Item 1. Business.
Overview
Magnolia Lane Income Fund was incorporated in the state of Delaware on May 12, 2009. We were formed to commence business as a stock agent in the wool trade.
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 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, 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.
Our Operating Strategy
Our business plan is focused on managing real property. Specifically, we intend to acquire real estate in small markets with high degrees of safety to provide income streams to our shareholders. In addition, we will develop, syndicate, manage and acquire property for capital appreciation.
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.
As of April 30, 2016, real estate that we, through our subsidiaries, owned consisted of three properties:
Grove Street, Topsfield, Ma 01983
● Description: 12,000 Square foot, Business Office, Retail and Professional Space
● Status: Rented at 100% occupancy. Lease term: 3-Year
● Owner: Grove Realty Partners, LLC
● Purchase Price: $2.025 million
● Mortgage Debt: 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).
Main Street, Topsfield, Ma 01983
● Description: 4,000 Square foot, Commercial Building
● Status: Rented 100% occupancy. Lease term: 3-Year
● Owner: Walker Partners, LLC
● Purchase Price: $503,000
● Mortgage Debt as of April 30, 2016: $525,322
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
Competition
We believe that we face a lot of competition for properties that meet our investment objectives. Many of our competitors have greater resources than we do. We compete with similarly situated entities engaged in real estate investment activities, including individuals, corporations, banks and insurance company investment accounts, REITs, real estate limited partnerships, the U.S. Government and other entities, to acquire, manage and rent real estate properties. Our competitors may demonstrate significant competitive advantages that result from, among other things, a lower cost of capital, additional access to capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable investments may increase which would cause our competition to increase.
Government Regulation
We do not expect any governmental regulations to have an impact on our planned business operations. Existing laws with which we must comply cover issues that include:
● Corporate Taxes
● Environmental
New laws may impact our ability to market our products in the future. However, we are not aware of any pending laws or regulations that would have an impact on our business.
Employees
As of April 30, 2016, we have no full time employees. Our President, Chief Executive Officer and Chief Financial Officer, Brian Woodland, spends approximately 30 hours per week on the Company’s matters. We believe this is sufficient time to successfully implement our business plan and further commence our operations. We plan to employ qualified employees in the near future.
Item 1A.
Item 1A. Risk Factors.
Smaller reporting companies are not required to provide the information required by this item.
Item 1B.
Item 1B. Unresolved Staff Comments.
Smaller reporting companies are not required to provide the information required by this item.
Item 2.
Item 2. Properties.
Our principal office is located at 7 Grove Street, Topsfield, MA 01983. Our primary telephone number is (978) 887-5981. Our officers are located in a property owned by one of our subsidiary’s Butler Cabin, LLC.
Item 3.
Item 3. Legal Proceedings.
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 4.
Item 4. Mine Safety Disclosures.
Not Applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Price Range of Common Stock
Our common stock is quoted on the OTC Pink under the symbol “MIFC.” The OTC Pink is a quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter equity securities. Although the stock is quoted on OTC Pink, there has been no active trading activity.
Holders
As of July 28, 2016 we had eight (7) record holders of our common stock, holding 2,000,590 shares of common stock.
Holders of our common stock are entitled to one vote for each share on all matters submitted to a stockholder vote. Holders of common stock do not have cumulative voting rights.
Therefore, holders of a majority of the shares of common stock voting for the election of directors can elect all of the directors. Holders of our common stock representing a majority of the voting power of our capital stock issued and outstanding and entitled to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of our stockholders. A vote by the holders of a majority of our outstanding shares is required to effectuate certain fundamental corporate changes such as liquidation, merger or an amendment to our Articles of Incorporation.
Although there are no provisions in our charter or by-laws that may delay, defer or prevent a change in control, we are authorized, without shareholder approval, to issue shares of preferred stock that may contain rights or restrictions that could have this effect.
Holders of common stock are entitled to share in all dividends that the board of directors, in its discretion, declares from legally available funds. In the event of liquidation, dissolution or winding up, each outstanding share entitles its holder to participate pro rata in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the common stock. Holders of our common stock have no pre-emptive rights, no conversion rights and there are no redemption provisions applicable to our common stock.
