PART II AND III 2 tm2011406d1_partiiandiii.htm PART II AND III

 

FORM 1-A DISCLOSURE FORMAT

PART II

OFFERING CIRCULAR

Groundfloor Real Estate 1, LLC.

 

Sixteen Series of Limited Recourse Obligations

Totaling $2,965,190

 

Dated: March 2, 2020

 

This Post-Qualification Offering Circular Amendment No. 4 (this “PQA”), made on the Form 1-A disclosure format, amends the offering circular of Groundfloor Real Estate 1, LLC, dated November 15, 2019, as qualified on November 27, 2019, 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 $2,965,190 in aggregate amount of Limited Recourse Obligations (the “LROs”) to be issued by Groundfloor Real Estate 1, LLC. (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   $ 2,965,190     N/A   $ 2,965,190       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. 024-11094) 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. Part II of the Post-Qualification Amendment # 2.

 

  3.

Part II of the Post-Qualification Amendment # 3.

 

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 98 and 101 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
 
8275 KNOTTS LANDING DRIVE NORTH, JACKSONVILLE, FL 32244   $ 103,600  
4352 NORTH 43RD STREET, PENNSAUKEN, NJ 08109     104,960  
7611 SOUTH PAULINA STREET, CHICAGO, IL 60620     120,290  
8230 SOUTH MORGAN STREET, CHICAGO, IL 60620     130,000  
1532 NORTH PEARL STREET #2, JACKSONVILLE, FL 32206     132,050  
5179 HORSE TRACK DRIVE NORTH, JACKSONVILLE, FL 32257     133,840  
1532 NORTH PEARL STREET #1, JACKSONVILLE, FL 32206     133,850  
2056 CLARK STREET, AUGUSTA, GA 30904     179,790  
519 E BARNARD STREET, WEST CHESTER, PA 19382     182,830  
1961 MEADOW LANE, DECATUR, GA 30032     220,050  
1404 INWOOD TERRACE, JACKSONVILLE, FL 32207     220,920  
2911 DOWNING STREET, JACKSONVILLE, FL 32205     222,650  
6909 S LAGOON DR, PANAMA CITY BEACH, FL 32408     243,750  
81 FORD STREET, HIGHLAND PARK, MI 48203     243,830  
34 SOUTH LONGVIEW ROAD, HOWELL, NJ 07731     262,420  
WOODBRIAR CIRCLE (6 UNITS) #3, TUCKER, GA 30084     330,360  
Total   $ 2,965,190  

 

 

 

Project Summaries

 

Each Project Summary attached below is included in the Offering Circular following page PS-59.

 

 

 

 

PROJECT SUMMARIES FOR PQA NO. 4

 

 

 

 

8275 KNOTTS LANDING DRIVE NORTH, JACKSONVILLE, FL 32244

 

PS-59

 

 

4352 NORTH 43RD STREET, PENNSAUKEN, NJ 08109 104,960

 

PS-60

 

 

7611 SOUTH PAULINA STREET, CHICAGO, IL 60620 120,290

 

PS-61

 

 

8230 SOUTH MORGAN STREET, CHICAGO, IL 60620 130,000 

8230 SOUTH MORGAN STREET, CHICAGO, IL 60620 130,000

 

PS-62

 

 

1532 NORTH PEARL STREET #2, JACKSONVILLE, FL 32206 132,050

 

PS-63

 

 

5179 HORSE TRACK DRIVE NORTH, JACKSONVILLE, FL 32257 133,840 

 

PS-64

 

 

1532 NORTH PEARL STREET #1, JACKSONVILLE, FL 32206 133,850 

 

PS-65

 

 

2056 CLARK STREET, AUGUSTA, GA 30904 179,790

 

PS-66

 

 

519 E BARNARD STREET, WEST CHESTER, PA 19382 182,830

 

PS-67

 

 

 1961 MEADOW LANE, DECATUR, GA 30032 220,050

 

PS-68

 

 

1404 INWOOD TERRACE, JACKSONVILLE, FL 32207 220,920 

 

PS-69

 

 

2911 DOWNING STREET, JACKSONVILLE, FL 32205 222,650 

 

PS-70

 

 

6909 S LAGOON DR, PANAMA CITY BEACH, FL 32408 243,750

 

PS-71

 

 

