NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
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, LLC (“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 owned 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 5 for further information.
Our wholly owned subsidiary, Resort at Lake Selmac, Inc. (formerly Smoke on the Water, Inc.) was incorporated on October 21, 2016, in the State of Nevada. The name change was effected February 3, 2020. Resort at Lake
Selmac 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 C corporation on June 24, 2019. We acquired Bombshell on July
23, 2019 (See Note 4). 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 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 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 4), 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 and pursuing suitable 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 its operations up to the date of sale were included as Assets and Liabilities’ Held for Sale. (Note 5). While the Company actively marketed the Resort at Lake Selmac during the first and second quarters
of fiscal 2020, given the current market conditions, the Company let the listing agreement expire on March 31, 2020 and we decided to continue operating the business until such time as a viable exit strategy for the resort is identified.
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 1 – Organization and Description of Business (continued)
On May 13, 2020, the Company’s board of directors and stockholders approved an amended and restated certificate of incorporation to, among other things, effect a reverse split on the outstanding shares of the Company’s
common stock on a one-for-20 basis (the “Reverse Stock Split”). The Reverse Stock Split became effective on July 30, 2020 and has been shown on a retroactive basis within all periods presented. The par values of the common were not adjusted as a
result of the reverse stock split.
Keeping with management’s determination to acquire complementary revenue generating operations, on August 19, 2020, the Company acquired PERA LLC, a Nevada limited liability company
(“PERA”), pursuant to an exchange agreement (the “Exchange Agreement”), effective as of August 3, 2020 (the “Effective Date”), by and between PERA, the members of PERA (the “PERA Members”), and the Company. As a result, PERA became a wholly-owned
subsidiary of the Company. At the time of the acquisition of PERA LLC, the Company determined that Appreciation Financial was under common control with PERA LLC, as they are both controlled by our Chief Operating Officer, Terry Kennedy (see Note
4). Additionally, Appreciation was considered to be a primary beneficiary of PERA LLC. The Company has had discussions with the members of Appreciation Financial about potential combinations, which as of the date of these financial statements are
not yet probable. However, because of the nature of the relationship, the Company determined that while Appreciation Financial is not a variable interest entity to the Company, the nature of the common control relationship coupled with the
inter-relationship with PERA LLC meant that in order for the results of operations and financial position to not be misleading, the Company had to combine its results with those of Appreciation Financial upon the acquisition of PERA, LLC.
With the acquisition of PERA LLC, and concurrent combination of the operations of Appreciation Financial, the Company expanded its operations into lead generation services and insurance brokerage.
PERA LLC provides public employee retirement serving as an appointment portal for agents to schedule qualified appointments with public employee seeking financial planning for retirement and other associated insurance coverage. Appreciation
Financial LLC has a network of member agents offering full-service retirement planning servicing public employees and their families providing policies from a series of insurance carriers that meet their retirement planning requirements.
As the Company looks to continue to expand in the financial technology and related sectors, Grow Capital expects to identify additional acquisition targets, complete those acquisitions, and grow
its complementary operating companies. Any potential acquisitions or divestitures remain subject to final agreements, due diligence, and typical closing conditions.
Going Concern
During the three month periods ended September 30, 2020 and 2019, the Company reported a net loss of $1,001,336 and $248,893 respectively. The Company had a working capital deficit of $1,612,666 with approximately $1,495,517 of cash on hand as
of September 30, 2020. Cash provided by operations totaled $300,908 during the three months ended September 30, 2020. The Company continues to work actively to increase its customer/client base and increase gross profit in Bombshell Technologies
and PERA LLC, in order to achieve net profitability by the close of fiscal 2021. For any operational shortfalls, the Company intends to rely on sales of our unregistered common stock, loans and advances until such time as we achieve profitable
operations. In addition, the current presentation is based on the fact that the Company is currently in negotiations to acquire Appreciation Financial LLC and its related entities. Should that not occur, its possible that the Company will no
longer combine its results with those of Appreciation Financial LLC and its related entities. If the Company fails to generate positive cash flow or obtain additional financing, when required and on acceptable terms, the Company may have to modify,
delay, or abandon some or all of its business and expansion plans, and potentially cease operations altogether. Consequently, the aforementioned items raise substantial doubt about the Company’s ability to continue as a going concern within one
year after the date that the financial statements are issued. The accompanying consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 1 – Organization and Description of Business (continued)
Covid-19 Pandemic
The recent COVID-19 pandemic could have an adverse impact on our ongoing operations. To date the Company’s primary operating segments, Bombshell and Pera LLC have not experienced a decline in sales as a result of the
impact of COVID-19, and in fact, have increased sales due to the increase in demand for virtual appointments which can be serviced by PERA LCC as a part of their core operational mandate. In addition, the Company’s operations in the FinTech sector
are carried out with a limited amount of person to person contact and we do not expect an impact on these operations as a result of COVID 19, however, the full effect of the COVID-19 outbreak continues to evolve as of the date of this report, is
highly uncertain and subject to change. Operations of the Company’s Resort at Lake Selmac property were delayed until July 2020 when the government permitted the resort to reopen, however since that time the resort has continued to receive regular
bookings and has returned to normal operating parameters. As a result, Management does not expect the delay in opening the resort for the 2020-2021 season to substantially impact profitable operations for this business in the long term. Management
is actively monitoring the situation but given the daily evolution of the COVID-19 outbreak, the Company is not able to estimate the effects of the COVID-19 outbreak on its operations or financial condition in the next 12 months. While significant
uncertainty remains, the Company does not believe the COVID-19 outbreak will have a negative impact on its ability to raise additional financing, conclude the acquisition of targeted business operations or reach profitable operations.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated and combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The unaudited
condensed financial statements included herein are unaudited. Such financial statements, in the opinion of management, contain all adjustments necessary to present fairly the financial position and results of operations as of and for the periods
indicated. All such adjustments are of a normal recurring nature outside of the combination of Appreciation Financial. These interim results are not necessarily indicative of the results to be expected for the year ending June 30, 2021 or for any
other period. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission,
and because of this, for further information, readers should refer to the financial statements and footnotes included in its Form 10-K for the fiscal year ended June 30, 2020 filed on October 13, 2020. The Company believes that the disclosures are
adequate to make the interim information presented not misleading.
