Item
2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations
The
following is management’s discussion and analysis of financial condition and results of operations and is provided as a
supplement to the accompanying unaudited financial statements and notes to help provide an understanding of our financial condition,
results of operations and cash flows during the periods included in the accompanying unaudited financial statements.
In
this Quarterly Report on Form 10-Q, “Company,” “the Company,” “us,” and “our”
refer to Hubilu Venture Corporation, a Delaware corporation, unless the context requires otherwise.
We
intend the following discussion to assist in the understanding of our financial position and our results of operations for the
three-months ended September 30, 2018 and 2017, respectively. You should refer to the Financial Statements and related Notes in
conjunction with this discussion.
Results
of Operations
General
We
commenced operations in March 2015, which, until June 2015, were limited to organizational and business development activities.
We began implementing our business plan in June 2015. We are real estate advisory and consulting company that assists real estate
investor professionals, as well as established companies, with advisory and consulting services focused on providing research,
analysis and acquisition opportunities. In August 2016, we launched a real estate acquisitions division, which specializes
in student housing income properties and the development of real estate opportunities located near Los Angeles Metro stations
within the Los Angeles Metro/Subway system.
On
August 18, 2016, we entered into a purchase contract (the Zinnia Agreement”) with Zinnia Investments, LLC (“Zinnia”),
a Wyoming limited liability company, which was 100% owned by Esteban Coaloa. On January 3, 2017, Zinnia amended its operating
agreement to admit Jacaranda Investments, Inc. (“Jacaranda”) as a 45% member and the Marisol Trust, Lorenzo Soria,
as Trustee, as a 10% member. On January 3, 2017, all of the members of Zinnia approved the sale of Zinnia to us. Jacaranda is
100% owned by our Chairman and CEO and Esteban Coaloa was our Vice President until his death in 2017. Under the terms of the Zinnia
Agreement, we acquired 100% of the membership interests of Zinnia for $910,695 (the “Purchase Price”). Zinnia’s
sole asset is the real property located at 2909 South Catalina Street, Los Angeles, California (the “Property”). Under
the terms of the Zinnia Agreement, our consideration for the Purchase Price is: (1) a $655,000 All Inclusive Deed of Trust, secured
by the Property, and a promissory note (the “Note”), which bears interest at 6%, interest only, with $145,000 due
in one (1) year and the balance due on in two (2) years; and (2) 270,000 share of our Series 1 Convertible Preferred Stock at
an issuance price of $1.00 per share, for $270,000 (the “Zinnia Preferred Stock”). The interest rate on the Note will
decrease to the greater of 3.5%, principal and interest or the 11
th
District Cost of Funds Index plus 2.8% principal
and interest, rounded up to the nearest 0.125% and adjusted every six (6) months starting the 1
st
day of month 6 following
the $145,000 payoff, and adjusting every 6 months thereafter. The Zinnia Preferred Stock is convertible into our common stock
at the lesser of $0.50 per share or a 10% discount to the average closing price of our common stock for the five (5) days prior
to the holders’ date of conversion. The Zinnia Preferred Stock pays a 5% dividend in-kind, annually. Under the terms of
the Zinnia Agreement, the closing was subject to our verification of title, rental income and our satisfaction with the completion
and results of Zinnia’s audited financial statements. On April 10, 2017, we closed the acquisition of Zinnia.
On
September 26, 2016, we entered into a purchase contract (the Akebia Agreement”) with Akebia Investments, LLC (“Akebia”),
a Wyoming limited liability company, which was 100% owned by Esteban Coaloa, our former Vice President. On January 2, 2017, Akebia
amended its operating agreement and admitted Jacaranda as a 90% member. On January 2, 2017, all of the members of Akebia approved
the sale to us. Jacaranda and Esteban Coaloa are related parties as described above. We agreed to acquire 100% of the membership
interests of Akebia for $882,463 (the “Purchase Price”). Akebia’s sole asset is the real property located at
3711 South Western Avenue, Los Angeles, California (the “Akebia Property”). The terms of the Akebia Agreement, our
consideration for the Purchase Price is: (1) a $710,000 All Inclusive Deed of Trust, secured by the Akebia Property and a promissory
note (the “Akebia Note”), which bears interest at 6%, interest only, with $100,000 due in one (1) year and the balance
due on August 1, 2019; and (2) 180,000 shares of our Series 1 Convertible Preferred Stock at an issuance price of $1.00 per share,
for $180,000 (the “Akebia Preferred Stock”). After the $100,000 is paid off, the interest rate on the balance of the
note will decrease to 4% principal and interest. The Akebia Preferred Stock is convertible into our common stock at the lesser
of $0.50 per share or a 10% discount to the average closing price of our common stock for the five (5) days prior to the holders’
date of conversion. The Akebia Preferred Stock pays a 5% dividend in-kind, annually. Under the terms of the Akebia Agreement,
the closing was subject to our verification of title, rental income and our satisfaction with the completion and results of Akebia’s
audited financial statements. On April 10, 2017, we closed the acquisition of Akebia.
