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CH REAL ESTATE II, INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 18, 2014

Results of Operations

Overview of Earnings for the three month periods ended June 30, 2014 and June 30, 2013

The Company had revenues of $5,075 and $3,848 for the three month periods ended June 30, 2014 and 2013, respectively. The increase in revenue for the three month periods ended June 30, 2014 compared to the three month period ended June 30, 2013 related to increased interest income related to the Company's not receivable. The Company incurred operating expenses of $26,006 and $2,063 for the three month periods ended June 30, 2014 and 2013, respectively. The increase in operating expenses in 2014 primarily relates to increased professional fees related to the Company's public filings. The Company had had net interest expense of $2,706 and $710 for the three month periods ended June 30, 2014 and 2013 respectively. Interest expense increased primarily due to increase related party payables during the year.

Overview of Earnings for the six month periods ended June 30, 2014 and June 30, 2013

The Company had revenues of $238,389 and $5,375 for the six month periods ended June 30, 2014 and 2013, respectively. The increase in revenue for the six months ended 2014 compared to six month period ended June 30, 2013 related to the sale of the property in Salt Lake City (note 3). The Company incurred operating expense of $42,737 and $3,887 during the six month periods ended June 30, 2014 and 2013, respectively. The increase in operating expenses in 2014 primarily relates to increased professional fees related to the Company's public filings. The Company had net interest expense of $4,857 and $1,555 for the six month periods ended June 30, 2014 and 2013, respectively. Interest expense increased primarily due to increase related party payables during the year.

Plan of Operations

Although the Company intends to primarily engage in the purchase, improvement, and disposition of real property, it may also purchase hard money loans with maturity dates of less than a year that are secured by real property and earn above-market interest (in excess of twelve percent (12%) per annum). The Company generally does not perform a formal appraisal of the value of the security, and the Company identifies such Notes via referral from DoHardMoney.com, a company in the business of making hard money loans secured by real estate and managed by an individual that has been our Chief Executive Officer's real estate agent for several years. DoHardMoney.com has their own underwriting standards, with the results reviewed by the Company upon referral of the loan. DoHardMoney.com's underwriting procedure typically includes the following:



The loan to after-repair-value of property should be around 65%



Three qualified realtors informally value the property



Borrower Background Check for criminal record



Verify down payment source if applicable



Receive borrower's loan application short form



Review borrower credit scores and history



Review borrower's purchase contract for property



Verify borrower's company information and verification



Review borrower's submitted contractor bids for property rehabilitation/repair



Review Title Report and insurance



Review 24 month chain of title

Review hazard insurance



The Company does not perform any additional due diligence with respect to loan referrals from DoHardMoney.com other than a review of DoHardMoney.com's underwriting results, and the Company makes its decision to purchase a Note referred by DoHardMoney.com based on that review.

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The Company intends to use its cash flows from operations to partially retire liabilities, beginning with outstanding interest on its related party debt and then principal on that debt, as well as to purchase additional properties. As management expects that the Company will make further purchases of real property during the next year, it expects that the Company's current cash funds and cash flow from operations will only fund its operations for the next six months. The Company intends to seek additional capital from its founder and raise additional capital through private equity financing and/or debt financing if possible.

During our startup phase of operations, we will seek to initially raise approximately $115,000 in additional capital by offering our common stock to business associates through private sales exempt from registration, and the capital raise thereby will be used to acquire additional properties, depending upon management's analysis of the amount by which the subject properties are determined to be priced below their intrinsic values, and/or retire existing debt with the founder if we are unable to locate any such properties. If appropriate "undervalued" properties are located, we anticipate that we will be able to purchase two such properties using all $115,000 in startup capital. Our ability to do so within the projected 18-month startup phase is wholly dependent upon the real estate market and our identification of properties priced enough below their intrinsic values to justify the expenses associated with purchasing, maintaining, repairing/improving, and selling such properties. If the Company is unable to generate capital to fund operations or raise additional capital through the sale of equity, but it does locate properties that it determines offer an attractive risk-reward ratio, it will be forced to borrow funds from its founder or from outside sources on terms it considers less attractive. The startup phase of our operations will be complete when we have generated $50,000 in net profits from our operations.

