The accompanying notes are an integral part
of the condensed consolidated financial statements.
The accompanying notes are an integral part
of the condensed consolidated financial statements.
The accompanying notes are an integral part
of the condensed consolidated financial statements.
REVEN HOUSING REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2014
NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Reven Housing REIT, Inc. (the “Company”)
was initially incorporated in the State of Colorado and then recently converted to a Maryland corporation on April 1, 2014. The
Company acquires portfolios of occupied and rented single-family homes throughout the United States with the objective of receiving
income from rental property activity and future profits from the sale of rental property at appreciated values.
Basis of Presentation
The accompanying unaudited condensed consolidated
interim financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, all adjustments (which include only normal recurring adjustments except as noted in management’s
discussion and analysis of financial condition and results of operations) necessary to present fairly the financial position, results
of operations and changes in cash flows have been made.
Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States
of America (“GAAP”) have been condensed or omitted. It is suggested that these condensed consolidated financial statements
be read in conjunction with the consolidated financial statements and notes thereto included in the 2013 Annual Report on Form
10-K, filed March 25, 2014. The results of operations for the period ended June 30, 2014 are not necessarily indicative of the
operating results for the full year.
Principles of Consolidation
The accompanying financial statements consolidate
the accounts of the Company and its wholly-owned subsidiaries, Reven Housing Georgia, LLC, Reven Housing Texas, LLC and Reven Housing
Florida, LLC. All significant inter-company transactions have been eliminated in consolidation.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09
Revenue from Contracts with Customers
, or ASU No.
2014-09, which will supersede nearly all existing revenue recognition guidance under GAAP. ASU No. 2014-09 provides that an entity
recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. This update also requires additional disclosure about
the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments
and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU No. 2014-09 allows for
either full retrospective or modified retrospective adoption and will become effective for the Company in the first quarter of
2018.
The Company has adopted all recently issued
accounting pronouncements. The adoption of the accounting pronouncements, including those not yet effective, is not anticipated
to have a material effect on the financial position or results of operations of the Company.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with an original maturity of three months or less as cash equivalents.
Rents and Other Receivables
Rents and other receivables represent the
amount of rent receivables, security deposits and net rental funds which are held by the property manager on behalf of the Company,
net of any allowance for amounts deemed uncollectible.
Tax, Insurance reserves and holdback funds
Tax, insurance reserves and holdback funds represent amounts
held in accordance with the terms of our loan for taxes, insurance and the holdback of funds until our loan was fully funded in
August 2014.
Loan Fees
Loan closing costs and fees totaled $266,503 and will be amortized
over the term of the loan which is 60 months.
NOTE 1. ORGANIZATION, OPERATIONS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Deferred Stock Issuance Costs
Deferred stock issuance costs represent
amounts paid for consulting services and other offering expenses in conjunction with the future raising of additional capital to
be performed within one year. These costs are charged against additional paid-in capital as a cost of the stock issuance upon closing
of the respective stock placement.
Warrant Issuance and Note Conversion
Feature
The Company accounts for the proceeds from
the issuance of convertible notes payable with detachable stock purchase warrants and embedded conversion features in accordance
with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 470-20,
Debt
with Conversion and Other Options.
Under FASB ASC 470-20, the proceeds from the issuance of a debt instrument with detachable
stock purchase warrants shall be allocated to the two elements based on the relative fair values of the debt instrument without
the warrants and of the warrants themselves at the time of issuance. The portion of the proceeds allocated to the warrants is accounted
for as additional paid-in capital and the remaining proceeds are allocated to the debt instrument which resulted in a discount
to debt which is amortized and charged as interest expense over the term of the note agreement. Additionally, pursuant to FASB
ASC 470-20, the intrinsic value of the embedded conversion feature of the convertible notes payable is included in the discount
to debt and amortized and charged to interest expense over the life of the note agreement.
Revenue Recognition
Property is leased under rental agreements of generally one
year and revenue is recognized over the lease term on a straight-line basis.
Income Taxes
The Company intends to elect to be taxed
as a real estate investment trust (“REIT”), as defined in the Internal Revenue Code, commencing with the taxable year
ended December 31, 2014. Management believes that the Company will be able to satisfy the requirements for qualification as a REIT.