Consolidation and Combination
The Company’s policy is to consolidate all entities that it controls by ownership of a majority of the outstanding voting stock. In addition, upon the acquisition of PERA LLC, the Company combined entities that met the
criteria of having common control with Grow Capital and its controlled subsidiaries. Upon the acquisition of PERA LLC (see below), the Company identified certain common control entities, the operations of which are included in our consolidated and
combined financial statements.
The accompanying unaudited condensed consolidated and combined financial statements include the accounts of Grow Capital Inc. and its wholly-owned subsidiaries, Bombshell Technologies Inc., The Resort at Lake Selmac
and PERA LLC, as well as PERA Administrators LLC, the operations of which are for the sole benefit of PERA LLC. In addition, the Company has combined the results of Appreciation Financial LLC and Appreciation Rewards LLC. At the time of the
acquisition of PERA LLC, the Company determined that Appreciation Financial was the primary beneficiary of PERA LLC. In addition, the Company determined that it has common ownership with Appreciation Financial and the Company has had discussions
with the members of Appreciation Financial about potential combinations, which as of the date of these financial statements are not yet probable. However, because of the nature of the relationship, the Company determined that while Appreciation
Financial is not a variable interest entity to the Company, the nature of the common control relationship coupled with the inter-relationship with PERA LLC meant that
in order for the results of operations and financial
position to not be misleading, the Company had to combine its results with those of Appreciation Financial upon the acquisition of PERA, LLC.
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 2 – Summary of Significant Accounting Policies (continued)
Reported operations in the three months ended September 30, 2020 include operations of our wholly owned subsidiaries Bombshell and The Resort at Lake Selmac, as as well as the results of operations by PERA LLC and its
common control entities for the period from acquisition (August 19, 2020 through September 30, 2020). In addition, September 30, 2020 operating results also include the combined results of both Appreciation Financial LLC Appreciations Rewards LLC
for the period from August 19, 2020 to September 30, 2020. Results for the comparative three month period ended September 30, 2019 include Grow Capital, Bombshell and the Resort at Lake Selmac.
All material intercompany accounts, transactions, and profits have been eliminated in consolidation and with and between the combined entities.
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. Significant items subject to estimates and
assumptions include timing of recognition of commission revenue on insurance policy renewals and expenses related thereto, along with costs associated with policy acquisition and our allowance for doubtful accounts and useful lives of our fixed
assets related to Lake Selmac. Actual results could differ from those estimates.
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.
Concentrations
Concentration of Credit Risk
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 September 30, 2020 and 2019, the Company had $272,767 and $0 in excess of the FDIC insured limit, respectively.
Concentration Risk - Revenues
For the three months ended September 30, 2020, one customer accounted for 53% of combined and consolidated gross revenue, 57% of combined and consolidated revenue from non-related parties and 70% of revenue recorded by Appreciation Financial
LLC. The contribution of revenue to the three month operating period ended September 30, 2020 was derived from operations of Appreciation Financial LLC for the period between August 19, 2020 and September 30, 2020.
Concentration of Financing Risk
Appreciation Financial is dependent upon on its largest customer for financing of its operations. That customer has provided commission advances of approximately $3.3 million and loans of
approximately $4.8 million as of September 30, 2020.
Accounts Receivable and Allowance for Doubtful Accounts
The Company determines the allowance for doubtful accounts by considering a number of factors, including the length of time the accounts receivable are beyond the contractual payment terms, previous loss history, and
the customer’s current ability to pay its obligation. When the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, the Company records a charge to the allowance to reduce the customer’s related
accounts. At September 30, 2020, the allowance for doubtful accounts totaled approximately $41,400.
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.
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02 – Topic 842 Leases. ASU 2016-02 requires that most leases be recognized on the
financial statements, specifically the recognition of right-to-use assets and related lease liabilities, and enhanced disclosures about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. The standard requires using the modified retrospective transition method and apply ASU 2016-02 either at (i) latter of the earliest comparative period presented in the financial statements or commencement
date of the lease, or (ii) the beginning of the period of adoption. The Company has elected to apply the standard at the beginning period of adoption, July 1, 2019 which resulted in no cumulative adjustment to retained earnings. On July 30, 2018, the
FASB issued ASU 2018-11 to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU 2016-02 (codified as ASC 842). Specifically, under the amendments in ASU 2018-11: (i) Entities may elect not to
recast the comparative periods presented when transitioning to ASC 842 (Issue 1), and (ii) Lessors may elect not to separate lease and nonlease components when certain conditions are met (Issue 2).
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 2 – Summary of Significant Accounting Policies (continued)
Leases (cont'd)
The Company has elected to apply the short-term scope exception for leases with terms of 12 months or less at the inception of the lease and will continue to
recognize rent expense on a straight-line basis. As a result of the adoption, on July 1, 2019, the Company recognized a lease liability of approximately $291,753, which represented the present value of the remaining minimum lease payments using an
estimated incremental borrowing rate of 6.75%. As of July 1, 2019, the Company recognized a right-to-use asset of approximately $289,089. Lease expense did not change materially as a result of the adoption of ASU 2016-02. As a result of the
acquisition of PERA LLC and combined entity Appreciation Financial LLC, as of August 19, 2020 the Company recognized a right to use asset of $157,795 and a lease liability of $153,413 with respect to PERA LLC and a right to use asset of $1,575,145
and a lease liability of $1,598,068 with respect to combined entity Appreciation Financial LLC.
Intangible Assets
The Company’s intangible assets consist of intellectual property with minimal value.
