REVEN HOUSING REIT, INC. AND SUBSIDIARY
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
REVEN HOUSING REIT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2011 and 2012
NOTE 1. ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Reven Housing REIT, Inc. and Subsidiary
(the “Company”) (formerly known as Bureau of Fugitive Recovery, Inc.) was incorporated in the State of Colorado on
April 26, 1995. The Company provided bounty hunting services for bail bond businesses through July 2, 2012.
There was a change of control for the Company
when on July 2, 2012; Chad M. Carpenter purchased an aggregate of 5,999,300 shares of the outstanding common stock of the Company
from certain of the Company’s stockholders in a private transaction. As consideration for the shares, Mr. Carpenter paid
a total purchase price of $128,605 in cash from his personal funds. In connection with the transaction, an aggregate of 1,650,000
shares of the Company’s outstanding common stock were returned to treasury for cancellation. Immediately upon the closing
of the transaction, Mr. Carpenter became the majority shareholder of the Company and beneficially owned stock representing 71.8
percent of the outstanding voting shares of the Company.
The Company is now engaged in a new business
and has formerly changed its name from the Bureau of Fugitive Recovery, Inc. to “Reven Housing REIT, Inc.”. The Company
intends to acquire portfolios of occupied and rented single-family houses throughout the United States in accordance with its new
business plan. The Company’s business plan involves (i) acquiring portfolios of rented houses from investors; and (ii) receiving
income from rental property activity and future profits from sale of rental property at appreciated values.
Discontinued Operations
On July 2, 2012, the Company discontinued
operations related to the Bureau of Fugitive Recovery, Inc. upon Chad M. Carpenter becoming the majority shareholder of the Company.
Accordingly, the former operations are classified as discontinued operations in the accompanying consolidated statements of operations.
The assets and liabilities of the former company are separately reflected on the consolidated balance sheet.
Earnings per share attributable to discontinued
operations were $0.0 and $0.0 for 2012 and 2011, respectively.
Going Concern
The Company has suffered losses from operations,
has a working capital deficit, and stockholders' deficit. Further, a company owned by the majority stockholder has provided significant
advances to the Company for operations. The Company in all likelihood will be required to make significant future expenditures
in connection with its new business plan of acquiring portfolios of rental homes along with incurring additional general and administrative
expenses. These conditions raise substantial doubt about the Company’s ability to continue as a going concern should the
Company not be successful in raising new capital.
To carry out
its business plan, the Company will need to seek additional funding and
may raise additional capital through the sale of
its equity securities, through an offering of debt securities, and/or through borrowings from financial institutions. There can
be no assurance that such capital will be available on favorable terms or at all or that any additional capital that the Company
is able to obtain will be sufficient to meet its needs.
The Company is currently in the process of reviewing
potential opportunities to purchase portfolios of rented houses in its target markets across the United States and is seeking additional
investment opportunities.
By doing so, the Company hopes to generate revenues from the rental of its future acquired residential
home portfolios. Management believes that actions presently being taken to obtain additional funding will provide the opportunity
for the Company to continue as a going concern.
Basis of Accounting
The accompanying consolidated balance sheet
is presented in conformity with accounting principles generally accepted in the United States of America ("GAAP").
Principals of Consolidation
The accompanying financial statements consolidate the accounts
of the Company and its wholly-owned subsidiary Reven Housing Georgia, LLC. All significant inter-company transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with an original maturity of three months or less as cash equivalents.
Advances to Property Manager
Advances to property manager represent
the amount of security deposits which are held by the property manager on behalf of the Company.
Deferred Stock Issuance Costs
Deferred stock issuance costs represent
amounts paid for consulting services in conjunction with the anticipated raising of additional capital to be performed within one
year.
Warrant Issuance and Note Conversion
Feature
The Company accounts for the proceeds from
the issuance of convertible notes 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
Revenue for bounty services is recognized on an accrual basis
after services have been performed under contract terms, the service price to the client is fixed or determinable, and collectability
is reasonably assured. Property is leased under rental agreements of varying terms (generally one year) and revenue is recognized
over the lease term on a straight-line basis.
