NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Organization and Summary of Significant Accounting Policies
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 Enterprises, Inc. (“WCS”) is an Oregon limited liability company which was formed on September 9, 2013 with operations beginning in October 2013. WCS is a real estate purchaser, developer and manager of specific use industrial properties providing "Condo" style turn-key aeroponics grow facilities to support cannabis farmers. WCS 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 rental 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).
Basis of Presentation:
The accompanying consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States ("GAAP"), and pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC").
Consolidation
These consolidated financial statements include the accounts of Grow Condos, Inc., and its wholly-owned subsidiaries, WCS, Enterprises, LLC and Smoke on the Water, Inc. as of June 30, 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, assumptions used in the valuation of equity compensation, allocation of purchase price for acquired assets and assumptions used in our impairment testing of long-lived assets.
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.
GROW CONDOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Organization and Summary of Significant Accounting Policies (cont’d)
Lease Receivables and deferred rent
Lease receivables are recognized when rents are due, and for the straight-line adjustment to rents over the term of the lease less an allowance for expected uncollectible amounts. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, the customer's willingness or ability to pay, the Company's compliance with lease terms, the effect of general economic conditions and the ongoing relationship with the customer. Accounts with outstanding balances longer than the payment terms are considered past due. We do not charge interest on past due balances. The Company writes off lease receivables when it determines that they have become uncollectible after all reasonable collection efforts have been made. If we record bad debt expense, the amount is reflected as a component of operating expenses in the statements of operations. As of June 30, 2017, and 2016, an allowance for doubtful accounts was recorded in the amount of $ 2,861. As of June 30, 2017 and 2016, the Company had recorded deferred rent for the straight-line value of rental income of $26,006 and $22,539 respectively as part of other assets.
Investment In and Valuation of Real Estate Assets
Real estate assets are stated at cost, less accumulated depreciation and amortization. Amounts capitalized to real estate assets consist of the cost of acquisition (excluding acquisition related expenses), construction costs, and mortgage interest during the period the facilities are under construction and prior to readiness for occupancy, and any tenant improvements, major improvements and betterments that extend the useful life of the real estate assets and leasing costs. All repairs and maintenance are expensed as incurred.
The Company is required to make subjective assessments as to the useful lives of its depreciable assets. The Company considers the period of future benefit of each respective asset to determine the appropriate useful life of the assets. Real estate assets, other than land, are depreciated on a straight-line basis over the estimated useful life of the asset. The estimated useful lives of the Company's real estate assets by class are generally as follows:
Land
|
Indefinite
|
Buildings
|
40 years
|
Tenant improvements
|
Lesser of useful life or lease term
|
Intangible lease assets
|
Lease term
|
Revenue Recognition
We recognize revenue only when all of the following criteria have been met:
o
|
persuasive evidence of an arrangement exists;
|
o
|
use of the real property has taken place or services have been rendered;
|
o
|
the fee for the arrangement is fixed or determinable; and
|
o
|
collectability is reasonably assured.
|
Persuasive Evidence of an Arrangement
– We document all terms of an arrangement in a real property lease signed by the tenant, for leases with a term greater than 30 days, prior to recognizing revenue.
GROW CONDOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Organization and Summary of Significant Accounting Policies (cont’d)
Our real property lease agreements, which are governed by the laws of the state of Oregon, usually are non-cancellable and range from six to thirty-six months with a cash security deposit and personal guarantee required. We account for our leases in accordance with Accounting Standard Codification ("ASC") Topic 840,
Leases
, as operating leases. Leases may include escalating rental rates, an option to extend the term of the lease at a fixed rental rate, and an option to purchase the portion of the building being leased at the end of the lease term. Leases may be assigned with our approval. Common area maintenance and water are paid by the Company with the tenant responsible for maintenance, repairs and liability insurance associated with their specific unit within the building. Cash received for purchase options is recorded as deferred option revenue in the accompanying consolidated financial statements. These amounts are recorded to revenue upon the exercise of the option by the tenant or the expiration of the unused option.
Future minimum lease payments to be received under non-cancelable real property leases are as follows as of June 30, 2017 for the fiscal year ending in:
2018
|
$
|
117,400
|
2019
|
|
16,200
|
|
|
|
|
$
|
133,600
|
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $226,087 and $205,035 for the fiscal years ended June 30, 2017 and 2016, respectively.