81 FORD STREET, HIGHLAND PARK, MI 48203 243,830 

 

PS-72

 

 

34 SOUTH LONGVIEW ROAD, HOWELL, NJ 07731 262,420 

 

PS-73

 

 

WOODBRIAR CIRCLE (6 UNITS) #3, TUCKER, GA 30084 330,360 

 

PS-74

 

 

 

*               *               *

 

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 REAL ESTATE 1, LLC

 

Condensed Financial Statements

 

June 30, 2019 and 2018

 

 

 

 

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Table of Contents

 

Condensed Financial Statements  
   
Condensed Balance Sheets (unaudited) as of June 30, 2019 and December 31, 2018 F-1
   
Condensed Statements of Operations for the six months ended June 30, 2019 and 2018 F-2
   
Condensed Statements of Member’s (Deficit) Equity for the six months ended June 30, 2019 and 2018 F-3
   
Condensed Statements of Cash Flows for the six months ended June 30, 2019 and 2018 F-4
   
Notes to Condensed Financial Statements F-5

 

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Condensed Balance Sheets

 

   Unaudited   Audited 
   June 30,
2019
   December 31,
2018
 
Assets          
Current assets:          
Cash  $20,100   $20,100 
Loans to developers, net   157,070    157,070 
Interest receivable on loans to developers   9,903    9,903 
Other real estate owned   23,569    23,569 
Total current assets   210,642    210,642 
Total assets  $210,642   $210,642 
Liabilities and Member’s Equity          
Current liabilities:          
Accounts payable  $-   $- 
Related party payable   -    - 
Accrued interest on limited recourse obligations   9,903    9,903 
Limited recourse obligations, net   200,739    200,739 
Total current liabilities   210,642    210,642 
Total liabilities   210,642    210,642 
           
Member’s equity:          
Member’s capital   100    100 
Member’s contribution receivable   (100)   (100)
Retained earnings   -    - 
Total member’s equity   -    - 
Total liabilities and member’s equity  $210,642   $210,642 

 

See accompanying notes to condensed financial statements

 

F-1

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Condensed Statements of Operations

  

   Unaudited 
   Six Months Ended June 30, 
   2019   2018 
Loan servicing revenue  $-   $5,200 
Net interest income:          
Interest income   -    95,899 
Interest expense   -    (95,899)
Net interest income   -    - 
Net revenue   -    5,200 
Cost of revenue   -    3,250 
Gross profit   -    1,950 
Operating expenses:          
General and administrative   -    1,950 
Total operating expenses   -    1,950 
Income from operations   -    - 
Net income  $-   $- 

 

See accompanying notes to condensed financial statements

 

F-2

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Condensed Statements of Member’s (Deficit) Equity

  

          Member’s     (Accumulated
deficit)
    Total
Member’s
 
    Member’s     Contribution     Retained     (Deficit)  
    Capital     Receivable     Earnings     Equity  
Member’s deficit as of December 31, 2017 (audited)   $ 100     $ (100 )   $             -     $             -  
Member contributions     -       -       -       -  
Net income     -       -       -       -  
Member’s equity as of December 31, 2018 (audited)   $ 100     $ (100 )   $ -     $ -  
Net income     -       -       -       -  
Member’s equity as of June 30, 2019 (unaudited)   $ 100     $ (100 )   $ -     $ -  

 

See accompanying notes to condensed financial statements

 

F-3

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Condensed Statements of Cash Flows

  

   Unaudited 
   Six Months Ended June 30, 
   2019   2018 
Cash flows from operating activities          
Net income  $-   $- 
Adjustments to reconcile net income to net cash provided by operating activities:          
Changes in operating assets and liabilities:          
Interest receivable on loans to developers   -    (95,899)
Accounts payable and related party payable   -    - 
Accrued interest on limited recourse obligations   -    95,899 
Net cash provided by operating activities   -    - 
Cash flows from investing activities          
Loan payments to developers   -    (299,644)
Repayments of loans from developers   -    1,969,453 
Net cash provided by (used in) investing activities   -    1,669,809 
Cash flows from financing activities          
Proceeds from limited recourse obligations   -    - 
Repayments of limited recourse obligations   -    (2,001,109)
Issuance of membership interest   -    - 
Net cash (used in) provided by financing activities   -    (2,001,109)
Net (decrease) increase in cash   -    (331,300)
Cash as of beginning of the period   20,100    389,400 
Cash as of end of the period  $20,100   $58,100 
Supplemental disclosure of noncash investing and financing activities:          
Loans to developers transferred to other real estate owned  $-   $23,569 
Write-down of loans to developers and limited recourse obligations, net   -    35,054 
Write-down of interest receivable on loans to developers and accrued interest on limited recourse obligations   -    4,706 

