NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited interim financial statements of Heavenstone Corp. ("Heavenstone" or the "Company"), have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (the "SEC"), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended June 30, 2016, filed with the SEC. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the Financial Statements which substantially duplicate the disclosure contained in the audited financial statements for fiscal 2016 as reported in the Company's Annual Report on Form 10-K have been omitted.

NOTE 2. GOING CONCERN

These financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. For the three months ended September 30, 2016, the Company had an accumulated deficit of $456,009 and revenue of $0. The continuation of the Company as a going concern is dependent upon the company's continued financial support from its shareholders, the ability of the Company to obtain necessary equity financing to continue operations, and the attainment of profitable operations. These factors raise substantial doubt regarding the Company's ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

The Company intends to fund operations through equity and debt financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements for the year ending June 30, 2017.

NOTE 3.  LAND AND LAND DEVELOPMENT COSTS

Land and land development costs are carried at cost. Land development costs capitalized include costs associated with the development of the purchased land, including inspection fees and engineering fees. For the three months ended September 30, 2016, the Company had incurred $301,255 in land development costs. Also, the Company capitalized the interest costs of $42,420 incurred for the real estate projects under ASC 835-20, during the three months ended September 30, 2016.

NOTE 4. RELATED-PARTY TRANSACTIONS

Loans from Officer's Family

During the period ended September 30, 2016, the Company obtained two separate loans from the family of one of its officers, as follows:

 

 

July 2016 – $170,000. The Company obtained this loan pursuant to a loan agreement and delivered a promissory note, face amount $170,000, in consideration of such loan. Unpaid principal on such loan bears interest at 5% per annum, with principal and accrued interest due in July 2018. The proceeds from this loan were used by the Company for operating expenses.

August 2016 – $100,000. The Company obtained this loan pursuant to a loan agreement and delivered a promissory note, face amount $100,000, in consideration of such loan. Unpaid principal on such loan bears interest at 5% per annum, with principal and accrued interest due in August 2018. The proceeds from this loan were used by the Company for operating expenses.

In addition, the total outstanding balance to the family of one of its officer as of June 30, 2016 is $479,975. This balance remained unpaid and outstanding as of September 30, 2016.

Loan from Related Party

During the period ended September 30, 2016, the Company obtained a single loan from a related party, as follows:

September 2016 – $270,000. The Company obtained this loan pursuant to a loan agreement and delivered a promissory note, face amount $270,000, in consideration of such loan. Unpaid principal on such loan bears interest at 5% per annum, with principal and accrued interest due in September 2018. The proceeds from this loan were applied by the Company to operating expenses.

Loans from Majority Shareholder

The total outstanding balance to the majority shareholder as of June 30, 2016, is $2,250,000. This balance remained unpaid and outstanding as of September 30, 2016.

As of September 30 and June 30, 2016, the total outstanding short-term related party debt was $2,100,000.

As of September 30 and June 30, 2016, the total outstanding long-term related party debt was $1,169,975 and $629,975, respectively.

NOTE 5. NOTES PAYABLE

In February 2016, the Company delivered a promissory note, face amount $76,587, in payment of certain insurance premiums associated with an officers' and directors' insurance policy obtained by the Company. Unpaid principal on such loan bears interest at 6.95% per annum. Repayment of this promissory note is to be made in ten equal monthly payments of $7,904.80, beginning in March 2016.

During the three months ended September 30, 2016, the Company repaid a total of $23,173 in principal and $542 in interest. The outstanding principal as of September 30 and June 30, 2016, are $15,673 and $38,846, respectively.

As of September 30 and June 30, 2016, the total outstanding long-term notes payable was $1,050,000.

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

Jumpstart Our Business Startups Act of 2012

As a company with less than $1 billion in revenue during our last fiscal year, we qualify as an "emerging growth company", as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act). As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:

•

Only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced "Management's Discussion and Analysis of Financial Condition and Results of Operations" disclosure.

•

Reduced disclosure about our executive compensation arrangements.

•

Not having to obtain non-binding advisory votes on executive compensation or golden parachute arrangements.

