UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2012
Or
[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-54431
American Realty Funds Corporation
(Exact name of registrant as specified in its charter)
Tennessee		27-1952547
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
501 S. Euclid Avenue Bay City, Michigan		48706
(Address of principal executive offices)		(Zip Code)
800-613-3250
(Registrant’s telephone number, including area code)
(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  x  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date 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  x 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 (Check one):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 10,098,713 shares of common stock as of May 15, 2012.

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American Realty Funds Corporation

Table of Contents

	Page
PART I – FINANCIAL INFORMATION	1
Item 1. Financial Statements:.	2
Balance Sheets (unaudited)	2
Statements of Operations (unaudited)	3
Statements of Cash Flows (unaudited)	4
Notes to Financial Statements (unaudited)	5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of  Operations	10
Item 3. Quantitative and Qualitative Disclosure About Market Risk	14
Item 4. Controls and Procedures	14
PART II – OTHER INFORMATION	15
Item 1. Legal Proceedings.	15
Item 1A. Risk Factors.	15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3. Defaults Upon Senior Securities	15
Item 4. Mine Safety Disclosures	15
Item 5. Other Information.	15
Item 6. Exhibits	16
SIGNATURES	17

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PART I – FINANCIAL INFORMATION

Forward-Looking Information

This report on Form 10-Q contains forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “will,” “could” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.

Examples of forward-looking statements include:

·

the timing of the development of future products;

·

projections of costs, revenue, earnings, capital structure and other financial items;

·

statements of our plans and objectives;

·

statements regarding the capabilities of our business operations;

·

statements of expected future economic performance;

·

statements regarding competition in our market; and

·

assumptions underlying statements regarding us or our business.

The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. We discuss our known material risks under Item 1.A “Risk Factors contained in the Company’s Form 10-K for the fiscal year ended June 30, 2011 and our most recent Registration Statement on Form S-11. Many factors could cause our actual results to differ materially from the forward-looking statements. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

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Item 1.

Financial Statements

American Realty Funds Corporation

Balance Sheets

		March 31,				June 30,
		2012				2011
		(unaudited)
Assets
Investment in real estate assets:
Real estate subject to land contracts, less accumulated depreciation of $3,304 and $8,587, respectively		$	291,847			$	516,268
Inventory of real estate			1,676,284				28,469
Total investment in real estate assets, net			1,968,131				544,737
Cash and cash equivalents			32,646				6,986
Prepaid and other current assets			-				23,444
Due from shareholders			459,236				-
Fixed assets, less accumulated depreciation of $4,428and $4,115, respectively			-				313
Total  assets		$	2,460,013			$	575,480
Liabilities and Shareholders' Equity
Due to shareholders		$	-			$	25,285
Notes payable			2,111,921				-
Accrued liabilities			43,768				6,321
Deposit liabilities			98,110				150,900
Total liabilities			2,253,799				182,506
Commitments and contingencies
Series A preferred stock, $10 par value, 10,000,000,000 shares authorized, 0 shares issued and outstanding			-				-
Series A preferred stock, no par value, 90,000,000,000 shares authorized, 0 shares issued and outstanding			-				-
Common stock, $0.001 par value, 100,000,000 shares authorized, 10,098,713 shares issued and outstanding at March 31, 2012 and June 30, 2011.			10,099				10,099
Paid-in capital			1,129,015				1,129,015
Accumulated deficit			(932,900	)			(746,140	)
Total shareholders' equity			206,214				392,974
Total liabilities and shareholders' equity		$	2,460,013			$	575,480

See accompanying notes to the financial statements.

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American Realty Funds Corporation

Statements of Operations

		Three Months Ended March 31,								Nine Months Ended March 31,
		2012				2011				2012				2011
Net revenues		$	-			$	-			$	52,387			$	-
Operating expenses:
Salaries			25,884				26,451				73,700				68,451
Professional fees			23,570				10,925				28,570				27,208
Commission and fees			12,750				15,151				13,325				26,701
Depreciation			698				4,167				2,423				7,325
Utilities			13,481				-				14,431				-
Other operating expenses			5,954				(819	)			15,353				2,948
Total operating expenses			82,337				55,875				147,802				132,633
Operating loss			(82,337	)			(55,875	)			(95,415	)			(132,633	)
Other income (expense):
Interest expense			(58,545	)			-				(97,505	)			-
Other income (expense), net			4				(79	)			(21,039	)			(615	)
Total other income (expense)			(58,541	)			(79	)			(118,544	)			(615	)
Loss before income tax provision			(140,878	)			(55,954	)			(213,959	)			(133,248	)
Income tax provision			-				-				-				-
Net loss		$	(140,878	)		$	(55,954	)		$	(213,959	)		$	(133,248	)
Net loss per share:
Basic			(0.01	)			(0.01	)			(0.02	)			(0.01	)
Diluted			(0.01	)			(0.01	)			(0.02	)			(0.01	)
Weighted average common shares outstanding:
Basic			10,098,713				10,098,713				10,098,713				9,721,694
Diluted			10,098,713				10,098,713				10,098,713				9,721,694

