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 September 30, 2016
[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from __________ to __________

 

Commission File No. 000-50331

 

REALSOURCE RESIDENTIAL, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		98-0371433
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

2089 East Fort Union Blvd., Salt Lake City, Utah		84121
(Address of Principal Executive Offices)		(Zip Code)

 

(801) 601-2700

(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 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 [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.

 

[  ]	Large accelerated filer	[  ]	Accelerated filer
[  ]	Non-accelerated filer	[X]	Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange ct): Yes [X] No [  ]

 

As of November 11, 2016, the registrant had 15,719,645 shares of common stock outstanding.

 

 

 

RealSource Residential, Inc.

 

Quarterly Report on Form 10-Q

 

TABLE OF CONTENTS

 

		Page
Cautionary Note Regarding Forward-Looking Statements		-ii-
PART 1-FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	F-1
	Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015	F-2
	Statements of Operations for the nine and three months ended September 30, 2016 and 2015 (Unaudited)	F-3
	Statement of Changes in Stockholders’ Equity (Deficit) for the interim period ended September 30, 2016 (Unaudited)	F-4
	Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (Unaudited)	F-5
	Notes to Financial Statements	F-6
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	6
Item 1A.	Risk Factors	6
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6
Item 3.	Defaults Upon Senior Securities	6
Item 4.	Mine Safety Disclosures	6
Item 5.	Other Information	6
Item 6.	Exhibits	6
SIGNATURES		7

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain information set forth in this Quarterly Report on Form 10-Q, including in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere herein may address or relate to future events and expectations and as such constitutes “forward-looking statements” within the meaning of the Private Securities Litigation Act of 1995. Statements which are not historical reflect our current expectations and projections about our future results, performance, liquidity, financial condition, prospects and opportunities and are based upon information currently available to us and our management and their interpretation of what is believed to be significant factors affecting our business, including many assumptions regarding future events. Such forward-looking statements include statements regarding, among other things:

 

	●	our ability to implement our current stated business plan of acquiring, managing and holding real estate assets as a real estate investment trust;
	●	our ability to establish and maintain our brand;
	●	our ability to attract and retain key members of our management team;
	●	our future financing plans and our ability to consummate financing on favorable terms if at all;
	●	our anticipated needs for working capital;
	●	the anticipated trends in our industry;
	●	our ability to expand operational capabilities;
	●	competition existing today or that will likely arise in the future; and
	●	our ability to establish a market for our common stock and operate as a public company.

 

Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “should,” “would,” “could,” “scheduled,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “seek,” or “project” or the negative of these words or other variations on these words or comparable terminology. Actual results, performance, liquidity, financial condition and results of operations, prospects and opportunities could differ materially and perhaps substantially from those expressed in, or implied by, these forward-looking statements as a result of various risks, uncertainties and other factors. These statements may be found under the section of our Annual Report on Form 10-K for the fiscal-year ended December 31, 2015 (filed on March 30, 2016) entitled “Risk Factors” as well as in our other public filings.

 

There can be no assurance that the forward-looking statements contained herein will in fact occur. Readers should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.

 

 

RealSource Residential, Inc.

 

September 30, 2016 and 2015

 

Index to the Financial Statements

 

Contents	Page(s)
Balance Sheets at September 30, 2016 (Unaudited) and December 31, 2015	F-2
Statements Operations for the Nine and Three Months ended September 30, 2016 and 2015 (Unaudited)	F-3
Statement of Changes in Stockholders’ Equity (Deficit) for the Interim Period ended September 30, 2016 (Unaudited)	F-4
Statements of Cash Flows for the Nine Months ended September 30, 2016 and 2015 (Unaudited)	F-5
Notes to the Financial Statements (Unaudited)	F-6

 

 

RealSource Residential, Inc.

Balance Sheets

 

		September 30, 2016				December 31, 2015
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash		$	38,222			$	180,384
Interest receivable - related party			-				364,784
Total Current Assets			38,222				545,168
Deposits - related party			-				1,562,636
Investments			-				475,000
Total Assets		$	38,222			$	2,582,804
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable		$	4,390			$	-
Accrued interest			-				567,416
Total Current Liabilities			4,390				567,416
LONG-TERM LIABILILTIES:
Convertible notes payable			-				2,310,000
Total Long Term Liabilities			-				2,310,000
Total Liabilities			4,390				2,877,416
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock par value $0.001: 100,000,000 shares authorized; none issued or outstanding			-				-
Common stock par value $0.001: 100,000,000 shares authorized; 15,719,645 and 11,975,645 shares issued and outstanding			15,719				11,975
Additional paid-in capital			7,586,426				7,215,770
Accumulated deficit			(7,568,313	)			(7,522,357	)
Total Stockholders' Equity (Deficit)			33,832				(294,612	)
Total Liabilities and Stockholders' Equity (Deficit)		$	38,222			$	2,582,804

 

See accompanying notes to the financial statements.

 

 

RealSource Residential, Inc.

Statements of Operations

 

		For the 9 Months				For the 9 Months				For the 3 Months				For the 3 Months
		Ended				Ended				Ended				Ended
		September 30, 2016				September 30, 2015				September 30, 2016				September 30, 2015
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Revenue from equity investments in real estate		$	3,666			$	83,149			$	-			$	9,788
Operating expenses:
Professional fees			34,259				47,700				3,390				14,000
General and administrative expenses			10,623				15,700				-				3,446
Total operating expenses			44,882				63,400				3,390				17,446
Income (loss) from operations			(41,216	)			19,749				(3,390	)			(7,659	)
Other (income) expense:
Interest and finance charges			32,210				207,330				-				69,870
Interest income			(27,470	)			(133,951	)			(13	)			(46,576	)
Other (income) expense, net			4,740				73,379				(13	)			23,294
Income (loss) before income tax provision			(45,956	)			(53,630	)			(3,377	)			(30,952	)
Income tax provision			-				-				-				-
Net income (loss)		$	(45,956	)		$	(53,630	)		$	(3,377	)		$	(30,952	)
Earings per share:
- Basic and diluted		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.00	)
Weighted average common shares outstanding:
- Basic and diluted			15,255,015				11,975,645				15,719,645				11,975,645

 

See accompanying notes to the financial statements.