 

See accompanying notes to condensed financial statements

 

F-4

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Condensed Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

GROUNDFLOOR Real Estate 1, LLC (the “Company”), a Georgia limited liability company formed on December 16, 2016. The Company is a wholly-owned subsidiary of GROUNDFLOOR Finance Inc. (“GROUNDFLOOR”), a Georgia corporation.

 

Description of Business

 

GROUNDFLOOR has developed an online investment platform designed to crowdsource financing for real estate development projects, which GROUNDFLOOR utilizes to provide investment opportunities to investors. With this online investment platform, investors are able to choose between multiple real estate development investment opportunities, and developers of the projects are able to obtain financing. GROUNDFLOOR believes this method of financing real estate has many advantages including reduced project origination and financing costs, lower interest rates for real estate development financing, and attractive returns for investors. GROUNDFLOOR will identify which loans it seeks to originate, and will sell limited recourse obligations (“LROs”) which correspond to those loans. GROUNDFLOOR’s primary business is the sale of LROs and the Company’s primary purpose is the servicing of loans which correspond to those LROs.

 

Basis of Accounting and Liquidity

 

The Company’s condensed 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. The accompanying condensed financial statements have been prepared on a basis which assumes that the Company will continue as a going concern. The Company has earned limited revenue 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. 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 to fund product development and sales and marketing.

 

Management intends to fund operations by capital obtained from GROUNDFLOOR. However, there are no assurances that the Company can be successful in obtaining the additional capital or such financing will be on terms favorable or acceptable to the Company or GROUNDFLOOR. These matters raise substantial doubt about the ability of the Company to continue as a going concern.

 

The condensed financial statements do not include any adjustments that might result from the outcome of uncertainties described in the condensed financial statements. In addition, the condensed 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 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 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 “Loan servicing revenue” which are paid by the Developers.

 

F-5

 

  

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Condensed Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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.

 

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 LROs (if issued by GROUNDFLOOR Real Estate 1, LLC) 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 Condensed Financial Statements, “Limited recourse obligations, net” refers to LROs. LROs are the Company’s currently registered securities.

 

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.

 

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 LROs.

 

The Company’s obligation to pay principal and interest on an 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’s lien may be senior or junior to the Borrower’s other financing obligations. 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 LROs, if applicable, less collection costs incurred by the Company.

 

The Loan and corresponding LROs are recorded on the Company’s Condensed 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.

 

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.

 

F-6

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Condensed Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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.

 

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. 

 

Income Taxes

 

As a limited liability company, the Company is not a taxpaying entity for federal income tax purposes. Accordingly, its taxable income or losses are allocated to its member based on the provisions of the operating agreement and are included in the members’ income tax returns. The condensed financial statements, therefore, do not include a provision for income taxes. Similar provisions apply for state income tax purposes.

 

Management has assessed the effect of the guidance provided by U.S. GAAP on accounting for uncertainty in income taxes. Management has evaluated all tax positions that could have a significant effect on the condensed financial statements and determined the Company had no uncertain income tax positions at June 30, 2019 and December 31, 2018.

 

F-7

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Condensed Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recent Accounting Pronouncements

 

The Company has evaluated the recent pronouncements issued since filing its annual audited Condensed 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 Financial Statements.

 

NOTE 2: LOANS TO DEVELOPERS, NET

 

The Company purchases notes that provide 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 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 LROs. The Company has commenced a formal foreclosure process to secure the real estate property. 

 

GROUNDFLOOR uses a proprietary grading algorithm to assign one of seven letter grades, from A to G, to each Loan. The letter grade generally reflects the overall risk of the Loan, with A indicating less risk and G indicating higher risk.