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:
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 6).
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.
Revenue Recognition under ASC 606
The Company has adopted accounting standard, ASC 606 “Revenue from Contracts with Customers” and all related amendments to the new accounting standard to contracts.
Revenues from contracts with customers are recognized when control of promised goods and services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in
exchange for those goods or services.
The Company recognizes revenue using the five-step model as prescribed by ASC 606:
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 2 – Summary of Significant Accounting Policies (continued)
Revenue Recognition under ASC 606 (cont'd)
When a contract with a customer or an agent is signed, the Company assesses whether collection of the fees under the arrangement is probable. The Company estimates the amount to reserve for uncollectible amounts at the
end of each reporting period based on the aging of the contract balance, current and historical customer trends, and communications with its customers. These reserves are recorded against the related accounts receivable.
The transaction price is the consideration that the Company expects to receive from its customers and agents in exchange for its products or services. In determining the allocation of the transaction price, the Company
identifies performance obligations in contracts with customers, which may include subscriptions to software and services, support, professional services and customization. In the case of the Company’s software contracts and support services prices
are predetermined based on the specific terms of the contract either in flat fee customization/license fee charges or as hourly support and/or software customization charges. Charges relative to license fees are amortized over the term of the
license. Charges relative to customization of the software are charged over the term of the scope of work on a percentage of completion basis. Charges relative to support and ongoing services and professional fees are charged when incurred and
control has been transferred or the work has been completed. Income earned through the sale of appointments to agents by PERA LLC are recognized on the date of the service appointment.
License fees and customization of software
License and implementation fees are charged as flat fees which are amortized over the term of the contract. For contracts with elements related to customized software solutions and certain build-outs or software
systems that require significant modification or customization, the Company will recognize revenue using the percentage-of-completion method. In using the percentage-of-completion method, revenues are generally recorded based on completion of
milestones under a scope of work or based on total estimated cost of work and percentage completion as at the balance sheet date.
Software Revenue
The Company generates software revenue monthly on a single fee per subscribed user basis. The Company recognizes software revenue monthly on a per user for each user that is able to deploy software and provided all
revenue recognition criteria have been met. If the revenue recognition criteria has not been met, the revenue is deferred or not recognized.
Customization, support and maintenance
Revenue from the Company’s customization of software to meet a particular client’s needs is recognized on a percentage of completion basis over the term of the customization work and until control of the goods or
services is transferred to the customer or such date the customer agrees the scope of work has been completed and the intended functionality of the software is complete and able to perform the desired service. Support and maintenance revenue is
generated from recurring monthly support and is invoiced monthly based on hourly fees at predetermined rates based on each customer contract.
The Customer is credited a certain number of services hours monthly based on the numbers of users actively subscribed to the software which amounts offset any monthly user fees.
Support and maintenance services include e-mail and telephone support, unspecified rights to software fixes and product updates and upgrades and enhancements available on a when-and-if available basis.
Professional services and other
Professional services and other revenue is generated through services including onsite training, product implementation and other similar services. Professional services are generally flat fee services based on a
number of hours or scope of work for each specific service. Depending on the services to be provided, revenue from professional services and other is generally recognized at the time of delivery when the services have been completed and control has
been transferred.
Income from agent appointments
Income generated by booking appointments for insurance agents is earned on the date on which the appointment takes place. Appointment fees which are collected in advance of appointments are recorded as unearned
revenue.
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 2 – Summary of Significant Accounting Policies (continued)
Revenue Recognition under ASC 606 (cont'd)
Unearned Revenue
Unearned revenue represents billings or payments received in advance of revenue recognition and is recognized upon transfer of control. Balances consist primarily of appointment fees collected from member agents where
the client appointment has not yet occurred, license fees being amortized over the term of the customer contract and customization services which have not yet been concluded and are being deferred using the percentage-of-completion method.
Campground space rentals and concession sales
Revenues from our campsite operations from the sales of concession items, equipment rentals or campsite locations are recoded on the cash basis due to the nature of collection of campsite fees and concession items,
which occur daily as the site is rented and sundry items are purchased.
Commissions earned on insurance coverage (Appreciation Financial LLC)
Appreciation Financial LLC earns commissions paid by insurance carriers for the binding of insurance coverage. Commissions are earned at a point in time upon the effective date of bound insurance
coverage, as no performance obligation exists after coverage is bound. If there are other services within the contract, Appreciation estimates the stand-alone selling price for each separate performance obligation, and the corresponding apportioned
revenue is recognized over a period of time as the performance obligations are fulfilled. Incentive commissions represent a form of variable consideration which includes additional commissions over base commissions received from insurance carriers
based on predetermined production levels mutually agreed upon by both parties. Incentive commissions are estimated with a constraint applied and accrued relative to the recognition of the corresponding core commissions based on the amount of
consideration that will be received in the coming year such that a significant reversal of revenue is not probable. Advance Commissions are paid by insurance carriers under agreed terms of certain individual customer policies. Advance Commissions
are recorded as deferred revenue and amortized over the term of the contract.
Appreciation Management determines the policy cancellation reserve based upon historical cancellation experience adjusted for any known circumstance.
Commission revenues – Prior to the adoption of Topic 606, commission revenues, including those billed on an installment basis, were recognized on the latter of the policy effective date or the date that the premium was
billed to the customer. As a result of the adoption of Topic 606, commission revenues associated with the issuance of policies are now recognized upon the effective date of the associated policy. The overall impact of these changes is expected to be
significant.. These commission revenues, including those billed on an installment basis, will now be recognized earlier than they had been previously. Revenue is accrued based upon the completion of the performance obligation, thereby creating a
current asset for the unbilled revenue, until such time as an invoice is generated.