Income Taxes
The Company accounts for income taxes pursuant
to FASB ASC 740,
Income Taxes
. Under FASB ASC 740, deferred taxes are provided on a liability method, whereby, deferred
tax assets are recognized for deductible temporary differences and operating loss carry forwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company accounts for uncertain tax
positions in accordance with FASB ASC 740, which addresses the determination of whether tax benefits claimed or expected to be
claimed on a tax return should be recorded in the financial statements. Under FASB ASC 740, the Company may recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from
such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized
upon ultimate settlement. As of December 31, 2012 and 2011, the Company does not have a liability for unrecognized tax uncertainties.
The Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense. As of December
31, 2012 and 2011, the Company has no interest or penalties related to uncertain tax positions.
The
Company is subject
to routine audits by taxing jurisdictions, however,
currently no audits for any tax periods are in process. Management believes it is not subject to examinations by tax authorities
for tax years prior to 2008.
Pursuant to the Internal Revenue Code,
Sections 382 and 383, use of the Company’s net operating loss and credit carry forwards are limited if a cumulative change
in ownership of more than 50% occurs within a three-year period. Management believes that such a change has taken place as of July
2, 2012. The Company has not yet performed an assessment on the potential limitation on net operating loss and credit carry forwards.
Incentive Compensation Plan
During 2012, the Company established the
2012 Incentive Compensation Plan (“2012 Plan”). The 2012 Plan allows for the grant of options and other awards representing
up to 5,002,500 shares of the Company’s common stock. Such awards may be granted to officers, directors, or employees of
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. No awards have been granted as of December 31, 2012.
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. As of December 31, 2012 there are no shares that are potentially dilutive.
Financial Instruments
The carrying value of the Company’s
financial instruments, as reported in the accompanying consolidated balance sheets, approximates fair value.
Security Deposits
Security deposits represent amounts deposited
by tenants at the inception of the lease. These amounts have been allocated from the purchase price of the residential homes (Note
2). Security deposits amounted to $3,375 at December 31, 2012.
Use of Estimates
The preparation of 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 date and reported amounts of expenses for the periods
presented. Accordingly, actual results could differ from those estimates. Significant estimates include assumptions used to value
warrants and conversion features associated with notes payable (Note 3). Further, 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 FASB 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.
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. As of December 31, 2012, 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.
NOTE 2. RESIDENTIAL HOMES, NET
On November 9, 2012 and January 10, 2013,
Reven Housing Georgia, LLC (a wholly owned subsidiary of Reven Housing REIT, Inc.) completed the acquisition of nine residential
homes (the “Homes”), pursuant to a Purchase and Sale Agreement (“PSA”), dated July 30, 2012 as amended
on August 12, 2012, October 16, 2012 and January 7, 2013. Five of the Homes were purchased on November 10, 2012 at a total cost
including closing expenses of $343,410. The remaining four homes were purchased subsequent to year end at a cost of approximately
$263,000.
In accordance with ASC 805, the Company
allocated the purchase price of the properties acquired on November 9, 2012 as follows:
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|
|
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Total
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Residential
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Purchase
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Land
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Homes
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Price
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7220 Little Fawn Parkway, Palmetto, Georgia
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|
$
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12,874
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|
|
$
|
53,142
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|
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$
|
66,016
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|
5242 Station Circle, Norcross, Georgia
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13,631
|
|
|
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56,171
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69,802
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615 Cowan Road Covington, Georgia
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|
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14,009
|
|
|
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57,686
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71,695
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110 Bear Run Ct., Palmetto, Georgia
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12,874
|
|
|
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53,221
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|
|
|
66,095
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|
4860 Lost Colony, Stone Mountain, Georgia
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|
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13,631
|
|
|
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56,171
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69,802
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|
|
|
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|
|
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|
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|
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|
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$
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67,019
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|
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$
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276,391
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|
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$
|
343,410
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|
The nine Homes are located in various cities
in Georgia, consisting of approximately 12,989 rentable square feet and are located on approximately 2.35 acres of land. The Homes
are 100% leased on short-term leases expiring on various dates through December 31, 2013.
