreements”) with twenty nine (29) accredited investors. The Notes accrue interest at 12% per year and have a maturity date of December 9, 2015. The Notes will be automatically converted into shares of the Company’s Common Stock at the then applicable conversion price in the event that the 90-day trading volume weighted average price per share of the Common Stock exceeds $1.50 per share at any time during the term of the Notes.

 

The Company estimated the relative fair value of the warrants on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

		December 9, 2013
Expected life (year)			5
Expected volatility (*)			61.39	%
Expected annual rate of quarterly dividends			0.00	%
Risk-free rate(s)			1.54	%

 

*

As a thinly traded entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected five (5) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within real estate brokerage and management industry which the Company engages in to calculate the expected volatility. The Company calculated those five (5) comparable companies’ historical volatility over the expected life of the options or warrants and averaged them as its expected volatility.

 

 

The estimated relative fair value of the warrants was deminimus at the date of issuance using the Black-Scholes Option Pricing Model.

 

Note 5 – Related Party Transactions

 

Related Parties

 

Related parties with whom the Company had transactions are:

 

Related Parties		Relationship
Michael Anderson		Chairman, significant stockholder and director
Nathan Hanks		President and CEO, significant stockholder and director
V. Kelly Randall		Chief Operating Officer, Chief Financial Officer and Director
RS Cambridge Apartments, LLC		An entity controlled and partially owned by the Chairman, President and CEO of the Company

 

Purchase and Sale agreement- RS Cambridge Apartments, LLC

 

Proceeds from the Offering were used to (i) acquire a $2.85 million face value subordinated mortgage note secured by the Cambridge Apartments in Gulfport, Mississippi (the “Property”) for approximately $1,073,000 (the “B Note”) and (ii) fund (in the amount of approximately $465,000) certain costs associated with a refinancing of the senior mortgage indebtedness encumbering the Property (which refinancing occurred concurrently with the Company’s acquisition of the B Note). The remaining proceeds from the Offering (in the amount of approximately $772,000) will be used for the general working capital of the Company. The Cambridge Property is owned by RS Cambridge Apartments, LLC (the “Property Owner”). Nathan Hanks and Michael Anderson, officers and directors of the Company, own 10% of the outstanding membership interests of the Property Owner.

 

Immediately upon the acquisition of the B Note, the Company converted the B Note into a right of first refusal and option (the “Option”) in the amount of approximately $1,538,000 (the “Option Payment”), which is the amount of funds from the Offering used to purchase the B Note and otherwise support the refinancing of the Property.

 

To memorialize the Option, on December 9, 2013, the Company entered into a Right of First Refusal and Option Agreement (the “Option Agreement”) with the Property Owner. The Option affords the Company the right to acquire the Property within five (5) years after the Closing at the fair value of the Property as negotiated between the Company and the Property Owner. In addition, under the Option, if the Property Owner receives an offer to purchase the Property during the option period, the Company will have a right of first refusal to purchase the Property on the same terms as the offer. Should the Company elect not to match the offer, the Option Payment is required to be repaid upon the sale of the Property to the other buyer.

 

On March 12, 2014, the Company entered into a Purchase and Sale Agreement (the “PS Agreement”) with the Property Owner. The Option Payment was converted into a “Deposit” against the purchase of the property and shall continue to accrue interest at the rate of 12% per annum, from the date of the Option Agreement through the date of the purchase of the Property. The property will not be purchased prior to August 1, 2014.

 

Note 6 – Stockholders’ Equity (Deficit)

 

Shares Authorized

 

Upon formation the total number of shares of all classes of stock which the Company is authorized to issue is Two Hundred Million (200,000,000) shares of which One Hundred Million (100,000,000) shares shall be Preferred Stock, par value $0.001 per share, and One Hundred Million (100,000,000) shares shall be Common Stock, par value $0.001 per share.

