NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 – Organization and Summary of Significant Accounting Policies
Presentation of Interim Information:
The accompanying unaudited condensed consolidated interim financial statements of Grow Condos, Inc. ("we", "us", "our" or "Company") have been prepared by the Company’s management in conformity with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the consolidated financial statements and notes thereto of the Company contained in the Company’s Annual Report on Form 10-K for the year ended June 30, 2016 (“Form 10-K”), which was filed on September 13, 2016. The condensed consolidated financial statements are prepared in accordance with the requirements for unaudited interim periods, and consequently, do not include all disclosures required to be made in conformity with accounting principles generally accepted in the United States of America.
In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate the disclosures contained in the financial statements for the fiscal year ended June 30, 2016 as reported in the Form 10-K have been omitted.
The Company has reclassified the presentation of certain prior-year information to conform to the current presentation.
Nature of the Corporation:
Grow Condos, Inc. ("GCI" or the "Company") (f/k/a Fanatic Fans Inc. and Calibrus, Inc.) was incorporated on October 22, 1999, in the State of Nevada.
Our wholly owned subsidiary, 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 aeroponic grow facilities to support cannabis farmers. WCS intends to own, lease, sell and manage multi- tenant properties so as to reduce the risk of ownership and reduce costs to tenants and owners.
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 acquiring properties in the RV and campground industry.
On March 7, 2017, Smoke on the Water, Inc. executed a Real Estate Purchase Agreement to acquire the Lake Selmac Resort located at 2700 Lakeshore Drive, Selma, Oregon (see Note 3 below).
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Basis of Presentation:
The accompanying unaudited condensed consolidated interim 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").
Change in Accounting Principle and correction of an error
In the fiscal year ended June 30, 2017, the Company has adopted the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASB”) 2015-03 Interest – Imputation of Interest. This has required the Company to adopt a new accounting principle in which debt offering or issuance costs are net against the debt shown in the liability section of the balance sheet instead of as a stand-alone long-term asset on the balance sheet. The table below shows the effect of this restatement for the change in accounting principle as of June 30, 2016.
In addition, there was an error in the balance sheet in the period ended June 30, 2016, in which an issuance of stock was mistakenly reversed between the amount shown as common stock and additional paid-in capital which is also corrected in the table below as of June 30, 2016:
|
|
Originally
|
|
As
|
|
|
Presented
|
Adjustment
|
Restated
|
|
|
|
|
|
Debt discount, summary
|
|
104,982
|
(104,982)
|
-
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TOTAL ASSETS
|
|
1,698,731
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(104,982)
|
1,593,747
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|
|
|
|
|
Derivatives, net
|
|
792,445
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(104,983)
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687,462
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TOTAL LIABILITIES
|
|
2,405,774
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(104,983)
|
2,300,791
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|
|
|
|
|
Common stock
|
|
228,680
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(199,891)
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28,789
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Additional paid-in capital
|
|
12,001,259
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199,891
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12,201,150
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TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
1,698,731
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(104,983)
|
1,593,747
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Principles of Consolidation:
These condensed consolidated financial statements include the accounts of Grow Condos, Inc., and its wholly-owned subsidiaries, WCS, Enterprises, LLC and Smoke on the Water, Inc. as of March 31, 2017. 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 effect on the financial statements of a condition, situation, or set of circumstances that existed 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.
Significant estimates include, but are not limited to, the estimate of the allowance for doubtful accounts, equity compensation, allocation of purchase price for acquired assets, assumptions, and methods used to value derivative liabilities.
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Fair Value of Financial 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 accounts payable, accrued liabilities, mortgages payable and short term advances approximate fair value given their short term nature or effective interest rates, which represent level 3 inputs.
Earnings per Share:
Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares 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 period ended March 31, 2017, 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.
The following table sets forth the amount of dilutive shares as of March 31, 2017.
Options
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750,000
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Warrants
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150,000
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Convertible notes
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700,000
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Total diluted shares
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1,600,000
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Income Taxes:
The Company files income tax returns in the U.S. federal jurisdiction and the State of Oregon. The Company is subject to federal, state and local income tax examinations by tax authorities for approximately the past three years, or in some instances longer periods.
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". SFAS No. 109 requires the Company to provide a net deferred tax asset/liability equal to the expected future tax benefit/expense of temporary reporting differences between book and tax accounting methods and any available operating loss or tax credit carryforwards. At June 30, 2016, the Company had available unused operating loss carryforwards of approximately $1,497,116, which may be applied against future taxable income and which expire in various years through 2026.