 

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  $-   $-   $-   $- 
B   -    -    -    - 
C   -    -    157,070    157,070 
D   -    -    -    - 
E   -    -    -    - 
F   -    -    -    - 
G   -    -    -    - 
Carrying amount as of June 30, 2019  $-   $-   $157,070   $157,070 

  

   Current   Workout   Fundamental
Default
   Total 
Loan grades:                    
A  $-   $-   $-   $- 
B   -    -    -    - 
C   -    -    157,070    157,070 
D   -    -    -    - 
E   -    -    -    - 
F   -    -    -    - 
G   -    -    -    - 
Carrying amount as of December 31, 2018  $-   $-   $157,070   $157,070 

 

F-8

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Condensed 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 $157,070 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  $-   $                 -   $- 
Less than 90 days past due   -    -    - 
More than 90 days past due   157,070    -    157,070 
Total as of June 30, 2019  $157,070   $-   $157,070 

 

   Carrying
Amount
   Allowance for
Loan
Losses
   Total 
Aging schedule:               
Current  $-   $-   $- 
Less than 90 days past due   -             -    - 
More than 90 days past due   157,070    -    157,070 
Total as of December 31, 2018  $157,070   $-   $157,070 

 

Impaired Loans

 

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

 

   Balance 
Nonaccrual loans  $157,070 
Fundamental default not included above   - 
Total impaired loans   157,070 
      
Interest income recognized on impaired loans  $9,903 

 

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

 

   Balance 
Principal loan balance  $157,070 
      
Recorded investment with no allowance   157,070 
Recorded investment with allowance   - 
Total recorded investment  $157,070 
      
Related allowance   - 
Average recorded investment  $157,070 

 

F-9

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Condensed Financial Statements

 

NOTE 2: LOANS TO DEVELOPERS, NET (continued)

 

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

 

   Balance 
Nonaccrual loans  $157,070 
Fundamental default not included above   - 
Total impaired loans   157,070 
      
Interest income recognized on impaired loans  $9,903 

 

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

 

   Balance 
Principal loan balance  $157,070 
      
Recorded investment with no allowance   157,070 
Recorded investment with allowance   - 
Total recorded investment  $157,070 
      
Related allowance   - 
Average recorded investment  $157,070 

 

F-10

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Condensed Financial Statements

 

NOTE 2: LOANS TO DEVELOPERS, NET (continued)

 

Credit Quality Monitoring

 

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  $-   $             -   $- 
Workout   -    -    - 
Fundamental default   157,070    -    157,070 
Total as of June 30, 2019  $157,070   $-   $157,070 

 

   Carrying
Amount
   Allowance
for Loan
Losses
   Loans to
Developers,
Net
 
Performance states:               
Current  $-   $-   $- 
Workout   -    -    - 
Fundamental default   157,070    -    157,070 
Total as of December 31, 2018  $157,070   $-   $157,070 

 

F-11

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Condensed Financial Statements

 

NOTE 3: OTHER REAL ESTATE OWNED

 

“Other real estate owned” in the Company’s Condensed Balance Sheet was $23,569 at June 30, 2019 and December 31, 2018.

 

NOTE 4: RELATED PARTY ARRANGEMENTS

 

GROUNDFLOOR Finance Inc.

 

GROUNDFLOOR will receive fees and compensation in connection with the Company’s Offering, and the servicing and sale of the Company’s LROs.

 

The Company will also reimburse GROUNDFLOOR for actual expenses incurred on behalf of the Company in connection with the servicing of a Loan, to the extent not reimbursed by the borrower. The Company will reimburse GROUNDFLOOR for out-of-pocket expenses paid to third parties in connection with providing services to the Company. This does not include GROUNDFLOOR’s overhead, employee costs borne by GROUNDFLOOR, utilities or technology costs. For the six months ended June 30, 2019 and 2018, GROUNDFLOOR incurred $0 and $5,100 of costs on the Company’s behalf, respectively. No such costs were due and payable to GROUNDFLOOR as of June 30, 2019 and December 31, 2018, respectively.

 

GROUNDFLOOR GA Holdings LLC

 

GROUNDFLOOR GA Holdings LLC may close and fund a Loan prior to it being acquired by the Company. The ability to warehouse Loans allows us the flexibility to deploy the offering proceeds as funds are raised. The Company then will acquire such LROs at a price equal to the fair market value of the Loan (including reimbursements for servicing fees and accrued interest, if any), so there is no mark-up (or mark-down) at the time of purchase. 