Incentive and contingent commissions – Prior to the adoption of Topic 606, revenue that was not fixed and determinable because a contingency existed was not recognized until the contingency was resolved. Under Topic
606, Appreciation must estimate the amount of consideration that will be received in the coming year such that a significant reversal of revenue is not probable. Incentive and contingent commissions represent a form of variable consideration
associated with the placement of coverage, for which we earn commissions and fees. In connection with Topic 606, these commissions are estimated with a constraint applied and accrued relative to the recognition of the corresponding core
commissions. The resulting effect on the timing of recognizing of these contingent commissions will now more closely follow a similar pattern as our commissions and fees with any true-ups recognized when payments are received or as additional
information that affects the estimate becomes available.
Fee Revenues: Appreciation earns fee revenue related to the onboarding of its agents which is recorded at the time of the transaction.
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 2 – Summary of Significant Accounting Policies (continued)
Revenue Recognition under ASC 606 (cont'd)
Additionally, Appreciation is required to evaluate the impact of ASC Topic 340 – Other Assets and Deferred Cost (“ASC 340”) which requires companies to defer certain incremental cost to obtain customer contracts, and
certain costs to fulfill customer contracts.
Incremental cost to obtain – The adoption of ASC 340 is expected to result in Appreciation deferring certain costs to obtain customer contracts primarily as they relate to commission-based compensation for which the
Company pays an incremental amount of compensation on new business. These incremental costs are expected to be deferred and amortized based on the term of customer polices and expected renewals.
Cost to fulfill – The adoption of ASC 340 may result in Appreciation deferring certain costs to fulfill contracts and recognizing costs as the associated performance obligations are fulfilled. In order for contract
fulfillment costs to be deferred under ASC 340, the costs must (1) relate directly to a specific contract or anticipated contract, (2) generate or enhance resources that Appreciation will use in satisfying its obligations under the contract, and (3)
be expected to be recovered through sufficient net cash flows from the contract.
As of the filing date, Appreciation Financial is unable to estimate with certainty its historical renewal rates for the insurance policies previously sold and therefore has not included commission revenue to be earned
upon renewal based on this estimate. This also means that Appreciation is unable to estimate the costs to be deferred under ASC 340, or the costs to be expensed upon recognition of renewal revenue under ASC 606. Appreciation Financial prior to the
combination of its financial statements herein did not previously report the results of its operations and financial position under US GAAP and is currently in the process of developing the systems and processes in which to estimate these amounts.
The Company currently expects that the processes and systems will be in place for the reporting for the Company’s year ended June 30, 2021 financial statements.
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.
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.
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.
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 2 – Summary of Significant Accounting Policies (continued)
Income taxes (cont'd)
In the quarters ended September 30, 2020 and 2019, the Company issued a significant number of new shares in its acquisition of PERA LLC and Bombshell Technologies, Inc. (see Note 4) and the cancellation of then
outstanding shares upon the sale of WCS Enterprises, LLC (see Note 5). The effect of these issuances and cancellations is that most likely, the Company experienced the requisite change of control as promulgated under the US Internal Revenue Code
section 382. The effect of this will be that going forward, the ability of the Company to utilize the US Federal net operating loss carryforwards of Grow Capital, Inc. from prior to these transactions will be limited in its usage. In order to
determine the specific effect, the Company must perform the computations required under the Internal Revenue Code, which have not yet been performed. The Company expects it will perform the required computations once its evident that profits are
likely.
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 three months ended September 30, 2020 and 2019, all potentially dilutive securities are anti-dilutive due to the Company's losses
from operations.
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.
There were no potential shares outstanding as of September 30, 2020 and 2019.
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. These reclassifications had no effect
on net income for the prior periods. In addition, we previously included the results of operations and financial position of the Resort on Lake Selmac for the period ended September 30, 2019 in discontinued operations and assets and liabilities held
for sale, respectively. Subsequent to the original Form 10-Q filing for the period ended September 30, 2019, we no longer had a plan of sale and therefore the results of Lake Selmac and its financial position are now included in our results from
continuing operations and cash flows for the period ended September 30, 2019.
Recent Accounting Pronouncements
Fair Value Measurements (“ASU 2018-03”). In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for
Fair Value Measurement.” The amendments in the standard apply to all entities that are required, under existing GAAP, to make disclosures about recurring or nonrecurring fair value measurements. ASU 2018-13 removes, modifies, and adds certain
disclosure requirements in ASC 820, Fair Value Measurement. The standard is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.
The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be
applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is
permitted upon issuance of ASU 2018-13. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. The Company is currently
assessing the impact that ASU 2018-13 will have on its financial statements.
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 2 – Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements (cont'd)
Financial Instruments – Credit Losses (“ASU 2016-13”). In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” to require the
measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this ASU is to provide financial statement users with more
decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.
The standard was originally effective for interim and annual reporting periods beginning after December 15, 2019 and early adoption is permitted for interim and annual reporting periods beginning after December 15,
2018. However, in November 2019, the Financial Accounting Standard Board (FASB) issued ASU 2019-10, Financial Instruments—Credit Losses, (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) — Effective Dates (“ASU 2019-10”). ASU 2019-10 deferred the adoption date for (i) public business entities that meet the definition of an SEC filer, excluding entities
eligible to be “smaller reporting companies” as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and (2) all other entities for fiscal years beginning after December 15,
2022, including interim periods within those fiscal years. As of June 30, 2020, the Company qualified as a smaller reporting companies as defined by the SEC. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated
financial statements but does not anticipate there to be a material impact.
Note 3 – Prepaid expenses
Prepaid expenses at September 30, 2020 and June 30, 2020 consist of the following:
Note 4 – Merger with PERA LLC
On August 19, 2020, the Company acquired PERA LLC, a Nevada limited liability company (“PERA”), pursuant to an exchange agreement (the “Exchange Agreement”), effective as of August 3, 2020 (the “Effective Date”), by
and between PERA, the members of PERA (the “PERA Members”), and the Company (the “Closing”), concurrently, PERA became a wholly-owned subsidiary of the Company. Eric Tarno, the current President of PERA, will continue to serve as the President of
PERA. Pursuant to the Exchange Agreement, at the Closing, the Company acquired 100% of the outstanding membership interests of PERA (the “PERA Ownership Interests”) in exchange for 9,358,185 unregistered restricted shares of the Company’s common
stock (the “GC Common Stock”) on a pro rata basis (the “Exchange”). At the Closing, the PERA Members conveyed all of the right, title and interest in and to the PERA Ownership Interests in exchange for the right to receive a number of shares of GC
Common Stock equal to an exchange ratio (the “Exchange Ratio”).