•

Exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.

We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1 billion in annual revenue, we have more than $700 million in market value of our stock held by non-affiliates, or we issue more than $1 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced burdens. We have taken advantage of these reduced reporting burdens herein, and the information that we provide may be different than what you might get from other public companies in which you hold stock.

Cautionary Statement

The following discussion and analysis should be read in conjunction with our financial statements for the three months ended September 30, 2016 (unaudited) and 2015 (unaudited), included elsewhere in this Quarterly Report on Form 10-Q. The results shown herein are not necessarily indicative of the results to be expected for any future periods.

This discussion contains forward-looking statements. These forward-looking statements are based on our management's current expectations with respect to future events, financial performance and operating results, which statements are subject to risks and uncertainties, including, but not limited to, those discussed below and elsewhere in this prospectus. The risks and uncertainties discussed herein could cause our actual results to differ from the results contemplated by these forward-looking statements.

Basis of Presentation – "True" Inception Date

While our company was incorporated in the State of Nevada in June 2104, we undertook no activities until July 14, 2014. Due to our having less than one year of actual operations, we determined, for financial statement purposes, our "true" inception date to be July 14, 2014, the date of first activities. The following discussion, as well as the accompanying financial statements, is presented in accordance with such determination.

Background and Recent Developments

We are a development-stage company that was incorporated under the laws of the State of Nevada on June 13, 2014. We intend to become a large real estate development and construction company with operations in the luxury vineyard estate home construction industry, our Ranch Segment, and the hospitality industry, our Resort Segment.

 

 

Until such time as the results of our operations require us to do so, this discussion will not present separate segment information.

Ranch Segment. Since our inception, we have acquired approximately 70 acres of unimproved real estate located in Temecula, California. We intend to construct our first vineyard estate home development on this land. However, we do not currently possess sufficient capital to complete these objectives. Recently, we started the permitting process necessary to begin construction on our first estate home development.

Resort Segment. We have identified one or more parcels totaling approximately 25 acres located in Temecula on which we intend to build and operate our planned Sorrento Resort, Vineyard & Winery. However, we do not have a contract to purchase this property and we do not currently possess sufficient capital to complete these objectives.

Principal Factors Affecting Our Financial Performance

We expect that our operating results will be primarily affected by the following factors:

Expected Financial Performance

Based on our current business plan, we expect to incur operating losses through at least the first quarter of 2017. However, because we do not yet possess capital to commence operations in the Ranch Segment, we cannot predict whether we will have any estate home sales prior to the end of such period.

We are still required to obtain approximately $4.5 million in order to begin full-scale operations in our Ranch Segment and approximately $50 million in order to begin full-scale operations in our Resort Segment, which includes the construction of our planned resort property. There is no assurance that we will be successful in obtaining this needed funding.

Results of Operations

For the Three Months Ended September 30, 2016 and 2015. During the three months ended September 30, 2016 (the "Current Period"), and the three months ended September 30, 2015 (the "Prior Period"), we generated no revenues. We do not expect to generate any revenues until the second quarter of 2017, at the earliest.

For the Current Period, we incurred a net loss of $(2,016) (unaudited). For the Prior Period, we incurred a net loss of $(67,866) (unaudited). Had we not experienced a reimbursement of approximately $48,000 in consulting and related fees, our net loss for the Current Period would have been approximately $50,000. Until we begin full scale business operations, we expect the level of our quarterly expenses to be approximately $50,000.

Plan of Operations

General. We require significant funding to achieve our objectives. Sources of funding are expected to be from sources of equity or debt financing, as well as from sales of our estate homes. As with any start-up company that offers unproven products, there is no assurance that our company will be successful with any level of additional funding.

Ranch Segment. Since our inception, our Ranch Segment has acquired approximately 70 acres of unimproved real estate located in Temecula, California. Our Ranch Segment intends to construct our first vineyard estate home development on these properties.

Since acquiring these properties, we have taken, and will take, the following actions towards obtaining needed permits and approvals for the subdivision planning, construction and delivery of vineyard estate homes:

•

submit complete improvement plans to county for review and approval – expected time for approval is between four and six months;

•

three months after approval of improvements plan, commence street and other property improvements – approximately three months to complete.