See accompanying notes to the financial statements.

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American Realty Funds Corporation

Statements of Cash Flows

		Nine Months Ended March 31,
		2012				2011
Cash flows from operating activities:
Net loss		$	(213,959	)		$	(133,248	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			2,423				7,325
Gain on sale of land contract interests			20,614
Changes in assets and liabilities:
Prepaid and other current assets			23,444				1,201
Accrued liabilities			37,448				2,939
Deposit liabilities			51,009				36,678
Purchase and development of real estate properties			(1,858,718	)			(524,855	)
Net cash used in operating activities			(1,937,739	)			(609,960	)
Cash flows from investing activities:
Proceeds from sale of land contract interests			336,000				-
Purchase of fixed assets			-				(4,428	)
Net cash provided by (used in) investing activities			336,000				(4,428	)
Cash flows from financing activities:
Proceeds from notes payable			1,484,500				-
Payments on notes payable			(2,579	)			-
Due to/from shareholders, net			145,478				18,149
Proceeds from issuance of common stock			-				598,994
Net cash provided by financing activities			1,627,399				617,143
Change in cash and cash equivalents			25,660				2,755
Cash and cash equivalents, Beginning of period			6,986				5,000
Cash and cash equivalents, End of period		$	32,646			$	7,755
Noncash Financing and Investing Activities:
Capital Contribution		$	27,199			$	-
Proceeds from sale of land contract interest recorded in deposit liabilities		$	76,600			$	-
Note proceeds received directly by related party		$	630,000			$	-

See accompanying notes to the financial statements.

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American Realty Funds Corporation

Notes to Financial Statements

March 31, 2012

(Unaudited)

Note 1:  

Background and Basis of Presentation

American Realty Funds Corporation (the “Company”) was incorporated on February 22, 2010 (Date of Inception) in the State of Tennessee.  The Company focuses on acquiring, renovating and reselling residential real estate.

The accompanying unaudited financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments, consisting only of normal and recurring adjustments considered necessary for a fair statement, have been included.  The reported results of operations are not necessarily indicative of the results that may be expected for the full year.  These financial statements should be read in conjunction with the audited financial statements and accompanying notes for the fiscal year ended June 30, 2011.

Note 2:  

Going Concern and Operations

The accompanying financial statements have been prepared assuming the Company will continue as a going concern.  The Company has incurred losses, has had negative operational cash flows since inception, and has had minimal revenues.  The future of the Company is dependent upon future profitable operations and the development of the business plan.

These conditions raise substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments that might arise from this uncertainty.

Note 3:  

Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted accounting principles 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 and reported  amounts of revenues and expenses during the reporting  period.  Actual results could differ from those estimates.

Cash

The Company considers all highly liquid investments with maturities from date of purchase of three months or less to be cash equivalents. Cash consists of balances on deposit with domestic banks.  

Inventory- Residential Properties

Pre-renovated residential properties acquisitions, materials, other direct costs, interests and other indirect costs related to acquisition and renovation of the real estate properties are capitalized.  A flat renovation fee per property of $31,000 is charged by Diversified Group Partnership Management, LLC ("DGPM") which is owned by the Company’s Co-Chief Executive Officers Joel Wilson and Michael Kazee to the Company.  The fee is based on a non-arm’s length transaction between the Company and DGPM and is prorated if renovations on a property are not complete as of the end of the period.  The properties shall be renovated to a condition into which they can be sold for a price at around, or above the after repaired value estimate as estimated by the Company.  Capitalized costs of residential properties which are held for sale are recorded at the lower of its carrying amount or fair value less cost to sell.  Other costs like marketing, etc. incurred in connection with renovated real estate properties and other selling and administrative costs are charged to earnings when incurred.  If the Company has a continuing obligation to complete renovations subsequent to the sale of the property, an estimate of the costs to complete are charged to cost of sales with a corresponding liability at the time of sale.   