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 4 – Merger with PERA LLC (continued)
The Exchange Ratio is calculated by dividing (a) the Exchange Shares (as defined below) by (b) the total number of shares of PERA Ownership Interests outstanding immediately prior to the Effective Date. “Exchange
Shares” means the number of shares of GC Common Stock obtained by dividing (a) $10,000,000 by (b) the 10-day volume weighted average price per share (“VWAP”) calculated immediately before the date that a reverse stock split of GC Common Stock became
effective on OTCQB, July 30, 2020. In addition, if PERA meets certain yearly targeted gross revenues for each of year one, two, and three following the Closing, the PERA owners may earn a cumulative total of up to $5,000,000 of shares of GC Common
Stock (the “Earn-out Shares”) to be determined using the applicable 10-day VWAP stock price of the Company’s common stock preceding each earn-out period calculation date as set forth in the Exchange Agreement in connection with all of the three
years, subject to certain catch up provisions if such yearly period targets are not met in the applicable period. At the Closing the Company also entered into a registration rights agreement (the “Registration Rights Agreement”) with
the PERA Members to register the GC Common Stock to be issued in connection with the Exchange. Pursuant to the Registration Rights Agreement, the Company has granted certain demand and piggy-back registration rights whereby the Company will register
the resale of the GC Common Stock issued in the Exchange. The PERA Members include certain limited liability companies owned by (i) Terry Kennedy, the CEO of the Company, (ii) Jonathan Bonnette, the CTO of the Company and the CEO of Bombshell (iii)
Joel Bonnette, the President of Bombshell and brother of Jonathan Bonnette, and (iv) Carl Sanko, a director and Secretary of the Company, and (v) Jared Bonnette, brother of Jonathan Bonnette.
The acquisition of PERA was not accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. Due to the related party and common control relationships held between
Bombshell and Grow Capital, Inc., the assets and liabilities of Bombshell transferred over to the Company at their historical carrying values.
The following table provides information as of August 19, 2020 of the assets acquired and the liabilities assumed in the merger:
*The Grow Capital, Inc. common stock held by PERA LLC and Appreciation Financial at the time of the closing was included as treasury stock.
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 5 – Assets Held for Sale
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 determined that it was 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 434,694 shares of the Company’s Common Stock, valued at $2.00 per share. The Purchase Agreement also provided that Mr. Zallen transfer to the Company
an additional 20,000 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. The Company reversed related payroll taxes of
approximately $61,000 and included the amount in the gain on sale. The shares issued in the Exchange are subject to certain registration rights with no liquidated damages for failure to complete registration by a specific date.
After payment of all closing costs, the Company recorded a gain on sale of approximately $553,000. (See detail below)
Discontinued Operation:
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 6 – Property and Equipment, Net
Property and improvements consisted of the following as of September 30, 2020 and June 30, 2020:
Depreciation expense amounted to $5,235 and $6,404, for the three months ended September 30, 2020 and 2019, respectively.
Note 7 – Promissory Note Receivable
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.
The Board of Directors of the Company have determined not to proceed with the acquisition as contemplated under the LOI.
During the fiscal year ended June 30, 2020, the Company received $16,000 towards monthly installments. We recorded interest income of $6,304 during the period ended June 30, 2020. The Note receivable balance at June
30, 2020 was $88,510.
On September 25, 2020 the Company and Encompass More Group Inc. (the “Borrower”) entered into an addendum to the July 22, 2019 Commercial Loan Agreement (the “Addendum”) in order to modify certain of the terms and
conditions. Under the Addendum, the Borrower shall enter into a new promissory note in the principal amount of $72,000, with any unpaid interest due and payable at June 30, 2020 to accrue and become due and payable on October 1, 2021. Further under
the terms of the promissory note the Borrower shall make twelve (12) installment payments of $6,000 commencing November 1, 2020, until the principal balance of the loan is repaid in full, at which time all accrued and unpaid interest shall come due
and payable. Interest on the promissory note shall continue to accrue at a rate of Five (5%) per annum. Concurrent with the execution of the Addendum, the Borrower made a lump sum payment of $16,510 to reduce the principal of the original $100,000
loan to $72,000. Payments through January 31, 2021 have been received as of the date of this report. The Company believes the note to be fully collectible as of September 30, 2020.
Note 8 – Accrued Liabilities
Accrued liabilities at September 30, 2020 and June 30, 2020 consist of the following:
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 9 - Debts and Other Noncurrent Liabilities
In March 2017, the Company acquired the Lake Selmac Property. Upon closing, the Company entered into a promissory note payable with the seller in the amount of $625,000 with a maturity date of March 6, 2022. The
promissory note 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. The Company has irrevocably granted to First American Trust Company, as the Trustee the power to sell the property with the sellers as the beneficiaries. The purpose of grant
is to secure performance on the promissory note.
