UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-Q

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017

[ ]

TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________

Commission File No. 333-201314

HEAVENSTONE CORP. (Exact name of registrant as specified in its charter)

Nevada

47-1445393

(State or Other Jurisdiction of Incorporation or Organization)

(IRS Employer Identification No.)

17800 Castleton Street, Suite 300, City of Industry, California 91748 (Address of Principal Executive Offices, Including Zip Code)

Registrant’s telephone number, including area code: (626) 581-3335

Securities Registered under Section 12(b) of the Exchange Act: None

Securities Registered under Section 12(g) of the Exchange Act: None

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 [ ] No [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ]

Non-accelerated filer [ ]

Accelerated filer [ ]

Smaller reporting company [X]

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

As of May 22, 2017, 71,159,423 shares of the common stock of the registrant were issued and outstanding.

Documents Incorporated by Reference: None.

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

 

INDEX TO FINANCIAL STATEMENTS
		Page
Unaudited Consolidated Balance Sheets as of March 31, 2017, and June 30, 2016			3
Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2017 and 2016			4
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2017 and 2016			5
Notes to Unaudited Consolidated Financial Statements			7

 

 

HEAVENSTONE CORP. CONSOLIDATED BALANCE SHEETS
		As of March 31, 2017 (unaudited)				As of June 30, 2016
ASSETS
Current assets
Cash and cash equivalents		$	14,337			$	52,592
Prepaid and other current assets			16,850				156,340
Total current assets			31,187				208,932
Fixed assets
Land and land development cost			6,045,703				3,888,846
Office furniture and equipment			14,047				14,047
Accumulated depreciation			(6,555	)			(4,448	)
Total fixed assets			6,053,195				3,898,445
Total assets		$	6,084,382			$	4,107,377
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable		$	186,592			$	155,538
Interest payable			319,438				185,509
Short-term notes payable			---				38,846
Short-term related party debt			2,100,000				2,100,000
Total current liabilities			2,606,030				2,479,893
Non-current liabilities
Long-term related party debt			2,019,940				929,975
Long-term notes payable			1,500,000				750,000
Total non-current liabilities			3,519,940				1,679,975
Total liabilities			6,125,970				4,159,868
Stockholders’ deficit
Preferred stock, $.0001 par value: 50,000,000 shares authorized; zero and zero shares issued and outstanding at March 31, 2017, and June 30, 2016, respectively			---				---
Common stock, $.0001 par value: 200,000,000 shares authorized; 71,159,423 shares and 71,159,423 shares issued and outstanding at March 31, 2017, and June 30, 2016, respectively			7,116				7,116
Additional paid-in capital			394,386				394,386
Accumulated deficit			(557,846	)			(453,993	)
Total Heavenstone stockholders’ deficit			(156,344	)			(52,491	)
Non-controlling interest			114,756				---
Total stockholders’ deficit			(41,588	)			(52,491	)
Total liabilities and stockholders’ deficit		$	6,084,382			$	4,107,377
The accompanying notes are an integral part of these unaudited financial statements.

 

 

HEAVENSTONE CORP. CONSOLIDATED STATEMENTS OF OPERATIONS
		For the Three Months Ended								For the Nine Months Ended
		March 31, 2017 (unaudited)				March 31, 2016 (unaudited)				March 31, 2017 (unaudited)				March 31, 2016 (unaudited)
Operating expenses		$	23,546			$	42,484			$	70,345			$	85,782
Operating loss			(23,546	)			(42,484	)			(70,345	)			(85,782	)
Interest expense			(18,128	)			(37,902	)			(34,914	)			(109,153	)
Net loss			(41,674	)			(80,386	)			(105,259	)			(194,935	)
Less: Net loss attributable to non-controlling interest			1,406				---				1,406				---
Net loss attributable to Heavenstone Corp.		$	(40,268	)		$	(80,386	)		$	(103,853	)		$	(194,935	)
Net loss per common share
Basic and diluted		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.00	)
Weighted average number of common shares outstanding:
Basic and diluted			71,159,423				71,159,423				71,159,423				71,159,423
The accompanying notes are an integral part of these unaudited financial statements.

