UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended July 31, 2015

 

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, 2015, 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, 2015

 

INDEX

 

		Page
PART I -- FINANCIAL INFORMATION
Item 1.	Financial Statements	F-1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4
Item 4.	Control and Procedures	4
PART II -- OTHER INFORMATION
Item 1.	Legal Proceedings	5
Item 1A.	Risk Factors	5
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5
Item 3.	Defaults Upon Senior Securities	5
Item 4.	Mine Safety Disclosures	5
Item 5.	Other Information	5
Item 6.	Exhibits	6
SIGNATURE		7

 

 

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

Condensed Consolidated Balance Sheets

 

		July 31, 2015				April 30, 2015
ASSETS		(Unaudited)
Rental property, net		$	2,266,005			$	2,289,618
Cash			14,534				17,286
Restricted cash			15,608				13,799
Accounts receivable			1,925				1,225
Total Assets		$	2,298,072			$	2,321,928
LIABILITIES AND STOCKHOLDERS DEFICIT
Mortgage payable		$	538,486			$	542,694
Related party mortgage payable			1,425,982				1,425,982
Accounts payable and accrued expenses			118,697				103,465
Security deposits			2,900				2,900
Due to shareholders			450,581				450,581
Total Liabilities			2,536,646				2,525,622
Commitments and Contingencies
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			311,575				303,972
Accumulated deficit			(550,329	)			(507,846	)
Total Stockholders' Deficit			(238,574	)			(203,694	)
Total Liabilities and Stockholders' Deficit		$	2,298,072			$	2,321,928

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

MAGNOLIA LANE INCOME FUND
Condensed Consolidated Statements of Operations
(Unaudited)
			For the three				For the three
			months ended				months ended
			July 31, 2015				July 31, 2014
REVENUE
Rental revenue		$	62,818			$	63,568
OPERATING EXPENSES
Operating costs			11,954				25,609
Professional fees			38,122				22,500
Repairs and maintenance			6,164				3,734
Depreciation			23,613				22,237
Interest expense			33,956				36,498
Total operating expenses			113,809				110,578
LOSS FROM OPERATIONS			(50,991	)			(47,010	)
OTHER INCOME
Insurance proceeds			8,508				-
NET LOSS		$	(42,483	)		$	(47,010	)
NET LOSS PER COMMON SHARE
- BASIC AND DILUTED:		$	(0.02	)		$	(0.03	)
Weighted average common shares outstanding
- basic and diluted			1,796,875				1,796,875

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

MAGNOLIA LANE INCOME FUND
Condensed Consolidated Statements of Cash Flows
(Unaudited)
		For the three				For the three
		months ended				months ended
		July 31, 2015				July 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(42,483	)		$	(47,010	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			23,613				22,237
Imputed interest			7,603				7,515
Changes in operating assets and liabilities:
Accounts receivable			(700	)			(58	)
Accounts payable and accrued expenses			15,232				42,398
Deferred income			-				(4,010	)
Net cash provided by operating activities			3,265				21,072
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash			(1,809	)			(1,219	)
Building Improvements			-				(5,871	)
Net cash used in investing activities			(1,809	)			(7,090	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from shareholders			-				(30	)
Repayments of mortgages payable			(4,208	)			(2,264	)
Net cash used in financing activities			(4,208	)			(2,294	)
NET CHANGE IN CASH			(2,752	)			11,688
Cash at beginning of period			17,286				19,379
Cash at end of period		$	14,534			$	31,067
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest		$	6,745			$	6,376
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Imputed interest on stockholder loans		$	7,603			$	7,515

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

MAGNOLIA LANE INCOME FUND

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JULY 31, 2015

(UNAUDITED)

  

NOTE 1 - ORGANIZATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in The United States of America and the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information necessary for a comprehensive presentation of financial position and results of operations. The interim results for the period ended July 31, 2015 are not necessarily indicative of results for the full fiscal year. It is management's opinion, however that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statements presentation.

 

Magnolia Lane Income Fund, formerly known as Palmerston Stock Agency, Inc.  (the “Company,” ”We,” “Ours,” “Us”), 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, Chief Financial 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. 

  

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 5)

 

NOTE 2 – SUMMARY OF ACCOUNTING POLICIES

 

Principles of consolidation

 

The accompanying unaudited condensed consolidated 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.

