The accompanying notes are an integral part of these unaudited condensed consolidated and combined financial statements
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 1 – Organization and Description of Business
Grow Capital, Inc. (the "Company," “we,” or “us”) (f/k/a Grown Condos, Inc.) was incorporated on October 22, 1999, in the State of Nevada.
Our former wholly owned subsidiary, WCS Enterprises, LLC (“WCS”) is an Oregon limited liability company which was formed on September 9, 2013 with operations beginning in October 2013. WCS is a real estate purchaser, developer and manager of specific use industrial properties providing "Condo" style turn-key aeroponics grow facilities to support cannabis farmers. WCS owns, leases, sells and manages multi- tenant properties so as to reduce the risk of ownership and reduce costs to tenants and owners. WCS owned a condominium property in Eagle Point, Oregon (the “Eagle Point Property”). On September 30, 2019, we sold WCS to the Wayne A. Zallen Trust u/a/d/ 10/24/2014 (the “Zallen Trust”), of which Wayne Zallen, our former CEO and Chairman, is the trustee and a beneficiary. See Note 5 for further information.
Our wholly owned subsidiary, Resort at Lake Selmac, Inc. (formerly Smoke on the Water, Inc.) was incorporated on October 21, 2016, in the State of Nevada. The name change was effected February 3, 2020. Resort at Lake Selmac is focused on operating properties in the RV and campground rental industry and currently owns the Lake Selmac Resort located at 2700 Lakeshore Drive, Selma, Oregon (the “Lake Selmac Property”).
Our wholly owned subsidiary Bombshell Technologies, Inc. (“Bombshell”), was formed as Bombshell Technologies, LLC on November 5, 2018 and converted into a C corporation on June 24, 2019. We acquired Bombshell on July 23, 2019. Bombshell is a full-service design and software development company focused on developing and selling software to financial services firms and advisors and is the first acquisition as part of our strategic shift into the financial technology (“FinTech”) sector and related sectors.
On June 22, 2018, the Board of Directors of the Company approved an amendment to our articles of incorporation to increase our authorized capital to 180,000,000 shares, consisting of 175,000,000 shares of common stock (“Common Stock”), par value $0.001, and 5,000,000 shares of preferred stock (“Preferred Stock”), par value $0.001 (the “Recapitalization”) and to change the name of the Company to “Grow Capital, Inc.” The Company filed articles of amendment with the State of Nevada to effect the aforementioned changes on July 10, 2018 and August 28, 2018, respectively. The Company received approval from the Financial Industry Regulatory Authority ("FINRA") for the above noted corporate actions on August 8, 2019.
On July 23, 2019, and effective July 25, 2019, the Board of Directors of the Company and the holders of our outstanding capital stock having a majority of the voting power, respectively, adopted resolutions to amend and restate our articles of incorporation to increase our authorized capital to 550,000,000 shares, consisting of 500,000,000 shares of Common Stock and 50,000,000 shares of Preferred Stock. The effective date of the aforementioned actions was August 29, 2019.
In connection with its name change, the Company adopted a business plan focused on shifting the Company’s strategy away from rental activities focused in the cannabis industry and into the FinTech sector and related sectors. In connection with this strategy, the Company hired a new Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) and appointed a new chairman of the Company’s board of directors (the “Board”), all of whom have significant experience in the FinTech sector. The Company intends to acquire FinTech companies, such as Bombshell, with a clear niche and strong leadership and use its experience and understanding of the FinTech sector and access to the public markets to help its acquisitions grow. The Company is currently in the process of identifying and pursuing suitable acquisitions. In connection with the shift in the Company’s strategy away from rental activities focused in the cannabis industry, the Company sold WCS on September 30, 2019 and its operations up to the date of sale were included as Assets and Liabilities’ Held for Sale. (Note 5). While the Company actively marketed the Resort at Lake Selmac during the first and second quarters of fiscal 2020, given the current market conditions, the Company let the listing agreement expire on March 31, 2020 and we decided to continue operating the business until such time as a viable exit strategy for the resort is identified. On January 27, 2021 the Company entered into an agreement with a Buyer for the sale of the Resort at Lake Selmac site location for an offering price of $740,000. There are no commissions payable on the sale, and the sale was closed on March 3, 2021. As a result, the operations of the Selmac Property are included in discontinued operations as of March 31, 2021. (See Note 5).
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GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 1 – Organization and Description of Business (continued)
On May 13, 2020, the Company’s board of directors and stockholders approved an amended and restated certificate of incorporation to, among other things, effect a reverse split on the outstanding shares of the Company’s common stock on a one-for-20 basis (the “Reverse Stock Split”). The Reverse Stock Split became effective on July 30, 2020 and has been shown on a retroactive basis within all periods presented. The par values of the common were not adjusted as a result of the reverse stock split.
Keeping with management’s determination to acquire complementary revenue generating operations, on August 19, 2020, the Company acquired PERA LLC, a Nevada limited liability company (“PERA”), pursuant to an exchange agreement (the “Exchange Agreement”), effective as of August 3, 2020 (the “Effective Date”), by and between PERA, the members of PERA (the “PERA Members”), and the Company. As a result, PERA became a wholly-owned subsidiary of the Company. At the time of the acquisition of PERA LLC, the Company determined that Appreciation Financial was under common control with PERA LLC, as they are both controlled by our Chief Operating Officer, Terry Kennedy (see Note 4). Additionally, Appreciation was considered to be a primary beneficiary of PERA LLC. The Company has had discussions with the members of Appreciation Financial about potential combinations, which as of the date of these financial statements are not yet probable. However, because of the nature of the relationship, the Company determined that while Appreciation Financial is not a variable interest entity to the Company, the nature of the common control relationship coupled with the inter-relationship with PERA LLC meant that in order for the results of operations and financial position to not be misleading, the Company had to combine its results with those of Appreciation Financial upon the acquisition of PERA, LLC.
With the acquisition of PERA LLC, and concurrent combination of the operations of Appreciation Financial, the Company expanded its operations into lead generation services and insurance brokerage. PERA LLC provides access to public employee retirement services, serving as an appointment portal for agents to schedule qualified appointments with public employees seeking financial planning for retirement and other associated insurance coverage. Appreciation Financial LLC has a network of member agents offering full-service retirement planning servicing public employees and their families providing policies from a series of insurance carriers that meet their retirement planning requirements.
As the Company looks to continue to expand in the financial technology and related sectors, Grow Capital expects to identify additional acquisition targets, complete those acquisitions, and grow its complementary operating companies. Any potential acquisitions or divestitures remain subject to final agreements, due diligence, and typical closing conditions.
Going Concern
During the nine month periods ended March 31, 2021 and 2020, the Company reported a net loss of $2,621,008 and $1,243,038, respectively. The Company had a working capital deficit of $1,553,807, with approximately $1,097,000 of cash on hand as of March 31, 2021. Cash used in operations totaled $857,192 during the nine months ended March 31, 2021. The Company continues to work actively to increase its customer/client base and increase gross profit in Bombshell Technologies and PERA LLC, in order to achieve net profitability by the close of fiscal 2021. For any operational shortfalls, the Company intends to rely on sales of our unregistered common stock, loans and advances until such time as we achieve profitable operations. In addition, the current presentation is based on the fact that the Company is currently in negotiations to acquire Appreciation Financial LLC and its related entities. Should that not occur, its possible that the Company will no longer combine its results with those of Appreciation Financial LLC and its related entities. If the Company fails to generate positive cash flow or obtain additional financing, when required and on acceptable terms, the Company may have to modify, delay, or abandon some or all of its business and expansion plans, and potentially cease operations altogether. Consequently, the aforementioned items raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The accompanying consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.
8
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBEMARCH 31, 2021
Note 1 – Organization and Description of Business (continued)
Covid-19 Pandemic
The recent COVID-19 pandemic could have an adverse impact on our ongoing operations. To date the Company’s primary operating segments, Bombshell and PERA LLC have not experienced a decline in sales as a result of the impact of COVID-19, and in fact, have increased sales due to the increase in demand for virtual appointments which can be serviced by PERA LCC as a part of their core operational mandate. In addition, the Company’s operations in the FinTech sector are carried out with a limited amount of person to person contact and we do not expect an impact on these operations as a result of COVID 19, however, the full effect of the COVID-19 outbreak continues to evolve as of the date of this report, is highly uncertain and subject to change. Operations of the Company’s Resort at Lake Selmac property, now included in discontinued operations, were delayed until July 2020 when the government permitted the resort to reopen, however since that time the resort had continued to receive regular bookings and had returned to normal operating parameters up until its sale on March 3, 2021. As a result, Management does not expect the delay in opening the resort for the 2020-2021 season to substantially impact profitable operations for this business in the long term. Management is actively monitoring the situation but given the daily evolution of the COVID-19 outbreak, the Company is not able to estimate the effects of the COVID-19 outbreak on its operations or financial condition in the next 12 months. While significant uncertainty remains, the Company does not believe the COVID-19 outbreak will have a negative impact on its ability to raise additional financing, conclude the acquisition of targeted business operations or reach profitable operations.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated and combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The unaudited condensed financial statements included herein are unaudited. Such financial statements, in the opinion of management, contain all adjustments necessary to present fairly the financial position and results of operations as of and for the periods indicated. All such adjustments are of a normal recurring nature outside of the combination of Appreciation Financial. These interim results are not necessarily indicative of the results to be expected for the year ending June 30, 2021 or for any other period. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, and because of this, for further information, readers should refer to the financial statements and footnotes included in its Form 10-K for the fiscal year ended June 30, 2020 filed on October 13, 2020. The Company believes that the disclosures are adequate to make the interim information presented not misleading.
Consolidation and Combination
The Company’s policy is to consolidate all entities that it controls by ownership of a majority of the outstanding voting stock. In addition, upon the acquisition of PERA LLC, the Company combined entities that met the criteria of having common control with Grow Capital and its controlled subsidiaries. Upon the acquisition of PERA LLC (see below), the Company identified certain common control entities, the operations of which are included in our consolidated and combined financial statements.
The accompanying unaudited condensed consolidated and combined financial statements include the accounts of Grow Capital Inc. and its wholly-owned subsidiaries, Bombshell Technologies Inc., The Resort at Lake Selmac and PERA LLC, as well as PERA Administrators LLC, the operations of which are for the sole benefit of PERA LLC. In addition, the Company has combined the results of Appreciation Financial LLC and Appreciation Rewards LLC. At the time of the acquisition of PERA LLC, the Company determined that Appreciation Financial was the primary beneficiary of PERA LLC. In addition, the Company determined that it has common ownership with Appreciation Financial and the Company has had discussions with the members of Appreciation Financial about potential combinations, which as of the date of these financial statements are not yet probable. However, because of the nature of the relationship, the Company determined that while Appreciation Financial is not a variable interest entity to the Company, the nature of the common control relationship coupled with the inter-relationship with PERA LLC meant that in order for the results of operations and financial position to not be misleading, the Company had to combine its results with those of Appreciation Financial upon the acquisition of PERA, LLC.
9
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 2 – Summary of Significant Accounting Policies (continued)
Reported operations in the three and nine months ended March 31, 2021 include operation of our wholly owned subsidiary Bombshell, with the operational results of The Resort at Lake Selmac reflected as discontinued operations as a result of a recent entry into a sales agreement closed on March 3, 2021. In addition, results reported include the results of operations by PERA LLC and its common control entities for the period from acquisition (August 19, 2020 through March 31, 2021). March 31, 2021 operating results also include the combined results of both Appreciation Financial LLC Appreciations Rewards LLC for the period from August 19, 2020 to March 31, 2021. Results for the comparative three and nine month periods ended March 31, 2020 include Grow Capital and Bombshell with the results of the Resort at Lake Selmac included as discontinued operations.
All material intercompany accounts, transactions, and profits have been eliminated in consolidation and with and between the combined entities.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to estimates and assumptions include timing of recognition of commission revenue on insurance policy renewals and expenses related thereto, along with costs associated with policy acquisition and our allowance for doubtful accounts. Actual results could differ from those estimates.
Cash and Cash Equivalents
For financial accounting purposes, cash and cash equivalents are considered to be all highly liquid investments with a maturity of three (3) months or less at the time of purchase.
Concentrations
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At March 31, 2021 and June 30, 2020, the Company had $122,222 and $0 in excess of the FDIC insured limit, respectively.
Concentration Risk - Revenues
For the three and nine months ended March 31, 2021, one customer accounted for 55% and 55% of combined and consolidated gross revenue, 55% and 56% of combined and consolidated revenue from non-related parties and 68% and 68% of revenue recorded by Appreciation Financial LLC. The contribution of revenue to the three and nine month operating period ended March 31, 2021 was derived from operations of Appreciation Financial LLC for the period between August 19, 2020 and March 31, 2021.
Concentration of Financing Risk
Appreciation Financial is dependent upon on its largest customer for financing of its operations. That customer has provided commission advances of approximately $3.3 million and loans of approximately $4.75 million as of March 31, 2021.
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GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 2 – Summary of Significant Accounting Policies (continued)
Accounts Receivable and Allowance for Doubtful Accounts
The Company determines the allowance for doubtful accounts by considering a number of factors, including the length of time the accounts receivable are beyond the contractual payment terms, previous loss history, and the customer’s current ability to pay its obligation. When the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, the Company records a charge to the allowance to reduce the customer’s related accounts. At March 31, 2021 the allowance for doubtful accounts totaled approximately $100,150 (June 30, 2020 - $35,350.).
Lease Receivables and deferred rent
Lease receivables are recognized when rents are due, and for the straight-line adjustment to rents over the term of the lease less an allowance for expected uncollectible amounts. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, the customer's willingness or ability to pay, the Company's compliance with lease terms, the effect of general economic conditions and the ongoing relationship with the customer. Accounts with outstanding balances longer than the payment terms are considered past due. We do not charge interest on past due balances. The Company writes off lease receivables when it determines that they have become uncollectible after all reasonable collection efforts have been made. If we record bad debt expense, the amount is reflected as a component of operating expenses in the statements of operations.
