GRWC Grow Capital Inc (CE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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, 2018, and 2017, an allowance for doubtful accounts was recorded in the amount of $2,861.  As of June 30, 2018, and 2017, the Company had recorded deferred rent for the straight-line value of rental income of $6,150 and $26,006 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:

Revenue Recognition

GROW CONDOS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Advertising costs are expensed as incurred.  Advertising expense was $717 and $226,087 for the fiscal years ended June 30, 2018 and 2017, respectively.

GROW CONDOS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 June 30, 2018, and 2017, the Company had recorded within Convertible Notes, net of discount, the amount of $0 and $350,000 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.

Net (loss) income per share

GROW CONDOS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

All dilutive common stock equivalents are reflected in our earnings (loss) per share calculations. Anti-dilutive common stock equivalents are not included in our earnings (loss) per share calculations.  

The following table sets forth the number of dilutive shares as of June 30, 2018:

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

supersedes most existing revenue recognition guidance under U.S. GAAP. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Topic 606 also requires enhanced disclosures about the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. The Company has the option of adopting Topic 606 using either 1) a full retrospective approach, in which comparative periods presented would be adjusted to reflect the provisions of Topic 606, or 2) a modified retrospective approach, in which the cumulative effect of applying the new standards to open contracts as of July 1, 2018 would be recognized as a cumulative effect adjustment.  The Company is currently reviewing the impact of Topic 606 and this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

Note 2 – Going Concern

At June 30, 2018 and June 30, 2017, the Company reported a net loss of $2,482,639 and $1,614,855, respectively. As of June 30, 2018, we had a net working capital deficit of approximately $1,494,646 and cash available of only approximately $14,000 (see Note 10). The Company believes that its existing capital resources are not adequate to enable it to execute its business plan.  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 2019 and beyond based on its current operating plan and condition. In July and August 2018, the Company began a private placement of its common shares and raised gross proceeds of approximately $1,165,000.  The Company used approximately $900,000 of these proceeds from the private placements to retire the two mortgages held on the WCS condo property (see Note 7).  In addition, in September 2018, the Company completed the sale of its land held in the Pioneer Business Park (see Note 4).  The Company received proceeds of approximately $74,000 after payment of expenses of the sale and full retirement of the attached mortgage of approximately $250,000.  These actions have reduced the working capital deficit below $500,000.  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 – Assets Held for Sale

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

sheet, respectively. In September 2018, the Company completed the sale of the property for a gross sales price of $349,000 (See Note 7).

Note 5 – Property and Equipment, Net

Property and improvements consisted of the following as of June 30, 2018 and 2017:

Depreciation expense (excluding impairment) amounted to $29,692 and $28,228 for the year ended June 30, 2018 and 2017, respectively.

Impairment of condo construction deposits and other assets in regard to the land purchased in Eugene for the year ended June 30, 2018 was $31,843.  Impairment of condo construction deposits and other assets in regard to the land purchased in Eugene for the fiscal year ended June 30, 2017 was nil. Impairment expense for the Pioneer business park in in the fiscal year ended June 30, 2017 was $97,763.

Note 6 – Accrued Liabilities

Accrued Liabilities at June 30, 2018 and 2017 consist of the following:

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, 2018, and 2017, the balance on the mortgage was $797,476 and $827,322, 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, 2018, and 2017, the balance on the mortgage was $105,235 and $107,139, respectively.

In August 2018, the Company paid the above two mortgages in full.

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GROW CONDOS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, the balance on the mortgage was $267,129.  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 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. As of June 30, 2018, the balance on the mortgage was $250,868.

As noted above in Footnote 4, in September 2018, the Company closed on the sale of the parcel of land acquired with financing provided by the mortgage.  As a condition of the sale, the mortgage was fully repaid at closing.

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, 2018, and 2017, the balance on the mortgage was $613,848 and $622,802, respectively.  The note is unsecured.

The following table provides a five-year runoff of all of the Company’s obligations with terms to maturity greater than one year as of June 30, 2018:

Note 8 – Convertible Notes Payable

At June 30, 2018 and June 30, 2017, convertible notes payable consisted of the following:

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

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 had a maturity date of October 23, 2017 and interest at 10% per annum  with fixed conversion price of 50% of the lowest closing price for the 10 trading days prior to the conversion date.  The Company recorded $175,000 as liability on stock settled debt associated with this convertible note. In connection with the issuance of the Note the Company also issued a one-year warrant to purchase 150,000 of common stock of the Company at $0.85 subject to adjustment for standard anti-dilution events.  The warrant 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.  During the three months ended September 30, 2017, t he Company recognized interest expense of $136,905 related to the amortization of the  beneficial conversion feature discount and $10,531 related to the amortization of original  issuance  cost. As of September 30, 2017, the unamortized balance of beneficial conversion feature was $nil (June 30, 2017 -  $136,905) and the unamortized balance of original  issuance cost  was $nil (June 30, 2017 - $10,531).  During the three months ended September 30, 2017, Auctus gave notice of conversion and the Company issued 13,403,839 shares of its common stock in full satisfaction of the entire principal and accrued interest balance  under the note of $175,000 .