Fair Value of Financial Instruments:
The Company follows the fair value measurement rules, which provides guidance on the use of fair value in accounting and disclosure for assets and liabilities when such accounting and disclosure is called for by other accounting literature. These rules establish a fair value hierarchy for inputs to be used to measure fair value of financial assets and liabilities. This hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels: Level 1 (highest priority), Level 2, and Level 3 (lowest priority).
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the balance sheet date.
Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3—Inputs are unobservable and reflect the Company’s assumptions as to what market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available.
Investments are reflected in the accompanying financial statements at fair value. The carrying amount of receivables and accounts payable and accrued expenses approximates fair value due to the short-term nature of those instruments.
The estimated fair values for financial instruments are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The carrying amounts of lease receivables, accounts payable, accrued liabilities, and mortgages payable approximate fair value given their short term nature or effective interest rates, which constitutes level three inputs.
GROW CONDOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Organization and Summary of Significant Accounting Policies (cont’d)
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. Restricted 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.
The fair value of options is calculated using the Black-Scholes option pricing model to determine the fair value of stock options on the date of grant based on key assumptions such as expected volatility and expected term, so long as the option does not contain provisions that require a more complex model to be used.
Convertible debt and beneficial conversion features
The Company evaluates embedded conversion features within convertible debt under ASC 815 "Derivatives and Hedging" to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 "Debt with Conversion and Other Options" for consideration of any beneficial conversion features.
Stock settled debt
In certain instances, the Company will issue convertible notes which contain a provision in which the price of the conversion feature is priced at a fixed discount to the trading price of the Company’s common shares as traded in the over-the-counter market. In these instances, the Company records a liability, in addition to the principal amount of the convertible note, as stock-settled debt for the fixed value transferred to the convertible note holder from the fixed discount conversion feature. As of December 31, 2017 and 2016, the Company had recorded within Convertible Notes, net of discount, the amount of $350,000 and $nil for the value of the stock settled debt for certain convertible notes (see Note 8).
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.
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 CONDOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Organization and Summary of Significant Accounting Policies (cont’d)
Net (loss) income 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 fiscal years ended June 30, 2017 and 2016, 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 number of dilutive shares as of June 30, 2017.
Options
|
500,000
|
Warrants
|
300,000
|
Convertible notes*
|
2,567,000
|
Total diluted shares
|
3,367,000
|
* the number of shares was calculated based on the closing price of the common stock of the Company as of June 30, 2017.
Recent accounting pronouncements
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. This standard clarifies the presentation of certain specific cash flow issues in the Statement of cash flows. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. This standard requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows and no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. This standard is effective for public companies who are SEC filers for fiscal years beginning after December 15, 2017, including interim periods within those years, with early adoption permitted.
The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business". This standard changed the definition of a business to help entities determine whether a set of transferred assets and activities is a business. This standard is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company elected to early adopt ASU No. 2017-01 and applied the guidance to the Transaction, which was accounted for as an asset acquisition under the revised guidance.
In May 2017, the FASB issued ASU No. 2017-09, "Stock Compensation (Topic 718): Scope of Modification Accounting". This standard clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification, with entities applying the modification accounting guidance if the value, vesting conditions or classification of the award changes. In addition to all disclosures about modifications that are required under the current guidance, entities will be also required to disclose that compensation expense has not changed if applicable. This standard is effective for
public companies who are SEC filers for fiscal years, and interim periods
GROW CONDOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Organization and Summary of Significant Accounting Policies (cont’d)
within those fiscal years, beginning after December 15, 2017, with early adoption permitted, including any interim period for which financial statements have not yet been issued or made available for issuance. The guidance will be applied prospectively to awards modified on or after the adoption date. The Company expects to adopt this guidance when effective.
Note 2 – Going Concern
At June 30, 2017 and June 30, 2016, the Company reported a net loss of $1,614,855 and $29,798,215, respectively. The Company believes that its existing capital resources are not adequate to enable it to execute its business plan. As of June 30, 2017, we had a net working capital deficit of approximately $2,029,000. These conditions raise substantial doubt as to the Company's ability to continue as a going concern. The Company estimates that it will require additional cash resources during fiscal year 2018 and beyond based on its current operating plan and condition. Through October 2018, three of the four mortgages on the properties of the Company mature, which will require approximately $1.2 million to satisfy those mortgages. The Company expects cash flows from operating activities to improve marginally in the short term, primarily as a result of an increase in cash received from tenants and a decrease in certain operating expenses, although there can be no assurance thereof. In addition, there can be no assurance that new tenants will become available after 2019 when the remaining leases expire for the Eagle Point condominium. If we fail to generate positive cash flow or obtain additional financing, when required, we may have to modify, delay, or abandon some or all of our business and expansion plans, and potentially cease operations altogether.The accompanying consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.