 

 

RealSource Residential, Inc.

Statement of Changes in Stockholders' Equity (Deficit)

For the Interim Period Ended September 30, 2016

(Unaudited)

 

		Common Stock Par Value $0.001								Additional								Total
		Number of Shares				Amount				Paid-in Capital				Accumulated Deficit				Stockholders'Equity (Deficit)
Balance, December 31, 2014			11,975,645			$	11,975			$	7,215,770			$	(7,346,609	)		$	(118,864	)
Net loss															(175,748	)			(175,748	)
Balance, December 31, 2015			11,975,645				11,975				7,215,770				(7,522,357	)			(294,612	)
Common issued for debt			3,744,000				3,744				370,656								374,400
Net loss															(45,956	)			(45,956	)
Balance at September 30, 2016			15,719,645			$	15,719			$	7,586,426			$	(7,568,313	)		$	33,832

 

See accompanying notes to the financial statements.

 

 

RealSource Residential, Inc.

Statements of Cash Flows

 

		For the 9 Months				For the 9 Months
		Ended				Ended
		September 30, 2016				September 30, 2015
		(Unaudited)				(Unaudited)
Cash flows from operating activities:
Net loss		$	(45,956	)		$	(53,630	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Revenue from equity investments in real estate			(3,666	)			(83,149	)
Changes in operating assets and liabilities:
Interest receivable			364,784				(118,369	)
Accounts payable and accrued interest			(8,627	)			195,330
Net cash provided by (used in) operating activities			306,535				(59,818	)
Cash flows from investing activities:
Distributions from investments			3,666				23,798
Refund of deposit			1,537,637				-
Net cash provided by investing activities			1,541,303				23,798
Cash flows from financing activities:
Repayment of notes payable			(1,990,000	)			-
Net cash used in financing activities			(1,990,000	)			-
Net change in cash			(142,162	)			(36,020	)
Cash at beginning of reporting period			180,384				230,172
Cash at end of reporting period		$	38,222			$	194,152
Supplemental disclosure of cash flows information:
Interest paid		$	42,225			$	-
Income tax paid		$	-			$	-
Supplemental disclosure of noncash financing activities:
Conversion of notes payable and accrued interest to 3,744,000 shares of common stock		$	374,400			$	-
Distribution of investments and option in final settlement of accrued interest		$	500,000			$	-

 

See accompanying notes to the financial statements.

 

 

RealSource Residential, Inc.

September 30, 2016 and 2015

Notes to the Financial Statements

(Unaudited)

 

Note 1 - Organization and Operations

 

Upstream Biosciences, Inc.

 

Upstream Biosciences, Inc. ("Upstream Biosciences") was incorporated on March 20, 2002 under the laws of the State of Nevada. Upstream Biosciences engaged in developing technology relating to biomarker identification, disease susceptibility and drug response areas of cancer.

 

Change in Control

 

On May 24, 2013, Charles El-Moussa and Six Capital Limited (“Six Capital”) (collectively, the “Sellers”), as majority stockholders of Upstream Biosciences, Inc., a Nevada corporation, and RealSource Acquisitions Group, LLC, a Utah limited liability company, and Chesterfield Faring Ltd., a New York corporation (collectively, the “Purchasers”), entered into a Securities Purchase Agreement (the “Agreement”) pursuant to which the Sellers agreed to sell to the Purchasers an aggregate of 10,778,081 shares (representing approximately 90% of the issued and outstanding voting securities of the Company) of common stock of the Company (the “Common Stock”) for $175,000 in cash from the personal funds of the Purchasers.

 

RealSource Residential, Inc.

 

On July 11, 2013, Upstream Biosciences entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which Upstream Biosciences merged with its newly formed, wholly owned subsidiary, RealSource Residential, Inc., a Nevada corporation (“Merger Sub” and such merger transaction, the “Merger”) with the Company remaining as the surviving corporation under the name “RealSource Residential, Inc.” (the “Surviving Company” or the “Company”). Upon the consummation of the Merger, the separate existence of Merger Sub ceased and shareholders of the Company became shareholders of the surviving company named RealSource Residential, Inc. The Merger was effective on Monday, July 15, 2013 and was approved by the Financial Industry Regulatory Authority on August 5, 2013.

 

Note 2 - Significant and Critical Accounting Policies and Practices

 

The Management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness of accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. The Company’s significant and critical accounting policies and practices are disclosed below as required by generally accepted accounting principles.

 

Basis of presentation

 

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules of the Securities Exchange Commission.

 

Use of Estimates and Assumptions and Critical Accounting Estimates and Assumptions

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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(s) of the financial statements and the reported amounts of revenues and expenses during the reporting period(s).

 

Critical accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates and assumptions affecting the financial statements were:

 

 

	(i)	Assumption as a going concern: Management assumes 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;
	(ii)	Valuation allowance for deferred tax assets: Management assumes that the realization of the Company’s net deferred tax assets resulting from its net operating loss (“NOL”) carry–forwards for Federal income tax purposes that may be offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company has incurred recurring losses, (b) general economic conditions, and (c) its ability to raise additional funds to support its daily operations by way of a public or private offering, among other factors.
	(iii)	Estimates and assumptions used in valuation of equity instruments: Management estimates expected term of share options and similar instruments, expected volatility of the Company’s common shares and the method used to estimate it, expected annual rate of quarterly dividends, and risk free rate(s) to value share options and similar instruments.

 

These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.

 

Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

 

Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly.

 

Actual results could differ from those estimates.

