Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking
Statements
Certain
statements, other than purely historical information, including estimates, projections, statements relating to our business plans,
objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking
statements.” These forward-looking statements generally are identified by the words “believes,” “project,”
“expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,”
“may,” “will,” “would,” “will be,” “will continue,” “will likely
result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are
subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our
ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have
a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes
in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted
accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue
reliance should not be placed on such statements.
Company
Overview
We
are focused on the acquisition and rehabilitation of distressed residential properties in the United States. Our corporate offices
are located at 2375 East Camelback Road, Suite 600, Phoenix, AZ 85016 and our phone number is (602) 387-5393.
We
believe that the current housing market environment presents an unprecedented opportunity for those who have the expertise, operating
platform, technology systems and capital in place to execute an acquisition and operating strategy in a cost-effective manner.
We intend to build a geographically diversified portfolio of residential homes in target markets that we believe exhibit favorable
demographics and long-term economic trends, attractive acquisition prices, rental yields and appreciation potential. We intend
to implement a buy and renovate strategy to increase value, livability, and attractiveness, and then sell the properties or keep
them for value as rental properties.
In
furthering our business plan, we have been actively searching for capital to purchase distressed properties and build our inventory.
In 2013 and through April 2014, we sold an aggregate of $7,150,000 of our 5% unsecured promissory notes (the “5% Notes”)
for gross proceeds to us of $7,150,000. The 5% Notes accrued interest at the rate of 5% per annum are due and payable twenty four
months from their respective dates of issuance, subject to acceleration in the event of default and the 5% Notes may be prepaid,
in whole or in part, without penalty or premium.
With the money we have raised through debt financing to date
we have acquired 11 properties for a purchase price of $4,762,290. Of theses 11 properties we have sold 3 for $1,210,000. The properties
include single and multi-family residences in 3 States. We plan to recycle all the capital from these properties and purchase more
similar type assets to rehabilitate and sell. Additionally, we plan to expand our portfolio and have been looking at other major
urban markets to enter into. Our short and long-term goals are to seek out opportunistic real estate investments that meet our
underwriting criteria including twenty percent annualized returns. There is no assurance, however, that we will find the assets
that fit our parameters or that we will raise the needed capital to implement our business plan.
We will continue our efforts to secure additional financing, which is necessary to implement our business
strategy of acquiring a substantial portfolio investment properties. We plan to continue our efforts to secure financing.
Results
of Operations for the three and six months ended May 31, 2014 and 2013
Revenues
We
generated sales of $1,210,000 for the three months ended May 31, 2014, our first quarter to post revenues.. Our cost of sales
totaled $1,108,610. Our costs of sales includes: purchase price, rehabilitation, escrow, closing costs, and commissions. We achieved
a gross profit of $101,390 for the three months ended May 31, 2014 which represented a 9.2% return.
Operating
Expenses
Operating
expenses increased by $49,937 to $95,737 for the three months ended May 31, 2014 from $45,800 for the three months ended May 31,
2013. Our operating expenses for the three months ended May 31, 2014 consisted of professional fees in the amount of $36,713,
management fees and expenses of $35,621, general and administrative expenses of $17,338 and insurance expenses of $6,065. In comparison,
our operating expenses for the three months ended May 31, 2013 consisted of professional fees in the amount of $1,894, management
fees and expenses of $37,500, and general and administrative expenses of $6,406.
Operating
expenses increased by $27,057 to $145,732 for the six months ended May 31, 2014 from $116,675 for the six months ended May 31,
2013. Our operating expenses for the six months ended May 31, 2014 consisted of professional fees in the amount of $44,965, management
fees and expenses of $54,371, general and administrative expenses of $26,331, consulting fees of $12,000 and insurance expenses
of $6,065.. In comparison, our operating expenses for the six months ended May 31, 2013 consisted of professional fees in the
amount of $43,376, management fees and expenses of $50,000, general and administrative expenses of $22,299 and consulting fees
of $1,000.
We
anticipate our operating expenses will increase as we undertake our plan of operations. The increase will be attributable to administrative
and operating costs associated with the acquisition, renovation and sale of residential properties and our continued reporting
obligations with the Securities and Exchange Commission.
Interest
Expenses
Interest
expenses increased by $40,890 to $60,240 for the three months ended May 31, 2014 from $169,350 for the three months ended May
31, 2013. Interest expenses increased by $59,421 to $95,821 for the six months ended May 31, 2014 from $36,400 for the six months
ended May 31, 2013. The increase is attributable to the increase in long-term promissory notes.
On
June 13, 2013, we issued a promissory note for proceeds of $2,150,000 at an interest rate of 5% per annum. The promissory note
is unsecured and is due on June 13, 2015. On June 27, 2013, we issued a promissory note for proceeds of $500,000 at an interest
rate of 5% per annum. The promissory note is unsecured and is due on June 27, 2015. On April 21, 2014, we issued a promissory
note for proceeds of $4,500,000 at an interest rate of 5% per annum. The promissory note is unsecured and is due on April 21,
2016.
Net
Loss
We
incurred a net loss of $54,587 for the three months ended May 31, 2014, compared to a net loss of $65,150 for the three months
ended May 31, 2013. We incurred a net loss of $138,165 for the six months ended May 31, 2014, compared to a net loss of $153,075
for the six months ended May 31, 2013.
