The accompanying notes are an integral part of these audited consolidated financial statements.
The accompanying notes are an integral part of these audited consolidated financial statements.
The accompanying notes are an integral part of these audited consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Organization and Description of Business
Grow Capital, Inc. (the "Company," “we,” or “us”) (f/k/a Grown Condos, Inc.) was incorporated on October 22, 1999, in the State of Nevada.
Our former wholly owned subsidiary, WCS Enterprises, Inc. (“WCS”) is an Oregon limited liability company which was formed on September 9, 2013 with operations beginning in October 2013. WCS is a real estate purchaser, developer and manager of specific use industrial properties providing "Condo" style turn-key aeroponics grow facilities to support cannabis farmers. WCS owns, leases, sells and manages multi- tenant properties so as to reduce the risk of ownership and reduce costs to tenants and owners. WCS currently owns a condominium property in Eagle Point, Oregon (the “Eagle Point Property”). On September 30, 2019, we sold WCS to the Wayne A. Zallen Trust u/a/d/ 10/24/2014 (the “Zallen Trust”), of which Wayne Zallen, our former CEO and Chairman, is the trustee and a beneficiary. See Note 3 for further information.
Our wholly owned subsidiary, Smoke on the Water, Inc. was incorporated on October 21, 2016, in the State of Nevada. Smoke on the Water is focused on operating properties in the RV and campground rental industry and currently owns the Lake Selmac Resort located at 2700 Lakeshore Drive, Selma, Oregon (the “Lake Selmac Property”).
Our wholly owned subsidiary Bombshell Technologies, Inc. (“Bombshell”), was formed as Bombshell Technologies, LLC on November 5, 2018 and converted into a corporation on June 24, 2019. We acquired Bombshell on July 23, 2019 (See Note 11). Bombshell is a full-service design and software development company focused on developing and selling software to financial services firms and advisors and is the first acquisition as part of our strategic shift into the financial technology (“FinTech”) sector and related sectors.
On June 22, 2018, the Board of Directors of the Company approved an amendment to our articles of incorporation to increase our authorized capital to 180,000,000 shares, consisting of 175,000,000 shares of common stock (“Common Stock”), par value $0.001, and 5,000,000 shares of preferred stock (“Preferred Stock”), par value $0.001 (the “Recapitalization”) and to change the name of the Company to “Grow Capital, Inc.” The Company filed articles of amendment with the State of Nevada to effect the aforementioned changes on July 10, 2018 and August 28, 2018, respectively. The Company received approval from the Financial Industry Regulatory Authority ("FINRA") for the above noted corporate actions on August 8, 2019.
On July 23, 2019, and effective July 25, 2019, the Board of Directors of the Company and the holders of our outstanding capital stock having a majority of the voting power, respectively, adopted resolutions to amend and restate our articles of incorporation to increase our authorized capital to 550,000,000 shares, consisting of 500,000,000 shares of Common Stock and 50,000,000 shares of Preferred Stock. The effective date of the aforementioned actions was August 29, 2019.
In connection with its name change, the Company has adopted a business plan focused on shifting the Company’s strategy away from rental activities focused in the cannabis industry and into the FinTech sector and related sectors. In connection with this strategy, the Company has hired a new Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) and appointed a new chairman of the Company’s board of directors (the “Board”), all of whom have significant experience in the FinTech sector. The Company intends to acquire FinTech companies, such as Bombshell (see Note 11), with a clear niche and strong leadership and use its experience and understanding of the FinTech sector and access to the public markets to help its acquisitions grow. The Company is currently in the process of identifying suitable acquisitions and completing those acquisitions. In connection with the shift in the Company’s strategy away from rental activities focused in the cannabis industry, the Company sold WCS on September 30, 2019, and has determined to divest Smoke on the Water, which it is currently actively marketing . In connection with these efforts, management of the Company has determined it is appropriate to include the operations of WCS and Smoke on the Water in this report as Assets and Liabilities Held for Sale (See Note 3). As the Company moves away from the cannabis industry and into financial technology and related sectors, Grow
F-7
GROW CAPITAL, INC.
AND SUBSIDIARIES
(formerly Grow Condos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capital expects to identify suitable acquisitions, complete those acquisitions, and grow those companies. Any potential acquisitions or divestitures remain subject to final agreements, due diligence, and typical closing conditions.
Going Concern
During the fiscal year ended June 30, 2019 and 2018, the Company reported a net loss of $2,405,097 and $2,482,639, respectively, combined with a working capital deficit of approximately $481,000 (after removing prepaid stock-based compensation) with approximately $483,000 of cash on hand. The Company believes that as of June 30, 2019 its existing capital resources are not adequate to enable it to fully execute its business plan. While the Company acquired an operating business is the FinTech sector subsequent to fiscal year end, which is generating net income as at June 30, 2019, we do not believe the additional cash flows are yet sufficient to meet all of our anticipated operational overhead for fiscal 2020. These conditions raise substantial doubt as to the Company's ability to continue as a going concern. During fiscal 2019 the Company raised gross proceeds from private placements of our common shares of $1,765,000 which were allocated to working capital and to retire certain debt obligations. These funds were raised for use in the execution of the Company’s shift away from the cannabis industry and towards its new business plan focused on acquisitions in the FinTech sector and other related sectors. As part of this plan, the Company has sold WCS as of September 30, 2019 and Smoke on the Water is currently being offered for sale (See Note 3). If the Company fails to sell Smoke on the Water, generate positive cash flow or obtain additional financing, when required, the Company may have to modify, delay, or abandon some or all of its business and expansion plans, and potentially cease operations altogether. The accompanying consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States ("GAAP"), and pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC").
Consolidation
These consolidated financial statements include the accounts of Grow Capital, Inc. and its wholly-owned subsidiaries, WCS and Smoke on the Water, as of June 30, 2019. All significant intercompany accounting transactions have been eliminated as a result of consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We believe that it is at least reasonably possible that the estimates of amounts realizable upon our properties currently for sale at the date of the financial statements will change in the near term due to one or more future confirming events and the effect of the change would be material to the financial statements.
Cash and Cash Equivalents
For financial accounting purposes, cash and cash equivalents are considered to be all highly liquid investments with a maturity of three (3) months or less at the time of purchase.
Concentration of Credit Risk
F-8
GROW CAPITAL, INC.
AND SUBSIDIARIES
(formerly Grow Condos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At June 30, 2019, the Company had $212,985 in excess of the FDIC insured limit, respectively.