Dividends
We have never declared or paid dividends on our common stock. We do not intend to declare dividends in the foreseeable future because we anticipate that we will reinvest any future earnings into the development and growth of our business. Any decision as to the future payment of dividends will depend on our results of operations and financial position and such other factors as our Board of Directors in its discretion deems relevant.
Unregistered Sales of Equity Securities
On November 1, 2015, the Company issued 169,256 shares of common stock valued at $1,184,792 ($7.00 per share) to a related party to purchase the remaining minority interest in Butler Cabin LLC. Subsequent to November 1, 2015, the parties elected to rescind the share issuance. As of April 30, 2016 the shares were returned to the treasury.
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).
These shares were issued in reliance on the exemption under Section 4(2) of the Securities Act. These shares of the Company’s common stock qualified for exemption under Section 4(2) since the issuance shares by the Company did not involve a public offering. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the deal, size of the offering, manner of the offering and number of shares offered. In addition, the investors had the necessary investment intent as required by Section 4(2) since they agreed to and received share certificates bearing a legend stating that such shares are restricted pursuant to Rule 144 of the Act. This restriction ensures that these shares would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(2) of the Securities Act for this transaction.
Securities Authorized for Issuance under Equity Compensation Plans
The Company does not have in effect any compensation plans under which the Company’s equity securities are authorized for issuance.
Item 6.
Item 6. Selected Financial Data.
Smaller reporting companies are not required to provide the information required by this item.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following plan of operation provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto.
Overview
Magnolia Lane Income Fund was incorporated in the state of Delaware on May 12, 2009. We were formed to commence business as a stock agent in the wool trade.
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 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, 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 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.
Plan of Operations
Our business plan is focused on managing real property. Specifically, we intend to acquire real estate in small markets with high degrees of safety to provide income streams to our shareholders. In addition, we will develop, syndicate, manage and acquire property for capital appreciation.
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.
As of April 30, 2016, real estate that we, through our subsidiaries, owned consisted of three properties:
Grove Street, Topsfield, Ma 01983
● Description: 12,000 Square foot, Business Office, Retail and Professional Space
● Status: Rented at 100% occupancy. Lease term: 3-Year
● Owner: Grove Realty Partners, LLC
● Purchase Price: $2.025 million
● Mortgage Debt: 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).
Main Street, Topsfield, Ma 01983
● Description: 4,000 Square foot, Commercial Building
● Status: Rented 100% occupancy. Lease term: 3-Year
● Owner: Walker Partners, LLC
● Purchase Price: $503,000
● Mortgage Debt as of April 30, 2016: $525,322
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
Limited Operating History
We have only begun generating modest revenue, have a limited financial history and have limited capital. Our business is subject to risks inherent in growing an enterprise, including limited capital resources and possible rejection of our business model and/or sales methods.
Going Concern
The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate sufficient revenues. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern.
Results of Operations
For the years ended April 30, 2016 and 2015
Revenues were $280,745 for the year ended April 30, 2016 as compared to $248,351 in revenue for the year ended April 30, 2015, an increase in revenue of $32,394. The increase in rental revenue was primarily due the Company purchase of Butler Cabin LLC which resulted in increased rents from a related party. Operating expenses for the year ended April 30, 2016 totaled $487,222 resulting in a loss from operations of $206,477 as compared with operating expenses of $435,645 for the year ended April 30, 2015 resulting in a loss of $187,294. Our operating expenses for the year ended April 30, 2016 consisted of $137,933 in operating costs, $116,307 in professional fees, $23,133 in repairs and maintenance, $98,454 in depreciation and $111,395 in interest expense. Our operating expenses for the year ended April 30, 2015 consisted of $91,813 in operating costs, $91,764 in professional fees, $20,519 in repairs and maintenance, $93,638 in depreciation and $137,911 in interest expense
Capital Resources and Liquidity
We have incurred an accumulated loss of $707,094 since inception which indicates substantial doubt as to our ability to continue as a going concern.
