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OMEGA COMMERCIAL FINANCE CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 14, 2014

The following management's discussion and analysis should be read in conjunction with our historical combined financial statements and the related notes. The management's discussion and analysis contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words "believe," "plan," "intend," "anticipate," "target," "estimate," "project," "expect" and the like, and/or future tense or conditional constructions ("will," "may," "could," "should," etc)., or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this Current Report. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. We disclaim any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Current Report. Please see "Forward-Looking Statements" and "Risk Factors" for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements.

Overview



We were incorporated in the state of Wyoming on November 6, 1973 under the name DOL Resources, Inc. From inception until October 2002, our primary business activity was the acquisition, disposition, commercialization and/or exploration of interests in oil, gas and/or coal properties. In October 2002, we sold all of our oil and gas properties to Glauber Management Company whereupon we ceased any business operations and became a development stage company, whose activities were limited to that of a shell company seeking to merge with or acquire an operating business.

On September 14, 2007, we entered into a Stock Purchase Agreement and Share Exchange with Omega Capital Funding LLC, a Florida limited liability company (" Omega Capital ") pursuant to which we acquired 100% ownership of Omega Capital (the " Reorganization "). After the Reorganization, our business operations consisted of those of Omega Capital. Prior thereto since 2002, we were a non-operating shell company with no revenue and minimal assets. As a result of the Reorganization, we were no longer considered a shell company.

Since the Reorganization in September 2007, our business operations, through various subsidiaries, have been directed primarily on offering financing to the real estate markets in the United States. We provide short and medium term loans to borrowers primarily consisting of commercial real estate developers and speculators, business owners, landlords, and owners of core and non-core assets.

We focus on various alternative commercial real estate financings with an emphasis on loans secured by commercial real estate and also on financing non-core assets, including ground up developments, as well as core assets, including office buildings, multi-family residences, shopping centers, and luxury residential estates. The loans consist of senior debt loans, mezzanine or subordinated loans, preferred equity, and other equity participation financing structures. Our operations are based primarily in Miami Beach, Florida.

Going Concern



As of June 30, 2014, we have not yet achieved profitable operations. We have accumulated losses since inception, a working capital deficiency and we expect to incur further losses in the development of our business, all of which, according to our accountants, casts substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to generate future profitable operations and/or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. We intend to seek additional funds by equity financing through an offering of our securities and/or related party advances, however there is no assurance of additional funding being available.

Results of Operations - three months ended June 30, 2014 and 2013



Revenues

For the three months ended June 30, 2014 our sales decreased $240,410 compared to the same period in 2013 primarily as a result of delayed contract signing and new business startups.

Cost of Sales



Cost of sales for the three months ended June 30, 2014 increased by $54,800 compared to the same period in 2013 even though our sales decreased, primarily because of ongoing business not yet closed. Cost of sales as a percentage of revenues for the three months ended June 30, 2014 was 456.75% compared to 14.0% for the three months ended June 30, 2013. These increases were primarily as a result of the new business startup, Omega Capital Street, and more due diligence for prospective deals being brought into the company.

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Operating Expenses

Total expenses for the three months ended June 30, 2014 increased by $8,343,784 compared to the same period in 2013. The increase was primarily due to stock and warrants issued for fundraising, convertible debentures issued for operating capital including warrant expenses and derivative expenses, calculated using the Black-Scholes model as well as increased contractor costs, rent and professional fees for operational subsidiaries.

Other Income (Expense)

Total other income (expense) for the three months ended June 30, 2014 was ($3,386,046), due to fair valuation of assets and fair value adjustment of derivative liabilities, compared to ($0) for the three months ended June 30, 2013.

Loss From Operations



Our net loss for the three months ended June 30, 2014 increased by $12,025,040 compared to the same period in 2013 due to the circumstances set forth above.

Results of Operations - six months ended June 30, 2014 and 2013

Revenues

For the six months ended June 30, 2014 our sales decreased $265,362 compared to the same period in 2013 primarily as a result of delayed contract signing and new business startups.

Cost of Sales



Cost of sales for the six months ended June 30, 2014 increased by $55,249 compared to the same period in 2013 even though our sales decreased, primarily because of ongoing business not yet closed. Cost of sales as a percentage of revenues for the six months ended June 30, 2014 was 226.3% compared to 27.3% for the six months ended June 30, 2013. These increases were primarily as a result of the decrease in sales discussed above and partially increased by consulting services related to ongoing projects.

Operating Expenses

Total expenses for the six months ended June 30, 2014 increased by $8,799,807 compared to the same period in 2013. The increase was primarily due to stock and warrants issued for fundraising including warrant expenses and derivative expenses, calculated using the Black-Scholes model as well as increased contractor costs, rent and professional fees for operational subsidiaries.