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02 – Topic 842 Leases. ASU 2016-02 requires that most leases be recognized on the financial statements, specifically the recognition of right-to-use assets and related lease liabilities, and enhanced disclosures about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The standard requires using the modified retrospective transition method and apply ASU 2016-02 either at (i) latter of the earliest comparative period presented in the financial statements or commencement date of the lease, or (ii) the beginning of the period of adoption. The Company has elected to apply the standard at the beginning period of adoption, July 1, 2019 which resulted in no cumulative adjustment to retained earnings. On July 30, 2018, the FASB issued ASU 2018-11 to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU 2016-02 (codified as ASC 842). Specifically, under the amendments in ASU 2018-11: (i) Entities may elect not to recast the comparative periods presented when transitioning to ASC 842 (Issue 1), and (ii) Lessors may elect not to separate lease and nonlease components when certain conditions are met (Issue 2).
The Company has elected to apply the short-term scope exception for leases with terms of 12 months or less at the inception of the lease and will continue to recognize rent expense on a straight-line basis. As a result of the adoption, on July 1, 2019, the Company recognized a lease liability of approximately $291,753, which represented the present value of the remaining minimum lease payments using an estimated incremental borrowing rate of 6.75%. As of July 1, 2019, the Company recognized a right-to-use asset of approximately $289,089. Lease expense did not change materially as a result of the adoption of ASU 2016-02. As a result of the acquisition of PERA LLC and combined entity Appreciation Financial LLC, as of August 19, 2020 the Company recognized a right to use asset of $157,795 and a lease liability of $153,413 with respect to PERA LLC and a right to use asset of $1,575,145 and a lease liability of $1,598,068 with respect to combined entity Appreciation Financial LLC.
Intangible Assets
The Company’s intangible assets consist of intellectual property with minimal value.
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GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 2 – Summary of Significant Accounting Policies (continued)
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:
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Land
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Indefinite
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Buildings
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40 years
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Tenant improvements
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Lesser of useful life or lease term
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Intangible lease assets
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Lease term
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Impairment of long-lived assets
The Company monitors its long-lived assets and finite-lived intangibles for indicators of impairment. If such indicators are present, the Company assesses the recoverability of affected assets by determining whether the carrying value of such assets is less than the sum of the undiscounted future cash flows of the assets. If such assets are found not to be recoverable, the Company measures the amount of such impairment by comparing the carrying value of the assets to the fair value of the assets, with the fair value generally determined based on the present value of the expected future cash flows associated with the assets (See Note 6).
Share-based compensation
The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. Unregistered stock awards are measured based on the fair market values of the underlying stock on the dates of grant. For service type awards, share-based compensation expense is recognized on a straight-line basis over the period during which the employee is required to provide service in exchange for the entire award. For awards that vest or begin vesting upon achievement of a performance condition, the Company estimates the likelihood of satisfaction of the performance condition and recognizes compensation expense when achievement of the performance condition is deemed probable using an accelerated attribution model.
Revenue Recognition under ASC 606
The Company has adopted accounting standard, ASC 606 “Revenue from Contracts with Customers” and all related amendments to the new accounting standard to contracts.
Revenues from contracts with customers are recognized when control of promised goods and services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
12
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 2 – Summary of Significant Accounting Policies (continued)
Revenue Recognition under ASC 606 (cont’d)
The Company recognizes revenue using the five-step model as prescribed by ASC 606:
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1)
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Identification of the contract, or contracts, with a customer;
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2)
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Identification of the performance obligations in the contract;
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3)
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Determination of the transaction price;
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4)
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Allocation of the transaction price to the performance obligations in the contract; and
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5)
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Recognition of revenue when or as, the Company satisfies a performance obligation.
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When a contract with a customer or an agent is signed, the Company assesses whether collection of the fees under the arrangement is probable. The Company estimates the amount to reserve for uncollectible amounts at the end of each reporting period based on the aging of the contract balance, current and historical customer trends, and communications with its customers. These reserves are recorded against the related accounts receivable.
The transaction price is the consideration that the Company expects to receive from its customers and agents in exchange for its products or services. In determining the allocation of the transaction price, the Company identifies performance obligations in contracts with customers, which may include subscriptions to software and services, support, professional services and customization. In the case of the Company’s software contracts and support services prices are predetermined based on the specific terms of the contract either in flat fee customization/license fee charges or as hourly support and/or software customization charges. Charges relative to license fees are amortized over the term of the license. Charges relative to customization of the software are charged over the term of the scope of work on a percentage of completion basis. Charges relative to support and ongoing services and professional fees are charged when incurred and control has been transferred or the work has been completed. Income earned through the sale of appointments to agents by PERA LLC are recognized on the date of the service appointment.
License fees and customization of software
License and implementation fees are charged as flat fees which are amortized over the term of the contract. For contracts with elements related to customized software solutions and certain build-outs or software systems that require significant modification or customization, the Company will recognize revenue using the percentage-of-completion method. In using the percentage-of-completion method, revenues are generally recorded based on completion of milestones under a scope of work or based on total estimated cost of work and percentage completion as at the balance sheet date.
Software Revenue
The Company generates software revenue monthly on a single fee per subscribed user basis. The Company recognizes software revenue monthly on a per user for each user that is able to deploy software and provided all revenue recognition criteria have been met. If the revenue recognition criteria has not been met, the revenue is deferred or not recognized.
Customization, support and maintenance
Revenue from the Company’s customization of software to meet a particular client’s needs is recognized on a percentage of completion basis over the term of the customization work and until control of the goods or services is transferred to the customer or such date the customer agrees the scope of work has been completed and the intended functionality of the software is complete and able to perform the desired service. Support and maintenance revenue is generated from recurring monthly support and is invoiced monthly based on hourly fees at predetermined rates based on each customer contract.
13
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 2 – Summary of Significant Accounting Policies (continued)
Revenue Recognition under ASC 606 (cont’d)
Customization, support and maintenance (cont’d)
The Customer is credited a certain number of services hours monthly based on the numbers of users actively subscribed to the software which amounts offset any monthly user fees.
Support and maintenance services include e-mail and telephone support, unspecified rights to software fixes and product updates and upgrades and enhancements available on a when-and-if available basis.
Professional services and other
Professional services and other revenue is generated through services including onsite training, product implementation and other similar services. Professional services are generally flat fee services based on a number of hours or scope of work for each specific service. Depending on the services to be provided, revenue from professional services and other is generally recognized at the time of delivery when the services have been completed and control has been transferred.
Income from agent appointments
Income generated by booking appointments for insurance agents is earned on the date on which the appointment takes place. Appointment fees which are collected in advance of appointments are recorded as unearned revenue.
Unearned Revenue
Unearned revenue represents billings or payments received in advance of revenue recognition and is recognized upon transfer of control. Balances consist primarily of appointment fees collected from member agents where the client appointment has not yet occurred, license fees being amortized over the term of the customer contract and customization services which have not yet been concluded and are being deferred using the percentage-of-completion method.
Campground space rentals and concession sales
Revenues from our campsite operations from the sales of concession items, equipment rentals or campsite locations are recoded on the cash basis due to the nature of collection of campsite fees and concession items, which occur daily as the site is rented and sundry items are purchased.
Commissions earned on insurance coverage (Appreciation Financial LLC)
Appreciation Financial LLC earns commissions paid by insurance carriers for the binding of insurance coverage. Commissions are earned at a point in time upon the effective date of bound insurance coverage, as no performance obligation exists after coverage is bound. If there are other services within the contract, Appreciation estimates the stand-alone selling price for each separate performance obligation, and the corresponding apportioned revenue is recognized over a period of time as the performance obligations are fulfilled. Incentive commissions represent a form of variable consideration which includes additional commissions over base commissions received from insurance carriers based on predetermined production levels mutually agreed upon by both parties. Incentive commissions are estimated with a constraint applied and accrued relative to the recognition of the corresponding core commissions based on the amount of consideration that will be received in the coming year such that a significant reversal of revenue is not probable. Advance Commissions are paid by insurance carriers under agreed terms of certain individual customer policies. Advance Commissions are recorded as deferred revenue and amortized over the term of the contract.
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GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 2 – Summary of Significant Accounting Policies (continued)
Revenue Recognition under ASC 606 (cont’d)
Commissions earned on insurance coverage (Appreciation Financial LLC) (cont’d)
Appreciation Management determines the policy cancellation reserve based upon historical cancellation experience adjusted for any known circumstance.
Commission revenues – Prior to the adoption of Topic 606, commission revenues, including those billed on an installment basis, were recognized on the latter of the policy effective date or the date that the premium was billed to the customer. As a result of the adoption of Topic 606, commission revenues associated with the issuance of policies are now recognized upon the effective date of the associated policy. The overall impact of these changes is expected to be significant. These commission revenues, including those billed on an installment basis, will now be recognized earlier than they had been previously. Revenue is accrued based upon the completion of the performance obligation, thereby creating a current asset for the unbilled revenue, until such time as an invoice is generated.
Incentive and contingent commissions – Prior to the adoption of Topic 606, revenue that was not fixed and determinable because a contingency existed was not recognized until the contingency was resolved. Under Topic 606, Appreciation must estimate the amount of consideration that will be received in the coming year such that a significant reversal of revenue is not probable. Incentive and contingent commissions represent a form of variable consideration associated with the placement of coverage, for which we earn commissions and fees. In connection with Topic 606, these commissions are estimated with a constraint applied and accrued relative to the recognition of the corresponding core commissions. The resulting effect on the timing of recognizing of these contingent commissions will now more closely follow a similar pattern as our commissions and fees with any true-ups recognized when payments are received or as additional information that affects the estimate becomes available.
Fee Revenues: Appreciation earns fee revenue related to the onboarding of its agents which is recorded at the time of the transaction.
Additionally, Appreciation is required to evaluate the impact of ASC Topic 340 – Other Assets and Deferred Cost (“ASC 340”) which requires companies to defer certain incremental cost to obtain customer contracts, and certain costs to fulfill customer contracts.
Incremental cost to obtain – The adoption of ASC 340 is expected to result in Appreciation deferring certain costs to obtain customer contracts primarily as they relate to commission-based compensation for which the Company pays an incremental amount of compensation on new business. These incremental costs are expected to be deferred and amortized based on the term of customer polices and expected renewals.
Cost to fulfill – The adoption of ASC 340 may result in Appreciation deferring certain costs to fulfill contracts and recognizing costs as the associated performance obligations are fulfilled. In order for contract fulfillment costs to be deferred under ASC 340, the costs must (1) relate directly to a specific contract or anticipated contract, (2) generate or enhance resources that Appreciation will use in satisfying its obligations under the contract, and (3) be expected to be recovered through sufficient net cash flows from the contract.
As of the filing date, Appreciation Financial is unable to estimate with certainty its historical renewal rates for the insurance policies previously sold and therefore has not included commission revenue to be earned upon renewal based on this estimate. This also means that Appreciation is unable to estimate the costs to be deferred under ASC 340, or the costs to be expensed upon recognition of renewal revenue under ASC 606. Appreciation Financial prior to the combination of its financial statements herein did not previously report the results of its operations and financial position under US GAAP and is currently in the process of developing the systems and processes in which to estimate these amounts. The Company currently expects that the processes and systems will be in place for the reporting for the Company’s year ended June 30, 2021 financial statements.
15
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 2 – Summary of Significant Accounting Policies (continued)
Fair Value of Financial Instruments
The Company follows the fair value measurement rules, which provides guidance on the use of fair value in accounting and disclosure for assets and liabilities when such accounting and disclosure is called for by other accounting literature. These rules establish a fair value hierarchy for inputs to be used to measure fair value of financial assets and liabilities. This hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels: Level 1 (highest priority), Level 2, and Level 3 (lowest priority).
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the balance sheet date.
Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3—Inputs are unobservable and reflect the Company’s assumptions as to what market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available.
The carrying amount of receivables and accounts payable and accrued expenses approximates fair value due to the short-term nature of those instruments.
The estimated fair values for financial instruments are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The carrying amounts of lease receivables, accounts payable, and accrued liabilities approximate fair value given their short-term nature or effective interest rates, which constitutes level three inputs.
Income taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured at rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of operations in the period that includes the enactment date. A valuation allowance is recorded when it is not more likely than not that all or a portion of the net deferred tax assets will be realized.
In the quarters ended September 30, 2020 and 2019, the Company issued a significant number of new shares in its acquisition of PERA LLC and Bombshell Technologies, Inc. (see Note 4) and the cancellation of then outstanding shares upon the sale of WCS Enterprises, LLC (see Note 5). The effect of these issuances and cancellations is that most likely, the Company experienced the requisite change of control as promulgated under the US Internal Revenue Code section 382. The effect of this will be that going forward, the ability of the Company to utilize the US Federal net operating loss carryforwards of Grow Capital, Inc. from prior to these transactions will be limited in its usage. In order to determine the specific effect, the Company must perform the computations required under the Internal Revenue Code, which have not yet been performed. The Company expects it will perform the required computations once its evident that profits are likely.
16
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 2 – Summary of Significant Accounting Policies (continued)
Net (loss) income per share
Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of shares of Common Stock outstanding for the period and contains no dilutive securities. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity.
All dilutive common stock equivalents are reflected in our earnings (loss) per share calculations. Anti-dilutive common stock equivalents are not included in our earnings (loss) per share calculations.
There were no potential dilutive shares outstanding as of March 31, 2021 and June 30, 2020.
Reclassification
Certain prior period balances have been reclassified to conform to the current period presentation in the Company’s consolidated financial statements and the accompanying notes. These reclassifications had no effect on net income for the prior periods. In addition, we have included the results of operations and financial position of the Resort at Lake Selmac for all periods presented in discontinued operations and assets and liabilities held for sale, respectively. The Company accepted an offer to sell the Resort at Lake Selmac effective January 27, 2021, and the transaction was closed on March 3, 2021.
Recent Accounting Pronouncements
Fair Value Measurements (“ASU 2018-03”). In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in the standard apply to all entities that are required, under existing GAAP, to make disclosures about recurring or nonrecurring fair value measurements. ASU 2018-13 removes, modifies, and adds certain disclosure requirements in ASC 820, Fair Value Measurement. The standard is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.
The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of ASU 2018-13. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. The Company is currently assessing the impact that ASU 2018-13 will have on its financial statements.
Financial Instruments – Credit Losses (“ASU 2016-13”). In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.