•

record final tract map, upon completion of improvements;

•

submit grading and building plans for approval, upon recording final tract map – expected time for approval is approximately three months; and

 

We expect to have obtained all of the necessary permits and approvals by early 2017, at which time we will commence construction of our first vineyard estate home. However, due to the nature of this process, we cannot assure you that we will be able to accomplish these objectives by such date.

In addition, our Ranch Segment plans to offer a wide array of personal services to the owners of the estate homes during and after their being built. Because we believe that a prompt and courteous response to an estate home purchaser's needs during construction will reduce post-closing repair costs, enhance our reputation for high quality service and, ultimately, lead to referral business from our estate home purchasers, our personnel will be trained to provide exceptional service throughout the construction process, which service will be provided as part of the estate home purchase price.

Following the completion of construction and in conjunction with the sale of homes, our company is planning to provide to purchasers of our estate homes, a wide array of personal services designed to enhance the luxury estate home lifestyle. For additional fees, the following services, among others, will be made available to estate home purchasers:

 

Our Ranch Segment anticipates a long-term development of properties, generally in increments of between 10 and 50 homes, depending on the characteristics of the available properties, and to develop staff necessary to perform the planned services. On the approximately 70 acres owned by the Ranch Segment, we intend to construct the first 10 of our vineyard estate homes. We have completed a portion of the required permitting and approval process necessary to begin property improvement activities. It is anticipated that approval for our property improvements will have been obtained by the end of the third quarter of 2016, with home construction beginning during the first quarter of 2017. However, we will not be able to begin full-scale operations in our Ranch Segment, unless we first obtain approximately $4.5 million, $2 million for the completion of the required land improvements infrastructure construction and $2.5 million for the completion of our first model vineyard estate home. There is no assurance that we will be able to obtain such needed capital. Any inability to so obtain needed capital would negatively impact our ability to be successful in establishing our Ranch Segment. We do not intend to build our vineyard estate homes on speculation, that is, we do not intend to begin construction of a vineyard estate home, unless we have entered into a final, fully-funded construction contract with a purchaser.

Resort Segment. Our Resort Segment has identified, but has not entered into a purchase contract for, one or more parcels totaling 25 acres of undeveloped real estate located in Temecula, California, on which we intend to construct and operate our planned Sorrento Resort, Vineyard and Winery. Currently, we do not possess adequate capital with which to complete the purchase of the identified property. To complete the purchase of this property and construction of the resort facility, we must obtain approximately $50 million in funding. Our management estimates that such $50 million would be applied in the following manner: $7.5 million for professional, consulting and broker fees and commissions; $3.0 million for pre-market advertising and marketing; $3.5 million for other pre-market costs and working capital; $2.6 million for the purchase of land; $5.0 million for land improvements and infrastructure; $6.0 million for equipment; and $22.4 million for resort building construction. There is no assurance that we will be able to secure such funding.

Liquidity

For the Three Months Ended September 30, 2016. At September 30, 2016, we had a working capital deficit of $2,075,950 and cash of $128,664. Currently, we possess approximately $100,000 in cash.

Loans from Related Parties and Third Parties. During the Current Period, we obtained the following loans from related parties and from third parties, as follows, as follows:

July 2016 – $170,000. The Company obtained this loan pursuant to a loan agreement and delivered a promissory note, face amount $170,000, in consideration of such loan. Unpaid principal on such loan bears interest at 5% per annum, with principal and accrued interest due in July 2018. The proceeds from this loan were used by the Company for operating expenses.

August 2016 – $100,000. The Company obtained this loan pursuant to a loan agreement and delivered a promissory note, face amount $100,000, in consideration of such loan. Unpaid principal on such loan bears interest at 5% per annum, with principal and accrued interest due in August 2018. The proceeds from this loan were used by the Company for operating expenses.