 

 

Common Stock

 

Amendment to the Articles of Incorporation to Effectuate a Reverse Stock Split

 

Effective December 4, 2012, the Board of Directors and the majority voting stockholders adopted and approved a resolution to amend its Articles of Incorporation to effectuate a reverse split of all issued and outstanding shares of common stock, at a ratio of thirty five-for one (35:1) (the “Reverse Stock Split”)..

 

All shares and per share amounts in the financial statements have been adjusted to give retroactive effect to the Stock Split.

 

Issuance of Common Stock

 

On July 23, 2012, the Company issued 1,000,000 shares of common stock, at $0.035 per share for gross proceeds of $35,000.

 

On March 28, 2013, the Company entered into a share for debt agreement whereby it issued 10,000,000 shares of its common stock in exchange for the extinguishment of $35,000 in debt to a related party.

 

Warrants

 

Summary of the Company’s Warrants Activities

 

The table below summarizes the Company’s warrants activities:

 

		Number of Warrant Shares				Exercise Price Range Per Share				Weighted Average Exercise Price				Relative Fair Value at Date of Issuance				Aggregate Intrinsic Value
Balance, December 31, 2013			2,310,000			$	2.00			$	2.00			$	*			$	—
Granted			—				—				—				—				—
Canceled			—				—				—				—				—
Exercised			(—	)			—				—				—				—
Expired			—				—				—				—				—
Balance, March 31, 2014			2,310,000			$	2.00			$	2.00			$	*			$	—
Earned and exercisable, March 31, 2014			2,310,000			$	2.00			$	2.00			$	*			$	—
Unvested, March 31, 2014			—			$	—			$	—			$	—			$	—

 

* The relative fair value at date of issuance was de minimis.

 

The following table summarizes information concerning outstanding and exercisable warrants as of March 31, 2014:

 

			Warrants Outstanding												Warrants Exercisable
Range of Exercise Prices			Number Outstanding				Average Remaining Contractual Life (in years)				Weighted Average Exercise Price				Number Exercisable				Average Remaining Contractual Life (in years)				Weighted Average Exercise Price
$2.00				2,310,000				4.7			$	2.00				2,310,000				4.7			$	2.00

 

Note 7 – Subsequent Events

 

The Company has evaluated all events that occur after the balance sheet date through the date when the financial statements were issued to determine if they must be reported. The Management of the Company determined that there were no reportable subsequent events to be disclosed.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and related notes thereto in our Transition Report on Form 10-K for the three month period ended December 31, 2013.

 

This discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those discussed in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth herein and elsewhere in this Quarterly Report and in our other filings with the Securities and Exchange Commission. See “Cautionary Note Regarding Forward Looking Statements.”

 

Corporate History and Recent Developments

 

We were incorporated pursuant to the laws of the State of Nevada on March 20, 2002 under the name Integrated Brand Solutions Inc. and on February 6, 2006, changed our name to Upstream Biosciences Inc. From 2006 to December 2009, our company operated as a biotechnology company, and from 2010 until May 2013, our company had no operating business.

 

On May 24, 2013, our then majority stockholders of our company sold their interests in our company (consisting of 10,778,081 shares of our common stock representing approximately 90% of the issued and outstanding voting security of our company) to RealSource Acquisition Group, LLC, a Utah limited liability company (“RSAG”), and Chesterfield Faring Ltd., a New York corporation in consideration of an aggregate of $175,000 in cash. RSAG is affiliated with The RealSource Group, a group of affiliated real estate brokerage and management companies based in Salt Lake City, Utah. On July 11, 2013, we changed our corporate name by merging with our newly formed, wholly owned subsidiary called RealSource Residential, Inc., a Nevada corporation, and we remained as the surviving corporation under the name “RealSource Residential, Inc.” The merger was effective on July 15, 2013 and was approved by the Financial Industry Regulatory Authority on August 5, 2013.

 

Leveraging the experience of our management team and The RealSource Group, we plan to focus on acquiring, managing and holding primarily multi-family housing assets in anticipation of creating a real estate investment trust (a “REIT”). We expect the process of acquiring such multi-family housing assets during 2014. There are certain regulatory requirements that must be satisfied in order to acquire these assets and to operate as a REIT, including audited financial statements for the specific properties acquired, and no assurances can be given that we will be able to do so.

