10-Q: My City Builders Narrows Losses, Boosts Assets

My City Builders, Inc. reported a significant reduction in net loss and increased assets for the nine months ended April 30, 2025, despite ongoing going concern doubts and internal control weaknesses.

Summary

• Net loss significantly decreased to $215,051 for the nine months ended April 30, 2025, from $1,174,411 in the prior year.
• Revenue from rental income increased to $90,232 for the nine months ended April 30, 2025, up from $35,645 in the previous year.
• Total assets grew to $4,307,607 as of April 30, 2025, from $3,469,049 as of July 31, 2024.
• Working capital improved substantially to $1,523,883 as of April 30, 2025, from $64,205 as of July 31, 2024.
• Total stockholders' equity increased to $2,662,629 as of April 30, 2025, from $1,161,680 as of July 31, 2024.
• Homes inventory for sales increased to $1,933,795 as of April 30, 2025, from $1,613,005 as of July 31, 2024.
• The company sold 100% of its wholly-owned subsidiary, RAC Real Estate Acquisition Corp., to RAC Merger LLC for $2,374,896 on July 8, 2025.
• As of April 30, 2025, 12 homes were completed, with 9 leased at monthly rates ranging from $1,100 to $2,150, and 3 remaining unleased.

Sentiment

Score: 4

Explanation: While the company significantly reduced its net loss and improved working capital, it continues to face substantial doubt about its ability to continue as a going concern, has negative cash flow from operations, and suffers from material weaknesses in internal controls. The sale of its subsidiary RAC, while generating a large 'purchase amount', appears to be an internal restructuring rather than a cash infusion from an external party, and the cash distribution to non-controlling shareholders was minimal. The operational growth in properties is positive, but overshadowed by fundamental financial and governance issues.

Positives

• Net loss decreased significantly by $959,360 to $215,051 for the nine months ended April 30, 2025, compared to $1,174,411 in the prior year.
• Rental income more than doubled, increasing by $54,587 to $90,232 for the nine months ended April 30, 2025.
• Total assets increased by $838,558 to $4,307,607 as of April 30, 2025.
• Working capital improved substantially by $1,459,678 to $1,523,883 as of April 30, 2025.
• Total stockholders' equity increased by $1,500,949 to $2,662,629 as of April 30, 2025.
• Operating expenses decreased by $5,515 to $224,669 for the nine months ended April 30, 2025.
• Successfully settled $1,716,000 in debt to a related party through the issuance of 4,290,000 common shares.
• Acquired additional land in Gadsden, Alabama, for future residential home construction, including plans for up to thirty single-family Garden Homes.
• Successfully leased 9 out of 12 completed homes, generating consistent rental income.

Negatives

• Cash balance decreased by $4,432 to $15,813 as of April 30, 2025, from $20,245 as of July 31, 2024.
• Net cash used in operating activities increased significantly to $644,036 for the nine months ended April 30, 2025, from $172,366 in the prior year.
• Interest expense increased substantially to $79,486 for the nine months ended April 30, 2025, from $9,310 in the prior year.
• Three completed homes with occupancy permits were not yet leased as of April 30, 2025.
• The company continues to operate with an accumulated deficit of $2,234,659 as of April 30, 2025.

Risks

• Substantial doubt exists about the company's ability to continue as a going concern due to recurring net losses and significant cash used in operating activities, requiring additional capital resources.
• Management's plans to raise necessary funding through equity and debt financing may be insufficient to meet capital expenditures and working capital requirements.
• Material weaknesses in internal controls over financial reporting exist due to the absence of segregation of duties, lack of qualified accounting personnel, and excessive reliance on third-party consultants.
• Disclosure controls were not effective as of April 30, 2025, raising concerns about the timely and accurate reporting of material information.
• The principal executive officers lack an accounting background, making the implementation of effective internal controls over financial reporting unlikely in the near future.
• Significant customer concentration risk exists, with 80.98% of rental income for the nine months ended April 30, 2025, derived from eight tenants, and 100% of accounts receivable related to one customer.
• All property homes are collateralized with an outstanding balance of $1,290,272 as of April 30, 2025, increasing financial risk.

Future Outlook

The company plans to continue its focus on real estate transactions, including acquiring, refurbishing, and selling traditional foreclosures, developing and renting properties in 'Land Banks,' and acquiring/developing homes through HECM pools. Specific plans include building 7-8 duplex apartments in Glencoe, Alabama, during calendar year 2025, followed by up to thirty single-family Garden Homes as a Phase Two construction project in Gadsden, Alabama.