Accordingly, the Company is not expecting to be subject to federal income tax, provided that it qualifies as a REIT and distributions
to the stockholders equal or exceed REIT taxable income.
However, qualification and taxation as
a REIT depends upon the Company’s ability to meet the various qualification tests imposed under the Internal Revenue Code
related to the percentage of income that are earned from specified sources, the percentage of assets that fall within specified
categories, the diversity of capital stock ownership, and the percentage of earnings that are distributed. Accordingly, no assurance
can be given that the Company will be organized or be able to operate in a manner so as to qualify or remain qualified as a REIT.
If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal and state income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate tax rates, and the Company may be ineligible to
qualify as a REIT for four subsequent tax years. Even if the Company qualifies as a REIT, it may be subject to certain state or
local income taxes.
The tax benefit of uncertain tax positions
is recognized only if it is “more likely than not” that the tax position will be sustained, based solely on its technical
merits, with the taxing authority having full knowledge of relevant information. The measurement of a tax benefit for an uncertain
tax position that meets the “more likely than not” threshold is based on a cumulative probability model under which
the largest amount of tax benefit recognized is the amount with a greater than 50% likelihood of being realized upon ultimate settlement
with the taxing authority, having full knowledge of all the relevant information. As of December 31, 2013 and June 30, 2014, the
Company had no unrecognized tax benefits. The Company does not anticipate a significant change in the total amount of unrecognized
tax benefits during 2014.
Incentive Compensation Plan
During 2012, the Company established the
2012 Incentive Compensation Plan, which was subsequently amended and restated in December 2013 (“2012 Plan”). The 2012
Plan allows for the grant of options and other awards representing up to 33,000,000 shares of the Company’s common stock.
Such awards may be granted to officers, directors, employees, consultants and other persons who provide services to the Company
or any related entity. Under the 2012 Plan, options may be granted at an exercise price greater than or equal to the market value
at the date of the grant, for owners of 10% or more of the voting shares, at an exercise price of not less than 110% of the market
value. Awards are exercisable over a period of time as determined by a committee designated by the Board of Directors, but in no
event longer than ten years.
On April 4, 2014, the Board of Directors
authorized the issuance of, and the Company issued, an aggregate of 975,000 shares of the Company’s restricted common stock
under the 2012 Plan to the members of the Board of Directors as compensation for their services.
NOTE 1. ORGANIZATION, OPERATIONS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Net Loss Per Share
Net loss per share is computed by dividing
the net loss by the weighted average number of shares of common stock outstanding. Warrants, stock options, and common stock issuable
upon the conversion of the Company's preferred stock (if any), are not included in the computation if the effect would be anti-dilutive
and would increase the earnings or decrease loss per share. For the six months ended June 30, 2013 there were no shares that were
potentially dilutive. For the six months ended June 30, 2014, potentially dilutive securities excluded from the calculations were
5,271,760 shares issuable upon exercise of outstanding warrants granted in conjunction with the convertible notes.
Financial Instruments
The carrying value of the Company’s
financial instruments, as reported in the accompanying condensed consolidated balance sheets, approximates fair value.
Security Deposits
Security deposits represent amounts deposited
by tenants at the inception of the lease.
Use of Estimates
The preparation of the condensed consolidated
financial statements in conformity with GAAP 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 balance sheet dates and reported amounts of
expenses for the periods presented. Accordingly, actual results could differ from those estimates. Significant estimates include
assumptions used to determine the allocation of purchase prices of property acquisitions (Note 1).
Property Acquisitions
The Company accounts for its acquisitions
of real estate in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
805, Accounting for Business Combinations, Goodwill, and Other Intangible Assets, which requires the purchase price of acquired
properties be allocated to the acquired tangible assets and liabilities, consisting of land, building, and identified intangible
assets, consisting of the value of above-market and below-market leases, the value of in-place leases, unamortized lease origination
costs and security deposits, based in each case on their fair values and ASC 970, Real Estate Project Costs, which requires that
pre-acquisition costs relating to the acquisition of property incurred before the property is acquired and are otherwise capitalizable
should be capitalized.
The Company allocates the purchase price
to tangible assets of an acquired property (which includes land and building) based on the estimated fair values of those tangible
assets, assuming the property was vacant. Fair value for land and building is based on the purchase price for these properties.
