PART II AND III 2 tm2032762d1_partiiandiii.htm PART II AND III

 

FORM 1-A DISCLOSURE FORMAT

PART II

OFFERING CIRCULAR

Groundfloor Real Estate 1, LLC.

 

Eleven Series of Limited Recourse Obligations

Totaling $1,716,170

 

Dated: September 17, 2020

 

This Post-Qualification Offering Circular Amendment No. 15 (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 $1,716,170 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  $1,716,170   N/A  $1,716,170   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. Amended Form 1-SA, for Groundfloor Real Estate 1, LLC, covering the periods ending July 30, 2020 and July 30, 2019.

 

  3. Form 1-SA, for Groundfloor Finance Inc., covering the periods ending July 30, 2020 and July 30, 2019.

 

4.Part II of the Post-Qualification Amendment # 14.

 

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
 
5187 CARDINAL CIRCLE, SANFORD, NC 27332  $103,040 
2884 1ST AVENUE SOUTHWEST, ATLANTA, GA 30315   120,500 
712 GLENWOOD AVENUE SE UNIT A #2, ATLANTA, GA 30312   131,450 
712 GLENWOOD AVENUE SE UNIT A #3, ATLANTA, GA 30312   131,450 
712 GLENWOOD AVENUE SE UNIT B #2, ATLANTA, GA 30312   131,450 
712 GLENWOOD AVENUE SE UNIT B #3, ATLANTA, GA 30312   131,450 
712 GLENWOOD AVENUE SE UNIT A #1, ATLANTA, GA 30312   156,400 
712 GLENWOOD AVENUE SE UNIT B #1, ATLANTA, GA 30312   156,400 
1161 MAYLAND CIRCLE SOUTHWEST, ATLANTA, GA 30310   194,220 
1507 FRAZIER ROAD, DECATUR, GA 30033   208,600 
815 WELCH STREET SOUTHWEST, ATLANTA, GA 30310   251,210 
Total  $1,716,170 

 

Project Summaries

 

Each Project Summary attached below is included in the Offering Circular following page PS-191.

 

 

 

 

 

PROJECT SUMMARIES FOR PQA NO. 15

 

 

 

 

 Construction '---F-i_rs_t_L_ie_n _,ll $103,040 returned on repayment/ due at maturity. INVEST NOW Click here to view the LRO Agreement FINANCIAL OVERVIEW TotalProject Costs Q) $127,532 $174,000 GRADE FACTORS The followingfactors determine in part how the loan was graded: (in descending order of importance) loan To ARV Score Q) 10 Quality of Valuation Report 4 Skin-in-the-Game Q) 10 location8 Borrower Experience-5 Borrower Commitment Q) 1 $24,492 0% Skin-in-the Game Q) First lien Loan Cushion Q) VALUATION REPORTS As Complete (ARV) $174,000 Broker's Price Opinion Purchase Price Q) Purchase Date $7,992 05/12/2020 Loan ToARV Q) Loan To Total Project Cost Q) 59.2% 80.0% Borrower Provided Appraisal Borrower Provided Comps PROPERTY DESCRIPTION '; i View larger map Address: 5187 CARDINAL CIRCLE,SANFORD,NC 27332 ' / ) .....,. Go gle_ The Borrower intends to use the loan proceeds to complete a new construction.Upon completion,the Borrower intends to sellthe property to repay the Groundfloor loan. INVEST NOW Mop data ®2020 Terms of Use Report a map errorClick here to view the LRO Agreement MISCELLANEOUS PROJECT SPECIFIC RISK FACTORS • The Borrower was advanced the money it needs to begin construction of this property on August 4, 2D20 by Groundfloor Finance Inc.("Groundfloor;'"we;'"us;'or "our") or a wholly-owned subsidiary of Groundfloor. The Borrower will has begun construction of the property.If this offeringis fully subscribed,Groundfloor will continue to administer and service the loan as further described in the OfferingCircular. • The Borrower has not completed or sold any projects in the past year.As such,the Borrower's average revenue,costs, and margins cannot be calculated. • The Principal has not yet completed or sold any projects.As such, the Principal's average revenue,costs,and margins cannot be calculated. • The construction of the property may be extensive,and therefore subject to delays and other unexpected issues. • The construction willrequire permitting, and permits may not be obtained on time or may be denied. • There is no existing structure on this property,or if there is,it will be demolished, and a new structure built in its place. • The event of default on one Groundfloor note secured by this property will trigger default on all Groundfloor notes secured by this property. All LRO holders investing in LROs corresponding to notes secured by this property share the same priority in any recovery and recovered proceeds will be distributed on a pro-rata basis. • Please consult the Offering Circular for further discussion of general risk factors. CLOSING CONOITIONS • Loan is conditioned upon a clean title search and valid title insurance at the time of close. DEVELOPER FEES • We generally charge borrowers an origination fee (which typically ranges between 2% and 6% of the principal loan amount) and a servicing fee (which typically ranges between 0.5% and 2%) for our services. • We do not take a "spread" on any part of the interest payments. • Borrowers may capitalize the cost of closing into the principal amount of their request. These closingcosts typically range from $500 to $1500. • Unless otherwise limited by applicable law,we will charge a penalty of up to 2% for any extension made to the Borrower.See "Fees and Related Expenses" in the Offering Circular SEC FILING INFORMATION • The series of LROs corresponding to this Project are offered pursuant to Post Qualification Amendment No.15 to the OfferingCircular dated November 15, 2019 (each,as amended and supplemented from time to time),including the documents incorporated by reference therein. You may access and review these documents on the Internal Filings Directory located on our Platform. BORROWER SUMMARY UNLESSNOTEDWITHA *'INFORMATIONBELOW ISSUPPLIEDBYTHE BORROWERAND ISNOT VERIFIED. BORROWERS REPRESENTAND WARRANT THAT INFORMATION SUPPLIED IS ACCURATE. THE J&R GROUP LLCFINANCIAL DATA Reportingdate:06/30/20 DATE OF FORMATION * 09/23/2019 IPRINCIPAL PROJECTS / REVENUE Reportingperiod:2019 Total Debt Q) Revenue Q) Daniel Brody GROUNDFLOOR HISTORY * HISTORICAL AVERAGES Reportingperiod:three years ending2019 FOCUS New Construction Loans Funded Q)Loans Repaid Q) Completed Projects PerYear Q) Average Project Revenue Q) '------1o JII o IIN/A I '------1J On Time Repayment Q) IN/A Average Project Average Total Time Q)Project Costs Q) L,lNIA ----'IIN/A

 

PS-191

 

 

 BORROWER Rustic 2 RealitY. LLC Rehab First Lien $120,500 INVEST NOW returned on repayment I due at maturity. Hussain Karmally - principal Click here to view the LRO Agreement FINANCIAL OVERVIEW After Value (ARV) (!) $180,000 Total$179,900 GRADE FACTORS The following factors determine in part how the loan was graded: (in descending order of importance) loanTo ARV Score (!) 10 Quality of Valuation Report 4 Skin-in-the-Game (!) 10 location 8 Borrower Experience 5 Borrower Commitment (!) 1 VALUATION REPORTS 0% ----Skin-in-the Game (!) First lien loan Cushion (!) As Complete (ARV) $180,000 I I Broker's Price Opinion Purchase Price (!) Purchase Date $100,000 07/12/2019 loanToARV (!) loan ToTotal 66.9% 65.8% Borrower Provided Appraisal Borrower Provided Comps Project Cost (!) PROPERTY DESCRIPTION C! ;;.. View larger map l :r.. .,.. "' Address: 2884 1ST AVENUE SOUTHWEST,ATLANTA. GA 30315 The Borrower intends to use the loan proceeds to renovate the property.Upon completion, the Borrower intends to sell the property to repay the Groundfloor loan. The Forrest Hill Academy Q . Ill INVEST NOW 4 ,....,5'11 ZionRdS"W' Go gle Mapdata C2020 Tenns of use " un n n a Repo map errorClick here to view the LRO Agreement MISCELLANEOUS PROJECT SPECIFIC RISK FACTORS • The Borrower was advanced the money it needed to begin renovation of this property on August 7,2020 by Groundfloor Finance Inc.("Groundfloor,"" we:· "us·:or "our") or a wholly-owned subsidiary of Groundfloor.The Borrower has now begun renovation of the property.If this offering is fully subscribed.Groundfloor will continue to administer and service the loan as further described in the Offering Circular. • The renovation of the property may be extensive,and therefore subject to delays and other unexpected issues. • The renovation will require permitting,and permits may not be obtained on time or may be denied. • The Borrower has not completed or sold any projects in the past year. As such, the Borrower's average revenue,costs,and margins cannot be calculated. • The Principalhas not yet completed or sold any projects.As such, the Principal's average revenue,costs,and margins cannot be calculated. • The Borrower is using $0.00 of the loan proceeds to pay off an existing loan that was used to acquire the property.Groundfloor will assume the first lien position. The rest of the loan proceeds will be put towards the renovation of the property,much like an acquisition and renovation loan. • Please consult the OfferingCircular for further discussion of general risk factors. CLOSING CONDITIONS • Loan is conditioned upon a clean title search and valid title insurance at the time of close. DEVELOPER FEES • We generally charge borrowers an origination fee (which typically ranges between 2% and 6% of the principal loan amount) and a servicing fee (which typically ranges between 0.5% and 2%) for our services. • We do not take a "spread" on any part of the interest payments. • Borrowers may capitalize the cost of closing into the principal amount of their request. These closing costs typically range from $500 to $1500. • Unless otherwise limited by applicable law, we willcharge a penalty of up to 2% for any extension made to the Borrower.See "Fees and Related Expenses" in the OfferingCircular SEC FILING INFORMATION • The series of LROs corresponding to this Project are offered pursuant to Post Qualification Amendment No.15 to the Offering Circular dated November 15, 2019 (each,as amended and supplemented from time to time), including the documents incorporated by reference therein.You may access and review these documents on the InternalFilings Directory located on our Platform. BORROWER SUMMARY UNLESS NOTED WITH A * 'INFORMATION BELOW IS SUPPLIED BY THE BORROWER AND IS NOT VERIFIED. BORROWERS REPRESENT AND WARRANT THAT INFORMATION SUPPLIED IS ACCURATE. RUSTIC 2 REALITY LLCFINANCIAL DATA p120 PROJECTSI REVENUE DATE OF FORMATION * 04/17/2019 Value of Properties (!) TotalDebt (!)Revenue (!) PRINCIPAL Hussain Karmally GROUNDFLOOR HISTORY * HISTORICAL AVERAGES Report"ngper"od:,l,ree ears ending 2019 FOCUS Fix&Fiip loans Funded (!)Loans Repaid (!) Completed Projects PerYear (!) Average Project Revenue (!) IL o JIIo On Time Repayment (!) IN/A II N/A Average Project Average Total Time (!)Project Costs (!) IL__ N_A IJ IN/A

 

PS-192

 

 

 FINANCIAL OVERVIEW After Repair Value (ARV) Q) $660,000 TotalProject Costs Q) $465,925 GRADE FACTORS The following factors determine in part how the loan was graded: (in descendingorder of importance) Loan To ARV Score Q) 10 - Skin-in-the-Game Q) 10 location8 Borrower Experience 5 Borrower Commitment Q) 1 0% ----$46,625 Skin-in-the Game Q) First lien Loan Cushion Q) VALUATION REPORTS As Complete (ARV) $660,000 Broker's Price Opinion Purchase Price Q) Purchase Date $186,250 08/04/2020 Loan ToARV Q) Loan To Total Project Cost Q) 63.5% 93.4% Borrower Provided Appraisal Borrower Provided Comps PROPERTY DESCRIPTION " View larger map Bryan StSE Address: 712 GLENWOOD AVENUE SE UNIT A #2,ATLANTA,GA 30312 StS£ Maynard Holbrook·O Jackson High School "-'.!' GLENWOO !PARK The Borrower intends to use the l oan proceeds to complete a new construction.Upon completion,the Borrower intends to sellthe property to repay the Groundfloor loan. INVEST NOW o gle), Rt:: Map data ®2020 Terms of Use .Report a map error Click here to view the LRO Agreement PROPERTY PHOTOS MISCELLANEOUS PROJECT SPECIFIC RISK FACTORS • The Borrower was advanced the money it needs to begin construction of this property on August 4,2020 by Groundfloor Finance Inc.("Groundfloor;'"we ' "us ' or "our") or a wholly-owned subsidiary of Groundfloor.The Borrower will has begun construction of the property. If this offeringis fully subscribed,Groundfloor will continue to administer and service the loan as further described in the OfferingCircular. • The construction of the property may be extensive,and therefore subject to delays and other unexpected issues. • The construction willrequire permitting, and permits may not be obtained on time or may be denied. • There will be multiple l oans on this project,each representing subsequent draws. The loans will range from $100,000 to $200,000.The Financial Overvi ew box represents the aggregate amount of all loans to be secured by this property,giving a complete financial picture of the project. • There is no existing structure on this property,or if there is,it will be demolished,and a new structure built in its pl ace. • This loan represents the second draw for the construction project and is secured by an individual note. • Each draw on this project is structured as an individual loan.We will fund each draw from our own capital or credit facilities as and when requested by the Borrower,provided conditions for each draw are met as described in our Offering Circular.Once a draw has been approved and funded,we will then sellthe corresponding seri es of LROs on our platform,each of which will be due 12 months from the time such seri es of LRO is deemed issued,as described in our Offering Circular.Subsequent draws are expected to be requested every two months from the date we advanced the first draw,but may be requested sooner,or later, depending on the progress of construction. • The borrower has had late repayments,but has repaid all loans in full,with all interest and fees due. • The event of default on one Groundfloor note secured by this property will trigger default on all Groundfloor notes secured by this property. All LRO holders investingin LROs corresponding to notes secured by this property share the same priority in any recovery and recovered proceeds will be distributed on a pro-rata basis. • Please consult the OfferingCircular for further discussion of general risk factors. CLOSING CONOITIONS • Loan is conditioned upon a clean title search and valid title insurance at the time of close. DEVELOPER FEES • We generally charge borrowers an origination fee (which typically ranges between 2% and 6% of the principal loan amount) and a servicing fee (which typically ranges between 0.5% and 2%) for our services. • We do not take a "spread" on any part of the interest payments. • Borrowers may capitalize the cost of closing into the principal amount of their request. These closingcosts typically range from $500 to $1500. • Unless otherwise limited by applicable l aw,we will charge a penalty of up to 2% for any extension made to the Borrower.See "Fees and Related Expenses" in the Offering Circular SEC FILING INFORMATION • The series of LROs corresponding to this Project are offered pursuant to Post Qualification Amendment No.15 to the Offering Circular dated November 15,2019 (each,as amended and supplemented from time to time),including the documents incorporated by reference therein. You may access and review these documents on the Internal Filings Directory located on our Platform. BORROWER SUMMARY UNLESSNOTED WITH A " 'INFORMATIONBELOW IS SUPPLIED BY THE BORROWER AND ISNOT VERIFIED. BORROWERS REPRESENTAND WARRANT THAT INFORMATION SUPPLIED IS ACCURATE. PARTON PROPERTY SOLUTIONS,INCFINANCIAL DATA Reportingdate:06/30/20 DATE OF FORMATION * Value of Properties Q) 12/11/2014 PROJECTS I REVENUE Reportingperiod:2019 Revenue Q) $946.2K Gross Margin% Q) 36.7% $1.SM IPRINCIPAL Mark Hall GROUNDFLOOR HISTORY * HISTORICAL AVERAGES Reportingperiod:three years ending 2019 FOCUS New Construction Loans Funded Q)Loans Repaid Q) Compl eted Projects PerYear Q) Average Project Revenue Q) Ll8-----'114 On Time Repayment Q) I0% IIsII$279K Average Project Average Total --'II Ll 6_m_o_nt_hs_$189.5K

 

PS-193

 

 

 FINANCIAL OVERVIEW After Repair Value (ARV) Q) $660,000 TotalProject Costs Q) $465,925 GRADE FACTORS The following factors determine in part how the loan was graded: (in descendingorder of importance) Loan To ARV Score Q) 10 - Skin-in-the-Game Q) 10 location8 Borrower Experience 5 Borrower Commitment Q) 1 0% ----$46,625 Skin-in-the Game Q) First li en Loan Cushion Q) VALUATION REPORTS As Complete (ARV) $660,000 Broker's Price Opinion Purchase Price Q) Purchase Date $186,250 08/04/2020 Loan ToARV Q) Loan To Total Project Cost Q) 63.5% 93.4% Borrower Provided Appraisal Borrower Provided Comps PROPERTY DESCRIPTION " View larger map StS£ Bryan StSE GLENWOO !PARK Address: 712 GLENWOOD AVENUE SE UNIT A #3,ATLANTA,GA 30312 The Borrower intends to use the loan proceeds to complete a new construction.Upon completion,the Borrower intends to sellthe property to repay the Groundfloor loan. Maynard Holbrook·O Jackson High School "-'.!' o gle), INVEST NOW Rt:: Map data ®2020 Terms of Use .Report a map error Click here to view the LRO Agreement PROPERTY PHOTOS MISCELLANEOUS PROJECT SPECIFIC RISK FACTORS • The Borrower was advanced the money it needs to begin construction of this property on August 4,2020 by Groundfloor Finance Inc.("Groundfloor;'"we ' "us ' or "our") or a wholly-owned subsidiary of Groundfloor.The Borrower will has begun construction of the property. If this offeringis fully subscribed,Groundfloor will continue to administer and service the loan as further described in the OfferingCircular. • The construction of the property may be extensive,and therefore subject to delays and other unexpected issues. • The construction willrequire permitting, and permits may not be obtained on time or may be denied. • There will be multiple loans on this project,each representing subsequent draws. The loans will range from $100,000 to $200,000.The Financial Overview box represents the aggregate amount of all loans to be secured by this property,giving a complete financial picture of the project. • There is no existing structure on this property,or if there is,it will be demolished,and a new structure built in its place. • This loan represents the third draw for the construction project and is secured by an individual note. • Each draw on this project is structured as an individual loan.We will fund each draw from our own capital or credit facilities as and when requested by the Borrower,provided conditions for each draw are met as described in our Offering Circular.Once a draw has been approved and funded,we will then sellthe corresponding series of LROs on our platform,each of which will be due 12 months from the time such series of LRO is deemed issued,as described in our Offering Circular.Subsequent draws are expected to be requested every two months from the date we advanced the first draw,but may be requested sooner,or later, depending on the progress of construction. • The borrower has had late repayments,but has repaid all loans in full,with all interest and fees due. • The event of default on one Groundfloor note secured by this property will trigger default on all Groundfloor notes secured by this property. All LRO holders investingin LROs corresponding to notes secured by this property share the same priority in any recovery and recovered proceeds will be distributed on a pro-rata basis. • Please consult the OfferingCircular for further discussion of general risk factors. CLOSING CONOITIONS • Loan is conditioned upon a clean title search and valid title insurance at the time of close. DEVELOPER FEES • We generally charge borrowers an origination fee (which typically ranges between 2% and 6% of the principal loan amount) and a servicing fee (which typically ranges between 0.5% and 2%) for our services. • We do not take a "spread" on any part of the interest payments. • Borrowers may capitalize the cost of closing into the principal amount of their request. These closingcosts typically range from $500 to $1500. • Unless otherwise limited by applicable law,we will charge a penalty of up to 2% for any extension made to the Borrower.See "Fees and Related Expenses" in the OfferingCircular SEC FILING INFORMATION • The series of LROs corresponding to this Project are offered pursuant to Post Qualification Amendment No.15 to the OfferingCircular dated November 15,2019 (each,as amended and supplemented from time to time),including the documents incorporated by reference therein. You may access and review these documents on the Internal Filings Directory located on our Platform. BORROWER SUMMARY UNLESSNOTED WITH A " 'INFORMATIONBELOW IS SUPPLIED BY THE BORROWER AND ISNOT VERIFIED. BORROWERS REPRESENTAND WARRANT THAT INFORMATION SUPPLIED IS ACCURATE. PARTON PROPERTY SOLUTIONS,INCFINANCI AL DATA Reportingdate:06/30/20 DATE OF FORMATION * Value of Properties Q) PROJECTS I REVENUE Reporting period:2019 Revenue Q) 12/11/2014 $946.2K Gross Margin% Q) 36.7% $1.SM IPRINCIPAL Mark Hall GROUNDFLOOR HISTORY * HISTORICAL AVERAGES Reporting period:three years ending 2019 FOCUS New Construction Loans Funded Q)Loans Repaid Q) Completed Projects PerYear Q) Average Project Revenue Q) Ll8-----'114 On Time Repayment Q) I0% IIsII$279K Average Project Average Total --'II Ll 6_m_o_nt_hs_$189.5K