Management Comments

• "We were formerly classified as a shell company and have since transitioned into active operations following the acquisition of RAC Real Estate Acquisition Corp. ('RAC'). We no longer maintain the status of a shell company due to these developments."
• "Management plans to raise necessary funding through equity and debt financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements."
• "The ability of the Company is dependent upon, among other things, obtaining financing to continue operations and continue developing the business plan. The Company cannot give any assurance as to the ability to develop or operate profitably."
• "Both executive officers do not have an accounting background which makes it unlikely that we will be able to implement effective internal controls over financial reporting in the near future."

Industry Context

My City Builders operates in the low-income housing and real estate development sector, focusing on acquiring, refurbishing, and developing properties for sale or rent. The company's strategy to target foreclosures, land banks, and HECM pools aligns with broader trends in affordable housing initiatives and capitalizing on distressed asset markets. The expansion into new construction projects in Alabama indicates a growth-oriented approach within this niche, potentially addressing local housing shortages. The sale of its subsidiary, RAC, suggests a strategic realignment or consolidation of operations, though the details imply it's an internal restructuring given RAC Merger LLC's ownership.

Management Changes

Corporate Governance

Legal Proceedings

• RAC filed a complaint for breach of two promissory notes against Fix Pads Holdings, LLC, and for injunctive relief in the 11th Judicial Circuit Court in Miami-Dade County Florida (later removed to the United States District Court for the Southern District of Florida). RAC obtained temporary injunctive relief.
• RAC filed a complaint for appointment of receiver, breach of Limited Liability Company Agreement, and breach of fiduciary duty against Fix Pads Holdings LLC, FixPads Management, LLC and RAC FixPads II, LLC. RAC sought a receiver to wind up real property assets and damages.
• In June 2024, the parties entered into two settlement agreements, resulting in the transfer of 44 properties to the Company, with 29 Quitclaim Deed Certificates issued as of the report date.

Related Party Transactions

• Settlement of $1,716,000 due to one related party in exchange for the issuance of 4,290,000 shares of common stock on January 22, 2025.
• Related parties advanced $1,249,200 to the Company and the Company repaid $340,700 to related parties during the nine months ended April 30, 2025.
• On April 17, 2025, a related party (shareholder and director) obtained $489,400 in bank loans collateralized by four homes, using the proceeds to settle $353,099 of the Company's line of credits, with $136,301 net balance transferred to the Company.
• The sale of RAC Real Estate Acquisition Corp. to RAC Merger LLC for $2,374,896 on July 8, 2025, was a related party transaction as RAC Merger LLC owned 98.5% of My City Builders, Inc.

Stakeholder Impact

• Shareholders: Experienced dilution from the issuance of 4,290,000 common shares to settle related party debt. The sale of RAC to a related party (RAC Merger LLC, which owns 98.5% of My City Builders) means that 98.5% of the purchase amount was satisfied by assignment, with only 1.5% ($35,623.44) distributed in cash to other shareholders, suggesting limited direct cash benefit for minority shareholders from the RAC sale.
• Creditors: The company's ability to continue as a going concern is in doubt, which could impact creditors' ability to recover debts. However, the reduction in 'Due to related parties' from $1,106,000 to $298,500 and the settlement of related party loans indicate some debt restructuring.
• Employees: No specific information on employee impact, but ongoing operational challenges and going concern doubts could create uncertainty.
• Customers (Tenants): Increased rental income and more leased properties suggest continued service, but customer concentration (80.98% from 8 tenants) poses a risk if any major tenant defaults or leaves.

Next Steps

• Renovate and sell the 29 properties obtained from the Fix Pads Holdings LLC settlement.
• Continue construction of three additional homes in East Gadsden, Alabama.
• Build seven to eight duplex apartments on acquired land in Glencoe, Alabama, during calendar year 2025.
• Initiate Phase Two construction project in Gadsden, Alabama, to build up to thirty single-family Garden Homes.
• Renovate and sell the acquired home in Laurel, Mississippi.
• Obtain additional capital resources through equity and debt financing arrangements.
• Address material weaknesses in internal controls over financial reporting.

Key Dates

Recommendation

Despite a significant reduction in net loss and an increase in assets, the company faces substantial doubt about its ability to continue as a going concern, indicating fundamental financial instability. The negative cash flow from operating activities is worsening, suggesting an unsustainable business model without continuous external financing. Material weaknesses in internal controls and a lack of accounting expertise in management raise serious governance and reporting concerns. The 'sale' of the subsidiary RAC appears to be an internal restructuring with minimal cash benefit to non-controlling shareholders, rather than a true external value realization. High customer concentration in rental income adds further risk. These factors collectively point to a highly speculative investment with significant downside risk, warranting a 'sell' recommendation for seasoned investors.

Keywords

Real Estate Development, Low-Income Housing, Property Management, SEC Filing, 10-Q, Financial Performance, Housing Market, Gadsden Alabama, Glencoe Alabama, RAC Real Estate Acquisition Corp., My City Builders, Residential Properties, Rental Income, Going Concern, Internal Controls