As of April 30, 2016 we had $209,079 cash on hand and net cash used in operations of $22,835. Management believes our current cash balance and the availability of loans from related parties will be adequate to sustain our operations at the current level for the next twelve months. Should we not be able to meet our current financial needs, the Company will seek alternative methods of financing, such as issuing convertible debt or introducing additional shares of its common stock into the market.
As of April 30, 2016, the Company has a stockholders’ equity of $1,601,950. For the year ended April 30, 2016 and 2015, the Company’s net loss available to common stockholders was $199,248 and $187,294, respectively.
Net cash used in operating activities was $22,835 for the year ended April 30, 2016 as compared to net cash provided by operations of $13,985 for the year ended April 30, 2015. This reflects an increase in deferred revenue and restricted cash which was offset by decreased accounts receivable and decreases in accounts payable and accrued expenses.
Net cash used in investing activities was $1,207,251 for the year ended April 30, 2016 and reflects monies paid for the membership interest in Butler Cabin, LLC of $1,191,000 in which was partially offset by cash acquired from the non-controlling interest of $430,103. Net cash used in investing activities was $9,493 for the year ended April 30, 2015 and is comprised of building improvements.
Net cash provided by financing activities amounted to $1,422,149 for the year ended April 30, 2016, and reflects proceeds from a line of credit of $956,113, advances from shareholders of $53,637 which was partially offset by mortgage repayments of $17,372. Net cash used in financing activities amounted to $6,585 for the year ended April 30, 2015, and reflects advances from shareholders of $8,897 which was partially offset by mortgage repayments of $15,482.
Our principal sources of liquidity include cash from rental revenue and loans from shareholders to cover mortgage obligations.
Mortgage Obligations
Main Street
On January 16, 2014, the Company assumed a mortgage note payable to a third-party, unrelated to the seller, on a property located at 58 Main Street, Topsfield, Massachusetts. The note bears interest at 6.75% per annum and is due August 26, 2019. Monthly principal and interest payments totaling $4,320 started on September 26, 2009 and will continue through the maturity date. The mortgage note is secured by the property. At maturity, the balloon payment will be due in full. The remaining principal balance as of April 30, 2016 was $525,322.
Grove Street
On January 16, 2014, the Company assumed a mortgage note payable to a third-party, unrelated to the seller, on a property located at 7 Grove Street, Topsfield, Massachusetts. The note bore interest at 7.9 % per annum and was scheduled to mature on September 5, 2032. Monthly payments of $17,775 started on October 5, 2008. The mortgage note was secured by the property. At maturity, the balloon payment was to be due in full.
On April 12, 2014, the mortgage note payable on the property at 7 Grove Street was paid in full by its majority shareholder. On that same date, a new mortgage payable was established between the Company and its majority shareholder for an amount equal to the balance that was remaining on the original mortgage. The new related party mortgage payable began on April 12, 2014 and is a 5-year fixed loan at 5.5% interest, with a balloon payment on May 15, 2019 for the outstanding balance. Interest only payments until maturity began on May 15, 2014 in the amount of $6,536.
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 April 30, 2016 the Company has drawn down a total of $956,113 which was used to purchase the 64% interest in Butler Cabin, LLC.
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 years ended April 30, 2016 and 2015 the Company imputed interest expense of $30,245 and $27,991, respectively. During the years ended April 30, 2016 and 2015, the related party advanced the Company an additional $53,637 and $8,897, respectively, to fund operations.
During the years ended April 30, 2016 and 2015 included $55,760 and $36,000, 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 year ended April 30, 2016 a 31% owner of Butler Cabin LLC paid us rental income of $6,616.
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.
On October 15, 2015, the Company paid a total of $761,355 for the purchase of 64% 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 April 30, 2016 the shares were returned to the treasury (see note 11).
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).