Note 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 plus closing costs, and 50,000 shares of the Company's common stock valued at $52,000 based on the closing price of the common stock at the close. Because all RV and campground rentals have contracts lengths for a maximum term of 30 days, no amounts were allocated to the small number of rentals acquired at acquisition.
Note 4 – Acquisition of Land in Pioneer Business Park
In April 2016, the Company purchased a parcel of land near Eugene, Oregon within the Pioneer Business Park from a private seller in the amount of $326,629 plus closing costs. As part of the purchase, the Seller financed through a note payable $267,129 of the purchase price (see Note 7). The intent of the Company was to build an industrial condominium building on the parcel, akin to the WCS property. The Company was unable to secure additional funding via debt or equity and due to the hostility of the local county government towards the intended operations of the tenants, the Company in late calendar 2017 abandoned those plans. As part of the abandonment, the Company recorded an impairment charge in the amount of approximately $97,800 for the value of contractor deposits and other deposits on improvements in the fiscal year ended June 30, 2017. After June 30, 2017, the Company has made the determination due to the hostility of the local government to put the parcel up for sale (see Note 13).
GROW CONDOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Property and Equipment, Net
Property and improvements consisted of the following as of June 30, 2017 and 2016:
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
Cost
|
|
|
|
|
|
|
Buildings and improvements
|
|
$
|
1,360,240
|
|
|
$
|
1,114,190
|
|
Land
|
|
|
1,103,791
|
|
|
|
482,205
|
|
Furniture and Fixture
|
|
|
15,271
|
|
|
|
3,563
|
|
|
|
|
2,479,302
|
|
|
|
1,599,958
|
|
Less: accumulated depreciation and impairment
|
|
|
(386,982
|
)
|
|
|
(358,754
|
)
|
|
|
$
|
2,092,320
|
|
|
$
|
1,241,204
|
|
On June 30, 2016, the Company made the determination in its impairment testing that the land and condominium tenant building operation of WCS required an impairment of approximately $282,600.
Depreciation expense (excluding impairment) amounted to $28,228 and $28,228 for the year ended June 30, 2017 and 2016, respectively.
Note 6 – Accrued Liabilities
Accrued Liabilities at June 30, 2017 and 2016 consist of the following:
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
Accrued salaries and wages
|
|
$
|
514,372
|
|
|
|
294,800
|
|
Accrued expenses
|
|
|
74,531
|
|
|
|
2,802
|
|
|
|
$
|
588,903
|
|
|
|
297,602
|
|
Note 7 – Mortgages Payable
In 2013, upon the acquisition of the condominium property in Eagle Point, Oregon, WCS assumed the mortgage payable of the Seller to Peoples Bank of Commerce, NA. The original principal amount of the mortgage was $930,220, bears interest at the rate of the bank’s prime rate plus 1.75%, and required 58 monthly payments of $5,946 and matures on June 28, 2018 with a balloon payment due at that time of $802,294. The mortgage is secured by liens against certain properties owned by the Seller. As of June 30, 2017 and 2016, the balance on the mortgage was $827,322 and $859,209, respectively.
In 2013, after acquisition, WCS entered into a second mortgage with Peoples Bank of Commerce, NA in the amount of $120,000. The mortgage bears interest at the rate of the bank’s prime rate plus 3%, requires 56 monthly payments of $883 and matures on October 15, 2018 with a balloon payment due at maturity of $104,329. The mortgage is collateralized by a deed of trust and assignment of rents with the Seller and WCS in the amount of $120,000. As of June 30, 2017 and 2016, the balance on the mortgage was $107,139 and $109,903, respectively.
In April 2016, as more fully described in Note 4, the Company acquired a parcel of land and entered into a mortgage with the seller in the amount of $267,129. The mortgage bears an interest rate of 6% per annum and has a maturity date of the sooner of (a) October 1, 2017 or the date construction begins on the condominium building proposed to be built. As of June 30, 2017 and 2016, the balance on the mortgage was $267,129, respectively. In October 2017, the Company entered into an amended mortgage by making a principal payment of $15,000 and financing the remaining balance of $252,129. The amended mortgage bears interest at the rate of 6% per annum and requires
GROW CONDOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 – Mortgages Payable(cont’d)
interest only monthly payments of $1,261 from November 2017 through June 2018 with the remaining amount due on the note in the form of a final balloon payment will be due in July 2018. The note is unsecured.