The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing
and leasing activities in estimating the fair values of the tangible and intangible assets and liabilities acquired.
The total value allocable to intangible
assets acquired, which consists of unamortized lease origination costs and in-place leases (including an above-market or below-market
component of an acquired in-place lease), are allocated based on management’s evaluation of the specific characteristics
of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics considered
by management in allocating these values include the nature and extent of the existing business relationships with the tenant,
growth prospects for developing new business with the tenant, the remaining term of the lease and the tenant’s credit quality,
among other factors. For acquisitions made in 2013 and 2014, management has determined that no value is required to be allocated
to intangible assets, as the leases assumed are short-term with values that are insignificant.
Land, Buildings and Improvements
Land, buildings and improvements are recorded
at cost and depreciated over estimated useful lives of approximately 27.5 years using the straight-line method. Maintenance and
repair costs are charged to operations as incurred.
The Company assesses the impairment of
long-lived assets, whenever events or changes in business circumstances indicate that carrying amounts of the assets may not be
fully recoverable. When such events occur, management determines whether there has been impairment by comparing the asset’s
carrying value with its fair value, as measured by the anticipated undiscounted net cash flows of the asset. Should impairment
exist, the asset is written down to its estimated fair value. The Company has not recognized any impairment losses through June
30, 2014.
NOTE 1. ORGANIZATION, OPERATIONS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Reclassifications
Certain amounts for 2013 have been reclassified
to conform to the current period’s presentation.
NOTE 2. RESIDENTIAL HOMES
Residential homes purchased by the Company
are recorded at cost. The homes are leased on short-term leases expiring on various dates over the coming year.
The following table represents the Company’s investment
in the homes and allocates purchase price in accordance with ASC 805:
|
|
Number
|
|
|
|
|
|
Residential
|
|
|
Total
|
|
|
|
of Homes
|
|
|
Land
|
|
|
Homes
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at December 31, 2013
|
|
|
159
|
|
|
$
|
2,514,009
|
|
|
$
|
10,064,626
|
|
|
$
|
12,578,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased during 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas
|
|
|
18
|
|
|
|
319,500
|
|
|
|
1,264,843
|
|
|
|
1,584,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at June 30, 2014
|
|
|
177
|
|
|
$
|
2,833,509
|
|
|
$
|
11,329,469
|
|
|
$
|
14,162,978
|
|
NOTE 3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
At December 31, 2013 and June 30, 2014,
accounts payable and accrued expenses consisted of the following:
|
|
2013
|
|
|
2014
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
89,666
|
|
|
$
|
89,443
|
|
Accrued property taxes
|
|
|
196,141
|
|
|
|
122,859
|
|
Accrued legal and other expenses
|
|
|
61,372
|
|
|
|
254,131
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
347,179
|
|
|
$
|
466,433
|
|
NOTE 4. NOTE PAYABLE
On June 12, 2014, Reven Housing Texas,
LLC, a wholly owned subsidiary of the Company, issued a promissory note in the principal amount of up to $7,570,000 to Silvergate
Bank, secured by deeds of trust encumbering the Company’s homes located in Texas. The entire balance of principal and accrued
interest is due and payable on July 5, 2019. The note provides for monthly payments of interest only at a rate of 1.00% over the
prime rate (current interest rate is 4.25%) until July 5, 2016. Thereafter, monthly payments of interest and principal, assuming
a 25 year amortization rate will be made until maturity. The note has a prepayment penalty of 3% calculated on principal amounts
prepaid prior to July 5, 2016. There is no prepayment penalty on amounts paid after that date. Loan closing costs and fees totaled
$266,503 and will be amortized over the term of the loan which is 60 months.
As of June 30, 2014, only $1,227,100 of
the principal amount had been drawn by Reven Housing Texas, LLC. The remaining principal amount of $6,342,900 was drawn by Reven
Housing Texas, LLC and advanced by Silvergate Bank on August 6, 2014.
The terms of the note also provide for
escrows of taxes, insurance and holdback funds. As of June 30, 2014, a total of $354,405 of cash was held in these lender escrow
accounts.