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Recent Accounting Pronouncements
The Company has reviewed accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the Company’s reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of the Company’s financial management and certain standards are under consideration. Those standards have been addressed in the notes to the audited financial statement and in this, the Company’s Annual Report, filed on Form 10-K for the period ended April 30, 2016.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Smaller reporting companies are not required to provide the information required by this item.
Item 8.
Item 8. Financial Statements and Supplementary Data.
MAGNOLIA LANE INCOME FUND
(fka PALMERSTON STOCK AGENCY, INC.)
April 30, 2016
Index to the Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
Magnolia Lane Income Fund
Topsfield, Massachusetts
We have audited the accompanying consolidated balance sheet of Magnolia Lane Income Fund (the "Company") as of April 30, 2015, and the related consolidated statements of operations, stockholders' deficit and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Magnolia Lane Income Fund as of April 30, 2015 and the results of their operations and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the consolidated financial statements, the Company has an accumulated deficit of $507,846 and stockholders' deficit of $203,694. These factors raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 4. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ BAKER TILLY VIRCHOW KRAUSE, LLP
New York, New York
July 29, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Magnolia Lane Income Fund and Subsidiaries
We have audited the accompanying consolidated balance sheet of Magnolia Lane Income Fund and Subsidiaries (the “Company”) as of April 30, 2016 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year ended April 30, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the financial position of Magnolia Lane Income Fund and Subsidiaries as of April 30, 2016 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the financial statements, the Company has used cash in operations of $22,835 and an accumulated deficit of $707,094 at April 30, 2016. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Note 4. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Very truly yours,
/s/ Liggett & Webb, P.A.
LIGGETT & WEBB, P.A.
Certified Public Accountants
Boynton Beach, Florida
July 29, 2016
MAGNOLIA LANE INCOME FUND
Consolidated Balance Sheets
See accompanying notes to consolidated financial statements.
MAGNOLIA LANE INCOME FUND
Consolidated Statements of Operations
See accompanying notes to consolidated financial statements.
MAGNOLIA LANE INCOME FUND
Consolidated Statement of Stockholders' Equity / (Deficit)
For the Years Ended April 30, 2015 and April 30, 2016
See accompanying notes to consolidated financial statements.
MAGNOLIA LANE INCOME FUND
Consolidated Statements of Cash Flows
See accompanying notes to consolidated financial statements.
MAGNOLIA LANE INCOME FUND
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF APRIL 30, 2016 and 2015
NOTE 1 - ORGANIZATION
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 April 30, 2016, $8,090 of accounts receivable was due from one tenant.
For the year ended April 30, 2016 we had two clients that represented 19% and 16%, respectively of revenues (related party).
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.
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 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 April 30, 2016 and April 30, 2015, the Company had $7,459 and $0 in deferred revenue, respectively.
Segments
The Company operates in one segment and therefore segment information is not presented.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In April 2015, FASB issued Accounting Standards Update (“ASU”) No. 2015-03, “ Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”, is to simplify presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The ASU does not affect the recognition and measurement guidance for debt issuance costs. For public companies, the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
In April 2015, FASB issued Accounting Standards Update (“ASU”) No. 2015-04, “Compensation - Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets”, permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The ASU is effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
In April 2015, FASB issued Accounting Standards Update (“ASU”) No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”, provides guidance to customers about whether a cloud computing arrangement includes a software license. If such an arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for it as a service contract. For public business entities, the ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early application is permitted. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
In April 2015, FASB issued Accounting Standards Update (“ASU”) No. 2015-06, “Earnings Per Share (Topic 260): Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions”, specifies that, for purposes of calculating historical earnings per unit under the two-class method, the earnings (losses) of a transferred business before the date of a drop down transaction should be allocated entirely to the general partner. In that circumstance, the previously reported earnings per unit of the limited partners (which is typically the earnings per unit measure presented in the financial statements) would not change as a result of the dropdown transaction. Qualitative disclosures about how the rights to the earnings (losses) differ before and after the dropdown transaction occurs for purposes of computing earnings per unit under the two-class method also are required. The ASU is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Earlier application is permitted. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
NOTE 4 - GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. As reflected in the accompanying consolidated financial statements, the Company had an accumulated deficit of $707,094 and cash used in operations of $22,835. 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 April 30, 2016 and 2015:
As of April 30, 2016, real estate investments consisted of three properties:
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 April 30, 2016: $525,322
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).