As of September 30, 2020, the approximate future aggregate principal payments in respect of our current obligations were as follows:
On May 1, 2020, the Company entered into a promissory note with the US Small Business Administration (SBA) for funding in the amount of $250,772 with an interest rate of 1% per annum under the
payroll protection program (PPP). Principal and interest payments are deferred during the first six (6) months of the term of this Note (the “Deferral Period”). Interest will continue to accrue on the outstanding principal balance during the
Deferral Period. After proceeds of this Note have been expended by Borrower, but not sooner than eight weeks after the date of initial disbursement on this Note, Borrower may submit to Lender a request for forgiveness of the Loan. Borrower must
submit all documentation required by Lender to verify number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations, certifying that the documents are true and that Borrower used
the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. Lender will notify Borrower within 60 days whether all or part of the requested forgiveness of the Loan has been approved. If the entire
principal balance of this Note and accrued interest is not forgiven before the end of the Deferral Period, then the principal balance together with and all accrued and unpaid interest outstanding on the Amortization Commencement Date shall be paid in
eighteen (18) monthly payments, commencing in the month immediately following the amortization commencement date.
In addition, the Company received an Economic Injury and Disaster Loan “EIDL” in the amount of $224,900 from the SBA for working capital purposes, pursuant to the terms and conditions set forth in a
Loan Authorization and Agreement, Note, and Security Agreement between the Company and the SBA. The EIDL accrues interest at the rate of 3.75% per annum and matures on August 11, 2050 (30 years from the date of the note). Pursuant to the terms of the
loan agreement, the Company granted the SBA a security interest in all of its tangible and intangible personal property to secure payment and performance of the Company’s obligations. The loan agreement contains certain affirmative and restrictive
covenants, including a covenant prohibiting the Company from selling or transferring any collateral (other than the sale of inventory in the ordinary course of business) without the SBA’s prior written consent, as well as a covenant prohibiting the
Company from making any distribution of assets or any direct or indirect advance, by way of a loan, gift, bonus or otherwise, to any owner or employee of the Company or its affiliates without the SBA’s prior written consent. An event of default will
occur under the note if, among other things, the Company reorganizes, merges, consolidates or otherwise undergoes a change in ownership or business structure without the SBA’s prior written consent. The Company may prepay the note at any time without
notice or penalty.
Appreciation had certain loan agreements with National Life Distribution, LLC as below:
Future maturities over the remaining term of the debt are as follows:
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 10 – Operating Leases
We have entered into various non-cancelable operating lease agreements for certain of our offices. Our leases have original lease periods expiring between 2021 and 2028.
Future minimum lease payments in respect of the above under non-cancellable leases as of September 30, 2020 as presented in accordance with ASC 842 were as follows:
Note 11 – 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 increased its authorized shares to 500,000,000 shares of Common Stock and 50,000,000 shares of
Preferred Stock, respectively.
Reverse Stock Split
On May 13, 2020, the Company’s board of directors and stockholders approved an amended and restated certificate of incorporation to, among other things, effect a reverse split on the outstanding shares of the Company’s
common stock on a one-for-20 basis (the “Reverse Stock Split”). The Reverse Stock Split became effective on July 30, 2020 and has been shown on a retroactive basis within all periods presented. The par values of the common were not adjusted as a
result of the reverse stock split.
Common Stock
On August 19, 2020, the Company issued a total of 9,358,185 unregistered, restricted shares of Common Stock to acquire Pera LLC. (See Note 4).
During the three months ended September 30, 2020, the Company issued a total of 145,495 unregistered, restricted Common Shares to officers and directors as part of their respective executive and/or board compensation
package. The Company valued those issuances at the closing price of the Company’s stock as traded on the OTCMarket on the date of grant and recorded stock-based compensation of $165,065.
During the three months ended September 30, 2020, the Company issued 17,104 fully vested shares of unregistered, restricted Common Shares 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 $15,000 liability settlement and stock-based compensation of $8,108 on the statement of operations.
During the three months ended September 30, 2020, the Company issued a total of 75,000 unregistered, restricted shares of Common Stock in respect to private placements at $1.00 per share and received cash proceeds of
$75,000, in which $35,000 subscripted from Appreciation.
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.
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 11 - Capital Stock (continued)
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 100,000 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 100,000 shares under the Incentive Plan during April 2016, 75,000 of
which have been exercised and 25,000 of which have vested and were canceled, unexercised, during the current fiscal year. There are no remaining shares available under the Incentive Plan.
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 100,000 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.
Options
There were no unvested options outstanding during the years ended June 30, 2020 and 2019. Options outstanding had intrinsic value as of June 30, 2020 and 2019 of $nil. In the year ended June 30, 2016 the Company issued
an option with no term attached, and effective June 30, 2020, in accordance with the terms of the 2015 Equity Incentive Plan, the Company terminated 25,000 unexercised, vested options.
Note 12 – Related Party Transactions
Revenue
The following table summarizes the revenue from the Company’s related parties. Revenues below reflect the transactions between Bombshell, PERA and Appreciation to to the time of acquisition, consolidation and
combination effective August 20, 2020, thereafter intercorporate sales are eliminated:
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 12 – Related Party Transactions (continued)
The following table summarizes the accounts receivable from the Company’s related parties:
Appreciation and PERA balances are eliminated as of September 30, 2020.
Costs of Goods and Commissions Fees
The following table summarizes the Costs of Sales – related parties:
The following table summarizes expense related to commission fees included as General and administrative – related parties:
(1)Related entities are controlled by over 5% shareholders of the Company and/or officer/directors of the Company.
The following table summarizes accounts payable to the Company’s related parties:
(1)Related entities are controlled by over 5% shareholders of the Company and/or officer/directors of the Company.
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 12 – Related Party Transactions (continued)
The following table summarizes the Costs of Sales – related parties:
(1)Related entities are controlled by over 5% shareholders of the Company and/or officer/directors of the Company.
The following table summarizes expense related to commission fees paid to related parties and included as General and administrative – related parties:
The following table summarizes the Costs of Sales – related parties:
The following table summarizes expense related to compensation included as General and administrative – related parties:
Upon combination of Appreciation, the Company assumed accounts payable as below:
On February 12, 2020, the Company entered into a consulting agreement with Trevor Hall and appointed Mr. Hall to serve as an interim CFO of the Company beginning January 1, 2020 through December 31, 2020. Pursuant to
the consulting agreement, a fixed fee of Sixty Thousand (60,000) shares of the Company’s unregistered restricted common stock for his providing chief financial officer services. The shares are to be issued at a rate of Fifteen Thousand (15,000)
shares per quarter. The first and second installments, covering the period January 1 to June 30, 2020, were issued on March 3, 2020 and vested immediately upon issuance.