Residential homes purchased by the Company
are recorded at cost. The Homes are depreciated over the estimated useful lives using the straight-line method for financial reporting
purposes. The estimated useful life for the residential homes is estimated to be 27.5 years. Depreciation expense was $1,400 and
$0 for the years ended December 31, 2012 and 2011, respectively.
NOTE 3. CONVERTIBLE NOTES PAYABLE
On July 2, 2012, the Company issued convertible
promissory notes to four accredited investors in the aggregate principal amount of $52,789 (the “Notes”). The maturity
date of the Notes was July 2, 2013 and the Notes bore interest at a rate of 10 percent per annum payable in full on the maturity
date and are unsecured.
Chad M. Carpenter, the President, Chief
Executive Officer, Chief Financial Officer and a member of the Company’s Board of Directors, is one of the investors in the
Notes. The Company issued a Note in the principal amount of $26,395 to Mr. Carpenter prior to Mr. Carpenter joining the Company.
On October 18, 2012, the Company issued
additional convertible promissory notes to five accredited investors in the aggregate principal amount of $500,000 (“October
Notes”). The maturity date for these notes is the earlier of December 31, 2013, or upon the Company raising $5 million of
equity capital. The notes bear interest at a rate of 10 percent per annum payable in full on the maturity date and are unsecured.
Upon the Company successfully raising additional capital, the October Notes may be exchanged by the holders for such securities
of the Company at the same price and on the same terms and conditions being offered to the other investors in such financing, and
the principal and accrued interest under the October Notes will be applied towards the purchase price of such security. The October
Notes may be prepaid in whole or in part at the Company’s option without penalty. Proceeds from the October Notes were utilized
for property acquisitions and to fund payables and operations of the Company.
Chad M. Carpenter was one of the individuals investing in this
new note round and the Company issued a note for $225,000 to Mr. Carpenter in exchange for his additional investment.
Additionally, the Notes issued on July
2, 2012 bearing a principal balance of $52,789, were cancelled and exchanged, along with the accrued interest due of $1,563, for
new notes bearing terms identical to the October Notes round for an aggregate principal balance of $554,352.
Warrant Issuance and Note Conversion Feature
In connection with the issuance of the
above Notes, the Company also issued to the investors 5-year detachable warrants exercisable for shares of the Company’s
common stock issued (the “Warrants”). The exercise price of the Warrants will be the same as the price per share of
the equity securities sold to investors in the qualified equity financing and each Warrant provides for 100% warrant coverage on
the principal amount of the related Note.
The fair value of the warrants were determined
using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, and the risk-free interest
rate. Expected volatilities are based on weighted averages of the selected peer group of thirteen companies as the Company has
no trading history and are estimated over the expected term of the warrants. The risk-free rate is based on the U.S. Treasury yield
curve at October 18, 2012 (date of issuance) for the period of the expected term. Accordingly, the fair value of the proceeds attributable
to warrants of $163,982 and the debt beneficial conversion feature of $163,931 totaling $327,863, have been recorded as an increase
in additional paid-in capital and as a corresponding discount to the notes payable. The discount is being amortized over the term
of the notes payable using the interest method. The amount of the discount amortized and included in interest expense on the consolidated
statements of operations for the year ended December 31, 2012 was $56,530.
A summary of the assumptions used to value
the warrants and the beneficial conversion feature are as follows:
Risk-free interest rate
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0.79
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%
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Expected stock volatility
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48
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%
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Time to expiration (years)
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5
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Fair value of common stock
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$
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1.00
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Expected dividends
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$
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0.00
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NOTE 4. ACCRUED EXPENSES
Significant components of accrued expenses are as follows:
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2011
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2012
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|
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Legal fees
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$
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-
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$
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119,978
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NOTE 5. INCOME TAXES
Significant components of the Company's
deferred tax assets and liabilities are as follows:
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2011
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2012
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Deferred tax assets:
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Start-up costs
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$
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-
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$
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20,000
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Net operating losses
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4,000
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210,000
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Total
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4,000
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|
|
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230,000
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Valuation allowance
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(4,000
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)
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(230,000
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)
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Net deferred tax assets
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$
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-
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|
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$
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-
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|
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, 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. The valuation allowance increased by $226,000 and by $400 during 2012 and 2011, respectively.