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 years ended April 30, 2016 and 2015 totaled $98,454 and $93,638, respectively.
NOTE 6 - MORTGAGE AND RELATED PARTY NOTES PAYABLE
Main Street
On January 16, 2014, the Company assumed a mortgage note payable to a third-party, unrelated to the seller, on the property located at 58 Main Street, Topsfield, Massachusetts. The note bears interest at 6.75% per annum and is due August 26, 2019. Monthly principle and interest payments totaling $4,320 started on September 26, 2009 and will continue through the maturity date. The mortgage note is secured by the underlying property. At maturity, the balloon payment of $481,454 will be due in full. The remaining principal balance as of April 30, 2016 and 2015 is $525,322 and $542,694, respectively.
Grove Street
On January 16, 2014, the Company assumed a mortgage note payable to a third-party, unrelated to the seller, on the property located at 7 Grove Street, Topsfield, Massachusetts. The note bore interest at 7.9 % per annum and was scheduled to mature on September 5, 2032. Monthly payments of $17,775 started on October 5, 2008. The mortgage note was secured by a mortgage on the property. At maturity, the balloon payment was to be due in full.
On April 12, 2014, the mortgage note payable on the property at 7 Grove Street was paid in full by a shareholder. On that same date, a new mortgage payable was established between the Company and the shareholder for an amount equal to the balance that was remaining on the original mortgage. The new related party mortgage payable began on April 12, 2014 and is a 5-year fixed loan at 5.5% interest, with a balloon payment on May 15, 2019 for the outstanding balance. Interest only payments began on May 15, 2014 in the amount of $6,536 per month. 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). The transaction with the related party was valued at historical cost.
Future principle requirements on long-term debt for fiscal years ending after April 30, 2016 are as follows:
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 April 30, 2016 the Company has drawn down a total of $956,113 and recorded accrued interest of $2,465.
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 April 30, 2016:
For the year ended April 30, 2016, one tenant represented approximately 16% of the Company’s revenue. For the year ended April 30, 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 years ended April 30, 2016 and 2015 the Company imputed interest expense of $30,245 and $27,991, respectively. During the years ended April 30, 2016 and 2015, the related party advanced the Company an additional $53,637 and $8,897, respectively, to fund operations.
During the years ended April 30, 2016 and 2015 included $55,760 and $36,000, 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 year ended April 30, 2016 a 31% owner of Butler Cabin LLC paid us rental income of $6,616.
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 - INCOME TAXES
FASB ASC 740-10 provides guidance for the recognition and measurement of certain tax positions in an enterprise’s financial statements. Recognition involves a determination of whether it is more likely than not that a tax position will be sustained upon examination with the presumption that the tax position will be examined by the appropriate taxing authority having full knowledge of all relevant information.
Pursuant to FASB ASC 740-10-10, an entity recognizes deferred tax assets and liabilities for future tax consequences or events that have been previously recognized in the Company’s financial statements or tax returns. The measurement of deferred tax assets and liabilities is based on provisions of enacted tax law. The effects of future changes in tax laws or rates are not anticipated.
At April 30, 2016, the Company has net operating loss (“NOL”) carry-forwards for Federal income tax purposes of approximately $652,000 that may be offset against future taxable income through 2036. Due to changes in ownership, approximately $121,000 of the NOL carry-forward may be subject to certain annual limitations imposed under Section 382 of the Internal Revenue Code. At this time, the amount of the limitation has not been determined, since the Company has not completed its Section 382 study. Deferred tax assets would arise from the recognition of anticipated utilization of these net operating losses to offset future taxable income. No tax benefit has been reported with respect to these deferred tax assets in the accompanying financial statements because of Management’s assertion that it is more likely than not that the Company’s deferred tax assets of approximately $652,497 will not be realized and accordingly, the deferred tax assets are offset by a full valuation allowance.
