NOTES
TO CONDENDED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF JULY 31, 2016
(UNAUDITED)
NOTE
1 – ORGANIZATION
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in The United States of America and the rules and regulations of the Securities and Exchange Commission for
interim financial information. Accordingly, they do not include all of the information necessary for a comprehensive presentation
of financial position and results of operations. The interim results for the period ended July 31, 2016 are not necessarily indicative
of results for the full fiscal year. It is management's opinion, however that all material adjustments (consisting of normal recurring
adjustments) have been made which are necessary for a fair financial statements presentation.
Magnolia
Lane Income Fund, formerly known as Palmerston Stock Agency, Inc. (the “Company,” ”We,” “Ours,”
“Us”), was incorporated on May 12, 2009 under the laws of the State of Delaware. On November 12, 2015, the Company
changed domicile from the State of Delaware to the State of Nevada by filing Articles of Domestication and Articles of Incorporation
with the Secretary of State of Nevada. The Company was originally formed to commence business as a stock agent in the wool
trade.
On
May 13, 2013, we entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Ian Raleigh and Michael
Raleigh (the “Sellers”) and Magnolia Lane Financial, Inc. (the “Purchaser”), whereby the Purchaser purchased
from the Sellers, 10,000,000 shares of common stock, par value $0.0001 per share, of the Company (the “Shares”), representing
approximately 69.57% of the issued and outstanding shares of the Company. As a result, the Purchaser became the majority shareholder
of the Company.
In
connection with the Stock Purchase Agreement, we have ceased pursuing our prior business plan and have begun focusing on our new
business which is to manage and invest in real property. Our current Chief Executive Officer, Chief Financial Officer and
sole director, Brian Woodland, has numerous years in the real estate acquisition, syndication and asset management business. We
intend to acquire real estate in small markets with high degrees of safety to provide income streams to our shareholders. In addition,
we will develop property, syndicate, manage and acquire property for capital appreciation.
In
connection with this change of control and change of business, we have conducted a name change and reverse stock split. On August
1, 2013, we filed a Certificate of Amendment to our Articles of Incorporation (the “Amendment”) to change its name
from “Palmerston Stock Agency, Inc.” to “Magnolia Lane Income Fund” (the “Name Change”) and
to memorialize a 1:8 reverse stock split (the “Stock Split”). The Amendment was effective as of August 1, 2013.
On
August 12, 2013, the Company received approval from the Financial Industry Regulatory Authority (“FINRA”) to effectuate
the Name Change and Stock Split. FINRA also confirmed that the new stock symbol is MIFC.
On
December 23, 2013, a shareholder of ours, Magnolia Lane Financial, entered into three separate LLC Membership Interest Purchase
and Sale Agreements for the acquisition of two limited liability companies, Grove Realty Partners, LLC and Walker Partners, LLC
(the “
Acquisition Agreements
”). Pursuant to the Acquisition Agreements, Magnolia Lane Financial acquired 100%
of the equity interests in Grove Realty Partners, LLC and Walker Partners, LLC. As consideration for the acquisition, Magnolia
Lane Financial transferred 134,574 shares of our Common Stock to WS Advantage and Phalanx Wealth Management (the “
Consideration
Shares
”). For purposes of the Acquisition Agreements, the parties valued the shares at $16.60 per share for a total
purchase price of $2,233,928. Prior to this transaction, Magnolia Lane Financial owned 1,250,000 shares of our common stock and
now owns 1,115,426 shares of our common stock. WS Advantage, LP owns 115,347 shares of our common stock and Phalanx Partners,
LLC owns 19,227 shares of our common stock.
On
January 16, 2014, we entered into an LLC Membership Interest Purchase and Sale Agreement with Magnolia Lane Financial, Inc. (the
“
Agreement
”). Pursuant to the Agreement, we acquired all rights, title and interest to all assets of Magnolia
Lane Financial, including the assets acquired in the Acquisition Agreements, for a total purchase price of $3,000.