 

PS-194

 

 

 BORROWER Parton ProQertY. Solutions, Inc Mark Hall - principal Purpose New Construction Loan Position Total Loan Amount Repayment Terms L F_ir_s_t L_ie_n_---'II $ 1314 _ . .returned on repayment I due at maturity. INVEST NOW Click here to view the LRO Agreement FINANCIAL OVERVIEW After Repair Value (ARV) (!) $648,000 $465,925 GRADE FACTORS The followingfactors determine in part how the loan was graded: (in descendingorder of importance} LoanTo ARV Score (!) 10 Quality of Valuation Report 4 Skin in the Game (!) 10 Location 8 Borrower Experience 5 Borrower Commitment (!) 1 VALUATION REPORTS 0% ----Skin in·the· Game (!) First Lien Loan Cushion (!) As Complete (ARV) $648,000 ICertified Independent Appraisal Broker's Price Opinion Purchase Price 0 Purchase Date $186,250 08/04/2020 Loan ToARV (!} Loan To Total Project Cost <2) 64.7% 93.4% Borrower Provided Appraisal Borrower Provided Camps PROPERTY DESCRIPTION l View larger map Bryan St S£ Address: 712 GLENWOOD AVENUE SE UNIT B #2, ATLANTA,GA 30312 St SE Maynard Holbrook 0 Jackson High SchoolY· <Go gle G LE·NW OC PARK The Borrower intends to use the loan proceeds to complete a new construction.Upon completion, the Borrower intends to sell the property to repay the Groundfloor loan. INVEST NOW Ro Map data ©2020 Terms of Use Report a map errorClick here to view the LRO Agreement MISCELLANEOUS PROJECT SPECIFIC RISK FACTORS • The Borrower was advanced the money it needs to begin construction of this property on August 4,2020 by Groundfloor Finance Inc. ("Groundfloor;· "we;' "us," or "our") or a wholly-owned subsidiary of Groundfloor.The Borrower will has begun construction of the property. If this offering is fully subscribed,Groundfloor will continue to administer and service the loan as further described in the Offering Circular. • The construction of the property may be extensive, and therefore subject to delays and other unexpected issues. • The construction will require permitting,and permits may not be obtained on time or may be denied. • There will be multiple loans on this project,each representing subsequent draws.The loans will range from $100,000 to $200.000.The FinancialOverview box represents the aggregate amount of all loans to be secured by this property,giving a complete financial picture of the project • There is no existing structure on this property,or if there is,it will be demolished,and a new structure built in its place. • This loan represents the second draw for the construction project and is secured by an individual note. • Each draw on this project is structured as an individual loan.We will fund each draw from our own capital or credit facilities as and when requested by the Borrower,provided conditions for each draw are met as described in our Offering Circular.Once a draw has been approved and funded,we will then sell the corresponding series of LROs on our platform,each of which will be due 12 months from the time such series of LRO is deemed issued,as described in our Offering Circular.Subsequent draws are expected to be requested every two months from the date we advanced the first draw,but may be requested sooner,or later, depending on the progress of construction. • The borrower has had late repayments,but has repaid all loans in full, with all interest and fees due. • The event of default on one Groundfloor note secured by this property will trigger default on all Groundfloor notes secured by this property. All LRO holders investing in LROs corresponding to notes secured by this property share the same priority in any recovery and recovered proceeds will be distributed on a pro-rata basis. • Please consult the Offering Circular for further discussion of general risk factors. CLOSING CONDITIONS • Loan is conditioned upon a clean title search and valid title insurance at the time of close. DEVELOPER FEES • We generally charge borrowers an origination fee (which typically ranges between 2% and 6% of the principal loan amount) and a servicing fee (which typically ranges between 0.5% and 2%) for our services. • We do not take a "spread" on any part of the interest payments. • Borrowers may capitalize the cost of closing into the principal amount of their request. These closing costs typically range from $500 to $1500. • Unless otherwise limited by applicable law,we will charge a penalty of up to 2% for any extension made to the Borrower.See "Fees and Related Expenses" in the Offering Circular SEC FILING INFORMATION • The series of LROs corresponding to this Project are offered pursuant to Post Qualification Amendment No.15 to the Offering Circular dated November 15, 2019 (each,as amended and supplemented from time to time), including the documents incorporated by reference therein. You may access and review these documents on the InternalFilings Directory located on our Platform. BORROWER SUMMARY UNLESS NOTEDWITH A ' .INFORMATION BELOW IS SUPPLIED BY THE BORROWER ANDIS NOT VERIFIED. BORROWERS REPRESENT AND WARRANT THAT INFORMATION SUPPLIED IS ACCURATE. PARTON PROPERTY SOLUTIONS,INCFINANCIAL DATA R rtt (, 0/20 PROJECTS/REVENUE e •c. t DATE OF FORMATION * Value of Properties (!) TotalDebt (!) Completed Projects (!) Revenue (!) 12/11/2014 $946.2K Unsold Inventory (!) Aged Inventory (!) Gross Margin% (!) 36.7% $1.5M PRINCPI AL Mark Hall GROUNDFLOOR HISTORY * HISTORICAL AVERAGES 0 I.(. .ending2019 FOCUS New Construction Loans Funded (!) Loans Repaid (!) Completed Projects Per Year (!) Average Project Revenue (!) IL..0 JII o On Time Repayment (!) IN/A II sII$279K Average ProjectAverage Total Time (!) Project Costs (!) IL_ 6_m_on_th_s_ ,ll$189.SK

 

PS-195

 

 

Purpose Loan PositionTotal Loan Amount Repayment Terms New L F_ir_st_L_i_en_ J]] $1 ,4 .--'8a.l:.l_o_o_n_p_a_y_m_e_n_t - pr-inc_i_pa-l_a_n_d-in_t_ere-s---,t BORROWER Parton ProQe!!Y. Solutions,Inc Mark Hall - principal Construction 31 50 _. .returned on repayment I due at maturity. INVEST NOW Click here to view the LRO 8greement FINANCIAOl VERVIEW After Repair Value (ARV) (!) $648,000 Total Costs (!) GRADE FACTORS The following factors determine in part how the loan was graded: (in descendingorder of importance) LoanToARVScore (!) 10 Quality of Valuation Report 4 Skin-in-the-Game (!) 10 Location 8 Borrower Experience 5 Borrower Commitment (!) 1 VALUATION REPORTS 0% ----Skin-in-the Game(!) First Lien Loan Cushion (!) As Complete (ARV) $648,000 Certified Independent Appraisal Broker's Price Opinion Purchase Price Purchase Date $186,250 08/04/2020 LoanToARV Loan To Total 64.7% 93.4% Borrower Provided Appraisal Borrower Provided Comps Project Cost PROPERTY DESCRIPTION • Address: 712 GLENWOOD AVENUE SE UNIT B #3,ATLANTA, GA 30312 >U View larger map BtyanStSE St SE Maynard Holbrook 0 Jackson Hjgh School Y ,Go gle G L E·N W O C PARK The Borrower intends to use the loan proceeds to complete a new construction.Upon completion, the Borrower intends to sell the property to repay the Groundfloor loan. INVEST NOW Ro Map data ©2020 Terms of Use Report a map error Click here to view the LRO Agreement MISCEllANEOUS PROJECT SPECIFIC RISK FACTORS • The Borrower was advanced the money it needs to begin construction of this property on August 4, 2020 by Groundfloor Finance Inc.("Groundfloor;·"we;•"us," or "our") or a wholly-owned subsidiary of Groundfloor.The Borrower will has begun construction of the property. If this offering is fully subscribed,Groundfloor will continue to administer and service the loan as further described in the Offering Circular. • The construction of the property may be extensive,and therefore subject to delays and other unexpected issues. • The construction will require permitting,and permits may not be obtained on time or may be denied. • There will be multiple loans on this project,each representing subsequent draws.The loans will range from $100.000 to $200,000.The Financial Overview box represents the aggregate amount of all loans to be secured by this property,giving a complete financial picture of the project. • There is no existing structure on this property,or if there is, it will be demolished,and a new structure built in its place. • This loan represents the third draw for the construction project and is secured by an individual note. • Each draw on this project is structured as an individual loan.We will fund each draw from our own capitalor credit facilities as and when requested by the Borrower,provided conditions for each draw are met as described in our Offering Circular. Once a draw has been approved and funded,we will then sell the corresponding series of LROs on our platform,each of which will be due 12 months from the time such series of LRO is deemed issued,as described in our Offering Circular.Subsequent draws are expected to be requested every two months from the date we advanced the first draw, but may be requested sooner,or later, depending on the progress of construction. • The borrower has had late repayments, but has repaid all loans in full,with all interest and fees due. • The event of default on one Groundfloor note secured by this property will trigger default on all Groundfloor notes secured by this property.All LRO holders investing in LROs corresponding to notes secured by this property share the same priority in any recovery and recovered proceeds will be distributed on a pro-rata basis. • Please consult the Offering Circular for further discussion of general risk factors. CLOSING CONDITIONS • Loan is conditioned upon a clean title search and valid title insurance at the time of close. DEVELOPER FEES • We generally charge borrowers an origination fee (which typically ranges between 2% and 6% of the principal loan amount) and a servicing fee (which typically ranges between 0.5% and 2%) for our services. • We do not take a "spread" on any part of the interest payments. • Borrowers may capitalize the cost of closing into the principal amount of their request. These closing costs typically range from $500 to $1500. • Unless otherwise limited by applicable law,we will charge a penalty of up to 2% for any extension made to the Borrower.See "Fees and Related Expenses" in the Offering Circular SEC FILING INFORMATION • The series of LROs corresponding to this Project are offered pursuant to Post Qualification Amendment No.15 to the Offering Circular dated November 15, 2019 (each,as amended and supplemented from time to time), including the documents incorporated by reference therein.You may access and review these documents on the InternalFilings Directory located on our Platform. BORROWER SUMMARY UNLESS NOTED WITH A ' ,INFORMATION BELOW IS SUPPLIED BY THE BORROWER AND IS NOT VERIFIED. BORROWERS REPRESENT AND WARRANT THAT INFORMATION SUPPLIED IS ACCURATE. PARTON PROPERTY SOLUTIONS, INCFINANCIAL DATA /20 PROJECTS I REVENUE DATE OF FORMATION * Value of Properties (!) Total Debt (!) Completed Projects (!) Revenue (!) 12111/2014 $946.2K $1.SM Unsold Inventory (!) Aged Inventory (!) Gross Margin% (!) 36.7% PRINCIPAL Mark Hall GROUNDFLOOR HISTORY * HISTORICAL AVERAGES :.ending2019 FOCUS New Construction Loans Funded (!) Loans Repaid (!) Completed Projects PerYear (!) Average Project Revenue (!) IL..o On Time JII0 I I5 II $279K Average Project Average Total Repayment (!) IN/A Time (!) Project Costs (!) IL 6_m_on_th_s_ IJ I$189.5K

 

PS-196

 

 

Purpose New loan Position Totalloan Amount Repayment Terms ,__ F_ir_s_t_Li_e_n _JI I $15 ,400 ;..=B:..::al-1'-o':..:.on::.c:_p.:..:a.:..:y.:..:cm:e._n_t 6 pri_n_ci_p_al_a_n_d_i_nte_r_est--, Construction _ . . returned on repayment/ due at maturity. BORROWER Parton Pro[lertv. Solutions,Inc Mark Hall - principal INVEST NOW Click here to view the LRO Agreement FINANCIAL OVERVIEW After RepairValue (ARV) Q) $660,000 TotalProject Costs Q) $465,925 GRADE FACTORS The following factors determine in part how the loan was graded: (in descendingorder of importance) Loan To ARV Score Q) 10 - Skin-in-the-Game Q) 10 location8 Borrower Experience 5 Borrower Commitment Q) 1 0% ----$46,625 Skin-in-the Game Q) First lien Loan Cushion Q) VALUATION REPORTS As Complete (ARV) $660,000 Broker's Price Opinion Purchase Price Q) Purchase Date $186,250 08/04/2020 LoanToARV Q) Loan To Total Project Cost Q) 63.5% 93.4% Borrower Provided Appraisal Borrower Provided Comps PROPERTY DESCRIPTION " View larger map Bryan StSE Address: 712 GLENWOOD AVENUE SE UNIT A #1,ATLANTA,GA 30312 StS£ Maynard Holbrook·O Jackson High School "-'.!' GLENWOO !PARK The Borrower intends to use the l oan proceeds to complete a new construction.Upon completion,the Borrower intends to sellthe property to repay the Groundfloor loan. INVEST NOW o gle), Rt:: Map data ®2020 Terms of Use .Report a map error Click here to view the LRO Agreement PROPERTY PHOTOS MISCELLANEOUS PROJECT SPECIFIC RISK FACTORS • The Borrower was advanced the money it needs to begin construction of this property on August 4,2020 by Groundfloor Finance Inc.("Groundfloor;'"we ' "us';or "our") or a wholly-owned subsidiary of Groundfloor.The Borrower will has begun construction of the property. If this offeringis fully subscribed,Groundfloor will continue to administer and service the loan as further described in the OfferingCircular. • The construction of the property may be extensive,and therefore subject to delays and other unexpected issues. • The construction willrequire permitting, and permits may not be obtained on time or may be denied. • There will be multiple loans on this project,each representing subsequent draws. The loans will range from $100,000 to $200,000.The Financial Overview box represents the aggregate amount of all loans to be secured by this property,giving a complete financial picture of the project. • There is no existing structure on this property,or if there is,it will be demolished,and a new structure built in its place. • This loan represents the first draw for the construction project and is secured by an individual note. • Each draw on this project is structured as an individual loan.We will fund each draw from our own capital or credit facilities as and when requested by the Borrower,provided conditions for each draw are met as described in our Offering Circular.Once a draw has been approved and funded,we will then sellthe corresponding series of LROs on our platform,each of which will be due 12 months from the time such series of LRO is deemed issued,as described in our Offering Circular.Subsequent draws are expected to be requested every two months from the date we advanced the first draw,but may be requested sooner,or later, depending on the progress of construction. • The borrower has had late repayments,but has repaid all loans in full,with all interest and fees due. • The event of default on one Groundfloor note secured by this property will trigger default on all Groundfloor notes secured by this property. All LRO holders investingin LROs corresponding to notes secured by this property share the same priority in any recovery and recovered proceeds will be distributed on a pro-rata basis. • Please consult the OfferingCircular for further discussion of general risk factors. CLOSING CONOITIONS • Loan is conditioned upon a clean title search and valid title insurance at the time of close. DEVELOPER FEES • We generally charge borrowers an origination fee (which typically ranges between 2% and 6% of the principal loan amount) and a servicing fee (which typically ranges between 0.5% and 2%) for our services. • We do not take a "spread" on any part of the interest payments. • Borrowers may capitalize the cost of closing into the principal amount of their request. These closingcosts typically range from $500 to $1500. • Unless otherwise limited by applicable l aw,we will charge a penalty of up to 2% for any extension made to the Borrower.See "Fees and Related Expenses" in the Offering Circular SEC FILING INFORMATION • The series of LROs corresponding to this Project are offered pursuant to Post Qualification Amendment No.15 to the Offering Circular dated November 15,2019 (each,as amended and supplemented from time to time),including the documents incorporated by reference therein. You may access and review these documents on the Internal Filings Directory located on our Platform. BORROWER SUMMARY UNLESSNOTED WITH A " 'INFORMATIONBELOW IS SUPPLIED BY THE BORROWER AND ISNOT VERIFIED. BORROWERS REPRESENTAND WARRANT THAT INFORMATION SUPPLIED IS ACCURATE. PARTON PROPERTY SOLUTIONS,INCFINANCIAL DATA Reportingdate:06/30/20 DATE OF FORMATION * Value of Properties Q) 12/11/2014 PROJECTS I REVENUE Reportingperiod:2019 Revenue Q) $946.2K Gross Margin% Q) 36.7% $1.SM IPRINCIPAL Mark Hall GROUNDFLOOR HISTORY * HISTORICAL AVERAGES Reportingperiod:three years ending 2019 FOCUS New Construction Loans Funded Q)Loans Repaid Q) Completed Projects PerYear Q) Average Project Revenue Q) Ll8-----'114 On Time Repayment Q) I0% II5 II$279K Average Project Average Total --'II Ll 6_m_o_nt_hs_$189.5K