The standard was originally effective for interim and annual reporting periods beginning after December 15, 2019 and early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. However, in November 2019, the Financial Accounting Standard Board (FASB) issued ASU 2019-10, Financial Instruments—Credit Losses, (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) — Effective Dates (“ASU 2019-10”). ASU 2019-10 deferred the adoption date for (i) public business entities that meet the definition of an SEC filer, excluding entities eligible to be “smaller reporting companies” as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and (2) all other entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As of June 30, 2020, the Company qualified as a smaller reporting companies as defined by the SEC. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements but does not anticipate there to be a material impact.
17
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 3 – Prepaid expenses
Prepaid expenses at March 31, 2021 and June 30, 2020 consist of the following:
|
|
March 31,
2021
|
|
June 30,
2020
|
|
|
|
|
|
|
|
|
Professional fees
|
$
|
103,106
|
|
$
|
50,000
|
|
|
Other expenses
|
|
6,807
|
|
|
13,204
|
|
|
Total
|
$
|
109,913
|
|
$
|
63,204
|
|
Note 4 – Merger with PERA LLC
On August 19, 2020, the Company acquired PERA LLC, a Nevada limited liability company (“PERA”), pursuant to an exchange agreement (the “Exchange Agreement”), effective as of August 3, 2020 (the “Effective Date”), by and between PERA, the members of PERA (the “PERA Members”), and the Company (the “Closing”), concurrently, PERA became a wholly-owned subsidiary of the Company. Eric Tarno, the current President of PERA, will continue to serve as the President of PERA. Pursuant to the Exchange Agreement, at the Closing, the Company acquired 100% of the outstanding membership interests of PERA (the “PERA Ownership Interests”) in exchange for 9,358,185 unregistered restricted shares of the Company’s common stock (the “GC Common Stock”) on a pro rata basis (the “Exchange”). At the Closing, the PERA Members conveyed all of the right, title and interest in and to the PERA Ownership Interests in exchange for the right to receive a number of shares of GC Common Stock equal to an exchange ratio (the “Exchange Ratio”).
The Exchange Ratio is calculated by dividing (a) the Exchange Shares (as defined below) by (b) the total number of shares of PERA Ownership Interests outstanding immediately prior to the Effective Date. “Exchange Shares” means the number of shares of GC Common Stock obtained by dividing (a) $10,000,000 by (b) the 10-day volume weighted average price per share (“VWAP”) calculated immediately before the date that a reverse stock split of GC Common Stock became effective on OTCQB, July 30, 2020. In addition, if PERA meets certain yearly targeted gross revenues for each of year one, two, and three following the Closing, the PERA owners may earn a cumulative total of up to $5,000,000 of shares of GC Common Stock (the “Earn-out Shares”) to be determined using the applicable 10-day VWAP stock price of the Company’s common stock preceding each earn-out period calculation date as set forth in the Exchange Agreement in connection with all of the three years, subject to certain catch up provisions if such yearly period targets are not met in the applicable period. At the Closing the Company also entered into a registration rights agreement (the “Registration Rights Agreement”) with the PERA Members to register the GC Common Stock to be issued in connection with the Exchange. Pursuant to the Registration Rights Agreement, the Company has granted certain demand and piggy-back registration rights whereby the Company will register the resale of the GC Common Stock issued in the Exchange. The PERA Members include certain limited liability companies owned by (i) Terry Kennedy, the CEO of the Company, (ii) Jonathan Bonnette, the CTO of the Company and the CEO of Bombshell (iii) Joel Bonnette, the President of Bombshell and brother of Jonathan Bonnette, and (iv) Carl Sanko, a director and Secretary of the Company, and (v) Jared Bonnette, brother of Jonathan Bonnette.
The acquisition of PERA was not accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. Due to the related party and common control relationships held between Bombshell and Grow Capital, Inc., the assets and liabilities of Bombshell transferred over to the Company at their historical carrying values.
The following table provides information as of August 19, 2020 of the assets acquired and the liabilities assumed in the merger:
18
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 4 – Merger with PERA LLC (continued)
|
|
|
PERA
|
|
|
Appreciation
|
|
|
Combined
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
27,693
|
|
|
$
|
856,580
|
|
|
$
|
884,273
|
|
|
Accounts receivable
|
|
|
67,779
|
|
|
|
28,534
|
|
|
|
96,313
|
|
|
Due to/from related parties
|
|
|
(356,096
|
)
|
|
|
388,596
|
|
|
|
32,500
|
|
|
Prepaid and other assets
|
|
|
32,440
|
|
|
|
187,283
|
|
|
|
219,723
|
|
|
Property and equipment
|
|
|
-
|
|
|
|
106,791
|
|
|
|
106,791
|
|
|
Right to use assets
|
|
|
157,795
|
|
|
|
1,575,145
|
|
|
|
1,732,940
|
|
|
Grow Capital stock held*
|
|
|
140,600
|
|
|
|
60,000
|
|
|
|
200,600
|
|
|
Total Assets
|
|
$
|
70,211
|
|
|
$
|
3,202,929
|
|
|
$
|
3,273,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
36,186
|
|
|
$
|
885,625
|
|
|
$
|
921,811
|
|
|
Accounts payable and accrued liabilities, related parties
|
|
|
-
|
|
|
|
201,252
|
|
|
|
201,252
|
|
|
Unearned revenue
|
|
|
5,667
|
|
|
|
3,326,726
|
|
|
|
3,332,393
|
|
|
Debt
|
|
|
75,000
|
|
|
|
5,201,321
|
|
|
|
5,276,321
|
|
|
Lease liabilities
|
|
|
153,413
|
|
|
|
1,598,068
|
|
|
|
1,751,481
|
|
|
Total liabilities
|
|
$
|
270,266
|
|
|
$
|
11,212,992
|
|
|
$
|
11,483,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
$
|
(200,055
|
)
|
|
$
|
(8,010,063
|
)
|
|
$
|
(8,210,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration: 9,358,185 shares
|
|
|
|
|
|
|
|
|
|
$
|
9,358
|
|
|
Additional paid in capital
|
|
|
|
|
|
|
|
|
|
|
(209,413
|
)
|
|
Members’ equity
|
|
|
|
|
|
|
|
|
|
|
(8,010,063
|
)
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
(8,210,118
|
)
|
*The Grow Capital, Inc. common stock held by PERA LLC and Appreciation Financial at the time of the closing was included as treasury stock.
Note 5 – Discontinued Operations
WCS Enterprises, Inc.
In the quarter ended March 31, 2019, the Company began to actively market WCS for sale and has begun negotiations with certain parties for the sale of WCS, subject to diligence, negotiation of a purchase agreement and fulfillment of typical closing conditions. In connection with these efforts, management determined that it was appropriate to classify WCS as Assets Held for Sale.
On September 30, 2019, the Company entered into a membership interest purchase agreement with the Zallen Trust pursuant to which the Company sold all of the Company’s membership interests in WCS for an aggregate purchase price of $782,450. The Zallen Trust paid the purchase price by transferring to the Company 434,694 shares of the Company’s Common Stock, valued at $2.00 per share. The Purchase Agreement also provided that Mr. Zallen transfer to the Company an additional 20,000 shares of Common Stock to settle $36,000 in back rent owed at the time of the sale. The Company retired all of the shares received as a result of the transaction. In connection with the sale of WCS, the Company and Mr. Zallen entered into a separation and release of claims agreement pursuant to which the Company and Mr. Zallen provided a mutual release of claims against the other party and such party’s affiliates, including all claims related to Mr. Zallen’s service as an officer, employee, and director of the Company. The release of claims by Mr. Zallen resulted in the forgiveness of salary accruals of approximately $367,000 for services provided up to June 30, 2018. The Company reversed related payroll taxes of approximately $61,000 and included the amount in the gain on sale. The shares issued in the Exchange are subject to certain registration rights with no liquidated damages for failure to complete registration by a specific date. After payment of all closing costs, the Company recorded a gain on sale of approximately $553,000. (See detail below)
19
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 5 – Discontinued Operations (continued)
Resort at Lake Selmac (formerly Smoke on the Water)
On January 27, 2021 the Company entered into sale agreement with a Buyer for the sale of the Resort at Lake Selmac site location for an offering price of $740,000. There are no commissions payable on the sale, and the sale closed on March 3, 2021.
Discontinued Operation:
|
(a)
|
The Results of the Discounted Operations are as follows:
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
25,844
|
|
|
$
|
-
|
|
|
$
|
148,381
|
|
|
$
|
140,912
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
1,190
|
|
|
|
2,463
|
|
|
|
16,852
|
|
|
|
38,716
|
|
|
General and administrative
|
|
|
21,500
|
|
|
|
8,036
|
|
|
|
66,111
|
|
|
|
73,780
|
|
|
Depreciation, amortization and impairment
|
|
|
1,004
|
|
|
|
776
|
|
|
|
2,968
|
|
|
|
11,636
|
|
|
Total operating expenses
|
|
|
23,694
|
|
|
|
11,275
|
|
|
|
85,931
|
|
|
|
124,132
|
|
|
Income (Loss) from operations
|
|
|
2,150
|
|
|
|
(11,275
|
)
|
|
|
62,450
|
|
|
|
16,780
|
|
|
Gain (loss) on sale
|
|
|
(31,075
|
)
|
|
|
-
|
|
|
|
(31,075
|
)
|
|
|
492,439
|
|
|
Interest expense
|
|
|
(6,031
|
)
|
|
|
(8,937
|
)
|
|
|
(26,131
|
)
|
|
|
(26,917
|
)
|
|
Income (loss) from discontinued operations
|
|
$
|
(34,956
|
)
|
|
$
|
(20,212
|
)
|
|
$
|
5,244
|
|
|
$
|
482,302
|
|
|
(b)
|
Assets and liabilities disposed of are as follows:
|
|
|
|
March 3, 2021
|
|
|
June 30,2020
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Lease receivable
|
|
$
|
5,903
|
|
|
$
|
5,903
|
|
|
Prepaid expenses
|
|
|
-
|
|
|
|
5,521
|
|
|
Property, plant and equipment, net
|
|
|
781,382
|
|
|
|
783,993
|
|
|
Other assets
|
|
|
4,435
|
|
|
|
500
|
|
|
Total Assets
|
|
$
|
791,720
|
|
|
$
|
795,917
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
22,725
|
|
|
$
|
23,483
|
|
|
Debt
|
|
|
590,257
|
|
|
|
596,308
|
|
|
Total Liabilities
|
|
|
612,982
|
|
|
|
619,791
|
|
|
Net Assets
|
|
$
|
178,738
|
|
|
$
|
176,126
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration:
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property
|
|
$
|
147,663
|
|
|
$
|
-
|
|
|
Purchaser return 9,093,888 shares of common stock, FMV at $0.10
|
|
|
-
|
|
|
|
909,389
|
|
|
Payment on certain items during closing
|
|
|
-
|
|
|
|
(2,030
|
)
|
|
Total consideration
|
|
|
147,663
|
|
|
|
907,359
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on sale of Resort on Selmac and WCS
|
|
$
|
(31,075
|
)
|
|
$
|
492,439
|
|
20
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 5 – Discontinued Operations (continued)
|
|
March 31,
2021
|
|
June 30,
2020
|
|
|
Note payable, Resort at Lake Selmac
|
$
|
-
|
|
$
|
596,308
|
|
Under the Sale Agreement above, at closing, escrow calculated the balance owed on this note payable, having a start date of March 6, 2017, an original principal amount of $625,000 and with the remaining balance on the installment note to be credited to the Purchase Price as closed on March 3, 2021.
Note 6 – Property and Equipment, Net
Property and improvements consisted of the following as of March 31, 2021 and June 30, 2020:
|
|
|
March 31,
2021
|
|
|
June 30,
2020
|
|
|
Automobiles
|
|
|
216,637
|
|
|
|
-
|
|
|
Leaseholder improvement
|
|
|
156,653
|
|
|
|
67,644
|
|
|
Furniture, Fixtures and Equipment
|
|
|
107,601
|
|
|
|
8,947
|
|
|
|
|
|
480,891
|
|
|
|
76,591
|
|
|
Less: accumulated depreciation
|
|
|
(331,676
|
)
|
|
|
(17,609
|
)
|
|
|
|
$
|
149,215
|
|
|
$
|
58,982
|
|
Depreciation expense amounted to $(868) and $1,758, for the three months ended March 31, 2021 and 2020, respectively.
Depreciation expense amounted to $10,635 and $7,032, for the nine months ended March 31, 2021 and 2020, respectively.
Note 7 – Promissory Note Receivable
On July 8, 2019, the Company entered into a non-binding letter of intent (the “LOI”) to acquire Encompass More Group, Inc. (“Encompass”), a Nevada corporation. In connection with the LOI, Encompass issued a promissory note (the “Note”) to the Company pursuant to a loan agreement (the “Loan Agreement”), dated July 22, 2019, by and between Encompass and the Company, in exchange for a loan of $100,000 (the “Loan”). Pursuant to the Loan Agreement, the proceeds of the Loan will be used by Encompass for working capital and general corporate purposes. The Note has a twelve-month term, an interest rate of 5.0%, and is payable in monthly installments of $2,000, with all remaining principal and interest due on the maturity date, unless paid earlier by Encompass.
The Board of Directors of the Company have determined not to proceed with the acquisition as contemplated under the LOI.
During the fiscal year ended June 30, 2020, the Company received $16,000 towards monthly installments. We recorded interest income of $6,304 during the period ended June 30, 2020. The Note receivable balance at June 30, 2020 was $88,510.
On September 25, 2020 the Company and Encompass More Group Inc. (the “Borrower”) entered into an addendum to the July 22, 2019 Commercial Loan Agreement (the “Addendum”) in order to modify certain of the terms and conditions. Under the Addendum, the Borrower shall enter into a new promissory note in the principal amount of $72,000, with any unpaid interest due and payable at June 30, 2020 to accrue and become due and payable on October 1, 2021. Further under the terms of the promissory note the Borrower shall make twelve (12) installment payments of $6,000 commencing November 1, 2020, until the principal balance of the loan is repaid in full, at which time all accrued and unpaid interest shall come due and payable. Interest on the promissory note shall continue to accrue at a rate of Five (5%) per annum. Concurrent with the execution of the Addendum, the Borrower made a lump sum payment of $16,510 to reduce the principal of the original $100,000 loan to $72,000. The borrower resumed principal payments after year end. The balance of the note at March 31, 2021 was $54,000. The Company believes the note to be fully collectible as of March 31, 2021.