During
the 9 months ended June 30, 2018, we installed Solar Panels at 3711 S. Western Ave, Los Angeles (“Western”). The cost
was $28,300 of which we borrowed $26,500 at 6%. Western is a master metered property for utilities.
We
expect to reduce our electric utility bill at Western by approximately $5,000 per year. After providing for the cost of the loan
we expect to recover the money in approximately 7 to 8 years. The value of the property also increased by approximately $100,000
because of the increase to the bottom line.
On
May 31, 2018, the Company acquired a 100% membership interest in Sunza Investments, LLC, a Wyoming Limited Liability Company (“Sunza”)
for $510,000 (“Purchase Price”). Sunza’s sole asset is the real property located at 3910 Walton Avenue, Los
Angeles CA.
The
terms of the Hubilu membership interest purchase for $510,000 was subject to two loans as follows:
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A $325,500 first
position note owing by Sunza, whose terms of payments due were interest only, payable from April 5, 2018 on unpaid principal
at the rate of 6% per annum. Interest only payable in monthly installments of $1,627.50 or more on the 1st day of each month
beginning on the 1st day of May 2018 and continuing until the 30th day of April 2020, at which time the entire principal balance
together with interest due thereon, shall become due and payable.
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A
$184,500 second position note owing by Sunza, whose terms of payments due were interest only, payable from June 1, 2018 on
unpaid principal at the rate of 6% per annum. Interest only payable in monthly installments of $922.50 or more on the 1st
day of each month beginning on the 1st day of July 2018 and continuing until the 30th day of April 2020, at which time the
entire principal balance together with interest due thereon, shall become due and payable. On September 27, 2018, Sunza Investments,
LLC, a Wyoming Limited Liability Company (“Sunza”), of which the Company is 100% Member, acquired a property at
3910 Wisconsin Ave, Los Angeles, CA 90037 for $475,000 (“Purchase Price”)
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On September 27,
2018, Sunza Investments, LLC, a Wyoming Limited Liability Company (“Sunza”), of which the Company is 100% Member,
acquired a property at 3910 Wisconsin Ave, Los Angeles, CA 90037 for $487,500 (“Purchase Price”)
The terms of the purchase for $475,000 was subject to three loans as follows:
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A first position note with unpaid principal balance of $252,867.91
taken “subject to” the property seller owing their underlying lender, whose terms of payments due are principle
and interest, with the next payment payable from November 1, 2018 on unpaid principal at the rate of 4.375% per annum. Interest
only payable in monthly installments of $1,627.50 or more on the 1st day of each month beginning on the 1st day of November
2018 and continuing until the 30th day of April 2020, at which time the entire principal balance together with interest due
thereon, shall become due and payable. The note was already in effect since
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A $200,000
second position note owing by Sunza to Yerba Mate Corporation, whose terms of payments due were interest only, payable from
November 1, 2018 on unpaid principal at the rate of 9% per annum. Interest only payable in monthly installments of $1,500.00
or more on the 1st day of each month beginning on the 1st day of November 2018 and continuing until the 31st day of October
2020, at which time the entire principal balance together with any outstanding interest due thereon, shall become due and
payable.
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A $40,000 third position note owing by Sunza to Belladonna Lily Investments, Inc. (“Bella”),
whose terms of payments due were interest only, payable from November 1, 2018 on unpaid principal at the rate of 9% per annum.
