PART II AND III 2 tm201387d1_partiiandiii.htm PART II AND III

 

 

FORM 1-A DISCLOSURE FORMAT

PART II

OFFERING CIRCULAR

 Groundfloor Finance Inc.

 

Twelve Series of Limited Recourse Obligations

Totaling $1,824,510

 

Dated: January 7, 2020

 

This Post-Qualification Offering Circular Amendment No. 70 (this “PQA”), made on the Form 1-A disclosure format, amends the offering circular of Groundfloor Finance Inc, dated December 29, 2017, as qualified on January 4, 2018, and as may be amended and supplemented from time to time (the “Offering Circular”), to add additional securities to be offered pursuant to the Offering Circular. This PQA relates to the offer and sale of up to an additional $1,824,510 in aggregate amount of Limited Recourse Obligations (the “LROs”) to be issued by Groundfloor Finance Inc. (the “Company,” “we,” “us,” or “our”). Unless otherwise defined below, capitalized terms used herein shall have the same meanings as set forth in the Offering Circular. See “Incorporation by Reference of Offering Circular” below.

 

We make LROs available for investment on our web-based investment platform www.groundfloor.com (the “Groundfloor Platform”). Our principal offices and mailing address are located at 600 Peachtree Street, Suite 810, Atlanta, GA 30308. The phone number for these offices is (404) 850-9225.

 

We will issue the LROs in distinct series, each corresponding to a real estate development project (each, a “Project”) financed by a commercial loan from us (each, a “Loan”). The borrower for each Project is a legal entity (the “Borrower”) that owns the underlying property and has been organized by one or more individuals (each, a “Principal”) that own and operate the Borrower. This PQA relates to the offer and sale of each separate series of LROs corresponding to the Projects for which we extend Loans, as described below (the “Offering”).

 

The LROs will be unsecured special, limited obligations of the Company. The LROs are not listed on any national securities exchange or on the over-the-counter inter-dealer quotation system. There is no market for the LROs. Our obligation to make payments on a LRO is limited to an amount equal to each holder’s pro rata share of amount of payments, if any, actually received on the corresponding Loan, net of certain fees and expenses retained by us. See the sections titled “General Terms of the LROs,” “The LROs Covered by this Offering Circular,” and “Project Summaries” of the Offering Circular, as amended hereby, for the specific terms of the LROs covered by this PQA.

 

We do not guarantee payment of the LROs in the amount or on the time frame expected. The LROs are not obligations of the Borrowers or their Principals, and we do not guarantee payment on the corresponding Loans. We have the authority to modify the terms of the corresponding Loans which could, in certain circumstances, reduce (or eliminate) the expected return on your investment. See the “General Terms of the LROs—Administration, Service, Collection, and Enforcement of Loan Documents” section on page 106 of the Offering Circular.

 

The LROs are speculative securities. Investment in the LROs involves significant risk, and you may be required to hold your investment for an indefinite period of time. You should purchase these securities only if you can afford a complete loss of your investment. See the “Risk Factors” section on page 12 of the Offering Circular.

 

Generally, no sale may be made to you in this offering to the extent that the aggregate purchase price you pay is more than 10% of the greater of your annual income or net worth. Different rules apply to accredited investors and non-natural persons. Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(c) of Regulation A. For general information on investing, we encourage you to refer to www.investor.gov.

 

We will commence the offering of each series of LROs promptly after the date this PQA is qualified by posting on the Groundfloor Platform a separate landing page corresponding to each particular Loan and Project (each, a “Project Summary”). The offering of each series of LROs covered by this PQA will remain open until the earlier of (1) 30 days, unless extended, or (2) the date the offering of a particular series of LROs is fully subscribed with irrevocable funding commitments (the “Offering Period”); however, we may extend the Offering Period for a particular series of LROs in our sole discretion (with notice to potential investors) up to a maximum of 45 days. We will notify investors who have previously committed funds to purchase such series of LROs of any such extension by email and will post a notice of the extension on the corresponding Project Summary on the Groundfloor Platform.

 

This Offering is being conducted on a “best-efforts” basis, which means that our officers will use their commercially reasonable best efforts in an attempt to sell the LROs. Such officers will not receive any commission or any other remuneration for these sales. In offering the LROs on our behalf, the officers will rely on the safe harbor from broker-dealer registration set out in Rule 3a4-1 under the Securities Exchange Act of 1934, as amended.

   

THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION DOES NOT PASS UPON THE MERITS OF OR GIVE ITS APPROVAL TO ANY SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SOLICITATION MATERIALS. THESE SECURITIES ARE OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE COMMISSION; HOWEVER, THE COMMISSION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES OFFERED HEREUNDER ARE EXEMPT FROM REGISTRATION.

 

    Offering price
to the public		     Underwriting
discounts and
commissions		     Proceeds to
issuer(1)(2)		     Proceeds to other
persons		  
Per Unit   $ 10.00       N/A     $ 10.00       N/A  
Total Minimum   $ 0.00       N/A     $ 0.00       N/A  
Total Maximum   $ 1,824,510       N/A     $ 1,824,510       N/A  

 

(1) We estimate all expenses for this Offering to be approximately $1,000, which will not be financed with the proceeds of the Offering.

(2) Assumes no promotions or discounts applied to any offerings covered by this PQA.

  

 

 

 

Incorporation by Reference of Offering Circular

 

The Offering Circular, including this PQA, is part of an offering statement (File No. 024-10753) that we filed with the Securities and Exchange Commission. We hereby incorporate by reference into this PQA all of the information contained in the following:

 

1.Part II of the Offering Circular, including the form of LRO Agreement beginning on page LRO-1 thereof to the extent not otherwise modified or replaced by offering circular supplement and/or post-qualification amendment.
2.Post-Qualification Amendment No. 43 to the Offering Circular, disclosing year end audited statements and revised MD&A.
3.Post-Qualification Amendment No. 69 to the Offering Circular, disclosing additional securities for sale.
4.Supplement No. 22 to the Offering Circular, disclosing loan performance.

 

Note that any statement that we make in this PQA (or have made in the Offering Circular) will be modified or superseded by any inconsistent statement made by us in a subsequent offering circular supplement or post-qualification amendment.

 

The LROs Covered by the Offering Circular and Use of Proceeds

 

The following disclosure is added on pages 109 and 110 of the Offering Circular under the table included under “The LROs Covered by this Offering Circular” and “Use of Proceeds,” respectively:

 

The table below lists the additional Projects covered by this PQA. Each series of LROs is denominated by the corresponding Project’s name.

 

Series of LROs/Project   Aggregate Purchase
Amount/Loan
Principal		  
412 SOUTH OLIVE STREET, SAN ANTONIO, TX 78203   $ 113,280  
8358 SOUTH PERRY AVENUE, CHICAGO, IL 60620     115,450  
8201 SOUTHWEST 103RD ST. ROAD, OCALA, FL 34481     124,380  
1312 NASH ROAD NORTHWEST, ATLANTA, GA 30331     129,400  
2096 KIPLING CIRCLE SOUTHEAST, ATLANTA, GA 30315     136,350  
6558 SOUTH RHODES AVENUE, CHICAGO, IL 60637     141,230  
4001 WINGATE DRIVE #2, RALEIGH, NC 27609     143,270  
4001 WINGATE DRIVE #1, RALEIGH, NC 27609     150,000  
25405 EDGEMONT DRIVE, SOUTHFIELD, MI 48033     174,950  
1 WAYSIDE ROAD, BERLIN, NJ 08009     179,960  
6604 DOGWOOD ROAD, BALTIMORE, MD 21207     181,350  
809 HOLLYRIDGE DRIVE, BALLWIN, MO 63011     234,890  
Total   $ 1,824,510  
           

Project Summaries

 

Each Project Summary attached below is included in the Offering Circular following page PS-735.

 

 

 

 

 

 

PROJECT SUMMARIES FOR PQA NO. 70

 

• First Lien 1 $113.280 1 BORROWER monthly,principal due at maturity. (in descendingorderof importance) ••••••m•to Loan To ARVScore <!> Quality of ValuationReport Skin-in-the-Game (!) Location 8 Project Cost HIS T O R IC, ,,,, . • View larger map GARDE R N S 412 South OhveStreet Church PauiS1 Branch YM( ont.;u\HIg ;...; !! Address: 412 SOUTH OLIVE STREET,SAN ANTONIO,TX 78203 The property is beingused as collateralfor a loan.No substantial work is beingdone onthe property,and the majority of the collateralis represented by the Borrower's skin in the game. AlabamaSt Davis-Sc{ Mapdata C2020 Gooo e Termsof Use RepOI't a maperror Click here to view the LRO Agreement INVESTNOW w,..,. PROPERTY DESCRIPTION As Complete (ARV) $229,000 Broker's Price Opinion Borrower Provided Appraisal Borrower Provided Comps $229,000 Total 0% ----Skin-in-theFirst Lien Loan Cushion {!) Game (!) Purchase Price0229,000LoanToARV loan ToTotal Purchase Date 01/01/201949.7% (!) {!) (!) VALUATION REPORTS The following factors determine in part how the loan was graded: -•••-••-•m-•t4o Borrower Experience Borrower Commitment <!> GRADE FACTORS FINANCIAL OVERVIEW RateLoan To Valueloan Amount Loan PositionTotalLoan Amount Repayment Terms Monthly payment-interest returned Hunt Retirement LLC Andrew Huntp• rincipal Click here to view the LRO Agreement INVEST NOW $113,280 49.7% PROJECT SPECIFIC RISK FACTORS The Borrower was advanced the money it needs to refinance this loan onNovember 27,2019by Groundfloor Finance Inc.("Groundfloor;•"we•;"us;•or "our") or a wholly-owned subsidiary of Groundfloor.The Borrower hasnow been refinanced for this property.If this offering is fully subscribed,Groundfloorwill continue to administer and servicethe loan as furtherdescribed in the OfferingCircular. The Borrower has not completedor sold any projects inthepast year.As such,the Borrower's average revenue,costs,andmargins cannot be calculated. The property is beingusedas collateral for a loan.No substantialwork is being done on the property,and the majority of the collateralis represented by the Borrower's skin-in-the-game.As a result,there will be little to no "cushion" and the Borrower willrepay the Groundfloor loanby selling the property or refinancing it. Please consult theOffering Circular for further discussion of generalrisk factors. CLOSING CONDITIONS • Loan is conditioned upon a cleantitle searchand valid title insurance at the time of close. DEVELOPER FEES GROUNDFLOOR generally charges borrowers between 2% and 6%of the principalamount of the loan for our services. GROUNDFLOOR does not take a 'spread'on any part of the interest payments. Developers may capitalize the cost of closinginto theprincipalamount of their request.These closi ng costs typically range from $500 to $1500. Unless otherwise limited by applicable law,GROUNDFLOOR will charge a penalty of 2% for any extensionmadeto the borrower.See GROUNDFLOOR 'Fees and Expenses' inthe Offering Circular. SEC FILING INFORMATION The series of LROs correspondingto this Project are offered pursuant to Post Qualification Amendment No.70 to the Offering Circular dated December 29,2017 (each,as amended and supplemented from time to time),includingthe documentsincorporated by reference therein.Youmay access and review these documents on the InternalFilings Directory located onour Platform. MISCELLANEOUS GROUNDFLOOR HISTORY * HISTORICAL AVERAGES Completed ProjectsAverage Project 1'_ _1 1 ° L. , CONTAINED THEREIN IS HELPFUL.WE DO NOT USEIT AS THE SOLE BASIS FOR A FUNDING DECISION. fHE COMPANY PLAYEDNOROLE IN THE PREPARATION OF ANY OF THE VALUATIONSOURCES OR ANY OTHER MATERIALS PROVIDED BY THE BORROWER.WHILE WE BELIEVE THE DATA UNLESS NOTEDWITH A INFORMATION BELOW IS SUPPLIEDBY THE BORROWER AND IS NOT VERIFIED HUNT RETIREMENT llGFINANCIAL DATAPROJECTSI REVENUE DATE OF FORMATION* 07/12/2018 PRINCIPAL Andrew Hunt FOCUS Fix&FiipLoans Funded 0Loans Repaid 0 Per Year 0Revenue 0 0I I1I I$225.8K On TimeAverage ProjectAverage Total Repayment 0Time 0Project Costs 0 IN/A I12 months I I$189.2K Reportmgperiod:three years ending 2019 Reportingperiod:2019 Reportin1.date:12/31.'19 BORROWERS REPRESENT AND WARRANT THAT INFORMATIONSUPPLIED IS ACCURATE BORROWER SUMMARY

 

PS-736

 

 

_ _jll $115,450 F_ir_s_tL_ie_n returned on repayment I due at maturity. L_ (in descendingorder of importance) - 10 LoanTo ARV Score (!) Skin-in-the-Game (!) 10 As Complete (ARV) Project Cost (!) .... $165,000 Broker's Price Opinion Borrower Provided Appraisal Borrower Provided Camps After $165,000 Total $139,850 Skin-in-theFirst Lien loan Cushion (!) Game (!) PurchasePrice (!) $75,000loanToARV (!) 70.0% Loan ToTotal PurchaseDate 11/05/2019 81.9% VALUATION REPORTS Thefollowing factors determine in part how the loanwas graded: Quality of Valuation Report ----4 Location8 Borrower Experience Borrower Commitment (!) GRADE FACTORS FINANCIAL OVERVIEW LoanToARV loan Amount Loan PositionTotal Loan Amount rR-'e'p-a--'-ym__en_t_li.c..e_rm_s-, Balloon payment-principal and i nterest BORROWER 1516 East 69th Place I ndustries LLC Jeffrey LangJr.-principalClick here to view the LRO Agreement INVEST NOW $115,450 70.0% Address: 8358 SOUTH PERRY AVENUE,CHICAGO,IL 60620 51 Viewlarger map y-f""lallt"l nur1C'$S ESJrdSt i The Borrower intends to use the loan proceeds to purchase andrenovate the property.Upon completion,the Borrower intends to sell the property to repay the Groundfloor loan. 8358South Perry Avenue 9 = Q • i &_ Lowe's Home ter QImprovement dio Movie Grill 0 GCWQiel E85thS1. Click here to view theLRO Agreement Map data 02020 G le T«ms of Use Re90rt amaperror PROJECT SPECIFIC RISK FACTORS The Borrower was advanced themoney it needed topurchase this property onNovember 5,2019 by Groundfloor Finance Inc.("Groundfloor," "we," "us," or "our") or a wholly-owned subsidiary of Groundfloor.The Borrower is now inpossession of the property.If this offeri ng is fully subscribed,Groundfloorwillcontinue to administer and service the loan as further described inthe Offering Circular. The renovation of the property may be extensive,and therefore subject to delays and other unexpectedissues. The renovation willrequire permitting,and permits may not be obtained on time or may be denied. The Borrower has not completed or sold any projects in the past year.As such,the Borrower's average revenue,costs,andmargins cannot be calculated. Please consult the OfferingCircular for further discussion of generalrisk factors. CLOSING CONDITIONS • Loan is conditioned upon a clean title search and validtitle insurance at the time of close. DEVELOPER FEES GROUNDFLOOR generally charges borrowers between 2% and 6% of the principalamount of the loan for our services. GROUNDFLOOR does not take a 'spread' on any part of theinterest payments. Developers maycapitalize the cost of closing into the principalamount of their request.These closing costs typically range from $500to $1500. Unless otherwise limti ed by applicablelaw,GROUNDFLOOR will charge a penalty of 2% for any extensionmade to the borrower.See GROUNDFLOOR 'Fees and Expenses' in the Offering Circular. SEC FILING INFORMATION The series of LROs correspondingto this Project are offered pursuant to Post Qualification Amendment No.70 to theOfferingCircular dated December 29,2017 (each,as amended and supplementedfrom time to time).including the documentsincorporatedby reference therein.You may access and review these documents on the InternalFilings Dri ectory located on our Platform. MISCELLANEOUS INVEST NOW PROPERTY DESCRIPTION Value of Properties (!) TotalDebt (!) GROUNDFLOOR HISTORY * HISTORICALAVERAGES Jeffrey LangJr. Completed Projects Average Project l j CONTAINED THEREIN IS HELPFUL.WEDONOT USE 'T ASTHE SOLEBASIS FOR AFUNDING DECISION. THE COMPANY PLAYED NO ROLE IN THE PREPARATION OF ANY OF THE VALUATION SOURCESOR ANY OTHER MATERIALSPROVIDEDBY THEBORROWER.WHILE WE BELIEVE THE DATA BORROWERS REPRESENT AND WARRANT THAT INFORMATIONSUPPLIED IS ACCURATE 1516 EAST 69TH PLACE INDUSTRIES FINANCIAL DATA PROJECTS/ REVENUE LLC DATE OF FORMATION * 01/08/2018 PRINCIPAL FOCUS Fix&FiipLoans Funded <.!>Loans Repaid <.!> PerYear <.!>Revenue (!) '---I_0 _,I I oI I1I I$130K On Time Average Project Average Total Repayment (!) Time (!) Project Costs (!) IN/A I8 monthsI I$93K Reporting period:threeyears ending 2019 $145K $225K Reporti 1gpc, iod 2019 Reporting date:12/31/19 UNLESS NOTEDWITHA INFORMATION BELOW IS SUPPLIED BYTHE BORROWER AND ISNOT VERIFIED BORROWER SUMMARY

 

PS-737

 

 

F rs_t_L_ic_n _,l l $124,380 Refresh ProRerties LLC returned on repayment I due at maturity. L (in descendingorder of importance) Loan To ARV Score (!) Quality of ValuationReport 10 location 8 Borrower Experience ProjectCost (!) As Complete (ARV) $200,000 Broker's Price Opinion Borrower Provided Appraisal Borrower ProvidedComps After $200,000 Total $139,880 Skin-in•the•First Lien LoanCushion (!) Game (!) Purchase Price (?)$111,000LoanToARV {!) 62.2% Purchase Date 12/02/2019LoanToTotal88.7% VALUATION REPORTS The followingfactors determine in part how the loan was graded: - --140 Borrower Commitment (!) GRADE FACTORS FINANCIAL OVERVIEW Rate LoanToARVLoan Amount BORROWER Loan Position Total Loan Amount Repayment Terms Balloon payment - principaland interest Todd Jenkinsp• rincipal Click here to view the LRO Agreement INVEST NOW $124,380 62.2% <.,_Rd .._$"' ; 4 Address: 8201SOUTHWEST 103RD STREET ROAD,OCALA,F3l 4481 View larger map The Borrower intends to use the loanproceeds to purchase andrenovate the property.Upon completion,the Borrower intends to sellthe property to repay the Groundfloor loan. , 821 Southwest 103rd Street Road ft FirstS Y Preset sw 105mPIG C11ntryside Medical' SW11)6thSt 111 O g e Map data 02020 Terms of Use Repon amaperror Click here to view the LRO Agreement PROJECT SPECIFIC RISK FACTORS The Borrower was advanced the money it needed to purchase this propertyon December 2,2019 by Groundfloor FinanceI nc.("Groundfloor," "we "us," or "our") or a wholly-owned subsidiaryof Groundfloor.The Borrower is now in possession of the property.If this offering is fully subscribed,Groundfloor will continue to administer and service the Joan asfurther described in the Offering Circular. Therenovation of the property may be extensive,and therefore subject to delays and other unexpected issues. Therenovation willrequire permitting,and permits may not be obtained on time or may be denied. Please consult the Offering Circular for further discussion of generalrisk factors. CLOSING CONDITIONS • Loanis conditioned upon a clean titel search and valid title insurance at the time ot close. DEVELOPER FEES GROUNDFLOOR generally charges borrowers between 2%and 6% of the principalamount ot the loan for ourservices. GROUNDFLOOR doesnot take a 'spread' on any part ot the interest payments. Developers may capitalize the cost of closing into the principalamount of their request. These closingcosts typically range from $500to $1500. Unless otherwise limitedby applicablelaw,GROUNDFLOOR willcharge a penalty of 2% tor any extension made to the borrower.SeeGROUNDFLOOR 'Fees and Expenses' in theOffering Circular. SEC FILING INFORMATION • The series of LROs corresponding to this Project are offered pursuant to Post Qualification Amendment No. 70 to the OfferingCirculardated December 29,2017 (each.as amended and supplementedfromtime to time),including the documents incorporated by reference therein.You mayaccess and review these documents onthe InternalFilings Directory located on our Platform. MISCELLANEOUS INVEST NOW PROPERTY DESCRIPTION BORROWERS REPRESENT ANDWARRANT THAT INFORMATIONSUPPLIEDIS ACCURATE Valueof Properties (!) Revenue (!) GROUNDFLOOR HISTORY * HISTORICAL AVERAGES Completed Projects Average Project I I 1'-------_ -------1' 1 Ll _ a_m_o_nt_hs CONTAINEDTHEREIN ISHELPFUL.WE DONOT USE T ASTHE SOLEBASIS FOR AFUNDINGDECISION. THE COMPANY PLAYEDNOROLE INTHE PREPARATIONOFANY OF THE VALUATIONSOURCES OR ANY OTHER MATERIALS PROVIDEDBY THEBORROWER. WHILE WE BELIEVETHEDATA REFRESH PROPERTIES LLCFINANCIAL DATAPROJECTS I REVENUE DATE OF FORMATION * 05/24/2018 PRINCIPAL Todd Jenkins FOCUS Fix& FlipLoans Funded <!>Loans Repaid <!> PerYear <!>Revenue <!> 6 6 2 I I$180K OnTime Average Project Average Total Repayment (!) Time (!) Project Costs (!) 183% _.I I$125K Reporting period:three years ending2019 23.0% $428.3K $139K Reportingperiod:2019 Reporting date: 12/31/19 UNLESS NOTEDWITH A INFORMATION BELOW IS SUPPLIED BYTHE BORROWER ANDIS NOT VERIFIED BORROWER SUMMARY

 

PS-738

 

 