On
October 15, 2015 the Company paid a total of $761,355 for the purchase of 64% of Butler Cabin LLC. This entity is controlled by
our President, a principal of Butler Cabin LLC.
On
November 12, 2015, the Company changed domicile from the State of Delaware to the State of Nevada by filing Articles of Domestication
and Articles of Incorporation with the Secretary of State of Nevada.
NOTE
2 – SUMMARY OF ACCOUNTING POLICIES
Principles
of consolidation
The
accompanying consolidated financial statements represent the consolidated financial position and results of operations of the
Company and include the accounts and results of operations of the Company and its subsidiaries. The accompanying financial statements
include the active entity of Magnolia Lane Income Fund and its wholly owned subsidiaries, Walker Partners, LLC, Grove Realty Partners,
LLC. and our 64% subsidiary Butler LLC. from October 15, 2015.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements as well as the reported amount of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Cash
Equivalents
The
Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.
Restricted
Cash
Restricted
cash consists of cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual
agreements. The Company’s restricted cash is reserved for real estate taxes on both of its properties.
Concentrations
Concentration
in a geographic area
The
Company operates in the real estate industry and the operations are concentrated in the State of Massachusetts.
As
of July 31, 2016 three customers comprised 38%, 38% and 24%, respectively of accounts receivable. At April 30, 2016, 100% of accounts
receivable was due from one tenant, respectively.
For
the three months ended July 31, 2016 we had two clients that represented 24% and 14%, respectively of revenues (related party).
For the three months ended July 31, 2015, two tenants represented approximately 17% and 14% of the Company’s revenue.
Rental
Property, Net
Rental
property assets are stated at cost less accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated
useful lives of the asset.
We
capitalize replacements and improvements, such as HVAC equipment, structural replacements, windows, appliances, flooring, carpeting
and renovations. Ordinary repairs and maintenance, such as unit cleaning, painting and appliance repairs, are expensed when incurred.
Asset
|
|
Useful
Life
(in years)
|
Building
|
|
30
years
|
Land
|
|
Indefinite
|
Building Improvements
|
|
30
years
|
Net
loss per common share
Net
loss per common share is computed pursuant to section 260-10-45 of the Financial Accounting Standards Board Accounting Standards
Codification. Basic net loss per common share is computed by dividing net loss by the weighted average number of shares of common
stock outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average
number of shares of common stock and potentially dilutive outstanding shares of common stock during the period.
There
were no potentially dilutive shares outstanding for any periods presented.
Income
Taxes
The
Company utilizes the asset and liability method to measure and record deferred income tax assets and liabilities. Deferred tax
assets and liabilities reflect the future income tax effects of temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
The
Company follows the provisions of Income Taxes Topic of the FASB Accounting Standards Codification, which
provides clarification on accounting for uncertainty in income taxes recognized in an enterprise’s financial
statements. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition,
classification, interest and penalties, disclosure and transition. At July 31, 2016 and April 30, 2016, no significant income
tax uncertainties have been included in the Company’s Balance Sheets. The Company’s policy is to recognize
interest and penalties on unrecognized tax benefits in income tax expense in the Statements of Operations. No interest and
penalties are present for periods open.
The
Company is subject to the United States federal and state income tax examinations by the tax authorities for the 2015, 2014, and
2013 tax years.
Property
Revenue Recognition
Our
commercial property leases are for varied terms ranging from month-to-month to 3 years. Rental income is recognized on a straight-line
basis over the term of the lease.
Rent
concessions, including free rent incurred in connection with commercial property leases, are amortized on a straight-line basis
over the terms of the related leases and are charged as a reduction of rental revenue.
Impairment
of Real Estate Investments
The
Company assesses on a regular basis whether there are any indicators that the carrying value of rental property assets may be
impaired. Potential indicators may include an increase in vacancy at a property, tenant reduction in utilization of a property,
tenant financial instability and the potential sale of the property in the near future. An asset is determined to be impaired
if the asset’s carrying value is in excess of its estimated fair value.
