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EX-32.1 - CERTIFICATION - Huntwicke Capital Group Inc.f10q0714ex32i_magnolialane.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

S        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended July 31, 2014

 

Or

 

£        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______.

 

Commission File Number: 000-54379

 

MAGNOLIA LANE INCOME FUND


(Exact name of registrant as specified in its charter)

 

Delaware    

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employee

Identification No.)

 

7 Grove Street

Topsfield, MA 01983


(Address of principal executive offices and Zip code)

 

(978) 887-5981


(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) 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 ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock. As of September 15, 2014, there were 1,796,875 shares of common stock, par value $.0001 per share, issued and outstanding.

 

 

 

 
 

  

MAGNOLIA LANE INCOME FUND

 

FORM 10-Q

July 31, 2014

 

INDEX

 

    Page
PART I -- FINANCIAL INFORMATION  
     
Item 1. Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 2
Item 3. Quantitative and Qualitative Disclosures About Market Risk 5
Item 4. Control and Procedures 5
     
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
     
SIGNATURE 8

 

 
 

 

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “anticipate,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.

 

We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this quarterly report on Form 10-Q and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.

 

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of the quarterly report on Form 10-Q. All subsequent written and oral forward-looking statements concerning other matters addressed in this Quarterly Report on Form 10-Q and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this quarterly report on Form 10-Q.

 

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

 

CERTAIN TERMS USED IN THIS REPORT

 

Unless the context otherwise indicates, references in this report to the terms “Palmerston,” “Magnolia Lane,” “we,” “us,” “our,” and the “Company” refer to Magnolia Lane Income Fund.

 

 
 

 

PART I -- FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MAGNOLIA LANE INCOME FUND

(fka PALMERSTON STOCK AGENCY, INC.)

 

July 31, 2014

 

Index to the Consolidated Financial Statements

 

Contents   Page(s)
     
Consolidated Balance Sheets at July 31, 2014 and  April 30, 2014   F-1
     
Consolidated Statements of Operations for the three months ended  July 31, 2014 and 2013   F-2
     
Consolidated Statements of Cash Flows for the three months ended  July 31, 2014 and 2013   F-3
     
Notes to the Consolidated Financial Statements   F-4

 

1
 

 

MAGNOLIA LANE INCOME FUND
Consolidated Balance Sheets

 

   July 31,
2014
   April 30,
2014
 
   (unaudited)     
ASSETS        
           
Rental property, net  $2,382,656   $2,399,022 
Cash     31,067    19,379 
Restricted cash   16,778    15,559 
Accounts receivable   1,808    1,750 
           
Total Assets  $2,432,309   $2,435,710 
           
LIABILITIES AND STOCKHOLDERS DEFICIT          
           
Mortgage payable  $555,912   $558,176 
Related party mortgage payable   1,425,982    1,425,982 
Accounts payable and accrued expenses   64,898    22,500 
Deferred revenue   790    4,800 
Security deposits   1,700    1,700 
Due to shareholders   441,654    441,684 
           
Total Liabilities   2,490,936    2,454,842 
           
STOCKHOLDERS' DEFICIT:          
Preferred stock: par value $0.0001; 100,000,000 shares authorized;          
None issued or outstanding   -    - 
           
Common stock: par value $0.0001; 200,000,000 shares authorized;          
1,796,875 and 1,796,875 shares issued and outstanding, respectively   180    180 
Additional paid-in capital   303,624    296,109 
Accumulated deficit   (362,431)   (315,421)
           
Total Stockholders' Deficit   (58,627)   (19,132)
           
Total Liabilities and Stockholders' Deficit  $2,432,309   $2,435,710 

 

See accompanying notes to the consolidated financial statements

 

F-1
 

  

MAGNOLIA LANE INCOME FUND
Consolidated Statements of Operations
 
   For the three
months ended
July 31,
2014
   For the three
months ended
July 31,
2013
 
   (unaudited)   (unaudited) 
         