Interest only payable in monthly installments of $300.00 or more on the 1st day of each month beginning on the 1st day of
November 2018 and continuing until the 30th day of April 2022, at which time the entire principal balance together with any
outstanding interest due thereon, shall become due and payable.
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Our
mission statement is Strategic Growth through Smart Ventures, which is designed to focus us on real estate opportunities that
we believe are recession proof and have limited downside risk, while offering high upside potential in equity appreciation and
cash flow. We will also continue to assist investors and professionals in the early stage analysis of market opportunities and
the evaluation of properties prior to them committing capital for the purchase or the leasing of real estate properties. For our
consulting services, we are focusing our marketing efforts in the commercial markets; however, we are also looking at residential
and income producing markets. We are using the Internet as well as the services of independent sales consultants to market our
services to investors and professionals in Southern California with our primary efforts focused in Beverly Hills and Los Angeles
near the University of Southern California campus. Our real estate acquisitions division will actively be pursuing real estate
acquisitions near the University of Southern California campus. We have had limited consulting operations and have limited financial
resources.
We
are offering services to investors and professionals with the mission to assist them in investment and property evaluation strategies
and provide hands-on support to reduce evaluation time and resources and increase the speed for them to determine whether to proceed
with a real estate lease or investment. Besides general property evaluation services, we are offering services to assist the principals
with property development ideas and investment structure.
In
September 2016, we appointed the following new officers to the company:
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Eric Klein, VP,
Operations & Business Development, 20 years’ experience
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Tracy Black-Van
Wier, VP, Investor Relations, 20 years’ experience
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Chille DeCastro,
VP, Marketing, 20 years’ experience
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In
addition to executing two purchase contracts and expanding our staff, we updated and launched our website and began marketing
the company on various social media platforms including LinkedIn, Twitter, and Facebook.
As
of September 30, 2018, we had $3,993 cash on hand and in the bank. Management does not believe this amount will satisfy our cash
requirements for the next twelve months. We plan to satisfy our future cash requirements - primarily the working capital required
for operations by loans from our shareholders or additional equity financing from related or third parties. The additional equity
financings will likely be in the form of private placements of common stock. As of September 30, 2018, the Company has borrowed
$450,400 from its majority shareholder.
Management
believes that if subsequent private placements are successful, we will generate sales revenue within the following twelve months
thereof. However, additional equity financing may not be available to us on acceptable terms or at all, and thus we could fail
to satisfy our future cash requirements.
If
we are unsuccessful in raising the additional proceeds through a private placement offering, we will then have to seek additional
funds through debt financing, which would be highly difficult for a new development stage company with nominal assets to secure.
Therefore, we are highly dependent upon the success of a future private placement offering and failure thereof would result in
our having to seek capital from other resources such as debt financing, which may not even be available to us. However, if such
financing were available, because we are a startup company with no operations to date, we would likely have to pay additional
costs associated with high-risk loans and be subject to an above market interest rate. At such time these funds are required,
management would evaluate the terms of such debt financing and determine whether the business could sustain operations and growth
and manage the debt load. If we cannot raise additional proceeds via a private placement of our common stock or secure debt financing,
we would be required to cease business operations. As a result, investors in our common stock would lose all of their investment.
At
the present time, we intend to seek various investors to obtain additional equity financing. There can be no assurance that we
will be successful in obtaining additional capital from these negotiations. If are unable to raise additional capital, we will
either suspend marketing operations until we do raise the cash or cease operations entirely. Other than as described in this paragraph
and the preceding paragraphs, we have no other financing plans.
We
are encouraged by the effectiveness under which our properties are operating. Net Operating Income on our properties is
much greater than industry standards of competitive properties in similar locations. To continue to keep our costs low, management
does not plan to hire additional employees at this time. Our officers and directors, as well as independent contractors, will
be responsible for providing consulting services.
The
following discussion of our financial condition and results of operations should be read in conjunction with our unaudited financial
statements for the three months ended September 30, 2018 and 2017, respectively, together with notes thereto, which are included
in this Quarterly Report on Form 10-Q.
Three
months ended September 30, 2018 compared to the three months ended September 30, 2017
Revenues
.
Our revenues increased to $60,183 for the three months ended September 30, 2018 compared to $33,501 for the comparable period
in 2017. The increase is due to the acquisitions of our property in May 31, 2018.