Rate LoanToARV • Loan Amount BORROWER Sabrina Jones-principal (in descendingorderof importance) Loan ToARV Score (1) - 10 Quality of ValuationReport Skin-in-the-Game (!) 10 Location Project Cost (!) As Complete (ARV) $195,000 Broker 's Price Opinion Borrower Provided Appraisal Borrower ProvidedCamps After $195,000 Total$143,900 0% ---Skin-in-the First Lien Loan Cushion (!) Game (1} Purchase Price (!) $48,000 LoanToARV (?)66.4% Purchase Date 12/09/2019loan ToTotal89.5% VALUATION REPORTS The following factors determine inpart how the loan was graded: ----4 8 Borrower Experience Borrower Commitment (!) GRADE FACTORS FINANCIAL OVERVIEW Loan PositionTotalloan Amount rR-"'ep:.:a:.cym=en-"1t'--''"e-rm"-=s------------, Balloon payment-principal and interest '----F_i rs_tLie_nJI I $129,400returned on repayment I due at maturity. Illtl..MQg ll...l.!..l.E Click here to view the LRO Agreement INVEST NOW $129,400 66.4% D Address: 1312 NASH ROAD NORTHWEST,ATLANTA,GA 30331 View larger map ENGLISH PARK 1312Nash Road Northwest TA Truck Service Q The Borrower intends to use theloan proceeds to purchase and renovate the property.Upon completion,the Borrower intends to sellthe property to repay the Groundtloor loan. Go g Map data C2il20 Terms of Use Report 1map M"Of Click here to view the LRO Agreement PROJECT SPECIFIC RISK FACTORS The Borrower was advanced themoney it neededto purchase this property on December 9,2019 by Groundfloor Finance Inc.("Groundfloor," "we," "us or "our") ora wholly owned subsidiary of Groundfloor.The Borrower is now in possession of the property.If this offering is fuly subscribed,Groundfloor willcontinue to administer and service the loan asfurther described in the Offering Circular. The renovation of the property may be extensive,and therefore subject to delays and other unexpectedissues. The renovation will requirepermitting,andpermits may not be obtained on time or may be denied. • The Borrower has not completed or sold any projects inthe past year.As such,the Borrower's averagerevenue,costs,andmargins cannot be calculated. Please consult theOfferingCircular for furtherdiscussionof generalrisk factors. CLOSING CONDITIONS • Loanis conditionedupon a clean title search and valid titleinsurance at the time of close. DEVELOPER FEES GROUNDFLOOR generally charges borrowers between 2% and 6%of the principalamount of the loan for our services. GROUNDFLOOR does not take a 'spread'on any part of the interest payments. Developers may capitalize the cost of closing into the principal amount of their request.These closing costs typically range from $500 to $1500. Unlessotherwise limited by applicable law,GROUNDFLOOR willcharge a penalty of 2% for any extension made to the borrower.See GROUNDFLOOR 'Fees and Expenses' intheOfferingCircular. SEC FlUNG INFORMATION The series of LROs correspondingto this Project are offered pursuant to Post Qualification Amendment No.70 to theOfferingCircular dated December 29,2017 (each,as amended and supplementedfrom time to time),includingthe documents incorporated by reference therein.You may access and review these documents on the InternalFilings Directory located on our Platform. MISCELLANEOUS INVEST NOW PROPERTY DESCRIPTION Sabrina Jones FOCUS Completed Projects Average Project Loans Funded (!) Loans Repaid (!) PerYear (!) Revenue (!) Fix& Flip I I I I 2 1'-------1 -------'1 1 $206.2K 1 CONTAINED THEREIN ISHELPFUL WE DO NOT USE IT AS THE SOLE BASIS FOR AFUNDINGDECISION. 1"HE COMPANY PLAYEDNOROLE INTHE PREPARATIONOF ANY Of THE VALUATIONSOURCESOR ANY OTHER MATERIALS PROVIDEDBY THE BORROWER. WHILE WEBELIEVETHEDATA BORROWERS REPRESENT AND WARRANT THAT INFORMATION SUPPLIED IS ACCURATE THE B MOGUL GROUP LLLPFINANCIAL DATAPROJECTS / REVENUE DATE OF FORMATION * 10/08/2018 'PRINCIPALGROUNDFLOOR HISTORY *HISTORICAL AVERAGES On Time Average Project Average Total Repayment (!) Time (!) Project Costs (!) 1100%.l_ 12_m_o_n_th_s l, l $125.8K Reportingperiod:three years ending2019 Reporting period:2019 Reporting date: 12/31/19 INFORMATION BELOW IS SUPPLIED BY THE BORROWER ANDIS NOT VERIFIED UNLESS NOTEDWITH A BORROWER SUMMARY

 

PS-739

 

 

Balloon payment - principaland interest returned on repaymentI due at maturity. (in descending order of importance) loan To ARV Score (!) 10 Quality of Valuation Report 10 location 8 Borrower Experience $250,000 Project Cost (!) As Complete (ARV) Broker's Price Opin ion Borrower Provided Appraisa l Borrower Provided Camps AfterValue(ARV) (!) $250,000 TotalCosts (!) 0% ---Skin in-the First lien loan Cushion (!) Game (!) Purchase Price (?)$28,000 loanToARV (!}54.5% Loan To Total Purchase Date 10/02/201882.3% VALUATION REPORTS The followingfactors determine in part how the loan was graded: Skin-in•the-Game (!) - --4 Borrower Commitment (!) GRADE FACTORS FINANCIAL OVERVIEW loanloARV loan Amount loan PositionTotal loan Amount rRe;:,p:.:a"-ym=en.:.:t...:l.:;er.:.:m.:::s , c_ _ Fr_ist_L_ie_n _jll $136,350 BORROWER Social Elements LLC Orby Pruitt-principal Click here to view the LROAgreement INVEST NOW $136,350 54.5% ., t Address: 2096 KIPLINGCIRCLESOUTHEAST,ATLANTA,GA 30315 \ View larger map H'kr.,..t OrSE D'"' The Borrower intends to use theloanproceeds to renovatethe property.Upon completion,the Borrower intends to sell the property to repay theGroundfloor loan. , 2096 Kipling Circle Southeast Qi-SE ,cademy 9 l(ey RdSE 9 Constitution Apartments Go gle Map data C2020 1 Term• of Us11 Ra map error ies O Click here to view the LRO Agreement PROJECT SPECIFIC RISK FACTORS The Borrower was advanced the money it needed to beginrenovation of this propertyon September 26,2019 by Groundfloor Finance Inc.("Groundfloor." "we; "us or "our") or a wholly-owned subsidiary of Groundfloor.The Borrower has now begun renovationof the property.l fthis offering is fully subscribed, Groundfloorwill continue to administer and service the loan as further described in the OfferingCircular. Therenovationof the property may be extensive,and therefore subject to delays and other unexpected issues. Therenovation will require permitting, and permits may not be obtained on time or may be denied. The Borrower has not completed or sold any projects in the past year.As such,the Borrower's average revenue,costs,andmargins cannot be calculated. Please consult the Offering Circular for further discussionof general risk factors. CLOSING CONDITIONS • Loan is conditionedupona clean title searchand valid title insurance at the time of close. DEVELOPER FEES GROUNDFLOOR generally charges borrowers between 2% and 6%of the principalamount of the loanforour services. GROUNDFLOOR does not take a 'spread' on any part of thei nterest payments. Developers may capitalize the cost of closing into the principalamount of their request. These closingcosts typically range from $500 to $1500. Unless otherwise limited by applicable law.GROUNDFLOOR willcharge a penalty of 2% for any extensionmade to the borrower.See GROUNDFLOOR 'Fees and Expenses' in the Offering Circular. SEC flUNG INFORMATION The series of LROs corresponding to this Project are offered pursuant to Post QualificationAmendment No.70 to the Offering Circular dated December 29,2017 (each,as amended and supplemented fromtime to time),includingthe documents incorporatedby reference therein.You may access and review these documents on the InternalFilings Directory located on our Platform. MISCELLANEOUS INVEST NOW PROPERTY DESCRIPTION GROUNDFLOOR HISTORY * HISTORICAL AVERAGES Orby Pruitt FOCUS Completed Projects PerYear 0 Average Project Revenue 0 Loans Funded 0Loans Repaid 0 Fix&Fiip IL o JI I o I I 2 $217.7K I I Time 0 Project Costs 0 Repayment 0 CONTAINEDTHEREINIS HELPFUL.WEDONOTUSE IT AS THE SOLEBASIS FOR A FUNDING DECISION. THE COMPANY PLAYEDNO ROLE INTHE PREPARATIONOF ANY OF THE VALUATION SOURCESOR ANY OTHER MATERIALSPROVIDED BY THE BORROWER.WHILE WE BELIEVE THE DATA UNLESSNOTEDWITH A INFORMATIONBELOW IS SUPPliED BY THE BORROWER AND IS NOT VERIFIED BORROWERS REPRESENT AND WARRANT THAT INFORMATION SUPPLIED IS ACCURATE SOCIAL ELEMENTS LLCFINANCIAL DATA PROJECTS I REVENUE DATE OF FORMATION * 08/24/2010 'PRINCIPAL OnTime Average Project Average Total I N/A.l_ 6_m_o_nt_h_s_ _.I I $143.3K Reportingperiod: thPyears ending 2019 Reportin!period:2019 Reportingdate:12/31/19 BORROWER SUMMARY

 

PS-740

 

 

• Total loan Amount rR"-ep"-'a"-'y-"m-"e-"n'-n-"e"-r"-m"-s--------------, Balloon payment - principal and interest returned on repayment I due at maturity. ----4 - r Commitment (!) Skin-in-the Cushion (!) First Lien Loan Project Cost (!) View larger map i Rhodes Avenue ch 7 h 39 i ALDI q Borrower intends to sell the property to repay theGroundfloor loan. EMarquetteRd tteRd -s-_ G&..(I-St"' "' "' "' Click here to view the LRO Agreement '-. •, -..-..-.•.,•..,-..Address: 6558 SOUTH RHODESAVENUE,CHICAGO,IL 60637 E15SthSt! 6558South'The Borrower intends to use theloanproceeds to purchase and renovate the property.Uponcompletion,the .. Map data 02020 Terms of Use Report a map error INVEST NOW PROPERTY DESCRIPTION As Complete (ARV).... $270,000 Broker's Price Opinion Borrower Provided Appraisal Borrower Provided Comps After Repair Value(ARV) 0$270,000 TotalCosts 0 0% ---Game 0 Purchase Price (!) $89,999 LoanToARV (!}52.3% Purchase Date 11/25/2019Loan To Total76.9% VALUATION REPORTS The following factors determine in part how the loan was graded: (indescendingorder of importance) Loan To ARV Score (!) 10 Quality of Valuation Report Skin-in-the-Game (!) 10 Location 8 Borrower Experience Borrowe GRADE FACTORS FINANCIAL OVERVIEW Rate LoanToARVLoan Amount Loan Position c_ _ F_isr-t_L_ie_n_lj l $141,230 BORROWERClick here to view the LRO Agreement K&D Assets LLC Kelvin Dunigan-principal INVEST NOW $141,230 52.3% PROJECT SPECIFIC RISK FACTORS The Borrower was advanced the money it needed to purchase this property onNovember 25,2019 by Groundfloor Finance Inc. ("Groundfloor," "we," "us," or "our") or a wholly-owned subsidiary of Groundfloor.The Borrower is now inpossession of the property.If this offering is fully subscribed,Groundfloor willcontinue to administer and service the loan as further describedin the Offering Circular. The renovation of the property may beextensive,and therefore subject to delays and other unexpected issues. The renovation will require permitting,and permits may not be obtained on time or may bedenied. The Borrower has not completed or sold any projects in the past year.As such,the Borrower's average revenue,costs,and margins cannot be calculated. • The Principalhas not yet completed or sold any projects.As such,the Principal's average revenue,costs,and margins cannot be calculated. • Please consult the Offering Circular for further discussion of generalrisk factors. CLOSING CONDITIONS • Loan is conditioned upon a clean title search and valid title insurance at the time of close. DEVELOPER FEES GROUNDFLOOR generallycharges borrowers between 2%and 6% of the principalamount of the loan for our servci es. GROUNDFLOOR does not take a 'spread' on any part of the interest payments. • Developers may capitalize the cost of closing into the principalamount of their request. These closingcosts typically range from $500 to $1500. Unless otherwise limited by applicable law,GROUNDFLOOR willcharge a penalty of 2% for any extension made to the borrower.See GROUNDFLOOR 'Fees and Expenses' in the OfferingCircular. SEC FILING INFORMATION • The series of LROs correspondingto this Project are offered pursuant to Post Qualification Amendment No.70 to theOffering Circular dated December 29,2017 (each,as amended and supplemented from time to time),including the documents incorporated by reference therein.You may access and review these documents on the InternalFilngs Directory located on our Platform. MISCELLANEOUS Valueof Properties ® TotalDebt ® GROUNDFLOOR HISTORY * HISTORICAL AVERAGES Kelvin Dunigan Completed Projects Average Project CONTAINED THEREIN ISHELPFUL,WEDO NOT USE 'T ASTHE SOLE BASISFOR A FUNDING DECISION. 'HE COMPANY PLAYED NOROLE INTHE PREPARATION OF ANY OF THE VALUATIONSOURCESOR ANY OTHER MATERIALS PROVIDED BY THE BORROWER.WHILE WE BELIEVETHEDATA BORROWERS R EPRESENT AN D WARRANT THAT INFORMATION SUPPLIED I S ACCURATE K&D ASSETS LLGFINANCIAL DATAPROJECTSI REVENUE DATE OF FORMATION* 02/27/2017 PRINCIPAL FOCUS Buy&HoldLoans Funded (!) Loans Repaid (!) Per Year (!) Revenue (!) I'---0 ,I I o I IoII$O On Time Average ProjectAverage Total Repayment (!) Time (!) Project Costs (!) IN/A 1'------/-AN ------'11$0 Reportingpt!riod: threeyears ending 2019 $53K $100K Re1 ort 1gpe 1od: 2019 12/31/19 Repoing dat• UNLESS NOTED WITH A INFORMATION BELOW ISSUPPLIED BY THE BORROWER AND IS NOT VERIFIED BORROWER SUMMARY

 

PS-741

 

 

First Lien $150.000 1 1 . '------------' --4 - (!) Project Cost (!) As Complete (ARV) $425,000 Broker's Price Opinion Borrower ProvidedAppraisal Borrower Provided Comps AfterRepairValue(ARV) (2)$425,000 Total Project Costs (!) $335,270 0% Skin-in-the-First lien LoanCushion (2) Game (!) Purchase Price (!) $280,000LoanToARV {!) 69.0% Purchase Date 12/04/2019Loan To Total90.2% VALUATION REPORTS The following factors determine in part how the loan was graded: (indescendingorder of importance) LoanTo ARVScore ® 10 Quality of ValuationReport Skin-in-the-Game10 Location 8 Borrower Experience Borrower Commitment (!) GRADE FACTORS FINANCIAL OVERVIEW LoanToARVLoan Amount Loan Posioti n TotalLoan Amount iR'e"'<p::a:..<y.::meo::n::.: e:::_r::_m::_s--, BORROWERBalloon payment-principaland interest returned on repaymentI due at maturity. Randy David Requa-principal Click here to view the LRO Agreement INVEST NOW $150,000 69.0% ,, '"••-•i1ePark TGI Fn Address: 4001WINGATE DRIVE#l,RALEIGH,NC 27609 View larger map i• OS OF LBANS < Montec•to West 9 <'oo, ALDIQ .l The Borrower intends touse theloan proceeds to purchaseand renovate the property.Upon completion,the Borrower intends tosell the property to repay the Groundfloor loan. EASTGATE 'II..... *@filii•'* Click here toview theLROAgreement »""''<f Go gle.-" M da C2020Google TermaofUse Report•fMClmor PROJECT Sl'lCIFIC RISK FACTORS The Borrower was advanced the money it needed tobegin renovation of this property on December 4, 2019 by Groundtloor Finance Inc.(•Groundtloor:we; •us; or •our•) or a wholly-owned subsidi ary of Groundfloor.The Borrower has now begun renovation of the property.If this offering is f ully subscribed,Groundfloorwill continue to administer and service the loanas further described inthe Offering Circular. The renovationof the propertymay be extensive,and therefore subject to delaysandother unexpected issues. The renovation willrequire permitting,andpermits may not be obtainedon time or maybe denied. TheBorrower has not completed or sold any projects inthe past year.As such,theBorrower's average revenue,costs,and margins cannot be calculated. There will betwo loans onthis project,each representingsubsequent draws.The first loanis $150,000and thesecondloan is $143,270.The FinancialOverview box represents theaggregate amount of allloans to besecured by this property,givni gacomplete financialpicture of the project. This loan represents the first draw for the project. Each draw onthis project is structured as an individualloan.We will fund each draw fromour owncapitalor credit facilities asand when requested by the Borrower, provided conditions for each draw are metas described in our OfferingCircular.Once a draw has beenapprovedand funded,we willthen sellthe correspondingseries of LROs onour platform,each of which willbe due 9months from the time such series of LROis deemed issued,as describedinourOffering Circular.Subsequent draws are expected tobe requested every twomonths from thedate we advanced the first draw,but may be requested sooner,or later, depending on the progress of construction. Theevent of default onone Groundtloor note secured by this property willtrigger default onall Groundtloor notes securedby this property.All LROholders investinginLROs correspondingtonotessecured by this propertysharethe samepriority inany recoveryand recovered proceeds willbe distributedon a pror•ata basis. Pleaseconsult the OfferingCircular for further discussionof generalrisk factors. CLOSING CONDITIONS • Loanis condit oned upon a cleantitle search and valid title insurance at the timeof close. DEVELOPER FEES GROUNDFLOOR generally charges borrowers between2%and 6% of the principalamount of the loanfor our services. GROUNDFLOOR does not take a 'spread'onany part of the interest payments. Developers may capitalize the cost of dosinginto the principalamount of their request. Theseclosingcosts typicallyrange from $500 to$1500. Unless otherwise limited by applicable law,GROUNDFLOOR willcharge a penalty of 2%for any extensionmadeto the borrower.See GROUNDFLOOR 'Fees and Expenses'in theOfferingCircular. SEC FlUNG INFORMATION Theseries of LROs corresponding tothis Project are offered pursuant to Post Qualification Amendment No.70 to the Offerni gCircular dated December 29,2017 (each,as amended andsupplemented fromtime to t me),includni gthe documents incorporated by reference therein.Youmay access and review these documents onthe InternalFilings Directory locatedonour Platform. MISCELLANEOUS PROPERTY DESCRIPTION GROUNDFLOOR HISTORY * HISTORICAL AVERAGES Randy David Requa Completed Projects Average Project CONTAINED THEREINIS HELPFUL.WEDONOTUSE 1T ASTHE SOLE BASISFOR A FUNDINGDECISION. 'HECOMPANY PLAYEDNOROLE INTHEPREPARATIONOF ANY OFTHEVALUATION SOURCES OR ANY OTHER MATERIALS PROVIDEDBY THE BORROWER. WHILE WE BELIEVE THE DATA UNLESS NOTED WITH A INFORMATION BELOW IS SUPPLIEDBY THE BORROWER ANDIS NOT VERIFIED HOUSEKICK, INCFINANCIAL DATAPROJECTS / REVENUE DATE OFFORMATION * 01/04/2019 PRINCIPAL FOCUS Fix& Flip Loans Funded ®Loans Repaid ®Per Year ®Revenue ® Ll _ _ 0 _,I IoI I2 I I$227.3K On Time Average ProjectAverage Total Repayment ®Time ®Project Costs ® IN/A l'-----_4_m_on_t_h_s__lj l $168.2K Reporting period:three years ending2019 Reporting per ood:2019 Reportingdate:12/31/19 BORROWERS REPRESENT AND WARRANT THAT INFORMATIONSUPPLIED IS ACCURATE BORROWER SUMMARY

 

PS-742

 

 

loanToARV Loan Amount First li en $143.270 1 1 .l!X ----4 <?.> As Complete (ARV) $425,000 Project Cost ...-Broker's Price Opinion Borrower Provided Appraisal Borrower Provided Camps After Value(ARV) (1)$425,000 Total $335,270 0%----Skin-in-the- First lien LoanCushion (!) Game ® Purchase Price$280,000loan To ARV 69.0% Purchase Date 12/04/2019Loan ToTotal90.2% (!) (!) (!') VALUATION REPORTS The followingfactors determine in part how the Joan was graded: (indescendingorder of importance) Loan To ARV Score (!) 10 Quality of Valuation Report Skin-in-the-Game10 Location8 Borrower Experience Borrower Commitment (!) GRADE FACTORS FINANCIAL OVERVIEW loan PositionTotal loan Amount Repayment Terms BORROWERBalloon payment-principal and interest returned on repayment I due at maturity. Randy David Requa-principal Click here to view the LRO Agreement INVEST NOW $143,270 69.0% j TGIFric --•ltePar k Address: 4001WINGATE DRIVE #2,RALEIGH,NC 27609 i• OS OF LBANS Montecito West Q 2 The Borrower intends to usethe loan proceeds to purchase and renovate the property. Upon completion,the Borrower intends to sell the property torepay the Groundfloor loan. ALDIQ ""'" .. .. EASTGATE -+<""""' .. *IIH+illi•** Click here to v ew the LRO Agreement *"' Go -gle correspondingseries of LROson our platform,each of whichwillbe due 9months from the time suchseries of LRO is deemedissued,as described inour Offer ng PROJECT SPECIFIC RISK FACTORS The Borrower was advanced the money it needed to begin renovation of this property on December 4, 2019 by Groundfloor Finance Inc.(•Groundfloor,""we,"us; or "our") or a wholly•owned subsidiary ofGroundfloor.The Borrower has now begun renovationof the property.If this offeringis fully subscribed,Groundfloor will continue to administer and servicethe loanas further described inthe Offering Circular. The renovationof the property may be extensive,and therefore subject to delays and other unexpectedissues. The renovation willrequire permitting,and permits may not be obtainedontime or may be denied. The Borrower has not completedor sold anyprojectsin the past year.As such,the Borrower's average revenue,costs.and margins cannot be calculated. There willbetwo loans on this project,eachrepresentingsubsequent draws.The first loan is $150,()(X) and the secondloan is $143,270. TheFinancialOverview box represents the aggregate amount of allloans to besecured by this property,givinga complete financialpicture of the project. This loanrepresentsthe seconddraw for the project. Each draw on thisproject is structuredas anindividualloan.We willfund eachdraw from our own capitalor credit facilities as and when requestedby the Borrower,providedconditions for eachdraw are met as described inour OfferingCircular.Onceadraw has beenapproved and funded,we willthensell the Circular.Subsequent drawsare expected to be requestedevery two months from the date we advanced thefirst draw,but may be requestedsooner,or later, dependingon the progressof construction. The event of default onone Groundfloor note securedby this property willtrigger default onallGroundfloor notes secured by this property.AIILROholders investing inLROs correspondni g to notes securedby thisproperty share the same priority in anyrecovery and recovered proceeds will be distributedona pro•rata basis. Pleaseconsult the Offering Circular for further discussionof generalrisk factors. CLOSING CONDITIONS • loanisconditioned upon a clean title searchand validtitle insurance at the time of close. DEVELOPER FEES GROUNDFLOORgenerally charges borrowers between 2% and 6% of the principal amount of the loanfor our services. GROUNDFLOOR does not take a 'spread'on anypart of the interest payments. Developers may capitalizethe cost of closingintothe principalamount of theirrequest These closing costs typically range from$500 to $1500. Unless otherwise limited by applicablelaw,GROUNDFLOOR willcharge a penalty of 2% for any extension made to the borrower.See GROUNDFLOOR ' Feesand Expenses' in the OfferingCircular. SEC FILING INFORMATION The series of LROs correspondingto this Project are offered pursuant to Post Qualification Amendment No. 70to theOfferingCircular dated December 29,2017 (each,asamended andsupplementedfrom timeto time),including the documents incorporated by referencetherein.You may access and review these documents on the InternalFilings Directorylocatedonour Platform. MISCELLANEOUS PROPERTY DESCRIPTION BORROWERS REPRESENT AND WARRANT THAT INFORMATION SUPPLIEDIS ACCURATE GROUNDFLOOR HISTORY * HISTORICAL AVERAGES Randy David Requa CompletedProjects Average Project ° II I'---_-----1' 1 CONTAINEDTHEREINIS HELPFUL,WEDONOT USE IT AS THE SOLE BASIS FOR AFUNDING DECISION. THE COMPANY PLAYEDNO ROLE INTHE PREPARATIONOF ANY OFTHE VALUATIONSOURCES OR ANY OTHER MATERIALSPROVIDED BY THE BORROWER.WHILE WEBELIEVETHEDATA HOUSEKICK, INCFINANCIAL DATAPROJECTS / REVENUE DATE OF FORMATION * 01104/2019 PRINCIPAL FOCUS Fix& Flip Loans Funded (!) Loans Repaid (!) Per Year (!) Revenue (!) 0 2 I I$227.3K On Time Average Project Average Total Repayment (!) Tmi e (!)Project Costs (!) I N/A lc_ 4_m_o_nt_h_s --'I I $168.2K Reportingperiod:threeyears ending 2019 Reporting P"riod 2019 Reportingdate: 12/31/19 INFORMATIONBELOWIS SUPPLIED BY THE BORROWER AND IS NOT VERIFIED UNLESS NOTEDWITHA BORROWER SUMMARY