In March 2017, as more fully described in Note 3, the Company acquired a RV and campground park in Selma, Oregon. Upon closing, the Company entered into mortgage payable with the Seller in the amount of $625,000 with a maturity date of March 6, 2022. The mortgage bears interest at the rate of 5% per annum covering the monthly payments of $3,355 for the following 12 months, then increases 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. As of June 30, 2017, the balance on the mortgage was $622,802. The note is unsecured.
The future principal payments for loans with maturity dates greater than one year required under our mortgages as of June 30, 2017 were as follows:
2018
|
$
|
26,265
|
2019
|
|
365,403
|
2020
|
|
8,882
|
2021
|
|
9,430
|
2022
|
|
587,090
|
Thereafter
|
|
-
|
|
$
|
997,070
|
Because the Company successfully refinanced the Seller mortgage for the Pioneer Business Park parcel, the Company has treated that mortgage as long-term in these financials statements, and the payments required over the term of the mortgage are included in the table above.
Note 8 – Convertible Notes Payable
At June 30, 2017 and June 30, 2016, convertible notes payable consisted of the following:
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
Principal amount
|
|
$
|
515,000
|
|
|
$
|
208,750
|
|
Liability on stock settled debt
|
|
|
350,000
|
|
|
|
-
|
|
Less: unamortized debt discount
|
|
|
(350,736
|
)
|
|
|
(124,843
|
)
|
Convertible notes payable, net
|
|
$
|
514,264
|
|
|
$
|
83,907
|
|
Auctus Fund, LLC Agreement:
On March 21, 2016 the Company entered into a transaction with Auctus Fund, LLC (“Auctus”). 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. 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) 50% of the lowest trading price of the Company’s common stock during the 10 preceding trading days prior to the notice of conversion per $1 of principal.
Total beneficial conversion feature discount recognized was $56,780 which is being amortized over the terms of the convertible notes payable. During the fiscal year ended June 30, 2017 and 2016, the Company recognized interest expense of $36,752 and $20,028, respectively, related to the amortization of the debt discount.
The unamortized balance was $nil and
$36,752, respectively,
as of June 30, 2017 and 2016. In October 2016, Auctus gave notice of conversion and the Company issued 352,163 shares of its
GROW CONDOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 – Convertible Notes Payable(cont’d)
common stock in full satisfaction of the entire principal and accrued interest balance of $88,041 of the convertible note.
On
January 23, 2017 the Company entered into a convertible promissory note with Auctus Fund, LLC, and received net proceeds of $150,000 in the gross amount of $175,000. The Company paid original issuance cost of $25,000 in connection with this note which will be amortized over the term of the note. The Note has a maturity date of October 23, 2017 and interest at 10% per annum
with fixed conversion price of 50% of the lowest closing price for the 10 trading days prior to the conversion date. The Company recorded $175,000 as liability on stock settled debt associated with this convertible note. In connection with the issuance of the Note the Company also issued a one year warrant to purchase 150,000 of common stock of the Company at $0.85 subject to adjustment for standard anti-dilution events. The warrant has a term of 21 months. The Company has granted the holder piggy back rights for the common stock underlying the convertible debenture and warrants.
Total beneficial conversion feature discount recognized was $325,000 which is being amortized over the terms of the convertible notes payable.
During the fiscal year ended June 30, 2017 the Company recognized interest expense of $188,095 related to the amortization of the beneficial conversion feature discount and $14,469 related to the amortization of original
issuance
cost. The unamortized balance of beneficial conversion feature was
$136,905 and the unamortized balance of original
issuance cost
was $10,531 as of June 30, 2017. Subsequent to the year ended June 30, 2017, Auctus gave notice and fully converted the entire principal
and accrued interest balance into 13,403,839 shares of common stock of the Company.
Tangiers Financing Agreement:
On March 28, 2016 the Company entered into convertible note with Tangiers Global, LLC (“Tangiers”),
and received net proceeds of $75,000 from a convertible note in the gross amount of $100,000. The Note had a maturity date of six (6) months from the date of issue and interest at 10% per annumwith fixed conversion price of $0.25.
The Company paid original issuance cost of $10,000 and included legal fees incurred by Tangiers of $15,000 in connection with this note which will be amortized over the term of the convertible note.
Total beneficial conversion feature discount recognized was $68,000 which being amortized over the terms of the convertible notes payable.