 

PS-197

 

 

Purpose Loan PositionTotal Loan Amount Repayment Terms New L F_ir_st_L_i_en_ J]] $1 ,4 .--'8a.l:.l_o_o_n_p_a_y_m_e_n_t - pr-inc_i_pa-l_a_n_d-in_t_ere-s-t--, 56 00 BORROWER Parton ProQe!!Y. Solutions,Inc Mark Hall - principal Construction _. .returned on repayment I due at maturity. INVEST NOW Click here to view the LRO Agreement FINANCIAOl VERVIEW After Repair Value (ARV) (!) $648,000 GRADE FACTORS The following factors determine in part how the loan was graded: (in descendingorder of importance) LoanToARVScore (!) 10 Total Costs (!)$465,925 Quality of Valuation Report 4 Skin-in-the-Game (!) 10 Location 8 Borrower Experience 5 Borrower Commitment (!) 1 VALUATION REPORTS 0% ----Skin-in-the Game(!) First Lien Loan Cushion (!) As Complete (ARV) $648,000 Certified Independent Appraisal Broker's Price Opinion Purchase Price Purchase Date $186,250 08/04/2020 LoanToARV Loan ToTotal 64.7% 93.4% Borrower Provided Appraisal Borrower Provided Comps Project Cost PROPERTY DESCRIPTION Ill View larger map IIlyan S1 SE Address: 712 GLENWOOD AVENUE SE UNIT B #1.ATLANTA, GA 30312 StSE Maynard Holbrook 0 Jackson High School Y Go gle G LE·N WOC PARK The Borrower intends to use the loan proceeds to complete a new construction.Upon completion, the Borrower intends to sell the property to repay the Groundfloor loan. INVEST NOW R Map data ©2020 Terms of Use Report a map errorClick here to view the LRO Agreement MISCEllANEOUS PROJECT SPECIFIC RISK FACTORS • The Borrower was advanced the money it needs to begin construction of this property on August 4, 2020 by Groundfloor Finance Inc.("Groundfloor;' "we:·"us:·or "our") or a wholly-owned subsidiary of Groundfloor.The Borrower will has begun construction of the property.If this offering is fully subscribed.Groundfloor will continue to administer and service the loan as further described in the Offering Circular. • The construction of the property may be extensive,and therefore subject to delays and other unexpected issues. • The construction will require permitting,and permits may not be obtained on time or may be denied. • There will be multiple loans on this project,each representing subsequent draws.The loans will range from $100,000 to $200,000.The FinancialOverview box represents the aggregate amount of all loans to be secured by this property,giving a complete financial picture of the project. • There is no existing structure on this property,or if there is, it will be demolished,and a new structure built in its place. • This loan represents the first draw for the construction project and is secured by an individual note. • Each draw on this project is structured as an individual loan.We will fund each draw from our own capitalor credit facilities as and when requested by the Borrower,provided conditions for each draw are met as described in our Offering Circular. Once a draw has been approved and funded, we will then sell the corresponding series of LROs on our platform,each of which will be due 12 months from the time such series of LRO is deemed issued,as described in our Offering Circular.Subsequent draws are expected to be requested every two months from the date we advanced the first draw, but may be requested sooner,or later, depending on the progress of construction. • The borrower has had late repayments, but has repaid all loans in full,with all interest and fees due. • The event of default on one Groundfloor note secured by this property will trigger default on all Groundfloor notes secured by this property.All LRO holders investing in LROs corresponding to notes secured by this property share the same priority in any recovery and recovered proceeds will be distributed on a pro-rata basis. • Please consult the Offering Circular for further discussion of general risk factors. CLOSING CONDITIONS • Loan is conditioned upon a clean title search and valid title insurance at the time of close. DEVELOPER FEES • We generally charge borrowers an origination fee (which typically ranges between 2% and 6% of the principal loan amount) and a servicing fee (which typically ranges between 0.5% and 2%) for our services. • We do not take a "spread" on any part of the interest payments. • Borrowers may capitalize the cost of closing into the principal amount of their request. These closing costs typically range from $500 to $1500. • Unless otherwise limited by applicable law,we will charge a penalty of up to 2% for any extension made to the Borrower.See "Fees and Related Expenses" in the Offering Circular SEC FILING INFORMATION • The series of LROs corresponding to this Project are offered pursuant to Post Qualification Amendment No.15 to the Offering Circular dated November 15, 2019 (each,as amended and supplemented from time to time), including the documents incorporated by reference therein.You may access and review these documents on the InternalFilings Directory located on our Platform. BORROWER SUMMARY UNLESS NOTED WITH A - 'INFORMATION BELOW IS SUPPLIEDBY THE BORROWER AND IS NOT VERIFIED. BORROWERS REPRESENT ANDWARRANT THAT INFORMATION SUPPLIED IS ACCURATE. PARTON PROPERTY SOLUTIONS, INCFINANCIAL DATA DATE OF FORMATION * 120 PROJECTS / REVENUE l or otherwise). Value of Properties (!) Total Debt (!) Completed Projects (!) Revenue (!) 12/11/2014 $946.2K Unsold Inventory (!) Gross Margin% (!) 36.7% $1.5M PRINCIPAL Mark Hall GROUNDFLOOR HISTORY * HISTORICAL AVERAGES .ending2019 FOCUS New Construction Loans Funded (!) Loans Repaid (!) Completed Projects PerYear (!) Average Project Revenue (!) ]..._o On Time Repayment (!) IN/A ,llo I I5 II $279K Average Project Average Total Time (!) Project Costs (!) 1..._6__m_on_th_s_ .ll$189.5K

 

PS-198

 

 

Purchase & L F_ir_st_L_i_en_ J]] $1 , .--'8a.l:.l_o_o_n_p_a_y_m_e_n_t - pr-in-c_i_pa-l_a_n_d-in_t_ere-s-t--, BORROWER Sy:nergistic ProQerties Lloyd Middlebrooks and Tamara Middlebrooks - principal Renovation 94 220 _. .returned on repayment I due at maturity. INVEST NOW Click here to view the LRO Agreement FINANCIAlOVERVIEW After Repair Value (ARV) (!) $300,000 TotalProject Costs (!) GRADE FACTORS The following factors determine in part how the loan was graded: (in descendingorder of importance) LoanToARVScore (!) 10 Quality of Valuation Report 4 Skin-in-the-Game (!) 10 Location 8 Borrower Experience 5 Borrower Commitment (!)1 0% ----Skin-in-the Game(!) First Lien LoanCushion (!) VAlUATION REPORTS As Complete (ARV) $300,000 Certified Independent Appraisal Broker's Price Opinion Purchase Price Purchase Date $99,000 08/03/2020 LoanToARV Loan To Total Project Cost 64.7% 79.3% Borrower Provided Appraisal Borrower Provided Comps PROPERTY DESCRIPTION - II View Address: 1161MAYLAND CIRCLE SOUTHWEST,ATLANTA. GA30310 larger map @ ( 3:: ... 0 0> 0' ... !-!. 5-; •!!; The Borrower intends to use the loan proceeds to purchase and renovate the property.Upon completion, the Borrower intends to sell the property to repay the Groundfloor loan. on AveSW amrock Jerk Center University Ave SW Vl ... Vl .. "' NJ INVEST NOW Go gle GenumE Mapdata ©2020 Terms ofUse Report a maperrO< Click here to view the LRO Agreement • ••• • MISCEllANEOUS PROJECT SPECIFIC RISK FACTORS • The Borrower was advanced the money it needed to purchase this property on August 3,2020 by Groundfloor Finance Inc.("Groundfloor;·"we," "us;·or "our") or a wholly-owned subsidiary of Groundfloor.The Borrower is now in possession of the property.If this offering is fully subscribed,Groundfloor will continue to administer and service the loan as further described in the Offering Circular. • The renovation of the property may be extensive,and therefore subject to delays and other unexpected issues. • The renovation will require permitting,and permits may not be obtained on time or may be denied. • The Borrower has not completed or sold any projects in the past year. As such, the Borrower's average revenue,costs,and margins cannot be calculated. • Please consult the Offering Circular for further discussion of general risk factors. CLOSING CONDITIONS • Loan is conditioned upon a clean title search and valid title insurance at the time of close. DEVELOPER FEES • We generally charge borrowers an origination fee (which typically ranges between 2% and 6% of the principal loan amount) and a servicing fee (which typically ranges between 0.5% and 2%) for our services. • We do not take a "spread" on any part of the interest payments. • Borrowers may capitalize the cost of closing into the principal amount of their request. These closing costs typically range from $500 to $1500. • Unless otherwise limited by applicable law,we will charge a penalty of up to 2% for any extension made to the Borrower.See "Fees and Related Expenses" in the Offering Circular SEC FILING INFORMATION • The series of LROs corresponding to this Project are offered pursuant to Post Qualification Amendment No.15 to the Offering Circular dated November 15,2019 (each,as amended and supplemented from time to time), including the documents incorporated by reference therein.You may access and review these documents on the InternalFilings Directory located on our Platform. BORROWER SUMMARY UNLESS NOTED WITH A *,INFORMATION BELOW IS SUPPLIEDBY THE BORROWER AND IS NOT VERIFIED. BORROWERS REPRESENT ANDWARRANT THAT INFORMATION SUPPLIED IS ACCURATE. SYNERGISTIC PROPERTIESFINANCIAL DATA Report' 'g date:06 30/20 PROJECTS / REVENUE Re :>arf""g period:2C... Q DATE OF FORMATION * 0112912020 Value of Properties (!) TotalDebt (!) Completed Projects (!) Revenue (!) FOCUS PRINCIPAL Lloyd Middlebrooks and Tamara Middlebrooks GROUNDFLOOR HISTORY * HISTORICAL AVERAGES Completed Projects _,ending 2019 Average Project Single Family Loans Funded (!) Loans Repaid (!) PerYear (!) Revenue (!) ].._o .llo 1II$225K II On Time Repayment (!) IN/A Average ProjectAverage Total Time (!) Project Costs (!) I..__1_Bm__o_nt_hs_ .ll$144.5K

 

PS-199

 

 

 BORROWER JMP Start DeveloRment Refinance Cash Out IFirst lien 1 $208,600 1 Balloon payment-principal and interest returned on repayment I due at maturity. Partners,LLC Matthew Coleman and Patrick Henderson-principal INVEST NOW Click here to vi ew the LRO Agreement FINANCIAL OVERVIEW After $256.000 TotalCosts$255.900 GRADE FACTORS The following factors determine in part how the loan was graded: {in descendingorder of importance) LoanTo ARV Score (i) 10 - Skin-in-the-Game (i) 10 Location 8 Borrower Experience 5 Borrower Commitment (i) 1 VALUATION REPORTS 0%---Skin-in-the- Game (i) First LienLoan Cushion G> As Complete {ARV) $256,000 Broker's Price Opinion Purchase Price (!) $256,000LoanToARV 81.5% Borrower Provided Appraisal Purchase Date 07/26/2019 LoanTo Total ProjectCost (i) 81.5% Borrower Provided Camps PROPERTY DESCRIPTION View larger map lo; )o Address: 1507FRAZIER ROAD,DECATUR,GA30033 , 9 Southern Seafood C) sentor The property is being used as collateral for a loan.No substantialwork i s being done on the property,and the majority of the collateral is represented by the Borrower's skin-in-the-game. INVEST NOW Go gle ....• Mapdata ®2020 Terms of Use , Report a map error Click here to view the LRO Agreement MISCELLANEOUS PROJECT SPECIFIC RISK FACTORS • The Borrower was advanced the money it needs to refinance this loan on August 4, 2020 by Groundfloor Finance Inc. {"Groundfloor," "we; "us;·or "our") or a wholly-owned subsidiary of Groundfloor.The Borrower has now been refinanced for this property.I f this offeringis fully subscribed,Groundfloorwillcontinue to administer and service the loan as further described in the Offering Circular. • The Borrower has not completed or sold any projects in the past year.As such,the Borrower's average revenue,costs, and margins cannot be calculated. • The property is being used as collateral for a loan.No substantialwork is being done on the property, and the majority of the collateral is represented by the Borrower's skin-in-the-game.As a result, there will be little to no "cushion" and the Borrower will repay the Groundfloor loanby selling the property or refinancing it. • Please consult the Offering Circular forfurther di scussion of general risk factors. ClOSING CONDITIONS • Loan i s conditioned upon a clean title search and valid title insurance at the time of close. DEVELOPER FEES • We generally charge borrowers an origination fee {which typically ranges between 2% and 6% of the principal loan amount) and a servicing fee {which typically ranges between 0.5% and 2%) for our services. • We do not take a "spread" on any part of the interest payments. • Borrowers may capitalize the cost of closinginto the principal amount of their request. These closing costs typically range from $500 to $1500. • Unless otherwise limi ted by applicable law,we will charge a penalty of up to 2% for any extension made to the Borrower.See "Fees and Related Expenses"in the Offering Circular SEC FlUNG INFORMATION • The series of LROs corresponding to this Project are offered pursuant to Post Qualification Amendment No.15 to the Offering Circular dated November 15,2019 {each,as amended and supplemented from time to time),including the documents incorporated by reference therein.You may access and review these documents on the Internal Filings Directory located on our Platform. BORROWER SUMMARY UNLESS NOTEDWllHA * , INFORMATIONBELOWISSUPPUEO BYlHEBORROWERANOISNOTVERIAEO. BORROWERSREPRESENTAND WARRANT lHAT INFORMATION SUPPL EDISACCURATE. JMP START DEVELOPMENT PARTNERS, LLC DATE OF FORMATION * 05/08/2019 FINANCIAL DATA Reportingdate:06/30/20 PROJECTS / REVENUE Reporting period:2019 FOCUS PRINCIPAL Matthew Coleman and Patrick Henderson GROUNDFLOOR HISTORY* HISTORICAL AVERAGES Reporting period:three years ending 2019 Fix&Fiip Loans Funded Loans Repaid Completed Projects Per Year Average Project Revenue '---I _0 .II o On Time Repayment II 4II $146K Average Project Average Total Time Project Costs IN/A L l 4__m on_t_hs ,ll$92.7K

 

PS-200

 

 

Purpose loan Position Total oan Amount Repayment Terms Purchase & ,__ F_ir_s_t_Li_e_n $25 , 1210 ;..=B:..::al-'-'1o:..:.on::.c:_p.:..:a.:..:y.:..:cm:e._n_t pri_nc_i_p_al_a_n_d_i_nte_r_est--, BORROWER Goldkey: EntreP-ri se, LLC Domini que Jean-principal Renovation _ . . returned on repayment/ due at maturity. _JI I Click here to view the LRO Agreement FINANCIAL OVERVIEW After RepairValue (ARV) (!)$359,000 $42,040 GRADE FACTORS The followingfactors determine in part how the loan was graded: (in descending order of importance) TotalProject Costs (!) $316,960 loan To ARV Score (!) 10 Quality of Valuation Report 4 Skin-in-the-Game (!) 10 location8 Borrower Experience-5 Borrower Commitment (!) 1 0% Skin-in-the Game (!) First lien Loan Cushion (!) VALUATION REPORTS As Compl ete (ARV) $359,000 Broker's Price Opinion Purchase Price (!) Purchase Date $119,000 08/11/2020 Loan To ARV {!) Loan To Total Project Cost (!) 70.0% 78.5% Borrower Provided Appraisal Borrower Provided Comps PROPERTY DESCRIPTION View larger map ' Address: 815 WELCH STREET SOUTHWEST,ATLANTA,GA 30310 The Borrower intends to use the l oan proceeds to purchase and renovate the property. Upon compl etion,the INVEST NOW Gil'-i1e Ave: SW aiPiuk II @) l!' b ...:' Apartments Borrower i ntends to sellthe property to repay the Groundfloor loan. DAIR PARK $$ ;:: 9 Gogl-10e .............'<:.W Map data ®2020 Terms of Use.. Report a map error Click here to view the LRO Agreement PROPERTY PHOTOS "" MISCELLANEOUS PROJECT SPECIFIC RISK FACTORS • The Borrower was advanced the money i t needed to purchase this property on August 11,2020 by Groundfloor Finance Inc.("Groundfloor "we "us;'or "our") or a wholly-owned subsidiary of Groundfloor. The Borrower i s now in possession of the property.I f this offering is fully subscri bed,Groundfloor will continue to administer and service the loan as further described in the Offering Circular. • The renovati on of the property may be extensive,and therefore subject to delays and other unexpected i ssues. • The renovati on will require permi tti ng,and permits may not be obtained on time or may be denied. • The Borrower has not compl eted or sold any projects in the past year.As such,the Borrower's average revenue,costs, and margins cannot be calculated. • The Principal has not yet compl eted or sold any projects.As such, the Principal's average revenue,costs,and margins cannot be calculated. • Please consult the OfferingCircul ar for further discussi on of general ri sk factors. CLOSING CONDITIONS • Loan is conditi oned upon a clean ti tle search and valid title i nsurance at the time of close. DEVElOPER FEES • We generally charge borrowers an originati on fee (which typically ranges between 2% and 6% of the principalloan amount) and a servicing fee (which typically ranges between 0.5% and 2%) for our services. • We do not take a "spread" on any part of the interest payments. • Borrowers may capitalize the cost of closi ng into the principal amount of their request. These closingcosts typically range from $500 to $1500. • Unless otherwise limited by applicable l aw,we will charge a penalty of up to 2% for any extensi on made to the Borrower.See "Fees and Related Expenses" in the Offering Circular SEC FiliNG INFORMATION • The seri es of LROs corresponding to this Project are offered pursuant to Post Qualification Amendment No.1 5 to the Offering Circular dated November 1 5,2019 (each,as amended and supplemented from time to time),including the documents i ncorporated by reference therein. You may access and review these documents on the Internal Filings Directory located on our Platform. BORROWER SUMMARY UNLESSNOTED WITHA * 'INFORMATIONBELOW IS SUPPLIED BY THE BORROWERAND ISNOT VERIFIED. BORROWERS REPRESENTAND WARRANT THAT INFORMATION SUPPLIED IS ACCURATE. GOLDKEY ENTREPRISE, LLC FINANCIAL DATA Reportingdate:06/30/20 DATE OF FORMATION * 03/06/2019 PROJECTS / REVENUE Reportingperiod:2019 Total Debt (!) Revenue (!) Gross Margin% (!) N/A ' IPRINCIPALGROUNDFLOOR HISTORY * HISTORICAL AVERAGES Dominique Jean Reportingperiod:three years ending 2019 FOCUS Fix & Fiip Loans Funded (!) Loans Repaid (!) Compl eted Projects PerYear (!) Average Project Revenue (!) '----1 o JII o II N/AI '----1 J On Time Repayment (!) IN/A Average Project Average Total Time (!)Project Costs (!) '-I N_ _A _,IIN/A

 

PS-201

 

 

 

RISK FACTORS

 

The following information updates and amends the information in the section titled “Risk Factors” beginning on page 10 of the Offering Circular:

 

Economic, social and other disruptions caused by outbreaks of viruses or other diseases may adversely affect the business and operations of Groundfloor Real Estate 1, which may adversely affect your investment in the Limited Recourse Obligation.