 

PS-743

 

 

c_ F_ir_s_t_Li_e_n IJ I $174,950 returned on repayment I due at maturity. (indescending order of importance) Loan To ARV Score (2) - 10 Skin-in-the-Game (!) 10 8 $250,000 Project Cost View larger map , 25405 Edgemont Drive Click here to view the LRO Agreement MapdataC2020 TermsofUse Report a map error Address: 25405 EDGEMONT DRIVE,SOUTHFIELD,M1 48033 The Borrower intends to use the loan proceeds to purchaseand renovate the property.Upon completion,the Borrower intends to sell the property to repay theGroundfloor loan. Go gle\ INVEST NOW PROPERTY DESCRIPTION As Complete (ARV) Broker's Price Opinion Borrower Provided Appraisal Borrower Provided Comps After Repair Value (ARV) 0$250,000 Total$202,350 0% ----Skin-in-theFirst LienLoanCushion 0 Game 0 Purchase Price$170,000Loan ToARV 70.0% Purchase Date12/04/2019Loan ToTotal85.9% (!) {!) (!) VALUATION REPORTS The following factors determinein part how the loanwas graded: Quality of ValuationReport----4 Location Borrower Experience Borrower Commitment (!) GRADE FACTORS FINANCIAL OVERVIEW LoanToARVLoanAmount Loan PositionTotal Loan Amount rR-'-e,_pa-'_ym_e_n_tl_iec_rm__cs----, BORROWERBalloon payment-principal and interest Southeast Michig Darnell DeBoes-principal Cl ick here to view the LRO Agreement INVEST NOW $174,950 70.0% or a wholly-owned subsidiary of Groundfloor.The Borrower is now in possession of the property.If this offeringis fully subscribed,Groundfloor will continueto (each,as amended and supplemented from time to time),includingthe documents incorporated by reference therein.You may access and review these documents PROJECT SPECIFCI RISK FACTORS • The Borrower was advanced the money it neededto purchase this property on December 4,2019 by Groundfloor Finance Inc.("Groundfloor,""we:• "us," or "our") administer and service the loan as furtherdescribed in the Offering Circular. • The renovation of the property may be extensive,and therefore subject to delays and other unexpected issues. • The renovation will require permitting,andpermits may not be obtained on time or may be denied. • Please consult the Offering Circular for further discussion of general risk factors. CLOSING CONDITIONS • Loan is conditionedupon a clean title search and valid title insurance at the time of close. DEVELOPER FEES • GROUNDFLOOR generally charges borrowers between 2% and 6% of the principalamount of the loanfor our services. GROUNDFLOOR does not take a 'spread' on any part of the interest payments. Developers may capitalize the cost of closinginto the principalamount of their request.These closingcosts typically range from $500 to $1500. Unless otherwsi e limited by applicable law,GROUNDFLOOR will charge a penalty of 2% for any extensionmadeto the borrower.See GROUNDFLOOR 'Fees and Expenses' in the Offering Circular. SEC FILING INFORMATION The series of LROs corresponding to this Project areofferedpursuant to Post QualificationAmendment No.70 to theOffering Circular dated December 29,2017 on the InternalFilings Directory located on our Platform. MISCELLANEOUS BORROWERS REPRESENT AND WARRANT THAT INFORMATION SUPPLIED IS ACCURATE Darnell DeBoes FOCUS Completed ProjectsAverage Project Revenue <!> Loan s Funded ® Loans Repaid ® Per Year ® Fix& Flip I I 1'------I, 0 2 I o $221.3K I I CONTAINED THEREINIS HELPFUL,WE DO NOT USE IT AS THE SOLE BASIS FORA FUNDING DECISlO . iHECOMPANY PLAYED NO ROLE IN THEPREPARATION OF ANY OFTHEVALUATION SOURCES OR ANY OTHER MATERIALS PROVIDED BY THE BORROWER.WHILE WE BELIEVE THE DATA SOUTHEAST MICHIGAN INVESTORFINANCIAL DATAPROJECTS / REVENUE SOLUTIONS DATE OF FORMATION * Value of Properties ®TotalDebt ®Revenue ® 06/10/2015 Gross Margin% ® 'PRINCIPALGROUNDFLOORHISTORY *HISTORICAL AVERAGES On Time Average Project Average Total Repayment ®Time ®Project Costs ® I N/A 1'-----_a_m_o_nt_hs_--'I I$130.5K Reportingperiod:three years ending 2019 52.4% $885K $450K $BOOK Reportingperiod:2019 Reportingdate:12/31,'19 UNLESS NOTED WITH A INFORMATIONBELOW ISSUPPLIED BY THE BORROWER AND IS NOT VERIFIED BORROWER SUMMARY

 

PS-744

 

 

Fi_rs_t_L_ei_n _JII $179,960 KLHIM Inc. returned onrepayment I due at maturity. L (indescending order of importance) loanTo ARV Score (!) 10 Skin•in•the•Game (!) 10 location 8 Borrower Experience As Complete (ARV) Game 0 $375,000 Project Cost Address: 1 WAYSIDE ROAD,BERLIN,NJ 08009 q New View larger map .... " e• The Borrower intends to use the loan proceeds to purchase and renovate the property.Upon completion,the Borrower intends to sell the property to repay theGroundfloor loan. Click here to view he LRO Agreement INVEST NOW PROPERTY DESCRIPTION .... Broker's Price Opinion Borrower Provided Appraisal Borrower Provided Camps After $375,000 Total 0% ----Skin-in•the• First Lien LoanCushion 0 Purchase Price$162,750LoanToARV 48.0% Purchase Date 11/22/2019loan ToTotal87.6% (!) @ 0 VALUATION REPORTS The following factors determinein parthow the loanwas graded: Quality of ValuationReport - --4 Borrower Commitment (!) GRADE FACTORS FINANCIAL OVERVIEW Rate Projected TermLoanToARV LoanAmount I nvestors BORROWERLoan Position TotalLoan Amount i'R"'e"'pa,_,yc:.:m.::e:::n.:_n.:.:e::.r:::m:::_s ---, Balloon payment-principal and interest Abraham Gruber-principal Click here to view the LRO Agreement INVEST NOW $179,960 48.0% PROJECT SPECIFIC RISK FACTORS • The Borrower was advanced the money it needed to purchase this property onNovember 22,2019 by Groundfloor Finance Inc.("Groundfloor." "we." "uso; r "our") or a wholly-owned subsidiary of Groundfloor.The Borrower is now inpossessionof the property.If this offeringis fully subscribed,Groundfloor will continue to administer and service the loan as further described inthe Offering Circular. • The renovation of the property maybe extensive.and therefore subject to delays and other unexpected issues. The renovation will require permitting,and permits may not beobtained ontime or may be denied. • Please consult the Offering Circular for further discussion of generalrisk factors. CLOSING CONDITIONS • Loan is conditioned upon a clean title search and valid title insurance at the time of close. DEVELOPER FEES • GROUNDFLOOR generally chargesborrowers between 2%and 6% of the principalamount of the loanfor our services. GROUNDFLOOR does not take a 'spread' on any part of the interest payments. • Developers may capitalize the cost of closing into the principalamount of their request.Theseclosingcosts typically range from $500to $1500. Unless otherwise limited by applicable law,GROUNDFLOOR will charge a penalty of 2% for any extensionmade to the borrower.See GROUNDFLOOR 'Fees and Expenses'in theOfferingCircular. SEC FILING INFORMATION • The series of LROs corresponding to this Project are offered pursuant to Post QualificationAmendment No.70 to the Offering Circular dated December 29,2017 (each,as amended and supplemented from time to time),includingthe documents incorporated by reference therein. You may access and review these documents on the InternalFilings Directory located on our Platform. MISCELLANEOUS PROPERTY PHOTOS GROUNDFLOOR HISTORY * HISTORICAL AVERAGES Completed Projects Average Project I I 1'-----1 ---_II I I 1 3 $490K l'-----_6_m_o_n_th_s --'I I 100% 1 $300K THE COMPANY PLAYEDNOROLE INTHE PREPARATIONOFANY OFTHE VALUATION SOURCES OR ANY OTHER MATERIALS PROVIDED BY THE BORROWER.WHILEWEBELIEVETHEDATA CONTAINED THEREINISHELPFUL, WE DO NOT USEIT ASTHESOLE BASISFOR A FUNDING DECISIO . UNLESS NOTED WITH A INFORMATIONBELOW ISSUPPLIEDBY THE BORROWER ANOIS NOT VERIFIED BORROWERS REPRESENT AND WARRANT THAT INFORMATION SUPPLIEDIS ACCURATE KLHIM INC.FINANCIALDATA PROJECTS/ REVENUE DATE OF FORMATION*Valueof Properties <!> TotalDebt <!>Revenue <!> 07/02/2015 Gross Margin% (!) PRINCIPAL Abraham Gruber FOCUS Fix& FlipLoans Funded <!>Loans Repaid <!>Per Year <!>Revenue <!> OnTimeAverage Project Average Total Repayment (!) Time (!) Project Costs (!) Reporting riod:three years ending 2019 33.5% $564K $375K Reporting ptriod:2019 Reporting date:12/31/19 BORROWER SUMMARY

 

PS-745

 

 

loan To Value Loan Amount returned on repaymentI due at maturity. -----•Eiil•10 (indescendingorder of importance) LoanToARVScore (!) Quality of ValuationReport - 10 Skin-in-8 Borrower Experience Borrower Commitment I§•••rmt ••i!fl$11 Project Cost As Complete (ARV) $280,000 Broker's Price Opinion Borrower ProvidedAppraisal Borrower ProvidedComps Alter (ARVI(!)$280.000 Total $276,350 0% ----Skin-in-theFirst Lien LoanCushion (!) Game ® Purchase Price $280,000 Loan ToARV 68.5% Purchase Date 06/24/2019 Loan ToTotal 66.1% (!) {!) (!) VALUATION REPORTS The following factors determine in part how the loan was graded: the-Game (i) ----4 Location (!) GRADE FACTORS FINANCIAL OVERVIEW Loan PositionTotalLoan Amount Repayment Terms BORROWERFirst LienBalloon payment - principal and i nterest Bmore Realtor LLC Rodney Smith-principal Click here to view the LRO Agreement INVEST NOW $181,350 66.1% Address: 6604 DOGWOODROAD.BALTIMORE.MD 21207 I<> View larger map The property is being used as collateralfor a loan.No substantialwork is being done on the property,andthe majority of the collateralis represented by the Borrower's skin-in-the-game. Click here toview the LRO Agreement PROJECT SPECIFIC RISK FACTORS The Borrower was advanced the money it needs to refinance this loan on November 27,2019 by Groundfloor Finance Inc. ("Groundfloor," "we," "us;•or "our") ora wholly-owned subsidiaryof Groundfloor.The Borrower has now beenrefinanced for this property.If this offeringis fully subscribed,Groundfloor will continue to administer and service the loan as further described in the Offering Circular. The Borrower has not completed or sold any projects in the past year. As such,the Borrower's average revenue,costs, and margins cannot be calculated. The Principal has not yet completed or sold any projects. As such,the Principal's averagerevenue,costs, and margins cannot be calculated. The property is beingused as collateral for a loan.No substantial work is beingdone onthe property,and the majority of the collateral is represented by the Borrower's skin•in•the•game.As a result,there will be little to no "cushion" and the Borrower will repay the Groundfloor loan by selling the property or refinancing it. Please consult the OfferingCircular for further discussionof general risk factors. CLOSING CONDITIONS • Loan is conditioned upon a clean title searchand valid title insurance at the time of close. DEVELOPER FEES GROUNDFLOOR generally charges borrowers between2% and 6%of the principalamount of the loan for our services. GROUNDFLOOR does not take a 'spread' on any part of the interest payments. Developers may capitalize the cost of closing into the principalamountof their request.These closingcosts typically range from $500 to $1500. Unless otherwise limitedby applicable law,GROUNDFLOOR willcharge a penalty of 2% for any extensionmade to the borrower.SeeGROUNDFLOOR 'Fees and Expenses' in the OfferingCircular. SEC FILING INFORMATION The series of LROs corresponding to this Project are offeredpursuant to Post Qualification Amendment No.70 to the Offering Circular dated December 29,2017 (each,as amended and supplemented fromtimeto time),including the documents incorporatedby reference therein.You may access andreview these documents on the Internal Filings Directory located onour Platform. MISCELLANEOUS INVEST NOW PROPERTY DESCRIPTION BORROWERS REPRESENT AND WARRANT THAT INFORMATIONSUPPLIED IS ACCURATE GROUNDFLOOR HISTORY * HISTORICAL AVERAGES Rodney Smith FOCUS Completed Projects Average Project Loans Funded 0 Loans Repaid 0 Per Year 0 Revenue (?) I I I I Fix& Flip 1'-----o---_I Repayment 0 I o o $O Time 0 Project Costs 0 CONTAINED -HEREINISHELPFUL,WEDO NOT USE IT ASTHE SOLE BASISFOR A FUNDING DECISION. 'HECOMPANY PLAYED NO ROLE IN THEPREPARATIONOFANY OFTHE VALUATIONSOURCES OR ANY OTHER MATERIALS PROVIDED BY THE BORROWER WHILE WE BELIEVE Tf1EDATA BMORE REALTOR LLGFINANCIALDATAPROJECTS/ REVENUE DATE OF FORMATION * OS/04/2016 'PRINCIPAL OnTime Average Project Average Total IN/A 1'------/-A-N _I I$0 Repo"ingperiod: three years ending 2019 Reportingperiod:2019 Reporting date:12/31/19 UNLESS NOTED WITH A INFORMATION BELOW ISSUPPLIED BY THE BORROWER ANDIS NOT VERIFIED BORROWER SUMMARY

 

PS-746

 

 

Jesse Davila-principal First Lien 1 $234.890 1 returned on repayment I due at maturity. (indescendingorder of importance) - LoanTo ARV Score (!) 10 Quality of Valuation Report Skin-in-the-Game (!) 10 11/27/2019 89.6% Purchase Date Project Cost Address: 809HOLLYRIDGE DRIVE,BALLWIN,MO 63011 Click here to view the LRO Agreement 1Map data C2020 Tenns of Use Report a map..l.!fror rJ$••r-ttf:Jf View larger map hoolThe Borrower intends to use the loan proceeds to purchaseand renovate the property.Upon completion,the Borrower intends to sell the property to repay the Groundfloor loan. "'2J.o gleK ylor DGrou1 esign Ta INVEST NOW Sc PROPERTY DESCRIPTION As Complete (ARV) $380,000 Broker's Price Opinion Borrower Provided Appraisal Borrower Provided Camps After Value (ARV) (!) $380,000 TotalCosts (!) $261,090 Skin -in-the First lien loan Cushion (!) Game (!) Purchase Price$152,500Loan To ARV 61.8% loan To Total (!) <!) (!) VALUATION REPORTS The following factors determine in part how the loan was graded: ----4 Location8 Borrower Experience BorrowerCommitment (!) GRAOE FACTORS FINANCIAL OVERVIEW loanToARVLoan Amount Investors BORROWER LoanPosition TotalLoan Amount Repayment Terms JD SFR 2016-DE,J..!.J: Balloon payment-pri ncipaland interest Click here to view the LRO Agreement INVEST NOW $234,890 61.8% PROJECT SPECIFIC RISK FACTORS • The Borrower was advanced the money it needed to purchase this property onNovember 25,2019 by Groundfloor Finance Inc.("Groundfloor," "we "us';or "our") or a wholly-owned subsidiary of Groundfloor.The Borrower is now in possession of the property.If this offering is fully subscribed,Groundfloor will continue to adminsi ter and service the loan as further describedin the OfferingCircular. • The renovation of the property may be extensive,and therefore subject to delays and other unexpected issues. The renovation willrequire permitting,and permits may not be obtained on time or may bedenied. The Borrower has not completed or sold any projects in the past year.As such,the Borrower's average revenue,costs,and margins cannot be calculated. Please consult the OfferingCircular for further discussion of generalrisk factors. CLOSING COHOITIONS • Loanis conditioned upon a clean title search and valid title insurance at the time of close. OEVELOPER FEES • GROUNDFLOOR generally charges borrowers between 2% and 6%of the principalamount of the loan for our services. • GROUNDFLOOR does not take a 'spread' on any part of the interest payments. Developers may capitalize the cost of closing into the principalamount of their request. These closing costs typically range from $500 to $1500. Unless otherwise limited by applicable law,GROUNDFLOOR willcharge a penalty of 2% for any extension made to the borrower.See GROUNDFLOOR 'Fees and Expenses' inthe Offering Circular. SEC FILING INFORMATION • The series of LROs correspondingto this Project areoffered pursuant to Post Qualification Amendment No.70 to the Offering Circular dated December 29,2017 (each,as amended and supplemented from time to time),including the documents incorporated by reference therein.You may access and review these documents on the InternalFilings Directory located on our Platform. MISCELLANEOUS Revenue (!) GROUNDFLOOR HISTORY * HISTORICAL AVERAGES Jesse Davila Completed ProjectsAverage Project I I 1'-----1 --_I I I I 8 $109.9K o CONTAINEDTHEREINIS HELPFUL.WE DO NOT USEIT ASTHE SOLE BASISFOR A FUNDING DECISION. IHE COMPANY PLAYED NO ROLE INTHE PREPARATIONOF ANY OF THE VALUATION SOURCES OR ANY OTHER MATERIALS PROVIDED BY THE BORROWER. WHILE WE BELIEVETHE DATA BORROWERS REPRESENT AND WARRANT THAT INFORMATIONSUPPLIED IS ACCURATE JD SFR 2016-DE,LLC FINANCIALDATAPROJECTSI REVENUE DATE OF FORMATION * 11/08/2016 PRINCIPAL FOCUS Fix& FlipLoans Funded (!) Loans Repaid (!) Per Year (!) Revenue (!) OnTime Average ProjectAverage Total Repayment <!> Time <!>Project Costs <!> I N/A I9 months I I$72.8K '----------' Reportingperiod:three years ending 2019 25.0% $12.6K Reportingperiod 2019 12/31,'19 Reportingdat• INFORMATION BELOW ISSUPPLIED BYTHE BORROWER AND ISNOT VERIFIED UNLESS NOTED WITH A BORROWER SUMMARY

 

PS-747

 

 

*               *               *

 

Financial Statements

 

The following consolidated financial statements for the periods ended June 30, 2019, December 31, 2018 and December 31, 2017 and the notes thereto are added to the Offering Circular starting on page F-1:

 

 

 

 

GROUNDFLOOR FINANCE INC.