NOTE 11 - 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 April 30, 2016 the shares were returned to the treasury (See note 11). As of April 30, 2016, our consolidated balance sheets reflected total non-controlling interests of ($431,050) which represent the equity portion of our subsidiary held by non-controlling investors in Butler Cabin.
NOTE 12 - STOCKHOLDERS’ EQUITY
Common stock
Common Stock includes 200,000,000 shares authorized at a par value of $0.0001.
On November 1, 2015, the Company issued 169,256 shares of common stock valued at $1,184,792 ($7.00 per share) to a related party to purchase the remaining minority interest in Butler Cabin LLC. Subsequent to November 1, 2015, the parties elected to rescind the share issuance. As of April 30, 2016 the shares were returned to the treasury.
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).
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 years ended April 30, 2016 and 2015 the Company recorded imputed interest on stockholders loans of $30,245 and $27,991, respectively.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Previous Independent Registered Public Accounting Firm
(i) On September 4, 2015, Magnolia Lane Income Fund (the “Company”) dismissed its independent registered public accounting firm, Baker Tilly Virchow Krause, LLP (“Baker Tilly”).
(ii) The report of Baker Tilly on the consolidated financial statements of the Company as of April 30, 2015 and 2014, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years ended April 30, 2015 and 2014 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles other than an explanatory paragraph as to a going concern.
(iii) The decision to change the independent registered public accounting firm was recommended and approved by the Board of Directors of the Company.
(iv) During the Company’s two most recent fiscal years ended April 30, 2015 and April 30, 2014, and any subsequent interim periods through September 8, 2015, the date of dismissal, (a) there were no disagreements with Baker Tilly on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Baker Tilly, would have caused it to make reference thereto in its reports on the consolidated financial statements for such years and (b) there were no “reportable events” as described in Item 304(a)(1)(v) of Regulation S-K.
(v) On September 10, 2015, the Company provided Baker Tilly a copy of this Current Report and has requested that it furnish the Company with a letter addressed to the U.S. Securities and Exchange Commission stating whether it agrees with the above statements. A copy of such letter is attached as Exhibit 16.1 to this Current Report on Form 8-K.
New Independent Registered Public Accounting Firm
On September 4, 2015, the Board of Directors of the Company engaged Liggett & Webb, P.A., Certified Public Accountants (“Liggett”) as its new independent registered public accounting firm to audit and review the Company’s consolidated financial statements. During the two most recent fiscal years ended April 30, 2015 and April 30, 2014 and any subsequent interim periods through the date hereof prior to the engagement of Liggett, neither the Company, nor someone on its behalf, has consulted Liggett regarding:
(i) either: the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, and either a written report was provided to the Company or oral advice was provided that the new independent registered public accounting firm concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or
(ii) any matter that was either the subject of a disagreement as defined in paragraph 304(a)(1)(iv) of Regulation S-K or a reportable event as described in paragraph 304(a)(1)(v) of Regulation S-K.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and the principal financial officer, we are responsible for conducting an evaluation of the effectiveness of the design and operation of our internal controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the fiscal year covered by this report. Disclosure controls and procedures means that the material information required to be included in our Securities and Exchange Commission (“SEC”) reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms relating to our company, including any consolidating subsidiaries, and was made known to us by others within those entities, particularly during the period when this report was being prepared. Based on this evaluation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were ineffective as of April 30, 2016 due to the material weaknesses identified below.
Management's Annual Report on Internal Control Over Financial Reporting.
As of April 30, 2016, management assessed the effectiveness of our internal control over financial reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the Company’s Chief Executive Officer and Chief Financial Officer and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP in the United States of America and includes those policies and procedures that:
☐ Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets;
☐ Provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
☐ Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statement.
In evaluating the effectiveness of our internal control over financial reporting, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer who also serves as our principal accounting officer concluded that, during the period covered by this report, such internal controls and procedures were ineffective to detect the inappropriate application of US GAAP rules as more fully described below.