During the fiscal year ended June 30, 2017, the Company recognized interest expense of $50,488 related to the amortization of the beneficial conversion feature discount and $18,562 related to the amortization of original
issuance
cost. During the fiscal year ended June 30, 2016, the Company recognized interest expense of $17,512 related to the amortization of the beneficial conversion feature discount and $6,438 related to the amortization of original
issuance
cost.
As of June 30, 2017, and 2016, t
he unamortized balance of beneficial conversion feature was $nil and
$50,488, respectively, and the unamortized balance of original issuance cost
was $nil and $18,562, respectively.
In October and November 2016, Tangiers gave notice to the Company and converted the entire principal and accrued interest under the note of $110,000 into 440,000 shares of common stock of the Company.
On April 4, 2016 the Company entered into convertible promissory note in the amount of $25,000 and received zero proceeds. 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.
Total beneficial conversion feature discount recognized was zero. During the fiscal year ended June 30, 2017 and 2016, the Company recognized interest expense of $19,041 and $5,959 related to the amortization of i
ssuance
cost, respectively.
As of June 30, 2017, and 2016, t
he unamortized balance of
issuance cost
was $nil and $19,041, respectively.
In February 2017, Tangiers gave notice to the Company and converted the entire principal and accrued interest under the note of $27,500 into 110,000 shares of common stock of the Company.
GROW CONDOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 – Convertible Notes Payable(cont’d)
On January 20, 2017 the Company entered into a convertible promissory notein the amount of $165,000. 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, unless the event of a default, at which time the conversion rate changes to a fixed 50% discount to
the lowest prior 10 day trading price. The Note was issued with a $15,000 original issue convertible issue discount.
In connection with the issuance of the Note the Company also issued a one year warrant to purchase 150,000 of common stock of the Company at $0.85 subject to adjustment for standard anti-dilution events. The warrant has a term of 1 year. The Company has granted the holder piggy back rights for the common stock underlying the convertible debenture and warrants.
Total beneficial conversion feature discount recognized was $140,000 which being amortized over the terms of the convertible notes payable. During the fiscal year ended June 30, 2017, the Company recognized interest expense of $124,530 related to the amortization of the beneficial conversion feature discount and $22,238 related to the amortization of original
issuance
cost and legal fees.
As of June 30, 2017, t
he unamortized balance of beneficial conversion feature was $15,470
and the unamortized balance of original issuance cost and legal fee
was $2,762, respectively.
Subsequent to the year ended June 30, 2017, and upon default for non-payment, Tangiers gave notice and converted the entire principal and accrued interest balance into 15,023,320 shares of common stock of the Company.
EMA Financing Agreement:
On January 9, 2017 the Company entered into a convertible promissory note with EMA Financial LLC and received net proceeds of $150,000 in the gross amount of $175,000. The Company paid original issuance cost of $25,000 in connection with this note which will be amortized over the term of the note. The Note has a maturity date of January 9, 2018 and interest at 10% per annum with fixed conversion price of 50% of the lowest closing price for the 10 trading days prior to the conversion date. The Company recorded $175,000 as liability on stock settled debt associated with this convertible note.
Total beneficial conversion feature discount recognized was $325,000 which being amortized over the terms of the convertible notes payable. During the fiscal year ended June 30, 2017 the Company recognized interest expense of $153,151 related to the amortization of the beneficial conversion feature discount and $11,781 related to the amortization of original
issuance
cost. The unamortized balance of beneficial conversion feature was
$171,849 and the unamortized balance of original issuance cost
was $13,219 as of June 30, 2017.
Subsequent to the year ended June 30, 2017, EMA gave notice and converted the entire principal and accrued interest balance into 15,583,632 shares of common stock of the Company.
The following table sets forth interest expense for amortization of the beneficial conversion feature and original issue discount recognized related to the Convertible Notes:
|
|
Year ended June 30,
|
|
|
2017
|
|
2016
|
Amortization of debt issuance costs
|
$
|
86,091
|
|
$
|
12,397
|
|
Amortization of beneficial conversion feature discount
|
|
553,016
|
|
|
37,540
|
|
Total
|
$
|
|
639,107
|
|
$
|
|
49,937
|
|
Note 9 – Capital Stock
Our board of directors and the holders of a majority of the shares of Common Stock entitled to vote thereon have adopted a resolution authorizing, but not requiring, a reverse split of our common stock at a ratio of 1-for-20. As a result of such reverse stock split, which was affected on November 16, 2015, the stock split has been recognized
GROW CONDOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 – Capital Stock(cont’d)
retroactively in the stockholders’ equity accounts as of October 22, 1999, the date of our inception, and in all shares and per share data in the financial statements
The Company's authorized common stock consists of 100,000,000 common shares with par value of $0.001 and 5,000,000 shares of preferred stock with par value of $0.001 per share.