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 12 – Related Party Transactions (continued)
On April 1, 2020, Jonathan Bonnette, who had been the President and Chief Executive Officer of Grow Capital since July 1, 2018, transitioned out of his role as President and Chief Executive Officer and became the
Company’s Chief Technology Officer and the Chief Executive Officer of the Company’s subsidiary, Bombshell Technologies.
Mr. Terry Kennedy was appointed to succeed Mr. Bonnette as the President and Chief Executive Officer of the Company, effective April 1, 2020. In connection with Mr. Kennedy’s appointment, the Company and Mr. Kennedy
entered into an executive compensation agreement (the “Compensation Agreement”) with an effective date of April 1, 2020. The Compensation Agreement governs the terms and conditions regarding Mr. Kennedy’s compensation for the three-month period
beginning on April 1, 2020, and ending on June 30, 2020, and may be terminated “for cause” only. Pursuant to the Compensation Agreement, following his appointment as President and Chief Executive Officer, Mr. Kennedy was issued 50,000 unregistered,
restricted shares of the Company’s Common Stock on April 20, 2020 as compensation for the three-month period ending June 30, 2020. The 50,000 shares were valued at $44,040 at the closing price of the Company’s Common Stock as traded on the OTCMarkets
on the date of grant. The shares of common stock issued are immediately and fully vested, and deemed to be fully earned, upon their issuance. If such a permanent executive compensation or employment agreement is not consummated prior to July 1,
2020, the Compensation Agreement will automatically renew for one additional three-month period beginning on July 1, 2020, with Mr. Kennedy entitled to receive up to an additional 50, 000 unregistered, restricted shares of the Company’s common stock,
with the actual number of shares being prorated for the portion of the extended period actually served until the more permanent executive compensation/employment agreement is consummated.
On May 15, 2020, the Company entered into Fee Agreements (collectively, the “Fee Agreements”) with each of (i) Jonathan Bonnette, and (ii) Carl Sanko, a director and the Secretary of the Company. Under the Fee
Agreements, on May 15, 2020, each of Mr. Bonnette, and Mr. Sanko were issued unregistered, restricted 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 of which 1/3, or $106,667 was
immediately payable. by way of an upfront payment of 133,333 unregistered, restricted shares of Common Stock valued at $113,017 and deemed to cover the three-month period from May 15, 2020 to August 15, 2020. The balance of Mr. Bonnette’s
compensation of $213,333 will vest monthly but be paid in shares of Common Stock quarterly in installments of $71,111 within 10 days following each of the three-month periods ending of November 15, 2020, February 15, 2021, and May 15, 2021.
(ii)Mr. Sanko received a fixed fee of $270,000 for his services as Secretary of the Company and for outside business management and consulting services, of which 1/3 or $90,000 was immediately
payable by way of an upfront payment of 112,500 unregistered, restricted shares of Common Stock valued at $95,400 and deemed to cover the three-month period from May 15, 2020 to August 15, 2020; The balance of Mr. Sanko’s compensation of $180,000
will vest monthly but be paid in shares of Common Stock in quarterly in installments of $60,000 within 10 days following each of the three-month periods ending of November 15, 2020, February 15, 2021, and May 15, 2021.
145,495 unregistered, restricted Common Shares to officers and directors as part of their respective executive and/or board compensation package. The Company valued those issuances at the closing price of the
Company’s stock as traded on the OTCMarket on the date of grant and recorded stock-based compensation of $165,065.
During the three months ended September 30, 2020, the Company issued a total of 75,000 unregistered, restricted shares of Common Stock to related parties for cash proceeds of $75,000.
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 13 – Segment Reporting
The Company's operations are classified into four reportable segments that provide different products or services. Separate management of each segment is required because each business unit is subject to different
marketing, operational, and growth and technology development strategies.
Resort at Lake Selmac
The recreational vacation site rentals segment operated by Resort at Lake Selmac, Inc. derives its revenue from rental of RV sites and campsites at its owned location on Lake Selmac in Oregon.
Bombshell Technologies and Corporate
US. The Fintech segment operated by Bombshell Technologies based in Nevada and Louisiana derives its income from proprietary software which delivers customized back office compliance, sophisticated multi-pay
commission processing, and a unique new client application submission system, along with digital engagement marketing services centric to financial services.
Pera
Our electronic appointment scheduling operations provides leads for insurance agents to connect retirement professionals and public employees to trusted insurance advisors.
Appreciation
The operations of combined entity Appreciation Financial LLC include full-service retirement planning by member agents which service public employees and their families providing policies
from a series of insurance carriers that meet their retirement planning requirements. We derive revenue from all operating segments.
There are inter-segment sales between each of our operating divisions other than Resort at Lake Selmac. The costs associated with management overhead for Grow Capital are dedicated to our key operating segment in the
FinTech industry, Bombshell Technologies and all corporate overhead has been included in this segment disclosure as a result.
Three months ended September 30, 2020 and 2019:
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 15 – Commitments and Contingencies
On December 13, 2019, Trendsic Corporation, Inc. (“Trendsic”), a related party entity which is 49% controlled by Joel A. Bonnette (former CEO of our wholly-owned subsidiary Bombshell
Technologies, Inc.) filed a lawsuit in the 19th Judicial District Court in East Baton Rouge Parish, Louisiana against Joel A. Bonnette, Jared Bonnette, Bombshell Software, LLC and Bombshell Technologies, Inc. The plaintiff is disputing the ownership
of certain intellectual property of Bombshell Technologies, Inc. and alleging misappropriation of trade secrets of Trendsic. Trendsic is seeking an unspecified amount of damages in excess of $75,000 and treble damages under the Louisiana Uniform
Trade Secrets Act, as well as injunctive relief. The Company believes the claims by Trendsic are without merit and is vigorously defending against such claims. At the time of this report, the Company and the plaintiff have entered into confidential
settlement negotiations. The Company has accrued $494,458 in accrued liabilities in respect of the estimated monetary settlement.