RENTAL REVENUE  $63,568   $38,887 
           
OPERATING EXPENSES          
Operating costs   25,609    15,489 
Professional fees   22,500    7,567 
Repairs and maintenance   3,734    2,861 
Depreciation   22,237    22,431 
Interest expense   36,498    32,887 
           
Total operating expenses   110,578    81,235 
           
NET LOSS  $(47,010)  $(42,348)
           
NET LOSS PER COMMON SHARE          
- BASIC AND DILUTED:  $(0.03)  $(0.02)
           
Weighted average common shares outstanding          
- basic and diluted   1,796,875    1,796,875 

 

See accompanying notes to the consolidated financial statements.

F-2
 

 

MAGNOLIA LANE INCOME FUND 

Consolidated Statements of Cash Flows

 

   For the three months  For the three months
   Ended  Ended
   July 31, 2014  July 31, 2013
   (unaudited)  (unaudited)
       
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net loss  $(47,010)  $(42,348)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:          
Depreciation and amortization   22,237    22,431 
Imputed interest   7,515    -   
Changes in operating assets and liabilities:          
Accounts receivable   (58)   3,950 
Accounts payable and accrued expenses   42,398    (26,487)
Deferred income   (4,010)   -   
Restricted cash   (1,219)   (1,803)
           
Net cash provided by (used in) operating activities   19,853    (44,257)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Building Improvements   (5,871)   -   
           
Net cash used in investing activities   (5,871)   -   
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Repayments/(proceeds) of stockholder loans   (30)   25,155 
Repayments of mortgages payable   (2,264)   (18,500)
Capital contribution   -      47,414 
           
Net cash (used in)/provided by financing activities   (2,294)   54,069 
           
NET CHANGE IN CASH   11,688    9,812 
           
Cash at beginning of year   19,379    5,621 
           
Cash at end of year  $31,067   $15,433 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:          
Cash paid for interest  $6,376   $17,500 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Assets contributed by stockholder  $-     $2,492,306 
Liabilities contributed by stockholder  $-     $2,317,469 
Imputed interest on stockholder loans  $7,515   $-   

  

See accompanying notes to the consolidated financial statements. 

F-3
 

 

MAGNOLIA LANE INCOME FUND

(fka PALMERSTON STOCK AGENCY, INC.)

 

July 31, 2014

NOTES TO FINANCIAL STATEMENTS

 

NOTE 1 – ORGANIZATION

 

Magnolia Lane Income Fund, formerly known as Palmerston Stock Agency, Inc.  (the “Company,” ”We,” “Ours,” “Us”), a development stage company, was incorporated on May 12, 2009 under the laws of the State of Delaware. The Company was originally formed to commence business as a stock agent in the wool trade.

 

On May 13, 2013, we entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Ian Raleigh and Michael Raleigh (the “Sellers”) and Magnolia Lane Financial, Inc. (the “Purchaser”), whereby the Purchaser purchased from the Sellers, 10,000,000 shares of common stock, par value $0.0001 per share, of the Company (the “Shares”), representing approximately 69.57% of the issued and outstanding shares of the Company. As a result, the Purchaser became the majority shareholder of the Company. 

In connection with the Stock Purchase Agreement, we have ceased pursuing our prior business plan and have begun focusing on our new business which is to manage and invest in real property.  Our current Chief Executive Officer and sole director, Brian Woodland, has numerous years in the real estate acquisition, syndication and asset management business. We intend to acquire real estate in small markets with high degrees of safety to provide income streams to our shareholders.  In addition, we will develop property, syndicate, manage and acquire property for capital appreciation.

 

In connection with this change of control and change of business, we have conducted a name change and reverse stock split. On August 1, 2013, we filed a Certificate of Amendment to our Articles of Incorporation to change our name from “Palmerston Stock Agency, Inc.” to “Magnolia Lane Income Fund” and to memorialize an 8 to 1 reverse stock split.