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The Company reviews investments in real estate assets for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The carrying amount of a long lived asset is not recoverable if it exceeds the expected sales price of such real estate assets. The amount of impairment loss, if any, is measured as the difference between the net book value of the asset and its estimated fair value.  

Revenue Recognition

Sales of the Company’s real estate property occurs through the use of a sales contract where revenues from renovated real estate property sales is recognized upon closing of the sale.  In accordance with Accounting Standard 360 Property, Plant, and Equipment, Issue 20 Real Estate Sales (“AS 360-20”), the Company uses the accrual method and recognizes revenue on the sale of its renovated properties when the earnings process is complete and the collectability of the sales price and additional proceeds is reasonably assured, which is typically when the sale of the property closes.

The Company sells most of its real estate properties through land contracts where the Company conveys to the purchaser real estate by a warranty deed if the purchaser pays a down payment on the delivery of the contract and pays the remaining sales amount over 30 years at a specified interest rate. During the time when payments are made, the purchaser has use of the real estate.  In the event of a default by the purchaser, the Company may void the contract and the property and all the payments made under the contract would be forfeited to the Company as rental for the use of the real estate and the Company may declare all amounts remaining unpaid under the contract due and payable.  In accordance with AS 360-20, the Company accounts for these Land Contract sales under the deposit method as the Company does not transfer to the purchaser all the risk and rewards of ownership of the real estate upon the sale of the property.  For a sale under the deposit method, the Company does not initially record a profit on the sale, does not record a notes receivable, continues to carry the property as an asset on it financial statements, and will recognize the down payment and subsequent monthly payments as a Deposit liability.

In accordance with AS 360-20, the Company recognizes profit on these land contracts when the earnings process is complete and the collectability of the sales price and additional proceeds is reasonably assured.  This will typically occur when the purchase price and all interest is paid in full and legal title to the property has transferred to the purchaser.

The Company also enters into sales of land contract interests where the Company transfers and delivers to the purchaser full interest in the land contracts noted above, including the transfer of full and legal title to the underlying properties and the right to receive the future payments made under the land contract.

In accordance with AS 360-20, the Company recognizes profit on these sales of land contract interests when the earnings process is complete and the collectability of the sales price and additional proceeds is reasonably assured.  This typically occurs when the purchase price and is paid in full and legal title to the property has transferred to the land contract interest purchaser.  Additionally, when the earnings process is complete, any down payments and monthly land contract income previously received and recorded as a deposit liability is recognized as revenue.  Any down payment or monthly land contract income received and recorded as a deposit liability that was borrowed from a related party is recorded as an equity recapitalization.

Net Loss per Share

Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. As the Company is in a net loss position, there are no outstanding potentially dilutive securities that would cause diluted earnings per share to differ from basic earnings per share.

Income Taxes

The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.   

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The Company applies the authoritative guidance in accounting for uncertainty in income taxes recognized in the financial statements. This guidance prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement.

Note 4:  

Investment in Real Estate Assets

Investment in real estate assets consist of residential properties held for sale and subject to land contracts.  

During the three months ended March 31, 2012, the Company acquired two properties for $42,077 and incurred renovation costs totaling $433,790.  During the nine months ended March 31, 2012, the Company acquired 50 properties for $856,323 and incurred renovation costs totaling $1,030,864.  There were five properties that were sold pursuant to land contracts during the nine months ended March 31, 2012.  As of March 31, 2012, the Company had 45 real estate inventory properties and 7 land contract properties.

In April 2011, the Company entered into three agreements for the sale of land contract interests.   The Company, upon full payment of the purchase price of the agreements, which final payments occurred in August 2011, transferred and delivered to the purchaser full interest in nine land contracts, including the transfer of full and legal title to the underlying nine properties and the right to receive the future payments made under the land contract.  The purchasers in all three agreements were limited partnerships, which consisted of general partner The Diversified Group Partnership Management, LLC, a related party, and multiple limited partners, who were not related parties to the Company.  No amounts under the agreement were paid by The Diversified Group Partnership Management, LLC.  In August 2011, the total installment payments received of $412,600 was recognized as other income and the carrying value of the underlying properties of $433,214 was recorded as other expense.  Additionally, a deposit liability of $52,387 consisting of down payments and monthly land contract payments previously received under the land contracts was recognized as revenue and a deposit liability of approximately $27,199 consisting of down payments received by the land contract purchaser that were borrowed from a related party was treated as a capital contribution.