21
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 8 – Accounts Payable and Accrued Liabilities
Accrued liabilities at March 31, 2021 and June 30, 2020 consist of the following:
|
|
|
March 31,
2021
|
|
|
June 30,
2020
|
|
|
Accounts payable
|
|
$
|
626,009
|
|
|
$
|
496,574
|
|
|
Accrued salaries and wages
|
|
|
48,888
|
|
|
|
23,748
|
|
|
Accrued commission fees
|
|
|
586,501
|
|
|
|
-
|
|
|
Accrued professional fees
|
|
|
145,000
|
|
|
|
126,173
|
|
|
Others
|
|
|
32,892
|
|
|
|
1,325
|
|
|
|
|
$
|
1,439,290
|
|
|
$
|
647,820
|
|
Note 9 - Debts and Other Noncurrent Liabilities
|
(1)
|
Paycheck Protection Program and SBA
|
|
Paycheck Protection Program (“PPP loan”)
|
|
$
|
332,837
|
|
|
EIDL loan
|
|
|
149,900
|
|
|
Total
|
|
$
|
482,737
|
|
On May 1, 2020, Appreciation and PERA, respectively, entered into promissory notes with the US Small Business Administration (SBA) for funding in the cumulative amount of $332,837 (December 31, 2020 - $325,772) with an interest rate of 1% per annum under the payroll protection program (PPP). In March 2021, the principal amount of $250,772 under Appreciation was forgiven, and further provided $257,837 under PPP. The Company recorded $250,772 as other income. Principal and interest payments are deferred during the first six (6) months of the term of this Note (the “Deferral Period”). Interest will continue to accrue on the outstanding principal balance during the Deferral Period. After proceeds of this Note have been expended by Borrower, but not sooner than eight weeks after the date of initial disbursement on this Note, Borrower may submit to Lender a request for forgiveness of the Loan. Borrower must submit all documentation required by Lender to verify number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations, certifying that the documents are true and that Borrower used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. Lender will notify Borrower within 60 days whether all or part of the requested forgiveness of the Loan has been approved. If the entire principal balance of this Note and accrued interest is not forgiven before the end of the Deferral Period, then the principal balance together with and all accrued and unpaid interest outstanding on the Amortization Commencement Date shall be paid in eighteen (18) monthly payments, commencing in the month immediately following the amortization commencement date.
In addition, Appreciation received an Economic Injury and Disaster Loan “EIDL” in the amount of $149,900 from the SBA for working capital purposes, pursuant to the terms and conditions set forth in a Loan Authorization and Agreement, Note, and Security Agreement between the Company and the SBA. The EIDL accrues interest at the rate of 3.75% per annum and matures on August 11, 2050 (30 years from the date of the note). Pursuant to the terms of the loan agreement, the Company granted the SBA a security interest in all of its tangible and intangible personal property to secure payment and performance of the Company’s obligations. The loan agreement contains certain affirmative and restrictive covenants, including a covenant prohibiting the Company from selling or transferring any collateral (other than the sale of inventory in the ordinary course of business) without the SBA’s prior written consent, as well as a covenant prohibiting the Company from making any distribution of assets or any direct or indirect advance, by way of a loan, gift, bonus or otherwise, to any owner or employee of the Company or its affiliates without the SBA’s prior written consent. An event of default will occur under the note if, among other things, the Company reorganizes, merges, consolidates or otherwise undergoes a change in ownership or business structure without the SBA’s prior written consent. The Company may prepay the note at any time without notice or penalty.
22
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 9 - Debts and Other Noncurrent Liabilities (continued)
|
(3)
|
Loans from National Life Group
|
Appreciation had certain loan agreements with National Life Distribution, LLC (“NLD”) as below:
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
Revolving line of credit loan up to $5M dated December 21, 2018 with maturity date on December 20, 2023: Interest rate at 6% per annum, increasing to 11% per annum in default. The line of credit is secured by a personal guarantee of our CEO and Board Member. In addition, the line of credit has a conversion feature that allows the lender at any time prior to maturity to convert the line of credit into membership interest of Appreciation, LLC at the rate of 100 divided by the principal and unpaid interest converted multiplied by four (4) times the prior calendar year EBITDA of Appreciation, LLC. The line of credit also contains certain cross default provisions with respect to the November 2, 2018 note below.
|
|
$
|
4,389,047
|
|
|
Promissory note dated November 2, 2018
- Maturity date of November 30, 2020. Interest rate of 5% per annum, with a default rate of 10% per annum, weekly minimum principal and interest payments required of $5,000, which are offset against commissions and revenues owed under their respective sales and commission agreements, secured by a first priority lien on a compensation owed under the respective sales and commission agreements, of which there was approximately $74,000 outstanding as of December 31, 2020. On February 18, 2021 the Company and NLD entered into a wavier of default and letter agreement revising the terms of the Note effective at maturity to “Due on Demand”, with no specified term, provided payments at the originally agreed rate of $5,000 per week continue to be applied from Borrower’s weekly commission payments until the indebtedness is paid in full, or Appreciation elects to settle the Note in full.
|
|
|
361,901
|
|
|
Total
|
|
$
|
4,750,948
|
|
For all our debt, future maturities over the remaining term of the debt are as follows:
|
2021
|
|
$
|
361,901
|
|
|
2022
|
|
|
482,737
|
|
|
2023
|
|
|
4,389,047
|
|
|
Subtotal
|
|
|
5,233,685
|
|
|
Less: current portion
|
|
|
(436,901
|
)
|
|
Long-term portion of debt
|
|
$
|
4,796,784
|
|
23
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINTE MONTHS ENDED MARCH 31, 2021
Note 10 – Operating Leases
We have entered into various non-cancelable operating lease agreements for certain of our offices. Our leases have original lease periods expiring between 2021 and 2028.
Future minimum lease payments in respect of the above under non-cancellable leases as of March 31, 2021 as presented in accordance with ASC 842 were as follows:
|
2021
|
|
|
368,366
|
|
|
2022
|
|
|
376,496
|
|
|
2023
|
|
|
295,240
|
|
|
2024
|
|
|
288,050
|
|
|
2025
|
|
|
245,903
|
|
|
Remaining periods
|
|
|
762,394
|
|
|
Total future minimum lease payments
|
|
|
2,336,449
|
|
|
Less: imputed interest
|
|
|
(472,940
|
)
|
|
Total
|
|
|
1,863,509
|
|
|
Current portion of operating lease
|
|
|
275,958
|
|
|
Long term portion of operating lease
|
|
$
|
1,587,551
|
|
Note 11 – Capital Stock
As of August 29, 2019, the Company increased its authorized shares to 500,000,000 shares of Common Stock and 50,000,000 shares of Preferred Stock, respectively.
Reverse Stock Split
On May 13, 2020, the Company’s board of directors and stockholders approved an amended and restated certificate of incorporation to, among other things, effect a reverse split on the outstanding shares of the Company’s common stock on a one-for-20 basis (the “Reverse Stock Split”). The Reverse Stock Split became effective on July 30, 2020 and has been shown on a retroactive basis within all periods presented. The par values of the common were not adjusted as a result of the reverse stock split.
Common Stock
On August 19, 2020, the Company issued a total of 9,358,185 unregistered, restricted shares of Common Stock to acquire PERA LLC. (See Note 4).
Share issuances during the nine months ended March 31,2021:
During the nine months ended March 31, 2021, the Company issued a total of 832,913 unregistered, restricted Common Shares to officers and directors as part of their respective executive and/or board compensation package. The Company valued those issuances at the closing price of the Company’s stock as traded on the OTCMarket on the date of grant and recorded stock-based compensation of $937,346.
During the nine months ended March 31, 2021, the Company issued 52,571 fully vested shares of unregistered, restricted Common Shares to settle certain liabilities. The Company valued those issuances at the closing price of the Company’s Common Stock as traded on the OTCMarkets on the date of grant and recorded a $45,000 liability settlement and stock-based compensation of $20,177 on the statement of operations.
During the three months ended September 30, 2020, the Company issued a total of 75,000 unregistered, restricted shares of Common Stock in respect to private placements at $1.00 per share and received cash proceeds of $75,000, of which $35,000 was received from Appreciation after the Company’s acquisition of Pera LLC and has been included in Treasury Stock.
24
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 11 - Capital Stock (continued)
Common Stock (cont’d)
During the three months ended December 31, 2020, the Company issued a total of 1,500,000 unregistered, restricted common shares to certain third parties and related entities for cash consideration of $375,000.
Share issuances during the nine months ended March 31,2020:
During the three months ended September 30, 2019, the Company issued a total of 110,675,328 shares to acquire Bombshell Technologies, Inc.
During the nine months ended March 31, 2020, the Company issued 3,277,778 shares of unregistered Common Stock in respect to private placements for total gross proceeds of $200,000. In the period, the Company collected $150,000 from a prior period subscription receivable.
During the nine months ended March 31, 2020, the Company issued a total of 3,175,948 shares to officers and directors as part of their respective executive and/or board compensation package. The Company valued those issuances at the closing price of the Company’s stock as traded on the OTCMarket on the date of grant and recorded stock-based compensation of $290,882.
During the nine months ended March 31, 2020, the Company issued 1,288,984 fully vested unregistered shares of Common Stock to settle certain liabilities. The Company valued those issuances at the closing price of the Company’s Common Stock as traded on the OTCMarkets on the date of grant and recorded a $91,433 liability settlement and stock-based compensation of $23,230 on the statement of operations.
On September 30, 2019, the Company retired 9,093,888 shares of the Company’s Common Stock. The Company valued those retired shares at the closing price of the Company’s Common Stock as traded on the OTCMarkets and recorded $869,380 as sale price of WCS and $40,000 as related to offset lease receivable.
Preferred Stock
In 2015, the Company designated all 5,000,000 shares of its Preferred Stock as Series A Convertible Preferred Stock (the "Series A Preferred"), par value $0.001. The Series A Preferred shareholders voted together with the Common Stock as a single class and were entitled to receive all notices relating to voting that are required to be given to the holders of the Common Stock. The holders of shares of Series A Preferred were entitled to five votes per share and each share was convertible by the holder into five shares of Common Stock. All of the Series A Preferred shares were issued and converted into Common Stock in November 2015.
Equity Incentive Plan
In December 2015, the Company adopted the 2015 Equity Incentive Plan (the “Incentive Plan”) with a term of 10 years. The Incentive Plan allows for the issuance up to a maximum of 100,000 shares of Common Stock, options exercisable into Common Stock of the Company or stock purchase rights exercisable into shares of Common Stock of the Company. The Incentive Plan is administered by the Board unless a separate delegation to an administrator is made by the Board. Options granted under the Incentive Plan carry a maximum term of 10 years, except to a grantee who is also a 10% beneficial owner at the time of grant, in which case the maximum term is 5 years. In addition, exercise prices of options granted must be within a certain percentage of the closing price on date of grant depending on the level of beneficial ownership of Common Stock of the Company by the grantee. All vesting conditions are set by the Board or a designated administrator. In December 2015, the Company filed a registration statement on Form S-8 covering all shares issued or issuable under the Incentive Plan. The Company has granted options to purchase 100,000 shares under the Incentive Plan during April 2016, 75,000 of which have been exercised and 25,000 of which have vested and were canceled, unexercised, during the current fiscal year. There are no remaining shares available under the Incentive Plan.
25
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 11 - Capital Stock (continued)
Stock Plan
In December 2015, the Company adopted the 2015 Stock Plan (the “Stock Plan”). As a condition of adoption of the Stock Plan, the Company filed a registration statement on Form S-8 in December 2015 to register the shares issued under the Stock Plan. The Stock Plan allows for the issuance of up to a maximum of 100,000 shares of Common Stock of the Company. The Stock Plan is administered by the Board unless a separate delegation to an administrator is made by the Board. The Stock Plan shall continue in effect until it is terminated by the Board or all shares are issued pursuant to the Stock Plan. The Company has not granted any shares under the Stock Plan.
Options
There were no unvested options outstanding during the years ended March 31, 2021 and June 30, 2020. Options outstanding had intrinsic value as of June 30, 2020 and 2019 of $nil. In the year ended June 30, 2016 the Company issued an option with no term attached, and effective June 30, 2020, in accordance with the terms of the 2015 Equity Incentive Plan, the Company terminated 25,000 unexercised, vested options.
Note 12 – Related Party Transactions
|
(1)
|
Bombshell Technologies, Inc.
|
Revenue
The following table summarizes the revenue from the Company’s related parties. Revenues below reflect the transactions between Bombshell, PERA and Appreciation to the time of acquisition, consolidation and combination effective August 20, 2020, thereafter intercorporate sales are eliminated:
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appreciation Financial LLC (1)(2)
|
|
$
|
-
|
|
|
$
|
195,065
|
|
|
$
|
101,217
|
|
|
$
|
586,154
|
|
|
Public Employee Retirement Assistance (PERA) (1)(2)
|
|
|
-
|
|
|
|
47,261
|
|
|
|
74,856
|
|
|
|
187,189
|
|
|
Superior Performers Inc. (1)
|
|
|
-
|
|
|
|
180,916
|
|
|
|
240,106
|
|
|
|
649,829
|
|
|
Others
|
|
|
15,085
|
|
|
|
111,365
|
|
|
|
69,349
|
|
|
|
234,737
|
|
|
Grand Total
|
|
$
|
15,085
|
|
|
$
|
534,607
|
|
|
$
|
485,528
|
|
|
$
|
1,657,909
|
|
|
(1)
|
The Company had a significant concentration of revenue from these three related party customers totaling 0% and 86% in the three and nine months ended March 31, 2021 and, 79% and 86% of gross related party revenues during the three and nine months ended March 31, 2020, respectively. Related entities are controlled by over 5% shareholders of the Company and/or officer/directors of the Company.
|
|
|
|
|
(2)
|
The amounts included in this table are for periods prior to the entity being consolidated/combined. The amounts in the periods shown from August 20, 2020 and forward include intercompany eliminations due to consolidation.
|
The following table summarizes the accounts receivable from the Company’s related parties:
|
|
|
March 31,
2021
|
|
|
June 30,
2020
|
|
|
Appreciation Financial LLC (1)
|
|
$
|
-
|
|
|
$
|
140,289
|
|
|
Public Employee Retirement Assistance (PERA) (1)
|
|
|
-
|
|
|
|
49,737
|
|
|
Superior Performers Inc. (1)
|
|
|
4,701
|
|
|
|
58,061
|
|
|
Others
|
|
|
15,717
|
|
|
|
970
|
|
|
Grand Total
|
|
$
|
20,418
|
|
|
$
|
249,057
|
|
|
(1)
|
The Company had a significant concentration of accounts receivable from these three customers totaling 99% as at June 30, 2020. Related entities are controlled by over 5% shareholders of the Company and/or officer/directors of the Company.
|
Appreciation and PERA balances are eliminated as of March 31, 2021.