The amount of and ultimate realization of the benefits from the operating loss carryforwards for income tax purposes is dependent, in part, upon the tax laws in effect, the future earnings of the Company, and other future events, the effects of which cannot be determined. Because of the uncertainty surrounding the realization of the loss carryforwards, the Company has established a valuation allowance equal to the tax effect of the loss carryforwards and, therefore, no deferred tax asset has been recognized for the loss carryforwards. The net deferred tax assets are approximately $1,497,116, $63,042 and $377 as of June 30, 2016, 2015 and 2014, respectively, with an offsetting valuation allowance of the same.
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Note 2 – Going Concern
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. In their report dated September 6, 2016, our independent registered public accounting firm included an emphasis-of-matter paragraph with respect to our financial statements for the period from July 1, 2015 to June 30, 2016 concerning the Company's assumption that we will continue as a going concern. The Company operates within an industry that is illegal under federal law, has yet to achieve profitable operations, has a significant accumulated deficit and is dependent on our ability to raise capital from stockholders or other sources to sustain operations and ultimately achieve viable profitable operations. As reported in these condensed consolidated financial statements, the Company has not yet achieved profitable operations and has an accumulated deficit of $13,872,829 which we have determined raises substantial doubt about the Company's ability to continue as a going concern.
Further, marijuana remains illegal under federal law as a schedule-I controlled substance, even in those jurisdictions in which the use of medical or recreational marijuana has been legalized at the state level. A change in the federal attitude towards enforcement could cripple the industry. The medical and recreational marijuana industry is our primary target market, and if this industry was unable to operate, we would be subject to all potential remedies under federal law and lose the majority of our potential clients, which would have a negative impact on our business, operations and financial condition.
The ability of the Company to continue as a going concern is dependent on our ability to raise adequate capital to fund operating losses until we are able to engage in profitable business operations and the continuation of the current regulatory and enforcement environment. To the extent financing is not available, the Company may not be able to, or may be delayed in, developing our services and meeting our obligations.
Management's plans to address these matters include maintaining an awareness of the current regulatory and enforcement environment, controlling costs, evaluating our projected expenditures relative to our available cash and evaluating additional means of financing in order to satisfy our working capital and other cash requirements. The accompanying condensed consolidated financial statements do not reflect any adjustments that might result from the outcome of these uncertainties.
Note 3 – Acquisition of Lake Selmac Resort
On March 7, 2017, the Company, through its wholly-owned subsidiary Smoke on the Water, Inc. executed a Real Estate Purchase Agreement to acquire the Lake Selmac Resort located at 2700 Lakeshore Drive, Selma, Oregon. The Company agreed to acquire the property for a purchase price of $875,000 plus closing costs consisting of a seller financing note in the amount of $625,000 with the seller carrying the note at 5% per annum for the first twelve months and then 6% per annum for the next four years, $200,000 in cash, and 50,000 shares of the Company's common stock valued at $50,000.
Note 4 – Convertible Notes Payable
On March 21, 2016 the Company entered into a transaction with Auctus Fund, LLC. In exchange for $75,000 cash net of fees, the Company issued a convertible promissory note in the amount of $83,750. The Note had a maturity date of nine (9) months from date of issue and interest at 10% per annum. At any time prior to the complete satisfaction of the Note, it was convertible into shares of the Company's common stock. On September 27, 2016 the Company received a Notice of Conversion. A total of 352,163 shares were issued to Auctus Fund, LLC in payment of the debt.
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On March 28, 2016 the Company entered into a transaction with Tangiers Global, LLC. In exchange for $90,000 cash net of fees, the Company issued a convertible promissory note in the amount of $100,000. The Note had a maturity date of six (6) months from the date of issue and interest at 10% per annum. On October 11, 2016 the Company received a Notice of Conversion for $50,000. A total of 200,000 shares were Issued to Tangiers Global, LLC in payment of one half on the debt owed. On November 11, 2016, the Company received a Notice of Conversion for the balance plus accrued interest of this note. The Company issued total of 240,000 shares of common stock in payment of the balance of the debt plus accrued interest.
On April 4, 2016 the Company entered into a transaction with Tangiers Global, LLC. In exchange for $25,000 cash net of fees, The Company issued a convertible promissory note in the amount of $25,000. The Note had a maturity date of April 4, 2017 and an interest at 10% per annum. The note is convertible at any time at the option of the holder into the common stock of the Company at the rate of the lower of (a) $0.25 or (b) 60% of the lowest trading price of the Company’s common stock during the 20 preceding trading days prior to the notice of conversion per $1 of principal. Because of the variable nature of the conversion feature, the Company bifurcated the conversion feature at inception of the note. On February 16, 2017, the Company received a Notice of Conversion for the balance plus accrued interest of this note. The Company issued total of 110,000 shares of common stock in payment of the balance of the debt plus accrued interest.