 

The business and operations of Groundfloor Real Estate 1 could be materially and adversely affected by the outbreak of health epidemics, including the spread of the novel coronavirus COVID-19, particularly if occurring in areas where Developers derive a significant amount of revenue or profit. While the impact of such an outbreak on the global economy is uncertain, such an event could significantly impact the real estate and fintech lending industries and severely disrupt the operations of Groundfloor Real Estate 1. Such event may also have a material adverse effect on the business, financial condition and results of operations of Groundfloor Real Estate 1, which could adversely affect your investment in the Limited Recourse Obligations.

 

DESCRIPTION OF THE BUSINESS OF GRE 1 AND OF GROUNDFLOOR FINANCE

 

Overview

 

GRE 1 and Groundfloor Finance

 

The following information updates and amends the information in the section titled “GRE 1 and Groundfloor Finance” beginning on page 30 of the Offering Circular:

 

Groundfloor Finance operates an online investment platform (the “Platform”) designed to source financing for real estate development projects. Through the Platform, investors can choose between multiple real estate development investment opportunities (each, a “Project”) and developers of the Projects (each, a “Developer”) can obtain financing. The Platform focuses on the commercial lending market for developers of residential and small commercial real estate projects that are not owned and occupied by the Developer. Proceeds from the loans are generally applied toward the Project’s acquisition and/or renovation or construction costs. Groundfloor Finance operates the Groundfloor Platform, facilitates due diligence and underwriting reviews, coordinates payment to and from investors and developers, manages loan advances, and administers, services and collects on the loans that it originates.

 

In connection with the Platform, Groundfloor Finance operates several subsidiaries with distinct functions. Subsidiaries help us isolate credit risks, legal risks, and other operational risks. This protects our investors, customers, and employees. Below is a list of our primary operating entities, including management structure, and function.

 

  · Groundfloor Finance Inc. (“GFI”). GFI is a Georgia corporation and is our main operating entity. It is managed by our executive team and governed by our board of directors (see “Management” section starting on page 33). GFI develops, owns, and operates the Groundfloor web platform, and associated technology IP.

 

  · Groundfloor Holdings GA LLC (“GFH”). GFH is a single member Georgia limited liability company. It is managed by GFI. It has access to a warehouse credit facility provided by ACM Alamosa DA LLC. Its sole purpose is to originate loans identified by its manager. It originates loans from its credit facility. Loans typically stay on its balance sheet for up to 30 days before being sold to GRE1 or GRE2.

 

  · Groundfloor Real Estate 1, LLC (“GRE1”). GRE1 is a single member Georgia limited liability company. It is managed by GFI and Nick Bhargava, Executive Vice President, Secretary, and Acting Chief Financial Officer of GFI. Its purpose is to select and acquire loans from GFH. Once loans have been identified for acquisition, GRE1 will sell Limited Recourse Obligations (LROs) to investors which correspond to the identified loan. It will use these funds to acquire and service the loan for the duration of the loan.

 

5

 

 

  · Groundfloor Real Estate 2, LLC (“GRE2”). GRE2 is a single member Georgia limited liability company. It is managed by GFI. Its purpose is to select and acquire loans from GFH. Once loans have been identified for acquisition, GRE2 will sell securities to institutional purchasers which correspond to the identified loan. It will use these funds to acquire and service the loan for the duration of the loan. 

 

  · Groundfloor Properties GA, LLC (“GFGA”). GFGA is a single member Georgia limited liability company. It is managed by GFI. Its purpose is to manage distressed assets that have been acquired by affiliated companies in the course of exercising creditor rights. It conducts the majority of foreclosures that may be required by either GRE1 or GRE2.

 

 

6

 

 

 

Summary Financial Information

 

The following information updates and replaces the information in the section titled “Summary Financial Information” beginning on page 78 of the Offering Circular on Form 1-A dated November 15, 2019 and qualified on November 27, 2019:

 

The unaudited condensed statements of operations data set forth below with respect to the six months ended June 30, 2020 and June 30, 2019 are derived from, and are qualified by reference to, the unaudited condensed consolidated financial statements included in this Offering Circular and should be read in conjunction with those unaudited condensed consolidated financial statements and notes thereto.

 

   Six Months Ended June 30, 
   2020   2019 
Loan servicing revenue  $36,316   $- 
Net interest income:          
Interest income   113,672    - 
Interest expense   (113,672)   - 
Net interest income   -    - 
Net revenue   36,316    - 
Cost of revenue   -    - 
Gross profit   -    - 
Operating expenses:          
General and administrative   36,316    - 
Total operating expenses   36,316    - 
Income from operations   -    - 
Net income  $-   $- 

 

Our consolidated financial statements for the years ended December 31, 2019 include a going concern note from our auditors. Since Groundfloor’s inception, Groundfloor has financed its operations through debt and equity financings. Groundfloor intends to continue financing its activities and working capital needs largely from private financing from individual investors and venture capital firms until such time that funds provided by operations are sufficient to fund working capital requirements.

 

DESCRIPTION OF THE COMPANY’S BUSINESS

 

We incorporate by reference the section titled “Description of the Company’s Business,” in the Offering Circular on Form 1-A dated November 15, 2019 and qualified on November 27, 2019.

 

7

 

 

MANAGEMENT DISCUSSION AND ANALYSIS FOR GROUNDFLOOR REAL ESTATE 1, LLC

(Unaudited, June 30, 2020 and june 30, 2019)

 

The following information updates and replaces the information in the section titled “Management Discussion and Analysis” beginning on page 78 of the Offering Circular:

 

You should read the following discussion in conjunction with our consolidated financial statements and the related notes and the section entitled “Description of the Company’s Business” elsewhere in this Offering Circular. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including but not limited to those discussed in the section entitled “Risk Factors” and elsewhere in this Offering Circular.

 

8

 

 

Results of Operations

 

Six Months Ended June 30, 2020 and 2019

 

   Six Months Ended June 30, 
   2020   2019 
Loan servicing revenue  $36,316   $- 
Net interest income:          
Interest income   113,672    - 
Interest expense   (113,672)   - 
Net interest income   -    - 
Net revenue   36,316    - 
Cost of revenue   -    - 
Gross profit   36,316    - 
Operating expenses:          
General and administrative   36,316    - 
Total operating expenses   36,316    - 
Income from operations   -    - 
Net income  $-   $- 

 

9

 

 

Net Revenue

 

Net revenue for the six months ended June 30, 2020 and 2019 was $36.3 thousand and $0, respectively. The Company serviced 65 and 0 developer loans during the six months ended June 30, 2020 and 2019, respectively. Loan servicing revenue are fees incurred in servicing the developer’s loan.

 

Gross Profit

 

Gross profit for the six months ended June 30, 2020 and 2019 was $36.3 thousand and $0, respectively. Cost of revenue consists primarily of vendor costs associated with facilitating and servicing loans.

 

General and Administrative Expense

 

General and administrative expense for the six months ended June 30, 2020 and 2019 were $36.3 thousand and $0, respectively, an increase of $36.3 thousand. General and administrative expenses consists primarily of costs incurred in servicing developer loans.

 

Net Income

 

We did not generate any net income during the six months ended June 30, 2020 and 2019.

 

Liquidity and Capital Resources

 

The consolidated financial statements included in this Offering Circular have been prepared assuming that the Company will continue as a going concern; however, the conditions discussed below raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

 

The Company incurred a net loss for the years ended December 31, 2019 and December 31, 2018, and has an accumulated deficit as of December 31, 2019 of $21.5 million. Since our inception, the Company has financed its operations through debt and equity financing from various sources. The Company is dependent upon raising additional capital or seeking additional equity financing to fund our current operating plans for the foreseeable future. Failure to obtain sufficient equity financing and, ultimately, to achieve profitable operations and positive cash flows from operations could adversely affect our ability to achieve its business objectives and continue as a going concern. Further, there can be no assurance as to the availability or terms upon which the required financing and capital might be available.

 

10

 

 

   For the six months
ended June 30,
2020
   For the six months
ended June 30,
2019
 
Operating activities  $(36,316)  $- 
Investing activities   (6,818,106)   - 
Financing activities   7,828,295    - 
Net (decrease) in cash  $973,873   $- 

 

Net cash used in operating activities for the six months ended June 30, 2020 and 2019 was $36.3 thousand and $0, respectively. Net cash used in operating activities includes costs incurred in servicing loans to developers.

 

Net cash used in investing activities for the six months ended June 30, 2020 and 2019 was $6.8 million and $0, respectively. Net cash used in investing activities primarily represents loan payments to developers, net of repayments, and proceeds from sale of real estate properties held for sale.

 

Net cash provided by financing activities for the six months ended June 30, 2020 and 2019 was $7.8 million and $0, respectively. Net cash provided by financing activities primarily represents proceeds from the issuance of LROs to investors through the Groundfloor Platform offset by repayments of LROs to investors.

 

Material Trends, Events, and Uncertainties

 

Despite COVID-19, funding of draws on outstanding loans to developers has remained relatively steady in March through the end of June 30, 2020, as much of the Southeast United States, where our borrower projects are concentrated, did not require cessation of construction projects. To date, we have not had significant difficulty funding our operations through LRO offerings, other Regulation A offerings, and other financing sources. We continue to see adequate credit performance in our Loan portfolio, and see robust demand for Loans by commercial borrowers. Our retail investment channel continues to invest in LROs on our platform and we continue to sell a relatively small number of loans to institutional purchasers. Moreover, our technology platform has enabled the Company to deploy a work from home environment for its employees, such that work continues more or less normally.

 

As a result, the Company has not yet experienced material changes in the funding amounts provided to developers due to material trends, events and uncertainties, including COVID-19. However, if the economic impacts of COVID-19 are sustained through the end of 2020 and into the first quarter of 2021, our business may be materially impacted. As of the date of this Offering Circular, the extent to which the COVID-19 pandemic may materially impact the amounts of funding provided to developers and the Company’s financial condition, liquidity or results of operations is uncertain.

 

11

 

 

MANAGEMENT DISCUSSION AND ANALYSIS FOR GROUNDFLOOR REAL ESTATE 1, LLC

(AUDITED, DECEMBER 31, 2019 and DECEMBER 31, 2018)

 

The following information supplements the information in the section titled “Management Discussion and Analysis” beginning on page 78 of the Offering Circular:

 

You should read the following discussion in conjunction with our consolidated financial statements and the related notes and the section entitled “Description of the Company’s Business” elsewhere in this Offering Circular. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including but not limited to those discussed in the section entitled “Risk Factors” and elsewhere in this Offering Circular.

 

Overview

 

Groundfloor Finance maintains and operates the Groundfloor Platform for use by Groundfloor Finance and its subsidiaries, including GRE 1, to provide real estate development investment opportunities to the public. Originally formed as Fomentum Labs LLC, a North Carolina limited liability company, in January 2013, Groundfloor Finance converted into a North Carolina corporation on July 26, 2013 under the name GROUNDFLOOR Inc. Effective August 5, 2014, Groundfloor Finance changed the domiciliary state of the corporation to Georgia under the name Groundfloor Finance Inc.

 

LRO Program

 

Groundfloor Finance began offering LROs through the Groundfloor Platform in September 2015 pursuant to an offering statement (File No. 024-10440) that was qualified on August 31, 2015. Groundfloor Finance subsequently qualified two additional offering statements: the second (File No. 024-10488) was qualified on October 29, 2015 and the third (File No. 024-10496) was qualified on December 15, 2015. Beginning in mid-January 2016, Groundfloor Finance began qualifying additional series of LROs through PQAs to the offering statement qualified on December 15, 2015. Groundfloor Finance (or its affiliates) may from time to time elect to offer and sell LROs pursuant to other exemptions from federal and state registration requirements. From May through June 2017, Groundfloor Real Estate 1, LLC (“GRE 1”), a wholly-owned subsidiary of Groundfloor Finance, offered LROs through the Groundfloor Platform pursuant to an offering statement (File No. 024-10670) that was qualified that same month. In January 2018, Groundfloor Finance’s offering circular (File No. 024-024-10753) was qualified by the SEC under Tier 2 of Regulation A.

 

Status of LROs Across Groundfloor Entities

 

Table 1:

 

Total Loans Currently Repaid 12/31/2019  A   B   C   D   E   F   G 
Loans Paid at or Before Maturity (1)   80    129    236    98    5    0    0 
Loans Paid Following Workout (2)   1    26    50    20    2    0    1 
Loans Paid Following Fundamental Default (3)   3    17    29    13    0    1    0 

 

  (1) Loans paid at or before maturity have paid in full with all interest due through the date of repayment.

 

  (2) Loans paid following workout have paid in full, past the dated maturity, but with all interest due through the date of repayment.

 

  (3) Loans paid after fundamental default have paid without full interest, partial principal, and / or full principal loss.

 

Other than the defaults referenced above, Groundfloor is not aware of any adverse business developments that have occurred in the course of its operations.

 

GRE 1

 

Results of Operations

 

Summary Financial Information

 

The consolidated statements of operations data set forth below with respect to the fiscal year ended December 31, 2019 and December 31, 2018 are derived from, and are qualified by reference to, the consolidated financial statements included in this Offering Circular and should be read in conjunction with those financial statements and notes thereto.

 

12

 

 

Fiscal Year Ended December 31, 2019 and 2018

 

   For the year ended December 31, 
   2019   2018 
Loan servicing revenue  $7,045   $5,200 
Net interest income:          
Interest income   -    95,899 
Interest expense   -    (95,899)
Net interest income   -    - 
Net revenue   7,045    5,200 
Cost of revenue   -    3,250 
Gross profit   7,045    1,950 
Operating expenses:          
General and administrative   7,045    1,950 
Total operating expenses   7,045    1,950 
Income from operations   -    - 
Net income  $-   $- 

 

Our consolidated financial statements for the years ended December 31, 2019 include a going concern note from our auditors. Since Groundfloor’s inception, Groundfloor has financed its operations through debt and equity financings. Groundfloor intends to continue financing its activities and working capital needs largely from private financing from individual investors and venture capital firms until such time that funds provided by operations are sufficient to fund working capital requirements.

 

Net Revenue

 

Net revenue for the years ended December 31, 2019 and 2018 was $7.0 thousand and $5.2 thousand, respectively. The Company serviced 2 and 7 developer loans during the years ended December 31, 2019 and 2018, respectively. Loan servicing revenue are fees incurred in servicing the developer’s loan.

 

Gross Profit

 

Gross profit for the years ended December 31, 2019 and 2018 was $7.0 thousand and $2.0 thousand, respectively. The increase in gross profit was due to an increase of $1.8 thousand in net revenue, coupled with an decrease in cost of revenue of $3.0 thousand. Cost of revenue consists primarily of vendor costs associated with facilitating and servicing loans.

 

General and Administrative Expense

 

General and administrative expense for the years ended December 31, 2019 and 2018 were $7.0 thousand and $2.0 thousand, respectively, a decrease of $3.2 thousand or 61.8%. General and administrative expenses consists primarily of management fees charged by Parent in reimbursement of servicing costs paid by Parent.

 

Net Income

 

Net income for the years ended December 31, 2019 and 2018 was $0 and $0, respectively.

 

Liquidity and Capital Resources

 

The consolidated financial statements included in this Offering Circular have been prepared assuming that Parent will continue as a going concern; however, the conditions discussed below raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should Parent be unable to continue as a going concern.

 

The Company has retained earnings as of December 31, 2019 and 2018, of $0. Since our inception, the Company has financed its operations through debt and equity financing from various sources. The Company is dependent upon raising additional capital or seeking additional equity financing to fund its current operating plans for the foreseeable future. Failure to obtain sufficient equity financing and, ultimately, to achieve profitable operations and positive cash flows from operations could adversely affect our ability to achieve its business objectives and continue as a going concern. Further, there can be no assurance as to the availability or terms upon which the required financing and capital might be available.

 

   For the year
ended
December 31,
2019
   For the year
Ended
December 31,
2018
 
Operating activities  $(7,045)  $- 
Investing activities   23,569    2,757,421 
Financing activities   (34,924)   (3,126,721)
Net (decrease) in cash  $(18,400)  $(369,300)

 

13

 

 

Net cash used in operating activities for the years ended December 31, 2019 and 2018 was $7.0 thousand and $0, respectively. Net cash used in operating activities includes loan servicing costs.

 

Net cash provided by investing activities for the years ended December 31, 2019 and 2018, was $23.6 thousand and $2.8 million, respectively. Net cash provided by investing activities primarily represents repayment of loans to developers and proceeds from sales of properties held for sale.

 

Net cash used in financing activities for the years ended December 31, 2019 and 2018, was $34.9 thousand and $3.1 million, respectively. Net cash used in financing activities primarily represents proceeds from the issuance of LROs to investors through the Groundfloor Platform offset by repayments of LROs to investors.

 

Material Trends, Events, and Uncertainties

 

Despite COVID-19, funding of draws on outstanding loans to developers has remained relatively steady in March through the end of May 2020, as much of the Southeast United States, where our borrower projects are concentrated, did not require cessation of construction projects. To date, we have not had significant difficulty funding our operations through LRO offerings, other Regulation A offerings, and other financing sources. We continue to see adequate credit performance in our Loan portfolio, and see robust demand for Loans by commercial borrowers. Our retail investment channel continues to invest in LROs on our platform and we continue to sell a relatively small number of loans to institutional purchasers. Moreover, our technology platform has enabled the Company to deploy a work from home environment for its employees, such that work continues more or less normally.