 

 

 

 

HEAVENSTONE CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS
		For the Nine Months Ended March 31, 2017 (unaudited)				For the Nine Months Ended March 31, 2016 (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(105,259	)		$	(194,935	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation expense			2,107				2,107
Changes in operating assets and liabilities:
Prepaid and other current assets			(139,490	)			(105,504	)
Accounts payable			(112,364	)			(56,301	)
Interest payable			(461	)			81,027
Net cash used in operating activities			(76,487	)			(273,606	)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for land development costs			(1,021,887	)			(337,988	)
Net cash used in investing activities			(1,021,887	)			(337,988	)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on loans from related parties			1,089,965				300,000
Borrowings on loans from third parties			---				150,000
Repayments on loans to third parties			(38,846	)			---
Net cash provided by financing activities			1,051,119				450,000
NET DECREASE IN CASH			(38,255	)			(161,594	)
Cash, beginning of period			52,592				271,101
Cash, end of period		$	14,337			$	109,507
The accompanying notes are an integral part of these unaudited  financial statements.

 

 

 

 

 

 

 

HEAVENSTONE CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (cont.)
		For the Nine Months Ended March 31, 2017 (unaudited)				For the Nine Months Ended March 31, 2016 (unaudited)
Non-cash investing the financing activities
Land development costs incurred on credit		$	143,418			$	---
Capitalized interest to land development cost		$	134,390			$	---
Third-party notes issued for land purchase		$	750,000			$	---
Purchase of land acquisition costs directly by non-controlling interest		$	116,162			$	---
Supplemental disclosure of cash flow information
Cash paid for income taxes		$	---			$	---
Cash paid for interest		$	35,375			$	28,126
The accompanying notes are an integral part of these unaudited financial statements.

 

 

	HEAVENSTONE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
		March 31, 2017 (unaudited)

 

NOTE 1. BASIS OF PRESENTATION

 

The accompanying unaudited interim consolidated 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.

 

Reclassifications

 

Certain prior year amounts have been reclassified to conform with the current year presentation.

 

Basis of Consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany accounts and transactions have been eliminated.

 

NOTE 2. GOING CONCERN

 

These unaudited interim consolidated 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 nine months ended March 31, 2017, the Company had an accumulated deficit of $557,846 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 consolidated 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 nine months ended March 31, 2017, the Company had incurred $2,156,857 in land and land development costs, of which $1,012,887 was paid in cash, $141,162 was incurred on credit, $750,000 was settled with note payable and $116,162 was assumed by non-controlling interest (see further discussion in Note 6). Also, the Company capitalized the interest costs of $134,390 incurred for the real estate projects under ASC 835-20, during the nine months ended March 31, 2017.

 

NOTE 4. RELATED-PARTY TRANSACTIONS

 

Loans from Officer's Family

 

During the nine months ended March 31, 2017, 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.

 

Loans from Related Party

 

During the nine months ended March 31, 2017, the Company obtained two separate loans 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.

 

January 2017 – $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 January 2019. The proceeds from this loan were applied by the Company to operating expenses.

 

January 2017 - $449,965. The Company obtained this loan pursuant to a loan agreement and delivered a promissory note, face amount $449,965, in consideration of such loan. Unpaid principal on such loan bears interest at 5% per annum, with principal and accrued interest due in January 2019. The proceeds from this loan were applied by the Company to operating expenses.

 

As of March 31, 2017, and June 30, 2016, the total outstanding short-term related party debt was $2,100,000. These notes were in default as of March 31, 2017.

 

As of March 31, 2017, and June 30, 2016, the total outstanding long-term related party debt was $2,019,940 and $929,975, 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, beginning in March 2016.