 

 

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 both of 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 Income Taxes Topic of the FASB Accounting Standards Codification, which provides clarification on accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, disclosure and transition. At July 31, 2015, no significant income tax uncertainties have been included in the Company’s Balance Sheets. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the Statements of Operations. No interest and penalties are present for periods open.  

  

The Company is subject to the United States federal and state income tax examinations by the tax authorities for the 2015, 2014, and 2013 tax years.

 

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, rental payments may be paid 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, 2015 and April 30, 2015, the Company had $0 and $0 in deferred revenue, respectively.

 

Segments

 

The Company operates in one segment and therefore segment information is not presented.

 

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

 

In April 2015, FASB issued Accounting Standards Update (“ASU”) No. 2015-03, “ Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”, is to simplify presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The ASU does not affect the recognition and measurement guidance for debt issuance costs. For public companies, the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

In April 2015, FASB issued Accounting Standards Update (“ASU”) No. 2015-04, “Compensation – Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets”, permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The ASU is effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

In April 2015, FASB issued Accounting Standards Update (“ASU”) No. 2015-05, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”, provides guidance to customers about whether a cloud computing arrangement includes a software license. If such an arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for it as a service contract. For public business entities, the ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early application is permitted. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition

In April 2015, FASB issued Accounting Standards Update (“ASU”) No. 2015-06, “Earnings Per Share (Topic 260): Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions”, specifies that, for purposes of calculating historical earnings per unit under the two-class method, the earnings (losses) of a transferred business before the date of a drop down transaction should be allocated entirely to the general partner. In that circumstance, the previously reported earnings per unit of the limited partners (which is typically the earnings per unit measure presented in the financial statements) would not change as a result of the dropdown transaction. Qualitative disclosures about how the rights to the earnings (losses) differ before and after the dropdown transaction occurs for purposes of computing earnings per unit under the two-class method also are required. The ASU is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Earlier application is permitted. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

NOTE 4 – GOING CONCERN

 

The accompanying consolidated 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 consolidated financial statements, the Company had an accumulated deficit of $550,329 and a stockholders’ deficit of $238,574. 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 consolidated 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 consolidated 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 5 – 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.

 

The Company recorded the contribution at carrying value. The net of $2,472,178 in assets contributed and $2,317,469 in liabilities assumed was recorded as a contribution of capital to the Company in the amount of $154,709.

 

Cash		$	13,730
Cash – escrow			6,023
Accounts receivable			15,050
Related Party note receivable			10,000
Real property, net			2,427,375
Deferred tax asset			458,324
Valuation allowance on deferred tax asset			(458,324	)
Assets contributed		$	2,472,178
Security deposits			(3,528	)
Mortgage notes payable			(2,313,941	)
Liabilities assumed		$	(2,317,469	)
Net assets contributed		$	154,709

 

NOTE 6 – RENTAL PROPERTY, NET

 

Rental Property, Net consisted of the following at July 31, 2015 and April 30, 2015:

 

		July 31, 2015				April 30, 2015
Land			120,733				120,733
Buildings			2,695,016				2,695,016
Leasehold Improvements			130,731				130,731
Accumulated Depreciation			(680,475	)			(656,862	)
Net, Real Estate Investments			2,266,005				2,289,618

 

 

As of July 31, 2015, 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

●

Mortgage Debt as of July 31, 2015: $538,486

 

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

●

Mortgage Debt as of July 31, 2015: $1,425,982

 

For the three months ended July 31, 2015 and 2014, the Company recognized revenues of $62,818 and $63,568, respectively. Rent for the three months ended July 31, 2015 and 2014 included $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, 2015 and 2014 totaled $23,613 and $22,237, respectively.

 

NOTE 7 – 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 the property located at 58 Main Street, Topsfield, Massachusetts.   The note bears interest at 6.75% per annum and is due August 26, 2019.  Monthly principle and interest payments totaling $4,320 started on September 26, 2009 and will continue through the maturity date.  The mortgage note is secured by the underlying property. At maturity, the balloon payment of $481,454 will be due in full. The remaining principal balance as of July 31, 2015 and April 30, 2015 is $538,486 and $542,694, respectively.

 

7 Grove Street

 

On January 16, 2014, the Company assumed a mortgage note payable to a third-party, unrelated to the seller, on the 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 the 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 per month.