NOTE 5. STOCKHOLDERS’ EQUITY
On April 4, 2014, in a separate follow-on
private placement to the September 27, 2013 private placement, the Company issued an additional 13,500,000 shares of its common
stock for a purchase price of $0.20 per share for gross proceeds of $2,700,000. On May 16, 2014, the Company completed the final
tranche of this follow-on private placement with the same accredited investor upon the receipt of additional gross proceeds of
$5,900,000 and issued an additional 29,500,000 shares of its common stock for a purchase price of $0.20 per share. Offering costs
related to this follow-on private placement totaled $227,730 resulting in combined net proceeds of $8,372,270.
NOTE 6. INCOME TAXES
The Company plans to elect REIT status
effective for the year ending December 31, 2014, when it meets all requirements allowing it to do so. At that time, the Company
would generally not be subject to income taxes assuming it complied with the specific distribution rules applicable to REITs.
Realization of deferred tax assets is dependent
upon sufficient future taxable income during the period that deductible temporary differences and expected carry-forwards are available
to reduce taxable income. The Company records a valuation allowance when, in the opinion of management, it is more likely than
not, that the Company will not realize some or all deferred tax assets. As the achievement of required future taxable income is
uncertain, the Company recorded a valuation allowance equal to the deferred tax asset at December 31, 2013 and June 30, 2014. At
December 31, 2013 the Company had federal and state net operating loss carry-forwards of approximately $675,000 and $673,000, respectively.
The federal and state tax loss carry-forwards will begin to expire in 2032, unless previously utilized.
Pursuant to Internal Revenue Code Section
382, use of the Company’s net operating loss carry-forwards may be limited if a cumulative change in ownership of more than
50% occurs within a three year period. Management believes that such an ownership change had occurred but has not performed a study
of the limitations on the net operating losses.
NOTE 7. RELATED PARTY TRANSACTIONS
The Company sub-leases office space on
a month-to-month basis from Reven Capital, LLC which is wholly-owned by Chad M. Carpenter, a shareholder of the Company and the
Company’s Chief Executive Officer, and reimburses Reven Capital for Company expenses paid and previously advanced by Reven
Capital, LLC. The advances are due on demand, unsecured and are non-interest bearing. These advances were paid off in full during
the year ended December 31, 2013. During the period ended June 30, 2013, the Company paid previous advances of $97,117.
NOTE 8. STOCK COMPENSATION
On April 4, 2014, the Board of Directors
authorized the issuance of, and the Company issued, an aggregate of 975,000 shares of the Company’s restricted common stock
under the 2012 Plan to the members of the Board of Directors as compensation for their services. These shares were valued at $.20
per share, for a total expense of $195,000 which has been included in the Company’s Condensed Consolidated Statement of Operations
for the period ended June 30, 2014.
NOTE 9. COMMITMENTS
Property Management Agreement
The Company has entered into property management
agreements with unrelated property management companies in which the Company will pay management fees ranging from six to eight
percent of gross rental receipts.
NOTE 10. SUBSEQUENT EVENTS
On July 7, 2014, Reven Housing Florida,
LLC, a wholly-owned subsidiary of the Company, completed the acquisition of 46 residential homes, pursuant to a purchase and sale
agreement with 7 different sellers. The acquired properties are part of a portfolio of 49 single family homes. The remaining 3
homes will be purchased from $198,387 of funds currently held by the escrow agent once leases are completed. The homes are primarily
three bedroom, one and one-half bath homes with an average size of 1,322 square feet and are located in the Jacksonville, Florida
metropolitan area. The contract purchase price for the 46 homes was approximately $3,181,000, excluding closing costs, which was
funded primarily by cash contributed from the Company.
Of the contract purchase price, $82,265
was funded to escrow to be utilized by the seller for required repairs. These escrow funds will be released to the seller and added
to the acquisition costs as the repairs are completed.
On July 28, 2014, Reven Housing Tennessee,
LLC, a wholly-owned subsidiary of the Company, completed the acquisition of 51 residential homes, pursuant to a purchase and sale
agreement with 3 different sellers. The acquired properties are part of a portfolio of 60 single family homes. The remaining 9
homes will be purchased from $594,000 of funds currently held by the escrow agent once leases are completed. The homes are primarily
three bedroom, two bath homes with an average size of 1,811 square feet and are located in the Memphis, Tennessee metropolitan
area. The contract purchase price for the 51 homes was approximately $4,131,800, excluding closing costs, which was funded primarily
by cash contributed from the Company.