 

During the nine months ended March 31, 2017, the Company repaid a total of $38,846 in principal. The outstanding principal as of March 31, 2017, and June 30, 2016, are $-0- and $38,846, respectively.

 

As of March 31, 2017, and June 30, 2016, the total outstanding long-term notes payable was $1,500,000 and $750,000, respectively.

 

 

 

NOTE 6. REAL ESTATE DEVELOPMENT PROJECT

 

In January 2017, the Company and a third party formed Temecula QK Holdings, LLC, a California limited liability company (“TQKH”), for the purpose of acquiring and developing approximately 40 acres of land located in Temecula, California, for $1,318,383. The Company owns 75% of TQKH. In connection with TQKH’s purchase of such land, TQKH issued a $750,000 face amount promissory note to the third-party seller of the land. The principal balance is due in March 2019. The unpaid principal balance of such promissory note bears interest at 4.5% per annum, with interest-only payments due monthly until the due date. This promissory note is secured by a deed of trust in favor of the selling party. For the three months ended March 31, 2017, TQKH received $116,162 from its non-controlling shareholder for the land acquisition costs.

 

NOTE 7. SUBSEQUENT EVENTS

 

Loan from Related Party

 

In April 2017, we obtained a loan in the amount of $140,000 pursuant to a loan agreement and delivered a promissory note, face amount $140,000, in consideration of such loan. Unpaid principal on such loan bears interest at 5% per annum, with principal and accrued interest due in April 2019.

 

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 nine months ended March 31, 2017 (unaudited) and 2016 (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 2014, 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. At that time, we intended to become a large real estate development and construction company with operations, primarily, in the luxury vineyard estate home construction industry and, secondarily, and the hospitality industry.

 

However, in January 2017, our Board of Directors determined to refocus our plan of business, in an effort to better position our company to generate ongoing revenues from our future operations. As a result of this action, we now concentrate more emphasis on engaging in the hospitality industry, which we call our Hospitality Segment. Nevertheless, we continue to participate in the real estate development and home building industries as an adjunct to our Hospitality Segment. These efforts are now referred to as our Real Estate Development Segment.

 

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

 

Real Estate Development Progress

 

Since our inception, we have acquired at total of approximately 110 acres of unimproved real estate located in Temecula, California, on which we intend to construct a total of 18 vineyard estate rental properties. Out of such 110 acres, on two five-acre parcels, we have begun construction efforts with respect to two vineyard estate rental properties. We are nearing completion of the permitting process with respect to each of such homes and have, as required by local ordinances, planted grapevines on approximately 50% of each 5 acre parcel.

 

Further, we have purchased approximately 25 acres also located in Temecula, on which we intend to build and operate our planned Sorrento Resort, Vineyard & Winery.

 

We continue to lack the capital with which to develop fully the properties described, and there is no assurance that we will ever possess such capital.

 

Principal Factors Affecting Our Financial Performance

 

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

 

•       our ability to obtain capital with which to build our rental properties;

•       our ability to attract guests to our rental properties and resort property, once built; and

•       our ability to contain our costs and maintain our low overhead.

 

Expected Financial Performance

 

Based on our current business plan, we expect to incur operating losses through at least the first quarter of 2018. However, because we do not yet possess capital to commence operations, we cannot predict whether we will have any revenues in our Hospitality Segment or our Real Estate Development Segment prior to the end of such period.

 

We must obtain approximately $4 million in order to begin construction of the first two of our vineyard estate rental properties and approximately $20 million in order to begin construction and full-scale operations of our planned Sorrento Resort property. There is no assurance that we will be successful in obtaining this needed funding.

 

 

Results of Operations

 

Until we begin full scale business operations, we expect the level of our quarterly expenses to be approximately $50,000.

 

For the Three Months Ended March 31, 2017 and 2016, we generated no revenues. We do not expect to generate any revenues until the first quarter of 2018, at the earliest.