Deferred
Revenue
From
time to time, rental payments may be paid by tenants, but not earned yet by the Company. Such revenue is initially recorded as
a deferred liability and is recognized as revenue once earned. As of July 31, 2016 and April 30, 2016, the Company had $6,098
and $7,459 in deferred revenue, respectively.
Segments
The
Company operates in one segment and therefore segment information is not presented.
NOTE
3 – RECENT ACCOUNTING PRONOUNCEMENTS
In
February 2016, the FASB issued ASU 2016-02,
Leases
, which will amend current lease accounting to require lessees to recognize
(i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted
basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of,
a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors;
however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard
will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We
are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash
flows or financial condition.
In
March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment
Accounting
, which relates to the accounting for employee share-based payments. This standard addresses several aspects of
the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards
as either equity or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal
years beginning after December 15, 2016, including interim periods within those fiscal years. We are currently reviewing the provisions
of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
In April 2016, the FASB
issued ASU 2016–10 Revenue from Contract with Customers (Topic 606): identifying Performance Obligations and Licensing.
The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update
clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance,
while retaining the related principles for those areas. Topic 606 includes implementation guidance on (a) contracts with customers
to transfer goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a
license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point
in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments in this
Update are intended render more detailed implementation guidance with the expectation to reduce the degree of judgement necessary
to comply with Topic 606. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our
results of operations, cash flows or financial condition.
NOTE
4 – GOING CONCERN
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern,
which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. As
reflected in the accompanying consolidated financial statements, the Company had an accumulated deficit of $746,345. These conditions raise substantial doubt about its ability to continue as a going concern.
The
ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business
plan and generate sufficient revenues. The consolidated financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern. Management believes that the actions presently being taken to further
implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern.
The
consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue
in existence.
NOTE
5 – RENTAL PROPERTY, NET
Rental
Property, Net consisted of the following at July 31, 2016 and April 30, 2016:
|
|
July
31,
2016
|
|
|
April
30,
2016
|
|
Land
|
|
358,958
|
|
|
358,958
|
|
Buildings
|
|
|
3,647,917
|
|
|
|
3,647,917
|
|
Leasehold Improvements
|
|
|
149,860
|
|
|
|
149,860
|
|
Accumulated Depreciation
|
|
|
(804,880
|
)
|
|
|
(758,050
|
)
|
Net,
Real Estate Investments
|
|
|
3,351,855
|
|
|
|
3,398,685
|
|
As
of July 31, 2016 and April 30, 2016, real estate investments consisted of three properties:
58
Main St. Topsfield, Ma 01983
|
●
|
Description: 4,000
Square foot, Commercial Building
|
|
|
|
|
●
|
Status: Rented 100%
occupancy. Lease term: 3-Year
|
|
|
|
|
●
|
Owner: Walker Partners,
LLC
|
|
|
|
|
●
|
Purchase Price: $503,000
|
|
|
|
|
●
|
Mortgage Debt as of
July 31, 2016 and April 30, 2016: $520,823 and $525,322, respectively
|
7
Grove St., Topsfield, Ma 01983
|
●
|
Description: 12,000
Square foot, Business Office, Retail and Professional Space
|
|
|
|
|
●
|
Status: Rented at
100% occupancy. Lease term: 3-Year
|
|
|
|
|
●
|
Owner: Grove Realty
Partners, LLC
|
|
|
|
|
●
|
Purchase Price: $2.025
million
|
|
|
|
|
●
|
Mortgage
Debt: On November 1, 2015 WS Advantage elected to convert its mortgage of $1,425,982 and accrued interest of $117,625 in Grove
Realty into 203,711 shares of common stock ($7.58 per share).
|
6
Park St., Topsfield, Ma 01983
|
●
|
Description: 4,500
Square foot, Business Office, Retail and Professional Space
|
|
|
|
|
●
|
Status: Rented at
70% occupancy. Lease term: Monthly
|
|
|
|
|
●
|
Owner: Butler Cabin,
LLC
|
|
|
|
|
●
|
Purchase Price: $1.19
million
|
Depreciation
expense for the three months ended July 31, 2016 and 2015 totaled $46,829 and $23,613, respectively.