Equity Incentive Plan
In December 2015, the Company adopted the 2015 Equity Incentive Plan (“Incentive Plan”) with a term of 10 years. The Incentive Plan allows for the issuance up to a maximum of 2 million shares of common stock, options exercisable into common stock of the Company or stock purchase rights exercisable into shares of common stock of the Company. The plan is administered by the board of directors unless a separate delegation to an administrator is made by the board of directors. Options granted under the 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 administrator. In December 2015, the Company filed a registration statement on Form S-8 covering all shares issued or issuable under the Incentive Plan.
Stock Plan
In December 2015, the Company adopted the 2015 Stock Plan (“Stock Plan”). As a condition of adoption of the Stock Plan, the Company entered into a registration statement on Form S-8 and covered the shares issued under the plan, which registration statement was filed in December 2015. The Stock Plan allows for the issuance up to a maximum of 2 million shares of common stock of the Company. The plan is administered by the board of directors unless a separate delegation to an administrator is made by the board of directors. The Stock Plan shall continue in effect until such time as is terminated by the Board or all shares are issued pursuant to the Stock Plan.
Common Stock
Share issuances during the fiscal year ended June 30, 2017:
During the year ended June 30, 2017, the Company issued 21,924 shares to employees, board members and consultants for services rendered. The Company valued those issuances on the closing price of the Company’s stock as traded in the other-the-counter market on the date of grant.
As described more fully above in Note 8, the Company issued 902,163 shares of common stock in full satisfaction of principal and accrued interest of convertible notes issued in the fiscal year ended June 30, 2016.
As more fully described in Note 4, the Company issued 50,000 shares of common stock as partial payment of the purchase price for the RV and Campground in Selma, Oregon.
In the year ended June 30, 2017, a holder exercised options (see below) and acquired 1,000,000 shares of common stock of the Company and remitted cash in the amount of $400,000 to the Company.
Share issuances during the fiscal year ended June 30, 2016:
During the year ended June 30, 2016, the Company issued 1,191,364 shares to employees, board members and consultants for services rendered. The Company valued those issuances on the closing price of the Company’s stock as traded in the other-the-counter market on the date of grant.
GROW CONDOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 – Capital Stock(cont’d)
In September 2015, the Company and its former attorneys entered into a settlement of outstanding invoices due, in which the attorneys agreed to accept 45,000 shares of the Company’s common stock in full satisfaction of the $71,469 owed as of that date.
Preferred Stock
The Company has designated a Series A Convertible Preferred Stock (the "Series A Preferred"). The number of authorized shares totals 5,000,000 and the par value is $.001 per share. The Series A Preferred shareholders vote together with the common stock as a single class. The holders of Series A Preferred are entitled to receive all notices relating to voting as are required to be given to the holders of the Common Stock. The holders of shares of Series A Preferred shall be entitled to 5 votes per share and have a conversion right granted to the holder to allow to convert into 5 common shares of the Company for each Series A Preferred Share held.
In December 2015, the board of directors of the Company granted the CEO and board member 5,000,000 shares of Series A preferred stock, which upon receipt were immediately converted by the holders into 25,000,000 shares of common stock of the Company. The Company valued this issuance at $25 million, based upon the closing price of the common stock on date of grant of the Series A Preferred Shares.
Warrants
On January 20, 2017, as more fully described in Note 8, the Company issued two
warrants for 300,000 shares, exercisable at $0.85 in connection with the issuance of a convertible notes.
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
(in years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
300,000
|
|
|
|
0.85
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
300,000
|
|
|
$
|
0.85
|
|
|
|
0.58
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2017
|
|
|
300,000
|
|
|
$
|
0.85
|
|
|
|
0.58
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROW CONDOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 – Capital Stock(cont’d)
The table below includes the significant ranges of the assumptions used to value the warrants under the Black Scholes Merton valuation model:
Fair value of underlying common
|
|
$
|
1.06 to 1.12
|
|
Exercise price
|
|
$
|
0.85
|
|
Term
|
|
|
12 to 21 months
|
|
Historical volatility
|
|
|
161.4% to 163.7%
|
|
Risk free interest rate
|
|
|
0.82% to 1.16%
|
|
Dividend rate
|
|
|
0
|
%
|
Options
In April 2016, the Company issued to a consultant an option to acquire 2 million shares of the Company’s common stock. The option had an exercise price of $0.40 per share with no stated expiration and vesting as follows: 1 million shares 30 days after issuance and the remaining 1 million shares 90 days after issuance. The Company estimated the exercise date as 3.5 years after issuance.