AND SUBSIDIARIES

 

Condensed Consolidated Financial Statements

 

June 30, 2019 and 2018

 

 

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Table of Contents

 

Condensed Consolidated Financial Statements (unaudited)  
   
Condensed Consolidated Balance Sheets (unaudited) F-1
   
Condensed Consolidated Statements of Operations (unaudited) F-2
   
Condensed Consolidated Statements of Stockholders’ Deficit (unaudited) F-3
   
Condensed Consolidated Statements of Cash Flows (unaudited) F-4
   
Notes to Condensed Consolidated Financial Statements F-5

 

 

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Condensed Consolidated Balance Sheets 

 

   Unaudited   Audited 
   June 30,   December 31, 
   2019   2018 
Assets          
Current assets:          
Cash  $2,047,549   $1,069,392 
Loans to developers, net   54,201,956    38,761,717 
Interest receivable on loans to developers   2,752,228    1,821,073 
Other current assets   85,604    484,391 
Total current assets   59,087,337    42,136,573 
Property, equipment, software, website, and intangible assets, net   847,081    813,104 
Other assets   42,604    63,906 
Total assets  $59,977,022   $43,013,583 
Liabilities and Stockholders’ Deficit          
Current liabilities:          
Accounts payable and accrued expenses  $1,714,598   $2,493,158 
Accrued interest on limited recourse obligations   2,064,367    1,372,474 
Limited recourse obligations, net   44,126,772    31,719,205 
Revolving credit facility   5,281,294    5,493,605 
Convertible notes   645,000    1,800,000 
Short-term notes payable   6,086,814    2,925,082 
Total current liabilities   59,918,845    45,803,524 
Other liabilities   139,693    60,765 
Total liabilities   60,058,538    45,864,289 
           
Stockholders’ deficit:          
Common stock, no par, 5,000,000 shares authorized, 2,091,153 and 1,732,585 issued and outstanding   10,830,464    6,125,264 
Series A convertible preferred stock, no par, 747,385 shares designated, 747,373 shares issued and outstanding (liquidation preference of $4,999,925)   4,962,435    4,962,435 
Series seed convertible preferred stock, no par, 568,796 shares designated, issued and outstanding (liquidation preference of $2,960,583)   2,609,091    2,609,091 
Additional paid-in capital   1,259,821    1,083,572 
Accumulated deficit   (19,742,767)   (17,630,508)
Stock subscription receivable   (560)   (560)
Total stockholders’ deficit   (81,516)   (2,850,706)
Total liabilities and stockholders’ deficit  $59,977,022   $43,013,583 

 

See accompanying notes to condensed consolidated financial statements

 

F-1

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Operations

 

   Unaudited 
   Six Months Ended June 30, 
   2019   2018 
Non-interest revenue:          
Origination fees  $1,216,642   $415,741 
Loan servicing revenue   752,162    416,892 
Total non-interest revenue   1,968,804    832,633 
Net interest income:          
Interest income   2,854,020    1,229,386 
Interest expense   (2,245,280)   (1,008,149)
Net interest income   608,740    221,237 
Net revenue   2,577,544    1,053,870 
Cost of revenue   (328,706)   (158,378)
Gross profit   2,248,838    895,492 
Operating expenses:          
General and administrative   940,396    971,678 
Sales and customer support   1,264,973    1,012,967 
Development   356,836    259,812 
Regulatory   189,068    168,154 
Marketing and promotions   591,799    916,830 
Total operating expenses   3,343,072    3,329,441 
Loss from operations   (1,094,234)   (2,433,949)
Interest expense   1,018,025    411,413 
Net loss  $(2,112,259)  $(2,845,362)

 

See accompanying notes to condensed consolidated financial statements

 

F-2

 

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Stockholders’ Deficit

 

   Series A   Series Seed                         
   Convertible   Convertible       Additional       Stock   Total 
   Preferred Stock   Preferred Stock   Common Stock   Paid-in   Accumulated   Subscription   Stockholders’ 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Receivable   Deficit 
Stockholders’ deficit as of December 31, 2017 (audited)   747,373   $4,962,435    568,796   $2,609,091    1,136,406   $56,834   $677,929   $(11,529,853)  $(560)  $(3,224,124)
Shares issued in the 2018 Common Stock Offering, net of offering costs   -    -    -    -    468,764    4,562,634    -    -    -    4,562,634 
Shares issued in a private placement   -    -    -    -    125,000    1,500,000    -    -    -    1,500,000 
Exercise of stock options   -    -    -    -    2,415    5,796    -    -    -    5,796 
Share-based compensation expense and warrants   -    -    -    -    -    -    405,643    -    -    405,643 
Net loss   -    -    -    -    -    -    -    (6,100,655)   -    (6,100,655)
Stockholders’ deficit as of December 31, 2018 (audited)   747,373   $4,962,435    568,796   $2,609,091    1,732,585   $6,125,264   $1,083,572   $(17,630,508)  $(560)  $(2,850,706)
Shares issued in the 2019 Common Stock Offering, net of offering costs   -    -    -    -    213,345    3,412,567    -    -    -    4,701,460 
Shares issued in the 2018 Common Stock Offering, net of offering costs   -    -    -    -    143,223    1,288,893    -    -    -    4,562,634 
Exercise of stock options   -    -    -    -    2,000    3,740    -    -    -    3,740 
Share-based compensation expense and warrants   -    -    -    -    -    -    176,249    -    -    176,249 
Net loss   -    -    -    -    -    -    -    (2,112,259)   -    (2,112,259)
Stockholders’ deficit as of June 30, 2019 (unaudited)   747,373   $4,962,435    568,796   $2,609,091    2,091,153   $10,830,464   $1,259,821   $(19,742,767)  $(560)  $(81,516)

 

See accompanying notes to condensed consolidated financial statements

 

F-3

 

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Cash Flows

 

   Unaudited 
   Six Months Ended June 30, 
   2019   2018 
Cash flows from operating activities          
Net loss  $(2,112,259)  $(2,845,362)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   254,269    154,311 
Share-based compensation   74,634    152,400 
Noncash interest expense   97,587    8,518 
Loss (gain) on sale of real estate owned   -    20,585 
Origination of loans held for sale   (6,478,955)   - 
Proceeds from sales of loans held for sale   6,478,955    - 
Conversion of beneficial interests   198,723    181,347 
Changes in operating assets and liabilities:          
Other current assets   36,634    (58,939)
Interest receivable on loans to developers   (2,769,347)   (1,047,570)
Accounts payable and accrued expenses   (565,740)   (246,155)
Accrued interest on limited recourse obligations   2,192,469    1,029,773 
Net cash used in operating activities   (2,593,030)   (2,651,092)
Cash flows from investing activities          
Loan payments to developers   (33,864,787)   (15,704,100)
Repayments of loans from developers   20,236,326    11,535,848 
Proceeds from sale of properties held for sale   301,067    1,057,621 
Purchases of computer equipment and furniture and fixtures   (11,757)   (76,952)
Payments of software and website development costs   (276,489)   (228,622)
Net cash used in investing activities   (13,615,640)   (3,416,205)
Cash flows from financing activities          
Proceeds from limited recourse obligations   33,802,754    15,313,410 
Repayments of limited recourse obligations   (22,786,960)   (13,253,673)
Payment of deferred financing costs   (10,000)   - 
Borrowings from the revolving credit facility   24,309,980    11,858,765 
Repayments on the revolving credit facility   (24,522,291)   (10,684,404)
Proceeds from GROUNDFLOOR Notes   9,686,010    - 
Repayments from GROUNDFLOOR Notes   (6,410,250)   - 
Proceeds from issuance of shares in the 2019 Common Stock Offering, less offering costs   3,213,844    - 
Proceeds from issuance of shares in the 2018 Common Stock Offering, less offering costs   -    3,571,573 
Exercise of stock options   3,740    2,998 
Repayments of shareholder loan   (100,000)   - 
Net cash provided by financing activities   17,186,827    6,808,669 
Net increase (decrease) in cash   978,157    741,372 
Cash as of beginning of the period   1,069,392    1,354,170 
Cash as of end of the period  $2,047,549   $2,095,542 
Supplemental cash flow disclosures:          
Cash paid for interest  $659,602   $319,865 
Supplemental disclosure of noncash investing and financing activities:          
Conversion of convertible notes payable and accrued interest converted into common stock   1,288,893    - 
Issued warrants in connection with the note payable   101,615    54,500 

 

See accompanying notes to condensed consolidated financial statements

 

F-4 

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business

 

The terms "we," "our," or the "Company" refer to Groundfloor Finance Inc. and its subsidiaries. The Company was originally organized as a North Carolina limited liability company under the name of Fomentum Labs LLC on January 28, 2013. Fomentum Labs LLC changed their name to Groundfloor LLC on April 26, 2013, and converted into a North Carolina corporation on July 26, 2013. In connection with this conversion, all equity interests in Groundfloor LLC were converted into shares of GROUNDFLOOR Inc.’s common stock. In August 2014, GROUNDFLOOR Inc. converted into a Georgia corporation and changed their name to Groundfloor Finance Inc. The accounting effects of these conversions are reflected retrospectively in the Condensed Consolidated Financial Statements. Groundfloor Holdings GA, LLC is the holder of the Revolver, as defined in Note 7. Groundfloor Properties GA LLC was created for the purpose of financing real estate in Georgia. Groundfloor Real Estate 1 LLC was created for the purpose of financing real estate in nine states. Groundfloor Real Estate, LLC is currently inactive and management does not have plans to use this entity in the near future.

 

The Company has developed an online investment platform designed to crowdsource financing for real estate development projects (the “Projects”). With this online investment platform (the “Platform”), public investors (the “Investors”) are able to choose between multiple Projects, and real estate developers (the “Developers”) of the Projects are able to obtain financing. GROUNDFLOOR’s financing model replaces traditional sources of financing for Projects with the aggregation of capital from Investors using the internet.

 

GROUNDFLOOR formed Groundfloor Properties GA LLC (“Groundfloor GA”) in August 2013 for the purpose of issuing nonrecourse promissory notes (“Georgia Notes”) corresponding to commercial real estate loans entered into by Groundfloor GA to residents of Georgia. Groundfloor GA began offering these investment opportunities to residents of Georgia through the Platform in November 2013.

 

Following the qualification of the Company’s first offering statement on Form 1-A on August 31, 2015, the Company began a multistate offering of limited recourse obligations (“LROs”) to Investors corresponding to commercial loans for real estate development projects financed by the Company. The Company does not intend to issue any additional Georgia Notes.

 

The Company believes this method of real estate financing has many advantages including reduced Project origination costs, lower interest rates for Developers, and attractive returns for Investors.

 

Basis of Presentation and Liquidity

 

The Company’s Condensed Consolidated Financial Statements include Groundfloor Finance Inc. and its wholly owned subsidiaries, Groundfloor Properties GA LLC; Groundfloor Real Estate, LLC; Groundfloor Holdings GA, LLC; Groundfloor Real Estate 1 LLC; and Groundfloor Real Estate 2, LLC (collectively the “Company” or “GROUNDFLOOR”). Intercompany transactions and balances have been eliminated upon consolidation.

 

The Company’s Condensed Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business.

 

Operations since inception have consisted primarily of organizing the Company, developing the technology, and securing financing. The accompanying Condensed Consolidated Financial Statements have been prepared on a basis which assumes that the Company will continue as a going concern. The Company has incurred losses and cash outflows from operations since its inception. The ultimate success of the Company is dependent on management’s ability to develop and market its products and services at levels sufficient to generate operating revenues in excess of expenses.

 

F-5

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Management evaluated the condition of the Company and has determined that until such sales levels can be achieved, management will need to secure additional capital to continue growing working capital and fund product development and operations.

 

Management intends to raise additional debt or equity financing to grow working capital and fund operations. Management believes the Company will obtain additional funding from current and new Investors in order to sustain operations. However, there are no assurances that the Company can be successful in obtaining the additional capital or that such financing will be on terms favorable or acceptable to the Company.

 

As of issuance date, the Company closed on approximately $3,000,000 in equity financing, see Note 13, “Subsequent Events.”

 

There is substantial doubt that the Company will continue as a going concern for at least 12 months following the date these Condensed Consolidated Financial Statements are issued, without additional financing based on the Company’s limited operating history and recurring operating losses.

 

The Condensed Consolidated Financial Statements do not include any adjustments that might result from the outcome of the uncertainties described in the Condensed Consolidated Financial Statements. In addition, the Condensed Consolidated Financial Statements do not include any adjustments relating to the recoverability and classification of assets nor the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

 

Use of Estimates

 

The preparation of Condensed Consolidated 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 Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

F-6

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Whole Loan Sales

 

Under loan sale agreements, the Company sells all of its rights, title, and interest in certain loans. At the time of such sales, the Company simultaneously enters into loan servicing agreements under which it acquires the right to service the loans. The Company calculates a gain or loss on the whole loan sale, based on the net proceeds from the whole loan sale, minus the net investment in the loans being sold. All origination fees incurred in the origination process are recognized directly to Condensed Consolidated Statements of Operations and recorded to “Origination fees”.

 

Share-Based Compensation

 

The Company accounts for share-based compensation using the fair value method of accounting which requires all such compensation to employees and nonemployees, including the grant of employee stock options or warrants, to be recognized in the Consolidated Statements of Operations based on its fair value at the measurement date. The expense associated with share-based compensation is recognized on a straight-line basis over the service period of each award.

 

F-7

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)

 

Income Taxes

 

Deferred tax assets and liabilities are determined based on the temporary differences between the Consolidated Financial Statements carrying amounts and the tax basis of assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. In estimating future tax consequences, all expected future events are considered other than enactment of changes in the tax law or rates.

 

The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

 

The determination of recording or releasing income tax valuation allowance is made, in part, pursuant to an assessment performed by management regarding the likelihood that the Company will generate future taxable income against which benefits of its deferred tax assets may or may not be realized. This assessment requires management to exercise significant judgment and make estimates with respect to its ability to generate taxable income in future periods.

 

Recent Accounting Pronouncements

 

The Company has evaluated the recent pronouncements issued since filing its annual audited Consolidated Financial Statements for the year-ended December 31, 2018 and believes that none of them will have a material effect on the Company’s Condensed Consolidated Financial Statements.

 

 

NOTE 2: LOANS TO DEVELOPERS, NET

 

The Company provides financing to borrowers for real estate-related loans. Real estate loans include loans for unoccupied single family or multifamily renovations costing between $20,000 and $2,000,000 over six months to a year.

 

The following table presents the carrying amount of “Loans to developers, net” by letter grade and performance state as of June 30, 2019 and December 31, 2018, respectively:

 

   Current   Workout   Fundamental Default   Total 
Loan grades:                    
A  $4,229,547   $-   $-   $4,229,547 
B   13,939,374    176,980    -    14,116,354 
C   24,308,688    2,322,585    517,791    27,149,064 
D   7,551,527    746,100    228,000    8,525,627 
E   681,364    -    -    681,364 
F   -    -    -    - 
G   -    -    -    - 
Carrying amount as of June 30, 2019  $50,710,500   $3,245,665   $745,791   $54,701,956 

 

F-8

 

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

NOTE 2: LOANS TO DEVELOPERS, NET (continued)

 

   Current   Workout   Fundamental
Default		   Total 
Loan grades:                    
A  $3,267,744   $293,473   $-   $3,561,217 
B   7,073,701    668,100    141,150    7,882,951 
C   17,009,297    2,465,820    517,791    19,992,908 
D   7,140,347    263,555    228,000    7,631,902 
E   192,739    -    -    192,739 
F   -    -    -    - 
G   -    -    -    - 
Carrying amount as of December 31, 2018  $34,683,828   $3,690,948   $886,941   $39,261,717 

 

F-9

 

  

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

NOTE 2: LOANS TO DEVELOPERS, NET (continued)

  

Nonaccrual and Past Due Loans

 

A Loan is placed on nonaccrual status when, in management’s judgment, the collection of the interest income appears doubtful. “Interest receivable on loans to developers” that has been accrued and is subsequently determined to have doubtful collectability is charged to “Interest income” and the corresponding “Accrued interest on limited recourse obligations” that has been accrued and is subsequently determined to have doubtful collectability is charged to “Interest expense”. Interest income on Loans that are classified as nonaccrual is subsequently applied to principal until the Loans are returned to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Past due Loans are loans whose principal or interest is past due 30 days or more. As of June 30, 2019, the Company placed Loans of $4,050,000 recorded to “Loans to developers, net” on nonaccrual status.

 

The following table presents an analysis of past due Loans as of June 30, 2019 and December 31, 2018:

 

   Carrying
Amount		   Allowance for
Loan Losses		   Total 
Aging schedule:               
Current  $50,710,500   $40,000   $50,670,500 
Less than 90 days past due   1,959,951    50,000    1,909,951 
More than 90 days past due   2,031,505    410,000    1,621,505 
Total as of June 30, 2019  $54,701,956   $500,000   $54,201,956 
                

 

   Carrying
Amount		   Allowance for
Loan Losses		    Total 
Aging schedule:               
Current  $35,112,798   $40,000   $35,072,798 
Less than 90 days past due   2,404,830    50,000    2,354,830 
More than 90 days past due   1,744,089    410,000    1,334,089 
Total as of December 31, 2018  $39,261,717   $500,000   $38,761,717 

 

F-10

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

NOTE 2: LOANS TO DEVELOPERS, NET (continued)

  

Impaired Loans

 

The following is a summary of information pertaining to impaired loans as of June 30, 2019:

 

   Balance 
Nonaccrual loans  $3,315,210 
Fundamental default not included above   745,790 
Total impaired loans   4,050,000 
      
Interest income recognized on impaired loans  $479,000 

 

The following table presents an analysis of information pertaining to impaired loans as of June 30, 2019:

 

   Balance 
Principal loan balance  $4,205,040 
      
Recorded investment with no allowance   3,300,000 
Recorded investment with allowance   750,000 
Total recorded investment  $4,050,000 
      
Related allowance   500,000 
Average recorded investment  $180,000 

 

The following is a summary of information pertaining to impaired loans as of December 31, 2018:

 

   Balance 
Nonaccrual loans  $2,146,000 
Fundamental default not included above   887,000 
Total impaired loans   3,033,000 
      
Interest income recognized on impaired loans  $400,000 

 

The following table presents an analysis of information pertaining to impaired loans as of December 31, 2018:

 

   Balance 
Principal loan balance  $3,495,120 
      
Recorded investment with no allowance   2,146,000 
Recorded investment with allowance   887,000 
Total recorded investment  $3,033,000 
      
Related allowance   500,000 
Average recorded investment  $230,000 

 

F-11

 

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

NOTE 2: LOANS TO DEVELOPERS, NET (continued)

  

Credit Quality Monitoring

 

The Company uses three performance states to better monitor the credit quality of outstanding loans. Outstanding loans are characterized as follows:

Current - This status indicates that no events of default have occurred, all payment obligations have been met or none are yet triggered.

Workout - This status indicates there has been one or more payment defaults on the Loan and the Company has negotiated a modification of the original terms that does not amount to a fundamental default.

Fundamental Default - This status indicates a Loan has defaulted and there is a chance the Company will not be able to collect 100% of the principal amount of the Loan by the extended payment date of the corresponding Georgia Notes or LROs. The Company has commenced a formal foreclosure process to secure the real estate property. 

 

The following table presents “Loans to developers, net” by performance state as of June 30, 2019 and December 31, 2018:

 

   Carrying
Amount		   Allowance
for Loan
Losses		   Loans to
Developers, Net		 
Performance states:               
Current  $50,710,500   $-   $50,710,500 
Workout   3,245,665    100,000    3,145,665 
Fundamental default   745,791    400,000    345,791 
Total as of June 30, 2019  $54,701,956   $500,000   $54,201,956 
                

 

   Carrying
Amount		   Allowance
for Loan
Losses		   Loans to
Developers, Net		 
Performance states:               
Current  $34,683,828   $-   $34,683,828 
Workout   3,690,948    100,000    3,590,948 
Fundamental default   886,941    400,000    486,941 
Total as of December 31, 2018  $39,261,717   $500,000   $38,761,717 

 

F-12

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

NOTE 2: LOANS TO DEVELOPERS, NET (concluded)

  

Allowance for Loan Losses

 

The following table details activity in the allowance for loan losses for the years ended June 30, 2019 and December 31, 2018:

 

   Balance 
Balance, December 31, 2018  $500,000 
Allowance for loan loss   100,000 
Loans charged off   (100,000)
Outstanding as of June 30, 2019  $500,000 
Period-end amount allocated to:     
  Loans individually evaluated for impairment  $400,000 
  Loans collectively evaluated for impairment   100,000 
Balance, June 30, 2019  $500,000 
Loans:     
  Individually evaluated for impairment  $750,000 
  Collectively evaluated for impairment   3,300,000 
Balance, June 30, 2019  $4,050,000 

 

   Balance 
Balance, December 31, 2017  $640,000 
Allowance for loan loss   240,000 
Loans charged off   (380,000)
Outstanding as of December 31, 2018  $500,000 
Period-end amount allocated to:     
  Loans individually evaluated for impairment  $400,000 
  Loans collectively evaluated for impairment   100,000 
Balance, December 31, 2018  $500,000 
Loans:     
  Individually evaluated for impairment  $887,000 
  Collectively evaluated for impairment   2,146,000 
Balance, December 31, 2018  $3,033,000 

 

F-13

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

 

NOTE 3: OTHER CURRENT ASSETS

 

“Other current assets” at June 30, 2019 and December 31, 2018, consists of the following:

 

   June 30,   December 31, 
   2019   2018 
Other real estate owned  $34,924   $418,379 
Unbilled servicing revenue   25,127    25,127 
Prepaid expenses   21,300    21,300 
Other   4,253    19,585 
Other current assets  $85,604   $484,391 

 

NOTE 4: PROPERTY, EQUIPMENT, SOFTWARE, WEBSITE AND INTANGIBLE ASSETS, NET

 

“Property, equipment, software, website development costs, and intangible assets, net” at June 30, 2019 and December 31, 2018, consists of the following:

 

   June 30,   December 31, 
   2019   2018 
Software and website development costs  $1,581,482   $1,304,993 
  Less: accumulated amortization   (946,701)   (725,255)
Software and website development costs, net  $634,781   $579,738 

 

   June 30,   December 31, 
   2019   2018 
Computer equipment  $99,516   $96,165 
Leasehold improvements   12,529    12,530 
Furniture and fixtures   142,955    134,548 
Office equipment   45,548    45,548 
Property and equipment   300,548    288,791 
  Less: accumulated depreciation and amortization   (111,748)   (79,925)
Property and equipment, net  $188,800   $208,866 

 

   June 30,   December 31, 
   2019   2018 
Domain names  $30,000   $30,000 
  Less:  accumulated amortization   (6,500)   (5,500)
Intangible assets, net  $23,500   $24,500 

 

Depreciation and amortization expense on “Property, equipment, intangible assets, software, and website development costs, net” for the six months ended June 30, 2019 and 2018 was $254,269 and $154,311, respectively.

 

F-14

 

  

  

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

 

NOTE 5: ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

“Accounts payable and accrued expenses” at June 30, 2019 and December 31, 2018, consists of the following:

 

   June 30,   December 31, 
   2019   2018 
Trade accounts payable  $465,437   $762,148 
Deferred revenue   1,069,950    867,950 
Accrued interest expense   149,374    360,325 
Accrued employee compensation   29,837    80,243 
Accrued contractor compensation   -    - 
Other   -    422,492 
Accounts payable and accrued expenses  $1,714,598   $2,493,158 

 

F-15

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

 

NOTE 6: REVOLVING CREDIT FACILITY

 

On November 1, 2016, the Company’s wholly owned subsidiary, Groundfloor Holdings GA, LLC, as borrower, entered into a revolving credit facility (the “Revolver”) with Revolver Capital, LLC. The credit agreement provided for revolving loans up to a maximum aggregate principal amount of $1,500,000. The Revolver will be used for bridge funding of underlying loans pending approval from the United States Securities and Exchange Commission (“SEC”).

On November 11, 2016, the Company entered into a First Amendment to the Credit Agreement (the “First Amendment”) which amended the existing Revolver dated November 1, 2016, among Groundfloor Holdings GA, LLC, as borrower, and Revolver Capital, LLC, as lender. Collateral security for the Revolver includes all property of the underlying loan, upon which a lien is created in favor of the lender. The First Amendment amended the Revolver to increase the Revolving Credit Commitments thereunder from $1,500,000 to $2,500,000. The other terms of the credit facility remain unchanged.