NOTE
6 – MORTGAGE AND RELATED PARTY NOTES PAYABLE
58
Main Street
On
January 16, 2014, the Company assumed a mortgage note payable to a third-party, unrelated to the seller, on the property located
at 58 Main Street, Topsfield, Massachusetts. The note bears interest at 4.875% per annum and is due August 26,
2019. Monthly principle and interest payments totaling $4,435 started on September 26, 2009 and will continue through
the maturity date. The mortgage note is secured by the underlying property. At maturity, the balloon payment of $481,454
will be due in full. The remaining principal balance as of July 31, 2016 and April 30, 2016 is $520,823 and $525,322, respectively.
Future
principle requirements on long-term debt for fiscal years ending after July 31, 2016 are as follows:
Mortgage Payable
|
For fiscal year ending
|
|
Future
Payout
|
|
2017
|
|
$
|
5,426
|
|
2018
|
|
|
16,371
|
|
2019
|
|
|
17,572
|
|
2020 and thereafter
|
|
|
481,454
|
|
Total
|
|
$
|
520,823
|
|
NOTE
7 – SECURED LINE OF CREDIT
On
October 14, 2015, by, between and among Grove Realty Partners (the “Borrower”) and Brian Woodland, individually, entered
into a $1,000,000 secured revolving line a credit with a financial institution. The Guarantor has agreed to guaranty the obligations
of the Borrower. The line of credit is securitized by the property at 7 Grove Street and as well as the personal guarantee of
Brian Woodland.
The
revolving line of credit note (hereinafter referred to as the “Note”), made by the Borrower and payable to the order
of the bank, at the initial per annum rate of 265 basis points above LIBOR (3.086% as of April 30, 2016), floating for two (2)
years. The Note shall provide for monthly payments of interest only for the first two (2) years of the term. Thereafter, the Note
shall for the next five (5) years of the Loan term provide for monthly payments of principal and interest based upon the 5/15
Federal Home Loan Bank Rate plus 200 basis points. Monthly payments of principal and interest shall be made based upon a 25-year
amortization schedule, with a final payment of the unpaid principal balance, interest, fees and late charges, if any, due on October
14, 2022.
As
of July 31, 2016 and April 30, 2016 the Company has drawn down a total of $956,113 and $956,113 and recorded accrued interest
of $2,596 and $2,465, respectively.
NOTE
8 – FUTURE RENTS AND TENANT CONCENTRATION
The
Company’s revenue is derived from property leases with varied lease terms. The following table represents future minimum
rents to be received under non-cancelable leases with terms of twelve months or more as of July 31, 2016:
Future Rents
|
2017
|
|
$
|
99,728
|
|
2018
|
|
|
95,520
|
|
2019
|
|
|
43,720
|
|
|
|
$
|
238,968
|
|
For
the three months ended July ended July 31, 2016 we had two clients that represented 24% and 14%, respectively of revenues (related
party). For the three months ended July 31, 2015, two tenants represented approximately 17% and 14% of the Company’s revenue.
NOTE
9 – RELATED PARTY TRANSACTIONS
Related
parties to the Company include, but are not limited to, officers, directors, and shareholders. From time to time, the Company
receives loans and advances from Phalanx Partners and WS Advantage LP for working capital purposes. Phalanx Partners and WS Advantage
LP formerly held equity interests in Grove Realty Partners, LLC and Walker Partners, LLC and are currently shareholders and controlled
by the Company’s president.
An aggregate of $504,218
has been received from related parties for working capital purposes and debt and expenses paid on the Company’s behalf.
These advances are interest-free and payable upon demand. During the three month ended July 31, 2016 and 2015 the Company imputed
interest expense of $7,603 and $7,603, respectively. During the three months ended July 31, 2016 and 2015, the related party received
repayments from the Company $0 and $0 respectively, to fund operations.