 

On August 12, 2013, the Company received approval from the Financial Industry Regulatory Authority (“FINRA”) to effectuate the Name Change and Stock Split.  FINRA also confirmed that the new stock symbol is MIFC.

 

On January 16, 2014, the Company entered into an LLC Membership Interest Purchase and Sale Agreement with Magnolia Lane Financial, Inc. (a shareholder). Pursuant to the Agreement, all rights, title and interest of two commercial real estate properties in Massachusetts were contributed to the Company. (See Note 4)

 

NOTE 2 – SUMMARY OF ACCOUNTING POLICIES

 

Basis of presentation

 

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, the rules and regulations of the United States Securities and Exchange Commission. In accordance with ASC 850-50, the consolidated financial statements for the period ended July 31, 2013 have been recast to give effect to the transaction described in Note 4 as occurring on May 13, 2013, which is the earliest date the entities were under common control.

Principles of consolidation

 

The accompanying financial statements represent the consolidated financial position and results of operations of the Company and include the accounts and results of operations of the Company and its subsidiaries. The accompanying financial statements include the active entity of Magnolia Lane Income Fund and its wholly owned subsidiaries, Walker Partners, LLC and Grove Realty Partners, LLC.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates.

 

F-4
 

 

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.

 

Restricted Cash

 

Restricted cash consists of cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements. The Company’s restricted cash is reserved for real estate taxes on its properties.

 

Concentrations

Concentration in a geographic area

The Company operates in the real estate industry and the operations are concentrated in the State of Massachusetts.

Rental Property, Net

Rental property assets are stated at cost less accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated useful lives of the asset.

 

We capitalize replacements and improvements, such as HVAC equipment, structural replacements, windows, appliances, flooring, carpeting and renovations. Ordinary repairs and maintenance, such as unit cleaning, painting and appliance repairs, are expensed when incurred.

 

Asset

Useful Life

(in years)

Building 30 years
Land Indefinite
Building Improvements 30 years

 

Net loss per common share

 

Net loss per common share is computed pursuant to section 260-10-45 of the Financial Accounting Standards Board Accounting Standards Codification. Basic net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock and potentially dilutive outstanding shares of common stock during the period.

There were no potentially dilutive shares outstanding for any periods presented.

Income Taxes

 

The Company utilizes the asset and liability method to measure and record deferred income tax assets and liabilities. Deferred tax assets and liabilities reflect the future income tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

The Company follows the provisions of Accounting for Uncertainty in Income Taxes, which clarified the accounting for uncertainties in tax positions and required that the Company recognizes in its financial statements the impact of an uncertain tax position, if that position has more likely than not chance of not being sustained on audit, based on technical merits of that position.

 

The Company is subject to the United States federal and state income tax examinations by the tax authorities for the 2014, 2013, and 2012 tax years.

 

F-5
 

 

Property Revenue Recognition

 

Our commercial property leases are for varied terms ranging from month-to-month to 3 years. Rental income is recognized on a straight-line basis over the term of the lease.

 

Rent concessions, including free rent incurred in connection with commercial property leases, are amortized on a straight-line basis over the terms of the related leases and are charged as a reduction of rental revenue.

 

Impairment of Real Estate Investments

 

The Company assesses on a regular basis whether there are any indicators that the carrying value of rental property assets may be impaired. Potential indicators may include an increase in vacancy at a property, tenant reduction in utilization of a property, tenant financial instability and the potential sale of the property in the near future. An asset is determined to be impaired if the asset’s carrying value is in excess of its estimated fair value.

 

Deferred Revenue

 

From time to time, some rental payments may be prepaid by tenants, but not earned yet by the Company. Such revenue is initially recorded as a deferred liability and is recognized as revenue once earned. As of July 31, 2014 and April 30, 2014, the Company had $790 and $4,800 in deferred revenue, respectively.