As of March 31, 2012 the Company held 7 properties subject to land contracts with a carrying value of $291,847, which has been reclassified from the Company’s inventory of real estate and is depreciated over life of 30 years.  As of March 31, 2012, the Company has received payments that have been recorded as a deposit liability totaling $28,369.

In August 2011, the Company entered into another agreement for the sale of land contract interests in two properties subject to land contracts.  The Company, upon full payment of the purchase price of the agreement, agreed to transfer and deliver to the purchaser full interest in two land contracts, including the transfer of full and legal title to the underlying two properties and the right to receive the future payments made under the land contract.  As of March 31, 2012, full payment had been received but title to the properties was not passed to the purchaser so the Company retained the properties.  The purchaser in the agreement was a limited partnership, which consisted of general partner The Diversified Group Partnership Management, LLC, a related party, and multiple limited partners, who were not related parties to the Company.  No amounts under the agreement were paid by The Diversified Group Partnership Management, LLC.  As of March 31, 2012, the Company held a deposit liability of $69,741 relating to payments received under the agreement.  When title to the underlying properties is transferred to the purchaser, the agreement payments will be recognized as other income and the carrying value of the underlying properties of approximately $82,000 will be recorded as other expense.  Additionally, a deposit liability of approximately $9,000 consisting of down payments and monthly land contract income previously received under the land contracts will be recognized as revenue and a deposit liability of $3,610 consisting of down payments received by the land contract purchaser that were borrowed from a related party will be treated as a capital contribution.

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Note 5:  

Notes Payable

In September 2011 the Company entered into separate promissory notes with The Diversified Group Land Contract Limited Partnership # 5 (“LCLP #5”) and The Diversified Group Land Contract Limited Partnership # 6 (“LCLP #6”) for $300,000 and $250,000, respectively.  LCLP #5 and LCLP #6 both consist of general partner The Diversified Group Partnership Management, LLC, a related party, and multiple limited partners, who are not related parties to the Company and are not parties in any other Company agreements.  No amounts under the promissory notes were paid by The Diversified Group Partnership Management, LLC.  Each note has an interest rate of 9.9% and a term that ends in December 2011.  Monthly payments are required with a final balloon payment due at the end of the loan term.  Additionally, in October 2011 the promissory notes were amended to extend the due date of the final balloon payment to June 1, 2012.

In October 2011 the Company entered into the following separate promissory notes:

Note Description		Amount		Rate		Due Date
The Diversified Group Land Contract Limited Partnership #7 (“LCLP#7”)		237,500		13.68%		6/1/2012
The Diversified Group Land Contract Limited Partnership #8 (“LCLP#8”)		247,000		11.13%		6/1/2012
The Diversified Group Land Contract Limited Partnership #9 (“LCLP#9”)		450,000		11.13%		6/1/2012

Each promissory note consists of general partner The Diversified Group Partnership Management, LLC, a related party, and multiple limited partners, who are not related parties to the Company and are not parties in any other Company agreements.  No amounts under the promissory notes were paid by The Diversified Group Partnership Management, LLC.  Monthly payments are required with a final balloon payment due June 1, 2012.  

In January 2012 the Company entered into separate promissory notes with The Diversified Group Land Contract Limited Partnership # 10 (“LCLP #10”) and The Diversified Group Land Contract Limited Partnership # 11 (“LCLP #11”) for $405,000 and $225,000, respectively.  LCLP #10 and LCLP #11 both consist of general partner The Diversified Group Partnership Management, LLC, a related party, and multiple limited partners, who are not related parties to the Company and are not parties in any other Company agreements.  No amounts under the promissory notes were paid by The Diversified Group Partnership Management, LLC.  Each note has an interest rate of 11.13% and a term that ends June 1, 2012.  The proceeds from these loans were received directly by DGPM and applied towards renovations performed or to be performed by DGPM on the Company’s real estate inventory.  Any unused loan proceeds received by DGPM were held for future renovations.  

Interest expense for the three and nine months ended March 31, 2012 was $58,545 and $97,505, respectively.