 

As of the date of this Quarterly Report, we have not acquired any real estate assets and are not structured or operating as a REIT, although during the three months ended December 31, 2013, we did acquire an option to purchase one multi-family housing asset in Gulfport, Mississippi. On March 12, 2014, we entered into a Purchase and Sale Agreement to acquire the property, but it will not be acquired prior to August 1, 2014.

 

Critical Accounting Policies

 

Our financial statements are prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States (“US GAAP”). Our fiscal year ends December 31.

 

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss our financial statements, which have been prepared in accordance with US GAAP. The preparation of these financial statements requires making estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses for the reporting periods. On an ongoing basis, we evaluate such estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ (perhaps significantly) from these estimates under different assumptions or conditions.

 

While all the accounting policies impact the financial statements, certain policies may be viewed to be critical. Our management believes that the accounting policies which involve more significant judgments and estimates used in the preparation of our consolidated financial statement include warrants liability, stock-based compensation, capitalization of costs and useful lives of assets:

 

Results of Operations

 

For the three months ended March 31, 2014 compared to the three months ended March 31, 2013:

 

Revenues

 

For the three month periods ended March 31, 2014 and 2013, we did not generate any revenues.

 

Cost of Revenues

 

For the three month periods ended March 31, 2014 and 2013, we did not incur any cost of revenues from operations.

 

Research and Development Expenses

 

For the three month periods ended March 31, 2014 and 2013, we did not incur any research and development related costs nor do we expect any future such costs with the change in our operations.

 

Marketing and pre-production costs

 

For the three month periods ended March 31, 2014 and 2013, there were no marketing and pre-production related costs.

 

General and Administrative Expenses

 

Our general and administrative costs increased from $4,748 during the first quarter of 2013 to $29,078 for the first quarter of 2014 with the primary increase related to legal, filing and audit fees.

 

Other income and expense

 

In the first quarter of 2014 we recorded $68,351 of interest expense on our outstanding 12% Senior Convertible Debentures and $46,648 in interest income on our option to purchase to purchase the Cambridge apartments. There were no such income and expense items for the same quarter in 2013.

 

 

Net loss

 

Net loss for the three month period ended March 31, 2014 was $50,781 compared to $4,748 for the same period in 2013. The components of this net loss and reasons for the change are explained above.

 

Plan of Operations and Cash Requirements for the Next 12 Months

 

Anticipated Cash Requirements

 

Over the next 12 months, we have estimated our minimum cash requirements (not including the costs associated with our initial and any subsequent acquisition of properties) to be as follows:

 

Cash Operating Expenses			—
Legal and accounting fees		$	84,000
General and administrative expenses		$	12,000
Corporate communications and SEC filing fees		$	18,000
Total		$	114,000

 

As our operations are currently minimal, our operating expenses are similarly limited. However, as we implement our business plan to acquire, manage and hold multifamily real estate assets, we will incur significant additional expenses related to these transactions (particularly the formation of a REIT structure and acquisitions and financings of the properties themselves) and thereafter the operations of the properties. While we expect that our acquired properties will generate sufficient cash flow to cover our operating costs related to our properties, no assurances can be given that this will in fact be the case.

 

At March 31, 2014, we had working capital of $654,338. For the next 12 months, we estimate minimum cash requirements of $114,000 to fund on-going operations before consideration of operating revenues and expenses related to any properties that may be acquired during the next 12 months.

 

Liquidity and Capital Resources

 

Our financial position as at March 31, 2014 and December 31, 2013 and the changes for the three months then ended are as follows:

 

Working Capital

 

		As of March 31, 2014				As of December 31, 2013
Current Assets		$	745,375			$	735,488
Current Liabilities			91,295				30,627
Working Capital (Deficit)		$	654,338			$	704,861	)

 

As of March 31, 2014 we had $687,742 in cash and cash equivalents. Working capital decreased by $50,523 from December 31, 2013 to March 31, 2014. The decrease resulted from cash used for operating expenses and accrued interest expense exceeding accrued interest income by approximately $22,000.