September 2016 – $270,000. The Company obtained this loan pursuant to a loan agreement and delivered a promissory note, face amount $270,000, in consideration of such loan. Unpaid principal on such loan bears interest at 5% per annum, with principal and accrued interest due in September 2018. The proceeds from this loan were applied by the Company to operating expenses.

Without these loans, we would have been unable to continue our operations.

As of September 30, 2016, the total outstanding principal balance on the foregoing loans was $540,000, with another $2,570 in accrued and unpaid interest.

Other Financing. In connection our purchase of 50 acres of land in Temecula, California, in 2014, we issued a $750,000 face amount promissory note to the third-party seller of the land. The unpaid principal balance of such promissory note bears interest at 5% per annum, with payments of $3,125 due monthly until the entire principal balance has been paid. This promissory note is secured by a deed of trust in favor of the selling party.

Working Capital. At September 30, 2016, we had a working capital deficit of $2,075,950 and cash of $128,664, compared to our working capital deficit of $2,270,961 and cash of $52,592, at June 30, 2016.

We are currently pursuing $54.5 million in additional funding. With $4.5 million of such funding, our Ranch Segment would be in a position to complete required land improvements and infrastructure construction and, with $50 million of such funding, our Resort Segment would be in a position to acquire the identified parcel or parcels totaling approximately 25 acres of Temecula property, construct the resort facility and begin operations of Sorrento Resort, Vineyard and Winery. We are actively pursuing this funding, with a current focus on potential foreign sources located throughout the world, including the Republic of China (Taiwan), where our management has significant contacts. While we would prefer to obtain funds through private sales of our equity securities, it is possible that funds would be obtained through loans or a combination of loans and sales of equity securities.

As of the date of this Quarterly Report on Form 10-Q, however, we have not obtained any commitments from any person that would have our company obtaining needed capital. There is no assurance that we will ever obtain capital in amounts as would allow our Resort Segment to pursue its plan of business.

Profits from sales of our vineyard estate homes will serve as another source of capital with which to further our business development. There is no assurance that we will be successful in our efforts to sell vineyard estate homes.

To sustain our current operations, we obtained loans in the total amount of $540,000, during the Current Period. These loans accrue interest at 5% per annum, with principal and accrued interest due in July 2018 (as to $170,000), August 2018 (as to $100,000) and September 2018 (as to $270,000).

Cash Flows.

Operating Activities. During the Current Period, we used $139,500 in our operating activities. During the Prior Period, we used $57,006 in our operating activities. We expect that, until we commence full-scale operations, operations will use between $50,000 and $100,000 of cash during future three-month periods.

Investing Activities. During the Current Period, we used $301,255 in our investing activities, which was for land development costs. During the Prior Period, we used $42,593 in our investing activities for land development costs.

Financing Activities. During the Current Period, our financing activities provided $516,827 in cash, all of which was proceeds of loans from related parties and repayments of loans to third parties. During the Prior Period, our financing activities provided no cash.

Contractual Obligations

Monthly Payment Obligations. We have entered into one significant long-term obligation that require us to make monthly cash payments. In connection our purchase of 50 acres of land in Temecula, California, we issued a $750,000 face amount promissory note to the third-party seller of the land. The unpaid principal balance of such promissory note bears interest at 5% per annum, with payments of $3,125 due monthly until the entire principal balance has been paid. This promissory note is secured by a deed of trust in favor of the selling party.

 

 

Balloon Payment Obligations. In 2014, we obtained three separate loans from our majority shareholder, as follows:

•

In October 2014, we obtained a loan in the amount of $850,000 pursuant to a loan agreement and delivered a promissory note, face amount $850,000, in consideration of such loan. Unpaid principal on such loan bears interest at 5% per annum, with principal and accrued interest due in October 2016, all of which remains unpaid. The proceeds from this loan were used by us to purchase approximately 50 acres of land in Temecula, California.

•

In October 2014, we obtained a loan in the amount of $650,000 pursuant to a loan agreement and delivered a promissory note, face amount $650,000, in consideration of such loan. Unpaid principal on such loan bears interest at 5% per annum, with principal and accrued interest due in October 2016, all of which remains unpaid. The proceeds from this loan were used by us to purchase approximately 10 acres of land in Temecula, California.