This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (i) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (ii) inadequate segregation of duties consistent with control objectives; and (iii) ineffective controls over period end financial disclosure and reporting processes. The aforementioned material weaknesses were identified by our President in connection with the review of our financial statements as of April 30, 2016.
Management believes that the lack of a functioning audit committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods.
Our management has begun evaluating remedies to reduce these deficiencies. However, we will not be able to implement any remedial measures, such as appointing independent members on our board of directors, until we have sufficient fund to do so.
Changes in Internal Control over Financial Reporting
No change in our system of internal control over financial reporting occurred during the period covered by this report (the fourth quarter of the fiscal year ended April 30, 2016) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
The following table sets forth the name and age of our officer and director as of April 30, 2016. The number of directors is determined by the Company’s board of directors. All of the Company’s directors hold office until the next annual meeting of the board or until their successors have been duly elected and qualified. The Company’s officers are elected by the Company’s board of directors and their terms of office are, except to the extent governed by employment contract, at the discretion of the Company’s board of directors.
Set forth below is a brief description of the background and business experience of our executive officer and director for the past five years.
Brian Woodland, age 44, Brian has 20 years of investment management experience. He has specialized in managing portfolios for individuals and small institutions during his career. He has also worked closely with trading desks, research analysts, and buy-side portfolio managers at different firms during his career. Brian began his career with Winthrop Securities in 1992. In 1993 joined Olde Financial and became an assistant Branch Manager. Brian joined Cowen & Company in 1996, as a Vice President in the Private Client Group, working with small institutions and private clients. Cowen was widely recognized for its research excellence, specifically in the areas of Technology and Healthcare.
Brian joined Salomon Smith Barney as a Senior Vice President of Investments in Boston, MA in 2000. Mr. Woodland managed portfolios for individuals, small institutions, and advised small institutional clients of the firm. Brian was certified as a Financial Planning Specialist for the firm in 2003. Brian left Smith Barney to start Woodland Asset Management in 2006, where he managed portfolios for private clients and small institutions. In 2008, Brian founded and became President of Phalanx Trading, LLC. In 2009, Brian also rebranded WAM into Phalanx Wealth Management in 2009.
Brian holds the Series 7, 8, 22, 24, 63, and 65 individual securities industry qualifying examinations.
Term of Office
Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board.
Employment Agreements
We currently do not have an employment agreement with Mr. Brian Woodland.
Family Relationships
Because Mr. Woodland serves as our sole executive officer and director, there are no family relationships between our director and executive officer.
Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years:
● been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
● had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
● been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
● been found by a court of competent jurisdiction in a civil action or by the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
● been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
● been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our directors and executive officers and persons who beneficially own more than 10% of our common stock to file initial reports of ownership and changes in ownership with the SEC. To the Company’s knowledge based on our review of copies of such reports furnished to us, all of the Company’s current directors, executive officers and beneficial owners of more than 10% of our common stock have complied with all Section 16(a) filing requirements with respect to the fiscal year ended April 30, 2016.
Code of Ethics
We have not adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions, because of the small number of persons involved in the management of the Company.
Board Committees
Our Board of Directors has no separate committees and our Board of Directors acts as the audit committee and the compensation committee. We do not have an audit committee financial expert serving on our Board of Directors.
Item 11.
Item 11. Executive Compensation.
The following summary compensation table sets forth all compensation awarded to, earned by, or paid to the named executive officers paid by us during the year ended April 30, 2016.
SUMMARY COMPENSATION TABLE
Outstanding Equity Awards at Fiscal Year-End Table
There were no outstanding equity awards at April 30, 2016.
Compensation of Directors
Directors are permitted to receive fixed fees and other compensation for their services as directors. The Board of Directors has the authority to fix the compensation of directors. No amounts have been paid to, or accrued to, directors in such capacity.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table shows the number of our securities beneficially owned by our named executive officers, our director, our executive officers and directors as a group, and each person known to us to own more than 5% of our outstanding shares of common stock as of July 28, 2016. Except as otherwise indicated, all shares are owned directly and the shareholders possess sole voting and investment power with respect to the shares listed below.