Note 6:  

Income Taxes

 

Since inception the Company has been in a cumulative net loss position.  The Company had net operating loss carry forwards at March 31, 2012 of $960,099 which expire beginning in 2030.  The Company has provided a full valuation allowance for all deferred tax assets because of the uncertainty regarding the utilization of the net operating loss carryforwards.

Note 7:  

Shareholders’ Equity

On February 6, 2012 the Company filed with the Securities Exchange Commission a registration statement on Form S-11 for the registration of their Series A Preferred Stock, $10 par value.  The amount of shares to be registered is 2,500,000 at for a proposed maximum offering share price of $10 per share. The registration statement has not yet been declared effective.

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Note 8:  

Related Party Transactions

The Company entered into a sublease agreement with the Company’s shareholders to occupy their current facility.  The agreement expires July 1, 2012 and requires the Company to pay rent of $500 per month.  The Company also made improvements to facilities owned by the majority shareholder totaling $4,428 that were capitalized as part of property and equipment and were fully depreciated as of March 31, 2012. 

The Company entered into real estate sales contracts with DGPM to purchase residential real estate properties.  During the three and nine months ended March 31, 2012 the Company paid DGPM $0 and $ 8,445, respectively for one residential property.  

The Company uses DGPM to perform certain renovations on the Company’s properties.  During the three and nine months ended March 31, 2012, DGPM was paid per an agreement a set amount per property ($31,000) for renovations services of $433,790 and $1,015,864 on properties the Company owned.  These amounts have been allocated to individual properties and included in investments in real estate assets.  The labor and materials is a flat fee per property and is based on a non-arm’s length transaction between the Company and DGPM and is prorated if renovations on a property are not complete as of the end of the period.  The properties shall be renovated to a condition into which they can be sold for a price at around, or above the after repaired value estimate as estimated by the Company.  Any amount paid by the Company to DGPM that is in excess of renovations performed is recognized as due from shareholders on the balance sheet.

 

From time to time, the Company’s shareholders pay for Company-related expenses.  Such amounts are recognized as amounts due to shareholders on the balance sheet.  These amounts are payable on demand and are non-interest bearing. As of March 31, 2012, there were no amounts due to shareholders.

The Company entered into four agreements for the sale of land contract interests.  The purchasers in all four agreements were limited partnerships, which consisted of general partner The Diversified Group Partnership Management, LLC, a related party, and multiple limited partners, who were not related parties to the Company (see Note 4: Investment in Real Estate Assets).  

As of March 31, 2012, the Company entered into promissory notes with five limited partnerships, which consisted of general partner The Diversified Group Partnership Management, LLC, a related party, and multiple limited partners, who were not related parties to the Company (see Note 5: Notes Payable).  

The underwriter for the offering of the preferred shares is WR Rice Financial Services, Inc. which is owned by the Company’s Co-Chief Executive Officers who will receive 10% of the gross proceeds from the offering (see Note 7: Shareholders’ Equity).

Note 9:  

Commitments and Contingencies

The Company may from time to time be involved in legal proceedings arising from the normal course of business.  There are no pending or threatened legal proceedings as of March 31, 2012.

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Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

Except for the historical information contained in this report on Form 10-Q, the matters discussed herein are forward-looking statements. Words such as “anticipates,” “believes,” “expects,” “future,” and “intends,” and similar expressions are used to identify forward-looking statements. These and other statements regarding matters that are not historical are forward-looking statements. These matters involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed below as well as those discussed elsewhere in this report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.  This information should also be read in conjunction with our audited historical financial statements which are included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011, filed with the Securities and Exchange Commission on September 28, 2011.

 

Background Overview

We purchase, renovate and resell residential real estate in the United States.  We typically sell our properties under a land contract to buyers who do not have sufficient cash to purchase a property outright and are unable to obtain mortgage financing from third-parties. In a typical land contract transaction, we receive a negotiated amount of the purchase price upfront and the remaining portion in monthly installments. There is substantial risk that we enter into transactions with buyers who are unable to make their monthly payments as planned. In the event a buyer defaults on their agreement with us, we may decide to evict any occupants, repair the property and sell it again. There would be substantial costs involved with each eviction, renovation and resale. If buyers are unable to pay us the amount agreed and when agreed, we would be negatively impacted to an unknown extent, which would negatively impact our cash flow and ability to continue as a going concern.