 

NOTE 3 – GOING CONCERN

 

The accompanying 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 accompanying financial statements, the Company had an accumulated deficit of $362,431. While the Company has net cash provided by operations in the current period of $19,853, its working capital deficit is $58,627. These conditions raise substantial doubt about its ability to continue as a going concern.

 

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 revenues. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern.

 

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 in existence.

 

NOTE 4 – ASSETS CONTRIBUTED

 

On December 23, 2013, a shareholder of the Company, Magnolia Lane Financial, Inc. entered into three separate LLC Membership Interest Purchase and Sale Agreements for the acquisition of two limited liability companies; Grove Realty Partners, LLC and Walker Partners, LLC. Pursuant to the Membership Interest Purchase and Sale Agreements, Magnolia Lane Financial, Inc. acquired 100% of the equity interests in Grove Realty Partners, LLC and Walker Partners, LLC.

 

Each of the entities acquired hold commercial real estate properties. More specifically,

 

Grove Realty Partners, LLC holds a single commercial property located at 7 Grove St., Topsfield, Massachusetts.
Walker Partners, LLC holds a single commercial property located at 58 Main St., Topsfield, Massachusetts.

 

Subsequent to the Membership Interest Purchase described above, on January 16, 2014, the Company entered into an LLC Membership Interest Purchase and Sale Agreement with Magnolia Lane Financial, Inc. Pursuant to the Agreement, Magnolia Lane Financial, Inc. contributed all rights, title and interest of Magnolia Lane Financial to the Company for total consideration of $3,000.

 

Because of the related party nature of this transaction, the Company recorded this as a contribution of capital. Assets and liabilities contributed were recorded at their carrying amounts at the date of the transfer. The results of operations included in the financial statements are reported as though the contribution had occurred on May 12, 2013, which is the date that common control was first established among the related parties.

 

F-6
 

 

The Company recorded the contribution at carrying value. The net of $2,492,306 in assets contributed and $2,317,469 in liabilities assumed was recorded as a contribution of capital to the Company in the amount of $174,837.

 

Cash  $13,730 
Cash - escrow   6,023 
Accounts receivable   15,050 
Related Party note receivable   10,000 
Real property, net   2,447,503 
Deferred tax asset   458,324 
Valuation allowance   (458,324)
Assets contributed  $2,492,306 
Security deposits   (3,528)
Mortgage notes payable   (2,313,941)
Liabilities assumed  $(2,317,469)
      
Net assets contributed  $174,837 

 

NOTE 5 – RENTAL PROPERTY, NET

 

Rental Property, Net consisted of the following at July 31, 2014 and April 30, 2014:

 

   July 31, 2014   April 30, 2014 
Land   280,333    280,333 
Buildings   2,535,416    2,535,416 
Leasehold Improvements   127,109    121,238 
Accumulated Depreciation   (560,202)   (537,965)
Net, Real Estate Investments   2,382,656    2,399,022 

 

As of July 31, 2014, real estate investments consisted of two properties:

 

58 Main St. Topsfield, Ma 01983

Description: 4,000 Square foot, Commercial Building
Status: Rented 100% occupancy. Lease term: 3-Year
Owner: Walker Partners, LLC
Purchase Price: $503,000
Current Mortgage Debt: $555,912

 

7 Grove St., Topsfield, Ma 01983

Description: 12,000 Square foot, Business Office, Retail and Professional Space
Status: Rented at 100% occupancy. Lease term: 3-Year
Owner: Grove Realty Partners, LLC
Purchase Price: $2.025 million
Current Mortgage Debt: $1,425,982

 

For the three month periods ending July 31, 2014 and 2013, the Company recognized rental revenues from the properties of $63,568 and $38,887, respectively. Rent for the current three-month period includes $9,000 from a related party who occupies an office in one of the Company’s properties.

 

Depreciation expense for the three month periods ended July 31, 2014 and 2013 totaled $22,237 and $22,431, respectively.