Lease Receivables and deferred rent
Lease receivables are recognized when rents are due, and for the straight-line adjustment to rents over the term of the lease less an allowance for expected uncollectible amounts. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, the customer's willingness or ability to pay, the Company's compliance with lease terms, the effect of general economic conditions and the ongoing relationship with the customer. Accounts with outstanding balances longer than the payment terms are considered past due. We do not charge interest on past due balances. The Company writes off lease receivables when it determines that they have become uncollectible after all reasonable collection efforts have been made. If we record bad debt expense, the amount is reflected as a component of operating expenses in the statements of operations. As of June 30, 2019, and June 30, 2018, an allowance for doubtful accounts was recorded in the amount of $2,861. As of June 30, 2019, and June 30, 2018, the Company had recorded deferred rent for the straight-line value of rental income of $6,150 as part of assets held for sale.
Investment In and Valuation of Real Estate Assets
Real estate assets are stated at cost, less accumulated depreciation and amortization. Amounts capitalized to real estate assets consist of the cost of acquisition (excluding acquisition related expenses), construction costs, and mortgage interest during the period the facilities are under construction and prior to readiness for occupancy, and any tenant improvements, major improvements and betterments that extend the useful life of the real estate assets and leasing costs. All repairs and maintenance are expensed as incurred.
The Company is required to make subjective assessments as to the useful lives of its depreciable assets. The Company considers the period of future benefit of each respective asset to determine the appropriate useful life of the assets. Real estate assets, other than land, are depreciated on a straight-line basis over the estimated useful life of the asset.
The estimated useful lives of the Company's real estate assets by class are generally as follows:
Land
|
Indefinite
|
Buildings
|
40 years
|
Tenant improvements
|
Lesser of useful life or lease term
|
Intangible lease assets
|
Lease term
|
Revenue Recognition
Condominium rentals
We recognize rental income from the lease of our condo spaces ratably over the term of the rental contracts dependent upon the total cash payable to the Company by the tenant under the lease contract, which takes into account any free rental periods or rent escalation clauses granted in the contracts. In the event that tenants continue to rent past the termination date of rental contracts, rents are negotiated and recorded on a month-to-month basis.
Campground space rentals and concession sales
Because we rent to individuals who plan on engaging in activities that include the consumption of cannabis products while they stay at our campground facilities, we do not document our transactions for the sale of concession items or space or equipment rentals at the facility. We therefore record our revenue on a cash basis.
F-9
GROW CAPITAL, INC.
AND SUBSIDIARIES
(formerly Grow Condos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase Options
From time to time we enter into contracts with our tenants that allow the tenants the right to purchase the condominium spaces that they rent from us. Those contracts contain provisions that allow the tenant to deposit monthly or quarterly their down payment for the proposed sale, which we retain as a long-term deposit. In the event that the customer exercises the contract right, the Company and tenant determine a fair value and use the amount deposited as the tenants down payment against the sales price. In the event that the tenant rental contract is cancelled, ends without exercise of the option or the tenant fails to make timely deposits under the purchase option, any amounts already held under the purchase option are forfeited by the tenant in their entirety.
Advertising Costs
Advertising costs are expensed as incurred. Advertising and promotion expense was $15,974 and $0 for the fiscal years ended June 30, 2019 and 2018, respectively.
Fair Value of Financial Instruments
The Company follows the fair value measurement rules, which provides guidance on the use of fair value in accounting and disclosure for assets and liabilities when such accounting and disclosure is called for by other accounting literature. These rules establish a fair value hierarchy for inputs to be used to measure fair value of financial assets and liabilities. This hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels: Level 1 (highest priority), Level 2, and Level 3 (lowest priority).
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the balance sheet date.
Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3—Inputs are unobservable and reflect the Company’s assumptions as to what market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available.
Investments are reflected in the accompanying financial statements at fair value. The carrying amount of receivables and accounts payable and accrued expenses approximates fair value due to the short-term nature of those instruments.
The estimated fair values for financial instruments are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The carrying amounts of lease receivables, accounts payable, and accrued liabilities approximate fair value given their short-term nature or effective interest rates, which constitutes level three inputs.
Share-based compensation
The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. Unregistered stock awards are measured based on the fair market values of the underlying stock on the dates of grant. For service type awards, share-based compensation expense is recognized on a straight-line basis over the period during which the employee is required to provide service in exchange for the entire award. For awards that vest or begin vesting upon achievement of a performance condition, the Company estimates the likelihood of satisfaction of the performance condition and recognizes compensation expense when achievement of the performance condition is deemed probable using an accelerated attribution model.
F-10
GROW CAPITAL, INC.
AND SUBSIDIARIES
(formerly Grow Condos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company capitalizes the cost of issuance grants that cover a period of employment or consulting agreement under contract or performance obligation related to future performance and amortizes the compensation related to these contracts ratably over the period of employment or at percentage of completion or other appropriate method for future performance grants. There are no issuance grants outstanding with a performance term longer than one year at June 30, 2019. Prepaid expenses for the fiscal years ended June 30, 2019 and 2018 include unamortized costs of issuance grants under employment and consulting contracts totalling $1,380,459 and $0, respectively.
Convertible debt and beneficial conversion features
The Company evaluates embedded conversion features within convertible debt under ASC 815 "Derivatives and Hedging" to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 "Debt with Conversion and Other Options" for consideration of any beneficial conversion features.
Stock settled debt
In certain instances, the Company will issue convertible notes which contain a provision in which the price of the conversion feature is priced at a fixed discount to the trading price of the Company’s shares of Common Stock as traded in the over-the-counter market. In these instances, the Company records a liability, in addition to the principal amount of the convertible note, as stock-settled debt for the fixed value transferred to the convertible note holder from the fixed discount conversion feature. As of June 30, 2019, and June 30, 2018, the Company had recorded within convertible notes, net of discount, the amount of $0 for the value of the stock settled debt for certain convertible notes (See Note 6).
Impairment of long-lived assets
The Company monitors its long-lived assets and finite-lived intangibles for indicators of impairment. If such indicators are present, the Company assesses the recoverability of affected assets by determining whether the carrying value of such assets is less than the sum of the undiscounted future cash flows of the assets. If such assets are found not to be recoverable, the Company measures the amount of such impairment by comparing the carrying value of the assets to the fair value of the assets, with the fair value generally determined based on the present value of the expected future cash flows associated with the assets (See Note 3).
Income taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured at rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of operations in the period that includes the enactment date. A valuation allowance is recorded when it is not more likely than not that all or a portion of the net deferred tax assets will be realized.