 

On December 21, 2016, the Company entered into a Second Amendment to the Credit Agreement (the “Second Amendment”) which amended the existing Revolver dated November 1, 2016, among Groundfloor Holdings GA, LLC, as borrower, and Revolver Capital, LLC, as lender. The Second Amendment amended the Revolver to increase the Revolving Credit Commitments thereunder from $2,500,000 to $3,500,000. The other terms of the credit facility remain unchanged.

 

On April 7, 2017, the Company entered into a Third Amendment to the Credit Agreement (the “Third Amendment”) which amended the existing credit agreement dated November 1, 2016, among Groundfloor Holdings GA, LLC, as borrower, and Revolver Capital, LLC, as lender. The Third Amendment amended the credit agreement to increase the Revolving Credit Commitments thereunder from $3,500,000 to $4,500,000. In connection with the Third Amendment the Company paid a $10,000 commitment fee, which is capitalized and amortized over a twelve-month period. The other terms of the credit facility remain unchanged.

 

On April 4, 2018, the Credit Agreement dated as of November 1, 2016, as amended by the First Amendment as of November 11, 2016, the Second Amendment dated as of February 22, 2017 and the Third Amendment dated as of April 7, 2017, was assigned to ACM Alamosa DA LLC. The Company and the lender agreed to amend and restate the Original Credit Agreement in its entirety. The other terms of the credit facility remain unchanged.

 

On September 18, 2018, the Company increased the Revolving Credit Commitments thereunder from $4,500,000 to $5,500,000. In connection with the increase the Company paid a $10,000 commitment fee, which is capitalized and amortized over a twelve-month period. The other terms of the credit facility remain unchanged.

 

The Revolver maturity date is November 1, 2019. The Company has the option to request and the lender may, in its sole discretion, elect to extend the maturity date.

 

As of June 30, 2019, the Company had $217,000 of available borrowings and $5,500,000 outstanding under the Revolver as presented within Revolving credit facility on the Condensed Consolidated Balance Sheets. As of June 30, 2019, the Company reflected $1,667 of deferred financing costs related to the Revolver as a reduction to the Revolving credit facility in the Condensed Consolidated Balance Sheets. Amortization of these costs was $5,000 and $833 for the six months ended June 30, 2019 and 2018, respectively. Accrued interest on the Revolver, presented within “Accounts payable and accrued expenses” in the Company’s Consolidated Balance Sheets, was $44,400 and $111,288 at June 30, 2019 and December 31, 2018, respectively.

 

The Revolver contains certain affirmative and negative covenants, including financial and other reporting requirements. The Company is in compliance with all such covenants at June 30, 2019.

 

F-16

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

NOTE 7: CONVERTIBLE NOTES

 

From March 2017 to May 2017, the Company issued subordinated convertible notes (the “Subordinated Convertible Notes”) to Investors for total proceeds of $825,000. The Subordinated Convertible Notes bear interest at the rate of 8% per annum. The outstanding principal and all accrued but unpaid interest was due and payable on the earlier of September 24, 2018, or the consummation of a sale of the Company by consolidation, merger, change of majority ownership, or sale or other disposition of all or substantially all of the assets of the Company (the “Maturity Date”). In the event of a closing of a preferred stock financing with gross proceeds of at least $8,000,000 (“Qualified Preferred Financing”) prior to the Maturity Date, the outstanding principal and all accrued but unpaid interest may be converted into shares of preferred stock issued in the financing at a price per share equal to 75% of the price per share of the Qualified Preferred Financing. In the event of a closing of a common stock financing with gross proceeds of at least $3,000,000 (“Qualified Common Financing”) prior to the Maturity Date, the outstanding principal and all accrued but unpaid interest may be converted into shares of common stock issued in the financing at a price per share equal to 90% of the price per share of the Qualified Common Financing. The indebtedness represented by the Subordinated Convertible Notes is subordinated in all respects to the principal of (and premium, if any), unpaid interest on and amounts reimbursable, fees, expenses, costs of enforcement, and other amounts due in connection with the Revolver and the Note. On October 27, 2017, the amended and restated subordinated convertible note agreement and the note amendment agreement amended the subordinated convertible note purchase agreement dated March 24, 2017, and Subordinated Convertible Notes issued thereunder (as amended, the “Restated Subordinated Convertible Notes”), respectively. Pursuant to the Restated Subordinated Convertible Notes, the outstanding principal and all accrued but unpaid interest is due and payable on the earlier of September 30, 2019, or the consummation of a sale of the Company by consolidation, merger, change of majority ownership, or sale or other disposition of all or substantially all of the assets of the Company (the “New Maturity Date”). The interest rate of 8% per annum remained unchanged.

 

From October 2017 to December 2017, the Company issued Restated Subordinated Convertible Notes to Investors for total proceeds of $1,225,000. The outstanding principal and all accrued but unpaid interest is due and payable on the New Maturity Date. In the event of a closing of a Qualified Financing prior to the New Maturity Date, the outstanding principal and all accrued but unpaid interest would become automatically converted into shares of stock issued in the financing at a price per share equal to 75% of the price per share of the financing. The indebtedness represented by the Restated Subordinated Notes is subordinated in all respects to the principal of (and premium, if any), unpaid interest on and amounts reimbursable, fees, expenses, costs of enforcement, and other amounts due in connection with the Revolver and the Note.

 

In 2018, a Restated Subordinated Convertible Notes holder converted their shares upon closing the 2018 Common Stock Offering, which qualified as a Qualified Common Financing. The noteholder converted $250,000 in principal and $27,617 in accrued interest at a 10% discount into 30,847 shares of common stock. The Company recorded $30,847 to interest expense as a result of the beneficial conversion.

 

In 2019, a Restated Subordinated Convertible Notes holder converted their shares upon closing the 2018 Common Stock Offering, which qualified as a Qualified Common Financing. The noteholder converted $1,155,000 in principal and $133,894 in accrued interest at a 10% discount into 143,223 shares of common stock. The Company recorded $143,223 to interest expense as a result of the beneficial conversion.

 

Accrued interest on the Restated Subordinated Convertible Notes, presented within “Accounts payable and accrued expenses” in the Company’s Condensed Consolidated Balance Sheets, was $85,662 at June 30, 2019 and $186,426 at December 31, 2018.

 

F-17

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

 

NOTE 8: NOTES PAYABLE

 

On January 11, 2017, the Company entered into a promissory note and security agreement (the “Note”) for a principal sum of $1,000,000. We paid an origination fee of $10,000 concurrently with the funding of the principal of the Note. We subsequently entered into an amendment to the Note extending the payment schedule for a $5,000 amendment fee, a second amendment increasing the principal amount outstanding to $2,000,000 for a $30,000 amendment fee, a third amendment further extending the repayment schedule among other terms described below for a $10,000 amendment fee, and a fourth amendment further extending the repayment schedule amount other terms described below for a $10,000 amendment fee. The amendment fees were deferred and amortized over the life of the Note.

 

The Note incurs interest at a rate of 8.0% per annum from January 11, 2017 until September 30, 2017, and 14.0% per annum from October 1, 2017, until payment in full of the Note, in each case calculated on the basis of a 360-day year for the actual number of days elapsed. The Note must be repaid as follows: (i) $50,000, plus any accrued but unpaid interest thereon, commencing on April 30, 2019, and each month thereafter, (ii) $1,000,000, plus any accrued but unpaid interest thereon, is due and payable on September 30, 2019, and (iii) any remaining outstanding principal amount, plus any remaining accrued but unpaid interest, is due and payable on December 31, 2020.

 

The Note includes certain financial covenants related to the Company’s quarterly financial results and operating capital. The Note is subject to customary event of default provisions. Upon the occurrence of any event of default, the interest rate under the Note shall increase by 7.0%. As collateral security for the Note, the Company granted first priority security interest in all of its assets, subject to certain exceptions. Among other things, the security interest specifically excludes (i) any assets serving as collateral for the Company’s Revolver; (ii) any Loans for which a series of LROs has been issued, regardless of whether such Loans and corresponding series of LROs have been originated and issued by the Company or one of its subsidiaries; and (iii) the equity interest in any subsidiary formed by the Company for the sole purpose of issuing Loans and corresponding series of LROs.

 

In connection with the third amendment to the Note, the Company agreed to issue a warrant for the purchase of shares of the Company’s common stock on the first day of each quarter commencing on October 1, 2017, until the Note is repaid in full for the purchase of the following number of shares: (i) for each quarter until and including the first quarter of 2019, 4,000 shares of common stock; (ii) for the second quarter of 2019, 3,500 shares of common stock; (iii) for the third quarter of 2019, 2,300 shares of common stock; and (iv) for the fourth quarter of 2019, 1,100 shares of common stock. The exercise price of the warrants issued on the Note in connection with the third amendment to the Note is $2.40.

 

As of June 30, 2018, the principal sum of $1,650,000 remains outstanding and is presented in “Short-term notes payable” on the Company’s Condensed Consolidated Balance Sheets net of deferred financing fees of $8,333, and debt discount of $84,020, amortizable over the amended term of the Note. Amortization of these costs was $89,695 for the six months ended June 30, 2019.

 

Accrued interest on the Note, presented within “Accounts payable and accrued expenses” in the Company’s Condensed Consolidated Balance Sheets, was $19,290 and $62,611 at June 30, 2019 and December 31, 2018, respectively.

 

The Note includes financial covenants that may trigger events of default or principal acceleration. The Company failed to comply with all the financial covenants during the six months ended June 30, 2019. Prior to the filing date of the Condensed Consolidated Financial Statements, the Company secured a waiver to prevent a default event and principal acceleration.

 

F-18

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

 

NOTE 8: NOTES PAYABLE (concluded)

 

In 2018, the Company entered into various secured promissory notes, (the “GROUNDFLOOR Notes”), with accredited Investors. The GROUNDFLOOR Notes are used for the purpose of the Company to originate, buy, and service loans for the purpose of building, buying, or rehabilitating single family and multifamily structures, or buying land, for commercial purposes. The GROUNDFLOOR Notes are issued and secured by the assets of Groundfloor Real Estate 1 LLC, a wholly owned subsidiary of Groundfloor Finance, Inc. As collateral security for GROUNDFLOOR Notes, the Company granted first priority security interest in all the loan assets of its wholly owned subsidiary, Groundfloor Real Estate 1 LLC, subject to certain exceptions. During the year-end December 31, 2018, there were ten notes entered into ranging in interest rates of 3.25% to 5.5% and terms of 30 and 90 days. As of June 30, 2019 and December 31, 2018, the principal sum of $4,556,860 and $1,281,100, respectively, remains outstanding and is presented in “Short-term notes payable” on the Company’s Consolidated Balance Sheets.

 

Accrued interest on the GROUNDFLOOR Notes, presented within “Accounts payable and accrued expenses” in the Company’s Consolidated Balance Sheets, was $34,573 and $4,100 at June 30, 2019 and December 31, 2018, respectively.

 

NOTE 9: STOCKHOLDERS’ (Deficit) EQUITY

 

Capital Structure

 

Authorized Shares - As of June 30, 2019, the Company is authorized to issue 5,000,000 shares of no par value common stock and 1,316,181 shares of no par value preferred stock. The preferred stock has been designated as Series A Preferred Stock (the “Series A”), consisting of 747,385 shares, and Series Seed Preferred Stock (the “Series Seed”), consisting of 568,796 shares (collectively, “Preferred Stock”).

 

Common Stock Transactions

 

2019 Common Stock Offering

 

On January 11, 2019, the Company launched an offering of our common stock under Tier 2 of Regulation A pursuant to an offering statement on Form 1-A qualified by the Security and Exchange Commission (the “2019 Common Stock Offering”). We are offering up to 900,000 shares of our common stock at $15 per share, with a minimum investment of $150, or 10 shares of common stock. As of June 30, 2019, we have issued 189,592 shares of common stock in the 2019 Common Stock Offering for $2,638,600 in proceeds.

 

2018 Common Stock Offering

 

In February 2018, the Company launched an offering of its common stock under Tier 2 of Regulation A pursuant to an offering statement on Form 1-A qualified by the SEC (the “2018 Common Stock Offering”). The Company offered up to 500,000 shares of common stock at $10 per share, with a minimum investment of $100, or ten shares of common stock. The aggregate initial offering price of the common stock will not exceed $5,000,000 in any 12-month period, and there is no minimum offering amount. The Company may issue up to 30,000 additional bonus shares. The 2018 Common Stock Offering closed on July 31, 2018. During the 2018 Common Stock Offering, the Company issued 437,917 shares of common stock for gross proceeds of $4,228,670. The Company incurred offering costs of $125,000 related to the 2018 Common Stock Offering. During the year ended December 31, 2018, the Company recorded $150,500 in beneficial interest related to the bonus shares issued in connection with the 2018 Common Stock Offering to “General and administrative” in the Company’s Consolidated Statement of Operations. In conjunction with the 2018 Common Stock Offering, the Company converted one noteholder’s outstanding restated subordinated convertible notes payable and accrued interest totaling $277,617 into 30,847 shares of common stock.

 

In January 2019, various noteholder’s converted outstanding restated subordinated convertible notes payable and accrued interest totaling $1,288,893 into 143,210 shares of common stock as triggered by the 2018 Common Stock Offering.

 

In October 2018, the Company entered into a common stock purchase agreement for private placement of 125,000 shares of the Company’s common stock for gross proceeds of $1,500,000.

 

F-19

 

 

  

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consoldiated Financial Statements

 

NOTE 9: STOCKHOLDERS’ (Deficit) EQUITY (concluded)

 

Preferred Stock Transactions

 

Series A

 

During 2015, the Company issued 709,812 shares of Series A to Investors for total proceeds of $4,748,705. In conjunction with the equity issuance, the Company converted all outstanding promissory notes payable and accrued interest totaling $251,295 into 37,561 shares of Series A.

 

Series Seed

 

During 2015 and 2014, the Company issued 201,146 and 91,259 shares, respectively, to Investors for total proceeds of $1,047,000 and $475,000. In conjunction with the equity issuance in 2014, the Company converted all outstanding convertible notes payable and accrued interest totaling $1,098,388 into 276,391 shares of Series Seed.

 

Voting - The holders of Preferred Stock are entitled to one vote for each share of common stock into which the preferred shares are convertible.

 

Liquidation - Upon any liquidation, dissolution, or winding up of the Company, the holders of Series A shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders before any payment shall be made to the holders of common stock or Series Seed, an amount per share equal to the greater of: i) the Series A original issue price of $6.69 per share, plus any dividends declared but unpaid, and ii) such amount per share as would have been payable had all shares of Series A been converted into common stock immediately prior to such liquidation, dissolution, or winding up. If the available assets are insufficient to pay the holders of shares of Series A the full amount to which they shall be entitled, then all of the available assets shall be distributed to the holders of the Series A pro rata in accordance with their ownership thereof.

 

After payment in full of the Series A preference amount, the Series Seed stockholders are entitled to a liquidation preference equal to the greater of: i) the Series Seed original issue price of $5.205 per share, plus any dividends declared but unpaid, or ii) such amount per share as would have been payable had all shares of Series Seed been converted into common stock immediately prior to such liquidation, dissolution, or winding up. If the available assets are insufficient to pay the holders of shares of Series Seed the full amount to which they shall be entitled, then all of the available assets shall be distributed to the holders of the Series Seed pro rata in accordance with their ownership thereof. Any assets remaining after such preferential distribution shall be distributed to holders of the common stock.

 

Conversion - Shares of Preferred Stock are convertible into shares of common stock at the option of the holder at any time. The number of common stock shares for Preferred Stock can be determined by dividing the original issue price by the then-effective conversion price.

 

Mandatory Conversion - All outstanding shares of Preferred Stock shall automatically be converted into shares of common stock upon the closing of the sales of shares of common stock to the public, with gross proceeds to the Company of at least $30,000,000. All outstanding shares of Series A shall automatically be converted into shares of common stock by the date and time, or the occurrence of an event, specified by vote or written consent of the holders of at least a majority of the then outstanding shares of Series A, voting as a single class. All outstanding shares of Series Seed shall automatically be converted into shares of common stock by the date and time, or the occurrence of an event, specified by vote or written consent of the holders of at least a majority of the then outstanding shares of Series Seed, voting as a single class.

 

Dividends - All dividends shall be declared pro rata on the common stock and Preferred Stock on a pari passu basis according to the numbers of common stock held by such holders on an as converted basis.

 

F-20

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consoldiated Financial Statements

 

NOTE 10: STOCK OPTIONS & WARRANTS

 

Stock Options

 

In August 2013, the Company adopted the 2013 Stock Option Plan (the “Plan”). The Plan provides incentives to eligible employees, officers, and directors in the form of incentive stock options, non-qualified stock options and restricted stock awards. During the six months ended June 30, 2018 the Company increased the shares available for common stock issuance under the Plan by 150,000. As of June 30, 2019, the Company reserved a total of 400,000 shares of common stock for issuance under the Plan. Of these shares, 80,321 shares are available for future stock option grants as of June 30, 2019.

 

During the six months ended June 30, 2019, the Company issued 26,500 stock options and 2,000 stock options were exercised.

 

As of June 30, 2019, there was approximately $595,330 of total unrecognized compensation cost related to stock option arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 2.3 years.

 

During the six months ended June 30, 2018, the Company issued 36,750 stock options and 1,249 stock options were exercised.

 

As of June 30, 2018, there was approximately $290,600 of total unrecognized compensation cost related to stock option arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 2.2 years.

 

The Company recorded $0 and $9,950 in non-employee and $74,634 and $127,000 in employee share-based compensation expense during 2019 and 2018, respectively.

 

Warrants

 

The Company issued 7,500 warrants during the six months ended June 30, 2019, for the purchase of common stock. The warrants are exercisable immediately at $2.40 with a contractual term of ten years. The warrants were issued in conjunction with the Note. The warrants were recorded for $101,615 as a debt discount to “Long-term notes payable” and corresponding increase in “Additional paid-in capital” and $88,235 was amortized to interest expense in the six months ended June 30, 2019.

 

The Company issued 8,000 warrants during the six months ended June 30, 2018, for the purchase of common stock. The warrants are exercisable immediately at $2.40 with a contractual term of ten years. The warrants were issued in conjunction with the Note. The warrants were recorded for $54,500 as a debt discount to “Long-term notes payable” and corresponding increase in “Additional paid-in capital” and $15,500 was amortized to interest expense in the six months ended June 30, 2018.

 

None of the warrants have been exercised as of June 30, 2019.

 

F-21

 

 

The Company has incurred net operating losses since inception and is forecasting additional losses through December 31, 2019. Therefore, no United States federal, state, or foreign income taxes are expected for 2019 and none have been recorded as of June 30, 2019.

 

Due to the Company’s history of losses since inception, there is not enough evidence at this time to support the conclusion that it will generate future income of a sufficient amount and nature to utilize the benefits of the Company’s net deferred tax assets. Accordingly, the Company fully reduced its net deferred tax assets by a valuation allowance, since it has been determined that it is more likely than not that all of the deferred tax assets will not be realized.

 

On December 22, 2017, the United States enacted new tax reform legislation which reduced the corporate tax rate to 21% effective for the tax year beginning January 1, 2018. Under Accounting Standards Codification 740, the effects of new tax legislation are recognized in the period which includes the enactment date. As a result, the deferred tax assets and liabilities existing on the enactment date must be revalued to reflect the rate at which these deferred balances will reverse. The corresponding adjustment would generally affect the income tax expense (benefit) shown on the Condensed Consolidated Statements of Operations. However, since the Company has a full valuation allowance applied against its deferred tax asset, there is no impact to the income tax expense for the six months ended June 30, 2019.

 

NOTE 12: RELATED PARTY TRANSACTIONS

 

ISB Development Corp.

 

The Company’s Note holder, ISB Development Corp, is owned and operated by a director of the Company. In January 2017, the Company’s Board of Directors approved the execution of the promissory note and security agreement (the “Note”) and subsequent amendments. See Note 8 for further discussion and disclosure associated with the Note.

 

NOTE 13: SUBSEQUENT EVENTS

 

As of July 31, 2019, the Company has closed on approximately $3,000,000 on the 2019 Common Stock Offering.

 

On August 8, 2019, the Company and ACM Alamosa DA LLC amended the Revolver to increase the Revolving Credit Commitments thereunder from $5,500,000 to $8,500,000.

 

Subsequent events were evaluated through September 20, 2019, the date the Condensed Consolidated Financial Statements were available to be issued.

 

F-22

 

 

 

GROUNDFLOOR FINANCE INC.

AND SUBSIDIARIES

 

Consolidated Financial Statements

 

December 31, 2018 and 2017

 

F-23

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Table of Contents

 

December 31, 2018 and 2017

 

Independent Auditors’ Report F-25
   
Consolidated Financial Statements  
   
Consolidated Balance Sheets F-26
   
Consolidated Statements of Operations F-27
   
Consolidated Statements of Stockholders’ (Deficit) Equity F-28
   
Consolidated Statements of Cash Flows F-29
   
Notes to Consolidated Financial Statements F-30

 

F-24

 

 

Independent Auditors’ Report

 

The Board of Directors

Groundfloor Finance Inc. and Subsidiaries

Atlanta, Georgia

 

We have audited the accompanying consolidated financial statements of Groundfloor Finance Inc. and Subsidiaries (the “Company”), which comprise the consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements of operations, stockholders’ (deficit) equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

 

Management’s Responsibility for the Consolidated Financial Statements

 

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors’ Responsibility

 

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Groundfloor Finance Inc. and Subsidiaries as of December 31, 2018 and 2017, and the consolidated results of their operations and their cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America.

 

Uncertainty Regarding Going Concern

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred losses and cash outflows from operations since its inception. Those conditions raise substantial doubt about its ability to continue as a going concern as of December 31, 2018. Management’s plans regarding those matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to that matter.