Other Income (Expense)

Total other income (expense) for the six months ended June 30, 2014 was ($3,931,717), due to fair valuation of assets and fair value adjustment of derivative liabilities, compared to ($22,843) for the six months ended June 30, 2013, which was due to loss on sales of trading securities and interest charges incurred through our margin account, partially offset by $3,765 in interest received on money market funds..

Loss From Operations

Our net loss for the six months ended June 30, 2014 increased by $13,029,292 compared to the same period in 2013 due to the circumstances set forth above.

Capital Resources and Liquidity



Liquidity is a measure of a company's ability to meet potential cash requirements. On June 30, 2014, we had total assets of $99,509 compared to $138,823 on December 31, 2013, a decrease of $39,314 (28.3%). We had total stockholders' deficit of $6,266,229 on June 30, 2013 compared to the deficit of stockholders' equity of $2,740,659 on December 31, 2013, an increase in the deficit of $3,525,570.

All assets are booked at historical cost. Management reviews on an annual basis the book value, along with the prospective dismantlement, restoration, and abandonment costs and estimate residual value for the assets, in comparison to the carrying values on the financial statements.

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Financing - The Equity Line of Credit. On February 8, 2013 we entered into a Standby Equity Purchase Agreement (the "Agreement") with Lambert Private Equity LLC ("Lambert"). The Agreement provides us with an equity line whereby we can sell to Lambert, from time-to-time, our shares of common stock up to an aggregate value of $100 million over a thirty-six month period. Under the terms of the Agreement, once a registration statement becomes effective we will have the right to deliver to Lambert from time-to-time a "Draw Down Notice" stating the dollar amount of common shares we intend to sell to Lambert, up to a maximum of $100 million. Our board of directors will also have the discretion to use the funds for purposes it deems to be in our best interest. There can be no assurance that once we file a registration statement, it will become effective or that we will realize any proceeds from the Agreement. The Agreement will not be effective until the date a registration statement is declared effective by the SEC. On June 3, 2013, the Company issued to Lambert 10,000,000 shares of its common stock under this agreement.

Net cash (used in) operating activities during the six months ended June 30, 2014 was ($300,753) as compared to net cash (used by) operating activities of ($112,115) for the six months ended June 30, 2013. These changes were primarily due to an increase in our net loss partially offset by non-cash expenses in connection with the issuance of common stock for services and debentures issued for operational cash flow.

Net cash used in investing activities during the six months ended June 30, 2014 was $45,133 as compared to net cash used in investing activities of $130,000 for the six months ended June 30, 2014. The decrease was due to non-cash financing of investments offset by cash purchases of trading securities and furniture, fixtures and computers.

Net financing activities for the six months ended June 30, 2014 was $367,649 compared to 140,213 during the six months ended June 30, 2013. The increase was due to sales of convertible debentures, common stock and contribution with no sales of securities.

Cash Requirements



We have not yet achieved profitable operations and expect to incur further losses in the development of our business, cash needs to complete various transactions we have entered into and repay certain indebtedness, the result of which casts substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to generate profitable operations and/or to obtain the necessary financing to meet our obligations and repay our liabilities arising from business operations when they come due. We intend to meet our financial needs for operations by equity and/or debt financing and/or related party advances. In the event we are unable to borrow or raise funds needed for our business, or we are unable to repay our current obligations when due, we will have to seek additional financing, and no assurances can be given that such financing would be available on a timely basis, on terms that are acceptable or at all. Failure to obtain such additional financing could result in delay or indefinite postponement of our planned operations which would materially adversely affect our business, results of operations and financial condition and threaten our financial viability.

Our registration statement on Form S-1 filed with the Securities and Exchange Commission which was declared effective on January 30, 2013, permits us to sell up to 100,000,000 shares of our common stock at $.10 per share for a proposed maximum aggregate offer price of $10,000,000 along with certain selling shareholders who may sell up 31,075,350 shares of our common stock. As of the date of this report, we sold 10,000,000 shares under this registration statement to Lambert as discussed above, 3,000,000 shares to 3 individual investors for cash and reserved 28,000,000 for conversion under the preferred stock issuances.

Any additional funds raised through the issuance of equity or convertible debt securities will reduce the percentage ownership of our stockholders who may experience additional dilution and such securities may have rights, preferences or privileges senior to those of our common stock.

In the next six months, the company's goal is to achieve profitable operations through implementation of our proposed financing products and services.

We do not currently have any contractual restrictions on our ability to incur debt and, accordingly we could incur significant amounts of indebtedness to finance operations. Any such indebtedness could contain covenants which would restrict our operations.

Off-Balance Sheet Arrangements

We currently do not have any off-balance sheet arrangements.