 

Fair Value of Financial Instruments

 

The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

 

Level 1		Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2		Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3		Pricing inputs that are generally observable inputs and not corroborated by market data.

 

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

 

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash, interest receivable and accounts payable and accrued liabilities, approximate their fair values because of the short maturity of these instruments.

 

The Company’s convertible notes payable approximates the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at December 31, 2015.

 

 

Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.

 

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.

 

Method of Accounting

 

Investments held in stock of entities other than subsidiaries, namely corporate joint ventures and other non-controlled entities usually are accounted for by one of three methods (i) the fair value method (addressed in Topic 320), (ii) the equity method (addressed in Topic 323), or (iii) the cost method (addressed in Subtopic 325-20). Pursuant to paragraph 323-10-05-5 the equity method tends to be most appropriate if an investment enables the investor to influence the operating or financial policies of the investee.

 

The Ability to Exercise Significant Influence

 

Pursuant to paragraph 323-10-15-6 the ability to exercise significant influence over operating and financial policies of an investee may be indicated in several ways, including but limited to the following: (a.) Representation on the board of directors, (b.) Participation in policy-making processes, (c.) Material intra-entity transactions, (d.) Interchange of managerial personnel, and (e.) Technological dependency. Pursuant to paragraph 323-10-15-8 an investment (direct or indirect) of 20 percent or more of the voting stock of an investee shall lead to a presumption that in the absence of predominant evidence to the contrary an investor has the ability to exercise significant influence over an investee. Conversely, an investment of less than 20 percent of the voting stock of an investee shall lead to a presumption that an investor does not have the ability to exercise significant influence unless such ability can be demonstrated.

 

Initial and Subsequent Measurement

 

Pursuant to Paragraph 323-10-30-2 an investor shall measure an investment in the common stock of an investee (including a joint venture) initially at cost in accordance with the guidance in Section 805-50-30. An investor shall initially measure, at fair value, a retained investment in the common stock of an investee (including a joint venture) in a deconsolidation transaction in accordance with paragraphs 810-10-40-3A through 40-5.

 

Pursuant to Section 323-10-35 under the equity method, an investor shall recognize its share of the earnings or losses of an investee in the periods for which they are reported by the investee in its financial statements rather than in the period in which an investee declares a dividend. An investor shall adjust the carrying amount of an investment for its share of the earnings or losses of the investee after the date of investment including adjustments similar to those made in preparing financial statements and shall report the recognized earnings or losses in income. An investor's share of losses of an investee may equal or exceed the carrying amount of an investment accounted for by the equity method plus advances made by the investor. An equity method investor shall continue to report losses up to the investor's investment carrying amount, including any additional financial support made or committed to by the investor and the investor ordinarily shall discontinue applying the equity method if the investment (and net advances) is reduced to zero and shall not provide for additional losses unless the investor has guaranteed obligations of the investee or is otherwise committed to provide further financial support for the investee. If the investee subsequently reports net income, the investor shall resume applying the equity method only after its share of that net income equals the share of net losses not recognized during the period the equity method was suspended. If a series of operating losses of an investee or other factors indicate that a decrease in value of the investment has occurred that is other than temporary the loss in value of an investment that is other than a temporary decline shall be recognized. Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment. A current fair value of an investment that is less than its carrying amount may indicate a loss in value of the investment. However, a decline in the quoted market price below the carrying amount or the existence of operating losses alone is not necessarily indicative of a loss in value that is other than temporary.

  

 

Disclosure

 

Pursuant to paragraph 323-10-50-3 all of the following disclosures generally shall apply to the equity method of accounting for investments in common stock:

 

	a.	Financial statements of an investor shall disclose all of the following parenthetically, in notes to financial statements, or in separate statements or schedules: (1) the name of each investee and percentage of ownership of common stock. (2) The accounting policies of the investor with respect to investments in common stock. Disclosure shall include the names of any significant investee entities in which the investor holds 20 percent or more of the voting stock, but the common stock is not accounted for on the equity method, together with the reasons why the equity method is not considered appropriate, and the names of any significant investee corporations in which the investor holds less than 20 percent of the voting stock and the common stock is accounted for on the equity method, together with the reasons why the equity method is considered appropriate. (3) The difference, if any, between the amount at which an investment is carried and the amount of underlying equity in net assets and the accounting treatment of the difference.
	b.	For those investments in common stock for which a quoted market price is available, the aggregate value of each identified investment based on the quoted market price usually shall be disclosed.
	c.	If investments in common stock of corporate joint ventures or other investments accounted for under the equity method are, in the aggregate, material in relation to the financial position or results of operations of an investor, it may be necessary for summarized information as to assets, liabilities, and results of operations of the investees to be presented in the notes or in separate statements, either individually or in groups, as appropriate.
	d.	Conversion of outstanding convertible securities, exercise of outstanding options and warrants, and other contingent issuances of an investee may have a significant effect on an investor's share of reported earnings or losses. Accordingly, material effects of possible conversions, exercises, or contingent issuances shall be disclosed in notes to financial statements of an investor.

 

Related Parties

 

The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.

 

Pursuant to Section 850-10-20 the related parties include (a.) affiliates of the Company (“Affiliate” means, with respect to any specified Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Person, as such terms are used in and construed under Rule 405 under the Securities Act); (b.) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; (c.) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; (d.) principal owners of the Company; (e.) management of the Company; (f.) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g.) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

 

The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: (a.) the nature of the relationship(s) involved; (b.) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c.) the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and (d.) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

 

Commitments and Contingencies

 

The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

 

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.

 

 

Revenue Recognition

 

The Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.

 

Deferred Tax Assets and Income Taxes Provision

 

The Company adopted the provisions of paragraph 740-10-25-13 of the FASB Accounting Standards Codification. Paragraph 740-10-25-13 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under paragraph 740-10-25-13, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Paragraph 740-10-25-13 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of paragraph 740-10-25-13.