 

Future principle requirements on long-term debt for fiscal years ending after July 31, 2015 are as follows:

 

Mortgage Payable - Related Party						Mortgage Payable
For fiscal year ending		Future Payout				For fiscal year ending		Future Payout
2016		$	-			2016		$	7,798
2017			-			2017			15,291
2018						2018			16,371
2019			-			2019			17,527
2020 and thereafter			1,425,982			2020 and thereafter			481,499
Total		$	1,425,982			Total		$	538,486

 

 

 

NOTE 8 – 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, 2015: 

 

Future Rents
2015		$	100,270
2016			37,999
2017			14,400
2018			8,400
Thereafter			-
		$	161,069

 

For the three months ended July 31, 2015, two tenants represented approximately 17% and 14% of the Company’s revenue. For the three months ended July 31, 2014, two tenants represented approximately 17% and 14% of the Company’s revenue.

 

NOTE 9 – 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.

 

An aggregate of $450,581 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, 2015 and 2014 the Company imputed interest expense of $7,603 and $7,515, respectively.

 

During the three months ended July 31, 2015 and 2014, the Company received $9,000 in rental income from Phalanx Partners, who occupies an office in one of the Company’s properties.

 

During the three months ended July 31, 2015 and 2014 the Company paid a related party $19,608 for principal and interest payments.

 

NOTE 10 - STOCKHOLDERS’ EQUITY

 

Common stock

 

Common Stock includes 200,000,000 shares authorized at a par value of $0.0001.

 

Preferred stock

 

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

 

Additional paid in Capital

 

During the three months ended July 31, 2015 the Company recorded imputed interest on stockholders loans of $7,603

 

NOTE 11 – SUBSEQUENT EVENTS

 

The Company has evaluated all events that occur after the balance sheet date through the date when the consolidated financial statements were issued to determine if they must be reported.

  

 

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. We were formed to commence business as a stock agent in the wool trade.

 

We did not commence business operations and on May 13, 2013, upon the change of control, we 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 1:8 reverse stock split (the “Stock Split”). The Amendment was effective as of August 1, 2013.

 

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, 2015, real estate that we, through our subsidiaries, owned consisted of two properties:

 

7 Grove Street, 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

●

Mortgage Debt as of July 31, 2015:  $1,425,982

 

58 Main Street, 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

●

Mortgage Debt as of July 31, 2015:  $538,486

 

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

 

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, 2015 and 2014

 

Our rental revenue for the three months ended July 31, 2015 was $62,818 as compared to $63,568 in revenue for the three months ended July 31, 2014. Operating expenses for the three months ended July 31, 2015 totaled $113,809 resulting in a loss of $50,991, as compared with operating expenses of $110,578 for the three month period ended July 31, 2014. Our operating expenses for the three months ended July 31, 2015 consisted of $11,954 in general and administrative fees, $38,122 in professional fees, $6,164 in repairs and maintenance, $23,613 in depreciation and $33,956 in interest expense.

 

Capital Resources and Liquidity

 

For the three months ended July 31, 2015 and 2014

 

As of July 31, 2015 we had $14,534 cash on hand and net cash provided by operations of $3,265. Though the Company has negative working capital of $552,819, 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, 2015, the Company has a stockholders’ deficit of $238,574. For the three months ended July 31, 2015 and 2014, the Company’s net loss was $42,483 and $47,010, respectively. The Company’s stockholders’ deficiency is primarily due to recurring losses.

 

 

Net cash provided by operating activities was $3,265 for the three months ended July 31, 2015 as compared to net cash provided by operations of $21,072 for the three months ended July 31, 2014, reflecting a decrease in accounts payable and accrued expenses.

 

Net cash used in investing activities was $1,809 for the three months ended July 31, 2015 and reflects monies paid for Building Improvements on our properties.

 

Net cash used in financing activities amounted to $4,208 for the three months ended July 31, 2015, 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, 2015 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, 2015 is $538,486.

 

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.

 

During the three months ended July 31, 2015, the Company received $9,000 in rental income from Phalanx Partners, who occupies an office in one of the Company’s properties.

 

The Company paid a related party $19,608 for principal and interest payments during the three months ended July 31, 2015.

 

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.

 

 

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.

 

 

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, 2015 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

 

 

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, 2015 furnished in XBRL).

 

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

 

 

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 16, 2015	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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