 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 annum with 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.  

On January 20, 2017 the Company entered into a convertible promissory note in the amount of $165,000.  The Note was due July 20, 2017 and 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 discount.   In connection with the issuance of the Note the Company also issued a one-year warrant to purchase 150,000 of

GROW CONDOS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. On July 20, 2017, the Company recognized additional beneficiary conversion feature in the amount of $110,000  upon default for non-payment. During the year ended June 30, 2018,  the Company recognized interest expense of $115,470 related to the amortization of the beneficial conversion feature discount and $2,762 related to the amortization of original  issuance  cost and legal fees. As of June 30, 2018, the unamortized balance of beneficial conversion feature was $nil (June 30, 2017 - $ 15,470 ) and the unamortized balance of original issuance cost  was $nil (June 30, 2017 - $2,762).  During the three months ended September 30, 2017 , Tangiers gave notice to the Company and converted the entire principal and accrued interest  under the note of $165,000 into 15,023,320 shares of common stock of the Company

On January 9, 2017 the Company entered into a convertible promissory note with EMA Financial LLC., received net proceeds of $150,000 in the gross amount of $175,000. The Company paid original issuance cost of $25,000 in connection with this note which will be amortized over the term of the note.  The Note had a maturity date of 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 Company recognized interest expense of $ 171,849  related to the amortization of the beneficial conversion feature discount and $13,219 related to the amortization of original  issuance  cost and legal fees. As of June 30, 2018, the unamortized balance  of beneficial conversion feature was $nil (June 30, 2017 -  $171,849) and the unamortized balance of original issuance cost  was $nil (June 30, 2017 - $13,219).  During the three months ended September 30, 2017, EMA gave notice to the Company and converted the entire principal and accrued interest under the note of $175,000 into 15,583,632 shares of common stock of the Company.

GROW CONDOS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2018:

During the fiscal year ended June 30, 2018, the Company issued 7,199,376 shares to employees, board members and consultants for services rendered and in settlement of certain liabilities.  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 $281,981, of this amount 4,565,259 shares valued at $175,326 were issued to officers and directors as part of their board compensation package.

GROW CONDOS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

The table below includes the significant ranges of the assumptions used to value the warrants under the Black Scholes Merton valuation model:

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The following table shows information on our vested and unvested options outstanding during the year ended June 30, 2018 and 2017:

Options outstanding had intrinsic value as of June 30, 2018 of $nil.

Note 10 – Related Party Transactions

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 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 units leases in the fiscal year ended June 30, 2017.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the fiscal year ended June 30, 2018 the Board of Directors ratified that our CEO, President and Director satisfied approximately $62,000 of receivables by netting the amount against his payroll payable.

In fiscal 2018, the Company was notified by its primary banks that these banks would no longer accept the Company as a client for its banking services.  As of June 30, 2018, the Company’s wholly owned subsidiary, WCS, was notified that its bank, which also holds both of its mortgages, would no longer continue to accept WCS as a customer shortly after its fiscal year end.  Because the Company rents its properties to those who engage in a federal crime under the Controlled Substances Act, most banks subject to any federal oversight (the Office of the Comptroller of the Currency or any of the Federal Reserve Bank’s of the United States) have declined to do business with any entity that is related in any way to cannabis operations.  The Company’s management and directors have as of June 30, 2018 transferred the Company’s cash and its banking operations to an entity owned and controlled by them.  The Company has treated the cash transferred as amounts due from this related entity and the cash expended from these accounts on behalf of the Company as reductions of the amounts due from these entities.  As of June 30, 2018, the amount held in cash by the related entity and reported as a current asset as due from related part was $40,268.

  Note 11 – Income Taxes

On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted into law including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. While the Company has revenue we have no foreign earnings and therefore, we do not anticipate the impact of a transition tax. We have remeasured our U.S. deferred tax assets at a statutory income tax rate of 21% during fiscal 2018. Since the Tax Act was passed late in the second quarter of fiscal 2018, and ongoing guidance and accounting interpretation are expected over the next 12 months, we consider the accounting of any transition tax, deferred tax re-measurements, and other items to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. We expect to complete our analysis within the measurement period in accordance with SAB 118, and no later than fiscal year end June 30, 2019.

The income tax expense (benefit) consisted of the following for the fiscal year ended June 30, 2018 and 2017:

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.

The following is a reconciliation of the expected statutory federal income tax and state income tax provisions to the actual income tax benefit for the fiscal year ended June 30, 2018 and 2017: 

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During the fiscal year ended June 30, 2018 and 2017 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.

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 down payments 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, 2018, and June 30, 2017, the Company held payments of $74,000 and $51,500 respectively.  During the year ended June 30, 2018 and 2017, the Company received payments under option contracts of $48,000 and $26,000, respectively, from related parties. In the fiscal year ended June 30, 2018, one optionee defaulted on the option contract without exercise and forfeited $25,900.