Operating
expenses.
Operating expenses include general and administrative expenses, consulting expense, depreciation, professional fees,
property taxes, rent, repairs and maintenance, transfer agent and filing fees, and utilities. In total, operating expenses increased
$15,340, to $110,547 for the three months ended September 30, 2018 compared to $95,207 for the comparable
period in 2017. The components of operating expenses are discussed below.
General
and administrative expenses decreased $2,821, to $11,953 for the three months ended September 30, 2018 compared
to $14,774 for the comparable period in 2017.
Consulting
expenses decreased $7,291 to $20,324 for the three months ended September 30, 2018 compared to $27,615 for the comparable period
in 2017. The decrease is attributable to the Company replacing a marketing consultant.
Depreciation
expense increased $4,355 to $24,498 for the three months ended September 30, 2018 compared to $20,143 for the comparable period
in 2017.
Professional
fees increased $21,024 to $24,471 for the three months ended September 30, 2018 compared to $3,447 for the comparable period in
2017. The increase is primarily due to the timing of the invoices provided by our professional advisors.
Property
tax expense decreased $912 to ($763) for the three months ended September 30, 2018 compared to $149 for the comparable
period in 2017. The decrease is due to a tax refund.
Rent
expense decreased $301 to $6,899 for the three months ended September 30, 2018 compared to $7,200 for the comparable period in
2017.
Repairs
and maintenance expense decreased $7,890 to $922 for the three months ended September 30, 2018 compared to $8,812 for the comparable
period in 2017. Even though we acquired an additional property during the quarter, our aggressive management and excellent condition
of the properties resulted in reductions of repairs and maintenance.
Transfer
Agent and Filing Fees increased $1,300 to $1,300 for the three months ended September 30, 2018 compared to $0 for the comparable
period in 2017. The increase is due to monthly fees paid.
Utilities
expense decreased $58 to $3,155 for the three months ended September 30, 2018 compared to $3,213 for the comparable period in
2017. Even though we purchased an additional property in the previous quarter and a property at the end of this quarter, the tenants
pay all utilities in both properties.
Promissory
Note Interest expense decreased $2,175 to $4,084 for the three months ended September 30, 2018 compared to $6,259 for the comparable
period in 2017.
Mortgage Interest increased $7,934
to $17,778 for the three months ended September 30, 2018 compared to $9,854 for the comparable period in 2017.
Net
loss.
Our net loss decreased $7,532 to $60,433 for the three months ended September 30, 2018 compared to $67,965 for the comparable
period in 2017. The decrease is attributable to the revenue and expenses discussed above.
Nine
months ended September 30, 2018 compared to the nine months ended September 30, 2017
Revenues
.
Our revenues increased to $158,531 for the nine months ended September 30, 2018 compared to $73,587 for the comparable period
in 2017. The increase is due to the acquisition of our property on May 31, 2018.
Operating
expenses.
Operating expenses include general and administrative expenses, consulting expense, depreciation, professional fees,
property taxes, rent, repairs and maintenance, transfer agent and filing fees, and utilities. In total, operating expenses increased
$281,159 to $539,874 for the nine months ended September 30, 2018 compared to $258,715 for the comparable
period in 2017. The components of operating expenses are discussed below.
General
and administrative expenses decreased $6,926, to $26,875 for the nine months ended September 30, 2018 compared to $33,801 for
the comparable period in 2017.
Consulting
expenses increased $236,557 to $324,272 for the nine months ended September 30, 2018 compared to $87,715 for the comparable period
in 2017. The increase is attributable to the Company issuing stock to a consultant to research potential cryptocurrency opportunities
and investments.
Depreciation
expense increased $19,827 to $60,114 for the nine months ended September 30, 2018 compared to $40,287 for the comparable period
in 2017. The increase is attributable to our acquisitions of our two rental properties in 2018.
Professional
fees increased $9,332 to $40,329 for the nine months ended September 30, 2018 compared to $30,997 for the comparable period in
2017. The increase is primarily due to the timing of the invoices provided by our professional advisors.
Property
tax expense increased $2,503 to $9,328 for the nine months ended September 30, 2018 compared to $6,825 for the comparable period
in 2017. The increase is due to the acquisition of our two rental properties in 2018.