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-------------------------------------------------------------------------------- Critical Accounting Policies and Estimates



Emerging Growth Company

We are an "emerging growth company" under the federal securities laws and will be subject to reduced public company reporting requirements. In addition, Section 107 of the JOBS Act also provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an "emerging growth company" can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are choosing to take advantage of the extended transition period for complying with new or revised accounting standards.

Critical Accounting Policies

Our financial statements 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, revenue, 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.

Our significant accounting policies are summarized in Note 1 of our financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause an effect on our results of operations, financial position or liquidity for the periods presented in this report.

Revenue Recognition

We will be primarily engaged in the sourcing of and providing advice in connection with second- and third-tier financing for commercial development and construction. Revenues are generated from fixed non-refundable processing fees associated with the contractual agreement. Revenues are recorded at the time each contract is signed and fees remitted.

The fees are non-refundable and fixed, which is unconditionally earned and is not contingent on success factors. We recognize revenues as amounts become billable in accordance with contract terms. These revenues based on contractual agreement with us are recognized as the contracts are signed and the fees are received, and amounts are earned in accordance with the Securities and Exchange Commission (the "SEC") Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), as amended by SAB No. 104, "Revenue Recognition" ("SAB 104"). We consider amounts to be earned once evidence of an arrangement has been obtained, the contract signed, and the processing fees remitted.

In the past our fees have not been refundable, which resulted in unclear contracts and several lawsuits. Our contracts have been rewritten to clearly state the processing fees as non-refundable, and customers are clearly informed of the fees and policies. If the Company elects to refund any processing fees, determined on a case by case basis, a loss provision will be recorded in the period in which the loss first becomes probable and reasonably estimable. Contract losses are determined by the contractual agreement and the amount of processing fees associated with the customer. There were $6,540 and $-0- in refunds or anticipated contract refunds as of June 30, 2014 and 2013, respectively.

Fair Value of Financial Instruments

The carrying amounts of our financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities, approximate fair value because of their short maturities.

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Investments in and Advances to Unconsolidated Entities

The trends, uncertainties or other factors that may negatively affected the Company's business and the finance, construction and new development industries in general may also affect the unconsolidated entities in which the Company may have investments. The Company will review each of its investments in unconsolidated entities on a quarterly basis to determine the recoverability of its investment. The Company evaluates the recoverability of its investment in unconsolidated entities, which entails a detailed cash flow analysis using many estimates including but not limited to expected sales pace, expected sales prices, expected incentives, costs incurred and anticipated, sufficiency of financing and capital, competition, and market conditions. When markets deteriorate and it is no longer probable that the Company can recover its investment in a joint venture, the Company impairs its investment. If a joint venture has its own loans or is principally a joint venture to hold an option, such impairment may result in the majority or all of our investment being impaired.

Income Taxes - Valuation Allowance

Significant judgment is required in estimating valuation allowances for deferred tax assets. In accordance with ASC 740, a valuation allowance is established against a deferred tax asset if, based on the available evidence, it is more likely than not that such asset will not be realized. The realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income in either the carryback or carry forward periods under tax law. We periodically assesses the need for valuation allowances for deferred tax assets based on ASC 740's "more-likely-than-not" realization threshold criterion. In our assessment, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency, and severity of current and cumulative income and losses, forecasts of future profitability, the duration of statutory carryback or carry forward periods, its experience with operating loss and tax credit carry forwards being used before expiration, and tax planning alternatives.

In accordance with ASC 740, we assesses whether a valuation allowance should be established based on its determination of whether it is more likely than not that some or all of the deferred tax assets will not be realized. Our assessment of the need for a valuation allowance on its deferred tax assets includes assessing the likely future tax consequences of events that have been recognized in its consolidated financial statements or tax returns. We base our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, on business plans and other expectations about future outcomes. Changes in existing tax laws or rates could affect actual tax results and future business results may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time. Our accounting for deferred tax assets represents its best estimate of future events using the guidance provided by ASC 740.

Due to uncertainties in the estimation process, particularly with respect to changes in facts and circumstances in future reporting periods (carry forward period assumptions), it is reasonably possible that actual results could differ from the estimates used in our historical analyses. Our assumptions require significant judgment because the residential homebuilding industry is cyclical and is highly sensitive to changes in economic conditions. If our results of operations are less than projected and there is insufficient objectively verifiable evidence to support the likely realization of its deferred tax assets, a valuation allowance would be required to reduce or eliminate its deferred tax assets

Stock Based Compensation



From time to time, we have compensated our officers and vendors with the issuance of stock. The value of the transaction is determined by the trading price on the day of the transactions. We anticipate that we will continue to compensate our officers with stock and traditional payments in the future.

Since the stock price is variable and there is no assurance the stock price will remain at any level, the amount of stock issued for services in kind or bonus awards will vary, and dilution may occur.

Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.


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