 

F-7
 

 

NOTE 6 – MORTGAGE AND RELATED PARTY NOTES PAYABLE

 

58 Main Street

 

On January 16, 2014, the Company assumed a mortgage note payable to a third-party, unrelated to the seller, on a property located at 58 Main Street, Topsfield, Massachusetts.   The note bears interest at 6.75% per annum and is due August 26, 2019.  Monthly principal and interest payments totaling $4,320 started on September 26, 2009 and will continue through the maturity date.  The mortgage note is secured by a mortgage on the property. At maturity, the balloon payment will be due in full. The remaining principal balance as of July 31, 2014 is $555,912.

 

7 Grove Street

 

On January 16, 2014, the Company assumed a mortgage note payable to a third-party, unrelated to the seller, on a property located at 7 Grove Street, Topsfield, Massachusetts.   The note bore interest at 7.9 % per annum and was scheduled to mature on September 5, 2032.  Monthly payments of $17,775 started on October 5, 2008.  The mortgage note was secured by a mortgage on the property. At maturity, the balloon payment was to be due in full.

 

On April 12, 2014, the mortgage note payable on the property at 7 Grove Street was paid in full by a shareholder. On that same date, a new mortgage payable was established between the Company and its majority shareholder for an amount equal to the balance that was remaining on the original mortgage.  The new related party mortgage payable began on April 12, 2014 and is a 5-year fixed loan at 5.5% interest, with a balloon payment on May 15, 2019 for the outstanding balance.  Interest only payments began on May 15, 2014 in the amount of $6,536.

 

Future principal requirements on long-term debt for fiscal years ending after July 31, 2014 are as follows:

 

Related Party Mortgage Payable   Mortgage Payable 
For fiscal year ending   Future Payout   For fiscal year ending   Future Payout 
 2015    --    2015    11,083 
 2016    --    2016    14,186 
 2017    --    2017    15,291 
 2018    1,425,982    2018    16,371 
 2019    --    2019    17,527 
 2020 and thereafter    --    2020 and thereafter    481,454 
 Total   $1,425,982    Total   $555,912 

 

NOTE 7 – FUTURE RENTS AND TENANT CONCENTRATION

The Company’s revenue is derived from property leases with varied lease terms. The following table represents future minimum rents to be received under non-cancelable leases with terms of twelve months or more as of July 31, 2014:

Future Rents 
 2015   $114,150 
 2016   $93,457 
 2017   $11,172 
 Thereafter   $--- 
     $218,779 

 

For the three months ended July 31, 2014, two tenants represented approximately 17% and 14% of the Company’s revenue. 

 

NOTE 8 – RELATED PARTY TRANSACTIONS

 

Related parties to the Company include, but are not limited to, officers, directors, and shareholders. From time to time, the Company receives loans and advances from Phalanx Partners and WS Advantage LP for working capital purposes. Phalanx Partners and WS Advantage LP formerly held equity interests in Grove Realty Partners, LLC and Walker Partners, LLC and are currently shareholders and controlled by the Company’s president.

 

F-8
 

 

An aggregate of $441,684 has been received from related parties for working capital purposes and debt and expenses paid on the Company’s behalf. These advances are interest-free and payable upon demand. During the three months ended July 31, 2014 and July 31, 2013, the Company has imputed interest on the notes at a rate of 6.75 percent totaling $7,515 and $0 respectively.

 

During the three months ended July 31, 2014, the Company received $9,000 in rental income from Phalanx Partners, who occupies an office in one of the Company’s properties.

 

NOTE 9 – STOCKHOLDERS’ EQUITY

 

Preferred stock

 

Preferred stock includes 100,000,000 shares authorized at a par value of $0.0001, of which none are issued or outstanding.

Common stock

 

Common Stock includes 200,000,000 shares authorized at a par value of $0.0001, of which 10,000,000 have been issued for the amount of $1,000 on May 12, 2009 to the Company’s officers as founders’ shares.