The Company also enters into sales of land contract interests where the Company transfers and delivers to the purchaser full interest in the land contracts noted above, including the transfer of full and legal title to the underlying properties and the right to receive the future payments made under the land contract.   

We initially raised $598,994 in a private placement which closed on October 4, 2010.  As of March 31, 2012, we owned 45 residential real estate properties in Michigan with an initial cost basis of $788,263 and renovations costs of $888,021.

In April 2011, interests in nine of our land contracts were sold to an entity controlled by our Co-Chief Executive Officers and the land contract interest purchaser is now entitled to receive the future monthly payments stated in the land contract agreement.  Additionally, in August 2011 we entered into a similar agreement, which was not finalized as of March 31, 2012, to sell interests in our two remaining land contracts.

In September 2011, the Company entered into two promissory notes with an entity controlled by our Co-Chief Executive Officers and received $550,000.  The promissory notes are at an interest rate of 9.9% and are due June 2012.    

In October 2011, the Company entered into an agreement for services with The Diversified Group Partnership Management, LLC ("DGPM"). The agreement is for DGPM to provide materials and labor for the renovation of properties owned by the Company.  Consideration for these materials and labor is $31,000 per property.

In October 2011, the Company entered into three promissory notes with an entity controlled by our Co-Chief Executive Officers and received $934,500.  The promissory notes have interest rates that range from 11.13% to 13.68% and are due June 2012.    

In January 2012, the Company entered into two promissory notes with an entity controlled by our Co-Chief Executive Officers.  The promissory notes have interest rates of 11.13% and are due June 2012.    

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Our officers have entered into material agreements with entities they control and will continue to do so in the future, which could result in decisions adverse to our general stockholders. Our Co-Chief Executive Officers, Joel Wilson and Michael Kazee, have executed several agreements between us and companies under their control. These related party agreements contained significant conflicts of interest. Additional information relating to these and other related party transactions and conflicts of interest is contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011, filed with the Securities and Exchange Commission on September 28, 2011.

Our officers intend to enter into related party agreements in the future where significant conflicts of interest may exist. The interests of our officers differ from the interests of other stockholders and their decisions may negatively impact the value of your investment. Our officers may earn a profit from related party transactions while our investors may lose their entire investment.

Results of Operations

For the three and nine months ended March 31, 2012, we generated revenues of $0, and $52,387, respectively, on payments received from our properties subject to land contracts.  For the three and nine months ended March 31, 2012 we incurred a net loss of $140,878 and $213,959, respectively.  Our net loss for the three months ending March 31, 2012 was primarily attributable to our operating expenses which include salaries and professional fees of $49,454, interest expense on our promissory notes of $58,545.  Our net loss for the nine months ending March 31, 2012 was primarily attributable to our operating expenses which include salaries and professional fees of $102,270 and interest expense on our promissory notes of $97,505.

For the three and nine months ended March 31, 2011, we generated no revenues and had a net loss of $55,954 and $133,248, respectively, which was primarily attributable to salaries expense, professional fees and other operating expenses.

The results of operations for the three and nine months ended March 31, 2012 are not indicative of the results for any future interim period.  We expect to considerably increase our operating expenses in the future, particularly expenses in sales, marketing and general working capital. We do not expect to generate income due to the accounting required under land contracts (see Revenue Recognition below).

Critical Accounting Policies

The summary of critical accounting policies below should be read in conjunction with the Company’s accounting policies included in Note 3 to the financial statements of the Company. We consider the following accounting policies to be the most critical:

Investment in Real Estate Assets

Inventory- Residential Properties

Pre-renovated residential properties acquisitions, materials, other direct costs, interests and other indirect costs related to acquisition and renovation of the real estate properties are capitalized.  A flat renovation fee per property of $31,000 is charged by Diversified Group Partnership Management, LLC ("DGPM") which is owned by the Company’s Co-Chief Executive Officers Joel Wilson and Michael Kazee to the Company.  The fee is based on a non-arm’s length transaction between the Company and DGPM and is prorated if renovations on a property are not complete as of the end of the period.  The properties shall be renovated to a condition into which they can be sold for a price at around, or above the after repaired value estimate as estimated by the Company.  Capitalized costs of residential properties which are held for sale are recorded at the lower of its carrying amount or fair value less cost to sell.  Other costs like marketing, etc. incurred in connection with renovated real estate properties and other selling and administrative costs are charged to earnings when incurred.  If the Company has a continuing obligation to complete renovations subsequent to the sale of the property, an estimate of the costs to complete are charged to cost of sales with a corresponding liability at the time of sale.