 

As a result, the Company has not yet experienced material changes in the funding amounts provided to developers due to material trends, events and uncertainties, including COVID-19. However, if the economic impacts of COVID-19 are sustained through the summer of 2020 and into the fall of 2020, our business may be materially impacted. As of the date of this Offering Circular, the extent to which the COVID-19 pandemic may materially impact the amounts of funding provided to developers and the Company’s financial condition, liquidity or results of operations is uncertain.

 

14

 

 

 

MANAGEMENT DISCUSSION AND ANALYSIS FOR GROUNDFLOOR FINANCE INC.

(UNaudited, For the period ending june 30, 2020 and june 30, 2018)

 

 

You should read the following discussion in conjunction with Groundfloor’s unaudited condensed consolidated financial statements and the related notes and the section entitled “Description of the Company’s Business” elsewhere in this Offering Circular. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including but not limited to those discussed in the section entitled “Risk Factors” and elsewhere in this Offering Circular.

 

Overview

 

Groundfloor Finance Inc. (“Groundfloor” or “Groundfloor Finance”) maintains and operates the Groundfloor Platform for use by us and Groundfloor subsidiaries to provide real estate development investment opportunities to the public. Groundfloor was originally organized as a North Carolina limited liability company under the name of Fomentum Labs LLC on January 28, 2014. Fomentum Labs LLC changed its name to Groundfloor LLC on April 26, 2014, and converted into a North Carolina corporation on July 26, 2014. In connection with this conversion, all equity interests in Groundfloor LLC were converted into shares of our common stock. Effective August 5, 2015, Groundfloor changed its domiciliary state to Georgia under the name Groundfloor Finance Inc. The unaudited condensed consolidated financial statements include Groundfloor’s wholly-owned subsidiaries, including Groundfloor GA (as defined below), which was created for the purpose of financing real estate properties in Georgia, Holdings, which was created for the purpose of facilitating our loan advance program by entering into the Revolver, and GRE 1, which sold and issued LROs through the Groundfloor Platform from May to July 2017.

 

15

 

 

Funding Loan Advances

 

To date, the Company has entered into the following financial arrangements designed to facilitate Loan advances.

 

In November 2016, the Company entered into the Revolver credit facility to fund Loan advances (as defined below). The terms of the credit facility are as follows: Interest accrues at the greater of 10.0% per annum or the weighted average annual interest rate of the Loans then held by Holdings which have been originated with proceeds from the credit facility. The revolving credit facility was originally limited to $1.5 million with an option to increase the limit to $15.0 million (under certain circumstances). In March 2020, in connection with the novel coronavirus pandemic and the related tightening of credit markets, GROUNDFLOOR’s creditor informed the Company that it would cease funding of draws on the Revolver for an undefined period of time and replace the lost financing by expanding on other existing sources of lending capital, most importantly the GROUNDFLOOR Notes program. In response, the Company developed a plan to repay the outstanding principal and accrued interest on the Revolver. The outstanding principal and accrued interest on the Revolver were repaid in full in June 2020 and no outstanding balance remains as of June 30, 2020. At the time of issuance of these condensed consolidated financial statements, the future of the Revolver credit arrangement remains unknown.

  

On January 11, 2017, Groundfloor entered into the ISB Note (as defined below) for a principal sum of $1.0 million, which was subsequently increased to $2.0 million, for the purpose of using the proceeds for our loan advance program, but may use the proceeds for other purposes in our sole discretion. The outstanding principal and accrued interest on the ISB Note were repaid in full in September 2019.

 

Starting in November 2018, Groundfloor entered into various GROUNDFLOOR Notes, secured promissory 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 principal outstanding as of June 30, 2020 was $16.3 million.

 

In November and December 2019, Groundfloor entered into various short-term, secured promissory notes with accredited investors. Proceeds from the notes are used by the Company for originating, buying, and servicing loans to developers for the purpose of building, buying, and rehabilitating single family and multifamily structures, or buying land for commercial purposes. The aggregate principal outstanding of these loans as of December 31, 2019, was $1.3 million; those loans were repaid in full at maturity during the six months ended June 30, 2020 and no balance remains outstanding as of June 30, 2020.

 

16

 

 

Financial Position and Operating History

 

In connection with their audit for the year ended December 31, 2019, our auditors expressed substantial doubt about our ability to continue as a going concern due to our losses and cash outflows from operations. To strengthen our financial position, Groundfloor have continued to raise additional funds through convertible debt and equity offerings.

 

Groundfloor has a limited operating history and have incurred a net loss since our inception. Our net loss was $1.3 million for the six months ended June 30, 2020. To date, Groundfloor has earned limited revenues from origination and servicing fees charged to borrowers in connection with the loans made by the Company and its wholly-owned subsidiaries GRE 1 and Groundfloor GA corresponding to the LROs and Georgia Notes. Groundfloor has funded our operations primarily with proceeds from our convertible debt and preferred stock issuances, which are described below under “Liquidity and Capital Resources”. Over time, Groundfloor expects that the number of borrowers and lenders, and the volume of loans originated through the Groundfloor Platform, will increase and generate increased revenue from borrower origination and servicing fees.

  

The proceeds from the sale of LROs described in this Offering Circular will not be used to directly finance our operations. Groundfloor will use the proceeds from sales of LROs exclusively to originate the Loans that correspond to the corresponding series of LROs sold to investors. However, Groundfloor collects origination and servicing fees on Loans Groundfloor is able to make to Developers, which Groundfloor recognizes as revenue. The more Loans Groundfloor is able to fund through the proceeds of our offerings, the more fee revenue Groundfloor will make. With increased fee revenue, our financial condition will improve. However, Groundfloor does not anticipate this increased fee revenue to be able to fully support our operations through the next twelve months.

 

Groundfloor’s operating plan calls for a continuation of the current strategy of raising equity and, in limited circumstances, debt financing to finance its operations until Groundfloor reach profitability and become cash-flow positive, which Groundfloor does not expect to occur before 2020. Groundfloor’s operating plan calls for significant investments in website development, security, investor sourcing, loan processing and marketing, and for several rounds of equity financing before Groundfloor reaches profitability.

 

17

 

 

Groundfloor completed its Series A Financing in December 2015, through which Groundfloor raised an aggregate of approximately $5.0 million (including the cancellation of the 2015 Bridge Notes (as defined below). Groundfloor raised an aggregate of $2.1 million as of December 31, 2017 through Groundfloor’s 2017 Note Financing (as defined below). Groundfloor has raised approximately $4.2 million in a 2018 Common Stock Offering, $3.1 million in a 2019 Common Stock Offering, and $0.5 million in a 2020 Common Stock Offering, as well as $3.6 million through Groundfloor’s 2019 Note Offering, in order to fund operations. See “Liquidity and Capital Resources” below.

 

Results of Operations

 

Six Months Ended June 30, 2020 and 2019

 

   Six Months Ended June 30, 
   2020   2019 
Non-interest revenue:          
Origination fees  $1,552,929   $1,216,642 
Loan servicing revenue   845,695    752,162 
Total non-interest revenue   2,398,624    1,968,804 
Net interest income:          
Interest income   5,210,695    2,854,020 
Interest expense   (3,968,122)   (2,245,280)
Net interest income   1,242,573    608,740 
Net revenue   3,641,197    2,577,544 
Cost of revenue   (320,372)   (328,706)
Gross profit   3,320,372    2,248,838 
Operating expenses:          
General and administrative   1,465,993    940,396 
Sales and customer support   1,293,443    1,264,973 
Development   402,005    356,836 
Regulatory   172,352    189,068 
Marketing and promotions   443,067    591,799 
Total operating expenses   3,776,860    3,343,072 
Loss from operations   (456,035)   (1,094,234)
Interest expense   846,976    1,018,025 
Net loss  $(1,303,011)  $(2,112,259)

 

Net Revenue

 

Net revenue for the six months ended June 30, 2020 and 2019 was $3.6 million and $2.6 million, respectively. The Company facilitated the origination of 187 and 285 developer loans during the six months ended June 30, 2020 and 2019, respectively. Origination fees and loan servicing revenue were earned related to the origination of these developer loans. Origination fees are determined by the term and credit risk of the developer loan and range from 1.0% to 6.0%. The fees are deducted from the loan proceeds at the time of issuance. Loan servicing revenue re fees incurred in servicing the developer’s loan. Additionally, Groundfloor incurred net interest income during the loan advance period. The increase in net interest income is due to the increase in overall portfolio size as the Company originated 38% more loans than the previous period. Groundfloor expects operating revenue to increase as its loan application and processing volume increases.

 

Gross Profit

 

Gross profit for the six months ended June 30, 2020 and 2019 was $3.3 million and $2.2 million, respectively. The increase in gross profit was due to $1.1 million in additional net revenue, with no material change in cost of revenue. Cost of revenue consists primarily of payment processing and vendor costs associated with facilitating and servicing loans. Groundfloor expects gross profit to increase as its loan application and processing volume increases.

   

General and Administrative Expense

 

General and administrative expense for the six months ended June 30, 2020 and 2019 were $1.5 million and $0.9 million, respectively, an increase of $0.6 million or 67.0%. General and administrative expenses consists primarily of employee compensation cost, professional fees, consulting fees and rent expense.

 

18

 

 

Sales and Customer Support

 

Sales and customer support expense for the six months ended June 30, 2020 and 2019 were $1.3 million and $1.3 million, respectively. Sales and customer support expense consists primarily of employee compensation cost. Groundfloor expect sales and customer support expense will continue to increase due to the planned investment in developer acquisition and customer support required to support its growth.

 

Development Expense

 

Development expense for the six months ended June 30, 2020 and 2019 were $0.4 million and $0.4 million, respectively. Development expense consists primarily of employee compensation cost and the cost of subcontractors who work on the development and maintenance of our website and lending platform. Groundfloor expects development expense will continue to increase due to the planned investments in our website and lending platform required to support our technology infrastructure as Groundfloor grows.

 

Regulatory Expense

 

Regulatory expense for the six months ended June 30, 2020 and 2019 held consant at $0.2 million for both periods. Regulatory expense consists primarily of legal fees and compensation cost required to maintain SEC and other regulatory compliance. Groundfloor expects regulatory expense may increase due to the additional expense related to qualifying our offerings with the SEC, including our transition to Tier 2 under Regulation A, which will require complying with ongoing reporting requirements with the SEC and certain filing fees with applicable state regulatory authorities.

 

Marketing and Promotions Expense

 

Marketing and promotions expense for the six months ended June 30, 2020 and 2019 were $0.4 million and $0.6 million, respectively, a decrease of $0.2 million or 33.3%. Marketing and promotions expense consists primarily of consulting expense, compensation cost as well as promotional and advertising expense. The decrease was primarily due to a decrease in investor and borrower acquisition.

 

19

 

 

Interest Expense

 

Interest expense for the six months ended June 30, 2020 and 2019, excluding interest paid on limited recourse obligations and GROUNDFLOOR Notes, was $0.8 million and $1.0 million, respectively, a decrease of $0.2 million. The company incurred $0.5 million in interest expense warehousing loans on the Revolver. Cash paid for interest on the Revolver was $0.6 million in the six months ended June 30, 2020. Interest expense related to the 2019 Subordinated Convertible Notes (as defined below) of $0.3 million was recognized during the six months ended June 30, 2020. Interest expense related to the 2017 Subordinated Convertible Notes (as defined below) of $0.2 million was recognized during the six months ended June 30, 2019.

 

Net Loss

 

Net loss for the six months ended June 30, 2020 and 2019 was $1.3 million and $2.1 million, respectively, a net loss decrease of $0.8 million or 38.1%. Operating expense consist primarily of compensation cost, legal fees, consulting and subcontractor cost as well as advertising and promotional expense. Operating expense for the six months ended June 30, 2020 and 2019 was $3.8 million and $3.3 million, respectively, an increase of $0.5 million. Operating expenses increased as the Company increased headcount and compensation costs compared to the prior period.

 

Liquidity and Capital Resources

 

The unaudited condensed consolidated financial statements included in this Offering Circular have been prepared assuming that Groundfloor will continue as a going concern; however, the conditions discussed below raise substantial doubt about our ability to continue as a going concern. The unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should Groundfloor be unable to continue as a going concern.

 

Groundfloor incurred a net loss for the six months ended June 30, 2020 and 2019, and have an accumulated deficit as of June 30, 2020 of $22.8 million. Since our inception, Groundfloor have financed our operations through debt and equity financing from various sources. Groundfloor are dependent upon raising additional capital or seeking additional equity financing to fund our current operating plans for the foreseeable future. Failure to obtain sufficient equity financing and, ultimately, to achieve profitable operations and positive cash flows from operations could adversely affect our ability to achieve its business objectives and continue as a going concern. Further, there can be no assurance as to the availability or terms upon which the required financing and capital might be available.

 

20

 

 

   For the six
months ended
June 30,
2020
   For the six
months ended
June 30,
2019
 
Operating activities  $(1,840,077)  $(2,593,030)
Investing activities   (4,052,906)   (13,615,640)
Financing activities   5,024,612    17,186,827 
Net decrease in cash  $868,371   $978,157 

 

Net cash used in operating activities for the six months ended June 30, 2020 and 2019 was $1.8 million and $2.6 million, respectively. Net cash used in operating activities funded salaries, expense for contracted marketing, development and other professional service providers and expense related to sales and marketing initiatives.

 

Net cash used in investing activities for the six months ended June 30, 2020 and 2019 was $4.1 million and $13.6 million, respectively. Net cash used in investing activities primarily represents loan payments to developers offset by the repayment of loans to developers.

 

Net cash provided by financing activities for the six months ended June 30, 2020 and 2019 was $5.0 million and $17.2 million, respectively. Net cash provided by financing activities primarily represents proceeds from the issuance of Georgia Notes and LROs to investors through the Groundfloor Platform, proceeds from Common Stock Offerings and private placement, offset by repayments of Georgia Notes and LROs to investors.

 

21

 

 

Groundfloor issued and sold 91,259 shares Series Seed Preferred Stock at an initial closing on December 5, 2014 (the “Series Seed Initial Closing”), for total proceeds of $475 thousand, pursuant to the Series Seed Preferred Stock Purchase Agreement (the “Series Seed Purchase Agreement”), dated December 5, 2014 between us and the investors named therein (the “Series Seed Investors”). In addition, at the Series Seed Initial, the entire unpaid principal and interest outstanding under certain previously-issued convertible promissory notes converted into 276,391 additional shares of Series Seed Preferred Stock. Groundfloor issued and sold an aggregate of 201,146 additional shares of Series Seed Preferred Stock, for total proceeds of $1.1 million, at subsequent closings on April 1, 2015, May 12, 2015 and August 31, 2015 (collectively, the “Series Seed Subsequent Closings” and together, with the Series Seed Initial Closing, the “Series Seed Financing”). Pursuant to the Series Seed Purchase Agreement, the Company sold each share of Series Seed Preferred Stock for $5.205 per share. In connection with the Series Seed Financing, Groundfloor also entered into an Investors’ Rights Agreement with the Series Seed Investors and certain holders of our common stock, which was subsequently amended and restated in connection with the Series A Financing. The shares of Series Seed Preferred Stock were offered and sold pursuant to the federal exemption from registration set forth in Rule 506 of Regulation D under the Securities Act. The Series Seed Financing terminated following the final Series Seed Subsequent Closing and Groundfloor does not intend to sell any additional shares of Series Seed Preferred Stock.

 

During November 2015, Groundfloor entered into promissory notes with investors for total proceeds of $250 thousand (the “2015 Bridge Notes”). The notes incur interest at the rate of 12% per annum. The outstanding principal and all accrued but unpaid interest was due and payable on the earlier of May 5, 2016 or the closing of an equity financing with gross proceeds of at least $4.3 million. The 2015 Bridge Notes and all accrued but unpaid interest thereunder were cancelled as consideration for 37,561 shares of Series A Preferred Stock in connection with the Series A Initial Closing. The notes were offered and sold pursuant to the federal exemption from registration set forth in Rule 506 of Regulation D under the Securities Act. The 2015 Bridge Notes Financing terminated with the closing of the Series A Financing.

 

In addition, Groundfloor issued and sold 709,812 shares of Series A Preferred Stock at an initial closing on November 24, 2015 and subsequent closings through December 2015, for total gross proceeds of approximately $4.7 million, pursuant to the Series A Preferred Stock Purchase Agreement. Pursuant to the Series A Purchase Agreement, the Company sold each share of Series A Preferred Stock for $6.69 per share. The shares of Series A Preferred Stock were offered and sold pursuant to the federal exemption from registration set forth in Rule 506 of Regulation D under the Securities Act. The Series A Financing terminated in December 2015 and Groundfloor does not intend to sell any additional shares of Series A Preferred Stock.

 

On November 1, 2016, Holdings, the Company’s wholly-owned subsidiary, as borrower, entered into a revolving credit facility (the “Revolver”) with Revolver Capital. The credit agreement (the “Credit Agreement”) provides for revolving loans up to a maximum aggregate principal amount of $1.5 million (the “Revolving Credit Commitments”). The Revolver will be used for bridge funding of underlying loans pending qualification from the SEC. The term of the Revolver was extended in October 2017 and will mature on April 4, 2019.

 

On November 11, 2016, the Company entered into a First Amendment to the Credit Agreement, which amended the Credit Agreement to increase the Revolving Credit Commitments thereunder from $1.5 million to $2.5 million. On December 21, 2016, the Company entered into a Second Amendment to the Credit Agreement, which amended the Credit Agreement to increase the Revolving Credit Commitments thereunder from $2.5 million to $3.5 million. On April 7, 2017, the Company entered into a Third Amendment to the Credit Agreement, which increased the Revolving Credit Commitments thereunder from $3.5 million to $4.5 million. The other terms of the credit facility remain unchanged.

 

22

 

 

 On April 4, 2018, the Credit Agreement dated as of November 2, 2016, as amended by the First Amendment as of November 14, 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.

 

On August 8, 2019, the Company increased the Revolving Credit Commitments thereunder from $5,500,000 to $8,500,000. In connection with the increase the Company paid a $30,000 commitment fee, which is capitalized and amortized over a twelve-month period. The other terms of the credit facility remain unchanged.