26
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 12 – Related Party Transactions (continued)
|
(1)
|
Bombshell Technologies, Inc. (cont’d)
|
Costs of Goods and Commissions Fees
The following table summarizes the Costs of Sales – related parties:
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trendsic Corporation Inc. (1)(2)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
178,799
|
|
|
Ambiguous Holdings LLC (1)(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,555
|
|
|
Others
|
|
|
1,800
|
|
|
|
-
|
|
|
|
1,800
|
|
|
|
-
|
|
|
Total
|
|
$
|
1,800
|
|
|
$
|
-
|
|
|
$
|
1,800
|
|
|
$
|
186,354
|
|
|
(1)
|
The Company had a significant concentration of total costs of goods sold from these two related party vendors totaling 0% and 100% of related party costs of goods sold in the three and nine months ended March 31, 2020, respectively.
|
|
(2)
|
Related entities are controlled by over 5% shareholders of the Company and/or officer/directors of the Company.
|
The following table summarizes expense related to commission fees included as General and administrative – related parties:
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zeake, LLC (1)
|
|
$
|
47,237
|
|
|
$
|
56,819
|
|
|
$
|
156,679
|
|
|
$
|
167,260
|
|
(1) Related entities are controlled by over 5% shareholders of the Company and/or officer/directors of the Company.
The following table summarizes accounts payable to the Company’s related parties:
|
|
|
March 31,
2021
|
|
|
June 30,
2020
|
|
|
Trendsic Corporation Inc. (1)
|
|
$
|
-
|
|
|
$
|
61,948
|
|
|
Zeake, LLC (1)
|
|
|
118,045
|
|
|
|
78,515
|
|
|
Grand Total
|
|
$
|
118,045
|
|
|
$
|
140,463
|
|
(1) Related entities are controlled by over 5% shareholders of the Company and/or officer/directors of the Company.
The following table summarizes the Costs of Sales – related parties:
|
|
|
Three months ended March 31, 2021
|
|
|
For the period
August 20, 2020 to March 31, 2021
|
|
|
PERA Wizards, LLC (1)
|
|
$
|
591,142
|
|
|
$
|
1,514,984
|
|
|
Wingbrook Partners, LLC (1)
|
|
|
321,396
|
|
|
|
894,385
|
|
|
Total
|
|
$
|
912,538
|
|
|
$
|
2,409,367
|
|
(1) Related entities are controlled by over 5% shareholders of the Company and/or officer/directors of the Company.
27
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 12 – Related Party Transactions (continued)
The following table summarizes expense related to commission fees paid to related parties and included as General and administrative – related parties:
|
|
|
Three months ended
March 31, 2021
|
|
|
For the period
August 20, 2020 to March 31, 2021
|
|
|
Management fee
|
|
$
|
55,519
|
|
|
$
|
147,250
|
|
|
Commission fee
|
|
|
75,070
|
|
|
|
201,872
|
|
|
Total
|
|
$
|
130,589
|
|
|
$
|
349,122
|
|
|
(3)
|
Appreciation Financial LLC
|
The following table summarizes the Costs of Sales – related parties:
|
|
Three months ended
March 31, 2021
|
|
For the period
August 20, 2020 to March 31, 2021
|
|
|
Member of Appreciation
|
$
|
24,315
|
|
$
|
77,128
|
|
The following table summarizes expense related to compensation included as General and administrative – related parties:
|
|
Three months ended
March 31,2021
|
|
For the period
August 20, 2020 to March 31, 2021
|
|
|
Member of Appreciation
|
$
|
376,745
|
|
$
|
1,072,042
|
|
Upon combination of Appreciation, the Company assumed accounts payable as below:
|
|
March 31, 2021
|
|
|
Member of Appreciation
|
$
|
201,252
|
|
On February 12, 2020, the Company entered into a consulting agreement with Trevor Hall and appointed Mr. Hall to serve as an interim CFO of the Company beginning January 1, 2020 through December 31, 2020. Pursuant to the consulting agreement, a fixed fee of Sixty Thousand (60,000) shares of the Company’s unregistered restricted common stock for his providing chief financial officer services. The shares are to be issued at a rate of Fifteen Thousand (15,000) shares per quarter. The first and second installments, covering the period January 1 to June 30, 2020, were issued on March 3, 2020 and vested immediately upon issuance.
On April 1, 2020, Jonathan Bonnette, who had been the President and Chief Executive Officer of Grow Capital since July 1, 2018, transitioned out of his role as President and Chief Executive Officer and became the Company’s Chief Technology Officer and the Chief Executive Officer of the Company’s subsidiary, Bombshell Technologies.
28
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31,2021
Note 12 – Related Party Transactions (continued)
|
(4)
|
Grow Capital (cont’d)
|
Mr. Terry Kennedy was appointed to succeed Mr. Bonnette as the President and Chief Executive Officer of the Company, effective April 1, 2020. In connection with Mr. Kennedy’s appointment, the Company and Mr. Kennedy entered into an executive compensation agreement (the “Compensation Agreement”) with an effective date of April 1, 2020. The Compensation Agreement governs the terms and conditions regarding Mr. Kennedy’s compensation for the three-month period beginning on April 1, 2020, and ending on June 30, 2020, and may be terminated “for cause” only. Pursuant to the Compensation Agreement, following his appointment as President and Chief Executive Officer, Mr. Kennedy was issued 50,000 unregistered, restricted shares of the Company’s Common Stock on April 20, 2020 as compensation for the three-month period ending June 30, 2020. The 50,000 shares were valued at $44,040 at the closing price of the Company’s Common Stock as traded on the OTCMarkets on the date of grant. The shares of common stock issued are immediately and fully vested, and deemed to be fully earned, upon their issuance. If such a permanent executive compensation or employment agreement is not consummated prior to July 1, 2020, the Compensation Agreement will automatically renew for one additional three-month period beginning on July 1, 2020, with Mr. Kennedy entitled to receive up to an additional 50,000 unregistered, restricted shares of the Company’s common stock, with the actual number of shares being prorated for the portion of the extended period actually served until the more permanent executive compensation/employment agreement is consummated.
On May 15, 2020, the Company entered into Fee Agreements (collectively, the “Fee Agreements”) with each of (i) Jonathan Bonnette, and (ii) Carl Sanko, a director and the Secretary of the Company. Under the Fee Agreements, on May 15, 2020, each of Mr. Bonnette, and Mr. Sanko were issued unregistered, restricted shares of Common Stock for services provided to the Company. Pursuant to the Fee Agreements:
(i)Mr. Bonnette received a fixed fee of $320,000 for his service as Chief Executive Officer of the Company and for outside business management and consulting services of which 1/3, or $106,667 was immediately payable. by way of an upfront payment of 133,333 unregistered, restricted shares of Common Stock valued at $113,017 and deemed to cover the three-month period from May 15, 2020 to August 15, 2020. The balance of Mr. Bonnette’s compensation of $213,333 will vest monthly but be paid in shares of Common Stock quarterly in installments of $71,111 within 10 days following each of the three-month periods ending of November 15, 2020, February 15, 2021, and May 15, 2021.
(ii)Mr. Sanko received a fixed fee of $270,000 for his services as Secretary of the Company and for outside business management and consulting services, of which 1/3 or $90,000 was immediately payable by way of an upfront payment of 112,500 unregistered, restricted shares of Common Stock valued at $95,400 and deemed to cover the three-month period from May 15, 2020 to August 15, 2020; The balance of Mr. Sanko’s compensation of $180,000 will vest monthly but be paid in shares of Common Stock in quarterly in installments of $60,000 within 10 days following each of the three-month periods ending of November 15, 2020, February 15, 2021, and May 15, 2021.
During the nine months ended March 31, 2021, the Company issued a total of 832,913 unregistered, restricted Common Shares to officers and directors as part of their respective executive and/or board compensation package. The Company valued those issuances at the closing price of the Company’s stock as traded on the OTCMarket on the date of grant and recorded stock-based compensation of $937,346.
During the nine months ended March 31, 2021, the Company made a cash payment of $20,000 to Carl Sanko, a director and the Secretary of the Company in respect to services provided to one of the Company’s subsidiaries.
During the nine months ended March 31, 2021, the Company issued a total of 75,000 unregistered, restricted shares of Common Stock to related parties for cash proceeds of $75,000.
During the nine months ended March 31, 2021, the Company issued a total of 500,000 unregistered, restricted common shares to certain third parties and related entities for cash consideration of $125,000.
29
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 13 – Segment Reporting
The Company's operations are classified into four reportable segments that provide different products or services. Separate management of each segment is required because each business unit is subject to different marketing, operational, and growth and technology development strategies.
Resort at Lake Selmac – under discontinued operation
The recreational vacation site rentals segment operated by Resort at Lake Selmac, Inc. derives its revenue from rental of RV sites and campsites at its owned location on Lake Selmac in Oregon.
Bombshell Technologies and Corporate
The Fintech segment operated by Bombshell Technologies based in Nevada and Louisiana derives its income from proprietary software which delivers customized back office compliance, sophisticated multi-pay commission processing, and a unique new client application submission system, along with digital engagement marketing services centric to financial services.
PERA
Our electronic appointment scheduling operations provides leads for insurance agents to connect retirement professionals and public employees to trusted insurance advisors.
Appreciation
The operations of combined entity Appreciation Financial LLC include full-service retirement planning by member agents which service public employees and their families providing policies from a series of insurance carriers that meet their retirement planning requirements. We derive revenue from all operating segments.
There are inter-segment sales between each of our operating divisions other than Resort at Lake Selmac. The costs associated with management overhead for Grow Capital are dedicated to our key operating segment in the FinTech industry, Bombshell Technologies and all corporate overhead has been included in this segment disclosure as a result.
|
|
As of
March 31,
|
|
As of
June 30,
|
|
|
|
2021
|
|
2020
|
|
|
Assets by segment
|
|
|
|
|
|
Bombshell Technologies and corporate
|
|
$
|
999,879
|
|
|
$
|
1,117,341
|
|
|
PERA
|
|
|
392,331
|
|
|
|
-
|
|
|
Appreciation
|
|
|
2,109,034
|
|
|
|
-
|
|
|
Assets held for sale
|
|
|
-
|
|
|
|
795,917
|
|
|
Total assets
|
|
$
|
3,501,244
|
|
|
$
|
1,913,258
|
|
30
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 13 – Segment Reporting (continued)
Three months ended March 31, 2021 and 2020:
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Revenues by segment:
|
|
|
|
|
|
|
|
Bombshell Technologies and corporate (*)
|
|
$
|
161,309
|
|
|
$
|
565,314
|
|
|
PERA
|
|
|
1,395,747
|
|
|
|
-
|
|
|
Appreciation
|
|
|
6,514,420
|
|
|
|
-
|
|
|
Total revenue from continuing operations
|
|
$
|
8,071,476
|
|
|
$
|
565,314
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
|
|
|
|
|
|
|
|
|
|
Bombshell Technologies and corporate (*)
|
|
$
|
(578,150
|
)
|
|
$
|
(594,824
|
)
|
|
PERA
|
|
|
51,389
|
|
|
|
-
|
|
|
Appreciation
|
|
|
(280,795
|
)
|
|
|
-
|
|
|
Total segment profit from continuing operations
|
|
$
|
(807,556
|
)
|
|
$
|
(594,824
|
)
|
Nine months ended March 31, 2021 and 2020:
|
|
|
Nine Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Revenues by segment:
|
|
|
|
|
|
|
|
Bombshell Technologies and corporate (*)
|
|
$
|
791,512
|
|
|
$
|
1,800,739
|
|
|
PERA
|
|
|
3,520,406
|
|
|
|
-
|
|
|
Appreciation
|
|
|
17,269,573
|
|
|
|
-
|
|
|
Total revenue from continuing operations
|
|
$
|
21,581,491
|
|
|
$
|
1,800,739
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
|
|
|
|
|
|
|
|
|
|
Bombshell Technologies and corporate (*)
|
|
$
|
(1,491,687
|
)
|
|
$
|
(1,725,340
|
)
|
|
PERA
|
|
|
(56,360
|
)
|
|
|
-
|
|
|
Appreciation
|
|
|
(1,078,205
|
)
|
|
|
-
|
|
|
Total segment profit from continuing operations
|
|
$
|
(2,626,252
|
)
|
|
$
|
(1,725,340
|
)
|
(*) Excludes discontinued operations related to assets held for sale
31
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 14 – Commitments and Contingencies
On December 13, 2019, Trendsic Corporation, Inc. (“Trendsic”), a related party entity which is 49% controlled by Joel A. Bonnette (former CEO of our wholly-owned subsidiary Bombshell Technologies, Inc.) filed a lawsuit in the 19th Judicial District Court in East Baton Rouge Parish, Louisiana against Joel A. Bonnette, Jared Bonnette, Bombshell Software, LLC and Bombshell Technologies, Inc. The plaintiff is disputing the ownership of certain intellectual property of Bombshell Technologies, Inc. and alleging misappropriation of trade secrets of Trendsic. Trendsic is seeking an unspecified amount of damages in excess of $75,000 and treble damages under the Louisiana Uniform Trade Secrets Act, as well as injunctive relief. The Company believes the claims by Trendsic are without merit and is vigorously defending against such claims. At the time of this report, the Company and the plaintiff have entered into confidential settlement negotiations. The Company has accrued $494,458 in accrued liabilities in respect of the estimated monetary settlement.