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The Company reviews investments in real estate assets for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The carrying amount of a long lived asset is not recoverable if it exceeds the expected sales price of such real estate assets. The amount of impairment loss, if any, is measured as the difference between the net book value of the asset and its estimated fair value.

Real Estate Subject to Land Contracts

Residential properties that are sold under Land Contracts are removed from our inventory of real estate and depreciated on a straight-line basis over the term of the Land Contract.

Revenue Recognition

Sales of the Company’s real estate property will occur through the use of a sales contract where revenues from renovated real estate property sales will be recognized upon closing of the sale.  In accordance with FASB ASC 360-20, the Company will use the accrual method and recognize revenue on the sale of its renovated properties when the earnings process is complete and the collectability of the sales price and additional proceeds is reasonably assured, which is typically when the sale of the property closes.  

The Company anticipates selling most of its real estate properties through Land Contracts where the Company conveys to the purchaser real estate by a warranty deed if the purchaser pays a down payment on the delivery of the contract and pays the remaining sales amount over 30 years at a specified interest rate. During the time when payments are made, the purchaser has use of the real estate.  In the event of a default by the purchaser, the Company may void the contract and the property and all the payments made under the contract would be forfeited to the Company as rental for the use of the real estate and the Company may declare all amounts remaining unpaid under the contract due and payable.  In accordance with FASB ASC 360-20, the Company will account for these Land Contract sales under the deposit method as the Company does not transfer to the purchaser all the risk and rewards of ownership of the real estate upon the sale of the property. For a sale under the deposit method, the Company will not initially record a profit on the sale, will not record a notes receivable, will continue to carry the property as an asset on it financial statements, and will recognize the down payment and subsequent monthly payments as a deposit liability.

In accordance with FASB ASC 360-20, the Company will recognize profit on these land contracts when the earnings process is complete and the collectability of the sales price and additional proceeds is reasonably assured. This will typically occur when the purchase price and all interest is paid in full and legal title to the property has transferred to the purchaser.

The Company also enters into sales of land contract interests where the Company transfers and delivers to the purchaser full interest in the land contracts noted above, including the transfer of full and legal title to the underlying properties and the right to receive the future payments made under the land contract.

In accordance with AS 360-20, the Company recognizes profit on these sales of land contract interests when the earnings process is complete and the collectability of the sales price and additional proceeds are reasonably assured.  This typically occurs when the purchase price is paid in full and legal title to the property has transferred to the land contract interest purchaser.  Additionally, when the earnings process is complete, any down payments and monthly land contract income previously received and recorded as a deposit liability is recognized as revenue.  Any down payment or monthly land contract income received and recorded as a deposit liability that was borrowed from a related party is recorded as an equity recapitalization.

Liquidity and Capital Resources

Net cash used by operating activities increased $1,327,781, or 218%, to $1,937,741 for the nine months ended March 31, 2012, compared to 609,960 for the nine months ended March 31, 2011. The increase of cash used by operating activities was attributable to an increase in purchases and renovation of real estate properties of $1,333,863.

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Net cash provided by (used in) investing activities was $336,000 and $(4,428) during the nine months ended March 31, 2012, and 2011, respectively.  Net cash provided by investing activities for the nine months ended March 31, 2012 consisted of proceeds from the sale of land contracts.  Net cash used in investing activities for the nine months ended March 31, 2011 consisted of investments in leasehold improvements.

Net cash provided by financing activities was $1,627,399 and $617,143 during the nine months ended March 31, 2012 and 2011, respectively. Net cash provided by financing activities for the nine months ended March 31, 2012 came from promissory note proceeds of $1,484,500, offset by payments on promissory notes of $2,579 and advances to shareholders of $145,478.  Net cash provided by financing activities for the nine months ended March 31, 2011 came from the proceeds of the issuance of common stock of $ 598,994, increased by advances from shareholders of $18,149.

Most of our cash has come from the issuance of shares in a private placement which closed on October 4, 2010 in which we raised $598,994, the sale of interests in nine of our land contracts in which we received $412,000, and promissory note in which we received $1,484,500.  Both the sale of land contract interests and promissory notes involved entering transactions with entities controlled by our Co-Chief Executive Officers.