 

The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its balance sheets and provides valuation allowances as management deems necessary.

 

Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.

 

Tax years that remain subject to examination by major tax jurisdictions

 

The Company discloses tax years that remain subject to examination by major tax jurisdictions pursuant to the ASC Paragraph 740-10-50-15. Major tax jurisdictions generally have the right to examine and audit the previous three years of tax returns filed.

 

Earnings Per Share

 

Earnings per share ("EPS") is the amount of earnings attributable to each share of common stock. For convenience, the term is used to refer to either earnings or loss per share. EPS is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16 Basic EPS shall be computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned) from income from continuing operations (if that amount appears in the income statement) and also from net income. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options or warrants.

 

Pursuant to ASC Paragraphs 260-10-45-21 through 260-10-45-23 Diluted EPS shall be based on the most advantageous conversion rate or exercise price from the standpoint of the security holder. The dilutive effect of outstanding call options and warrants (and their equivalents) issued by the reporting entity shall be reflected in diluted EPS by application of the treasury stock method unless the provisions of paragraphs 260-10-45-35 through 45-36 and 260-10-55-8 through 55-11 require that another method be applied. Equivalents of options and warrants include non-vested stock granted to employees, stock purchase contracts, and partially paid stock subscriptions (see paragraph 260–10–55–23). Anti-dilutive contracts, such as purchased put options and purchased call options, shall be excluded from diluted EPS. Under the treasury stock method: (a.) Exercise of options and warrants shall be assumed at the beginning of the period (or at time of issuance, if later) and common shares shall be assumed to be issued. (b.) The proceeds from exercise shall be assumed to be used to purchase common stock at the average market price during the period. (See paragraphs 260-10-45-29 and 260-10-55-4 through 55-5.) (c.) The incremental shares (the difference between the number of shares assumed issued and the number of shares assumed purchased) shall be included in the denominator of the diluted EPS computation.

 

 

The Company’s contingent shares issuance arrangement, stock options or warrants were as follows:

 

		Contingent shares issuance arrangement, stock options or warrants
			For the Reporting Period Ended Sep 30, 2016				For the Reporting Period Ended Dec 31, 2015
Convertible Notes Payable Shares and Related Warrant Shares
On December 9, 2013, the Company consummated the closing (the “Closing”) of a private placement offering (the “Offering”) of 231 units (“Units”) for $10,000 per Unit, for aggregate gross proceeds of $2,310,000. No placement agents or brokers were utilized by the Company in connection with the Offering. Each Unit consists of: (i) a $10,000 face value 12% Series A Senior Unsecured Convertible Promissory Note of the Company (collectively, the “Notes”) convertible into shares of Common Stock at $0.50 per share, and (ii) one detachable Common Stock Purchase Warrant (collectively, the “Warrants”) to purchase 10,000 shares (the “Warrant Shares”) of common stock of the Company (the “Common Stock”) with an exercise price of $.50 per share expiring December 9, 2020. See Note 5 for a discussion of changes in the Notes Payable Shares and Related Warrant Shares			(ii) 2,310,000				(i) 4,620,000 (ii) 2,310,000
Sub-total: convertible notes payable shares and related warrant shares			2,310,000				6,930,000
Total contingent shares issuance arrangement, stock options or warrants			2,310,000				6,930,000

 

There were no incremental common shares under the Treasury Stock Method for the reporting periods shown above.

 

Cash Flows Reporting

 

The Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, which classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (the “Indirect Method”) as defined by paragraph 230-10-45-25 of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments

 

Subsequent Events

 

The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements were issued. Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the FASB issued the FASB Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”).

 

This guidance amends the existing FASB Accounting Standards Codification, creating a new Topic 606, Revenue from Contracts with Customer. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

To achieve that core principle, an entity should apply the following steps:

 

	1.	Identify the contract(s) with the customer
	2.	Identify the performance obligations in the contract
	3.	Determine the transaction price
	4.	Allocate the transaction price to the performance obligations in the contract
	5.	Recognize revenue when (or as) the entity satisfies performance obligations

 

 

The ASU also provides guidance on disclosures that should be provided to enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue recognition and cash flows arising from contracts with customers. Qualitative and quantitative information is required about the following:

 

	1.	Contracts with customers – including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and performance obligations (including the transaction price allocated to the remaining performance obligations)
	2.	Significant judgments and changes in judgments – determining the timing of satisfaction of performance obligations (over time or at a point in time), and determining the transaction price and amounts allocated to performance obligations
	3.	Assets recognized from the costs to obtain or fulfill a contract

 

ASU 2014-09 is effective for periods beginning after December 15, 2016, including interim reporting periods within that reporting period for all public entities. Early application is not permitted.

 

In June 2014, the FASB issued the FASB Accounting Standards Update No. 2014-12 “Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU 2014-12”).

 

The amendments clarify the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The Update requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.

 

The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted.

 

In August 2014, the FASB issued the FASB Accounting Standards Update No. 2014-15 “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).

 

In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in Topic 450, Contingencies.

 

When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that (1) it is probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

 

If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes):

 

	a.	Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)
	b.	Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
	c.	Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.

 

If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:

 

 

	a.	Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
	b.	Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
	c.	Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

 

The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying financial statements.

 

Note 3 – Going Concern

 

The Company has elected to adopt early application of Accounting Standards Update No. 2014-15, “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).

 

The Company’s financial statements have been prepared assuming that it 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 financial statements, the Company had an accumulated deficit at September 30, 2016 and a net loss for the reporting period then ended. These factors raise substantial doubt about the Company’s 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 implement its business plan and generate sufficient revenue and its ability to execute a business strategy and raise additional funds.