During
the three months ended July 31, 2016 and 2015 revenue included $18,678 and $9,000, respectively, in rental income from Phalanx
Partners who is owned by our Principal and Shareholder, who occupies an office in one of the Company’s properties.
During
the three months ended July 31, 2016 a 36% owner of Butler Cabin LLC paid us rental income of $3,960.
On
October 14, 2015, by, between and among Grove Realty Partners (the “Borrower”) and Brian Woodland, individually, entered
into a $1,000,000 secured revolving line a credit with a financial institution. The Guarantor has agreed to guaranty the obligations
of the Borrower. The line of credit is securitized by the property at 7 Grove Street and as well as the personal guarantee of
Brian Woodland (See Note 7).
On
November 1, 2015 WS Advantage elected to convert its mortgage of $1,425,982 and accrued interest of $117,625 in Grove Realty into
203,711 shares of common stock ($7.58 per share).
NOTE
10 – NON-CONTROLLING INTERESTS
On
October 15, 2015, the Company paid a total of $761,355 for the purchase of 64% of Butler Cabin LLC. This entity is controlled
by our President, a principal of Butler Cabin LLC. The Company issued 169,286 shares on November 1, 2015 to acquire the remaining
minority interest portion. Subsequent to November 1, 2015 the parties elected to rescind the share issuance. As of July 31, 2016
the shares were returned to the treasury (See note 11). As of July 31, 2016, our consolidated balance sheets reflected total non-controlling
interests of ($428,344) which represent the equity portion of our subsidiary held by non-controlling investors in Butler Cabin.
Land
|
|
$
|
237,680
|
|
Building
|
|
|
950,715
|
|
Net Assets
|
|
$
|
1,188,395
|
|
NOTE
11 – STOCKHOLDERS’ EQUITY
Common
stock
Common
Stock includes 200,000,000 shares authorized at a par value of $0.0001.
Preferred
stock
Preferred
stock includes 100,000,000 shares authorized at a par value of $0.0001, of which none are issued or outstanding.
On
November 12, 2015, the board of directors of the Company authorized a Certificate of Designations of Preferences, Rights and Limitations
of Series A Preferred Stock (the “Certificate of Designation”), designating
five
(5) shares of Series A Preferred stock. Each share of Series A Preferred shall: (i) have a par value of $0.0001 per share, (ii)
rank on parity with the Company's common stock and any class of series of capital stock hereafter created, and (iii) be convertible
into one share of common stock at the option of the holder until January 1, 2017 after which the right to convert to common stock
ceases. Holders of the Series A Preferred are entitled to vote on all matters submitted to the Company's stockholders and are
entitled to such number of votes as is equal to the number of shares of Series A Preferred stock such holder owns. The holders
of Series A Preferred stock are not entitled to any dividends declared by the Company, nor do such holders have any liquidation
preferences or any other asset distribution rights as it relates to the Company.
Additional
paid in Capital
During the three months
ended July 31, 2016 and 2015 the Company recorded imputed interest on stockholders’ loans of $7,603 and $7,603, respectively.
NOTE
12 – SUBSEQUENT EVENTS
On
August 11, 2016, Magnolia Lane Income Fund (the “Company”) entered into a “Magnolia Lane Share Issuance Agreement”
with a subsidiary, Butler Cabin, LLC. (“Butler”), in which the Company purchased from Butler the remaining ownership
interest (36%) of real property located at 6 Park Street, Topsfield, MA 01983. As consideration for the purchase, the Company
agreed to issue Butler 61,396 shares of common stock of the Company. The Company now owns a 100% interest in 6 Park Street, Topsfield,
MA 01983.
On
August 11, 2016, the Company entered into a “Magnolia Lane Share Issuance Agreement" with Founders Circle Partners,
LLC (“Founders”) whereby the Company purchased from Founders a 100% interest in real property located at 36-42 Main
Street, Topsfield, MA 01983. As consideration for the purchase, the Company agreed to issue Founders 170,831 shares of common
stock of the Company.