The Company used a black scholesmerton pricing model with the following assumptions to value the option grant at issuance and to revalue upon vesting:
Fair value of underlying common
|
|
$
|
0.58 to 1.55
|
|
Exercise price
|
|
$
|
0.40
|
|
Term
|
|
|
3.5 years
|
|
Historical volatility
|
|
|
161.8% to 217.2%
|
|
Risk free interest rate
|
|
|
0.58% to 1.22%
|
|
Dividend rate
|
|
|
0.00%
|
|
A summary of the change in stock purchase options outstanding for the period ended June 30, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Grant Date
|
|
|
Life
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Fair Value
|
|
|
(Years)
|
|
Balance – June 30, 2015
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Options issued
|
|
2,000,000
|
|
|
$0.40
|
|
|
$0.52
|
|
|
See note above
|
|
Options expired
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Options exercised
|
|
(500,000)
|
|
|
$0.40
|
|
|
-
|
|
|
-
|
|
Balance – June 30, 2016
|
|
1,500,000
|
|
|
$0.40
|
|
|
$0.52
|
|
|
See note above
|
|
Options issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options exercised
|
|
|
(1,000,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance – June 30, 2017
|
|
|
500,000
|
|
|
|
$0.40
|
|
|
|
$0.52
|
|
|
|
See note above
|
|
GROW CONDOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 – Capital Stock(cont’d)
The following table shows information on our vested and unvested options outstanding during the year ended June 30, 2017 and 2016:
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Grant Date
|
|
|
Life
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Fair Value
|
|
|
(Years)
|
|
Balance – June 30, 2015, unvested
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options issued
|
|
|
2.000.000
|
|
|
|
$0.40
|
|
|
|
$0.52
|
|
|
|
See note above
|
|
Options vested
|
|
|
1,000,000
|
|
|
|
$0.40
|
|
|
|
$0.52
|
|
|
|
-
|
|
Options expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options exercised
|
|
|
(500,000)
|
|
|
|
$0.40
|
|
|
|
$0.52
|
|
|
|
-
|
|
Balance – June 30, 2016, unvested
|
|
|
1,000,000
|
|
|
|
$0.40
|
|
|
|
$0.52
|
|
|
|
See note above
|
|
Options issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options vested
|
|
|
1,000,000
|
|
|
|
$0.40
|
|
|
|
$0.52
|
|
|
|
-
|
|
Options expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options exercised
|
|
|
(1,000,000)
|
|
|
|
$0.40
|
|
|
|
$0.52
|
|
|
|
-
|
|
Balance – June 30, 2017, unvested
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options outstanding had intrinsic value as of June 30, 2017 of $95,000.
Note 10 – Related Party Transactions
The Company is currently leasing units located in Eagle Point Oregon. The building is an approximately 15,000square footbuilding which has 10 units of approximately 1,500 square feet each available for use. Four units are currently under lease to three different unrelated companies. One unit is being used as the Grow Condos, Inc. offices, and five units are under lease to a company that the CEO of Grow Condos, Inc. controls. The agreement to the lease the 4 condo units with the company controlled by the CEO was entered into the owner prior to its purchase by WCS in 2013. The lease term begins once the tenant improvements are completed and the premises are occupied and continues for a period of 36 months. Four unit lease terms began in the fiscal year ended June 30, 2016, with cash payments commencing on all four unit leases in the fiscal year ended June 30, 2017.
The CEO had loaned the Company a net amount of $15,575 the entire amount was re-paid on December 7, 2016. As of June 30, 2017, a related party had advanced the Company, on an unsecured basis, $100,000.
In November 2015, the Company entered into employment agreements with its CEO and CFO. Those employment agreements granted the employees gross annual wages in the amount of $250,000 and $150,000, respectively.