Net (loss) income per share
Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of shares of Common Stock outstanding for the period and contains no dilutive securities. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. For the fiscal year ended June 30, 2019 and 2018, all potentially dilutive securities are anti-dilutive due to the Company's losses from operations.
F-11
GROW CAPITAL, INC.
AND SUBSIDIARIES
(formerly Grow Condos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All dilutive common stock equivalents are reflected in our earnings (loss) per share calculations. Anti-dilutive common stock equivalents are not included in our earnings (loss) per share calculations.
The following table sets forth the number of dilutive shares outstanding as of June 30, 2019:
Options
|
500,000
|
Total dilutive shares
|
500,000
|
Reclassification
Certain prior period balances have been reclassified to conform to the current period presentation in the Company’s consolidated financial statements and the accompanying notes.
Recent accounting pronouncements
In August 2018, the Securities and Exchange Commission (“SEC”) adopted amendments to eliminate, integrate, update or modify certain of its disclosure requirements. The amendments are part of the SEC’s efforts to improve disclosure effectiveness and were focused on eliminating disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customer (Topic 606). This authoritative accounting guidance related to revenue from contracts with customers. This guidance is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This guidance is effective for annual reporting periods beginning after December 15, 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt this guidance. The Company adopted this updated accounting guidance effective on July 1, 2018 using the modified retrospective method. This adoption has not had a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “(Topic 842) Leases,” (“ASU 2016-02”) which requires lease assets and liabilities to be recorded on the balance sheet for leases with terms greater than twelve months. We adopted this ASU and related amendments effective July 1, 2019 and will elect certain practical expedients permitted under the transition guidance. Additionally, we will elect the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and will not restate prior periods.
Management has considered all recent accounting pronouncements issued and their potential effect on our financial statements. The Company's management believes that these recent pronouncements will not have a material effect on the Company’s financial statements.
Note 3 – Assets Held for Sale
(1)Assets in Oregon within the Pioneer Business Park
In April 2016, the Company purchased a parcel of land near Eugene, Oregon within the Pioneer Business Park (the “Pioneer Property”) from a private seller for the amount of $326,629 plus closing costs. As part of the purchase, the Seller financed through a note payable $267,129 of the purchase price (See Note 3). The intent of the Company was to build an industrial condominium building on the parcel, akin to the Eagle Point Property. The Company was unable to secure additional funding via debt or equity and due to the hostility of the local county government towards the intended operations of the tenants, and consequently, the Company abandoned those plans in late calendar 2017.
In December 2017, the Company made the decision to put the Pioneer Property up for sale, retained a sales agent and listed the Pioneer Property for sale at a purchase price of $399,000. At that time the Company impaired all costs
F-12
GROW CAPITAL, INC.
AND SUBSIDIARIES
(formerly Grow Condos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
incurred towards development of the land which amounted to $31,843 The financial statements show the value of the land and the related mortgage under Assets Held for Sale and Liabilities Held for Sale on the balance sheet as of June 30, 2018, respectively. In September 2018, the Company completed the sale of the Pioneer Property for a gross sales price of $349,000 (See Note 3). After payment of all closing costs, the Company recorded a loss on sale of approximately $5,400.
(2)WCS Enterprises, Inc.
In the quarter ended March 31, 2019, the Company began to actively market WCS for sale and has begun negotiations with certain parties for the sale of WCS, subject to diligence, negotiation of a purchase agreement and fulfillment of typical closing conditions. In connection with these efforts, management has determined that it is appropriate to classify WCS as Assets Held for Sale.
On September 30, 2019, the Company entered into a membership interest purchase agreement with the Zallen Trust pursuant to which the Company sold all of the Company’s membership interests in WCS for an aggregate purchase price of $782,450. The Zallen Trust paid the purchase price by transferring to the Company 8,693,888 shares of the Company’s Common Stock, valued at $0.09 per share. The Purchase Agreement also provided that Mr. Zallen transfer to the Company an additional 400,000 shares of Common Stock to settle $36,000 in back rent owed at the time of the sale. The Company retired all of the shares received as a result of the transaction. In connection with the sale of WCS, the Company and Mr. Zallen entered into a separation and release of claims agreement pursuant to which the Company and Mr. Zallen provided a mutual release of claims against the other party and such party’s affiliates, including all claims related to Mr. Zallen’s service as an officer, employee, and director of the Company. The release of claims by Mr. Zallen resulted in the forgiveness of salary accruals of approximately $367,000 for services provided up to June 30, 2018.
(3)Smoke on the Water
On September 4, 2019 the Company entered into a listing agreement for the sale of the Smoke on the Water site location for an offering price of $850,000, with expected 6% sales commission. In connection with these efforts, management has determined that it is appropriate to classify the Smoke on the Water site location as Assets Held for Sale, and all related operations are classified as discontinued. At June 30, 2019 the Company recorded a impairment change of $112,000 based on the expected sales price less costs of sale compared to the carrying value at June 30, 2019.
The Results of the Discounted Operations which included the results of Smoke on the water and WCS are as follows:
|
|
|
Fiscal Year Ended
|
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
Net revenues
|
|
$
|
341,016
|
|
$
|
330,850
|
Operating expenses
|
|
|
|
|
|
|
Cost of revenue
|
|
|
100,096
|
|
|
80,034
|
General and administrative
|
|
|
204,263
|
|
|
181,553
|
Depreciation, amortization and impairment
|
|
|
141,469
|
|
|
61,267
|
Total operating expenses
|
|
|
445,828
|
|
|
322,854
|
Income (Loss) from operations
|
|
|
(104,812)
|
|
|
7,996
|
Gain on cancellation of purchase option
|
|
|
-
|
|
|
25,900
|
Interest expense
|
|
|
(54,622)
|
|
|
(87,349)
|
Income (loss) from discontinued operations
|
|
$
|
(159,434)
|
|
$
|
(53,453)
|
F-13
GROW CAPITAL, INC.