 

For the Three Months Ended March 31, 2017 and 2016, we incurred a net loss of $(41,674) (unaudited) and $(80,386) (unaudited), respectively.

 

For the Nine Months Ended March 31, 2017 and 2016, we generated no revenues. We do not expect to generate any revenues until the first quarter of 2018, at the earliest.

 

For the Nine Months Ended March 31, 2017 and 2016, we incurred a net loss of $(105,259) (unaudited) and $(194,935) (unaudited), respectively. Had we not experienced a reimbursement of approximately $48,000 in consulting and related fees, our net loss for the Nine Months Ended March 31, 2017, would have been approximately $153,259.

 

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.

 

Our plan of business now focuses primarily on our becoming a hospitality-focused company. In conjunction with these efforts, we intend to develop and build vineyard estate properties and one or more resort properties.

 

Hospitality Segment. Our Hospitality Segment will operate the rental properties that are built and/or acquired by us. In addition, we have purchased 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. To complete the construction of the resort facility, we must obtain approximately $20 million in funding. There is no assurance that we will be able to secure such funding.

 

Real Estate Development Segment. Since our inception, we have acquired approximately 110 acres of unimproved real estate located in Temecula, California. We intend to construct vineyard estate rental properties on these acquired tracts.

 

Since acquiring these properties, we have taken substantially all actions necessary for obtaining needed permits and approvals for the subdivision planning and construction of two vineyard estate rental properties.

 

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

 

We anticipate a long-term development of vineyard estate rental properties on the 110 acres we currently own. However, we must first obtain approximately $4 million for the completion of the first two of our vineyard estate rental properties. 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 these rental properties.

 

Liquidity

 

For the Nine Months Ended March 31, 2017. At March 31, 2017, we had a working capital deficit of $2,574,843 and cash of $14,337. Currently, we possess approximately $1,500 in cash.

 

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

 

July 2016 – $170,000. We 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 for operating expenses.

 

August 2016 – $100,000. We 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 for operating expenses.

 

September 2016 – $270,000. We 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 used for operating expenses.

 

January 2017 – $100,000. We 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 January 2019. The proceeds from this loan were used for operating expenses.

 

January 2017 - $449,965. The Company obtained this loan pursuant to a loan agreement and delivered a promissory note, face amount $449,965, in consideration of such loan. Unpaid principal on such loan bears interest at 5% per annum, with principal and accrued interest due in January 2019. 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 March 31, 2017, the total outstanding principal balance on the foregoing loans was $1,089,965, with another $140,000 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.

 

In January 2017, our company and a third party formed Temecula QK Holdings, LLC, a California limited liability company (“TQKH”), for the purpose of acquiring and developing approximately 40 acres of land located in Temecula, California. We own 75% of TQKH. In connection with TQKH’s purchase of such land, TQKH issued a $750,000 face amount promissory note to the third-party seller of the land. The principal balance is due in March 2019. The unpaid principal balance of such promissory note bears interest at 4.5% per annum, with interest-only payments due monthly until the due date. This promissory note is secured by a deed of trust in favor of the selling party.

 

Working Capital. At March 31, 2017, we had a working capital deficit of $2,574,843 and cash of $14,337, compared to our working capital deficit of $2,270,961 and cash of $52,592, at June 30, 2016.

 

We are currently pursuing approximately $24 million in additional funding with which to build our vineyard estate rental properties and our Sorrento Resort property. We are actively pursuing this funding, with a current focus on potential foreign sources located throughout the world. 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 us to pursue our full plan of business.

 

Profits from sales, if any, of our vineyard estate rental properties will serve as another source of capital with which to further our business development. There is no assurance that any such sales would occur.

 

To sustain our current operations, we obtained loans in the total amount of $1,089,965, during the Current Nine Month 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), September 2018 (as to $270,000) and January 2019 (as to $549,965). Subsequent to March 31, 2017, in April 2017, we obtained a $140,000 loan, which accrues interest at 5% per annum, with principal and accrued interest due in April 2019.