Rent
expense was $20,699 for the nine months ended September 30, 2018 compared to $20,500 for the comparable period in 2017. The increase
is due to a slight increase in our monthly lease rate.
Repairs
and maintenance expense decreased $7,612 to $5,001 for the nine months ended September 30, 2018 compared to $12,613 for the comparable
period in 2017. Even though we acquired two additional properties in 2018, our aggressive management and excellent condition of
the properties, resulted in a decrease of repairs and maintenance.
Transfer
Agent and Filing Fees increased $2,095 to $2,095 for the nine months ended September 30, 2018 compared to $0 for the comparable
period in 2017. The increase is due to issuing stock certificates and other stock certificate resolutions and monthly fees.
Utilities
expense increased $3,781 to $10,104 for the nine months ended September 30, 2018 compared to $6,323 for the comparable period
in 2017. Increase reflects utilities for 9 months vs 6 months.
Promissory
Note Interest expense increased $3,057 to $12,903 for the nine months ended September 30, 2018 compared to $9,846
for the comparable period in 2017.
Mortgage Interest increased $21,403
to $41,057 for the nine months ended September 30, 2018 compared to $19,654 for the comparable period in 2017.
Net
loss.
Our net loss increased $218,131 to $413,105 for the nine months ended September 30, 2018 compared to $194,794 for the
comparable period in 2017. The increase is attributable to the revenue and expenses discussed above.
Liquidity
and Capital Resources
. For the nine months ended September 30, 2018, we borrowed $101,000 from our majority shareholder, which
was advanced to us interest free. We intend to seek additional financing for our working capital, in the form of equity or debt,
to provide us with the necessary capital to accomplish our plan of operation. There can be no assurance that we will be successful
in our efforts to raise additional capital.
Our
total assets are $2,722,454 as of September 30, 2018, consisting of $2,710,361 in net property assets, $3,993 in cash, $6,600
in deposits and $1,500 in prepaid expenses.
Our
total liabilities are $3,290,591 as of September 30, 2018.
As
of September 30, 2018, our total stockholders’ deficit was $568,137 and our accumulated deficit was $955,947.
We had $85,138 in cash used in operating
activities for the nine months ended September 30, 2018, including $413,105 in net loss which was offset by non-cash charges of
$60,114 for depreciation, $260,160 in stock based compensation, $18,859 in financing fees, and a net reduction of $29,266
in accounts payable.
We
used $48,773 in investing activities for the nine months ended September 30, 2018, which was used for building additions
and improvements.
We had $125,916 in cash provided by
financing activities for the nine months ended September 30, 2018.
The
Company had no formal long-term lines or credit or other bank financing arrangements as of September 30, 2018.
The
Company has no current plans for the purchase or sale of any plant or equipment.
The
Company has no current plans to make any changes in the number of employees.
Impact
of Inflation
The
Company believes that inflation has had a negligible effect on operations over the past quarter.
Capital
Expenditures
The
Company spent $36,272 on building improvements during the nine months ended September 30, 2018.
CRITICAL
ACCOUNTING POLICIES
Our
financial statements and related public financial information are based on the application of accounting principles generally
accepted in the United States (
“GAAP”
). GAAP requires the use of estimates; assumptions, judgments and subjective
interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported.
These estimates can also affect supplemental information contained in our external disclosures including information regarding
contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP
and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different
assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Areas
where significant estimation judgments are made and where actual results could differ materially from these estimates are the
carrying value of certain assets and liabilities which are not readily apparent from other sources and the classification of net
operating loss and tax credit carry forwards.
The
following critical accounting policies affect our more significant estimates and assumptions used in preparing our consolidated
financial statements.
Revenue
Recognition
Management
has determined that all of the Company’s leases with its various tenants are operating leases. Rental income is generally
recognized based on the terms of leases entered into with tenants. In those instances, in which the Company funds tenant improvements
and the improvements are deemed to be owned by the Company, revenue recognition will commence when the improvements are substantially
completed, and possession or control of the space is turned over to the tenant.
Asset
Impairment
We
review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the
asset to aggregate future net cash flows (undiscounted and without interest) expected to be generated by the asset. If such assets
are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets
exceed the fair value.