AND SUBSIDIARIES
(formerly Grow Condos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Groups of assets and liabilities held for sale as of June 30, 2019 and 2018:
|
|
June 30,
|
|
|
June 30,
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
Lease receivable
|
$
|
32,307
|
|
$
|
2,440
|
Prepaid expenses
|
|
13,449
|
|
|
4,309
|
Property, plant and equipment, net
|
|
1,606,097
|
|
|
2,067,884
|
Other assets
|
|
6,650
|
|
|
6,650
|
TOTAL ASSETS
|
$
|
1,658,503
|
|
$
|
2,081,283
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
385,647
|
|
$
|
393,735
|
Mortgage
|
|
605,359
|
|
|
1,767,427
|
Other liabilities
|
|
79,100
|
|
|
79,100
|
TOTAL LIABILITIES
|
|
1,070,106
|
|
|
2,240,262
|
NET ASSETS
|
$
|
588,397
|
|
$
|
(158,979)
|
(4)Mortgages Payable
(i)Mortgage related to assets held for sale on Pioneer Property and Eagle Mountain Property
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
Liability held for sale – Mortgages on Eagle Mountain Property
|
|
$
|
-
|
|
|
$
|
902,711
|
|
Liability held for sale – Mortgage on Pioneer Property
|
|
|
-
|
|
|
|
250,868
|
|
|
|
$
|
-
|
|
|
$
|
1,153,579
|
|
In 2013, upon the acquisition of the Eagle Point Property, WCS assumed the sellers’ mortgage from People’s Bank of Commerce, NA (“People’s Bank”). The original principal amount of the mortgage was $930,220, had an interest rate equal to People’s Bank’s prime rate plus 1.75%, required 58 monthly payments of $5,946 and required a balloon payment of $802,294 on June 28, 2018, the maturity date. The mortgage was secured by liens against certain properties owned by the seller. In August 2018, the Company paid the mortgage in full. As of June 30, 2019, and June 30, 2018, the balance on the mortgage was $0 and $797,476, respectively.
In 2013, after the acquisition of the Eagle Point Property, WCS entered into a second mortgage with People’s Bank for the amount of $120,000. The mortgage had an interest rate equal to People’s Bank’s prime rate plus 3%, required 56 monthly payments of $883, and required a balloon payment of $104,329 on October 15, 2018, the maturity date. The mortgage was collateralized by a deed of trust and assignment of rents with the seller and WCS in the amount of $120,000. In August 2018, the Company paid the mortgage in full. As of June 30, 2019, and June 30, 2018, balance on the mortgage was $0 and $105,235, respectively.
(i)Mortgage related to assets held for sale on Pioneer Property and Eagle Mountain Property (continued)
In April 2016, as more fully described in Note 3, the Company acquired the Pioneer Property and entered into a mortgage with the seller for the amount of $267,129. The mortgage originally had an interest rate of 6% per annum and a maturity date of the earlier of (a) October 1, 2017 or the date construction begins on the condominium building proposed to be built. In October 2017, the Company entered into an amended mortgage by making a
F-14
GROW CAPITAL, INC.
AND SUBSIDIARIES
(formerly Grow Condos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
principal payment of $15,000 and financing the remaining balance of $252,129. The amended mortgage bears interest at the rate of 6% per annum and required interest only monthly payments of $1,261 from November 2017 through June 2018 with the remaining amount due in the form of a final balloon payment in July 2018. As noted above in Note 3, in September 2018, the Company closed on the sale of the parcel of land acquired with financing provided by the mortgage. As a condition of the sale, the mortgage was fully repaid at closing. As of June 30, 2019, and June 30, 2018, the balance on the mortgage was $0 and $250,868, respectively.
(ii)Mortgage related to assets held for sale on Smoke on the Water
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
Liability held for sale on Smoke on the Water
|
|
$
|
605,359
|
|
|
$
|
613,848
|
|
In March 2017, as more fully described in Note 3, the Company acquired the Lake Selmac Property. Upon closing, the Company entered into mortgage payable with the seller in the amount of $625,000 with a maturity date of March 6, 2022. The mortgage had an interest rate of 5% per annum covering the monthly payments of $3,355 for the initial 12 months, which increased to 6% per annum for the monthly payments of $3,747 for the following 48 months. Upon maturity, the remaining balance due on the note is required to be paid through a balloon payment. In fiscal year periods ended June 30, 2019, the Company paid $8,489 to the principal of mortgage and $41,493 to the interests of the mortgage. As of June 30, 2019, and June 30, 2018, the balance on the mortgage was $605,359 and $613,848, respectively. The note is unsecured.
As of June 30, 2019, the approximate future aggregate principal payments in respect of our current obligations were as follows:
2020
|
$
|
8,012
|
2021
|
|
9,419
|
2022
|
|
587,928
|
|
$
|
605,359
|
Note 4 – Property and Equipment, Net
Property and improvements consisted of the following as of June 30, 2019 and June 30, 2018:
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
Cost
|
|
|
|
|
|
|
Leaseholder improvement
|
|
$
|
67,644
|
|
|
$
|
-
|
|
Furniture and Fixtures
|
|
|
1,875
|
|
|
|
1,875
|
|
|
|
|
69,519
|
|
|
|
1,875
|
|
Less: accumulated depreciation and impairment
|
|
|
(1,747)
|
|
|
|
(982)
|
|
|
|
$
|
67,772
|
|
|
$
|
893
|
|
Depreciation expense (excluding impairment) amounted to $765 and $268, for the fiscal year ended June 30, 2019 and 2018, respectively.
F-15
GROW CAPITAL, INC.
AND SUBSIDIARIES
(formerly Grow Condos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Accrued Liabilities
Accrued Liabilities at June 30, 2019 and June 30, 2018 consist of the following:
|
|
Fiscal year Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Accrued salaries and wages
|
|
$
|
113,823
|
|
|
$
|
189,220
|
|
Accrued expenses
|
|
|
156,469
|
|
|
|
34,001
|
|
|
|
$
|
270,292
|
|
|
$
|
223,221
|
|
Note 6 – Convertible Notes Payable
At June 30, 2019 and June 30, 2018, convertible notes payable consisted of the following:
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
Principal amount
|
|
$
|
-
|
|
|
$
|
-
|
|
Liability on stock settled debt
|
|
|
-
|
|
|
|
-
|
|
Less: unamortized debt discount
|
|
|
-
|
|
|
|
-
|
|
Convertible notes payable, net
|
|
$
|
-
|
|
|
$
|
-
|
|
Auctus Fund, LLC Agreement:
On January 23, 2017 the Company entered into a convertible promissory note with Auctus Fund, LLC, and received net proceeds of $150,000 in the gross amount of $175,000. The Company paid original issuance cost of $25,000 in connection with this note which will be amortized over the term of the note. The Note had a maturity date of October 23, 2017 and interest at 10% per annum with fixed conversion price of 50% of the lowest closing price for the 10 trading days prior to the conversion date. The Company recorded $175,000 as liability on stock settled debt associated with this convertible note. In connection with the issuance of the Note the Company also issued a one-year warrant to purchase 150,000 of Common Stock of the Company at $0.85 subject to adjustment for standard anti-dilution events. The warrant had a term of 21 months, which expired in October 2018. The Company has granted the holder piggy back rights for the Common Stock underlying the convertible debenture and warrants. Total beneficial conversion feature discount recognized was $325,000 which is being amortized over the terms of the convertible notes payable. During the year ended June 30, 2018, the Company recognized interest expense of $136,905 related to the amortization of the beneficial conversion feature discount and $10,531 related to the amortization of original issuance cost. As of June 30, 2018, the unamortized balance of beneficial conversion feature was $nil and the unamortized balance of original issuance cost was $nil. During the year ended June 30, 2018, Auctus gave notice of conversion and the Company issued 13,403,839 shares of its Common Stock in full satisfaction of the entire principal and accrued interest balance under the note of $175,000.