 

The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Note 4 – Investments

 

On June 10, 2014, the Company invested $375,000 (approximately 18.8%) into newly formed RS Bakken One, LLC (“RSB1”), an entity that acquired two properties in North Dakota, one near Williston and one in Watford City. These properties are located in the heart of the Bakken oil development and had a combined acquisition price of $5,700,000. Additionally, the Company purchased an option (Option) for $25,000 that will allow it to acquire 100% of these two properties after one year for a purchase price of not less than $7,000,000 or more than $8,000,000.

 

On October 24, 2014 the Company invested $100,000 (approximately a 3.876% interest) into newly formed RS Heron Walk Apartments, LLC (RSHWA), an entity that acquired the Heron Walk Apartments in Jacksonville, Florida. Heron Walk apartments is a value-add opportunity and the investment in RSHWA carries an 8% preferred return and with higher expected average cash-on-cash and internal rates of return.

 

Pursuant to paragraph 323-10-05-5 the equity method tends to be most appropriate if an investment enables the investor to influence the operating or financial policies of the investee. Although the Company owns less than 20 percent of the voting units in both of the above entities, the COO/CFO of the Company is the Vice President of RSB1 and RSHWA and the Chairman of the Company is the Manager of both these entities which enables the Company to influence the operating or financial policies of RSB1 and RSHWA. Thus, the Company accounts for its investment in these investments using the equity method of accounting and reports such in the balance sheets as investment.

 

Under terms of an amendment to the Note and Warrant (see Note 5-Convertible Notes) in February 2016, the Noteholders formed RSRT Holdings, LLC and agreed to accept an assignment of ownership in RSHWA and RSB1 and the Option in partial settlement of the Notes and accrued interest. The lenders on the two properties must be notified of the assignment of owner interests and may be required to approve such transfers based on the terms of the loan documents. The assignment of the interest in RSHWA was effective April 1, 2016. The assignment of RSB1 and the Option was effective on June 1, 2016.

 

 

Investment consisted of the following:

 

		Sep 30, 2016				Dec 31, 2015
Initial investment		$	475,000			$	475,000
Add: equity share of net income							198,271
Less: distributions							(101,702	)
Transfer of investments in settlement of accrued interest			(475,000	)
Valuation for impairment of assets							(96,569	)
		$	--			$	475,000

 

Note 5 – Convertible Notes

 

On December 9, 2013, the Company consummated the closing (the “Closing”) of a private placement offering (the “Offering”) of 231 units (“Units”) for $10,000 per Unit, for aggregate gross proceeds of $2,310,000. No placement agents or brokers were utilized by the Company in connection with the Offering. Each Unit consisted of: (i) a $10,000 face value 12% Series A Senior Unsecured Convertible Promissory Note of the Company convertible into common shares at $0.50 per share (collectively, the “Notes”), and (ii) one detachable Common Stock Purchase Warrant (collectively, the “Warrants”), each to purchase 10,000 shares (the “Warrant Shares”) of common stock of the Company (the “Common Stock”) with an exercise price of $2.00 per share expiring five years from the date of issuance. In connection with the Closing, the Company entered into definitive subscription agreements (the “Subscription Agreements”) with twenty nine (29) accredited investors. The Notes accrued interest at 12% per year and had a maturity date of December 9, 2015.

 

On January 15, 2016, each of the Holders of the Notes and the Warrants entered into a separate Amendment to Note and Warrant (the “Amendment”) to modify certain terms and provisions of the Notes and Warrants, such Amendment being effective as of December 9, 2015, the original maturity date of the Notes. The Amendment was entered into given the maturity of the Notes to memorialize the agreements of the Company and each Holder with respect to the Notes and the Warrants held by such Holder.

 

Pursuant to the Amendment, the term of the Notes has been extended by six months to June 9, 2016 (the “Maturity Date”). The Amendment also provides for the mandatory conversion of a portion of the Notes and interest accrued under the Note as of December 9, 2015 into shares of Common Stock (the “Mandatory Conversion”) at $.10 per share. In February 2016, the Notes and a portion of accrued interest was repaid with cash of $1,990,000 and the issuance of 3,744,000 shares of common stock at a value of $.10 per share. The Amendment also provides that the Company and each Holder that the Warrants held by such Holder shall be amendment to (i) reduce the exercise price of the Warrants from $2.00 to $0.50 per Warrant Share and (ii) to extend the expiration time of the Warrants from December 9, 2018 to December 9, 2020.

 

In February 2016 the Notes and a portion of the accrued interest were repaid with $1,990,000 of cash through the issuance of 3,744,000 shares of common stock issued at $.10 per share. The balance of accrued interest of $500,000 was repaid through the assignment of ownership interest in RSHWA and RSB1 and the Option as described above in Note 4 – Investments.

 

The Company estimated the relative fair value of the warrants on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

		December 9, 2015
Expected life (year)			5
Expected volatility (*)			26.8	%
Expected annual rate of quarterly dividends			0.00	%
Risk-free rate(s)			1.68	%

 

*

As a thinly traded entity it is not practicable for the Company to estimate the expected volatility of its share price. The Company selected four (4) comparable public companies listed on NYSE MKT and NASDAQ Capital Market within real estate brokerage and management industry which the Company engages in to calculate the expected volatility. The Company calculated those four (4) comparable companies’ historical volatility over the expected life of the options or warrants and averaged them as its expected volatility.

 

The estimated relative fair value of the warrants was de minimus at the date of issuance using the Black-Scholes Option Pricing Model.

 

  

Note 6 – Related Party Transactions

 

Related Parties

 

Related parties with whom the Company had transactions are:

 

Related Parties		Relationship
Michael Anderson		Chairman, significant stockholder and director
Nathan Hanks		President and CEO, significant stockholder and director
V. Kelly Randall		Chief Operating Officer, Chief Financial Officer and Director
RSRT Holdings, LLC		An entity controlled and partially owned by the Chairman, President and CEO of the Company

 

Note 7 – Stockholders’ Equity (Deficit)

 

Shares Authorized

 

Upon formation the total number of shares of all classes of stock which the Company is authorized to issue is Two Hundred Million (200,000,000) shares of which One Hundred Million (100,000,000) shares shall be Preferred Stock, par value $0.001 per share, and One Hundred Million (100,000,000) shares shall be Common Stock, par value $0.001 per share.