 

NOTE 5: SUBSEQUENT EVENTS

 

Subsequent events were evaluated through September 27, 2019, the date the Condensed Financial Statements were available to be issued. On August 2, 2019, the Company recovered $23,569 in sale proceeds on real estate owned.

 

F-12

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Financial Statements

 

December 31, 2018 and 2017

 

 

 

 

GROUNDFLOOR REAL ESTATE 1, LLC
 

Table of Contents

 

Independent Auditors’ Report F-1
Financial Statements  
Balance Sheets as of December 31, 2018 and 2017 F-3
Statements of Operations for the years ended December 31, 2018 and 2017 F-4
Statements of Member’s (Deficit) Equity for the years ended December 31, 2018 and 2017 F-5
Statements of Cash Flows for the years ended December 31, 2018 and 2017 F-6
Notes to Financial Statements F-7

 

 

 

 

Independent Auditors’ Report

 

To the Board of Directors

Groundfloor Real Estate 1, LLC
Atlanta, Georgia

 

We have audited the accompanying financial statements of Groundfloor Real Estate 1, LLC (the “Company”), which comprise the balance sheets as of December 31, 2018 and 2017, and the related statements of operations, member’s (deficit) equity, and cash flows for the years then ended, and the related notes to the financial statements.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these 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 financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

 

Our responsibility is to express an opinion on these 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 financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the 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 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 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 financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

F-1

 

  

Substantial Doubt about the Company’s Ability to Continue as a Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has not earned any significant revenues since its inception which result in substantial doubt about the ability of the Company to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans in regard to that matter also are described in Note 1. The 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.

 

 

 

Atlanta, Georgia

September 27, 2019

 

F-2

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

  

Balance Sheets

  

   December 31, 
   2018   2017 
Assets          
Current assets:          
Cash  $20,100   $389,400 
Loans to developers, net   157,070    2,743,606 
Interest receivable on loans to developers   9,903    148,218 
Other real estate owned   23,569    - 
Total current assets   210,642    3,281,224 
Total assets  $210,642   $3,281,224 
Liabilities and Member’s Equity          
Current liabilities:          
Accounts payable  $-   $- 
Related party payable   -    - 
Accrued interest on limited recourse obligations   9,903    148,218 
Limited recourse obligations, net   200,739    3,133,006 
Total current liabilities   210,642    3,281,224 
Total liabilities   210,642    3,281,224 
           
Member’s equity:          
Member’s capital   100    100 
Member’s contribution receivable   (100)   (100)
Retained earnings   -    - 
Total member’s equity   -    - 
Total liabilities and member’s equity  $210,642   $3,281,224 

    

See accompanying notes to financial statements

 

F-3

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Statements of Operations

  

   Year Ended December 31, 
   2018   2017 
Loan servicing revenue  $5,200   $16,400 
Net interest income:          
Interest income   95,899    216,437 
Interest expense   (95,899)   (216,437)
Net interest income   -    - 
Net revenue   5,200    16,400 
Cost of revenue   3,250    10,250 
Gross profit   1,950    6,150 
Operating expenses:          
General and administrative   1,950    5,100 
Total operating expenses   1,950    5,100 
Income from operations   -    1,050 
Net income  $-   $1,050 

  

See accompanying notes to financial statements

 

F-4

 

 

GROUNDFLOOR REAL ESTATE 1, LLC
 

Statements of Member’s (Deficit) Equity

 

  

Member’s

Capital

  

Member’s

Contribution

Receivable

  

(Accumulated

deficit)

Retained

Earnings

  

Total

Member’s

(Deficit)

Equity

 
Member’s deficit as of December 31, 2016  $100   $(100)  $(1,050)  $(1,050)
Member contributions   -    -    -    - 
Net income   -    -    1,050    1,050 
Member’s equity as of December 31, 2017   100    (100)   -    - 
Net income   -    -    -    - 
Member’s equity as of December 31, 2018  $100   $(100)  $-   $- 

 

See accompanying notes to financial statements

 

F-5

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Statements of Cash Flows

 