Tangiers Financing Agreement:
On January 20, 2017 the Company entered into a convertible promissory note in the amount of $165,000. The Note was due July 20, 2017 and had an interest rate of 10% and was convertible into shares of the Company's Common Stock at $0.85 per share, unless the event of a default, at which time the conversion rate changes to a fixed 50% discount to the lowest prior 10-day trading price. The note was issued with a $15,000 original issue discount. In connection with the issuance of the note the Company also issued a one-year warrant to purchase 150,000 of Common Stock of the Company at $0.85 subject to adjustment for standard anti-dilution events. The warrant had a term of one year. The Company has granted the holder piggy back rights for the Common Stock underlying the convertible
F-16
GROW CAPITAL, INC.
AND SUBSIDIARIES
(formerly Grow Condos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
debenture and warrants. Total beneficial conversion feature discount recognized was $140,000 which being amortized over the term of the convertible note payable. On July 20, 2017, the Company recognized additional beneficiary conversion feature in the amount of $110,000 upon default for non-payment. During the year ended June 30, 2018, the Company recognized interest expense of $115,470 related to the amortization of the beneficial conversion feature discount and $2,762 related to the amortization of original issuance cost and legal fees. As of June 30, 2018 the unamortized balance of beneficial conversion feature was $nil and the unamortized balance of original issuance cost was $nil. During the year ended June 30, 2018, Tangiers gave notice to the Company and converted the entire principal and accrued interest under the note of $165,000 into 15,023,320 shares of Common Stock of the Company.
EMA Financing Agreement:
On January 9, 2017 the Company entered into a convertible promissory note with EMA Financial LLC and received net proceeds of $150,000 on the gross amount of $175,000. The Company paid the original issuance cost of $25,000 in connection with this note which will be amortized over the term of the note. The note had a maturity date of January 9, 2018 and an interest rate of 10% per annum with a fixed conversion price of 50% of the lowest closing price for the 10 trading days prior to the conversion date. The Company recorded $175,000 as liability on stock settled debt associated with this convertible note. Total beneficial conversion feature discount recognized was $325,000 which was amortized over the terms of the convertible note payable. As of June 30, 2018, and 2019, the unamortized balance of beneficial conversion feature was $nil and the unamortized balance of original issuance cost was $nil. During the year ended June 30, 2018, EMA gave notice to the Company and converted the entire principal and accrued interest under the note of $175,000 into 15,583,632 shares of Common Stock of the Company.
Note 7 – Capital Stock
On June 22, 2018, the Board of Directors of the Company approved the Recapitalization, which increased the Company’s authorized Common Stock from 100,000,000 to 175,000,000 shares, effective July 10, 2018. As of June 30, 2019, the Company's authorized stock consisted of 175,000,000 shares and 5,000,000 shares of Preferred Stock. As of August 29, 2019, the Company has 500,000,000 shares of Common Stock and 50,000,000 shares of Preferred Stock authorized, respectively;
Common Stock
During the fiscal year ended June 30, 2019, the Company issued a total of 25,854,172 unregistered shares of Common Stock in respect to private placements between $0.06 and $0.10 per share and received cash proceeds of $1,915,000. As of June 30, 2019, $150,000 representing 937,500 shares was unpaid and issuable. The subscription was received in July 2019 and shares were issued.
During the fiscal year ended June 30, 2019, the Company issued a total of 2,921,183 unregistered shares of Common Stock to officers and directors as part of their respective board compensation package. The Company valued the issuances made as employment compensation at the closing price of the Company’s Common Stock as traded on the OTCMarkets on the date of grant and the issuances to directors at a discount of 35% to market on the first day of each calendar quarter, and consequently recorded stock-based compensation of $313,723.
During the fiscal year ended June 30, 2019, the Company issued 1,000,000 to the Company’s secretary for services rendered, valued at $115,000, or $0.115 per share, the closing price of the Company’s Common Stock on the date of issuance as posted on OTCMarkets.
During the year ended June 30, 2019, the Company issued an aggregate of 8,331,364 shares of Common Stock to its officers and directors, as compensation for their services pursuant to the terms of their employment agreements. The Company valued the issuances at the closing price of the Company’s Common Stock as traded on the OTCMarkets on the date of each grant. Because the share compensation is all of the compensation earned by the officers and directors for their services, the Company treated the issuances as akin to a cash payment and recorded $1,268,649 into prepaid expense upon issuance. The Company will ratably amortize the prepaid compensation over the term of
F-17
GROW CAPITAL, INC.
AND SUBSIDIARIES
(formerly Grow Condos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the employment covered in the employment agreements. For the fiscal year ended June 30, 2019, the Company expensed $195,337 as stock-based compensation.
During the year ended June 30, 2019, the Company issued 3,000,000 unregistered shares of Common Stock to Jonathan Bonnette, pursuant to the terms of his employment agreement as compensation for his initial year as President and CEO. Of the Common Stock issued, 1,500,000 vested at grant and the remaining 1,500,000 shares of Common Stock vested 180 days after the signing of the employment agreement in July 2018. The Company valued the issuance at $0.12 per share, the closing price of the Company’s Common Stock as traded on the OTCMarkets on the date of grant. Because the share compensation was all of the compensation earned by Mr. Bonnette for his services as CEO and President during the term of his employment agreement, the Company treated the issuance as akin to a cash payment and recorded $390,000 into prepaid expense upon issuance. The Company will ratably amortize the prepaid compensation over the initial 12-month period of employment covered in the employment agreement. For the fiscal year ended June 30, 2019, the Company expensed $390,000 as stock-based compensation.