(1) Based upon 2,000,590 shares of common stock issued and outstanding shares as of July 28, 2016.
(2) Owned individually and also indirectly through Magnolia Lane Financial, Inc., Phalanx Partners, LLC and WS Advantage LP.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
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 years ended April 30, 2016 and 2015 the Company imputed interest expense of $30,245 and $27,991, respectively. During the years ended April 30, 2016 and 2015, the related party advanced the Company an additional $53,637 and $8,897, respectively, to fund operations.
During the years ended April 30, 2016 and 2015 included $55,760 and $36,000, 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 year ended April 30, 2016 a 31% owner of Butler Cabin LLC paid us rental income of $6,616.
On October 14, 2015, by, between and among Grove Realty Partners 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.
On October 15, 2015, the Company paid a total of $761,355 for the purchase of 64% 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 April 30, 2016 the shares were returned to the treasury (See note 11).
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).
Item 14.
Item 14. Principal Accounting Fees and Services.
Audit Fees
For the Company’s fiscal years ended April 30, 2016 and 2015, we were billed approximately $56,575 and $68,300, respectively, by Baker Tilly Virchow Krause, LLP (formerly, Holtz Rubenstein Reminick, LLP) for professional services rendered for the audit and interim review of our financial statements filed with the Securities and Exchange Commission. For the Company’s fiscal years ended April 30, 2016 and 2015, we were billed approximately $33,500 and $0, respectively, by Liggett & Webb, PA for professional services rendered for the audit and interim review of our financial statements filed with the Securities and Exchange Commission.
Audit-Related Fees
There were no other fees for audit related services for the years ended April 30, 2016 and 2015.
Tax Fees and Other Fees
For the Company’s fiscal year ended April 30, 2016 and 2015, there were no fees billed for professional services rendered for tax compliance, tax advice, and tax planning or other services.
Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before our auditor is engaged by us to render any auditing or permitted non-audit related service, the engagement be:
● approved by our audit committee; or
● entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee’s responsibilities to management.
We do not have an audit committee. Our entire board of directors pre-approves all services provided by our independent auditors. The pre-approval process has just been implemented in response to the new rules. Therefore, our board of directors does not have records of what percentage of the above fees was pre-approved. However, all of the above services and fees were reviewed and approved by the entire board of directors either before or after the respective services were rendered.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this report:
Financial Statements: See Part II, Item 8 of this Report.
Exhibits: The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Report.
(b) The following are exhibits to this Report and, if incorporated by reference, we have indicated the document previously filed with the SEC in which the exhibit was included.
Certain of the agreements filed as exhibits to this Report contain representations and warranties by the parties to the agreements that have been made solely for the benefit of the parties to the agreement. These representations and warranties:
● may have been qualified by disclosures that were made to the other parties in connection with the negotiation of the agreements, which disclosures are not necessarily reflected in the agreements;
● may apply standards of materiality that differ from those of a reasonable investor; and
● were made only as of specified dates contained in the agreements and are subject to subsequent developments and changed circumstances.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date that these representations and warranties were made or at any other time. Investors should not rely on them as statements of fact.
(1) Incorporated by reference to the registration statement on Form S-1 filed with Securities and Exchange Commission on November 12, 2010.
(2) Incorporated by reference to the Form 10-Q filed with Securities and Exchange Commission on March 10, 2016.
(3) Incorporated by reference to the registration statement on Form 10-Q filed with Securities and Exchange Commission on July 30, 2014.
(4) Incorporated by reference to the Form 8-K filed with Securities and Exchange Commission on April 6, 2016.
(*) Filed herewith
+ In accordance with SEC Release 33-8238, Exhibit 32.1 is being furnished and not filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
MAGNOLIA LANE INCOME FUND
Dated: July 29, 2016 By: /s/ Brian Woodland
Brian Woodland
President, Chief Executive Officer, Chief Financial Officer and Director (Principal Executive Officer, Principal Financial and Accounting Officer)