 

On May 13, 2013, we entered into a stock purchase agreement with Ian Raleigh and Michael Raleigh (the “Sellers”) and Magnolia Lane Financial, Inc. (the “Purchaser”), whereby the Purchaser purchased from the Sellers, 10,000,000 shares of common stock, par value $0.0001 per share, of the Company (the “Shares”), representing approximately 69.57% of the issued and outstanding shares of the Company. As a result, the Purchaser became the majority shareholder of the Company. 

 

On July 22, 2013, the Company authorized a 1:8 reverse split of its common shares. Prior to the split, the Company had 14,375,000 shares and post-split shares outstanding are 1,796,875.

 

Capital Contribution

 

As a result of the contribution of member interests of Grove Realty Partners, LLC and Walker Partners, LLC on January 16, 2014, the Company recorded $174,837 as contributed capital, representing the net of assets acquired and liabilities assumed.

 

During the three months ended July 31, 2014, the Company recorded $7,515 as an in-kind contribution of interest imputed on shareholder loans.

 

NOTE 10 – 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.

 

F-9
 

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following plan of operation provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto. This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our predictions.

 

Plan of Operations

 

Magnolia Lane Income Fund was incorporated in the state of Delaware on May 12, 2009 under the name Palmerston Stock Agency, Inc. We were formed to commence business as a stock agent in the wool trade.

 

On May 13, 2013, upon the change of control, we ceased this business operation and changed our business to a business plan that is focused on managing real property. Specifically, we intend to acquire real estate in small markets with high degrees of safety to provide income streams to our shareholders. In addition, we will develop property, syndicate, manage and acquire property for capital appreciation.

 

In connection with this change of control and change of business, we have conducted a name change and reverse stock split. On August 1, 2013 we filed a Certificate of Amendment to our Articles of Incorporation (the “Amendment”) to change its name from “Palmerston Stock Agency, Inc.” to “Magnolia Lane Income Fund” (the “Name Change”) and to memorialize a 8 to 1 reverse stock split (the “Stock Split”). The Amendment was effective as of August 1, 2013. A copy of the Amendment is attached to this Quarterly Report on Form 10-Q as Exhibit 3.3.

 

On August 12, 2013, the Company received approval from the Financial Industry Regulatory Authority (“FINRA”) to effectuate the Name Change and Stock Split. FINRA also confirmed that the new stock symbol is MIFC.

 

On December 23, 2013, a shareholder of ours, Magnolia Lane Financial, entered into three separate LLC Membership Interest Purchase and Sale Agreements for the acquisition of two limited liability companies, Grove Realty Partners, LLC and Walker Partners, LLC (the “Acquisition Agreements”). Pursuant to the Acquisition Agreements, Magnolia Lane Financial acquired 100% of the equity interests in Grove Realty Partners, LLC and Walker Partners, LLC. As consideration for the acquisition, Magnolia Lane Financial transferred 134,574 shares of our Common Stock to WS Advantage and Phalanx Wealth Management (the “Consideration Shares”). For purposes of the Acquisition Agreements, the parties valued the shares at $16.60 per share for a total purchase price of $2,233,928. Prior to this transaction, Magnolia Lane Financial owned 1,250,000 shares of our common stock and now owns 1,115,426 shares of our common stock. WS Advantage, LP owns 115,347 shares of our common stock and Phalanx Partners, LLC owns 19,227 shares of our common stock.

 

Subsequently, on January 16, 2014, we entered into an LLC Membership Interest Purchase and Sale Agreement with Magnolia Lane Financial, Inc. (the “Agreement”). Pursuant to the Agreement, we acquired all rights, title and interest to all assets of Magnolia Lane Financial, including the assets acquired in the Acquisition Agreements, for a total purchase price of $3,000.