During the fiscal year ended June 30, 2019, the Company issued an aggregate of 4,283,104 fully vested unregistered shares of Common Stock to consultants for services pursuant to the terms of their consulting agreements. The Company valued the issuance at the closing price of the Company’s Common Stock as traded on the OTCMarkets on the date of each grant. Because the share compensation was all of the compensation earned by consultants for their services under the terms of their consulting agreements, the Company treated each of the issuances as a cash payment and recorded $767,046 into prepaid expense upon issuance. The Company will ratably amortize the prepaid compensation over the applicable 12-month period of each consulting agreement. For the fiscal year ended June 30, 2019, the Company expensed $459,859 as stock-based compensation.
During the fiscal year ended June 30, 2019, the Company issued 1,148,665 fully vested unregistered shares of Common Stock to settle certain liabilities. The Company valued those issuances at the closing price of the Company’s Common Stock as traded on the OTCMarkets on the date of grant and recorded a $79,894 liability settlement and interest expense of $6,612 and stock-based compensation of $10,099 on the statement of operations.
Preferred Stock
In 2015, the Company designated all 5,000,000 shares of its Preferred Stock as Series A Convertible Preferred Stock (the "Series A Preferred"), par value $0.001. The Series A Preferred shareholders voted together with the Common Stock as a single class and were entitled to receive all notices relating to voting that are required to be given to the holders of the Common Stock. The holders of shares of Series A Preferred were entitled to five votes per share and each share was convertible by the holder into five shares of Common Stock. All of the Series A Preferred shares were issued and converted into Common Stock in November 2015.
Equity Incentive Plan
In December 2015, the Company adopted the 2015 Equity Incentive Plan (the “Incentive Plan”) with a term of 10 years. The Incentive Plan allows for the issuance up to a maximum of 2 million shares of Common Stock, options exercisable into Common Stock of the Company or stock purchase rights exercisable into shares of Common Stock of the Company. The Incentive Plan is administered by the Board unless a separate delegation to an administrator is made by the Board. Options granted under the Incentive Plan carry a maximum term of 10 years, except to a grantee who is also a 10% beneficial owner at the time of grant, in which case the maximum term is 5 years. In addition, exercise prices of options granted must be within a certain percentage of the closing price on date of grant depending on the level of beneficial ownership of Common Stock of the Company by the grantee. All vesting conditions are set by the Board or a designated administrator. In December 2015, the Company filed a registration statement on Form S-8 covering all shares issued or issuable under the Incentive Plan. The Company has granted options to purchase 2 million shares under the Incentive Plan during April 2016, 1.5 million of which have been exercised and 0.5 million of which have vested and remain outstanding. There are no remaining shares available under the Incentive Plan
F-18
GROW CAPITAL, INC.
AND SUBSIDIARIES
(formerly Grow Condos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Plan
In December 2015, the Company adopted the 2015 Stock Plan (the “Stock Plan”). As a condition of adoption of the Stock Plan, the Company filed a registration statement on Form S-8 in December 2015 to register the shares issued under the Stock Plan. The Stock Plan allows for the issuance of up to a maximum of 2 million shares of Common Stock of the Company. The Stock Plan is administered by the Board unless a separate delegation to an administrator is made by the Board. The Stock Plan shall continue in effect until it is terminated by the Board or all shares are issued pursuant to the Stock Plan. The Company has not granted any shares under the Stock Plan.
Warrants
A summary of the change in stock purchase warrants outstanding for the period ended June 30, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
(in years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
300,000
|
|
|
$
|
0.85
|
|
|
|
0.58
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(150,000)
|
|
|
|
0.85
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
150,000
|
|
|
$
|
0.85
|
|
|
|
0.14
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(150,000)
|
|
|
|
0.85
|
|
|
|
-
|
|
|
|
-
|
|
Exercisable at June 30, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
F-19
GROW CAPITAL, INC.
AND SUBSIDIARIES
(formerly Grow Condos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options
A summary of the change in stock purchase options outstanding for the period ended June 30, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Grant Date
|
|
|
Life
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Fair Value
|
|
|
(Years)
|
|
Balance – June 30, 2017
|
|
500,000
|
|
|
$0.40
|
|
|
$0.52
|
|
|
3.83
|
|
Options issued
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Options expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Options exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance – June 30, 2018
|
|
|
500,000
|
|
|
$0.40
|
|
|
$0.52
|
|
|
2.83
|
|
Options issued
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Options expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Options exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance – June 30, 2019
|
|
|
500,000
|
|
|
$0.40
|
|
|
$0.52
|
|
|
1.83
|
|
There were no unvested options outstanding during the years ended June 30, 2019 and 2018. Options outstanding had intrinsic value as of June 30, 2019 and 2018 of $nil. In the year ended June 30, 2016 the Company issued an option with no term attached. Of the original option, 500,000 remain outstanding.
Note 8 – Related Party Transactions
Until its sale of WCS on September 30, 2019, the Company was leasing units in the building located at the Eagle Point Property. The building has approximately 15,000 square feet and is divided into four 1,500 square feet condo style grow rooms, 1,500 square feet of office space which is currently being offered for lease, and one 7,500 square foot grow facility. The four grow rooms are currently being offered for lease, and the grow facility is under lease to a company controlled by our former CEO and Chairman. The lease for the grow facility was entered into by the prior owner before the purchase of the Eagle Point Property by WCS in 2013. The lease term for the grow facility began once the tenant improvements were completed and the premises were occupied in fiscal 2017 and continues for a period of 36 months. The lease on the grow facility commenced in fiscal 2017. Revenue recorded in the year ended June 30, 2019 and 2018 included in discontinued operations to related parties accounted to $43,200 and $32,400 respectively.
On July 1, 2018, Wayne Zallen resigned as the President and CEO of the Company and David Tobias resigned his position as a member of the Board. On the same day, Jonathan Bonnette was elected to the Board to fill the vacancy created by the resignation of David Tobias and was also appointed President and CEO of the Company. Mr. Zallen remained the Chairman of the Board and served as the CFO until the appointment of James Olson as Chairman of the Board and the appointment of Trevor Hall as CFO, respectively. Mr. Zallen’s employment contract was terminated upon his resignation as CEO, and the Company agreed to pay Mr. Zallen $2,500 per month for his continued services.
In July 2018, the Company entered into an employment agreement with Mr. Bonnette. The employment agreement had an initial term of one year and includes compensation for the first year of $240,000 payable in unregistered shares of Common Stock at a valuation of $0.08 per share or 3,000,000 shares of Common Stock, which were issued in July 2018. The shares were valued at $390,000 upon grant, recorded to prepaid compensation and amortized ratably over the term of the agreement.
F-20
GROW CAPITAL, INC.