 

On October 1, 2019, the Company increased the Revolving Credit Commitments thereunder from $8,500,000 to $10,500,000. In connection with the increase the Company paid a $20,000 commitment fee, which is capitalized and amortized over a twelve-month period. The other terms of the credit facility remain unchanged.

 

In March 2020, in connection with the novel coronavirus pandemic and the related tightening of credit markets, GROUNDFLOOR’s creditor informed the Company that it would cease funding of draws on the Revolver for an undefined period of time and replace the lost financing by expanding on other existing sources of lending capital, most importantly the GROUNDFLOOR Notes program. In response, the Company developed a plan to repay the outstanding principal and accrued interest on the Revolver. The outstanding principal and accrued interest on the Revolver were repaid in full in June 2020 and no outstanding balance remains as of June 30, 2020. At the time of issuance of these condensed consolidated financial statements, the future of the Revolver credit arrangement remains unknown.

 

On January 11, 2017, Groundfloor entered into the ISB Note in favor of ISB for a principal sum of $1.0 million. Groundfloor paid to ISB an origination fee of $10 thousand concurrently with the funding by ISB of the principal of the ISB Note. Groundfloor subsequently entered into an amendment to the ISB Note extending the repayment schedule in return for a $5 thousand amendment fee, a second amendment increasing the principal amount outstanding to $2.0 million for a $30 thousand amendment fee, a third amendment further extending the repayment schedule among other terms described below in return for a $10 thousand amendment fee, and a fourth amendment further extending the repayment schedule among other terms described below for a $10 thousand amendment fee.

 

23

 

 

The ISB Note incurs interest at the rate of 8% per annum from January 11, 2017 until September 30, 2017 and 14% per annum from October 1, 2017 until payment in full of the ISB Note, in each case calculated on the basis of a 360-day year for the actual number of days elapsed. The ISB Note must be repaid as follows: (i) $50,000, plus any accrued but unpaid interest thereon, commencing on April 30, 2019, and each month thereafter, (ii) $1,000,000, plus any accrued but unpaid interest thereon, is due and payable on September 30, 2019, and (iii) any remaining outstanding principal amount, plus any remaining accrued but unpaid interest, is due and payable on December 31, 2020. As of the date hereof, the principal sum was paid in full and the note is no longer outstanding.

 

The ISB Note includes certain financial covenants related to the Company’s quarterly financial results and operating capital. The ISB Note is subject to customary event of default provisions. Upon the occurrence of any event of default, the interest rate under the ISB Note shall increase by 7%. As collateral security for the ISB Note, Groundfloor granted to ISB a 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 credit facility with Revolver Capital; (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 us or one of our subsidiaries; and (iii) the equity interest in any subsidiary formed by us for the sole purpose of issuing Loans and corresponding series of LROs.

 

In connection with the third amendment to the ISB Note, the Company agreed to issue to ISB a warrant for the purchase of shares of our common stock on the first day of each quarter commencing on October 1, 2017 until the ISB 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.

 

On April 1, 2019, the 2017 Note was amended and restated for a fee of $10,000, to be deferred and amortized over the life of the 2017 Note. The stated interest rate under the amended and restated promissory note and security agreement (“Restated Note”) was increased to 14%. Under the terms of the Restated Note, $50,000 of the principal amount plus any accrued but unpaid interest thereon was due and payable commencing on April 30, 2019, and each month thereafter; $1.0 million of the principal amount plus any accrued but unpaid interest was due and payable on September 30, 2019; and any remaining outstanding principal and accrued interest was due and payable on December 31, 2020. The agreement states that the Company may prepay the 2017 Note without premium or penalty.

 

24

 

 

In 2019, the Company made five payments of principal and accrued interest as outlined in the Restated Note agreement. The Company then prepaid the outstanding principal on the Restated Note in full, with accrued interest, on September 24, 2019.

 

As of December 31, 2019, there was no remaining balance outstanding on the Company’s Consolidated Balance Sheets. Amortization of deferred financing costs related to the 2017 ISB Note was $25,000 for the year ended December 31, 2019. Amortization of the related debt discount was $223,000 for the year ended December 31, 2019.

 

From March 2017 to December 2017, Groundfloor issued subordinated convertible notes (the “Subordinated Convertible Notes”) to investors for total proceeds of $2.1 million (the “2017 Note Financing”). On October 27, 2017, the Company entered into amendments to the outstanding Subordinated Convertible Notes and related Subordinated Convertible Promissory Note Purchase Agreement raising the principal amount of Subordinated Convertible Notes that may be sold to $2.0 million, extending the maturity date, and allowing the Subordinated Convertible Notes, at the option of the holders, to convert outstanding principal and accrued but unpaid interest into shares of the Company’s common stock as described below. In November 2017, Groundfloor issued Subordinated Convertible Notes to investors for additional proceeds of $675 thousand. Furthermore, in December 2017, Groundfloor oversubscribed and issued Subordinated Convertible Notes to investors for additional proceeds of $550 thousand. The notes incur interest at the rate of 8% per annum. The outstanding principal and all accrued but unpaid interest is due and payable on the earlier of September 30, 2019 or the consummation of a sale of the Company by consolidation, merger, change of majority ownership, or sale or other disposition of all or substantially all of the assets of the Company (the “Maturity Date”). In the event of a closing of a preferred stock financing with gross proceeds of at least $8.0 million (“Qualified Preferred Financing”) prior to the Maturity Date, the outstanding principal and all accrued but unpaid interest would become automatically converted into shares of our preferred stock issued in the financing at a price per share equal to 75% of the price per share of the preferred stock financing. In the event of a closing of a common stock financing under Regulation A with gross proceeds of at least $3.0 million (“Qualified Common Financing”) prior to the Maturity Date, then each holder may elect, in its discretion, to convert the outstanding principal and all accrued but unpaid interest into shares of our common stock issued in the financing at a price per share equal to 90% of the price per share of the common stock financing. The indebtedness represented by the 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 ISB Note.

 

25

 

 

On February 9, 2018, Groundfloor 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 SEC (the “2018 Common Stock Offering”). As described in this Offering Circular, Groundfloor is offering up to 500,000 shares of our common stock at $10 per share, with a minimum investment of $100, or 10 shares of common stock. The aggregate initial offering price of our common stock will not exceed $5,000,000 in any 12-month period, and there is no minimum offering amount. Groundfloor is also offering a Bonus Share Program where Groundfloor may issue up to 30,000 additional bonus shares of our common stock pursuant to the terms of this Offering Circular. As of December 31, 2018, Groundfloor issued 437,917 shares of common stock in the 2018 Common Stock Offering for $4.2 million in proceeds.

 

On October 12, 2018, the Company entered into a common stock purchase agreement for private placement of 125,000 shares of the Company’s common stock for proceeds of $1.5 million.

 

In January 2019, 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 “2019 Common Stock Offering”). The Company offered up to 900,000 shares of common stock at $15.00 per share, with a minimum investment of $150, or 10 shares of common stock. According to the terms of the offering statement, the aggregate initial offering price of the common stock will not exceed $13,500,000 in any 12-month period, and there is no minimum offering amount. The Company may issue up to 30,000 additional bonus shares through an incentive program available to investors who had provided a previous indication of interest in investing in the Company.

 

The 2019 Common Stock Offering closed on a rolling basis from January 2019 to July 2019. As a result of the offering, the Company received gross proceeds of $3.1 million in exchange for the issuance of 214,535 shares of common stock, including 6,800 bonus shares issued through the incentive program described above.

 

In conjunction with the 2019 Common Stock Offering, certain holders of Restated Subordinated Convertible Notes converted their outstanding principal and accrued interest into common stock at a contractually agreed upon 10% discount to the offered price. In 2019, $60,000 in notes principal and accrued interest were converted into 4,440 shares of common stock.

 

From September 2019 to December 2019, the Company issued subordinated convertible notes (the “2019 Subordinated Convertible Notes”) to Investors for total proceeds of $3.6 million. The 2019 Subordinated Convertible Notes bear interest at the rate of 10% per annum. The outstanding principal and all accrued but unpaid interest is due and payable on the earlier of August 30, 2021, 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 $8.0 million (“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 90% of the offering price per share in the Qualified Preferred Financing. At any time after six months after the issuance of a 2019 Subordinated Convertible Note, the investor may convert all or a portion of the outstanding principal and accrued interest into shares of common stock at 90% of the per share price of common stock at the time of conversion, as reasonably determined by the Board. The indebtedness represented by the 2019 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.

 

26

 

 

Because of the contractual right of noteholders to convert their holdings to common stock at a discount to fair value, the Company determined that the 2019 Subordinated Convertible Notes contain a beneficial conversion feature. The Company recognized this beneficial conversion feature as a debt discount and component of additional paid-in capital at the in-the-money amount of $0.4 million at the time of issuance. The discount is being amortized to interest expense until the earlier of maturity or exercise of the conversion option.

 

Certain investors in 2019 Subordinated Convertible Notes purchased their shares through the issuance of advance agreements to the Company (“Advances”). The Advances accrue interest at a rate of 10% per annum and are payable to the Company within an initial term of 30 days, with an investor option to extend the term by 30 days, after which the Advances begin accruing interest at a rate of 14% per annum. The funds advanced to the investors are subject to recourse by the Company against the investors. The Advances, with principal sum of $0.3 million as of December 31, 2019, are recorded as a component of “Other current assets” in the Company’s Consolidated Balance Sheets. The Company collected the Advances of $0.3 million during the six month period June 30, 2020.

 

Principal of $3.6 million on the 2019 Subordinated Convertible Notes, net of an unamortized discount of $0.4 million, was outstanding as of June 30, 2020. Accrued interest on the 2019 Subordinated Convertible Notes, presented within “Accounts payable and accrued expenses” in the Company’s Consolidated Balance Sheets, was $0.2 million as of June 30, 2020.

 

On February 1, 2020, Groundfloor 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 SEC (the “2020 Common Stock Offering”). As described in this Offering Circular, Groundfloor is offering up to 900,000 shares of our common stock at $17.50 per share, with a minimum investment of $175, or 10 shares of common stock. As of June 30, 2020, Groundfloor issued 30,745 shares of common stock in the 2020 Common Stock Offering for $2.6 million in proceeds.

 

27

 

 

In April 2020, the Company obtained an $829,100 loan under the Paycheck Protection Program (“PPP”). The Company plans to use the PPP Loan proceeds to cover payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act.

 

Groundfloor has incurred losses since its inception, and Groundfloor expects it will continue to incur losses for the foreseeable future. Groundfloor requires cash to meet its operating expenses and for capital expenditures. To date, Groundfloor has funded its cash requirements with proceeds from its convertible note and preferred stock issuances. Groundfloor anticipate that it will continue to incur substantial net losses as it grows the Groundfloor Platform. Groundfloor does not have any committed external source of funds, except as described above. To the extent our capital resources are insufficient to meet its future capital requirements, Groundfloor will need to finance its cash needs through public or private equity offerings or debt financings. Additional equity or debt financing may not be available on acceptable terms, if at all. On October 30, 2017, Groundfloor filed an offering statement on Form 1-A with the SEC for a proposed offering of its common stock. On February 9, 2018, Groundfloor’s offering statement on Form 1-A was qualified to issue Groundfloor common stock.

 

Plan of Operation

 

Prior to September 2015, Groundfloor’s operations were limited to issuing Georgia Notes solely in Georgia to Georgia residents pursuant to an intrastate crowdfunding exemption from registration under the Securities Act and qualification under Georgia law. On September 7, 2015, the SEC qualified Groundfloor’s first offering statement on Form 1-A covering seven separate series of LROs corresponding to the same number of Projects in eight states and the District of Columbia. Subsequently, Groundfloor has not issued, and do not intend to issue in the future, any additional Georgia Notes. Since that time, Groundfloor has qualified two additional offering statements on Form 1-A in addition to an offering statement on Form 1-A qualified for GRE 1, its wholly-owned subsidiary, in each case under Tier 1 of Regulation A. In January 2018, Groundfloor’s offering statement relating to the offer and sale of limited recourse obligations (the “LRO Offering Circular”) was qualified by the SEC under Tier 2 of Regulation A, raising the annual aggregate amount of LROs which Groundfloor may offer and sell to $50 million, less any other securities sold by Groundfloor under Regulation A (including pursuant to this Offering Circular). Groundfloor has filed, and intends to continue to file, post-qualification amendments to the LRO Offering Circular on a regular basis to include additional series of LROs. Groundfloor expect to expand the number of states in which Groundfloor offers and sells LROs during the next 12 months. With this increased geographic footprint, Groundfloor expects that the number of borrowers and corresponding investors, and the volume of loans originated through the Groundfloor Platform, will increase and generate increased revenue from borrower origination and servicing fees.

 

28

 

 

As the volume of Groundfloor loans and corresponding offerings increase, Groundfloor plans to continue the current strategy of raising equity and, in limited circumstances, debt financing to finance our operations until Groundfloor reaches profitability and becomes cash-flow positive, which Groundfloor does not expect to occur before 2020. Future equity or debt offerings by Groundfloor will be necessary to fund the significant investments in website development, security, investor sourcing, loan processing and marketing necessary to reach profitability. Groundfloor expects to hire more staff to support its expected growth in operations and to invest heavily in marketing throughout the next year.

 

Off-Balance Sheet Arrangements

 

We do not engage in any off-balance sheet financing activities. We do not have any interest in entities referred to as variable interest entities, which include special purpose entities and other structured finance entities.

 

Material Trends, Events, and Uncertainties

 

Despite COVID-19, funding of draws on outstanding loans to developers has remained relatively steady in March through the end of June 30, 2020, as much of the Southeast United States, where our borrower projects are concentrated, did not require cessation of construction projects. To date, we have not had significant difficulty funding our operations through LRO offerings, other Regulation A offerings, and other financing sources. We continue to see adequate credit performance in our Loan portfolio, and see robust demand for Loans by commercial borrowers. Our retail investment channel continues to invest in LROs on our platform and we continue to sell a relatively small number of loans to institutional purchasers. Moreover, our technology platform has enabled the Company to deploy a work from home environment for its employees, such that work continues more or less normally.

 

As a result, the Company has not yet experienced material changes in the funding amounts provided to developers due to material trends, events and uncertainties, including COVID-19. However, if the economic impacts of COVID-19 are sustained through the end of 2020 and into the first quarter of 2021, our business may be materially impacted. As of the date of this Offering Circular, the extent to which the COVID-19 pandemic may materially impact the amounts of funding provided to developers and the Company’s financial condition, liquidity or results of operations is uncertain.

 

29

 

 

MANAGEMENT DISCUSSION AND ANALYSIS FOR GROUNDFLOOR FINANCE INC.

(audited, Year ending 2019 and 2018)

 

Summary Financial Information of Groundfloor Finance

 

The consolidated statements of operations data set forth below with respect to the fiscal years ended December 31, 2019 and December 31, 2018 are derived from, and are qualified by reference to, the consolidated financial statements included in this Offering Circular and should be read in conjunction with those financial statements and notes thereto.

 

   Year Ended
December 31,
2019
   Year Ended
December 31,
2018
 
Operating revenue:          
Origination fees  $2,748,150   $1,183,583 
Loan servicing revenue   1,964,284    988,203 
Total operating revenue   4,712,434    2,171,786 
Net interest income:          
Interest income   6,323,801    3,178,629 
Interest expense   (4,633,122)   (2,460,454)
Net interest income   1,690,679    718,175 
Net revenue   6,403,113    2,889,961 
Cost of revenue   (779,756)   (423,776)
Gross profit   5,623,357    2,466,185 
Operating expenses:          
General and administrative   2,514,202    1,736,515 
Sales and customer support   2,939,149    2,456,875 
Development   1,125,071    1,006,840 
Regulatory   208,874    193,538 
Marketing and promotions   1,515,558    2,169,567 
Total operating expenses   8,302,854    7,563,335 
Loss from operations   (2,679,497)   (5,097,150)
Interest expense   1,157,769    1,003,505 
Net loss  $(3,837,266)  $(6,100,655)

 

Funding Loan Advances

 

To date, the Company has entered into four financial arrangements designed to facilitate Loan advances.

 

In November 2016, the Company entered into the Revolver credit facility to fund Loan advances (as defined below). The terms of the credit facility are as follows: Interest accrues at the greater of 10.0% per annum or the weighted average annual interest rate of the Loans then held by Holdings which have been originated with proceeds from the credit facility. The revolving credit facility was originally limited to $1.5 million with an option to increase the limit to $15.0 million (under certain circumstances). As of December 31, 2019 the capacity is $10.5 million and the maturity date is November 2, 2020, and is extendable for another additional year. The Company has given a corporate guaranty to Revolver Capital, now ACM Alamosa DA LLC, as additional support for the credit facility. ACM Alamosa DA LLC will also have a lien on the general assets of Holdings—which is made up exclusively of Loans that Holdings has originated. However, only Holdings, and its successors and assigns, are identified as a secured party in any documentation used to secure the advanced Loans. At no point will Holdings hold (or provide ACM Alamosa DA LLC a securities interest in) any Loan for which LROs have been issued.

 

When Holdings is not able to draw sufficient funds from this credit facility fast enough, the Company may elect to provide Holdings with a short term, non-interest bearing, full recourse loan using its operational capital to fund advances.

 

On January 11, 2017, Groundfloor entered into the ISB Note (as defined below) for a principal sum of $1.0 million, which was subsequently increased to $2.0 million, for the purpose of using the proceeds for our loan advance program, but may use the proceeds for other purposes in our sole discretion. The outstanding principal and accrued interest on the ISB Note were repaid in full in September 2019.

 

Starting in November 2018 and continuing throughout 2019, Groundfloor entered into various GROUNDFLOOR Notes, secured promissory 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 principal outstanding as of December 31, 2019 was $6.8 million.

 

In November and December 2019, Groundfloor entered into various short-term, secured promissory notes with accredited investors. Proceeds from the notes are used by the Company for originating, buying, and servicing loans to developers for the purpose of building, buying, and rehabilitating single family and multifamily structures, or buying land for commercial purposes. The aggregate principal outstanding of these loans as of December 31, 2019, was $1.3 million.

 

30

 

 

Financial Position and Operating History

 

In connection with their audit for the years ended December 31, 2019 and December 31, 2018, our auditors raised substantial doubt about our ability to continue as a going concern due to our losses and cash outflows from operations. To strengthen our financial position, Groundfloor have continued to raise additional funds through convertible debt and equity offerings.