On September 4, 2020, Colorado Public Employees’ Retirement Association filed a lawsuit against our wholly owned subsidiary PERA, LLC in United States District Court for the District of Colorado. Plaintiff asserts claims against the Company for violation of the Colorado Consumer Protection Act, C.R.S. Sec. 6-1-113 and for common law unfair competition. Plaintiff alleges that the Company has created confusion amongst Colorado public employees as to the affiliation of the Company with Plaintiff. The Company denies the claims asserted against it and is vigorously defending the lawsuit. At this point, Plaintiff has not identified any monetary damages alleged to be sustained as a result of the Company’s conduct.
On May 25, 2017, Asurea Insurance Services, Inc. filed a lawsuit against Appreciation, LLC and three of our top agents in the Superior Court of California, Sacramento. Plaintiff asserts claims of Breach of Settlement Agreement, Breach of Implied Covenant of Good Faith and Fair Dealing, Specific Performance, Declaratory Relief, Intentional Interference with Prospective Economic Relations, Negligent Interference with Prospective Economic Relations, and Aiding and Abetting. Plaintiff alleges that the Parties breached the Settlement Agreement reached between the parties on September 1, 2014. The Company denies the claims asserted against it and is vigorously defending the lawsuit. The parties have attended mediation in an attempt to settle this case to no avail. At this point, Plaintiff has not proven any monetary damages alleged to be sustained as a result of the Company’s alleged conduct.
On September 15, 2017, Nathan Burks filed a lawsuit against Appreciation, LLC and three of our top agents in the Superior Court of California, Sacramento. Plaintiff asserts claims of Breach of Settlement Agreement, Breach of Associate Agreement, Common Count- Services Rendered, Intentional Interference with Contractual Relations, Negligent Interference with Prospective Economic Relations, Declaratory Relief, Money Had and Received, and Unfair Competition. Plaintiff alleges that when he left Appreciation and returned to Asurea (his original place of employment in 2014, and a corporate entity with which we are in litigation) (see above) that despite violating the associate agreement, he is owed money. The Company denies the claims asserted against it and is vigorously defending the lawsuit. The parties have an arbitration set in May of 2021 in an attempt to settle this case. At this point, Plaintiff has not proven any monetary damages alleged to be sustained as a result of the Company’s alleged conduct.
On the basis of current information, the availability of legal advice, and in management’s opinion, the Company is not currently involved in any legal proceedings which, individually or in the aggregate, would have a material adverse effect on its financial condition, operations and/or cash flows.
Note 15 - Subsequent Events
On April 1, 2021, the Company made cash payment of $20,000 to Carl Sanko, a director and the Secretary of the Company in respect to services provided to one of the Company’s subsidiaries.
On April 1, 2021 the Company entered into an agreement with its CEO, Terry Kennedy to extend the terms of his executive compensation contract for services provided through December 31, 2021 whereby Mr. Kennedy will receive a flat fee of 50,000 unregistered, restricted shares on each of April 1, 2021, July 1, 2021 and October 1, 2021.
On April 1, 2021 the Company entered into an executive compensation agreement with its CFO Trevor Hall whereunder each month beginning April 1, 2021 the Company shall pay Mr Hall a fixed fee of $5,000 per month at the discretion of the Company in cash or unregistered restricted common shares at a discount of 20% to the market price valued based on the average 3 lowest closing market prices over the 10 days immediately preceding the end of the month in which the fee is due.
On April 7, 2021 the Company issued 107,257 unregistered, restricted common shares to officers and directors as part of their respective executive and/or board compensation package. The Company valued the issuances at the closing price of the Company’s stock as traded on the OTCMarket on the date of the board resolution approving the issuance of the shares.
32
GROW CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2021
Note 15 - Subsequent Events (continued)
On April 19, 2021 the Company entered into a Consulting Agreement with OTC PR Group Inc. (the “Consultant”). Under the Agreement, the Consultant will provide consulting services related to marketing to new investors. The company will pay the Consultant $4,000 per month for 3 months and issue shares equivalent to $12,000 in exchange for the Consultant’s services. On May 14, 2021, the Company issued a total of 3,174 unregistered, restricted common shares to two third parties in respect of the first tranche of shares payable under the aforementioned agreement. The Company valued the issuance at the closing price of the Company’s stock as traded on the OTCMarket on the date of the board resolution approving the issuance of the shares.
On May 14, 2020 the Company issued 50,000 unregistered, restricted shares of the Company’s common stock to the Company’s CEO, Terry Kennedy, concurrent with approving an extension to his executive compensation contract, as compensation for the three-month period commencing January 1, 2021. The shares were valued at the closing price of the Company’s Common Stock as traded on the OTCMarkets on the date of the board resolution approving the issuance of the shares.
On May 14, 2021 the Company issued a total of 600,000 unregistered, restricted common shares to related entities for cash consideration of $150,000 under the terms of two share purchase agreements.
On May 15, 2021, the Company entered into Fee Agreements (collectively, the “Fee Agreements”) with each of (i) Jonathan Bonnette, CTO and (ii) Carl Sanko, a director and the Secretary of the Company. Under the Fee Agreements, on May 15, 2021, each of Mr. Bonnette, and Mr. Sanko were issued unregistered, restricted shares of Common Stock for services provided to the Company. Pursuant to the Fee Agreements:
(i)Mr. Bonnette received a fixed fee of $320,000 for his service as Chief Executive Officer of the Company and for outside business management and consulting services of which 1/3, or $106,667 is immediately payable by way of the issuance of unregistered, restricted shares of Common Stock and deemed to cover the three-month period from May 15, 2021to August 15, 2021. The balance of Mr. Bonnette’s compensation of $213,333 will vest monthly but be paid in shares of Common Stock quarterly in installments of $71,111 within 10 days following each of the three-month periods ending of November 15, 2021, February 15, 2022, and May 15, 2022.
(ii)Mr. Sanko received a fixed fee of $270,000 for his services as Secretary of the Company and for outside business management and consulting services, of which 1/3 or $90,000 was immediately payable by way of an upfront payment of unregistered, restricted shares of Common Stock deemed to cover the three-month period from May 15, 2021 to August 15, 2021; The balance of Mr. Sanko’s compensation of $180,000 will vest monthly but be paid in shares of Common Stock in quarterly in installments of $60,000 within 10 days following each of the three-month periods ending of November 15, 2021, February 15, 2022, and May 15, 2022.
On May 20, 2021, the Company issued a total of 53,406 unregistered restricted common shares to a director as part of his board compensation package for services provided during the period January 1 through June 30, 2021. The Company valued the issuances at the closing price of the Company’s stock as traded on the OTCMarket on the date of the board resolution approving the issuance of the shares.
On May 20, 2020 the Company issued an aggregate of 191,327 unregistered, restricted shares of the Company’s common stock to two of the Company’s officers as part of their executive compensation packages for the period up to an including May 15, 2021. The shares were valued at the closing price of the Company’s Common Stock as traded on the OTCMarkets on the date of the board resolution approving the issuance of the shares.
On May 20, 2020 the Company issued an aggregate of 226,758 unregistered, restricted shares of the Company’s common stock to two of the Company’s officers concurrent with approving extensions to their executive compensation contracts for payments for the period from May 1, 2021 to August 15, 2021. The shares were valued at the closing price of the Company’s Common Stock as traded on the OTCMarkets on the date of the board resolution approving the issuance of the shares.
33
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This quarterly report contains forward-looking statements relating to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "intends", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential", or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors which may cause our or our industry's actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance. You should not place undue reliance on these statements, which speak only as of the date that they were made. These cautionary statements should be considered with any written or oral forward-looking statements that we may issue in the future. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results, later events or circumstances or to reflect the occurrence of unanticipated events.
The management’s discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").
The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated and combined financial statements for the three and nine months ended December 31, 2020 and the notes thereto appearing elsewhere in this Report and the Company's audited financial statements for the fiscal year ended June 30, 2020, as filed with the Securities and Exchange Commission in our Form 10-K on October 13, 2020, along with the accompanying notes. As used in this quarterly report, the terms "we", "us", "our", and the "Company" means Grow Capital, Inc.
Overview
On June 22, 2018, the Board of Directors of the Company approved an amendment to our articles of incorporation to increase our authorized capital to 180,000,000 shares, consisting of 175,000,000 shares of common stock (“Common Stock”), par value $0.001, and 5,000,000 shares of preferred stock (“Preferred Stock”), par value $0.001 (the “Recapitalization”) and to change the name of the Company to “Grow Capital, Inc.” in order to reflect our plans to expand our business focus into the financial technology (“FinTech”) sector. The Company filed articles of amendment with the State of Nevada to effect the aforementioned changes on July 10, 2018 and August 28, 2018, respectively. The Company received approval from the Financial Industry Regulatory Authority ("FINRA") for the above noted corporate actions on August 8, 2019.
In connection with this strategy, the Company hired a new Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) and appointed a new chairman of the Company’s board of directors, all of whom have significant experience in the FinTech sector. The Company intends to acquire FinTech companies with a clear niche and strong leadership and use its experience and understanding of the FinTech sector and access to the public markets to help its acquisitions grow.
Keeping in line with our change of operational focus as set out above, on June 26, 2019 the Company entered into a stock exchange agreement (the “Exchange Agreement”) with Bombshell Technologies, Inc. (“Bombshell”) and the shareholders of Bombshell (the “Bombshell Holders”). Pursuant to the Exchange Agreement, which closed on July 23, 2019, the Company acquired 100% of the outstanding shares of Bombshell (the “Bombshell Shares”) in exchange for the Bombshell Holders receiving the right to receive 110,675,328 shares (the “Consideration Shares”) of unregistered shares of the Company’s Common Stock on a pro rata basis (the “Exchange”), 33,000,000 of which were issued to the Bombshell Holders (the “Closing Shares”) at the Closing on a pro rata basis. The remaining 77,675,328 Consideration Shares (the “Secondary Shares”) were issued on September 3, 2019 upon approval of the increase to the Company’s authorized common stock to 550,000,000 shares, consisting of 500,000,000 shares of Common Stock and 50,000,000 shares of Preferred Stock, effective August 29, 2019. The Bombshell Holders are also eligible to receive earn-out consideration of up to an additional 36,769,215 shares of Common Stock (the “Earn-out Shares”) earnable in tranches of 12,256,405 shares of Common Stock in each of the second, third and fourth years after the Closing, based on whether Bombshell is able to meet certain Earnings Before Interest and Taxes thresholds in each year. The Bombshell Holders include certain limited liability companies owned by (i) Jonathan Bonnette, the Company’s former CEO and current CTO (ii) Joel Bonnette, the Bombshell CEO and (iii) Terry Kennedy, a majority shareholder of the Company and current CEO.
Bombshell was formed as Bombshell Technologies, LLC on November 5, 2018 and converted into a corporation on June 24, 2019. Bombshell is a full-service design and software development company focused on developing and selling software to financial services firms and advisors and is the first acquisition as part of our strategic shift into the FinTech sector and related sectors.
On July 8, 2019, the Company entered into a non-binding letter of intent (the “LOI”) to acquire Encompass More Group, Inc.
34
(“Encompass”), a Nevada corporation. In connection with the LOI, Encompass issued a promissory note (the “Note”) to the Company pursuant to a loan agreement (the “Loan Agreement”), dated July 22, 2019, by and between Encompass and the Company, in exchange for a loan of $100,000 (the “Loan”). Pursuant to the Loan Agreement, the proceeds of the Loan will be used by Encompass for working capital and general corporate purposes. The Note has a twelve-month term, an interest rate of 5.0%, and is payable in monthly installments of $2,000, with all remaining principal and interest due on the maturity date, unless paid earlier by Encompass. The Board of Directors have subsequently determined not to proceed with the acquisition as contemplated under the LOI.
On September 4, 2019 the Company entered into a listing agreement for the sale of the Resort at Lake Selmac site location (formerly Smoke on the Water) for an offering price of $850,000, with expected 6% sales commission. Such listing agreement was extended in December 2019 under the same terms and conditions, expiring in March 2020. Further, despite originally listing the Resort at Lake Selmac property for sale during September 2019 upon expiry of the listing agreement March 31, 2020, the Company determined to delay the sale, and to continue to operate the rebranded Resort at Lake Selmac as a family friendly RV resort facility in fiscal 2020. The Resort opened for operations in fiscal 2021 on July 1, 2020 subsequent to a delay resulting from the impact of Covid-19 and certain state mandated facility closures. On January 27, 2021 the Company entered into sale agreement with a Buyer for the sale of the Resort at Lake Selmac site location for an offering price of $740,000. There are no commissions payable on the sale, and the sale is expected to close on March 3, 2021. As a result, the operations of the Resort at Lake Selmac have been reported as discontinued in the financial statements included herein.
In connection with the shift in the Company’s strategy away from rental activities focused in cannabis industry, the Company sold WCS on September 30, 2019 by way of a membership interest purchase agreement (the “Purchase Agreement”) with the Zallen Trust. Under the terms of the Purchase Agreement, the Company sold all of the Company’s membership interests in WCS for an aggregate purchase price of $782,450. The Zallen Trust paid the purchase price by transferring to the Company 8,693,888 shares of the Company’s Common Stock, valued at $0.09 per share. The Purchase Agreement also provided that Mr. Zallen transfer to the Company an additional 400,000 shares of Common Stock to settle $36,000 in back rent owed at the time of the sale. The Company retired all of the shares received as a result of the transaction. In connection with the sale of WCS, the Company and Mr. Zallen entered into a separation and release of claims agreement pursuant to which the Company and Mr. Zallen provided a mutual release of claims against the other party and such party’s affiliates, including all claims related to Mr. Zallen’s service as an officer, employee, and director of the Company. The release of claims by Mr. Zallen resulted in the forgiveness of salary accruals of approximately $367,000 for services provided up to June 30, 2018. Mr. Zallen was the former CEO, Chairman and President of the Company.
On April 1, 2020, Jonathan Bonnette, who has been the President and Chief Executive Officer of Grow since July 1, 2018, transitioned out of his role as President and Chief Executive Officer and become the Company’s Chief Technology Officer and the Chief Executive Officer of the Company’s subsidiary, Bombshell Technologies.
Mr. Terry Kennedy was appointed to succeed Mr. Bonnette as the President and Chief Executive Officer of the Company, effective April 1, 2020.