   Year Ended December 31, 
   2018   2017 
Cash flows from operating activities          
Net income  $-   $1,050 
Adjustments to reconcile net income to net cash provided by operating activities:          
Changes in operating assets and liabilities:          
Interest receivable on loans to developers   (95,899)   (148,218)
Accounts payable and related party payable   -    (1,050)
Accrued interest on limited recourse obligations   95,899    148,218 
Net cash provided by operating activities   -    - 
Cash flows from investing activities          
Loan payments to developers   (299,644)   (4,930,941)
Repayments of loans from developers   3,057,065    2,187,335 
Net cash provided by (used in) investing activities   2,757,421    (2,743,606)
Cash flows from financing activities          
Proceeds from limited recourse obligations   -    5,034,456 
Repayments of limited recourse obligations   (3,126,721)   (1,901,450)
Issuance of membership interest   -    - 
Net cash (used in) provided by financing activities   (3,126,721)   3,133,006 
Net (decrease) increase in cash   (369,300)   389,400 
Cash as of beginning of the period   389,400    - 
Cash as of end of the period  $20,100   $389,400 
Supplemental disclosure of noncash investing and financing activities:          
Loans to developers transferred to other real estate owned  $23,569   $- 
Write-down of loans to developers and limited recourse obligations, net   35,054    - 
Write-down of interest receivable on loans to developers and accrued interest on limited recourse obligations   4,706    - 

  

See accompanying notes to financial statements

 

F-6

 

 

  

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

GROUNDFLOOR Real Estate 1, LLC (the “Company”), a Georgia limited liability company formed on December 16, 2016. The Company is a wholly-owned subsidiary of GROUNDFLOOR Finance Inc. (“GROUNDFLOOR”), a Georgia corporation.

 

Description of Business

 

GROUNDFLOOR has developed an online investment platform designed to crowdsource financing for real estate development projects, which GROUNDFLOOR utilizes to provide investment opportunities to investors. With this online investment platform, investors are able to choose between multiple real estate development investment opportunities, and developers of the projects are able to obtain financing. GROUNDFLOOR believes this method of financing real estate has many advantages including reduced project origination and financing costs, lower interest rates for real estate development financing, and attractive returns for investors. GROUNDFLOOR will identify which loans it seeks to originate, and will sell limited recourse obligations (“LROs”) which correspond to those loans. GROUNDFLOOR’s primary business is the sale of LROs and the Company’s primary purpose is the servicing of loans which correspond to those LROs.

 

Basis of Accounting and Liquidity

 

The Company’s 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. The accompanying financial statements have been prepared on a basis which assumes that the Company will continue as a going concern. The Company has not earned limited revenue 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. 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 to fund product development and sales and marketing.

 

Management intends to fund operations by capital obtained from GROUNDFLOOR. However, there are no assurances that the Company can be successful in obtaining the additional capital or such financing will be on terms favorable or acceptable to the Company or GROUNDFLOOR. These matters raise substantial doubt about the ability of the Company to continue as a going concern.

 

The financial statements do not include any adjustments that might result from the outcome of uncertainties described in the financial statements. In addition, the 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 Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Financial Statements and the reported amounts of revenues and expenses during the reporting period. 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 “Loan servicing revenue” which are paid by the Developers.

 

F-7

 

  

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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.

 

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 LROs (if issued by GROUNDFLOOR Real Estate 1, LLC) 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 Financial Statements, “Limited recourse obligations, net” refers to LROs. LROs are the Company’s currently registered securities.

 

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.

 

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 LROs.

 

The Company’s obligation to pay principal and interest on an 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’s lien may be senior or junior to the Borrower’s other financing obligations. 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 LROs, if applicable, less collection costs incurred by the Company.

 

The Loan and corresponding LROs are recorded on the Company’s 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-8

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to 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 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 LROs. The Company recognizes a reserve for uncollectable Loans and corresponding reserve for undeliverable 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 LROs, as applicable, that effectively absorb the related Loan losses.

 

“Loans to developers, net” are presented net of a reserve for doubtful accounts of $0 and $0 as of December 31, 2018 and 2017, respectively. “Limited recourse obligations, net” are presented net of a reserve for doubtful accounts of $35,054 and $0 as of December 31, 2018 and 2017, respectively.

  

F-9

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)

 

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.

 

Income Taxes

 

As a limited liability company, the Company is not a taxpaying entity for federal income tax purposes. Accordingly, its taxable income or losses are allocated to its member based on the provisions of the operating agreement and are included in the members’ income tax returns. The financial statements, therefore, do not include a provision for income taxes. Similar provisions apply for state income tax purposes.