Over the next 12 months, we anticipate needing at least $600,000 to acquire, renovate and sell other properties and for other operating expenses. We are totally dependent on external sources of financing for the foreseeable future. We also need $2.1 million to pay off our promissory notes which are due June 1, 2012 and are in the process of being extended for 6 months.

In the future, we plan to try and raise additional capital through the issuance of additional common shares or Series A Preferred Shares. If we issue additional common shares, our then-existing shareholders may face substantial dilution. If we issue Series A Preferred Shares, we would be obligated to pay a substantial amount of interest which would reduce our cash available for working capital, property acquisitions and renovations.  In addition, holders of Series A Preferred Shares would be entitled to be paid out of any assets we have in the event of any liquidation, dissolution or winding up of the corporation, before the holders of common share would be paid anything.

On February 6, 2012 we filed with the Securities Exchange Commission a registration statement on Form S-11 for the registration of our Series A Preferred Stock, $10 par value.  The registration statement has not yet been declared effective. The amount of shares to be registered is 2,500,000 with a proposed maximum offering share price of $10 per share. We cannot assure you that we will raise any funds pursuant to this securities offering. The underwriter for the offering of the preferred shares is WR Rice Financial Services, Inc. which is owned by our Co-Chief Executive Officers who will receive 10% of the gross proceeds from the offering.

Other than the registration of our Series A Preferred Stock mentioned above, we do not have any arrangements for any financing.  We can provide no assurances to investors that we will be able to obtain any financing when required. The only cash currently available to us is the cash in our bank account. We have no other sources of capital.

No assurance can be given that we will obtain access to capital markets in the future or that adequate financing to satisfy the cash requirements of implementing our business strategies will be available on acceptable terms.  Our inability to gain access to capital markets or obtain acceptable financing could have a material adverse effect upon the results of our operations and financial condition. Our failure to raise additional funds if needed in the future will adversely affect our business operations, which may require us to suspend our operations and lead you to lose your entire investment.

We do not expect to generate income due to the accounting required under land contracts (see Revenue Recognition). The extent of these losses will be contingent, in part, on the amount of gross profit we generate from the purchase, renovation and sale of any real estate transactions we are able to complete. It is likely that our operating losses will increase in the future and it is very possible we will never achieve or sustain profitability.

We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall or other unanticipated changes in our industry. Any failure by us to accurately make predictions would have a material adverse effect on our business, results of operations and financial condition.

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Off-balance sheet arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

Not applicable.

Item 4.

Controls and Procedures.  

Evaluation of Disclosure Controls and Procedures.  The Company’s management, with the participation of the Company’s Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2012. Based on this evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that, as of March 31, 2012 the Company’s disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to the Company’s management, including the Company’s Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

This quarterly report does not include a report of management’s assessment regarding internal control over financial reporting due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.

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PART II – OTHER INFORMATION

Item 1.

Legal Proceedings.

Not applicable.

Item 1A.

Risk Factors.

Not Applicable.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Not Applicable.

Item 3.

Defaults Upon Senior Securities.

Not Applicable.

Item 4.

Mine Safety Disclosures.

Not Applicable.

Item 5.

Other Information.

Not Applicable.

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Item 6.

Exhibits.

Exhibit	Title of
Number	Document	Location
3.1	Certificate of Incorporation	*
3.2	By-Laws	*
3.3	Articles of Amendment 2/22/10	*
3.4	Articles of Amendment 11/28/10	*
3.5	Articles of Amendment 2/6/12	**
3.6	Articles of Amendment 4/9/12	**
10.1	Agreement for Services	**
10.2	Real Estate Sales Contract	*
10.3	Management Contract	**
10.4	Form of Promissory Note	**
10.5	Schedule of Omitted Promissory Notes	**
10.6	Form of Land Contract	*
10.7	Form of Real Estate Agency Agreement	*
14.1	Code of Ethics	*
31.1	Certification of Co-Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1	Certification of Co-Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith
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 of 2002	Filed herewith

*Incorporated by reference to Registration Statement on Form S-11 filed on December 1, 2010.

**Incorporated by reference to Registration Statement on Form S-11 filed on February 6, 2012.

All other Exhibits called for by Rule 601 of Regulation S-K are not applicable to this filing. Information pertaining to our common stock is contained in our Certificate of Incorporation and By-Laws.

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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, thereunto duly authorized.

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