 

 

Cash Flows

 

		3 Months Ended March 31, 2014				3 Months Ended March 31, 2013
Net cash (used in) Operating Activities		$	(36,675	)		$	(13,501	)
Net cash (used in) Investing Activities			0				0
Net cash provided by Financing Activities			200,000				20,000
Increase in Cash during the Period			163,325				6,499
Cash, Beginning of Period			524,417				1,065
Cash, End of Period		$	687,742			$	7,564

 

Our net cash used in operating activities increased by $23,170 from the three month period ended March 31, 2013 to the same three month period in 2014. The net loss for the three months ended March 31, 2014 increased by $46,033 over the same period in the prior year and the increase was primarily related to professional fees and the interest accrual on the 12% convertible debt in excess of interest income accrual on the deposit for the purchase of the Cambridge apartments.

 

In order to effectuate our business plan of acquiring multi-family properties and operating as a REIT, we we will be required to raise substantial additional capital through a debt and/or equity financing both at the company level as well as on specific assets. We can provide no assurance that we will be able to consumate such financings on favorable terms or at all. These conditions raise substantial doubt about our ability to continue as a “going concern”.

 

Off-Balance Sheet Arrangements

 

As of March 31, 2014, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

We are a smaller reporting company and therefore are not required to provide the information for this item for Form 10-Q.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this Report, our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”), conducted evaluations of our disclosure controls and procedures. As defined under Sections 13a – 15(e) and 15d – 15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”). Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosures.

 

 

Based on their evaluation, the Certifying Officers concluded that, as of March 31, 2014, our disclosure controls and procedures were not designed at a reasonable assurance level and were therefore ineffective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including the Certifying Officers, as appropriate, to allow timely decisions regarding required disclosure.

 

The material weakness which relate to internal control over financial reporting that was identified at March 31, 2014 that we did not have sufficient personnel staffing in our accounting and financial reporting department. As a result, we were not able to achieve adequate segregation of duties and were not able to provide for adequate review of the financial statements.

 

This control deficiency could result in a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis. However, our management believes that the material weakness identified does not result in the restatement of any previously reported financial statements or any other related financial disclosure, and management does not believe that the material weakness had any effect on the accuracy of our financial statements included as part of this Quarterly Report.

 

We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking action and implementing additional enhancements or improvements, as necessary and as funds allow.

 

Changes in internal control over financial reporting.

 

Except as disclosed above, there were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on the Effectiveness of Internal Controls

 

Readers are cautioned that our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our control have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

 

 

PART II- OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

Factors that could cause our actual results to differ materially from those in this report are any of the risks described in our Transition Report on Form 10-K for the three month period ended December 31, 2013 filed with the SEC on March 27, 2014, as amended on March 31, 2014 to include Item 8 disclosure. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.

 

As of the date of this Quarterly Report there have been no material changes to the risk factors disclosed in our Transition Report on Form 10-K for the three month period ended December 31, 2013 filed with the SEC, except we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

None.

 

Item 5. Other Information.

 

None.

 

 

Item 6. Exhibits.

 

No.		Description of Exhibit
31.1		Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act 0f 2002
32.2		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act 0f 2002
101.INS *		XBRL Instance Document
101.CAL *		XBRL Taxonomy Extension Calculation Linkbase Document
101.SCH *		XBRL Taxonomy Extension Schema Document
101.DEF *		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB *		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE *		XBRL Taxonomy Extension Presentation Linkbase Document

 

*

XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

SIGNATURES

 

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 hereunto duly authorized.

 

Date: May 13, 2014	RealSource Residential, Inc.
	By:	/s/ Nathan W. Hanks
	Name:	Nathan W. Hanks
	Title:	President and Chief Executive Officer
	By:	/s/ V. Kelly Randall
	Name:	V. Kelly Randall
	Title:	Chief Operating Officer and Chief Financial Officer

 

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