On January 9, 2017, the Company entered into a Convertible Promissory Note with a face value of $175,000 at 10% interest with a conversion price of 50% of the lowest closing price for the 10 trading days prior to the conversion date. This note matures on January 9, 2018. As part of the agreement, the terms of the note automatically update for any future financings such that the note automatically acquires more beneficial features provided to investors in future financings should they occur while any amount of principal or interest is outstanding under the note. Because of the variable nature of the conversion feature, the Company bifurcated the conversion feature at inception of the note. At March 31, 2017, the derivative liability resulting from the bifurcation was valued at 212,866. As of March 31, 2017, the beneficial conversion discount associated with the provisions of this note was $136,164.
On January 20, 2017 the Company entered into a transaction with Tangiers Global, LLC, issuing a $165,000, 10% fixed convertible promissory note. The Note is due July 20, 2017 and bears an interest rate of 10%, and is convertible into shares of the Company's common stock at $.85 per share. The Note was issued with a $15,000 original issue convertible issue discount. In connection with the issuance of the Note the Company also issued a warrant to purchase 150,000 shares at $0.85 subject to adjustment for stock splits and the like. The warrant expires on January 20, 2018. Proceeds of the Note and any Warrant exercises will be used for working capital, $10,000 of the proceeds of the Note have been allocated to attorney fees. The Company has granted the holder piggy back rights for the common stock underlying the convertible debenture and warrants. At March 31, 2017, the derivative liability resulting from the bifurcation was valued at $118,697. Should the Company prepay the note, in whole or in part, a premium between 0% and 50% of the principal and interest is required based on the timing after issuance of the note of the prepayment. As of March 31, 2017, the beneficial conversion discount associated with the provisions of this note was $101,289.
On January 23, 2017 the Company entered into a transaction with Auctus Fund, LLC. In exchange for $160,000 cash net of fees, the Company issued a convertible promissory note in the amount of $175,000. The Note has a maturity date of October 23, 2017 and interest at 10% per annum with conversion price of 50% of the lowest closing price for the 10 trading days prior to the conversion date. Because of the variable nature of the conversion feature, the Company bifurcated the conversion feature at inception of the note. At March 31, 2017, the derivative liability resulting from the bifurcation was valued at $200,021. Should the Company prepay the note, in whole or in part, a premium between 35% and 50% of the principal and interest is required based on the timing after issuance of the note of the prepayment. As of March 31, 2017, the beneficial conversion discount associated with the provisions of this note was $132,051.
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Note 5 – Common Stock Options
The Company has entered into an Equity Incentive Plan with a grant date of April 15, 2016. The plan allows for immediate vesting. The total number of shares granted is 2,000,000 shares at an exercise price of $0.40 per share. The shares under this plan are to be utilized for non-related party compensation. During the nine months ended March 31, 2017, the Company issued 750,000 shares of common stock related to the exercise of these options. As of March 31, 2017, there were 750,000 options outstanding.
Note 6 – Related Party Transactions
The former Chief Financial Officer, who is a sibling of the Chief Executive Officer, provides the use of her facilities to the Company at no costs to the Company since our inception.
The Company is currently leasing units located in Eagle Point Oregon. The building is an approximately 15,000 square foot building which has 10 units of approximately 1,500 square feet each available for use. Four units are currently under lease to three different companies. One unit is being used as the Grow Condos, Inc. offices, and five units are under lease to a company that the CEO controls. The agreement with the company controlled by the CEO was entered into prior to the incorporation of Grown Condos, Inc. The lease term begins once the tenant improvements are completed and the premises are occupied, and continues for a period of 36 months. The lease agreement requires no rental payments for the first 12 months of the lease and rental payments of $54,000 per year for the second and third year of the lease. As of July 1, 2016, the lease term has begun on two of the five units. The lease term has not begun as of March 31, 2017 on the remaining three units and no revenue associated with these three units has been recorded in the accompanying financial statements.
The CEO had loaned the Company a net of $15,575 the entire amount was re-paid on December 7, 2016.
From November 2015 to December 2016, the two employees of the Company, the CEO and the CFO had not been compensated. The salaries owed them plus employer taxes, based on their employee agreements entered into in November 2015 have been accrued monthly. In December 2016 a partial payment of accrued salaries was paid. The total gross wages paid was $153,600 plus $13,753 for employer payroll taxes both to federal and state entities.
In consideration for the contributions to the Company made by the Board of Directors, the following compensation was approved and issued on October 18, 2016. For the year ended June 30, 2016, members of the Board were issued a total of 13,334 shares of common stock valued at $18,934. For the nine months ended March 31, 2017, members of the Board were issued an aggregate of 45,788 shares of common stock valued at $54,074
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