 

 

Groundfloor has a limited operating history and have incurred a net loss since our inception. Our net loss was $3.8 million for the year ended December 31, 2019. To date, Groundfloor has earned limited revenues from origination and servicing fees charged to borrowers in connection with the loans made by the Company and its wholly-owned subsidiaries GRE 1 and Groundfloor GA corresponding to the LROs and Georgia Notes. Groundfloor has funded our operations primarily with proceeds from our convertible debt and preferred stock issuances, which are described below under “Liquidity and Capital Resources”. Over time, Groundfloor expects that the number of borrowers and lenders, and the volume of loans originated through the Groundfloor Platform, will increase and generate increased revenue from borrower origination and servicing fees.

 

The proceeds from the sale of LROs described in this Offering Circular will not be used to directly finance our operations. Groundfloor will use the proceeds from sales of LROs exclusively to originate the Loans that correspond to the corresponding series of LROs sold to investors. However, Groundfloor collects origination and servicing fees on Loans Groundfloor is able to make to Developers, which Groundfloor recognizes as revenue. The more Loans Groundfloor is able to fund through the proceeds of our offerings, the more fee revenue Groundfloor will make. With increased fee revenue, our financial condition will improve. However, Groundfloor does not anticipate this increased fee revenue to be able to fully support our operations through the next twelve months.

 

Groundfloor’s operating plan calls for a continuation of the current strategy of raising equity and, in limited circumstances, debt financing to finance its operations until Groundfloor reach profitability and become cash-flow positive, which Groundfloor does not expect to occur before 2020. Groundfloor’s operating plan calls for significant investments in website development, security, investor sourcing, loan processing and marketing, and for several rounds of equity financing before Groundfloor reaches profitability.

 

Groundfloor completed its Series A Financing in December 2015, through which Groundfloor raised an aggregate of approximately $5.0 million (including the cancellation of the 2015 Bridge Notes (as defined below). Groundfloor raised an aggregate of $2.1 million as of December 31, 2017 through Groundfloor’s 2017 Note Financing (as defined below). Groundfloor has raised approximately $4.2 million in a 2018 Common Stock Offering and $3.1 million in a 2019 Common Stock Offering, as well as $3.6 million through Groundfloor’s 2019 Note Offering, in order to fund operations. See “Liquidity and Capital Resources” below.

 

Results of Operations

 

Fiscal Year Ended December 31, 2019 and 2018

 

   For the year
ended
December 31,
2019
   For the year
ended
December 31,
2018
 
Non-interest revenue:          
Origination fees  $2,748,150   $1,183,583 
Loan servicing revenue   1,964,284    988,203 
Total operating revenue   4,712,434    2,171,786 
Net interest income:          
Interest income   6,323,801    3,178,629 
Interest expense   (4,633,122)   (2,460,454)
Net interest income   1,690,679    718,175 
Net revenue   6,403,113    2,889,961 
Cost of revenue   (779,756)   (423,776)
Gross profit   5,623,357    2,466,185 
Operating expenses:          
General and administrative   2,514,202    1,736,515 
Sales and customer support   2,939,149    2,456,875 
Development   1,125,071    1,006,840 
Regulatory   208,874    193,538 
Marketing and promotions   1,515,558    2,169,567 
Total operating expenses   8,302,854    7,563,335 
Loss from operations   (2,679,497)   (5,097,150)
Interest expense   1,157,769    1,003,505 
Net loss  $(3,837,266)  $(6,100,655)

 

31

 

 

Net Revenue

 

Net revenue for the years ended December 31, 2019 and 2018 was $6.4 million and $2.9 million, respectively. The Company facilitated the origination of 646 and 325 developer loans during the years ended December 31, 2019 and 2018, respectively. Origination fees and loan servicing revenue was earned through the origination of developer loans. Origination fees are determined by the term and credit risk of the developer loan and range from 1.0% to 6.0%. The fees are deducted from the loan proceeds at the time of issuance. Loan servicing revenue are fees incurred in servicing the developer loans. Additionally, Groundfloor incurred net interest income during the loan advance period. The increase in net interest income is due to the increase in overall portfolio size as the Company originated 99% more loans than the previous period. Groundfloor expects operating revenue to increase as its loan application and processing volume increases.

 

Gross Profit

 

Gross profit for the years ended December 31, 2019 and 2018 was $5.6 million and $2.5 million, respectively. The increase in gross profit was due to $3.5 million in additional net revenue, offset by an increase in cost of revenue of $0.3 million. Cost of revenue consists primarily of payment processing and vendor costs associated with facilitating and servicing loans. Groundfloor expects gross profit to increase as its loan application and processing volume increases.

 

General and Administrative Expense

 

General and administrative expense for the years ended December 31, 2019 and 2018 were $2.5 million and $1.7 million, respectively, an increase of $0.8 million or 41.3%. General and administrative expenses consists primarily of employee compensation cost, professional fees, consulting fees and rent expense. The increase was driven primarily by additional employees added in 2019, and secondarily by higher rent expense attributable to a full year in a new office space. Groundfloor expects general and administrative expense will continue to increase due to the planned investment in business infrastructure required to support its growth.

 

Sales and Customer Support

 

Sales and customer support expense for the years ended December 31, 2019 and 2018 were $2.9 million and $2.5 million, respectively, an increase of $0.4 million or 19.6%. Sales and customer support expense consists primarily of employee compensation cost. The increase was primarily due to an increase in compensation related to increased headcount during the year to build out the sales and origination functions to support current and future growth. Groundfloor expect sales and customer support expense will continue to increase due to the planned investment in developer acquisition and customer support required to support its growth.

 

Development Expense

 

Development expense for the years ended December 31, 2019 and 2018 were $1.2 million and $1.0 million, respectively, an increase of $0.2 million or 17.8%. Development expense consists primarily of employee compensation cost and the cost of subcontractors who work on the development and maintenance of our website and lending platform. The increase was primarily due to increases in compensation cost related to increased headcount. Groundfloor expects development expense will continue to increase due to the planned investments in our website and lending platform required to support our technology infrastructure as Groundfloor grows.

 

Regulatory Expense

 

Regulatory expense for the years ended December 31, 2019 and 2018 were $0.2 million, respectively. Regulatory expense consists primarily of legal fees and compensation cost required to maintain SEC and other regulatory compliance. Groundfloor did not pursue additional regulatory paths during the year-ended December 31, 2019 and 2018 and therefore fees remained consistent to the prior period. Groundfloor expects regulatory expense may increase due to the additional expense related to qualifying our offerings with the SEC, including our transition to Tier 2 under Regulation A, which will require complying with ongoing reporting requirements with the SEC and certain filing fees with applicable state regulatory authorities.

 

Marketing and Promotions Expense

 

Marketing and promotions expense for the years ended December 31, 2019 and 2018 were $1.5 million and $2.2 million, respectively, a decrease of $0.7 million or 30.1%. Marketing and promotions expense consists primarily of consulting expense, compensation cost as well as promotional and advertising expense. The decrease was primarily due to a decrease in investor and borrower acquisition, which drove a decrease of $0.4 million in advertising and promotions. Groundfloor expects that marketing and promotions expense will increase due to the planned investment in investor and developer acquisition activities required to support its growth.

 

Interest Expense

 

Interest expense for the year ended December 31, 2019 and 2018, excluding interest paid on limited recourse obligations and GROUNDFLOOR Notes, was $1.2 million and $1.0 million, respectively, an increase of $0.2 million. The company incurred $0.8 million in interest expense warehousing loans on the Revolver. Cash paid for interest on the Revolver was $0.8 million in the year ended December 31, 2019. Interest expense related to the 2017 Subordinated Convertible Notes and 2019 Subordinated Convertible Notes (as defined below) of $0.1 million was recognized during the year ended December 31, 2019. Interest expense related to the 2017 ISB Note of $0.2 million was recognized during the year end December 31, 2019. Cash paid for interest related to the 2017 ISB Note was $0.2 million for the year ended December 31, 2019. Interest expense related to various other short-term notes issued in late 2019 was less than $0.1 million during the year ended December 31, 2019, and is accrued in “Accounts payable and accrued expenses” as of December 31, 2019.

 

32

 

 

Net Loss

 

Net loss for the years ended December 31, 2019 and 2018 was $3.8 million and $6.1 million, respectively, a net loss decrease of $2.3 million or 37.1%. Gross profit increased $3.1 million or 124.0% in 2019 relative to 2018, while operating expenses increased only $0.7 million or 9.8% over the same period, reflecting that the Company’s investments in its workforce, brand, and technology in prior years have driven higher revenues and gross profit in the current year. Operating expenses for the years ended December 31, 2019 and 2018 were $8.3 million and $7.6 million, respectively. Operating expenses consist primarily of compensation cost, legal fees, consulting and subcontractor cost as well as advertising and promotional expense. The increase was primarily due to higher compensation cost as Groundfloor added more staff to support business growth, increased consulting expense related to marketing operations, increased professional service fees and increased software development expense.

 

Liquidity and Capital Resources

 

The consolidated financial statements included in this Offering Circular have been prepared assuming that Groundfloor will continue as a going concern; however, the conditions discussed below raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should Groundfloor be unable to continue as a going concern.

 

Groundfloor incurred a net loss for the years ended December 31, 2019 and December 31, 2018, and have an accumulated deficit as of December 31, 2019 of $21.5 million. Since our inception, Groundfloor have financed our operations through debt and equity financing from various sources. Groundfloor are dependent upon raising additional capital or seeking additional equity financing to fund our current operating plans for the foreseeable future. Failure to obtain sufficient equity financing and, ultimately, to achieve profitable operations and positive cash flows from operations could adversely affect our ability to achieve its business objectives and continue as a going concern. Further, there can be no assurance as to the availability or terms upon which the required financing and capital might be available.

 

 

   For the year
ended
December 31,
2019
   For the year
Ended
December 31,
2018
 
Operating provided by (used in) activities  $769,848   $(5,130,539)
Investing used in activities   (40,097,871)   (18,671,601)
Financing provided by activities   39,957,827    23,517,362 
Net increase (decrease) in cash  $629,804   $(284,778)

 

Net cash provided by operating activities for the year ended December 31, 2019 was $0.8 million and net cash (used in) for the year ended December 31, 2018 was $5.1 million. Net cash provided by (used in) operating activities funded salaries, expense for contracted marketing, development and other professional service providers and expense related to sales and marketing initiatives.

 

Net cash used in investing activities for the years ended December 31, 2019 and 2018 was $40.1 million and $18.7 million, respectively. Net cash used in investing activities primarily represents loan payments to developers offset by the repayment of loans to developers.

 

Net cash provided by financing activities for the years ended December 31, 2019 and 2018 was $40.0 million and $23.5 million, respectively. Net cash provided by financing activities primarily represents proceeds from the issuance of Georgia Notes and LROs to investors through the Groundfloor Platform, proceeds from the 2019 Common Stock Offering and issuance of convertible notes, offset by repayments of Georgia Notes and LROs to investors.

 

Groundfloor issued and sold 91,259 shares Series Seed Preferred Stock at an initial closing on December 5, 2014 (the “Series Seed Initial Closing”), for total proceeds of $475 thousand, pursuant to the Series Seed Preferred Stock Purchase Agreement (the “Series Seed Purchase Agreement”), dated December 5, 2014 between us and the investors named therein (the “Series Seed Investors”). In addition, at the Series Seed Initial, the entire unpaid principal and interest outstanding under certain previously-issued convertible promissory notes converted into 276,391 additional shares of Series Seed Preferred Stock. Groundfloor issued and sold an aggregate of 201,146 additional shares of Series Seed Preferred Stock, for total proceeds of $1.1 million, at subsequent closings on April 1, 2015, May 12, 2015 and August 31, 2015 (collectively, the “Series Seed Subsequent Closings” and together, with the Series Seed Initial Closing, the “Series Seed Financing”). Pursuant to the Series Seed Purchase Agreement, the Company sold each share of Series Seed Preferred Stock for $5.205 per share. In connection with the Series Seed Financing, Groundfloor also entered into an Investors’ Rights Agreement with the Series Seed Investors and certain holders of our common stock, which was subsequently amended and restated in connection with the Series A Financing. The shares of Series Seed Preferred Stock were offered and sold pursuant to the federal exemption from registration set forth in Rule 506 of Regulation D under the Securities Act. The Series Seed Financing terminated following the final Series Seed Subsequent Closing and Groundfloor does not intend to sell any additional shares of Series Seed Preferred Stock.

 

33

 

 

During November 2015, Groundfloor entered into promissory notes with investors for total proceeds of $250 thousand (the “2015 Bridge Notes”). The notes incur interest at the rate of 12% per annum. The outstanding principal and all accrued but unpaid interest was due and payable on the earlier of May 5, 2016 or the closing of an equity financing with gross proceeds of at least $4.3 million. The 2015 Bridge Notes and all accrued but unpaid interest thereunder were cancelled as consideration for 37,561 shares of Series A Preferred Stock in connection with the Series A Initial Closing. The notes were offered and sold pursuant to the federal exemption from registration set forth in Rule 506 of Regulation D under the Securities Act. The 2015 Bridge Notes Financing terminated with the closing of the Series A Financing.

 

In addition, Groundfloor issued and sold 709,812 shares of Series A Preferred Stock at an initial closing on November 24, 2015 and subsequent closings through December 2015, for total gross proceeds of approximately $4.7 million, pursuant to the Series A Preferred Stock Purchase Agreement. Pursuant to the Series A Purchase Agreement, the Company sold each share of Series A Preferred Stock for $6.69 per share. The shares of Series A Preferred Stock were offered and sold pursuant to the federal exemption from registration set forth in Rule 506 of Regulation D under the Securities Act. The Series A Financing terminated in December 2015 and Groundfloor does not intend to sell any additional shares of Series A Preferred Stock.

 

On November 1, 2016, Holdings, the Company’s wholly-owned subsidiary, as borrower, entered into a revolving credit facility (the “Revolver”) with Revolver Capital. The credit agreement (the “Credit Agreement”) provides for revolving loans up to a maximum aggregate principal amount of $1.5 million (the “Revolving Credit Commitments”). The Revolver will be used for bridge funding of underlying loans pending approval from the SEC. The term of the Revolver was extended in October 2017 and will mature on April 4, 2019.

 

On November 11, 2016, the Company entered into a First Amendment to the Credit Agreement, which amended the Credit Agreement to increase the Revolving Credit Commitments thereunder from $1.5 million to $2.5 million. On December 21, 2016, the Company entered into a Second Amendment to the Credit Agreement, which amended the Credit Agreement to increase the Revolving Credit Commitments thereunder from $2.5 million to $3.5 million. On April 7, 2017, the Company entered into a Third Amendment to the Credit Agreement, which increased the Revolving Credit Commitments thereunder from $3.5 million to $4.5 million. The other terms of the credit facility remain unchanged.

 

On April 4, 2018, the Credit Agreement dated as of November 2, 2016, as amended by the First Amendment as of November 14, 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.

 

On August 8, 2019, the Company increased the Revolving Credit Commitments thereunder from $5,500,000 to $8,500,000. In connection with the increase the Company paid a $30,000 commitment fee, which is capitalized and amortized over a twelve-month period. The other terms of the credit facility remain unchanged.

 

On October 1, 2019, the Company increased the Revolving Credit Commitments thereunder from $8,500,000 to $10,500,000. In connection with the increase the Company paid a $20,000 commitment fee, which is capitalized and amortized over a twelve-month period. The other terms of the credit facility remain unchanged.

 

As of December 31, 2019, the Company had $7,000 of available borrowings and $10.5 million outstanding under the Revolver as presented within revolving credit facility on the consolidated balance sheets. As of December 31, 2019 and 2018, the Company reflected $33,000 and $7,000, respectively, of deferred financing cost related to the Revolver as a reduction to the revolving credit facility on the consolidated balance sheets.

 

On January 11, 2017, Groundfloor entered into the ISB Note in favor of ISB for a principal sum of $1.0 million. Groundfloor paid to ISB an origination fee of $10 thousand concurrently with the funding by ISB of the principal of the ISB Note. Groundfloor subsequently entered into an amendment to the ISB Note extending the repayment schedule in return for a $5 thousand amendment fee, a second amendment increasing the principal amount outstanding to $2.0 million for a $30 thousand amendment fee, and a third amendment further extending the repayment schedule among other terms described below in return for a $10 thousand amendment fee.

 

The ISB Note incurs interest at the rate of 8% per annum from January 11, 2017 until September 30, 2017 and 14% per annum from October 1, 2017 until payment in full of the ISB Note, in each case calculated on the basis of a 360-day year for the actual number of days elapsed. The ISB Note must be repaid as follows: (i) $250,000, plus any accrued but unpaid interest thereon, was due and payable on June 30, 2017, (ii) $250,000, plus any accrued but unpaid interest thereon, is due and payable on March 31, 2019, (iii) $500,000, plus any accrued but unpaid interest thereon, is due and payable on June 30, 2019, (iv) $500,000, plus any accrued but unpaid interest thereon, is due and payable on September 30, 2019, and (v) any remaining outstanding principal amount, plus any remaining accrued but unpaid interest, is due and payable on December 31, 2019. As of the date hereof, the principal sum of $1.8 million remains outstanding.

 

34

 

 

The ISB Note includes certain financial covenants related to the Company’s quarterly financial results and operating capital. The ISB Note is subject to customary event of default provisions. Upon the occurrence of any event of default, the interest rate under the ISB Note shall increase by 7%. As collateral security for the ISB Note, Groundfloor granted to ISB a 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 credit facility with Revolver Capital; (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 us or one of our subsidiaries; and (iii) the equity interest in any subsidiary formed by us for the sole purpose of issuing Loans and corresponding series of LROs.

 

In connection with the third amendment to the ISB Note, the Company agreed to issue to ISB a warrant for the purchase of shares of our common stock on the first day of each quarter commencing on October 1, 2017 until the ISB 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.

 

On April 1, 2019, the 2017 Note was amended and restated for a fee of $10,000, to be deferred and amortized over the life of the 2017 Note. The stated interest rate under the amended and restated promissory note and security agreement (“Restated Note”) was increased to 14%. Under the terms of the Restated Note, $50,000 of the principal amount plus any accrued but unpaid interest thereon was due and payable commencing on April 30, 2019, and each month thereafter; $1.0 million of the principal amount plus any accrued but unpaid interest was due and payable on September 30, 2019; and any remaining outstanding principal and accrued interest was due and payable on December 31, 2020. The agreement states that the Company may prepay the 2017 Note without premium or penalty.