 

As of July 31, 2014, real estate investments consisted of two properties:

 

7 Grove St., Topsfield, Ma 01983

 

  Description:   12,000 Square foot, Business Office, Retail and Professional Space

  Status: Rented at 100% occupancy. Lease term: 3-Year

  Owner: Grove Realty Partners, LLC

  Purchase Price:  $2.025 million

  Current Mortgage Debt:  $1,425,982

 

2
 

 

58 Main St. Topsfield, Ma 0198.

 

  Description:  4,000 Square foot, Commercial Building

  Status:  Rented 100% occupancy. Lease term: 3-Year

  Owner: Walker Partners, LLC
  Purchase Price:  $503,000

  Current Mortgage Debt:  $555,912

  

For the three month period ending July 31, 2014, the Company recognized revenues of $63,568 which includes $9,000 from a related party who occupies an office in one of the Company’s properties.

 

Depreciation expense for the three months ended July 31, 2014 totaled $22,237.

 

Limited Operating History

 

We have only begun generating modest revenue, have a limited financial history and have limited capital. Our business is subject to risks inherent in growing an enterprise, including limited capital resources and possible rejection of our business model and/or sales methods.

 

Going Concern

 

We have only recently begun earning revenues from operations. The Company has an accumulated deficit of $362,431 and negative working capital of $58,627. These conditions raise substantial doubt about its ability to continue as a going concern.

 

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 revenues. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern.

 

Results of Operations

 

For the three months ended July 31, 2014 and 2013

 

Our rental revenue for the three months ended July 31, 2014 reflects the contribution of rental properties to the Company on January 16, 2014. Revenues were $63,568 as compared to $38,887 in revenue for the three months ended July 31, 2013. The increase in rental revenue was primarily the result of a full three months of operations being reflected in the current period, versus the prior period which reflects revenues earned from the date of common control of May 12, 2013 to July 31, 2013. We have also increased occupancy in one of our properties in the current period resulting in an increase in revenue of approximately $3,000 per month. Operating expenses for the three months ended July 31, 2014 totaled $110,578 resulting in a loss of $47,010, as compared with operating expenses of $42,348 for the three month period ended July 31, 2013. Our operating expenses for the three months ended July 31, 2014 consisted of $25,609 in general and administrative fees, $22,500 in professional fees, $3,734 in repairs and maintenance, $22,237 in depreciation and $36,498 in interest expense.

 

Capital Resources and Liquidity

 

As of July 31, 2014 we had $31,067 cash on hand and net cash provided by operations of $19,853. Though the Company has negative working capital of $58,627, management believes our increasing cash provided by operations and the availability of loans from related parties will be adequate to sustain our operations at the current level for the next twelve months. Should we not be able to meet our current financial needs, the Company will seek alternative methods of financing, such as issuing convertible debt or introducing additional shares of its common stock into the market.

 

As of July 31, 2014, the Company has a stockholders’ deficit of $58,627. For the three months ended July 31, 2014 and 2013, the Company’s net loss was $47,010 and $42,348, respectively. The Company’s stockholders’ deficiency is primarily due to interest expense and general administrative expenses.

 

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Net cash provided by operating activities was $19,853 for the three months ended July 31, 2014 as compared to net cash used in operations of $(21,102) for the three months ended July 31, 2013, reflecting an increase in occupancy and rental rates.

 

Net cash used in investing activities was $5,871 for the three months ended July 31, 2014 and reflects monies paid for Building Improvements on our properties.

 

Net cash used in financing activities amounted to $2,294 for the three months ended July 31, 2014, representing the amount paid against the principle balances of our mortgages.

 

Our principal sources of liquidity include cash from rental revenue and loans from shareholders to cover mortgage obligations.

 

Mortgage Obligations

 

On January 16, 2014, the Company assumed a mortgage note payable to a third-party, unrelated to the seller, on a property located at 7 Grove Street, Topsfield, Massachusetts.   The note bears interest at 7.9 % per annum and matures on September 5, 2032.  Monthly payments of $17,775 started on October 5, 2008 and the mortgage note is secured by a mortgage on the property. At maturity, the balloon payment will be due in full.