During our second phase of operations, or our repayment and growth phase, we will need approximately $250,000 in available cash funds, which will be used first to retire existing debt and then to purchase additional properties as available funds permit. We anticipate generating such funds through our startup operations and through additional equity and/or debt raises. Assuming we have $50,000 in available cash funds generated during our startup phase, and have retired existing debt, we anticipate that we will be able to purchase two additional properties. We hope to earn enough from the disposition of these properties to enable us to hire a full-time real estate investor, who will assist us in locating more properties that meet our investment profile.

Our third and final phase will target debt-free growth and will be funded exclusively through cash flow from existing operations or through one or more public or private equity offerings. During this last phase, we will increase our inventory of properties and staff used to locate, improve and market those properties and will expand into other markets outside of Utah.

During the next twelve months, the Company anticipates that it will incur minimal operating expenses aside from the accounting and EDGAR filing expenses associated with being a public company. At the present time, we have not made any arrangements to raise additional cash. We may seek to obtain the funds we need through a public offering, private placement of securities or loans. Other than as described in this paragraph, we have no other financing plans at this time.

Liquidity and Capital Resources

As of June 30, 2014, the Company had cash and cash equivalents of $32,677, with which to continue its operations. Cash flows from operations used $51,226 and $10,317 for the six month periods ended June 30, 2014 and 2013. The Company's management believes that it is in position to fund its operation for the near term. The Company intends to seek financing via private equity investment and debt financing if necessary. Such equity investment would necessarily require the issuance of additional capital stock. We have not identified any potential lenders other than our founder who has loaned us funds in the past. We believe we can currently satisfy our cash requirements for the next twelve months with our current cash and expected revenues. Additionally, we may secure additional funds, for our growth, through our private placement of common stock. Management plans to increase the number of properties for the purpose of achieving a stream of revenue through rental properties. We believe that this plan will sustain future operational growth.

Completion of our plan of operation is subject to attaining adequate and continued revenue. We cannot assure investors that adequate rents and proceeds from out real estate transactions will be generated. In the absence of our anticipated rents and proceeds from sales, we believe that we will be able to proceed with our plan of operations. Even without significant revenues within the next twelve months, based on our current cash position, we anticipate being able to continue with our present activities. Although we believe we currently are adequately financed, we may require additional financing for sales and marketing objectives to achieve our goal of sustained profit, revenue and growth.

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In the event we are not successful in reaching our sustained revenue targets, we anticipate that depending on market conditions and our plan of operations, we could incur operating losses in the future. We base this expectation, in part, on the fact that we may not be able to generate enough gross profit from our property transactions to cover our operating expenses. Consequently, there remains the possibility that the Company may not continue to operate as a going concern in the long term. As described in our market risks, we are subject to many factors. Some of which involve factors outside of management's controls, including interest rates, our ability to attain adequate financing for our property purchases, our ability to hire and retain skills necessary for the repairs of our assets, as well as other factors. Additionally, we benefit from the current market conditions of a high inventory of real estate properties and few buyers, resulting in what we believe is a below normal market price. We do expect market conditions to change, which will affect our profitability as the market becomes more competitive.

We have been funded solely by our majority shareholder for our initial purchase. These funds were necessary for our purchase. We do not have any agreement or written commitment for continued support in our efforts to grow our business plan.

Management believes that current revenue generated and recent investment commitment provides the opportunity for the Company to continue as a going concern and fund the strategic plan.

Subsequent Events None 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. As a result, our financial statements may not be comparable to those of companies that comply with public company effective dates.

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 if 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.

The Company's significant accounting policies were presented as Note 2 to the consolidated financial statements in our Annual Report. 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. Management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.

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Off Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company's financial statements upon adoption.


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Source: Edgar Glimpses


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