  

/s/ Hughes Pittman & Gupton, LLP  
Raleigh, North Carolina  
March 21, 2019  

 

F-25

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

 

   December 31, 
   2018   2017 
Assets          
Current assets:          
Cash  $1,069,392   $1,354,170 
Loans to developers, net   38,761,717    18,899,485 
Interest receivable on loans to developers   1,821,073    1,354,533 
Other current assets   484,391    344,768 
Total current assets   42,136,573    21,952,956 
Property, equipment, software, website, and intangible assets, net   813,104    481,047 
Other assets   63,906    - 
Total assets  $43,013,583   $22,434,003 
Liabilities and Stockholders’ (Deficit) Equity          
Current liabilities:          
Accounts payable and accrued expenses  $2,493,158   $1,850,157 
Accrued interest on limited recourse obligations   1,372,474    1,133,008 
Limited recourse obligations, net   31,719,205    15,925,524 
Revolving credit facility   5,493,605    3,000,179 
Convertible notes   1,800,000    2,050,000 
Short-term notes payable   2,925,082    - 
Total current liabilities   45,803,524    23,958,868 
Other liabilities   60,765    - 
Long-term notes payable   -    1,699,259 
Total liabilities   45,864,289    25,658,127 
Commitments and contingencies (See Note 14)          
Stockholders’ (deficit) equity:          
Common stock, no par, 5,000,000 shares authorized, 1,732,585 and 1,136,406 issued and outstanding   6,125,264    56,834 
Series A convertible preferred stock, no par, 747,385 shares designated, 747,373 shares issued and outstanding (liquidation preference of $4,999,925)   4,962,435    4,962,435 
Series seed convertible preferred stock, no par, 568,796 shares designated, issued and outstanding (liquidation preference of $2,960,583)   2,609,091    2,609,091 
Additional paid-in capital   1,083,572    677,929 
Accumulated deficit   (17,630,508)   (11,529,853)
Stock subscription receivable   (560)   (560)
Total stockholders’ (deficit) equity   (2,850,706)   (3,224,124)
Total liabilities and stockholders’ (deficit) equity  $43,013,583   $22,434,003 

 

See accompanying notes to consolidated financial statements

 

F-26

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Consolidated Statements of Operations

 

   Year Ended December 31, 
   2018   2017 
Non-interest revenue:          
Origination fees  $1,183,583   $871,771 
Loan servicing revenue   988,203    509,939 
Total non-interest revenue   2,171,786    1,381,710 
Net interest income:          
Interest income   3,178,629    2,287,701 
Interest expense   (2,460,454)   (1,921,693)
Net interest income   718,175    366,008 
Net revenue   2,889,961    1,747,718 
Cost of revenue   (423,776)   (251,431)
Gross profit   2,466,185    1,496,287 
Operating expenses:          
General and administrative   1,736,515    1,102,137 
Sales and customer support   2,456,875    1,316,356 
Development   1,006,840    658,844 
Regulatory   193,538    457,844 
Marketing and promotions   2,169,567    1,338,635 
Total operating expenses   7,563,335    4,873,816 
Loss from operations   (5,097,150)   (3,377,529)
Interest expense   1,003,505    707,956 
Net loss  $(6,100,655)  $(4,085,485)

 

See accompanying notes to consolidated financial statements

 

F-27

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Consolidated Statements of Stockholders’ (Deficit) Equity

 

   Series A   Series Seed                       Total 
   Convertible   Convertible       Additional       Stock   Stockholders’ 
   Preferred Stock   Preferred Stock   Common Stock   Paid-in   Accumulated   Subscription   (Deficit) 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Receivable   Equity 
Stockholders’ equity as of December 31, 2016   747,373   $4,962,435    568,796   $2,609,091    1,131,070   $51,656   $497,866   $(7,444,368)  $(560)  $676,120 
Exercise of stock options   -    -    -    -    5,336    5,178    -    -    -    5,178 
Share-based compensation expense   -    -    -    -    -    -    180,063    -    -    180,063 
Net loss   -    -    -    -    -    -    -    (4,085,485)   -    (4,085,485)
Stockholders’ deficit as of December 31, 2017   747,373   $4,962,435    568,796   $2,609,091    1,136,406   $56,834   $677,929   $(11,529,853)  $(560)  $(3,224,124)
Shares issued in the 2018 Common Stock Offering, net of offering costs   -    -    -    -    468,764    4,562,634    -    -    -    4,562,634 
Shares issued in a private placement   -    -    -    -    125,000    1,500,000    -    -    -    1,500,000 
Exercise of stock options   -    -    -    -    2,415    5,796    -    -    -    5,796 
Share-based compensation expense and warrants   -    -    -    -    -    -    405,643    -    -    405,643 
Net loss   -    -    -    -    -    -    -    (6,100,655)   -    (6,100,655)
Stockholders’ deficit as of December 31, 2018   747,373   $4,962,435    568,796   $2,609,091    1,732,585   $6,125,264   $1,083,572   $(17,630,508)  $(560)  $(2,850,706)

 

See accompanying notes to consolidated financial statements

 

F-28

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

 

   Year Ended December 31, 
   2018   2017 
Cash flows from operating activities          
Net loss  $(6,100,655)  $(4,085,485)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   375,532    231,111 
Share-based compensation   281,143    160,063 
Noncash interest expense   73,388    69,676 
Loss (gain) on sale of real estate owned   7,963    - 
Origination of loans held for sale   (672,491)   (3,151,503)
Proceeds from sales of loans held for sale   672,491    3,151,503 
Conversion of beneficial interests   181,347    - 
Changes in operating assets and liabilities:          
Other current assets   41,492    7,058 
Interest receivable on loans to developers   (3,161,729)   (689,160)
Accounts payable and accrued expenses   731,383    894,862 
Accrued interest on limited recourse obligations   2,439,597    526,449 
Net cash used in operating activities   (5,130,539)   (2,885,426)
Cash flows from investing activities          
Loan payments to developers   (45,914,339)   (25,104,481)
Repayments of loans from developers   26,131,470    18,620,453 
Proceeds from sale of properties held for sale   1,818,857    - 
Purchases of computer equipment and furniture and fixtures   (220,489)   (20,299)
Payments of software and website development costs   (487,100)   (292,052)
Net cash used in investing activities   (18,671,601)   (6,796,379)
Cash flows from financing activities          
Proceeds from limited recourse obligations   43,135,416    28,032,146 
Repayments of limited recourse obligations   (28,997,881)   (21,197,033)
Payment of deferred financing costs   (10,000)   (65,000)
Borrowings from the revolving credit facility   37,369,522    23,876,708 
Repayments on the revolving credit facility   (34,870,261)   (23,627,941)
Proceeds from GROUNDFLOOR Notes   1,801,200    - 
Repayments from GROUNDFLOOR Notes   (520,100)   - 
Proceeds from issuance of shares in the 2018 Common Stock Offering, less offering costs   4,103,670    - 
Proceeds from issuance of shares in a private placement   1,500,000    - 
Exercise of stock options   5,796    5,178 
Proceeds from issuance of restated subordinate convertible notes   -    2,050,000 
Proceeds from issuance of shareholder loan   -    2,000,000 
Repayments of shareholder loan   -    (250,000)
Net cash provided by financing activities   23,517,362    10,824,058 
Net increase (decrease) in cash   (284,778)   1,142,253 
Cash as of beginning of the period   1,354,170    211,917 
Cash as of end of the period  $1,069,392   $1,354,170 
Supplemental cash flow disclosures:          
Cash paid for interest  $650,528   $509,908 
Supplemental disclosure of noncash investing and financing activities:          
Loans to developers transferred to other real estate owned  $2,071,840   $234,825 
Write-down (recovery) of loans to developers, net and limited recourse obligations, net   438,660    44,015 
Write-down (recovery) of interest receivable on loans to developers and accrued interest on limited recourse obligations   195,240    42,759 
Conversion of convertible notes payable and accrued interest converted into common stock   277,617    - 
Reduction to allowance for loan to developers and limited recourse obligations   90,000    60,000 
Issued warrants in connection with the note payable   124,500    20,000 

   

See accompanying notes to consolidated financial statements

 

F-29

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business

 

The terms "we," "our," or the "Company" refer to Groundfloor Finance Inc. and its subsidiaries. The Company was originally organized as a North Carolina limited liability company under the name of Fomentum Labs LLC on January 28, 2013. Fomentum Labs LLC changed their name to Groundfloor LLC on April 26, 2013, and converted into a North Carolina corporation on July 26, 2013. In connection with this conversion, all equity interests in Groundfloor LLC were converted into shares of GROUNDFLOOR Inc.’s common stock. In August 2014, GROUNDFLOOR Inc. converted into a Georgia corporation and changed their name to Groundfloor Finance Inc. The accounting effects of these conversions are reflected retrospectively in the Consolidated Financial Statements. Groundfloor Holdings GA, LLC is the holder of the Revolver, as defined in Note 7. Groundfloor Properties GA LLC was created for the purpose of financing real estate in Georgia. Groundfloor Real Estate 1 LLC was created for the purpose of financing real estate in nine states. Groundfloor Real Estate 2 LLC was created for the purpose of financing real estate in nine states. Groundfloor Real Estate, LLC is currently inactive and management does not have plans to use this entity in the near future.

 

The Company has developed an online investment platform designed to crowdsource financing for real estate development projects (the “Projects”). With this online investment platform (the “Platform”), public investors (the “Investors”) are able to choose between multiple Projects, and real estate developers (the “Developers”) of the Projects are able to obtain financing. GROUNDFLOOR’s financing model replaces traditional sources of financing for Projects with the aggregation of capital from Investors using the internet.

 

GROUNDFLOOR formed Groundfloor Properties GA LLC (“Groundfloor GA”) in August 2013 for the purpose of issuing nonrecourse promissory notes (“Georgia Notes”) corresponding to commercial real estate loans entered into by Groundfloor GA to residents of Georgia. Groundfloor GA began offering these investment opportunities to residents of Georgia through the Platform in November 2013.

 

Following the qualification of the Company’s first offering statement on Form 1-A on August 31, 2015, the Company began a multistate offering of limited recourse obligations (“LROs”) to Investors corresponding to commercial loans for real estate development projects financed by the Company. The Company does not intend to issue any additional Georgia Notes.

 

The Company believes this method of real estate financing has many advantages including reduced Project origination costs, lower interest rates for Developers, and attractive returns for Investors.

 

Basis of Presentation and Liquidity

 

The Company’s Consolidated Financial Statements include Groundfloor Finance Inc. and its wholly owned subsidiaries, Groundfloor Properties GA LLC; Groundfloor Real Estate, LLC; Groundfloor Holdings GA, LLC; Groundfloor Real Estate 1 LLC; and Groundfloor Real Estate 2, LLC (collectively the “Company” or “GROUNDFLOOR”). Intercompany transactions and balances have been eliminated upon consolidation.

 

The Company’s Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business.

 

Operations since inception have consisted primarily of organizing the Company, developing the technology, and securing financing. The accompanying Consolidated Financial Statements have been prepared on a basis which assumes that the Company will continue as a going concern. The Company has incurred losses and cash outflows from operations since its inception. The ultimate success of the Company is dependent on management’s ability to develop and market its products and services at levels sufficient to generate operating revenues in excess of expenses.

 

F-30

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Management evaluated the condition of the Company and has determined that until such sales levels can be achieved, management will need to secure additional capital to continue growing working capital and fund product development and operations.

 

Management intends to raise additional debt or equity financing to grow working capital and fund operations. Management believes the Company will obtain additional funding from current and new Investors in order to sustain operations. However, there are no assurances that the Company can be successful in obtaining the additional capital or that such financing will be on terms favorable or acceptable to the Company.

 

As of issuance date, the Company closed on approximately $1,500,000 in equity financing, see Note 15, “Subsequent Events.”

 

There is substantial doubt that the Company will continue as a going concern for at least 12 months following the date these Consolidated Financial Statements are issued, without additional financing based on the Company’s limited operating history and recurring operating losses.

 

The Consolidated Financial Statements do not include any adjustments that might result from the outcome of the uncertainties described in the Consolidated Financial Statements. In addition, the Consolidated Financial Statements do not include any adjustments relating to the recoverability and classification of assets nor the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

 

Use of Estimates

 

The preparation of Consolidated 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 Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Revenue Recognition

 

Revenue primarily results from fees earned on the loans to the Developers (the “Loans”). Fees include “Origination fees” and “Loan servicing revenue” which are paid by the Developers.

 

Origination Fees

 

“Origination fees” are paid by the Developers for the work performed to facilitate the Loans. The amount to be charged is a percentage based upon the terms of the Loan, including grade, rate, term, and other factors. Origination fees range from 1.0% to 5.0% of the principal amount of a Loan. The origination fee is paid when the Loan is issued to the Developer and deducted from the gross proceeds distributed. A Loan is considered issued when the funds are transferred to the Developer’s account, which occurs through an Electronic Funds Transfer (“EFT”).

 

The origination fees are recognized as revenue ratably over the term of the Loan, while direct costs to originate Loans are recorded as expenses as incurred.

 

Loan Servicing Revenue

 

The loan servicing revenue is recognized by the Company, upon recovery, for costs incurred in servicing the Developer’s Loan, including managing payments to and from Developers and payments to Investors. The Company records loan servicing revenue as a component of revenue when collected.

 

F-31

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Whole Loan Sales

 

Under loan sale agreements, the Company sells all of its rights, title, and interest in certain loans. At the time of such sales, the Company simultaneously enters into loan servicing agreements under which it acquires the right to service the loans. The Company calculates a gain or loss on the whole loan sale, based on the net proceeds from the whole loan sale, minus the net investment in the loans being sold. All origination fees incurred in the origination process are recognized directly to Consolidated Statements of Operations and recorded to “Origination fees”.

 

Interest Income on Loans to Developers and Interest Expense on Limited Recourse Obligations

 

The Company recognizes “Interest income” on Loans and “Interest expense” on the corresponding Investor Georgia Notes (if issued by Groundfloor GA) or LROs (if issued by Groundfloor Finance Inc.) using the accrual method based on the stated interest rate to the extent the Company believes it to be collectable. For the purposes of these Consolidated Financial Statements, “Limited recourse obligations, net” refers to both Georgia Notes and LROs. Georgia Notes are securities that the Company has issued through its previously registered Georgia-exclusive securities offering, which has since been terminated. LROs are the Company’s currently registered securities. Both Georgia Notes and LROs represent similar obligations to the Company.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company had no cash equivalents as of December 31, 2018 and 2017. From time to time, the Company could maintain cash deposits in excess of federally insured limits. The Company believes credit risk related to its cash and cash equivalents to be minimal.

 

Each investor’s escrow account receives Federal Deposit Insurance Corporation (“FDIC”) insurance coverage on cash balances subject to normal FDIC coverage rules. Investor funds, whether committed through a LRO or held in escrow, are not included as a part of the Company’s cash balance.

 

Loans to Developers and Limited Recourse Obligations

 

“Loans to developers, net” and the corresponding “Limited recourse obligations, net”, used to fund the Loans are originally recorded at outstanding principal. The interest rate associated with a Loan is the same as the interest rate associated with the corresponding Georgia Notes or LROs.

 

The Company’s obligation to pay principal and interest on a Georgia Note or LRO is equal to the pro rata portion of the total principal and interest payments collected from the corresponding Loan. The Company obtains a lien against the property being financed and attempts reasonable collection efforts upon the default of a Loan. The Company is not responsible for repaying “Limited recourse obligations, net” associated with uncollectable “Loans to developers, net”. Amounts collected related to a Loan default are returned to the Investors based on their pro rata portion of the corresponding Georgia Notes or LROs, if applicable, less collection costs incurred by the Company.

 

The Investors may remit funds through the Company’s online portal prior to the actual Loan being closed. These funds are held in an escrow account controlled by a major bank and are not recognized as a LRO until the Loan is closed and funds are transferred to the Developer, which occurs through an EFT transaction. Each Investor escrow account receives FDIC insurance coverage on cash balances subject to normal FDIC coverage rules.

 

The Loan and corresponding LROs are recorded on the Company’s Consolidated Balance Sheets to “Loans to developers, net” and “Limited recourse obligations, net”, respectively, once the Loan has closed. Loans are considered closed after the promissory note for that Loan has been signed and the security interest has been perfected.

 

F-32

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Nonaccrual and Past Due Loans

 

“Interest income” is accrued on the outstanding principal balance. The accrual of interest on “Loans to developers, net” and corresponding “Limited recourse obligations, net” is discontinued when, in management’s opinion, the borrower may be unable to make payments as they become due, unless the Loan is well secured and in the process of collection. “Interest income” and “Interest expense” on the “Loans to developers, net” and the corresponding “Limited recourse obligations, net” are discontinued and placed on nonaccrual status at the time the Loan is 90 days delinquent unless the Loan is well secured and in process of collection. The “Loans to developers, net” and corresponding “Limited recourse obligations, net” are charged off to the extent principal or interest is deemed uncollectible. Non-accrual Loans and Loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. All interest accrued, but not collected for “Loans to developers, net” and “Limited recourse obligations, net” that are placed on nonaccrual or charged off, is reversed against “Interest income” and the corresponding LROs recorded “Interest expense”.

 

Interest income collected on nonaccrual Loans is applied against principal until the Loans are returned to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

Impaired Loans

 

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans include Loans on nonaccrual status. When determining if the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, the Company considers the borrower’s capacity to pay, which includes such factors as the borrower’s current financial position, an analysis of global cash flow sufficient to pay all debt obligations and an evaluation of secondary sources of repayment, such as collateral value and guarantor support. The Company individually assesses for impairment all nonaccrual Loans and all Loans in fundamental default. If a Loan is deemed impaired, a specific valuation allowance is allocated, if necessary, so that the Loan is reported net, at the present value of estimated future cash flows using the Loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis.

 

Allowance for Uncollectable Loans and Undeliverable Limited Recourse Obligations

 

Payments to holders of Georgia Notes or LROs, as applicable, depend on the payments received on the corresponding Loans; a reduction or increase of the expected future payments on Loans will decrease or increase the reserve for the associated Georgia Notes or LROs. The Company recognizes a reserve for uncollectable Loans and corresponding reserve for undeliverable Georgia Notes or LROs in an amount equal to the estimated probable losses net of recoveries. The allowance is based on management’s estimates and analysis of historical bad debt experience, existing economic conditions, current loan aging schedules, and expected future write-offs, as well as an assessment of specific, identifiable Developer accounts considered at risk or uncollectible. Expected losses and actual charge-offs on Loans are offset to the extent that the Loans are financed by Georgia Notes or LROs, as applicable, that effectively absorb the related Loan losses.

 

“Loans to developers, net” are presented net of a reserve for doubtful accounts of $500,000 and $640,000 as of December 31, 2018 and 2017, respectively. “Limited recourse obligations, net” are presented net of a reserve for doubtful accounts of $500,000 and $590,000 as of December 31, 2018 and 2017, respectively. As of December 31, 2017, $50,000 of the reserve for doubtful accounts is attributed to Loans funded directly by the Company, which have not been funded by Investors.

 

F-33

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Other Real Estate Owned

 

Foreclosed assets acquired through or in lieu of loan foreclosure are held for sale and are initially recorded at fair value less estimated cost to sell. Any write-down to fair value at the time of transfer to foreclosed assets is charged to the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Costs of improvements are capitalized up to the fair value of the property, whereas costs relating to holding foreclosed assets and subsequent adjustments to the value are charged to operations. 

 

Software and Website Development Costs

 

Internal use software and website development costs are capitalized when preliminary development efforts are successfully completed, it is probable that the project will be completed and the software will be used as intended. Internal use software and website development costs are amortized on a straight-line basis over the project’s estimated useful life, which is generally three years. Capitalized internal use software development costs consist of employee compensation and fees paid to third-party consultants who are directly involved in development efforts. Costs related to preliminary project activities and post implementation activities, including training and maintenance, are expensed as incurred. Costs incurred for upgrades and enhancements that are considered to be probable to result in additional functionality are capitalized. Development costs of the Company’s website incurred in the preliminary stages of development are expensed as incurred. Once preliminary development efforts are successfully completed, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use.

 

Property and Equipment

 

Property and equipment consists of computer equipment, furniture and fixtures, and office equipment. Property and equipment is stated at historical cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of the life of the lease or the useful life of the improvements. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is credited or charged to income. Repairs and maintenance costs are expensed as incurred.

 

F-34

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Depreciation is computed using the following estimated useful lives:

 

Computer equipment   3 years 
Software and website development costs   3 years 
Office equipment   5 years 
Furniture and fixtures   5 years 

 

Impairment of Long-Lived Assets

 

Long-lived assets, such as computer equipment, office equipment, furniture and fixtures, intangible assets, and software and website development costs, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized for an amount by which the carrying amount of the asset exceeds the fair value of the asset.

 

Intangible Assets

 

Intangible assets consist of acquired domain names. The Company recognized $2,000 in amortization expense during the years ended December 31, 2018 and 2017. Intangible assets are being amortized over a 15-year period, their estimated useful lives, on a straight-line basis.

 

Equity Offering Costs

 

The Company accounts for offering costs in accordance with Accounting Standard Codification (“ASC”), ASC 340, Other Assets and Deferred Costs. Prior to the completion of an offering, offering costs will be capitalized as deferred offering costs on the balance sheet. The deferred offering costs will be charged to stockholders’ equity upon the completion of an offering or to expense if the offering is not completed. As of December 31, 2018, offering costs of $125,000 for the 2018 Common Stock Offering have been charged to stockholders’ equity.

 

Deferred Revenue

 

Deferred revenue consists of origination fee payments received in advance of revenue recognized.

 

Advertising Costs

 

The cost of advertising is expensed as incurred and presented within “Marketing and promotions” expenses in the Consolidated Statements of Operations. The Company incurred $700,000 and $476,000 in advertising costs during the years ended December 31, 2018 and 2017, respectively.

 

Rent Expense

 

The Company recognizes rent expense on a straight-line basis over the term of the lease. The difference between rent expense and rent paid is recorded as deferred rent in the Consolidated Balance Sheets. Rent expense is presented within “General and administrative” expenses in the Consolidated Statements of Operations. The Company incurred $139,445 and $66,000 in rent expense for office facilities during the years ended December 31, 2018 and 2017, respectively.

 

Share-Based Compensation

 

The Company accounts for share-based compensation using the fair value method of accounting which requires all such compensation to employees and nonemployees, including the grant of employee stock options or warrants, to be recognized in the Consolidated Statements of Operations based on its fair value at the measurement date. The expense associated with share-based compensation is recognized on a straight-line basis over the service period of each award.

 

F-35

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)

 

Income Taxes

 

Deferred tax assets and liabilities are determined based on the temporary differences between the Consolidated Financial Statements carrying amounts and the tax basis of assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. In estimating future tax consequences, all expected future events are considered other than enactment of changes in the tax law or rates.

 

The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

 

The determination of recording or releasing income tax valuation allowance is made, in part, pursuant to an assessment performed by management regarding the likelihood that the Company will generate future taxable income against which benefits of its deferred tax assets may or may not be realized. This assessment requires management to exercise significant judgment and make estimates with respect to its ability to generate taxable income in future periods.