 

Effective April 12, 2014, the Company refinanced the mortgage at 7 Grove Street.  The new mortgage is a 5-year fixed loan at 5.5% interest, with a balloon payment on May 15, 2019 for the outstanding balance.  Interest only payments will begin on May 15, 2014 in the amount of $6,536. The remaining principal balance as of July 31, 2014 is $1,425,982.

 

On January 16, 2014, the Company acquired a mortgage note payable to a third-party, unrelated to the seller, on a property located at 7 Grove Street, Topsfield, Massachusetts.   The note bears interest at 6.75% per annum and is due August 26, 2019.  Monthly payments of $4,320 started on September 26, 2009.  The mortgage note is secured by a mortgage on the property. At maturity, the balloon payment will be due in full. The remaining principal balance as of July 31, 2014 is $555,912.

 

Related Party Loans

 

From time to time, the Company receives loans and advances from Phalanx Partners and WS Advantage LP for working capital purposes.  Phalanx Partners and WS Advantage LP formerly held equity interests in Grove Realty Partners, LLC and Walker Partners, LLC and are currently controlled by the Company’s president and are shareholders.

 

An aggregate of $4,929 was received by related parties during the three months ended July 31, 2014 for working capital purposes and debt and expenses paid on the Company’s behalf.

 

During the three months ended July 31, 2014, the Company received $9,000 in rental income from Phalanx Partners, who occupies an office in one of the Company’s properties.

 

Recent Accounting Pronouncements

 

There are no new accounting pronouncements that are expected to have a material impact on the Company's financial position or results of operations.

 

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Critical Accounting Policies and Estimates

 

Rental Property, Net

 

Rental property assets are stated at cost less accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated useful lives of the asset.

 

We capitalize replacements and improvements, such as HVAC equipment, structural replacements, windows, appliances, flooring, carpeting and renovations. Ordinary repairs and maintenance, such as unit cleaning, painting and appliance repairs, are expensed when incurred.

 

Asset  

Useful Life

(in years)

Building   30 years
Land   Indefinite
Building Improvements   30 years

 

Impairment of Real Estate Investments

 

The Company assesses on a regular basis whether there are any indicators that the carrying value of rental property assets may be impaired. Potential indicators may include an increase in vacancy at a property, tenant reduction in utilization of a property, tenant financial instability and the potential sale of the property in the near future. An asset is determined to be impaired if the asset’s carrying value is in excess of its estimated fair value.

 

Off Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Smaller reporting companies are not required to provide the information required by this item.

 

Item 4. Controls and Procedures

 

Disclosure of controls and procedures.

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports, filed under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, 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 design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

As required by the SEC Rule 13a-15(b), we carried out an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level  due to the material weaknesses described below.

 

In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure our financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

 

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A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following material weaknesses which have caused management to conclude that as of July 31, 2014 our disclosure controls and procedures were not effective at the reasonable assurance level:

 

  (i)

lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures;

 

  (ii) inadequate segregation of duties consistent with control objectives; and

 

  (iii) ineffective controls over period end financial disclosure and reporting processes.

 

To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.

 

Changes in internal controls over financial reporting.

 

There has been no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting the Company, any of our officer or director in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 1A. Risk Factors

 

Smaller reporting companies are not required to provide the information required by this item.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None

 

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Item 6. Exhibits

 

(a) Exhibits

 

31.1 Certification of Principal Executive Officer and Principal Financial Officer of the Registrant pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1+ Certification of Principal Executive Officer and Principal Financial Officer of the Registrant pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101* Interactive Data File (Form 10-Q for the quarterly period ended July 31, 2014 furnished in XBRL).

 

+ In accordance with SEC Release 33-8238, Exhibit 32.1 is being furnished and not filed.

 

* 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, as amended, deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise not subject to liability under these sections.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  MAGNOLIA LANE INCOME FUND
   
Date:  September 15, 2014 By: /s/ Brian Woodland
    Brian Woodland
    President and Chief Financial Officer
   

(Duly Authorized Officer, Principal Executive Officer

and Principal Financial and Accounting Officer)

 

 

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