 

Common Stock

 

Warrants

 

Summary of the Company’s Warrants Activities

 

The table below summarizes the Company’s warrants activities for the reporting period ended September 30, 2016:

 

			Number of Warrant Shares				Exercise Price Range Per Share				Weighted Average Exercise Price				Relative Fair Value at Date of Issuance				Aggregate Intrinsic Value
Balance, December 31, 2015				2,310,000			$	2.00			$	2.00			$	*			$	-
Granted				-				-				-				-				-
Canceled				-				-				-								-
Exercised				-				-				-								-
Expired				-				-				-								-
Balance, September 30, 2016				2,310,000			$	.50			$	.50			$	*			$	-
Earned and exercisable, Sep 30, 2016				2,310,000			$	.50			$	.50			$	*			$	-
Unvested, September 30, 2016				-			$	-			$	-			$	-			$	-

 

* The relative fair values at date of issuance and subsequent measurement w minimis. See Note 5-Convertible Notes for an explanation of the change in the exercise price of the warrants.

 

The following table summarizes information concerning outstanding and exercisable warrants as of September 30, 2016:

 

				Warrants Outstanding										Warrants Exercisable
Range of Exercise Prices				Number Outstanding		Average Remaining Contractual Life (in years)				Weighted Average Exercise Price				Number Exercisable		Average Remaining Contractual Life (in years)				Weighted Average Exercise Price
$	.50			2,310,000			4.50			$	.50			2,310,000			4.50			$	.50

 

Note 8 – Subsequent Events

 

The Company has evaluated all events that occur after the balance sheet date through the date when the financial statements were issued to determine if they must be reported. The Management of the Company determined that there were no reportable subsequent events to be disclosed.

 

 

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

 

The following discussion should be read in conjunction with our financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the financial statements and related notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

This discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those discussed in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth herein and elsewhere in this Quarterly Report and in our other filings with the Securities and Exchange Commission. See “Cautionary Note Regarding Forward Looking Statements.”

 

Corporate History and Recent Developments

 

We were incorporated pursuant to the laws of the State of Nevada on March 20, 2002 under the name Integrated Brand Solutions Inc., and on February 6, 2006, we changed our name to Upstream Biosciences Inc. From 2006 to December 2009, our company operated as a biotechnology company, and from 2010 until May 2013, our company had no operating business.

 

On May 24, 2013, our then majority stockholders sold their interests in our company (consisting of 10,778,081 shares of our common stock, representing approximately 90% of the issued and outstanding voting security of our company) to RealSource Acquisition Group, LLC, a Utah limited liability company (“RSAG”), and Chesterfield Faring Ltd., a New York corporation in consideration of an aggregate of $175,000 in cash. RSAG is affiliated with The RealSource Group, a group of affiliated real estate brokerage and management companies based in Salt Lake City, Utah. On July 11, 2013, we changed our corporate name by merging with our newly formed, wholly owned subsidiary called RealSource Residential, Inc., a Nevada corporation, and we remained as the surviving corporation under the name “RealSource Residential, Inc.” The merger was effective on July 15, 2013 and was approved by the Financial Industry Regulatory Authority on August 5, 2013.

 

Leveraging the experience of our management team and The RealSource Group, we planned to focus on acquiring, managing and holding primarily multi-family housing assets in anticipation of creating a real estate investment trust (a “REIT”). We began the process of acquiring interests in such multi-family housing assets during 2014, however, as of September 30, 2016 our plan to acquire assets and create a REIT have been indefinitely deferred and we have divested the assets that were acquired.

 

On December 9, 2013, we consummated the closing of a private placement offering (the “2013 Private Placement”) of 231 units (or “Units”) for $10,000 per Unit, for aggregate gross proceeds of $2,310,000. Each Unit consisted of: (i) a $10,000 face value 12% Series A Senior Unsecured Convertible Promissory Note (collectively, the “Notes”), and (ii) one detachable Common Stock Purchase Warrant (collectively, the “Warrants”), each to purchase 10,000 shares (the “Warrant Shares”) of our common stock. The Notes accrued interest at 12% per year and had a maturity date of December 9, 2015.

 

The Notes were convertible into shares of our common stock at $0.50 per share (subject to customary adjustments for stock splits and similar transactions), and would automatically convert into shares of our common stock at the then applicable conversion price in the event that the 90-day trading volume weighted average price per share of the common stock exceeds $1.50 per share at any time during the term of the Notes.

 

Each Warrant included within each Unit granted to each investor the right, for a period of five (5) years from the closing of the 2013 Private Placement to subscribe for 10,000 shares of our common stock (i.e. 50% warrant coverage) at an exercise price equal to $2.00 per share. The exercise price of the Warrants is subject to adjust on the same terms as provided for in the Notes. As of the date of this report, an aggregate of 2,310,000 shares of our common stock are available for issuance assuming full exercise of the Warrants.

 

In connection with the closing of the 2013 Private Placement, we entered into definitive subscription agreements (the “Subscription Agreements”) with twenty-nine (29) accredited investors (the “Holders”). The Subscription Agreements contained customary representations, warranties and covenants.