AND SUBSIDIARIES
(formerly Grow Condos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the three months ended September 30, 2018, the Company negotiated a sublease agreement to lease approximately 1,338 square feet of office space at a business center known as Green Valley Corporate Center South located in Henderson, Nevada (the “Henderson Property”), effective October 19, 2018, for use as the Company’s new headquarters. The lease has a term of 123 months, an abatement of the first four months of rent during which time the Company would complete certain required leasehold improvements and escalating base monthly rent per square foot ranging between $2.00 to $3.00 per square foot. Material lease hold improvements are being amortized over the term of the lease. The Company commenced occupation of the premises in February 2019. Appreciation, LLC holds the master lease from which the Company derives its sublease for its headquarters. Terry Kennedy, the President of Appreciation, provides consulting services to the Company and is also a beneficial owner of more than 10% of the Company’s Common Stock (See Note 11). Total rent expenses recorded in the year ended June 30, 2019 under the leases was $17,538.
In July 2018, the Company entered into a consulting agreement with Mr. Kennedy with a one year term. Mr. Kennedy received a fixed fee of $100,000 for his services which was payable in unregistered shares of Common Stock valued at $0.10 per share for the first $50,000 on July 1, 2018 and at $0.034 for the second $50,000 payable on January 1, 2019 for a total of 1,970,805 unregistered shares of Common Stock, all of which have been issued. The shares payable on January 1, 2019 were valued at $394,161 and are being expensed in the fiscal year ended June 30, 2019.
On January 28, 2019, the Company entered into a consulting agreement with Trevor Hall and appointed Mr. Hall to serve as a part-time CFO of the Company through December 31, 2019. Mr. Hall succeeded Wayne Zallen as CFO, who resigned from the position in connection with Mr. Hall’s appointment. Pursuant to the consulting agreement, Mr. Hall received $63,000 in compensation, payable as 1,000,000 shares of Common Stock of unregistered Common Stock of the Company and will devote enough of his time to the Company as is reasonably necessary to meet the needs of the Company during the term. The shares were issued on January 29, 2019.
On April 29, 2019, Mr. Wayne Zallen resigned as a member of the Board of Directors and Chairman. Concurrently the board appointed James Olson to fill the Board vacancy and as Chairman of the Board. Mr. Olson will also be entitled to compensation for his service on the Board of Directors in the amount of $10,000 per quarter paid in the form of fully vested unregistered shares of the Company’s Common Stock at a discount of 35% to market on the first day of each calendar quarter. On April 29, 2019 Mr. Olson was issued a total of 108,853 shares in connection with his appointment at the discount to market described above.
On May 15, 2019, the Company entered into Fee Agreements (collectively, the “Fee Agreements”) with each of (i) Jonathan Bonnette, (ii) Carl Sanko, a director and the Secretary of the Company, and (iii) Terry Kennedy. Under the Fee Agreements, on May 15, 2019, each of Mr. Bonnette, Mr. Sanko, and Mr. Kennedy were issued unregistered shares of Common Stock for services provided to the Company. Pursuant to the Fee Agreements (i) Mr. Bonnette received a fixed fee of $320,000 for his service as Chief Executive Officer of the Company and for outside business management and consulting services, which was paid through the issuance of 4,124,597 unregistered shares of Common Stock; (ii) Mr. Sanko received a fixed fee of $210,000 for his services as Secretary of the Company and for outside business management and consulting services, which was paid through the issuance of 2,706,767 unregistered shares of Common Stock, and (iii) Mr. Kennedy received a fixed fee of $160,000 for outside business consulting services, which was paid through the issuance of 2,062,299 unregistered shares of Common Stock. Under the Fee Agreements, the shares of Common Stock were issued at a value of $0.07758 per share. The value of the Common Stock was set by the Company’s board of directors and was equal to the average of the three lowest closing prices of the Common Stock in the 30 trading days before May 15, 2019 after applying a 30% discount. The Fee Agreements each have a term of one year. The shares of Common Stock issued under the Fee Agreements were valued at $1,511,034 upon grant based upon the closing price of the Company’s Common Stock as traded on the OTCMarkets on the date of grant, recorded to prepaid compensation and amortized ratably over the term of the agreement.
In fiscal 2018, the Company was notified by its primary banks that these banks would no longer accept the Company as a client for its banking services. As of June 30, 2018, WCS, was notified that its bank, which also holds both of its mortgages, would no longer continue to accept WCS as a customer shortly after its fiscal year
F-21
GROW CAPITAL, INC.
AND SUBSIDIARIES
(formerly Grow Condos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
end. Because the Company rents its properties to those who engage in a federal crime under the Controlled Substances Act, most banks subject to any federal oversight (the Office of the Comptroller of the Currency or any of the Federal Reserve Bank’s of the United States) have declined to do business with any entity that is related in any way to cannabis operations. The Company’s management and directors have as of June 30, 2018 transferred the Company’s cash and its banking operations to an entity owned and controlled by them. The Company has treated the cash transferred as amounts due from this related entity and the cash expended from these accounts on behalf of the Company as reductions of the amounts due from the related entity. As of June 30, 2019, and June 30, 2018, the amount held in cash by the related entity and reported as a current asset as due from related party was $16,854 and $40,268.
See Note 10 for a description of the related parties involved in the Bombshell acquisition.
Note 9 - Commitments
During the three months ended September 30, 2018, the Company negotiated a sublease agreement with Appreciation, LLC effective October 19, 2018 to lease the Henderson Property for use as the Company’s new headquarters. The lease has a term of 123 months, an abatement of the first four months of rent during which time the Company would complete certain required leasehold improvements and escalating base monthly rent per square foot ranging between $2.00 to $3.00 per square foot. The Company commenced occupation of the premises in February 2019.
Total rent expenses for the fiscal year ended June 30, 2019 and 2018 are $17,538 and $0, respectively.
As of June 30, 2019, the approximate future aggregate minimum lease payments in respect of our current obligations were as follows:
2020
|
$
|
36,567
|
2021
|
|
38,896
|
2022
|
|
40,020
|
2023
|
|
41,264
|
2024
|
|
42,548
|
Remining periods
|
|
207,243
|
|
$
|
406,538
|
Note 10 – Income Taxes
The income tax expense (benefit) consisted of the following for the fiscal year ended June 30, 2019 and 2018:
|
|
|
June 30, 2019
|
|
|
|
June 30, 2018
|
Total current
|
|
$
|
-
|
|
|
$
|
-
|
Total deferred
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
F-22
GROW CAPITAL, INC.