 

Management has assessed the effect of the guidance provided by U.S. GAAP on accounting for uncertainty in income taxes. Management has evaluated all tax positions that could have a significant effect on the financial statements and determined the Company had no uncertain income tax positions at December 31, 2018 and 2017.

 

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 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 Financial Statements.

 

F-10

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Financial Statements

 

NOTE 3: LOANS TO DEVELOPERS, NET

 

The Company purchases notes that provide 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 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 LROs. The Company has commenced a formal foreclosure process to secure the real estate property.

 

GROUNDFLOOR uses a proprietary grading algorithm to assign one of seven letter grades, from A to G, to each Project. The letter grade generally reflects the overall risk of the Loan, with A indicating less risk and G indicating higher risk. 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:

 

           Fundamental     
   Current   Workout   Default   Total 
Loan grades:                    
A  $-   $-   $-   $- 
B   -    -    -    - 
C   -    -    157,070    157,070 
D   -    -    -    - 
E   -    -    -    - 
F   -    -    -    - 
G   -    -    -    - 
Carrying amount as of December 31, 2018  $-   $-   $157,070   $157,070 

 

           Fundamental     
   Current   Workout   Default   Total 
Loan grades:                    
A  $57,335   $-   $-   $57,335 
B   1,957,175    -                 -    1,957,175 
C   729,096    -    -    729,096 
D   -    -    -    - 
E   -    -    -    - 
F   -    -    -    - 
G   -    -    -    - 
Carrying amount as of December 31, 2017  $2,743,606   $-   $-   $2,743,606 

 

F-11

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to 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 $157,070 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   Allowance for     
   Amount   Loan Losses   Total 
Aging schedule:               
Current  $-   $-   $- 
Less than 90 days past due   -    -    - 
More than 90 days past due   157,070    -    157,070 
Total as of December 31, 2018  $157,070   $-   $157,070 

 

   Carrying   Allowance for     
   Amount   Loan Losses   Total 
Aging schedule:               
Current  $2,743,606   $-   $2,743,606 
Less than 90 days past due   -    -    - 
More than 90 days past due   -    -    - 
Total as of December 31, 2017  $2,743,606   $-   $2,743,606 

 

Impaired Loans

 

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

 

   Balance 
Nonaccrual loans  $157,070 
Fundamental default not included above   - 
Total impaired loans  $157,070 
      
Interest income recognized on impaired loans  $9,903 

 

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

 

   Balance 
Principal loan balance  $157,070 
      
Recorded investment with no allowance   157,070 
Recorded investment with allowance   - 
Total recorded investment  $157,070 
      
Related allowance   - 
Average recorded investment  $157,070 

 

F-12

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to 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  $- 
Fundamental default not included above   - 
Total impaired loans  $- 
      
Interest income recognized on impaired loans  $- 

 

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

 

    Balance 
Principal loan balance  $- 
      
Recorded investment with no allowance   - 
Recorded investment with allowance   - 
Total recorded investment  $- 
      
Related allowance   - 
Average recorded investment  $- 

 

F-13

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Financial Statements

 

NOTE 3: LOANS TO DEVELOPERS, NET (continued)

 

Credit Quality Monitoring

 

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   $ -     $            -     $ -  
Workout     -       -       -  
Fundamental default     157,070       -       157,070  
Total as of December 31, 2018   $ 157,070     $ -     $ 157,070  

  

    Carrying
Amount
    Allowance
for Loan
Losses
    Loans to
Developers,
Net
 
Performance states:                        
Current   $ 2,743,606     $ -     $ 2,743,606  
Workout     -                   -       -  
Fundamental default     -       -       -  
Total as of December 31, 2017   $ 2,743,606     $ -     $ 2,743,606  

 

F-14

 

 

GROUNDFLOOR REAL ESTATE 1, LLC
 

Notes to 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   $           -  
Allowance for loan loss     -  
Loans charged off     -  
Outstanding as of December 31, 2018   $ -  
Period-end amount allocated to:        
Loans individually evaluated for impairment   $ -  
Loans collectively evaluated for impairment     -  
Balance, December 31, 2018   $ -  
Loans:        
Individually evaluated for impairment   $ 157,070  
Collectively evaluated for impairment     -  
Balance, December 31, 2018   $ 157,070  

 