Liquidity
and Capital Resources
As
of May 31, 2014, we had total current assets of $6,551,988, consisting of cash and our real property inventory. We had current
liabilities of $2,615,903 as of May 31, 2014. Accordingly, we had a working capital of $3,936,085 as of May 31, 2014.
Operating
activities used $2,359,532 in cash for the six months ended May 31, 2014, as compared with $90,458 used for the six months ended
May 31, 2013. Our negative operating cash flow for May 31, 2014 was mainly a result of the increase in our real property inventory
and our net loss for the period.
Financing
activities for six months ended May 31, 2014 generated $4,537,353 in cash, as compared with cash flows provided by financing activities
of $100,000 for the three months ended May 31, 2013. Our positive cash flow from financing activities for the six months ended
May 31, 2014 was the result of our ability to raise debt financing.
As
of May 31, 2014, we had $2,323,869 in cash. Until we are able to sustain our ongoing operations through revenue, we intend to
fund operations through debt and/or equity financing arrangements, which may be insufficient to fund our capital expenditures,
working capital, or other cash requirements. We do not have any formal commitments or arrangements for the sales of stock or the
advancement or loan of funds at this time. There can be no assurance that such additional financing will be available to us on
acceptable terms, or at all.
Going
Concern
These
financial statements have been prepared on a going concern basis which assumes we will be able to realize our assets and discharge
our liabilities in the normal course of business for the foreseeable future. We have incurred losses since inception resulting
in an accumulated deficit of $1,483,788 as of May 31, 2014 and further losses are anticipated in the development of our business
raising substantial doubt about our ability to continue as a going concern. The ability to continue as a going concern is dependent
upon generating profitable operations in the future and/or to obtain the necessary financing to meet our obligations and repay
our liabilities arising from normal business operations when they come due. Management anticipates financing operating costs over
the next twelve months with loans and/or private placement of common stock. These financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that
might result from this uncertainty.
Critical
Accounting Policies
In
December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management
Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the
portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
We do not believe that any accounting policies currently fit this definition.
Recently
Issued Accounting Pronouncements
The company has limited operations and is considered
to be in the development stage. In the year ended February 28, 2014, the Company has elected to early adopt Accounting Standards
Update No. 2014-10,
Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements
.
The adoption of this ASU allows the company to remove the inception to date information and all references to development
stage
Off
Balance Sheet Arrangements
As
of May 31, 2014, there were no off balance sheet arrangements.
Item
4. Controls and Procedures
Disclosure
Controls and Procedures
We
conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended, or the Exchange Act, as of May 31, 2014, to ensure that information required to be disclosed
by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required
to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management,
including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that as of May 31, 2014, our disclosure controls and procedures were not effective at the reasonable assurance
level due to the material weaknesses identified and described below.
Our
principal executive officers do not expect that our disclosure controls or internal controls will prevent all error and all fraud.
Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and
our principal executive officers have determined that our disclosure controls and procedures are effective at doing so, a control
system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of
the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. 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 the Company
have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual
a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future
conditions.
Remediation
Plan to Address the Material Weaknesses in Internal Control over Financial Reporting
A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or
detected on a timely basis. Management identified the following three material weaknesses that have caused management to conclude
that, as of May 31, 2014, our disclosure controls and procedures, and our internal control over financial reporting, were not
effective at the reasonable assurance level:
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We
do not have written documentation of our internal control policies and procedures. Written
documentation of key internal controls over financial reporting is a requirement of Section
404 of the Sarbanes-Oxley Act as of the period ending May 31, 2014. Management evaluated
the impact of our failure to have written documentation of our internal controls and
procedures on our assessment of our disclosure controls and procedures and has concluded
that the control deficiency that resulted represented a material weakness.
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We
do not have sufficient segregation of duties within accounting functions, which is a
basic internal control. Due to our size and nature, segregation of all conflicting duties
may not always be possible and may not be economically feasible. However, to the extent
possible, the initiation of transactions, the custody of assets and the recording of
transactions should be performed by separate individuals. Management evaluated the impact
of our failure to have segregation of duties on our assessment of our disclosure controls
and procedures and has concluded that the control deficiency that resulted represented
a material weakness.
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Effective
controls over the control environment were not maintained. Specifically, a formally adopted
written code of business conduct and ethics that governs our employees, officers, and
directors was not in place. Additionally, management has not developed and effectively
communicated to employees its accounting policies and procedures. This has resulted in
inconsistent practices. Further, our Board of Directors does not currently have any independent
members and no director qualifies as an audit committee financial expert as defined in
Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive
effect across the organization, management has determined that these circumstances constitute
a material weakness.
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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. 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.
To
remediate the material weakness in our documentation, evaluation and testing of internal controls we plan to engage a third-party
firm to assist us in remedying this material weakness once resources become available.
We
intend to remedy our material weakness with regard to insufficient segregation of duties by hiring additional employees in order
to segregate duties in a manner that establishes effective internal controls once resources become available.
Changes
in Internal Control over Financial Reporting
No
change in our system of internal control over financial reporting occurred during the period covered by this report, the period
ended May 31, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.