 

Cash Flows.

 

Operating Activities. During the Current Nine Month Period, our operating activities used $683,067 in cash. During the Prior Nine Month Period, we used $76,487 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 Nine Month Period, we used $1,012,887 in our investing activities, which was for land development costs. During the Prior Nine Month Period, we used $337,988 in our investing activities for land development costs.

 

Financing Activities. During the Current Nine Month Period, our financing activities provided $1,051,119 in cash, all of which was proceeds of loans from related parties and repayments of loans to third parties. During the Prior Nine Month Period, our financing activities provided $450,000 in cash, all of which was proceeds of loans from related parties.

 

Contractual Obligations

 

Monthly Payment Obligations. We have entered into two significant long-term obligations that require us to make monthly cash payments.

 

In connection with 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.

 

In connection with our purchase, through TQKH, a 75%-owned subsidiary, of 40 acres of land in Temecula, California, TQKH 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 4.5% per annum, with interest-only payments due monthly until March 2019, when the entire principal balance is due. 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. This loan remains unpaid.

•

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. This loan remains unpaid.

•

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. This loan remains unpaid.

 

Loans During Current Nine Month Period. During the nine months ended March 31, 2017, 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.

•

In January 2017, 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 January 2019. The proceeds from this loan were used by us for operating expenses.

•

In January 2017, the Company obtained this loan pursuant to a loan agreement and delivered a promissory note, face amount $449,965, in consideration of such loan. Unpaid principal on such loan bears interest at 5% per annum, with principal and accrued interest due in January 2019. The proceeds from this loan were applied by the Company to operating expenses

 

 

 

Loan Subsequent to March 31, 2017. Subsequent to March 31, 2017, we have obtained a single loan from a related party, as follows:

 

•

In April 2017, we obtained a loan in the amount of $140,000 pursuant to a loan agreement and delivered a promissory note, face amount $140,000, in consideration of such loan. Unpaid principal on such loan bears interest at 5% per annum, with principal and accrued interest due in April 2019. 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:

 

•       our ability to obtain capital with which to build our rental properties;

•       our ability to attract guests to our rental properties and resort property, once built; and

•       our ability to contain our costs and maintain our low overhead.

 

There is no assurance that we 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 Nine Month Period, our capital expenditures were $2,154,750, all of which was for land development costs.

 

During the Prior Nine Month Period, our capital expenditures were $337,988, all of which was for land development costs.

 

Should we be successful in obtaining the funding needed for us to commence full-scale operations, 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 March 31, 2017, 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 March 31, 2017, we did not issue unregistered securities that have not been reported previously.

 

Subsequent to March 31, 2017, we issued unregistered securities, as follows:

 

1. (a) Securities Sold. In April 2017, a $140,000 principal amount promissory note was issued; (b) Underwriter or Other Purchasers. Such promissory note was issued to Yang Cong; (c) Consideration. Such promissory note was issued for $140,000 in cash; and (d) Exemption from Registration Claimed. These securities are exempt from registration under the Securities Act of 1933, as amended, pursuant to the provisions of Section 4(a)(2) thereof, as a transaction not involving a public offering. This purchaser was an accredited investor.

 

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 periodic financial report by the Chief Executive Officer of Heavenstone Corp. pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

* Certification of periodic financial report by the Chief Financial Officer of Heavenstone Corp. pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

* Certification of periodic financial report pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Chief Executive Officer of Heavenstone Corp.

32.2

* Certification of periodic financial report pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Chief Financial Officer of Heavenstone Corp.

 

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 May 22, 2017, on its behalf by the undersigned, thereunto duly authorized.

 

HEAVENSTONE CORP.

 

 

By: /s/ William E. Sluss

William E. Sluss

Chief Financial Officer

(Principal Financial Officer)