AND SUBSIDIARIES
(formerly Grow Condos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a reconciliation of the expected statutory federal income tax and state income tax provisions to the actual income tax benefit for the fiscal year ended June 30, 2019 and 2018:
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
Expected benefit at federal statutory rate
|
|
$
|
649,000
|
|
|
|
670,000
|
|
Non-deductible expenses
|
|
|
(360,000)
|
|
|
|
(554,000)
|
|
Change in valuation allowance (including the effect from change in tax rates)
|
|
|
(289,000)
|
|
|
|
(116,000)
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Significant components of the Company’s deferred tax assets and liabilities were as follows for the fiscal year ended June 30, 2019 and 2018:
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
2,589,000
|
|
|
$
|
2,993,000
|
|
Deferred payroll
|
|
|
81,200
|
|
|
|
150,000
|
|
Impairments
|
|
|
82,900
|
|
|
|
109,000
|
|
Other
|
|
|
-
|
|
|
|
29,000
|
|
Total deferred tax assets
|
|
|
2,753,100
|
|
|
|
3,281,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
-
|
|
|
|
-
|
|
Total deferred tax liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
2,753,100
|
|
|
|
3,281,000
|
|
Less valuation allowance
|
|
|
(2,753,100)
|
|
|
|
(3,281,000)
|
)
|
Net deferred tax assets (liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
During the fiscal year ended June 30, 2019 and 2018 the, the Company recognized no amounts related to tax interest or penalties related to uncertain tax positions. The Company is subject to taxation in the United States and various state jurisdictions. The Company currently has no years under examination by any jurisdiction.
As of June 30, 2019, the Company estimates it has approximately $11.3 million in US Federal net operating loss carryforwards, which will begin to expire in 2030 and an additional approximately $3.1 million in the state of Oregon net operating loss carryforwards.
Note 11- Subsequent Events
On July 1, 2019 the Company issued a total of 450,918 shares of unregistered Common Stock to its directors as part of their respective compensation package.
On July 8, 2019, the Company entered into a non-binding letter of intent (the “LOI”) to acquire Encompass More Group, Inc. (“Encompass”), a Nevada corporation. In connection with the LOI, Encompass issued a promissory note (the “Note”) to the Company pursuant to a loan agreement (the “Loan Agreement”), dated July 22, 2019, by and between Encompass and the Company, in exchange for a loan of $100,000 (the “Loan”). Pursuant to the Loan Agreement, the proceeds of the Loan will be used by Encompass for working capital and general corporate purposes. The Note has a twelve-month term, an interest rate of 5.0%, and is payable in monthly installments of $2,000, with all remaining principal and interest due on the maturity date, unless paid earlier by Encompass.
F-23
GROW CAPITAL, INC.
AND SUBSIDIARIES
(formerly Grow Condos, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the LOI, the Company and Encompass have agreed to enter into a stock exchange agreement (the “Encompass Exchange Agreement”) pursuant to which the Company will issue up to $1,800,000 in unregistered shares (the “Encompass Closing Shares”) of Common Stock, to the stockholders of Encompass (the “Encompass Holders”) in exchange for all of the capital stock of Encompass (the “Encompass Exchange”). After the closing of the Encompass Exchange, the Encompass Holders will also be eligible to receive earn-out consideration of up to an additional $3,000,000 in unregistered shares of Common Stock (the “Encompass Earn-out Shares”) earnable in tranches of $1,000,000 unregistered shares of Common Stock in each of the second, third and fourth years after the Closing, based on whether Encompass is able to meet certain revenue thresholds in each year.
The Encompass Exchange is subject to certain signing and closing conditions, including, among other conditions, (i) completion of diligence by the Company, (ii) the receipt of any necessary regulatory approvals and third party consents, (iii) the negotiation and execution of the Encompass Exchange Agreement, (iv) the approval by the Company’s stockholders of an amendment to the Company’s articles of incorporation authorizing additional shares of Common Stock, (v) there being no material adverse change in Encompass’ business, results of operations, prospects, condition (financial or otherwise) or assets, and (vi) certain other customary conditions.
On July 23, 2019, (the “Closing Date”), the Company acquired Bombshell, a Nevada corporation, pursuant to a stock exchange agreement (the “Exchange Agreement”), dated June 26, 2019, by and between Bombshell, the shareholders of Bombshell (the “Bombshell Holders”). At the Closing, Bombshell became a wholly-owned subsidiary of the Company. Joel Bonnette, the current President and Chief Executive Officer of Bombshell, now serves as the Chief Executive Officer of Bombshell.
Immediately prior to the Closing, the Company, Bombshell and the Bombshell Holders entered into an amendment to the Exchange Agreement (the “Amendment”). Pursuant to the Amendment, at the Closing, the Company acquired 100% of the outstanding shares of Bombshell (the “Bombshell Shares”) in exchange for the Bombshell Holders receiving the right to receive 110,675,328 shares (the “Consideration Shares”) of unregistered shares of the Company’s Common Stock on a pro rata basis (the “Exchange”), 33,000,000 of which were issued to the Bombshell Holders (the “Closing Shares”) at the Closing on a pro rata basis. The remaining 77,675,328 Consideration Shares (the “Secondary Shares”) were issued on September 3, 2019, to the Bombshell Holders upon the Company filing an effective amended and restated articles of incorporation (the “Charter Amendment”) that increased the number of authorized shares of Common Stock. The Bombshell Holders are also eligible to receive earn-out consideration of up to an additional 36,769,215 shares of Common Stock (the “Earn-out Shares”) earnable in tranches of 12,256,405 shares of Common Stock in each of the second, third and fourth years after the Closing, based on whether Bombshell is able to meet certain Earnings Before Interest and Taxes thresholds in each year. The Bombshell Holders include certain limited liability companies owned by (i) Jonathan Bonnette, (ii) Joel Bonnette, and (iii) Terry Kennedy.
On July 31, 2019 the Company issued 277,778 shares of Common Stock in respect to private placements for total gross proceeds of $50,000.
On September 30, 2019, the Company sold WCS to the Zallen Trust (See Note 3).
On October 1, 2019 the Company issued 1,074,381 fully vested unregistered shares of Common Stock to officers and directors as part of their respective board compensation package.
On October 10, 2019 the Company issued a total of 210,000 unregistered shares of Common Stock to a company controlled by one of its officers for services rendered with a value of $16,433. The issued shares were valued at fair market value on the date of issuance.
The Company has evaluated subsequent events through October 14, 2019, the date these financial statements were available for issuance.
F-24