On May 13, 2020 the Company’s Board of Directors approved a 1 for 20 reverse split whereby shareholders would receive one (1) post reverse split share of Common Stock for each twenty (20) pre-split shares of Common Stock. The Company would pay cash to shareholders who were left with only a fractional share and would round up any other partial shares to the nearest whole share. The corporate action was approved by FINRA and become effective on July 30, 2020 and all share and per share data included in this Annual Report has been retroactively impacted to reflect the share split.
Keeping with management’s determination to acquire complementary revenue generating operations, on August 19, 2020, the Company acquired PERA LLC, a Nevada limited liability company (“PERA”), pursuant to an exchange agreement (the “Exchange Agreement”), effective as of August 3, 2020 (the “Effective Date”), by and between PERA, the members of PERA (the “PERA Members”), and the Company. As a result, PERA became a wholly-owned subsidiary of the Company. At the time of the acquisition of PERA LLC, the Company determined that Appreciation Financial was under common control with PERA LLC, as they are both controlled by our Chief Operating Officer, Terry Kennedy (see Note 4). Additionally, Appreciation was considered to be a primary beneficiary of PERA LLC. The Company has had discussions with the members of Appreciation Financial about potential combinations, which as of the date of these financial statements are not yet probable. However, because of the nature of the relationship, the Company determined that while Appreciation Financial is not a variable interest entity to the Company, the nature of the common control relationship coupled with the inter-relationship with PERA LLC meant that in order for the results of operations and financial position to not be misleading, the Company had to combine its results with those of Appreciation Financial upon the acquisition of PERA, LLC.
Pursuant to the Exchange Agreement, at the Closing, the Company acquired 100% of the outstanding membership interests of PERA (the “PERA Ownership Interests”) in exchange for 9,358,185 unregistered restricted shares of the Company’s common stock on a pro rata basis (the “Exchange”). At the Closing, the PERA Members conveyed all of the right, title and interest in and to the PERA Ownership Interests in exchange for the right to receive a number of shares of GC Common Stock equal to an exchange ratio (the “Exchange Ratio”). The Exchange Ratio is calculated by dividing (a) the Exchange Shares (as defined below) by (b) the total number of shares of PERA Ownership Interests outstanding immediately prior to the Effective Date.
35
“Exchange Shares” means the number of shares of GC Common Stock obtained by dividing (a) $10,000,000 by (b) the 10-day volume weighted average price per share (“VWAP”) calculated immediately before the date that the previously announced reverse stock split of GC Common Stock became effective on OTCQB, July 30, 2020.
In addition, if PERA meets certain yearly targeted gross revenues for each of year one, two, and three following the Closing, the PERA owners may earn a cumulative total of up to $5,000,000 of shares of GC Common Stock (the “Earn-out Shares”) to be determined using the applicable 10-day VWAP stock price of the Company’s common stock preceding each earn-out period calculation date as set forth in the Exchange Agreement in connection with all of the three years, subject to certain catch up provisions if such yearly period targets are not met in the applicable period.
The PERA Members include certain limited liability companies owned by (i) Terry Kennedy, the CEO of the Company, (ii) Jonathan Bonnette, the CTO of the Company and the CEO of Bombshell Technologies, Inc., a subsidiary of the Company, (iii) Joel Bonnette, brother of Jonathan Bonnette, and (iv) Carl Sanko, a director and Secretary of the Company, and (v) Jared Bonnette, brother of Jonathan Bonnette.
With the acquisition of PERA LLC, and concurrent combination of the operations of Appreciation Financial, the Company expanded its operations into lead generation services and insurance brokerage. PERA LLC provides public employee retirement services, serving as an appointment portal for agents to schedule qualified appointments with public employees seeking financial planning for retirement and other associated insurance coverage. Appreciation Financial LLC has a network of member agents offering full-service retirement planning servicing public employees and their families providing policies from a series of insurance carriers that meet their retirement planning requirements.
On September 25, 2020 the Company and Encompass More Group Inc. (the “Borrower”) entered into an addendum to the July 22, 2019 Commercial Loan Agreement (the “Addendum”) in order to modify certain of the terms and conditions. Under the Addendum, the Borrower shall enter into a new promissory note in the principal amount of $72,000, with any unpaid interest due and payable at June 30, 2020 to accrue and become due and payable on October 1, 2021. Further under the terms of the promissory note the Borrower shall make twelve (12) installment payments of $6,000 commencing November 1, 2020, until the principal balance of the loan is repaid in full, at which time all accrued and unpaid interest shall come due and payable. Interest on the promissory note shall continue to accrue at a rate of Five (5%) per annum. Concurrent with the execution of the Addendum, the Borrower made a lump sum payment of $16,510 to reduce the principal of the original $100,000 loan to $72,000. As at January 31, 2021 Encompass was current with the required installment payments and the principal balance of the loan totaled $54,000.
On September 30, 2020 Terry Kennedy, CEO, and Eric Tarno, CEO of acquired subsidiary, PERA LLC, were appointed to the Company’s Board of Directors effective October 1, 2020.
Grow Capital expects to identify additional suitable acquisitions, complete those acquisitions, and grow those companies as part of our transition to a Fintech company. Any potential acquisitions or divestitures remain subject to final agreements, due diligence, and typical closing conditions.
Current Operations
Grow Capital has shifted its operational mandate with the acquisition of Bombshell and PERA to becoming a solution-oriented company focused on software, and developing the best professional technology (ie: FinTech) and financial services companies in the market. Our current management team consists of consultants and entrepreneurs that have combined decades of experience in this sector. Fintech is a term used to describe financial technology, an industry encompassing any kind of technology in financial services. This includes businesses and consumers and generally includes companies that provide financial services through software or other technology and ranging from mobile payment apps to cryptocurrency.
Operating Subsidiaries
Resort at Lake Selmac
On January 27, 2021 the Company entered into an agreement with a Buyer for the sale of the Resort at Lake Selmac site location for an offering price of $740,000. The transaction closed on March 3, 2021 and there were no commissions payable. As a result, the operations of the Resort at Lake Selmac are reported as discontinued in the financial statements included herein.
36
Bombshell Technologies, Inc.
Bombshell was formed as Bombshell Technologies, LLC on November 5, 2018 and converted into a corporation on June 24, 2019. Bombshell is a full-service design and software development company focused on developing and selling software to financial services firms and advisors and was our first acquisition as part of our strategic shift into the FinTech sector and related sectors.
Bombshell Technologies has operations in both Nevada and Louisiana, providing software to several large financial services organizations and leading the way on innovative industry-specific solutions for sales teams and management.
Bombshell Technologies is a solution-oriented company focused on software, technology and financial services business (i.e. FinTech). Our current management team consists of consultants and entrepreneurs that have combined decades of experience in this sector. Fintech is a term used to describe financial technology, an industry encompassing any kind of technology in financial services. This includes businesses and consumers and generally includes companies that provide financial services through software or other technology and ranging from mobile payment apps to cryptocurrency.
Bombshell's current software suite delivers customized back office compliance, sophisticated multi-pay commission processing, and a unique new client application submission system, along with digital engagement marketing services centric to financial services. In addition to our software customization, licensing and subscription service contracts which generate revenue through user subscriptions as well as ongoing customization services and maintenance, we offer ad hoc services including web hosting and website development and other complementary professional services which are invoiced on an “as-provided” basis.
Bombshell earns revenue from a combination of activities including monthly user fees for access to customized back end software, website development, and other professional services including maintenance and ongoing customization of its SAAS product offerings.
PERA LLC
PERA LLC, acquired in August 2020, provides public employee retirement assistance and currently works with employees of school districts, colleges, universities, and other public institutions nationwide. Every state licensed representative is appointed with one or more of the institution’s approved vendors.
Headquartered in Nevada, PERA connects retirement professionals and public employees who want help during school and government building closures. PERA has over 5,000 trusted advisors in its network to help public employees and has successfully set near half a million appointments for its’ clients since its inception.
PERA has continued assisting in the public employee sector of financial and retirement planning during COVID 19 as everyone is working from home and only taking online meetings. PERA’s use of technology, with its back office running Bombshell Technologies software, has been helping employees achieve their goals of getting retirement ready and kept agents in business. Serving major insurance and financial service companies, PERA intends to expand its client base through new ownership by Grow Capital.
PERA provides vetted appointments - not leads - to agents. PERA began as a way to put safety of public employees and students first - minimizing campus “walk-ons” by using an electronic scheduling program to ensure only licensed representatives with scheduled appointments visited your campus.
In our current virtual world, PERA offers fully electronic appointments through their live interactive meeting platform. Their virtual meetings allow employees to receive the expert, honest and reliable financial advice they deserve on their own time. PERA’s approach to the market is reflected in their significant growth over the last year. They have established a network of advisors who understand public employee’s professional lives and how to make their income last a lifetime.
COMBINED OPERATIONS OF APPRECIATION FINANCIAL LLC AND APPRECIATION REWARDS LLC
The operations of combined entity Appreciation Financial LLC and Appreciation Rewards, headquartered in Nevada, include full-service retirement planning by member agents which service public employees and their families providing policies from a series of insurance carriers that meet their retirement planning requirements.
37
RESULTS OF OPERATIONS FROM CONTINUING OPERATIONS
The Company shifted its focus to the FinTech sector during fiscal 2020 and has acquired operating, revenue generating subsidiaries, Bombshell and PERA. Further, in line with the shift in focus to FinTech, the Company divested WCS effective September 30, 2019 and the Resort at Lake Selman on March 3, 2021, and the operations for both of the aforementioned subsidiaries have been included in discontinued operations in the current reporting period for each of the three and nine months ended March 31, 2021 and 2020. Financial results for the three and nine months ended March 31, 2021 include the current operations of wholly owned subsidiaries, Bombshell and PERA, as well as Pera Administrators LLC, the operations of which are for the sole benefit of PERA LLC. In addition, the Company has combined the financial results of Appreciation Financial LLC and Appreciations Rewards LLC, deemed to be common control entities, for the period from August 19, 2020 to March 31, 2021, in order for the results of the Company’s operations and financial position to not be misleading. All material intercompany accounts, transactions, and profits have been eliminated in consolidation. Financial results for the three and nine months ended March 31, 2020 are “combined” with respect to the operations of Bombshell Technologies, Inc. under the requirements of ASC 850-50-45, which results impact the statements of profit and loss and statements of cash flows to include operations of Bombshell Technologies Inc. as though it had been acquired on inception.
Three Months Ended March 31, 2021 compared to Three Months ended March 31, 2020
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
8,056,391
|
|
|
$
|
30,707
|
|
|
|
Revenue, related parties
|
|
|
15,085
|
|
|
|
534,607
|
|
|
|
Total revenues
|
|
|
8,071,476
|
|
|
|
565,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, nonrelated parties
|
|
|
5,759,095
|
|
|
|
290,285
|
|
|
|
Cost of sale, related parties
|
|
|
938,655
|
|
|
|
-
|
|
|
|
Total cost of sales
|
|
|
6,697,750
|
|
|
|
290,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,373,726
|
|
|
|
275,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1,293,133
|
|
|
|
596,234
|
|
|
|
General and administrative, related parties
|
|
|
574,571
|
|
|
|
56,819
|
|
|
|
Professional fees
|
|
|
499,384
|
|
|
|
215,042
|
|
|
|
Settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
Depreciation, amortization and impairment
|
|
|
(868
|
)
|
|
|
1,758
|
|
|
|
Total operating expenses
|
|
|
2,366,220
|
|
|
|
869,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(992,494
|
)
|
|
|
(594,824
|
)
|
|
Revenue and costs of revenue
During the three months ended March 31, 2021 we generated revenues of $8,071,476, of which $15,085 was derived from related party customers, compared to $565,314 in the comparative three months ended March 31, 2020, of which $534,607 was derived from related party customers. Costs of sales in the current three months totaled $6,697,750 of which $938,655 were costs of related party services, compared to $290,285 for the three months ended March 31, 2020 of which $Nil were costs of related party services. Gross profit for the comparative three-month periods ended March 31, 2021 and 2019, respectively totaled $1,373,726 and $275,029. Reported revenues in the three months ended March 31, 2021 include operations of our wholly owned subsidiaries Bombshell as well as the revenues generated by PERA LLC (for the period from acquisition on August 19, 2020 through March 31, 2021). In addition, March 31, 2021 revenue results include results from Appreciation Financial LLC and Appreciations Rewards LLC deemed to be common control entities, for the period from August 19, 2020 to March 31, 2021, in order for the results of the Company’s operations and financial position to not be misleading upon its acquisition of PERA LLC. Revenues for the comparative three month period ended March 31, 2020 were generated by Bombshell.
38
Operating expenses
Three months ended March 31, 2021 and 2020
Our general and administrative expenses consist of rent, telephone, internet services, banking charges, salaries, consulting fees and miscellaneous office costs.
The Company experienced an increase in operating expenses from $869,853 during the three months ended March 31, 2020 to $2,366,220 during the three months ended March 31, 2021. The increase in operating expenses is predominantly attributable to substantial increases in general and administrative expenses, including related party general and administrative expenses, and professional fees, as well as the impact of the additional expenses of subsidiary PERA LLC and the operating results of combined entities Appreciation Financial LLC and Appreciation Rewards. Professional fees increased period over period from $215,042 to $499,384 as the Company undertook various corporate actions and acquired PERA LLC in the period, substantially increasing audit and accounting fees, as well as operations in the normal course and certain legal fees related to ongoing litigation. General and administrative fees also increased in the current three-month period ended March 31, 2021 from $596,234 (2020) to $1,293,133 in the three months ended March 31, 2021. This was a direct result of increased operations period over period related to Bombshell, newly acquired PERA LLC and the operations of combined entities Appreciation Financial LLC and Appreciation Rewards. General and administrative expenses reported include stock based compensation to certain board members, employees and consultants for services rendered at rates below market, the total combined value of which was $503,171 for the three months ended March 31, 2020 compared to stock issuances for total consideration of $383,158 in the current three months ended March 31, 2021. Further, general and administrative fees incurred from related parties also increased period over period from $56,819 in the three months ended March 31, 2020 to $574,571 in the three months ended March 31, 2021 predominantly from the combination of common control entities Appreciation Financial LLC and Appreciation Rewards. Depreciation, amortization and impairment decreased from $1,758 to a credit of $868 in the current three-month period, directly as a result of the divestiture of a vehicle by common control entity Appreciation Financial, the depreciation for which incurred prior was reversed in the current period.