 

Reclassification

 

Certain amounts in the December 31, 2017, Consolidated Financial Statements have been reclassified to conform to the December 31, 2018, presentation. These reclassifications had no effect on the year ended December 31, 2017, net loss, or December 31, 2017, accumulated deficit.

 

NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which will be effective January 1, 2019, for the Company. The Company had the option to early adopt the ASU as of January 1, 2017. The guidance clarifies that revenue from contracts with customers should be recognized in a manner that depicts both the likelihood of payment and the timing of the related transfer of goods or performance of services. In March 2016, the FASB issued an amendment ASU 2016-12, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) to the new revenue recognition guidance clarifying how to determine if an entity is a principal or agent in a transaction. In April 2016 ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing and May 2016 ASU 2016-12, Revenue from Contracts with Customers: Scope Improvements and Practical Expedients, the FASB further amended the guidance to include performance obligation identification, licensing implementation, collectability assessment and other presentation and transition clarifications. The effective date and transition requirements for the amendments is the same as for ASU 2014-09. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic: 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which will be effective for the Company on January 1, 2019. The amendment changes the accounting for equity investments, changes disclosure requirements related to instruments at amortized cost and fair value, and clarifies how entities should evaluate deferred tax assets for securities classified as available for sale. Affected entities should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company is evaluating the impact that ASU 2016-01 will have on its Consolidated Financial Statements.

 

F-36

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS (continued)

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize most leases on the balance sheet as a lease liability and corresponding right-of-use asset. The guidance is currently effective for the Company for the year ending December 31, 2020. The Company is currently evaluating the effect of this guidance on the Company’s Consolidated Financial Statements.

 

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging – Contingent Put and Call Options in Debt Instruments (“ASU 2016-06”), which the Company has adopted as of December 31, 2017. The guidance clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendment is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The adoption of this amendment did not have a material effect on the Company’s Consolidated Financial Statements.

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; (c) forfeitures; and (d) classification on the Consolidated Statements of Cash Flows. The amendments are effective for nonpublic companies for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted for any interim or annual period. The Company adopted this guidance in the year ended December 31, 2017. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace the current incurred loss approach with an expected loss model, referred to as the current expected credit loss (“CECL”) model. The new standard will apply to financial assets subject to credit losses and measured at amortized cost and certain off-balance-sheet credit exposures, which include, but are not limited to, loans, leases, held-to-maturity securities, loan commitments and financial guarantees. ASU 2016-13 simplifies the accounting for purchased credit-impaired debt securities and loans and expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2020. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Upon adoption, ASU 2016-13 provides for a modified retrospective transition by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is effective. The Company is currently evaluating the impact this standard will have on the Company’s Consolidated Financial Statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”) and in November 2016 issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). The ASUs will be effective January 1, 2019, and amend the existing accounting standards for the statement of cash flows. The amendments provide guidance on the following nine cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; separately identifiable cash flows and application of the predominance principle; and restricted cash. Early adoption is permitted, including adoption in an interim period. The Company is evaluating the impact that these standards will have on the Consolidated Statements of Cash Flows. However, the impact will depend on the facts and circumstances at the time of adoption of the new standards.

 

F-37

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES 

 

Notes to Consolidated Financial Statements

 

NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS (concluded)

 

In May 2017, the FASB issued ASU 2017-09 Stock Compensation (Topic 718) – Scope of Modification Accounting (“ASU 2017-09”), which the Company has adopted as of December 31, 2017. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The adoption of this amendment did not have a material effect on the Company’s Consolidated Financial Statements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The standard is effective for the Company for the year ending December 31, 2019, with early adoption permitted. The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s Consolidated Financial Statements

 

NOTE 3: LOANS TO DEVELOPERS, NET

 

The Company provides financing to borrowers for real estate-related loans. Real estate loans include loans for unoccupied single family or multifamily renovations costing between $20,000 and $2,000,000 over six months to a year.

 

The following table presents the carrying amount of “Loans to developers, net” by letter grade and performance state as of December 31, 2018 and 2017, respectively:

 

    Current     Workout    

Fundamental
Default

     Total  
Loan grades:                                
A   $ 3,267,744     $ 293,473     $ -     $ 3,561,217  
B     7,073,701       668,100       141,150       7,882,951  
C     17,009,297       2,465,820       517,791       19,992,908  
D     7,140,347       263,555       228,000       7,631,902  
E     192,739       -       -       192,739  
F     -       -       -       -  
G     -       -       -       -  
Carrying amount as of December 31, 2018   $ 34,683,828     $ 3,690,948     $ 886,941     $ 39,261,717  

 

   Current   Workout   Fundamental
Default		   Total 
Loan grades:                    
A  $1,833,134   $24,240   $-   $1,857,374 
B   3,835,133    514,180    54,986    4,404,299 
C   8,072,685    1,519,531    230,188    9,822,404 
D   2,192,073    906,191    357,144    3,455,408 
E   -    -    -    - 
F   -    -    -    - 
G   -    -    -    - 
Carrying amount as of December 31, 2017  $15,933,025   $2,964,142   $642,318   $19,539,485 

 

F-38

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 3: LOANS TO DEVELOPERS, NET (continued)

 

Nonaccrual and Past Due Loans

 

A Loan is placed on nonaccrual status when, in management’s judgment, the collection of the interest income appears doubtful. “Interest receivable on loans to developers” that has been accrued and is subsequently determined to have doubtful collectability is charged to “Interest income” and the corresponding “Accrued interest on limited recourse obligations” that has been accrued and is subsequently determined to have doubtful collectability is charged to “Interest expense”. Interest income on Loans that are classified as nonaccrual is subsequently applied to principal until the Loans are returned to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Past due Loans are loans whose principal or interest is past due 30 days or more. As of December 31, 2018, the Company placed Loans of $3,033,000 recorded to “Loans to developers, net” on nonaccrual status.

 

The following table presents an analysis of past due Loans as of December 31, 2018 and 2017:

 

   Carrying
Amount		  

Allowance for
Loan Losses

   Total 
Aging schedule:               
Current  $35,112,798   $40,000   $35,072,798 
Less than 90 days past due   2,404,830    50,000    2,354,830 
More than 90 days past due   1,744,089    410,000    1,334,089 
Total as of December 31, 2018  $39,261,717   $500,000   $38,761,717 

 

   Carrying
Amount		   Allowance for
Loan Losses		   Total 
Aging schedule:               
Current  $15,753,075   $57,000   $15,696,075 
Less than 90 days past due   2,292,122    59,000    2,233,122 
More than 90 days past due   1,494,288    524,000    970,288 
Total as of December 31, 2017  $19,539,485   $640,000   $18,899,485 

 

Impaired Loans

 

The following is a summary of information pertaining to impaired loans as of December 31, 2018:

 

   Balance 
Nonaccrual loans  $2,146,000 
Fundamental default not included above   887,000 
Total impaired loans   3,033,000 
      
Interest income recognized on impaired loans  $400,000 

 

The following table presents an analysis of information pertaining to impaired loans as of December 31, 2018:

 

   Balance 
Principal loan balance  $3,495,120 
      
Recorded investment with no allowance   2,146,000 
Recorded investment with allowance   887,000 
Total recorded investment  $3,033,000 
      
Related allowance   500,000 
Average recorded investment  $230,000 

 

F-39

 

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 3: LOANS TO DEVELOPERS, NET (continued)

 

The following is a summary of information pertaining to impaired loans as of December 31, 2017:

 

   Balance 
Nonaccrual loans  $1,500,000 
Fundamental default not included above   640,000 
Total impaired loans   2,140,000 
      
Interest income recognized on impaired loans  $262,438 

 

The following table presents an analysis of information pertaining to impaired loans as of December 31, 2017:

 

   Balance 
Principal loan balance  $2,423,540 
      
Recorded investment with no allowance   640,000 
Recorded investment with allowance   1,500,000 
Total recorded investment  $2,140,000 
      
Related allowance   640,000 
Average recorded investment  $153,000 

 

F-40

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 3: LOANS TO DEVELOPERS, NET (continued)

 

Credit Quality Monitoring

 

The Company uses three performance states to better monitor the credit quality of outstanding loans. Outstanding loans are characterized as follows:

 

Current - This status indicates that no events of default have occurred, all payment obligations have been met or none are yet triggered.

 

Workout - This status indicates there has been one or more payment defaults on the Loan and the Company has negotiated a modification of the original terms that does not amount to a fundamental default.

 

Fundamental Default - This status indicates a Loan has defaulted and there is a chance the Company will not be able to collect 100% of the principal amount of the Loan by the extended payment date of the corresponding Georgia Notes or LROs. The Company has commenced a formal foreclosure process to secure the real estate property. 

 

The following table presents “Loans to developers, net” by performance state as of December 31, 2018 and 2017:

 

  

Carrying

Amount

  

Allowance

for Loan

Losses

  

Loans to

Developers,

Net

 
Performance states:               
Current  $34,683,828   $-   $34,683,828 
Workout   3,690,948    100,000    3,590,948 
Fundamental default   886,941    400,000    486,941 
Total as of December 31, 2018  $39,261,717   $500,000   $38,761,717 

 

   Carrying
Amount		  

Allowance

for Loan

Losses

  

Loans to

Developers,

Net

 
Performance states:               
Current  $15,933,025   $-   $15,933,025 
Workout   2,964,142    330,000    2,634,142 
Fundamental default   642,318    310,000    332,318 
Total as of December 31, 2017  $19,539,485   $640,000   $18,899,485 

 

F-41

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 3: LOANS TO DEVELOPERS, NET (concluded)

 

Allowance for Loan Losses

 

The following table details activity in the allowance for loan losses for the years ended December 31, 2018 and 2017:

 

   Balance 
Balance, December 31, 2017  $640,000 
Allowance for loan loss   240,000 
Loans charged off   (380,000)
Outstanding as of December 31, 2018  $500,000 
Period-end amount allocated to:     
  Loans individually evaluated for impairment  $400,000 
  Loans collectively evaluated for impairment   100,000 
Balance, December 31, 2018  $500,000 
Loans:     
  Individually evaluated for impairment  $887,000 
  Collectively evaluated for impairment   2,146,000 
Balance, December 31, 2018  $3,033,000 

 

   Balance 
Balance, December 31, 2016  $700,000 
Allowance for loan loss   140,000 
Loans charged off   (200,000)
Outstanding as of December 31, 2017  $640,000 
Period-end amount allocated to:     
  Loans individually evaluated for impairment  $310,000 
  Loans collectively evaluated for impairment   330,000 
Balance, December 31, 2017  $640,000 
Loans:     
  Individually evaluated for impairment  $640,000 
  Collectively evaluated for impairment   1,500,000 
Balance, December 31, 2017  $2,140,000 

 

F-42

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 4: OTHER CURRENT ASSETS

 

“Other current assets” at December 31, 2018 and 2017, consists of the following:

 

   2018   2017 
Other real estate owned (1)  $418,379   $234,825 
Unbilled servicing revenue   25,127    72,026 
Prepaid expenses   21,300    - 
Other   19,585    37,917 
Other current assets  $484,391   $344,768 

 

(1) During the year ended December 31, 2018 the Company transferred $2,071,840 from “Loans to developers, net” to “Other current assets”. Other real estate owned met the held for sale criteria and have been recorded at the lower of carrying amount or fair value less cost to sell. There was no impact to the Company’s Consolidated Statements of Operation from this transfer. The Company recorded a decrease of $439,000 to “Loans to developers, net” and an offsetting decrease to “Limited recourse obligations, net”.

 

NOTE 5: PROPERTY, EQUIPMENT, SOFTWARE, WEBSITE AND INTANGIBLE ASSETS, NET

 

“Property, equipment, software, website development costs, and intangible assets, net” at December 31, 2018 and 2017, consists of the following:

 

   2018   2017 
Software and website development costs  $1,304,993   $817,893 
Less: accumulated amortization   (725,255)   (396,466)
Software and website development costs, net  $579,738   $421,427 

 

   2018   2017 
Computer equipment  $96,165   $42,388 
Leasehold improvements   12,530    12,530 
Furniture and fixtures   134,548    11,090 
Office equipment   45,548    2,294 
Property and equipment   288,791    68,302 
  Less: accumulated depreciation and amortization   (79,925)   (35,182)
Property and equipment, net  $208,866   $33,120 

 

   2018   2017 
Domain names  $30,000   $30,000 
  Less:  accumulated amortization   (5,500)   (3,500)
Intangible assets, net  $24,500   $26,500 

 

Depreciation and amortization expense on “Property, equipment, intangible assets, software, and website development costs, net” for the years ended December 31, 2018 and 2017 was $375,532 and $231,111, respectively.

 

F-43

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 6: ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

“Accounts payable and accrued expenses” at December 31, 2018 and 2017, consists of the following:

 

   2018   2017 
Trade accounts payable  $762,148   $834,785 
Deferred revenue   867,950    333,067 
Accrued interest expense   360,325    149,735 
Accrued employee compensation   80,243    202,242 
Accrued contractor compensation   -    184,569 
Other   422,492    145,759 
Accounts payable and accrued expenses  $2,493,158   $1,850,157 

 

F-44

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 7: REVOLVING CREDIT FACILITY

 

On November 1, 2016, the Company’s wholly owned subsidiary, Groundfloor Holdings GA, LLC, as borrower, entered into a revolving credit facility (the “Revolver”) with Revolver Capital, LLC. The credit agreement provided for revolving loans up to a maximum aggregate principal amount of $1,500,000. The Revolver will be used for bridge funding of underlying loans pending approval from the United States Securities and Exchange Commission (“SEC”).

 

On November 11, 2016, the Company entered into a First Amendment to the Credit Agreement (the “First Amendment”) which amended the existing Revolver dated November 1, 2016, among Groundfloor Holdings GA, LLC, as borrower, and Revolver Capital, LLC, as lender. Collateral security for the Revolver includes all property of the underlying loan, upon which a lien is created in favor of the lender. The First Amendment amended the Revolver to increase the Revolving Credit Commitments thereunder from $1,500,000 to $2,500,000. The other terms of the credit facility remain unchanged.

 

On December 21, 2016, the Company entered into a Second Amendment to the Credit Agreement (the “Second Amendment”) which amended the existing Revolver dated November 1, 2016, among Groundfloor Holdings GA, LLC, as borrower, and Revolver Capital, LLC, as lender. The Second Amendment amended the Revolver to increase the Revolving Credit Commitments thereunder from $2,500,000 to $3,500,000. The other terms of the credit facility remain unchanged.

 

On April 7, 2017, the Company entered into a Third Amendment to the Credit Agreement (the “Third Amendment”) which amended the existing credit agreement dated November 1, 2016, among Groundfloor Holdings GA, LLC, as borrower, and Revolver Capital, LLC, as lender. The Third Amendment amended the credit agreement to increase the Revolving Credit Commitments thereunder from $3,500,000 to $4,500,000. In connection with the Third Amendment the Company paid a $10,000 commitment fee, which is capitalized and amortized over a twelve-month period. The other terms of the credit facility remain unchanged.

 

On April 4, 2018, the Credit Agreement dated as of November 1, 2016, as amended by the First Amendment as of November 11, 2016, the Second Amendment dated as of February 22, 2017 and the Third Amendment dated as of April 7, 2017, was assigned to ACM Alamosa DA LLC. The Company and the lender agreed to amend and restate the Original Credit Agreement in its entirety. The other terms of the credit facility remain unchanged.

 

On September 18, 2018, the Company increased the Revolving Credit Commitments thereunder from $4,500,000 to $5,500,000. In connection with the increase the Company paid a $10,000 commitment fee, which is capitalized and amortized over a twelve-month period. The other terms of the credit facility remain unchanged.

 

The Revolver maturity date is April 4, 2019. The Company has the option to request and the lender may, in its sole discretion, elect to extend the maturity date.

 

As of December 31, 2018, the Company had $0 of available borrowings and $5,500,000 outstanding under the Revolver as presented within Revolving credit facility on the Consolidated Balance Sheets. As of December 31, 2018, the Company reflected $6,667 of deferred financing costs related to the Revolver as a reduction to the Revolving credit facility in the Consolidated Balance Sheets. As of December 31, 2017, the Company reflected $833 of deferred financing costs related to the Revolver as a reduction to the Revolving credit facility in the Consolidated Balance Sheets. Amortization of these costs was $4,166 and $45,000 for the years ended December 31, 2018 and 2017, respectively. Accrued interest on the Revolver, presented within “Accounts payable and accrued expenses” in the Company’s Consolidated Balance Sheets, was $111,288 and $34,032 at December 31, 2018 and 2017, respectively.

 

The Revolver contains certain affirmative and negative covenants, including financial and other reporting requirements. The Company is in compliance with all such covenants at December 31, 2018.

 

F-45

 

 

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 8: CONVERTIBLE NOTES

 

From March 2017 to May 2017, the Company issued subordinated convertible notes (the “Subordinated Convertible Notes”) to Investors for total proceeds of $825,000. The Subordinated Convertible Notes bear interest at the rate of 8% per annum. The outstanding principal and all accrued but unpaid interest was due and payable on the earlier of September 24, 2018, or the consummation of a sale of the Company by consolidation, merger, change of majority ownership, or sale or other disposition of all or substantially all of the assets of the Company (the “Maturity Date”). In the event of a closing of a preferred stock financing with gross proceeds of at least $8,000,000 (“Qualified Preferred Financing”) prior to the Maturity Date, the outstanding principal and all accrued but unpaid interest may be converted into shares of preferred stock issued in the financing at a price per share equal to 75% of the price per share of the Qualified Preferred Financing. In the event of a closing of a common stock financing with gross proceeds of at least $3,000,000 (“Qualified Common Financing”) prior to the Maturity Date, the outstanding principal and all accrued but unpaid interest may be converted into shares of common stock issued in the financing at a price per share equal to 90% of the price per share of the Qualified Common Financing. The indebtedness represented by the Subordinated Convertible Notes is subordinated in all respects to the principal of (and premium, if any), unpaid interest on and amounts reimbursable, fees, expenses, costs of enforcement, and other amounts due in connection with the Revolver and the Note. On October 27, 2017, the amended and restated subordinated convertible note agreement and the note amendment agreement amended the subordinated convertible note purchase agreement dated March 24, 2017, and Subordinated Convertible Notes issued thereunder (as amended, the “Restated Subordinated Convertible Notes”), respectively. Pursuant to the Restated Subordinated Convertible Notes, the outstanding principal and all accrued but unpaid interest is due and payable on the earlier of September 30, 2019, or the consummation of a sale of the Company by consolidation, merger, change of majority ownership, or sale or other disposition of all or substantially all of the assets of the Company (the “New Maturity Date”). The interest rate of 8% per annum remained unchanged.

 

From October 2017 to December 2017, the Company issued Restated Subordinated Convertible Notes to Investors for total proceeds of $1,225,000. The outstanding principal and all accrued but unpaid interest is due and payable on the New Maturity Date. In the event of a closing of a Qualified Financing prior to the New Maturity Date, the outstanding principal and all accrued but unpaid interest would become automatically converted into shares of stock issued in the financing at a price per share equal to 75% of the price per share of the financing. The indebtedness represented by the Restated Subordinated Notes is subordinated in all respects to the principal of (and premium, if any), unpaid interest on and amounts reimbursable, fees, expenses, costs of enforcement, and other amounts due in connection with the Revolver and the Note.

 

In 2018, a Restated Subordinated Convertible Notes holder converted their shares upon closing the 2018 Common Stock Offering, which qualified as a Qualified Common Financing. The noteholder converted $250,000 in principal and $27,617 in accrued interest at a 10% discount into 30,847 shares of common stock. The Company recorded $30,847 to interest expense as a result of the beneficial conversion.

 

Accrued interest on the Restated Subordinated Convertible Notes, presented within “Accounts payable and accrued expenses” in the Company’s Consolidated Balance Sheets, was $186,426 and $52,592 at December 31, 2018 and 2017, respectively.

 

F-46

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 9: NOTES PAYABLE

 

On January 11, 2017, the Company entered into a promissory note and security agreement (the “Note”) for a principal sum of $1,000,000. We paid an origination fee of $10,000 concurrently with the funding of the principal of the Note. We subsequently entered into an amendment to the Note extending the payment schedule for a $5,000 amendment fee, a second amendment increasing the principal amount outstanding to $2,000,000 for a $30,000 amendment fee and a third amendment further extending the repayment schedule among other terms described below for a $10,000 amendment fee. The amendment fees were deferred and amortized over the life of the Note.

 

The Note incurs interest at a rate of 8.0% per annum from January 11, 2017 until September 30, 2017, and 14.0% per annum from October 1, 2017, until payment in full of the Note, in each case calculated on the basis of a 360-day year for the actual number of days elapsed. The Note must be repaid as follows: (i) $250,000, plus accrued but unpaid interest thereon, was due and payable on June 30, 2017; (ii) $250,000, plus any accrued but unpaid interest thereon, is due and payable on March 31, 2019; (iii) $500,000, plus any accrued but unpaid interest thereon, is due and payable on June 30, 2019; (iv) $500,000, plus any accrued but unpaid interest thereon, is due and payable on September 30, 2019; and (v) any remaining outstanding principal amount, plus any remaining accrued but unpaid interest, is due and payable on December 31, 2019.

 

The Note includes certain financial covenants related to the Company’s quarterly financial results and operating capital. The Note is subject to customary event of default provisions. Upon the occurrence of any event of default, the interest rate under the Note shall increase by 7.0%. As collateral security for the Note, the Company granted first priority security interest in all of its assets, subject to certain exceptions. Among other things, the security interest specifically excludes (i) any assets serving as collateral for the Company’s Revolver; (ii) any Loans for which a series of LROs has been issued, regardless of whether such Loans and corresponding series of LROs have been originated and issued by the Company or one of its subsidiaries; and (iii) the equity interest in any subsidiary formed by the Company for the sole purpose of issuing Loans and corresponding series of LROs.

 

In connection with the third amendment to the Note, the Company agreed to issue a warrant for the purchase of shares of the Company’s common stock on the first day of each quarter commencing on October 1, 2017, until the Note is repaid in full for the purchase of the following number of shares: (i) for each quarter until and including the first quarter of 2019, 4,000 shares of common stock; (ii) for the second quarter of 2019, 3,500 shares of common stock; (iii) for the third quarter of 2019, 2,300 shares of common stock; and (iv) for the fourth quarter of 2019, 1,100 shares of common stock. The exercise price of the warrants issued on the Note in connection with the third amendment to the Note is $2.40.