Of the contract purchase price, $209,542 was funded to escrow
to be utilized by the seller for required repairs. These escrow funds will be released to the seller and added to the acquisition
costs as the repairs are completed.
Also on July 28, 2014, Reven Housing Tennessee,
LLC, a wholly-owned subsidiary of the Company, completed the acquisition of 10 residential homes, pursuant to a separate purchase
and sale agreement with another seller. The acquired properties are part of a portfolio of 14 single family homes. The remaining
4 homes will be purchased from $229,000 of funds currently held by the escrow agent once acceptable leases are completed. The homes
are primarily three bedroom, two bath homes with an average size of 1,525 square feet and are located in the Memphis, Tennessee
metropolitan area. The contract purchase price for the 10 homes was approximately $631,000, excluding closing costs, which was
funded primarily by cash contributed from the Company.
Of the contract purchase price $43,000
was funded to escrow to be utilized by the seller for required repairs. These escrow funds will be released to the seller and added
to the acquisition costs as the repairs are completed.
NOTE 10. SUBSEQUENT EVENTS (continued)
The below shows the pro forma effect to
the Company’s balance sheet of the purchase of the homes if the subsequent events had occurred as of June 30, 2014:
|
|
|
|
|
Florida Acquisition
|
|
|
Tennessee Acquisition
|
|
|
Pro Forma
|
|
Reven Housing REIT, Inc and Subsidiaries
|
|
June 30,
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
June 30,
|
|
Unaudited Pro Forma Condensed Balance Sheet
|
|
2014
|
|
|
Adjustments (a)
|
|
|
Adjustments (b)
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in real estate, net
|
|
$
|
13,883,778
|
|
|
$
|
3,151,254
|
|
|
$
|
4,652,559
|
|
|
$
|
21,687,591
|
|
Cash
|
|
|
9,213,610
|
|
|
|
(3,332,434
|
)
|
|
|
(5,662,006
|
)
|
|
|
219,170
|
|
Rents and other receivables
|
|
|
33,193
|
|
|
|
31,412
|
|
|
|
33,820
|
|
|
|
98,425
|
|
Tax, insurance reserves and holdback funds
|
|
|
354,405
|
|
|
|
-
|
|
|
|
-
|
|
|
|
354,405
|
|
Escrow deposits and prepaid expenses
|
|
|
121,294
|
|
|
|
236,097
|
|
|
|
1,114,259
|
|
|
|
1,471,650
|
|
Loan fees
|
|
|
266,503
|
|
|
|
-
|
|
|
|
-
|
|
|
|
266,503
|
|
Deferred stock issuance costs
|
|
|
325,344
|
|
|
|
-
|
|
|
|
-
|
|
|
|
325,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
24,198,127
|
|
|
$
|
86,329
|
|
|
$
|
138,632
|
|
|
$
|
24,423,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
466,433
|
|
|
$
|
54,917
|
|
|
$
|
97,542
|
|
|
$
|
618,892
|
|
Security deposits
|
|
|
176,714
|
|
|
|
31,412
|
|
|
|
41,090
|
|
|
|
249,216
|
|
Note payable
|
|
|
1,227,100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,227,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,870,247
|
|
|
|
86,329
|
|
|
|
138,632
|
|
|
|
2,095,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
131,836
|
|
|
|
-
|
|
|
|
-
|
|
|
|
131,836
|
|
Additional paid-in capital
|
|
|
24,476,475
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,476,475
|
|
Accumulated deficit
|
|
|
(2,280,431
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,280,431
|
)
|
Total Stockholders' Equity
|
|
|
22,327,880
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,327,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
24,198,127
|
|
|
$
|
86,329
|
|
|
$
|
138,632
|
|
|
$
|
24,423,088
|
|
(a) Acquisition of 46 single family homes in Jacksonville, Florida
metropolitan area for cash, allocation of purchase price and recognition of liabilities assumed.
(b) Acquisition of 61 single family homes in Memphis, Tennessee
metropolitan area for cash, allocation of purchase price and recognition of liabilities assumed.
Management has not included a pro forma statement of operations
as we are unable to obtain historical operations information for the acquired properties.