At December 31, 2012, the Company had federal net operating loss carry-forwards of approximately $538,000. The federal tax loss
carry-forwards will begin to expire in 2026 and 2019 respectively, unless previously utilized.
Expected income tax by applying the statutory income tax rate
to net loss differs from the actual tax provision as follows:
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2011
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2012
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|
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|
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|
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Tax computed at the federal statutory rate
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$
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(400
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)
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$
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(210,000
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)
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State taxes
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-
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(16,000
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)
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Change in valuation allowance
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400
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226,000
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Total provision
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$
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-
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$
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-
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NOTE 6. RELATED PARTY TRANSACTIONS
At December 31, 2012, the Company had convertible notes payable
outstanding to Chad M. Carpenter in the amount of $252,176, as described more fully in Note 3.
At December 31, 2012, the Company had convertible notes payable
outstanding to certain shareholders of the Company in the amount of $52,177.
At December 31, 2012, the Company owed
Reven Capital, LLC $266,877 for advances made for operating expenses incurred during 2012. The advances are due on demand, unsecured
and are non-interest bearing. Included in these amounts is $18,000 for rent paid on behalf of the Company by Reven Capital, LLC.
The Company sub-leases office space on a month-to-month basis from Reven Capital, LLC. Reven Capital, LLC is wholly-owned by Chad
M. Carpenter.
For the year ended December 31, 2012, the
Company paid $50,000 for consulting services to a company in which a Board of Director member of the Company is the Senior Managing
Principal. Additionally, in conjunction with the consulting services agreement, the Company is obligated to pay an amount equal
to five percent of any funds raised attributable to the efforts of this company.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Property Management Agreement
The Company has entered a property management
agreement with HomeSpot Property Management in which the Company will pay six percent of gross rental receipts.
NOTE 8. SUBSEQUENT EVENTS
On January 3, 2013, the Company issued
additional convertible promissory notes to certain accredited investors in the aggregate principal amount of $500,000. The terms
and conversion feature of these notes are the same as those previously issued (Note 3). Of the additional $500,000 in additional
promissory notes issued, $400,000 was issued to Reven Capital, LLC, an affiliated company 100% owned by Chad M. Carpenter. In
conjunction with these notes, the Company paid Reven Capital, LLC approximately $225,000 of the amount owed as related party advance
at December 31, 2012.
The Company acquired four homes on January
10, 2013, as described more fully in Note 2.
On March 4, 2013, the Company entered into
an employment agreement with Mr. Carpenter commencing March 4, 2013. The Employment Agreement will provide for, among other things,
(i) an initial term of five years; (ii) a base salary at an annual rate of $240,000 commencing on the date on which the Company
has received at least $10,000,000 of capital; (iii) bonuses ranging from 50% to 200% of his base salary based on the satisfaction
of performance criteria to be established by the Board of Directors; (iv) a severance payment equal to two times the sum of his
annual base salary and target bonus plus a lump-sum payment equal to the greater of 1% of the value of the Company at the time
of notice of termination or $2,000,000, less any gross amounts received or realized by Mr. Carpenter in respect of any stock options
or equity awards granted to him during his employment in the event that Mr. Carpenter’s employment is terminated by the Corporation
without cause, Mr. Carpenter leaves for good reason as specified in the Employment Agreement or the Employment Agreement is not
extended by the Company without cause or by Mr. Carpenter for good reason (the “Severance Payment”); and (v) payment
to Mr. Carpenter of the Severance Payment in the event Mr. Carpenter’s employment is terminated by the Company without cause
or by Mr. Carpenter for good reason during the 18-month period following a change in control of the Company.