•

In December 2014, we obtained a loan in the amount of $600,000 pursuant to a loan agreement and delivered a promissory note, face amount $600,000, in consideration of such loan. Unpaid principal on such loan bears interest at 5% per annum, with principal and accrued interest due in December 2016. The proceeds from this loan were used by the Company to purchase approximately 10 acres of land in Temecula, California.

Loans During Current Period. During the three months ended September 30, 2016, we obtained the following loans from related parties and from third parties, as follows:

•

In July 2016, we obtained a loan in the amount of $170,000 pursuant to a loan agreement and delivered a promissory note, face amount $170,000, in consideration of such loan. Unpaid principal on such loan bears interest at 5% per annum, with principal and accrued interest due in July 2018. The proceeds from this loan were used by us for operating expenses.

•

In August 2016, we obtained a loan in the amount of $100,000 pursuant to a loan agreement and delivered a promissory note, face amount $100,000, in consideration of such loan. Unpaid principal on such loan bears interest at 5% per annum, with principal and accrued interest due in August 2018. The proceeds from this loan were used by us for operating expenses.

•

In September 2016, we obtained a loan in the amount of $270,000 pursuant to a loan agreement and delivered a promissory note, face amount $270,000, in consideration of such loan. Unpaid principal on such loan bears interest at 5% per annum, with principal and accrued interest due in September 2018. The proceeds from this loan were used by us for operating expenses.

Without these loans, we would have been unable to continue our operations.

Critical Accounting Policies

Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the notes to our financial statements included in this prospectus. We have consistently applied these policies in all material respects. We do not believe that our operations to date have involved uncertainty of accounting treatment, subjective judgment or estimates, to any significant degree.

 

 

Uncertainties and Trends

We do not currently possess sufficient cash to commence full-scale business operations. In the future, our operations and revenues will be dependent upon the following factors, among others:

 

 

There is no assurance that our company will be able to accomplish our objectives. Our failure to do so would likely cause purchasers of our common stock to lose their entire investments in our company.

Inflation

Inflation can be expected to have an impact on our operating costs. A prolonged period of inflation could cause interest rates, wages and other costs to increase which would adversely affect our results of operations. In the current economic and political climate, no predictions can be made with respect to the future effects of inflation on our business.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that would have any current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Capital Expenditures

During the Current Period, our capital expenditures were $301,255, all of which was for land development costs.

During the Prior Period, our capital expenditures were $42,593, all of which was for land development costs.

Should we be successful in obtaining the $50 million needed for our Resort Segment to commence full-scale operations and/or should our Ranch Segment obtain approximately $4.5 million for required land improvements and infrastructure construction or experience significant sales of our vineyard estate homes, it can be expected that we would make significant capital expenditures. However, due to the uncertainty associated with our obtaining capital, we cannot predict the exact amount or timing of these potential capital expenditures.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

 

 

Item 4. Controls and Procedures.

Our management, after evaluating the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, has concluded that, as of the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were not effective to provide reasonable assurances that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and such information is accumulated and communicated to management, including the Principal Executive Officer and Principal Financial Officer as appropriate, to allow timely decisions regarding disclosures.

There was no change in our internal control over financial reporting during the quarter ended September 30, 2016, that has materially affected, or is reasonably likely to materially affect, our company's internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None.

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

During the three months ended September 30, 2016, we did not issue unregistered securities that have not been reported previously.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosure.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit No.

Description

31.1 *

Certification of Chief Executive Officer and Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 *

Certification of Chief Executive Officer and Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS **

XBRL Instance Document.

101.SCH **

XBRL Schema Document.

101.CAL **

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF **

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

101.LAB **

XBRL Taxonomy Extension Labels Linkbase Document.

101.PRE **

XBRL Taxonomy Extension Presentation Linkbase Document.

_____________________

  * filed herewith.

** furnished herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on November 14, 2016, on its behalf by the undersigned, thereunto duly authorized.

 

HEAVENSTONE CORP. By: William E.Sluss William E. Sluss Chief Financial Officer (Principal Financial Officer)