 

Proceeds from the 2013 Private Placement were used to (i) acquire, on December 10, 2013 a $2.85 million face value subordinated mortgage note secured by the Cambridge Apartments in Gulfport, Mississippi (“Cambridge”) for approximately $1,073,000 (the “B Note”) and (ii) fund (in the amount of approximately $465,000) certain costs associated with a refinancing of the senior mortgage indebtedness encumbering Cambridge (which refinancing occurred concurrently with our acquisition of the B Note). Immediately upon our acquisition of the B Note, we entered into a Right of First Refusal and Option Agreement with RS Cambridge Apartments, LLC (“RS Cambridge”), owners of Cambridge (the “Option Agreement”), pursuant to which we converted the B Note into a right of first refusal and option (the “Option”) in the amount of approximately $1,538,000 (the “Option Payment”). The Option afforded us the right to acquire Cambridge within five (5) years after the closing of the 2013 Private Placement at the fair value of Cambridge as we negotiated with RS Cambridge. Under the Option, if RS Cambridge received an offer to purchase Cambridge during the option period, we would have had a right of first refusal to purchase Cambridge on the same terms as the offer. Had we elected not to match the offer, the Option Payment was required to be repaid upon the sale of Cambridge to the other buyer. In February 2016, RS Cambridge sold Cambridge. We elected not to exercise our right of first refusal and the cost of the Option plus accrued interest was paid to us.

 

 

On June 10, 2014, we invested $375,000 to acquire an approximate 19% interest in RS Bakken One, LLC, a newly-formed affiliated entity, which in turn acquired two properties in North Dakota, one near Williston and one in Watford City and had a combined acquisition price of $5,700,000. Concurrently, we purchased an option for $25,000 that allows us to acquire 100% of these two properties after one year for a purchase price of not less than $7,000,000, or not more than $8,000,000. As of the date of this report, the option has not been exercised. The impact of the recent decline in oil prices is not yet known but could have an impact on the value of the property should oil prices remain depressed for an extended period of time. The property in Watford City is leased by two corporate tenants with longer term leases. The income from these leases is sufficient to cover the operating costs and debt service on the property. Under terms of the Amendment discussed below, effective June 1, 2016 the ownership in RS Bakken One was transferred to RSRT Holdings, LLC, which is owned by the Holders.

 

On October 24, 2014, we invested $100,000 to become an approximate 3.876% member in a newly formed entity called RS Heron Walk Apartments, LLC (“RSHWA”), an affiliated entity which acquired the Heron Walk Apartments in Jacksonville, Florida (“Heron Walk”). Our investment in the Heron Walk apartments, through our ownership in RSHWA, carries an 8% cumulative preferred return under the terms of the RSHWA operating agreement, with projected higher expected average cash-on-cash and internal rates of return. Under terms of the Amendment discussed above, effective April 1, 2016 the ownership in RSHWA was transferred to RSRT Holdings, LLC, which is owned by the Holders as described below.

 

On January 15, 2016, each of the Holders entered into a separate Amendment to Note and Warrant (the “Amendment”) to modify certain terms and provisions of the Notes and Warrants, such Amendment being effective as of December 9, 2015, the original maturity date of the Notes. The Amendment was entered into given the maturity of the Notes to memorialize the agreements of the Company and each Holder with respect to the Notes and the Warrants held by such Holder.

 

Pursuant to the Amendment, the term of the Notes was extended by six months to June 9, 2016 (the “Maturity Date”). The Amendment also provided for the mandatory conversion of a portion of the interest accrued under the Note as of December 9, 2015 into shares of our common stock (the “Mandatory Conversion”). The number of shares of common stock to be issued upon the Mandatory Conversion to each Holder equaled each Holder’s pro rata portion of interest owed on such Holder’s Note converted at $0.10 per share. A total of 3,744,000 shares of our common stock were issued in February 2016.

 

On December 31, 2015, we held an asset consisting of a deposit (the “Cambridge Deposit”) on the Cambridge property. Cambridge was owned by RS Cambridge, an entity controlled and partially owned by the Chairman, President and CEO of our company. The Amendment further provided that in the event that, prior to the Maturity Date, RS Cambridge sold Cambridge, thus generating a return of the Cambridge Deposit to the Company, we would, within thirty (30) days of such sale, prepay, without penalty, a portion of each Note equal to each Holder’s pro rata portion of the Cambridge Deposit. Cambridge was sold to a third party in February 2016 and the Cambridge Deposit plus accrued interest was paid to us. With the proceeds, we then redeemed the Notes plus a portion of the accrued interest as required under the Amendment.

 

Also pursuant to the Amendment, we agreed with each Holder that, by no later than February 15, 2016, we would establish a new limited liability company (“Newco 1”) and assign to Newco 1: (a) a $100,000 equity investment (the “Heron Equity”) previously made by us in RSHWA and (b) a $400,000 equity investment (“Bakken Equity”) previously made by us in the two properties in North Dakota described above. This investment consisted of a $375,000 investment in RS Bakken One Investors, LLC and a $25,000 option to acquire the two properties within a specific range of a purchase prices. The Amendment provides that each Holder will be given a pro rata portion (based on the aggregate principal of the Notes held by such Holder) of the equity in Newco 1, entitling each Holder to a pro rata portion of all cash flows, profits and losses generated by Newco 1’s holdings of the Bakken Equity and the Heron Equity. Each Holder similarly agreed that such Holder shall have no voting, management, consent or approval rights whatsoever over the business or operations of Newco 1 (save as required by law), and all such rights are vested in us or our affiliates as the sole managing member of Newco 1. Each Holder agreed to enter into a customary limited liability company operating agreement relating to Newco1 to memorialize the foregoing. We formed Newco 1 on February 5, 2016 with the name RSRT Holdings, LLC and each Holder signed the operating agreement.

 

Finally, the Amendment provides that the Warrants held by such Holder shall be amended to (i) reduce the exercise price of the Warrants from $2.00 to $0.50 per Warrant Share and (ii) to extend the expiration time of the Warrants from December 9, 2018 to December 9, 2020.

 

We are not currently structured or operating as a REIT. We have consulted advisors who recommend that the target properties should be combined into a private portfolio, raise additional equity to expand the asset value of the portfolio and form a private REIT. Once the asset value has grown to a sufficient size in our management’s determination and market conditions are favorable for public REITs, we could then use our company as a public vehicle to acquire the private REIT or its portfolio of real estate holdings. Therefore, our plan to create a public REIT and acquire assets has been indefinitely deferred.