Note 11 – Income Taxes
The income tax expense (benefit) consisted of the following for the fiscal year ended June 30, 2017 and 2016:
|
|
|
June 30, 2017
|
|
|
|
June 30, 2016
|
|
Total current
|
|
$
|
-
|
|
|
$
|
-
|
|
Total deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
GROW CONDOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 – Income Taxes (cont’d)
The following is a reconciliation of the expected statutory federal income tax provision to the actual income tax benefit for the fiscal year ended June 30, 2017 and 2016:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
Expected benefit at federal statutory rate
|
|
$
|
549,000
|
|
|
|
10,131,000
|
|
Non-deductible expenses
|
|
|
(156,000
|
)
|
|
|
(9,826,000
|
)
|
Change in valuation allowance
|
|
|
(393,000
|
)
|
|
|
(305,000)
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
In the table above, the expected tax benefit is calculated at statutory rate of 34% for amounts for the fiscal year ended June 30, 2017 and 2016.
Significant components of the Company’s deferred tax assets and liabilities were as follows for the fiscal year ended June 30, 2017 and 2016:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
2,930,000
|
|
|
$
|
3,298,000
|
|
Deferred payroll
|
|
|
139,000
|
|
|
|
100,000
|
|
Impairments
|
|
|
103,000
|
|
|
|
96,000
|
|
Total deferred tax assets
|
|
|
3,172,000
|
|
|
|
3,494,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
(7,000
|
)
|
|
|
(7,000
|
)
|
Total deferred tax liabilities
|
|
|
(7,000
|
)
|
|
|
(7,000
|
)
|
|
|
|
|
|
|
|
|
|
Change in effective tax rates
|
|
|
715,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
3,165,000
|
|
|
|
3,487,000
|
|
Less valuation allowance
|
|
|
(3,165,000
|
)
|
|
|
(3,487,000
|
)
|
Net deferred tax assets (liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
For the fiscal year ended June 30, 2016, the amounts in the table above were calculated using a 34% statutory rate. For the fiscal year ended June 30, 2017, the amounts in the table above were calculated using a 27% statutory rate, which reflects the change in rates based on passage of tax reform by the United States Congress in January 2018. At June 30, 2017, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $10.2 million and $2.7 million, respectively. The federal and state net operating loss carryforwards will expire beginning in 2021 for federal purposes. In the fiscal year ended June 30, 2017, due to the issuance of and then conversion of the Series A Preferred Shares into common shares of the Company, the use of the net operating loss carryforwards incurred prior to December 2015 became subject to the limitations of a change in control of the Company in accordance with Internal Revenue Code section 382. As of the time of these financial statements, the Company has not performed the valuation required to determine the extent of the limitation on the net operating loss carryforwards for its US Federal income taxes.
During the fiscal year ended June 30, 2017 and 2016 the, the Company recognized no amounts related to tax interest or penalties related to uncertain tax positions. The Company is subject to taxation in the United States and various state jurisdictions. The Company currently has no years under examination by any jurisdiction.
GROW CONDOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – Commitments and Contingencies
In 2013, WCS entered into multi-year option contracts with certain tenants of the Eagle Point condominium units. The option contracts gave the tenants the right to enter into a contract for the sale of the unit being rented by the tenant. As part of the option, the tenant is required to make a monthly or quarterly payment to the Company over the term of the agreement and in exchange, the tenant has the right to purchase the unit for a price as determined in the contract. Contract unit pricing ranges from a fixed $100,000 per unit to $150,000 multiplied by the usable space divided by the surveyed total condominium land area. The amounts paid on a monthly or quarterly basis are applied as downpayments for the purchase of the unit if elected by the contract holder. In the event of non-payment or expiration of the contract without the option being exercised, any and all payments held by the Company are forfeit by the optionee. As of June 30, 2017 and 2016, the Company held payments of $47,400 and $15,400 respectively. During the fiscal years ended June 30, 2017 and 2016, the Company received payments under option contracts of $26,000 and $nil from related parties. In the fiscal year ended June 30, 2016, one optionee defaulted on his contract and the Company recorded a gain on cancellation of $12,000 in its statement of operations.
Note 13- Subsequent Event
Subsequent to June 30, 2017, a member of the board of directors of the Company has made unsecured advances to the Company in the amount of $45,000.
Subsequent to June 30, 2017 the Company issued a total of 44,010,791 shares of common stock upon conversion of the principal and unpaid interest accrued on its convertible notes (see Note 8) and issued
a total of 13,870,692 shares of common stock to members of the Board, employees and consultants for compensation.
In the fourth quarter of 2017, the Company engaged a broker and listed the parcel of land purchased in March 2017 (see Note 4) for sale. The Company has listed the property for $399,000.
In April 2018, the Company sold 500,000 shares of its common stock to a director for cash in the amount of $20,000.