    Balance 
Balance, December 31, 2016  $- 
Allowance for loan loss   - 
Loans charged off   - 
Outstanding as of December 31, 2017  $- 
Period-end amount allocated to:     
Loans individually evaluated for impairment  $- 
Loans collectively evaluated for impairment   - 
Balance, December 31, 2017  $- 
Loans:     
Individually evaluated for impairment  $- 
Collectively evaluated for impairment   - 
Balance, December 31, 2017  $- 

 

F-15

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Financial Statements

 

NOTE 4: OTHER REAL ESTATE OWNED

 

“Other real estate owned” in the Company’s Balance Sheet was $23,569 and $0 at December 31, 2018 and 2017, respectively. During the year ended December 31, 2018 the Company transferred $58,623 from “Loans to developers, net” to “Other real estate owned”. 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 Statements of Operation from this transfer. The Company recorded a decrease of $35,054 to “Loans to developers, net” and an offsetting decrease to “Limited recourse obligations, net”.

 

NOTE 5: RELATED PARTY ARRANGEMENTS
 

GROUNDFLOOR Finance Inc.

 

GROUNDFLOOR will receive fees and compensation in connection with the Company’s Offering, and the servicing and sale of the Company’s LROs.

 

The Company will also reimburse GROUNDFLOOR for actual expenses incurred on behalf of the Company in connection with the servicing of a Loan, to the extent not reimbursed by the borrower. The Company will reimburse GROUNDFLOOR for out-of-pocket expenses paid to third parties in connection with providing services to the Company. This does not include GROUNDFLOOR’s overhead, employee costs borne by GROUNDFLOOR, utilities or technology costs. For the year ended December 31, 2018 and 2017, GROUNDFLOOR incurred $5,100 and $1,950 of costs on the Company’s behalf, respectively. No such costs were due and payable to GROUNDFLOOR as of December 31, 2018 and 2017, respectively.

 

GROUNDFLOOR GA Holdings LLC

 

GROUNDFLOOR GA Holdings LLC may close and fund a Loan prior to it being acquired by the Company. The ability to warehouse Loans allows us the flexibility to deploy the offering proceeds as funds are raised. The Company then will acquire such LROs at a price equal to the fair market value of the Loan (including reimbursements for servicing fees and accrued interest, if any), so there is no mark-up (or mark-down) at the time of purchase.

 

NOTE 6: SUBSEQUENT EVENTS

 

Subsequent events were evaluated through September 27, 2019, the date the Financial Statements were available to be issued. On August 2, 2019, the Company recovered $23,569 in sale proceeds on real estate owned.

 

F-16

 

 

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-6

 

 

 

  

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 Stockholder’s 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 

 

F-4

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Cash Flows

 

   Unaudited 
   Six Months Ended June 30, 
   2019   2018 
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-5

 

 

 

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-6

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)

 

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.

 

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 

 

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-9

 

 

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-10

 

 

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-11

 

 

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-12

 

 

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-13

 

 

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-14

 

 

 

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-15

 

 

 

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 October 3, 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-16

 

 

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 October 3, 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-17

 

 

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.

 

F-18

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

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

 

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.

 

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-19

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated 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-20

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

NOTE 11: INCOME TAXES

 

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-21

 

 

GROUNDFLOOR FINANCE INC.

AND SUBSIDIARIES

 

Consolidated Financial Statements

 

December 31, 2018 and 2017

 

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Table of Contents

 

December 31, 2018 and 2017

 

Independent Auditors’ Report   F-3
     
Consolidated Financial Statements    
     
Consolidated Balance Sheets   F-4
     
Consolidated Statements of Operations   F-5
     
Consolidated Statements of Stockholders’ (Deficit) Equity   F-6
     
Consolidated Statements of Cash Flows   F-7
     
Notes to Consolidated Financial Statements   F-9

 

F-2

 

 

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-3

 

 

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-4

 

 

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-5

 

 

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-6

 

 

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 

 

F-7

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

 

   Year Ended December 31, 
   2018   2017 
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-8

 

 

 

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-9

 

 

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-10

 

 

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-11

 

 

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-12

 

 

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-13

 

 

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-14

 

 

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-15

 

 

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-16

 

 

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-17

 

 

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-18

 

 

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-19

 

 

 

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-20

 

 

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-21

 

 

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-22

 

 

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-23

 

 

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.