On September 4, 2020, Colorado Public Employees’ Retirement Association filed a lawsuit against our wholly owned subsidiary PERA, LLC in United States District Court for the District of Colorado. Plaintiff asserts
claims against the Company for violation of the Colorado Consumer Protection Act, C.R.S. Sec. 6-1-113 and for common law unfair competition. Plaintiff alleges that the Company has created confusion amongst Colorado public employees as to the
affiliation of the Company with Plaintiff. The Company denies the claims asserted against it and is vigorously defending the lawsuit. At this point, Plaintiff has not identified any monetary damages alleged to be sustained as a result of the
Company’s conduct.
On May 25, 2017, Asurea Insurance Services, Inc. filed a lawsuit against Appreciation, LLC and three of our top agents in the Superior Court of California, Sacramento. Plaintiff asserts claims of
Breach of Settlement Agreement, Breach of Implied Covenant of Good Faith and Fair Dealing, Specific Performance, Declaratory Relief, Intentional Interference with Prospective Economic Relations, Negligent Interference with Prospective Economic
Relations, and Aiding and Abetting. Plaintiff alleges that the Parties breached the Settlement Agreement reached between the parties on September 1, 2014. The Company denies the claims asserted against it and is vigorously defending the lawsuit. The
parties have attended mediation in an attempt to settle this case to no avail. At this point, Plaintiff has not proven any monetary damages alleged to be sustained as a result of the Company’s alleged conduct.
On September 15, 2017, Nathan Burks filed a lawsuit against Appreciation, LLC and three of our top agents in the Superior Court of California, Sacramento. Plaintiff asserts claims of Breach of
Settlement Agreement, Breach of Associate Agreement, Common Count- Services Rendered, Intentional Interference with Contractual Relations, Negligent Interference with Prospective Economic Relations, Declaratory Relief, Money Had and Received, and
Unfair Competition. Plaintiff alleges that when he left Appreciation and returned to Asurea (his original place of employment in 2014, and a corporate entity with which we are in litigation) (see above) that despite violating the associate agreement,
he is owed money. The Company denies the claims asserted against it and is vigorously defending the lawsuit. The parties have an arbitration set in May of 2021 in an attempt to settle this case. At this point, Plaintiff has not proven any monetary
damages alleged to be sustained as a result of the Company’s alleged conduct.
On the basis of current information, the availability of legal advice, and in management’s opinion, the Company is not currently involved in any legal proceedings which, individually or in the
aggregate, would have a material adverse effect on its financial condition, operations and/or cash flows.
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
Note 16- Subsequent Events
On September 30, 2020 Terry Kennedy, CEO, and Eric Tarno, CEO of acquired subsidiary, PERA LLC, were appointed to the Company’s Board of Directors effective October 1, 2020.
On October 1, 2020 the Company issued 50,000 unregistered, restricted shares of the Company’s common stock to the Company’s CEO, Terry Kennedy, concurrent with approving an extension to his
executive compensation contract, as compensation for the three-month period commencing October 1, 2020. The shares were valued at the closing price of the Company’s Common Stock as traded on the OTCMarkets on the date of the board resolution
approving the issuance of the shares.
On October 1, 2020 the Company issued a total of 106,869 unregistered, restricted common shares to officers and directors as part of their respective executive and/or board compensation package. The Company valued the
issuances at the closing price of the Company’s stock as traded on the OTCMarket on the date of the board resolution approving the issuance of the shares.
On October 16, 2020, the Company issued a total of 15,000 unregistered restricted common shares as the quarterly payment to an officer as part of his respective executive and/or board compensation package. The shares
vest immediately upon issuance. The Company valued the issuances at the closing price of the Company’s stock as traded on the OTCMarket on the date of the board resolution approving the issuance of the shares.
On November 16, 2020 the Company issued a total of 199,370 shares of common stock to two officers and directors as part of their respective executive and/or board compensation package. The Company valued the
issuances at the closing price of the Company’s stock as traded on the OTCMarket on the date of the board resolution approving the issuance of the shares.
On November 23, 2020, the Company issued a total of 75,000 shares of common stock to three related companies for total consideration of $75,000.
On December 4, 2020, the Company issued a total of 20,797 shares to AF1 Public Relations LLC for consideration of serviced valued at $15,000. The Company valued the issuances at the closing price of the Company’s
stock as traded on the OTCMarket on the date of the board resolution approving the issuance of the shares.
On January 11, 2021, the Company issued a total of 119,718 unregistered, restricted common shares to officers and directors as part of their respective executive and/or board compensation package. The Company valued
the issuances at the closing price of the Company’s stock as traded on the OTCMarket on the date of the board resolution approving the issuance of the shares.
On January 11, 2021, the Company issued a total of 1,500,000 unregistered, restricted common shares to certain third parties and related entities for cash consideration of $375,000.
On January 11, 2020 the Company issued 50,000 unregistered, restricted shares of the Company’s common stock to the Company’s CEO, Terry Kennedy, concurrent with approving an extension to his executive compensation
contract, as compensation for the three-month period commencing October 1, 2020. The shares were valued at the closing price of the Company’s Common Stock as traded on the OTCMarkets on the date of the board resolution approving the issuance of the
shares.
On January 22, 2021, the Company issued a total of 15,000 unregistered restricted common shares as the quarterly payment to an officer as part of his respective executive and/or board compensation package. The shares
vest immediately upon issuance. The Company valued the issuances at the closing price of the Company’s stock as traded on the OTCMarket on the date of the board resolution approving the issuance of the shares.