We expect operating expenses to increase in future periods as we continue to expand our holdings seeking additional areas of operation to further enhance our existing revenue base.
Other Income (Expenses)
Other income of $184,938 recorded in the three months ended March 31, 2021 includes interest expense of $68,226 primarily from loans and a line of credit from National life to Appreciation Financial LLC with no comparable expense in the prior comparative period. Interest expenses are reduced in the three months ended March 31, 2021 by interest income of $2,392 related to a short term loan receivable from a third party, and other income of $250,772 as a result of the forgiveness of PPP loans received by common control entity Appreciation Financial in the period. Other income reported of $1,657 for the three-month period ended March 31, 2020 reflects interest income related to a short term loan receivable from a third party.
Net losses from continuing operations in the three months ended March 31, 2021 and 2020 totaled $807,556 and $593,167, respectively.
Discontinued operations
The Company entered into an agreement for the sale of The Resort at Lake Selmac on January 27, 2021which closed on March 3, 2021. As a result the operations of the Resort have been included in discontinued operations for the three months ended March 31, 2021 and 2020. During the three months ended March 31, 2021 and 2020, the Company reported a loss from discontinued operations of $34,956 and $20,212, respectively.
Net losses
Net losses attributable to members of Appreciation LLC and Appreciation Rewards totaling $280,795 are included in the three months ended March 31, 2021 net loss reported of $842,512. Net losses in the three months ended March 31, 2020 were $613,379.
39
Nine Months Ended March 31, 2021 compared to Nine Months ended March 31, 2020
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
$
|
21,095,963
|
|
|
$
|
142,830
|
|
|
Revenue, related parties
|
|
|
|
485,528
|
|
|
|
1,657,909
|
|
|
Total revenues
|
|
|
|
21,581,491
|
|
|
|
1,800,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, nonrelated parties
|
|
|
|
15,169,064
|
|
|
|
714,109
|
|
|
Cost of sale, related parties
|
|
|
|
2,488,297
|
|
|
|
186,354
|
|
|
Total cost of sales
|
|
|
|
17,657,361
|
|
|
|
900,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
3,924,130
|
|
|
|
900,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
3,098,025
|
|
|
|
1,712,152
|
|
|
General and administrative, related parties
|
|
|
|
1,597,843
|
|
|
|
167,261
|
|
|
Professional fees
|
|
|
|
1,432,343
|
|
|
|
743,894
|
|
|
Settlement
|
|
|
|
494,458
|
|
|
|
-
|
|
|
Depreciation, amortization and impairment
|
|
|
|
10,635
|
|
|
|
7,032
|
|
|
Total operating expenses
|
|
|
|
6,633,304
|
|
|
|
2,630,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
|
(2,709,174
|
)
|
|
|
(1,730,063
|
)
|
Revenue and costs of revenue
During the nine months ended March 31, 2021 we generated gross revenues of $21,581,491, of which $485,528 was derived from related party customers, compared to $1,800,739 in the comparative nine months ended March 31, 2020, of which $1,657,909 was derived from related party customers. Costs of sales in the current nine months totaled $17,657,361 of which $2,488,297 were costs of related party services, compared to $900,463 for the nine months ended March 31, 2020 of which $186,354 were costs of related party services. Gross profit for the comparative nine-month periods ended March 31, 2021 and 2020, respectively totaled $3,924,130 and $900,276. Reported revenues in the nine months ended March 31, 2021 include operations of our wholly owned subsidiaries Bombshell, as well as the revenues generated by PERA LLC for the period from acquisition (August 19, 2020 through March 31, 2021). In addition, March 31, 2021 revenue results include results from Appreciation Financial LLC and Appreciations Rewards LLC deemed to be common control entities, for the period from August 19, 2020 to March 31, 2021, upon our acquisition of PERA, LLC in order for the results of the Company’s operations and financial position to not be misleading. Revenues for the comparative nine-month period ended March 31, 2020 were generated by Bombshell.
Operating expenses
Nine months ended March 31, 2021 and 2020
Our general and administrative expenses consist of rent, telephone, internet services, banking charges, salaries, consulting fees and miscellaneous office costs.
The Company experienced an increase in operating expenses from $2,630,339 during the nine months ended March 31, 2020 to $6,633,304 during the nine months ended March 31, 2021. The increase in operating expenses is predominantly attributable to an increase in general and administrative expenses, including related party general and administrative expenses, and professional fees, as well as the impact of the additional expenses of subsidiary PERA LLC and the operating results of combined entities Appreciation Financial LLC and Appreciation Rewards. Professional fees increased period over period from $743,894 to $1,432,343 as the Company undertook various corporate actions and acquired PERA LLC in the period, experienced substantially increased costs for accounting and audit, including an increase in professional fees related to operations in the normal course and certain legal fees related to ongoing legal matters. General and administrative fees also increased in the current nine-month period ended March 31, 2021 from $1,712,152 (2020) to $3,098,025 in the nine months ended March 31, 2020. This was a direct result of increased operations period over period related to Bombshell, newly acquired PERA LLC and the operations of combined entities Appreciation Financial LLC and Appreciation Rewards. General and administrative expenses also include compensation to certain board members, employees and consultants for services rendered at rates below market, the total combined value of which was $957,523 for the nine months ended March 31, 2021 compared to
40
stock issuances for total consideration of $1,508,278 in the nine months ended March 31, 2020, of which $241,271 was recorded as prepaid expenses to be amortized over the period of service. Further, general and administrative fees incurred from related parties also increased period over period from $167,261 in the nine months ended March 31, 2020 to $1,597,843 in the nine months ended March 31, 2021 predominantly from the combination of common control entities Appreciation Financial LLC and Appreciation Rewards. During the current nine months ended March 31, 2021 the Company recorded $494,458 in respect to an accrual for a negotiated legal settlement, with no similar expense in the prior comparative nine months ended March 31, 2020. Depreciation, amortization and impairment increased from $7,032 to $10,635 in the current nine-month period.
We expect operating expenses to increase in future periods as we continue to expand our holdings seeking additional areas of operation to further enhance our existing revenue base.
Other Expenses
Other income of $82,922 recorded in the nine months ended March 31, 2021 includes interest expense of $174,435 primarily from loans and a line of credit from National life to Appreciation Financial LLC with no comparable expense in the prior comparative period. Interest expenses are reduced in the nine months ended March 31, 2021 by interest income of $6,585 related to a short term loan receivable from a third party, and other income of $250,772 as a result of the forgiveness of PPP loans received by common control entity Appreciation Financial in the period. Other income reported of $4,723 for the nine-month period ended March 31, 2020 reflects interest income related to a short term loan receivable from a third party.
Net losses from continuing operations in the nine months ended March 31, 2021 and 2019 totaled $2,626,252 and $1,725,340, respectively.
Discontinued operations
The Company sold wholly owned subsidiary WCS effective September 30, 2019. The effect of the sale and operations prior to the sale are included in discontinued operations. Further, the Company sold The Resort at Lake Selmac on March 3, 2021, and as a result the operations of the Resort have also been included in discontinued operations for the nine months ended March 31, 2021 and 2020. During the nine months ended March 31, 2021 and 2020, the Company reported income from discontinued operations of $5,244 and $482,302, respectively. The income from discontinued operations in the nine months ended March 31, 2020 includes a gain of $492,439 from the sale of WCS. The Company recorded a loss from the sale of the Resort at Lake Selmac of $31,075.
Net losses
Net losses including net losses attributable to members of Appreciation LLC and Appreciation Rewards totaling $1,078,205 in the nine months ended March 31, 2021 was $2,621,008. Net losses in the nine months ended March 31, 2020 was $1,243,038.
Liquidity and Financial Condition
Liquidity and Capital Resources
|
|
At
March 31, 2021
|
|
At
June 30,
2020
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
1,497,423
|
|
|
$
|
1,510,814
|
|
|
Current Liabilities
|
|
|
3,051,230
|
|
|
|
1,627,639
|
|
|
Working Capital
|
|
$
|
(1,553,807
|
)
|
|
$
|
(116,825
|
)
|
As of March 31, 2021, the Company had total current assets of $1,497,423 and negative working capital of $1,553,807 compared to total current assets of $1,510,814 and negative working capital of $116,825 as of June 30, 2020. The decrease in our working capital was primarily a result of an increase to current accrued liabilities in relation to commissions payable by combined entity Appreciation Financial LLC and the accrual of certain anticipated legal settlement amounts.
During the nine months ended March 31, 2021, the Company reported net cash used in operations of $857,192, primarily as a result of a net loss from continuing operations of $2,626,252. The net loss from continuing operations was offset by stock-based compensation of $957,523, a loss on an expected legal settlement of $494,458, depreciation and amortization expenses of $10,635, the disposal of fixed assets to an employee as compensation of $5,566, amortization of right to use assets of $16,419 and impairment of other current assets of $6,900. Further during the nine months ended March 31, 2021 we decreased our accounts receivable by $66,334, decreased our related party accounts receivable by $228,639, decreased our prepaid expenses by $23,093, decreased our accounts payable by $23,392 and decreased our related party accounts payable by $22,418 while increasing our unearned revenue by $7,561. In the nine
41
months ended March 31, 2020, net cash used in operating activities totaled $609,190 with a net loss from continuing operations of $1,725,340, offset by stock-based compensation of $,508,278, amortization of rights to use assets of $2,377 and depreciation and amortization expenses of $7,032. During the nine months ended March 31, 2020 we increased our prepaid expenses by $7,139, our accounts receivable by $81,381, and our accounts receivable – related parties increased by $192,497. We reduced accounts payable by $159,734 and unearned revenue by $6,240. Accounts payable related parties increased by $45,452.
Net cash used in investing activities in the nine months ended March 31, 2020 was $34,121, as compared to net cash provided of $1,066,446 in the nine months ended March 31, 2021. Cash provided by due from related party in the nine months ended March 31, 2020 totaled $16,854 with no comparative balance in the current nine months ended March 31, 2021. During the nine months ended March 31, 2020 the Company received cash from the acquisition of Bombshell of $43,975, whereas during the nine months ended March 31, 2021 the Company received cash from an acquisition and the combination of entities under common control of $884,273. Cash used in promissory notes receivable as a result of a loan to a third party totaled $94,950 in the nine months ended March 31, 2020 as compared to repayments of promissory note receivable of $34,510 in the current nine months ended March 31, 2021. During the nine months ended March 31, 2021, the Company received cash from the sale of the Resort at Lake Selmac of $147,663 with no similar transaction in the prior comparative period.
Net cash provided by financing activities was $607,364 in the nine months ended March 31, 2021 as compared to $336,879 in 2020. During the current nine-month period ended March 31, 2021, the Company closed private placements for total proceeds of $450,000, compared to total proceeds of $350,000 from private placements during the comparable period ended March 31, 2020. Cash from financing activities in the nine months ended March 31, 2020 was offset by a repayment to a related party of $13,121 as compared to proceeds received from a related party in the current nine-month period ended March 31, 2021 in the amount of $200,000. During the current nine months ended March 31, 2021 the Company repaid debt of $42,636 with respect to certain loan obligations of combined entity Appreciation Financial LLC with no comparable transactions in the comparative nine-month period.
Net cash used by discontinued activities totaled $20,621 in the nine months ended March 31, 2020, as compared to net cash provided by discontinued operations of $34,064 in the current nine months ended March 31, 2021.
Going Concern
During the nine month periods ended March 31, 2021 and 2020, the Company reported a net loss of $2,621,008 and $1,243,038, respectively. The Company had a working capital deficit of $1,553,807, with approximately $1,097,000 of cash on hand as of March 31, 2021. Cash used in operations totaled $857,192 during the nine months ended March 31, 2021. The Company continues to work actively to increase its customer/client base and increase gross profit in Bombshell Technologies and PERA LLC, in order to achieve net profitability by the close of fiscal 2021. For any operational shortfalls, the Company intends to rely on sales of our unregistered common stock, loans and advances until such time as we achieve profitable operations. In addition, the current presentation is based on the fact that the Company is currently in negotiations to acquire Appreciation Financial LLC and its related entities. Should that not occur, its possible that the Company will no longer combine its results with those of Appreciation Financial LLC and its related entities. If the Company fails to generate positive cash flow or obtain additional financing, when required and on acceptable terms, the Company may have to modify, delay, or abandon some or all of its business and expansion plans, and potentially cease operations altogether. Consequently, the aforementioned items raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The accompanying consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.
Covid-19 Pandemic
The recent COVID-19 pandemic could have an adverse impact on our ongoing operations. To date the Company’s primary operating segments, Bombshell and PERA LLC have not experienced a decline in sales as a result of the impact of COVID-19, and in fact, have increased sales due to the increase in demand for virtual appointments which can be serviced by PERA LCC as a part of their core operational mandate. In addition, the Company’s operations in the FinTech sector are carried out with a limited amount of person to person contact and we do not expect an impact on these operations as a result of COVID 19, however, the full effect of the COVID-19 outbreak continues to evolve as of the date of this report, is highly uncertain and subject to change. Operations of the Company’s Resort at Lake Selmac property, now included in discontinued operations, were delayed until July 2020 when the government permitted the resort to reopen, however since that time the resort had continued to receive regular bookings and had returned to normal operating parameters up until its sale on March 3, 2021. As a result, Management does not expect the delay in opening the resort for the 2020-2021 season to substantially impact profitable operations for this business in the long term. Management is actively monitoring the situation but given the daily evolution of the COVID-19 outbreak, the Company is not able to estimate the effects of the COVID-19 outbreak on its operations or financial condition in the next 12 months. While significant uncertainty remains, the Company does not believe the COVID-19 outbreak will have a negative impact on its ability to raise additional financing, conclude the acquisition of targeted business operations or reach profitable operations.
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Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. On an on-going basis, management evaluates its estimates and judgments which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances. The results of their evaluation form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions and circumstances. Our significant accounting policies are more fully discussed in the Notes to our Financial Statements. Refer to Note 2 of the Unaudited Condensed Consolidated and Combined Financial Statements included herein.
Recent Accounting Pronouncements
There were various accounting standards and interpretations issued recently, none of which are expected to have a material effect on the Company’s operations, financial position or cash flows.