 

As of December 31, 2018, the principal sum of $1,750,000 remains outstanding and is presented in “Short-term notes payable” on the Company’s Consolidated Balance Sheets net of deferred financing fees of $15,370, and debt discount of $90,648, amortizable over the amended term of the Note. Amortization of these costs was $69,222 for the year ended December 31, 2018. As of December 31, 2017, the principal sum of $1,750,000 was outstanding and is presented in “Long-term notes payable” on the Company’s Consolidated Balance Sheets net of deferred financing fees of $30,741, and debt discount of $20,000, amortizable over the amended term of the Note. Amortization of these costs was $24,676 for the year ended December 31, 2017.

 

Accrued interest on the Note, presented within “Accounts payable and accrued expenses” in the Company’s Consolidated Balance Sheets, was $62,611 and $63,111 at December 31, 2018 and 2017, respectively.

 

The Note includes financial covenants that may trigger events of default or principal acceleration. The Company failed to comply with all the financial covenants during the year-end December 31, 2018. Prior to the filing date of the Consolidated Financial Statements, the Company secured a waiver to prevent a default event and principal acceleration.

 

F-47

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 9: NOTES PAYABLE (concluded)

 

In 2018, the Company entered into various secured promissory notes, (the “GROUNDFLOOR Notes”), with accredited Investors. The GROUNDFLOOR Notes are used for the purpose of the Company to originate, buy, and service loans for the purpose of building, buying, or rehabilitating single family and multifamily structures, or buying land, for commercial purposes. The GROUNDFLOOR Notes are issued and secured by the assets of Groundfloor Real Estate 1 LLC, a wholly owned subsidiary of Groundfloor Finance, Inc. As collateral security for GROUNDFLOOR Notes, the Company granted first priority security interest in all the loan assets of its wholly owned subsidiary, Groundfloor Real Estate 1 LLC, subject to certain exceptions. During the year-end December 31, 2018, there were ten notes entered into ranging in interest rates of 3.25% to 5.5% and terms of 30 and 90 days. As of December 31, 2018, the principal sum of $1,281,100 remains outstanding and is presented in “Short-term notes payable” on the Company’s Consolidated Balance Sheets.

 

Accrued interest on the GROUNDFLOOR Notes, presented within “Accounts payable and accrued expenses” in the Company’s Consolidated Balance Sheets, was $4,100 at December 31, 2018.

 

NOTE 10: STOCKHOLDERS’ (Deficit) EQUITY

 

Capital Structure

 

Authorized Shares - As of December 31, 2018, the Company is authorized to issue 5,000,000 shares of no par value common stock and 1,316,181 shares of no par value preferred stock. The preferred stock has been designated as Series A Preferred Stock (the “Series A”), consisting of 747,385 shares, and Series Seed Preferred Stock (the “Series Seed”), consisting of 568,796 shares (collectively, “Preferred Stock”).

 

Common Stock Transactions

 

In February 2018, the Company launched an offering of its common stock under Tier 2 of Regulation A pursuant to an offering statement on Form 1-A qualified by the SEC (the “2018 Common Stock Offering”). The Company offered up to 500,000 shares of common stock at $10 per share, with a minimum investment of $100, or ten shares of common stock. The aggregate initial offering price of the common stock will not exceed $5,000,000 in any 12-month period, and there is no minimum offering amount. The Company may issue up to 30,000 additional bonus shares. The 2018 Common Stock Offering closed on July 31, 2018. During the 2018 Common Stock Offering, the Company issued 437,917 shares of common stock for gross proceeds of $4,228,670. The Company incurred offering costs of $125,000 related to the 2018 Common Stock Offering. During the year ended December 31, 2018, the Company recorded $150,500 in beneficial interest related to the bonus shares issued in connection with the 2018 Common Stock Offering to “General and administrative” in the Company’s Consolidated Statement of Operations. In conjunction with the 2018 Common Stock Offering, the Company converted one noteholder’s outstanding restated subordinated convertible notes payable and accrued interest totaling $277,617 into 30,847 shares of common stock.

 

In October 2018, the Company entered into a common stock purchase agreement for private placement of 125,000 shares of the Company’s common stock for gross proceeds of $1,500,000.

 

F-48

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 10: STOCKHOLDERS’ (Deficit) EQUITY (concluded)

 

Preferred Stock Transactions

 

Series A

 

During 2015, the Company issued 709,812 shares of Series A to Investors for total proceeds of $4,748,705. In conjunction with the equity issuance, the Company converted all outstanding promissory notes payable and accrued interest totaling $251,295 into 37,561 shares of Series A.

 

Series Seed

 

During 2015 and 2014, the Company issued 201,146 and 91,259 shares, respectively, to Investors for total proceeds of $1,047,000 and $475,000. In conjunction with the equity issuance in 2014, the Company converted all outstanding convertible notes payable and accrued interest totaling $1,098,388 into 276,391 shares of Series Seed.

 

Voting - The holders of Preferred Stock are entitled to one vote for each share of common stock into which the preferred shares are convertible.

 

Liquidation - Upon any liquidation, dissolution, or winding up of the Company, the holders of Series A shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders before any payment shall be made to the holders of common stock or Series Seed, an amount per share equal to the greater of: i) the Series A original issue price of $6.69 per share, plus any dividends declared but unpaid, and ii) such amount per share as would have been payable had all shares of Series A been converted into common stock immediately prior to such liquidation, dissolution, or winding up. If the available assets are insufficient to pay the holders of shares of Series A the full amount to which they shall be entitled, then all of the available assets shall be distributed to the holders of the Series A pro rata in accordance with their ownership thereof.

 

After payment in full of the Series A preference amount, the Series Seed stockholders are entitled to a liquidation preference equal to the greater of: i) the Series Seed original issue price of $5.205 per share, plus any dividends declared but unpaid, or ii) such amount per share as would have been payable had all shares of Series Seed been converted into common stock immediately prior to such liquidation, dissolution, or winding up. If the available assets are insufficient to pay the holders of shares of Series Seed the full amount to which they shall be entitled, then all of the available assets shall be distributed to the holders of the Series Seed pro rata in accordance with their ownership thereof. Any assets remaining after such preferential distribution shall be distributed to holders of the common stock.

 

Conversion - Shares of Preferred Stock are convertible into shares of common stock at the option of the holder at any time. The number of common stock shares for Preferred Stock can be determined by dividing the original issue price by the then-effective conversion price.

 

Mandatory Conversion - All outstanding shares of Preferred Stock shall automatically be converted into shares of common stock upon the closing of the sales of shares of common stock to the public, with gross proceeds to the Company of at least $30,000,000. All outstanding shares of Series A shall automatically be converted into shares of common stock by the date and time, or the occurrence of an event, specified by vote or written consent of the holders of at least a majority of the then outstanding shares of Series A, voting as a single class. All outstanding shares of Series Seed shall automatically be converted into shares of common stock by the date and time, or the occurrence of an event, specified by vote or written consent of the holders of at least a majority of the then outstanding shares of Series Seed, voting as a single class.

 

Dividends - All dividends shall be declared pro rata on the common stock and Preferred Stock on a pari passu basis according to the numbers of common stock held by such holders on an as converted basis.

 

F-49

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 11: STOCK OPTIONS AND WARRANTS

 

Stock Options

 

In August 2013, the Company adopted the 2013 Stock Option Plan (the “Plan”). The Plan provides incentives to eligible employees, officers, and directors in the form of incentive stock options, non-qualified stock options, and restricted stock awards. During the year ended December 31, 2018, the Company increased the shares available for common stock issuance under the Plan by 150,000. As of December 31, 2018 the Company reserved a total of 400,000 shares of common stock for issuance under the Plan. Of these shares, 65,004 shares are available for future stock option grants as of December 31, 2018.

 

The Board of Directors has the authority to administer the Plan and determine, among other things, the interpretation of any provisions of the Plan, the eligible employees who are granted options, the number of options that may be granted, vesting schedules, and option exercise prices. The Company’s stock options have a contractual life not to exceed ten years. The Company issues new shares of common stock upon exercise of stock options.

 

Due to limited historical data, the Company estimates stock price volatility based on the actual volatility of comparable publicly traded companies over the expected life of the option. The expected term represents the average time that options that vest are expected to be outstanding. The expected term for options granted to non-employees is the contractual life. The risk-free rate is based on the United States Treasury yield curve for the expected life of the option.

 

Management used the Black-Scholes-Merton option pricing model to determine the fair value of options issued during the years ended December 31, 2018 and 2017.

 

The assumptions used to calculate the fair value of stock options granted are as follows:

 

For the Year Ended December 31, 2018 

Non-

Employees

   Employees 
Estimated dividend yield   -%   -%
Expected stock price volatility   55.0%   50.0%
Risk-free interest rate   3.0%   2.8%
Expected life of options (in years)   10.0    6.25 
Weighted-average fair value per share  $6.71   $5.65 

 

For the Year Ended December 31, 2017 

Non-

Employees

   Employees 
Estimated dividend yield   -%   -%
Expected stock price volatility   52.3%   50.0%
Risk-free interest rate   1.8%   2.0%
Expected life of options (in years)   10.0    5.9 
Weighted-average fair value per share  $4.67   $4.48 

 

F-50

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 11: STOCK OPTIONS AND WARRANTS (continued)

 

The following summarizes the stock option activity for the years ended December 31, 2018 and 2017:

 

   Shares  

Weighted-

Average

Exercise

Price

  

Weighted-

Average

Remaining

Contractual

Term

  

Aggregate

Intrinsic

Value

 
Outstanding as of December 31, 2016   173,463   $1.64           
Exercised   (5,336)   0.97           
Terminated   (23,894)   2.40           
Granted   90,050    2.40           
Outstanding as of December 31, 2017   234,283   $1.88           
Exercised   (2,415)   2.40           
Terminated   (10,419)   4.81           
Granted   98,476    10.41           
Outstanding as of December 31, 2018   319,925   $4.40    7.7   $2,431,000 
Exercisable as of December 31, 2018   209,601    2.10    6.8   $2,075,000 
Expected to vest after December 31, 2018   110,324    8.77    9.4   $356,000 

 

The following table summarizes certain information about all stock options outstanding as of December 31, 2018:

 

Exercise Price  

Number of Options

Outstanding

  

Weighted-Average

Remaining

Contractual Life (In

Years)

  

Number of Options

Exercisable

 
$0.67    64,000    5.0    64,000 
 1.87    51,857    6.6    50,940 
 2.40    103,092    8.4    77,585 
 3.99    10,000    5.8    10,000 
 10.00    55,475    9.6    4,574 
 12.00    35,501    10.0    2,502 
      319,925         209,601 

 

As of December 31, 2018, there was approximately $554,000 of total unrecognized compensation cost related to stock option arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 2.2 years. The total intrinsic value of stock option awards exercised was approximately $23,000 during the fiscal year ended December 31, 2018.

 

The Company recorded $53,395 and $42,308 in non-employee and $191,748 and $89,314 in employee share-based compensation expense during 2018 and 2017, respectively.

 

F-51

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 11: STOCK OPTIONS AND WARRANTS (concluded)

 

Warrants

 

The Company issued 11,175 warrants during the year ended December 31, 2017, for the purchase of common stock. The warrants are exercisable immediately at $2.40 or $6.69 with a contractual term of ten years. The estimated fair value of the warrants was approximately $48,441 when issued. The fair value was calculated using the Black-Scholes-Morton pricing model with the following weighted-average assumptions yielding a weighted average fair value of $4.33: risk-free interest rate of 2.1%, expected life of ten years, dividend yields of 0% and volatility factor of 55.0%.

 

The Company issued 16,000 warrants during the year ended December 31, 2018, for the purchase of common stock. The warrants are exercisable immediately at $2.40 with a contractual term of ten years. The estimated fair value of the warrants was approximately $124,500 when issued. The fair value was calculated using the Black-Scholes-Morton pricing model with the following weighted-average assumptions yielding a weighted average fair value of $7.79, risk-free interest rate of 2.9%, expected life of ten years, dividend yields of 0%, and volatility factor of 55.0%.

 

Of the warrants issued during the year ended December 31, 2018, 16,000 were issued in conjunction with the Note. The warrants were recorded for $124,500 as a debt discount to “Long-term notes payable” and corresponding increase in “Additional paid-in capital” and will be amortized to interest expense over the estimated term of the Note. Of the warrants issued during the year ended December 31, 2017, 4,000 were issued in conjunction with the Note. The warrants were recorded for $20,000 as a debt discount to “Long-term notes payable” and corresponding increase in “Additional paid-in capital” and will be amortized to interest expense over the estimated term of the Note. The Company recognized interest expense of $53,852 and $28,441 during the years ended December 31, 2018 and 2017, respectively.

 

Additionally, the Company recognized $36,000 in share-based compensation expense during 2018 related to warrants issued in a prior period. The fair value was calculated using the Black-Scholes-Morton pricing model with the following weighted-average assumptions yielding a weighted average fair value of $2.39, risk-free interest rate of 2.08%, expected life of ten years, dividend yields of 0%, and volatility factor of 51.2%.

 

None of the warrants have been exercised as of December 31, 2018.

 

NOTE 12: INCOME TAXES

 

On December 22, 2017, the United States enacted new tax reform legislation which reduced the corporate tax rate to 21% effective for the tax year beginning January 1, 2018.  Under ASC 740, the effects of new tax legislation are recognized in the period which includes the enactment date.  As a result, the deferred tax assets and liabilities existing on the enactment date must be revalued to reflect the rate at which these deferred balances will reverse.  The corresponding adjustment would generally affect the income tax expense (benefit) shown on the Consolidated Statements of Operations.  However, since the Company has a full valuation allowance applied against its deferred tax asset, there is no impact to the income tax expense for the year ended December 31, 2018.

 

F-52

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 12: INCOME TAXES (concluded)

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the Company’s deferred income tax assets and liabilities as of December 31, 2018 and 2017, are as follows:

 

   2018   2017 
Deferred income tax assets and liabilities:          
Net operating loss carryforwards  $4,473,000   $2,887,000 
Accrued expenses   21,000    101,000 
Share-based compensation   82,000    45,000 
Accrued interest   94,000    39,000 
Research and development credit   25,000    25,000 
Depreciation and amortization   (31,000)   (30,000)
Valuation allowance   (4,664,000)   (3,067,000)
   $-   $- 

 

The Company has established a valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such asset. The valuation allowance increased by approximately $1,597,000 and $279,000, respectively, during the years ended December 31, 2018 and 2017.

 

As of December 31, 2018, the Company has federal and state net operating loss carryforwards of approximately $17,204,000 available to offset future federal and state taxable income, which begin to expire in 2033 and 2028. The Tax Reform Act of 1986 contains provisions which limit the ability to utilize the net operating loss carryforwards in the case of certain events, including significant changes in ownership interests. If the Company’s net operating loss carryforwards are limited, and the Company has taxable income which exceeds the permissible yearly net operating loss carryforwards, the Company would incur a federal income tax liability even though net operating loss carryforwards would be available in future years.

 

Income taxes computed at the statutory federal income tax rate are reconciled to the provision for income tax expense for 2018 and 2017 as follows:

 

   2018   2017 
   Amount  

% of Pre-Tax

Earnings

   Amount  

% of Pre-Tax

Earnings

 
Income tax expense (benefit) at statutory rate  $(1,281,000)   (21.0)%  $(1,389,000)   (34.0)%
Deferred tax impact of enacted tax rate and law changes   -    -%   1,443,000    35.3%
State taxes (net of federal benefit)   (278,000)   (4.6)%   (186,000)   (4.6)%
Non-deductible expenses   (38,000)   (0.6)%   (147,000)   (2.6)%
Change in valuation allowance   1,597,000    26.2%   279,000    5.9%
Provision for income tax expense  $-    0.0%  $-    0.0%

 

The Company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes. As of December 31, 2018 and 2017, the Company had no accrued interest related to uncertain tax positions.

 

F-53

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

NOTE 13: RELATED PARTY TRANSACTIONS

 

ISB Development Corp.

 

The Company’s Note holder, ISB Development Corp, is owned and operated by a director of the Company. In January 2017, the Company’s Board of Directors approved the execution of the promissory note and security agreement (the “Note”) and subsequent amendments. See Note 9 for further discussion and disclosure associated with the Note.

 

Del Oro Rock LLC

 

In August 2017, the Company launched its new whole loan sale program. In connection with the new program, the Company sold a Loan at par to Del Oro Rock LLC for $350,000. Del Oro Rock LLC is owned and operated by a member of management and stockholder of the Company.

 

In October 2017, the Company issued 7,550 warrants to Del Oro Rock LLC. The warrants were issued as a part of the Company’s Cornerstone Investor Program. A cornerstone investor is expected to participate in LROs at an agreed upon amount. The Company recorded $28,441 to “Additional paid-in capital” and share-based compensation expense during the year ended December 31, 2017.

 

NOTE 14: COMMITMENTS AND CONTINGENCIES

 

The Company has a noncancelable operating lease agreement for office space. The lease contains a renewal option within 67 months of the commencement date of September 2018. Rent expense for operating leases, which has escalating rents over the term of the lease, is recorded on a straight-line basis over the minimum lease terms. Rent expense under the operating lease was $60,766 during the year ended December 31, 2018.

 

As of December 31, 2018, the approximate amounts of the annual future minimum lease payments under noncancelable operating leases obligations are as follows:

 

   Balance 
Years ending December 31,     
2019  $172,329 
2020   265,261 
2021   273,219 
2022   281,416 
2023   289,858 
Thereafter   98,777 
   $1,380,860 

 

NOTE 15: SUBSEQUENT EVENTS

 

On February 12, 2018, the United States Securities and Exchange Commission issued a Notice of Qualification of the Company’s Offering Circular. On January 14, 2019 and on February 25, 2019, the Company filed amendments to this offering circular raising the price to $13.50 and $15.00 respectively. As of March 21, 2019 the Company has sold approximately $1,500,000 comprising of securities sold through the qualified offering circular, and securities sold through exemptions. The Company may sell additional securities through 2019.

 

Subsequent events were evaluated through March 21, 2019, the date the Consolidated Financial Statements were available to be issued.

 

Except as expressly set forth herein, the Company’s offering of Groundfloor Limited Recourse Obligations, as described in the Offering Circular, as amended or otherwise supplemented by the Company’s public reports filed with the Securities and Exchange Commission and available at the Commission’s website, www.sec.gov, which the Company incorporates by reference in the Offering Circular, remains unchanged.

 

F-54

 

 

  

PART III — EXHIBITS

 

Exhibit Index

 

            Incorporated by Reference
Exhibit
Number		  

Exhibit Description

(hyperlink)

  

Filed

Herewith

   Form   File No.   Exhibit

 

 

 Filing Date
                         
2.1   Groundfloor Finance Inc. Second Amended and Restated Articles of Incorporation       1-A/A   024-10496   2.1   November 25,
2015
                         
2.2   Groundfloor Finance Inc. Bylaws       1-A/A   024-10440   2.2   July 1, 2015
                         
3.1   Amended and Restated Investors’ Rights Agreement       1-A/A   024-10496   3.1   November 25,
2015
                         
3.2   Form of Investor Agreement       1-A/A   024-10753   3.2   November 1,
2018
                         
3.3   Preferred Stock Voting Agreement       1-A/A   024-10753   3.3   November 30,
2017
                         
4.1   Standard Form of LRO Agreement (incorporated by reference from the Offering Circular)       1-A/A   024-10496   N/A   October 22,
2018
                         
6.1   Executive Employment Agreement with Brian Dally dated November 19, 2014       1-A/A   024-10440   6.1   July 1, 2015
                         
6.2   Executive Employment Agreement with Nikhil Bhargava dated November 19, 2014       1-A/A   024-10440   6.2   July 1, 2015
                         
6.3   2013 Stock Option Plan       1-A/A   024-10440   6.6   July 1, 2015
                         
6.4   Option Award Agreement for Michael Olander Jr.       1-A/A   024-10440   6.8   July 1, 2015
                         
6.5   Option Award Agreement for Richard Tuley        1-A    024-10488    6.11    October 7,
2015
                         
6.6   Option Award Agreement for Bruce Boehm        1-A   024-10488     6.12    October 7,
2015
                         
6.7   Series Seed Preferred Stock Purchase Agreement       1-A/A   024-10440   3.1   July 1, 2015
                         
6.8   Series A Preferred Stock Purchase Agreement       1-A/A   024-10496   6.18   November 25,
2015
                         
6.9   Right of First Refusal and Co-Sale Agreement       1-A/A   024-10496   6.19   November 25,
2015
                         
6.10   Promissory Note and Security Agreement, as amended       1-A POS   024-10496   6.10   October 18,
2017
                         
6.11   Form of Loan Agreement       1-A/A   024-10440   6.14   July 1, 2015
                         
6.12   Form of Promissory Note       1-A/A   024-10440   6.15   July 1, 2015
                         
6.13   Loan Purchase Agreement with Harvest Residential Loan Acquisition, LLC       1-A/A   024-10758   6.11   January 22,
2018
                         
6.14   Servicing Agreement with Harvest Residential Loan Acquisition, LLC       1-A/A   024-10758   6.12   January 22,
2018
                         
11.1   Consent of Hughes Pitman & Gupton, LLP       1-A/A   024-10753   11.1   April 17, 2019
                         
11.2   Consent of Robbins Ross Alloy Belinfante Littlefield LLC (included as part of Exhibit 12.1)   X                
                         
12.1   Opinion of Robbins Ross Alloy Belinfante Littlefield LLC   X                

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of Regulation A, the issuer certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form 1-A and has duly caused this offering statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Atlanta, State of Georgia, on January 7, 2020.

 

  GROUNDFLOOR FINANCE INC.
     
  By: /s/ Nick Bhargava
  Name:  Nick Bhargava
  Title: Executive Vice President, Secretary and Acting Chief Financial Officer

 

This offering statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signature   Title   Date
         
*   President, Chief Executive Officer and Director
(Principal Executive Officer)  		   January 7, 2020
Brian Dally      
         
/s/ Nick Bhargava   Executive Vice President, Secretary, Acting Chief Financial Officer and Director (Principal Financial and Accounting Officer)     January 7, 2020
Nick Bhargava      
         
*   Director   January 7, 2020
Sergei Kouzmine        
         
*   Director   January 7, 2020
Bruce Boehm        
         
*   Director   January 7, 2020
Michael Olander Jr.        
         
*   Director   January 7, 2020
Richard Tuley Jr.        

 

*By:   /s/ Nick Bhargava  
Nick Bhargava  
Attorney-in-fact