 

 

Critical Accounting Policies

 

Our financial statements are prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States (US GAAP). Our fiscal year ends December 31.

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our financial statements, which have been prepared in accordance with US GAAP. The preparation of these financial statements requires making estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses for the reporting periods. On an ongoing basis, we evaluate such estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ (perhaps significantly) from these estimates under different assumptions or conditions.

 

While all the accounting policies impact the financial statements, certain policies may be viewed to be critical. Our management believes that the accounting policies which involve more significant judgments and estimates used in the preparation of our financial statement include derivative liability, stock-based compensation, capitalization of costs and useful lives of assets:

 

Results of Operations

 

For the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015:

 

Revenues

 

Revenue for the nine months ended September 30, 2016 was $3,666 compared $83,149 for the same period in 2015. The decrease is a result of transferring our interests in income producing properties to the Holders in the first and second quarters of 2016.

 

Expenses

 

Operating costs for the nine months ended September 30, 2016 were $44,882, compared to $63,400 for the nine months ended September 30, 2015. The decrease is a result of scaling back our operations following the divestiture of our existing assets. The primary costs include legal, accounting, transfer agent and filing fees.

 

Other income and expense

With the repayment of the Cambridge Deposit in February 2016, and the issuance of 3,744,000 shares of common stock we repaid the Notes at the end of February eliminating future income and expense related to these items.

 

Net loss

 

Net loss for the nine-month period ended September 30, 2016 was $45,956 compared to $53,630 for the same period in 2015. The change is a result of the items discussed above in revenues and expenses.

 

Plan of Operations and Cash Requirements for the Next 12 Months

 

Anticipated Cash Requirements

 

Over the next 12 months, we have estimated our minimum operating cash requirements to be as follows:

 

Cash Operating Expenses		$	—
Legal and accounting fees			18,000
General and administrative expenses			3,000
Corporate communications and SEC filing fees			10,000
Total		$	31,000

 

As our operations are currently minimal, our operating expenses are similarly limited. We estimate that we should have sufficient cash for a least the next year of cash requirements.

 

At September 30, 2016, we had working capital of $33,832 comprised of cash net of $4,390 in accounts payable.

 

 

Liquidity and Capital Resources

 

Our financial position as at September 30, 2016 and December 31, 2015 and the changes for the nine months then ended are as follows:

 

Working Capital

 

		As of September 30, 2016				As of December 31, 2015
Current Assets		$	38,222			$	545,168
Current Liabilities			4,390				567,416
Working Capital (Deficit)		$	33,832			$	(22,248	)

 

As of September 30, 2016 we had $38,222 in cash and cash equivalents. Working capital increased by $56,080 from December 31, 2015 to September 30, 2016, which is a result of transferring investments in RSHWA and RSB1 and the Option in payment of the accrued interest.

 

Cash Flows

 

		9 Months Ended September 30, 2016				9 Months Ended September 30, 2015
Net cash provided by (used in) Operating Activities		$	306,535			$	(59,818	)
Net cash provided by Investing Activities			1,541,303				23,798
Net cash (used in) Financing Activities			(1,990,000	)			—
Net change in cash			(142,162	)			(36,020	)
Cash, Beginning of Period			180,384				230,172
Cash, End of Period		$	38,222			$	194,152

 

Our net cash provided by operating activities increased by $366,4133 for nine-month period ended September 30, 2016 compared to the same nine-month period in 2015 primarily due to the receipt of interest receivable on the Deposit from RS Cambridge Apartments, LLC. The cash provided from investing activities was also related to the repayment of this Deposit. The cash used in financing activities reflects the cash payment towards the Notes during the nine months ended September 30, 2016. The balance of the Notes were paid through the issuance of common stock.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2016, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

We are a smaller reporting company and therefore are not required to provide the information for this item for Form 10-Q.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this Report, our Chief Executive Officer and Chief Financial Officer (our Certifying Officers), conducted evaluations of our disclosure controls and procedures. As defined under Sections 13a – 15(e) and 15d – 15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosures.

 

 

Based on their evaluation, the Certifying Officers concluded that, as of September 30, 2016, our disclosure controls and procedures were not effective.

 

The material weakness which relate to internal control over financial reporting that was identified at September 30, 2016 that we did not have sufficient personnel staffing in our accounting and financial reporting department. As a result, we were not able to achieve adequate segregation of duties and were not able to provide for adequate review of the financial statements.

 

This control deficiency could result in a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis. However, our management believes that the material weakness identified does not result in the restatement of any previously reported financial statements or any other related financial disclosure, and management does not believe that the material weakness had any effect on the accuracy of our financial statements included as part of this Quarterly Report.

 

We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking action and implementing additional enhancements or improvements, as necessary and as funds allow.

 

Changes in internal control over financial reporting.

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on the Effectiveness of Internal Controls

 

Readers are cautioned that our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our control have been detected. 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 control design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

 

 

PART II- OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

None.

 

Item 1A. Risk Factors.

 

Not applicable to smaller reporting companies.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

None.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

No.		Description of Exhibit
31.1		Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act 0f 2002
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 0f 2002
101.INS *		XBRL Instance Document
101.CAL *		XBRL Taxonomy Extension Calculation Linkbase Document
101.SCH *		XBRL Taxonomy Extension Schema 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

 

*

XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

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 hereunto duly authorized.

 

Date: November 14, 2016	RealSource Residential, Inc.
	By:	/s/ Nathan W. Hanks
	Name:	Nathan W. Hanks
	Title:	President and Chief Executive Officer
	By:	/s/ V. Kelly Randall
	Name:	V. Kelly Randall
	Title:	Chief Operating Officer and Chief Financial Officer