 

In 2019, the Company made five payments of principal and accrued interest as outlined in the Restated Note agreement. The Company then prepaid the outstanding principal on the Restated Note in full, with accrued interest, on September 24, 2019.

 

As of December 31, 2019, there was no remaining balance outstanding on the Company’s Consolidated Balance Sheets. Amortization of deferred financing costs related to the 2017 ISB Note was $25,000 for the year ended December 31, 2019. Amortization of the related debt discount was $223,000 for the year ended December 31, 2019.

 

From March 2017 to December 2017, Groundfloor issued subordinated convertible notes (the “Subordinated Convertible Notes”) to investors for total proceeds of $2.1 million (the “2017 Note Financing”). On October 27, 2017, the Company entered into amendments to the outstanding Subordinated Convertible Notes and related Subordinated Convertible Promissory Note Purchase Agreement raising the principal amount of Subordinated Convertible Notes that may be sold to $2.0 million, extending the maturity date, and allowing the Subordinated Convertible Notes, at the option of the holders, to convert outstanding principal and accrued but unpaid interest into shares of the Company’s common stock as described below. In November 2017, Groundfloor issued Subordinated Convertible Notes to investors for additional proceeds of $675 thousand. Furthermore, in December 2017, Groundfloor oversubscribed and issued Subordinated Convertible Notes to investors for additional proceeds of $550 thousand. The notes incur interest at the rate of 8% per annum. The outstanding principal and all accrued but unpaid interest is due and payable on the earlier of September 30, 2019 or the consummation of a sale of the Company by consolidation, merger, change of majority ownership, or sale or other disposition of all or substantially all of the assets of the Company (the “Maturity Date”). In the event of a closing of a preferred stock financing with gross proceeds of at least $8.0 million (“Qualified Preferred Financing”) prior to the Maturity Date, the outstanding principal and all accrued but unpaid interest would become automatically converted into shares of our preferred stock issued in the financing at a price per share equal to 75% of the price per share of the preferred stock financing. In the event of a closing of a common stock financing under Regulation A with gross proceeds of at least $3.0 million (“Qualified Common Financing”) prior to the Maturity Date, then each holder may elect, in its discretion, to convert the outstanding principal and all accrued but unpaid interest into shares of our common stock issued in the financing at a price per share equal to 90% of the price per share of the common stock financing. The indebtedness represented by the 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 ISB Note.

 

On February 9, 2018, Groundfloor 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 SEC (the “2018 Common Stock Offering”). As described in this Offering Circular, Groundfloor is offering up to 500,000 shares of our common stock at $10 per share, with a minimum investment of $100, or 10 shares of common stock. The aggregate initial offering price of our common stock will not exceed $5,000,000 in any 12-month period, and there is no minimum offering amount. Groundfloor is also offering a Bonus Share Program where Groundfloor may issue up to 30,000 additional bonus shares of our common stock pursuant to the terms of this Offering Circular. As of December 31, 2018, Groundfloor issued 437,917 shares of common stock in the 2018 Common Stock Offering for $4.2 million in proceeds.

 

On October 12, 2018, the Company entered into a common stock purchase agreement for private placement of 125,000 shares of the Company’s common stock for proceeds of $1.5 million.

 

In January 2019, 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 “2019 Common Stock Offering”). The Company offered up to 900,000 shares of common stock at $15.00 per share, with a minimum investment of $150, or 10 shares of common stock. According to the terms of the offering statement, the aggregate initial offering price of the common stock will not exceed $13,500,000 in any 12-month period, and there is no minimum offering amount. The Company may issue up to 30,000 additional bonus shares through an incentive program available to investors who had provided a previous indication of interest in investing in the Company.

 

35

 

 

The 2019 Common Stock Offering closed on a rolling basis from January 2019 to July 2019. As a result of the offering, the Company received gross proceeds of $3.1 million in exchange for the issuance of 214,535 shares of common stock, including 6,800 bonus shares issued through the incentive program described above.

 

In conjunction with the 2019 Common Stock Offering, certain holders of Restated Subordinated Convertible Notes converted their outstanding principal and accrued interest into common stock at a contractually agreed upon 10% discount to the offered price. In 2019, $60,000 in notes principal and accrued interest were converted into 4,440 shares of common stock.

 

From September 2019 to December 2019, the Company issued subordinated convertible notes (the “2019 Subordinated Convertible Notes”) to Investors for total proceeds of $3.6 million. The 2019 Subordinated Convertible Notes bear interest at the rate of 10% per annum. The outstanding principal and all accrued but unpaid interest is due and payable on the earlier of August 30, 2021, 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 $8.0 million (“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 90% of the offering price per share in the Qualified Preferred Financing. At any time after six months after the issuance of a 2019 Subordinated Convertible Note, the investor may convert all or a portion of the outstanding principal and accrued interest into shares of common stock at 90% of the per share price of common stock at the time of conversion, as reasonably determined by the Board. The indebtedness represented by the 2019 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.

 

Because of the contractual right of noteholders to convert their holdings to common stock at a discount to fair value, the Company determined that the 2019 Subordinated Convertible Notes contain a beneficial conversion feature. The Company recognized this beneficial conversion feature as a debt discount and component of additional paid-in capital at the in-the-money amount of $0.4 million at the time of issuance. The discount is being amortized to interest expense until the earlier of maturity or exercise of the conversion option.

 

Certain investors in 2019 Subordinated Convertible Notes purchased their shares through the issuance of advance agreements to the Company (“Advances”). The Advances accrue interest at a rate of 10% per annum and are payable to the Company within an initial term of 30 days, with an investor option to extend the term by 30 days, after which the Advances begin accruing interest at a rate of 14% per annum. The funds advanced to the investors are subject to recourse by the Company against the investors. The Advances, with principal sum of $0.3 million as of December 31, 2019, are recorded as a component of “Other current assets” in the Company’s Consolidated Balance Sheets.

 

Principal of $3.6 million on the 2019 Subordinated Convertible Notes, net of an unamortized discount of $0.4 million, was outstanding as of December 31, 2019. Accrued interest on the 2019 Subordinated Convertible Notes, presented within “Accounts payable and accrued expenses” in the Company’s Consolidated Balance Sheets, was $69,000 as of December 31, 2019.

 

Groundfloor has incurred losses since its inception, and Groundfloor expects it will continue to incur losses for the foreseeable future. Groundfloor requires cash to meet its operating expenses and for capital expenditures. To date, Groundfloor has funded its cash requirements with proceeds from its convertible note and preferred stock issuances. Groundfloor anticipate that it will continue to incur substantial net losses as it grows the Groundfloor Platform. Groundfloor does not have any committed external source of funds, except as described above. To the extent our capital resources are insufficient to meet its future capital requirements, Groundfloor will need to finance its cash needs through public or private equity offerings or debt financings. Additional equity or debt financing may not be available on acceptable terms, if at all.

 

Plan of Operation

 

Prior to September 2015, Groundfloor’s operations were limited to issuing Georgia Notes solely in Georgia to Georgia residents pursuant to an intrastate crowdfunding exemption from registration under the Securities Act and qualification under Georgia law. On September 7, 2015, the SEC qualified Groundfloor’s first offering statement on Form 1-A covering seven separate series of LROs corresponding to the same number of Projects in eight states and the District of Columbia. Subsequently, Groundfloor has not issued, and do not intend to issue in the future, any additional Georgia Notes. Since that time, Groundfloor has qualified two additional offering statements on Form 1-A in addition to an offering statement on Form 1-A qualified for GRE 1, its wholly-owned subsidiary, in each case under Tier 1 of Regulation A. In January 2018, Groundfloor’s offering statement relating to the offer and sale of limited recourse obligations (the “LRO Offering Circular”) was qualified by the SEC under Tier 2 of Regulation A, raising the annual aggregate amount of LROs which Groundfloor may offer and sell to $50 million, less any other securities sold by Groundfloor under Regulation A (including pursuant to this Offering Circular). Groundfloor has filed, and intends to continue to file, post-qualification amendments to the LRO Offering Circular on a regular basis to include additional series of LROs. Groundfloor expects to expand the number of states in which Groundfloor offers and sells LROs during the next 12 months. With this increased geographic footprint, Groundfloor expects that the number of borrowers and corresponding investors, and the volume of loans originated through the Groundfloor Platform, will increase and generate increased revenue from borrower origination and servicing fees.

 

As the volume of Groundfloor loans and corresponding offerings increase, Groundfloor plans to continue the current strategy of raising equity and, in limited circumstances, debt financing to finance our operations until Groundfloor reaches profitability and becomes cash flow positive, which Groundfloor does not expect to occur before 2020. Future equity or debt offerings by Groundfloor will be necessary to fund the significant investments in website development, security, investor sourcing, loan processing and marketing necessary to reach profitability. Groundfloor expects to hire more staff to support its expected growth in operations and to invest heavily in marketing throughout the next year.

 

36

 

 

Off-Balance Sheet Arrangements

 

We do not engage in any off-balance sheet financing activities. We do not have any interest in entities referred to as variable interest entities, which include special purpose entities and other structured finance entities.

 

Material Trends, Events, and Uncertainties

 

Despite COVID-19, funding of draws on outstanding loans to developers has remained relatively steady in March through the end of May 2020, as much of the Southeast United States, where our borrower projects are concentrated, did not require cessation of construction projects. To date, we have not had significant difficulty funding our operations through LRO offerings, other Regulation A offerings, and other financing sources. We continue to see adequate credit performance in our Loan portfolio, and see robust demand for Loans by commercial borrowers. Our retail investment channel continues to invest in LROs on our platform and we continue to sell a relatively small number of loans to institutional purchasers. Moreover, our technology platform has enabled the Company to deploy a work from home environment for its employees, such that work continues more or less normally.

 

As a result, the Company has not yet experienced material changes in the funding amounts provided to developers due to material trends, events and uncertainties, including COVID-19. However, if the economic impacts of COVID-19 are sustained through the summer of 2020 and into the fall of 2020, our business may be materially impacted. As of the date of this Offering Circular, the extent to which the COVID-19 pandemic may materially impact the amounts of funding provided to developers and the Company’s financial condition, liquidity or results of operations is uncertain.

 

37

 

 

*               *               *

 

Financial Statements

 

The following consolidated financial statements for the periods ended June 30, 2020, June 30, 2019, December 31, 2019 and December 31, 2018 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, 2020 and 2019 (Unaudited)

 

38

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Table of Contents

 

Condensed Financial Statements (unaudited)
 
Condensed Balance Sheets (unaudited) as of June 30, 2020 and December 31, 2019 F-1
 
Condensed Statements of Operations (unaudited) for the six months ended June 30, 2020 and 2019 F-2
 
Condensed Statements of Member’s (Deficit) Equity (unaudited) as of June 30, 2020 and December 31, 2019 F-3
 
Condensed Statements of Cash Flows (unaudited) for the six months ended June 30, 2020 and 2019 F-4
 
Notes to Condensed Financial Statements (unaudited) F-5

 

 

 

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Condensed Balance Sheets

 

   Unaudited   Audited 
  

June 30,

2020

   December 31,
2019
 
Assets          
Current assets:          
Cash  $975,573   $1,700 
Loans to developers, net   6,900,077    - 
Interest receivable on loans to developers   88,833    - 
Other real estate owned   -    166,973 
Total current assets   7,964,483    168,673 
Total assets  $7,964,483   $168,673 
Liabilities and Member’s Equity          
Current liabilities:          
Accrued interest on limited recourse obligations  $88,833   $9,903 
Limited recourse obligations, net   7,875,650    158,770 
Total current liabilities   7,964,483    168,673 
Total liabilities   7,964,483    168,673 
           
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  $7,964,483   $168,673 

 

See accompanying notes to condensed financial statements

 

F-1

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Condensed Statements of Operations

 

   Unaudited 
   Six Months Ended June 30, 
   2020   2019 
Loan servicing revenue  $36,316   $- 
Net interest income:          
Interest income   113,672    - 
Interest expense   (113,672)   - 
Net interest income   -    - 
Net revenue   36,316    - 
Cost of revenue   -    - 
Gross profit   36,316    - 
Operating expenses:          
General and administrative   36,316    - 
Total operating expenses   36,316    - 
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, 2018 (audited)  $100   $(100)  $-   $- 
Member contributions   -    -    -    - 
Net income   -    -    -    - 
Member’s equity as of December 31, 2019 (audited)  $100   $(100)  $-   $- 
Net income   -    -    -    - 
Member’s equity as of June 30, 2020 (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, 
   2020   2019 
Cash flows from operating activities          
Net income  $-   $- 
Adjustments to reconcile net income to net cash provided by operating activities:          
Non-cash recovery of servicing costs through write-down of limited recourse obligations   (36,316)     
Non-cash write-down of accrued interest on limited recourse obligations   9,903      
Changes in operating assets and liabilities:          
Interest receivable on loans to developers   (88,833)   - 
Accrued interest on limited recourse obligations   78,930    - 
Net cash used in operating activities   (36,316)   - 
Cash flows from investing activities          
Loan payments to developers   (8,679,197)   - 
Repayments of loans from developers   1,679,120    - 
Proceeds from sale of other real estate held for sale   181,971      
Net cash used in investing activities   (6,818,106)   - 
Cash flows from financing activities          
Proceeds from limited recourse obligations   9,654,770    - 
Repayments of limited recourse obligations   (1,826,475)   - 
Net cash (used in) provided by financing activities   7,828,295    - 
Net (decrease) increase in cash   973,873    - 
Cash as of beginning of the period   1,700    20,100 
Cash as of end of the period  $975,573   $20,100 
Supplemental disclosure of noncash investing and financing activities:          
Write-down of accrued interest payable on limited recourse obligations   9,903    - 

 

See accompanying notes to condensed financial statements

 

F-4

 

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Condensed Financial Statements (unaudited)

 

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 (unaudited)(continued)

 

Effective for 2019, the Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“Topic 606”). Topic 606 supersedes the revenue requirements in ASC Topic 605, Revenue Recognition. The Company has evaluated the impact of this accounting standard on its Consolidated Financial Statements and concluded that the Company’s contracts with customers continue to fall within the scope of existing guidance. Servicing fees, origination fees, net interest income, and gains and losses on sales of loans remain within the scope of ASC topic 310—Receivables or ASC topic 860—Transfers and Servicing. Consequently, there was no transition adjustment required on the accompanying financial statements for adopting Topic 606.

 

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 June 30, 2020 and 2019. 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

 

Accrual of interest on “Loans to developers, net” and corresponding “Limited recourse obligations, net” is discontinued when, in management’s opinion, the collection of the interest income appears doubtful. “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. A Loan may also be placed on nonaccrual status when, in management’s judgment, the collection of the interest income appears doubtful based on the status of the underlying development project, even if the Loan is not yet 90 days delinquent. Loans may be 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 (unaudited)(continued)

 

The “Loans to developers, net” and corresponding “Limited recourse obligations, net” are charged off to the extent principal or interest is deemed uncollectible. All interest accrued but later charged off for “Loans to developers, net” and “Limited recourse obligations, net” is reversed against “Interest income” and the corresponding LROs recorded “Interest expense”.

 

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 $100,000 and $0 as of June 30, 2020 and December 31, 2019, respectively. “Limited recourse obligations, net” are presented net of a reserve for doubtful accounts of $100,000 and $0 as of June 30, 2020 and December 31, 2019, respectively.

 

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.

 

F-7

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Condensed Financial Statements (unaudited)(continued)

 

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, 2020 and December 31, 2019.

 

Recent Accounting Pronouncements

 

The Company has evaluated the recent pronouncements issued since filing its annual audited Condensed Financial Statements for the six months ended June 30, 2020, 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, 2020 and December 31, 2019, respectively:

 

   Current   Workout   Fundamental
Default
   Total 
Loan grades:                    
A  $684,850   $-   $-   $684,850 
B   2,187,670    242,280    -    2,429,950 
C   2,166,326    -    -    2,166,326 
D   1,718,951    -    -    1,718,951 
E   -    -    -    - 
F   -    -    -    - 
G   -    -    -    - 
Carrying amount as of June 30, 2020  $6,746,757   $242,280   $-   $7,000,077 

 

    Current    Workout    Fundamental
Default
    Total 
Loan grades:                    
A  $-   $-   $-   $- 
B   -    -    -    - 
C   -    -    -      
D   -    -    -    - 
E   -    -    -    - 
F   -    -    -    - 
G   -    -    -    - 
Carrying amount as of December 31, 2019  $-   $-   $-   $- 

 

F-8

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Condensed Financial Statements (unaudited)(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, 2020 and December 31, 2019, the Company placed Loans of $0 and $0 recorded to “Loans to developers, net” on nonaccrual status, respectively.

 

The following table presents an analysis of past due Loans as of June 30, 2020 and December 31, 2019:

 

   Carrying
Amount
   Allowance
for Loan
Losses
   Total 
Aging schedule:               
Current  $6,749,537   $92,000   $6,657,537 
Less than 90 days past due   250,540    8,000    242,540 
More than 90 days past due   -    -    - 
Total as of June 30, 2020  $7,000,077   $100,000   $6,900,077 

 

    Carrying
Amount
    Allowance
for Loan
Losses
    Total   
Aging schedule:               
Current  $-   $-   $- 
Less than 90 days past due   -    -    - 
More than 90 days past due   -    -    - 
Total as of December 31, 2019  $-   $-   $- 

 

Impaired Loans

 

There were no loans deemed to be impaired as of June 30, 2020 and December 31, 2019, respectively.

 

F-9

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Condensed Financial Statements (unaudited)(continued)

 

Credit Quality Monitoring

 

The following table presents “Loans to developers, net” by performance state as of June 30, 2020 and December 31, 2019:

 

   Carrying
Amount
   Allowance
for Loan
Losses
   Loans to
Developers,
Net
 
Performance states:               
Current  $6,757,797   $87,000   $6,670,797 
Workout   242,280    13,000    229,280 
Fundamental default   -    -    - 
Total as of June 30, 2020  $7,000,077   $100,000   $6,900,077 
                

 

    Carrying
Amount
    Allowance
for Loan
Losses
    Loans to
Developers,
Net
 
Performance states:               
Current  $-   $-   $- 
Workout   -    -    - 
Fundamental default   -    -    - 
Total as of December 31, 2019  $-   $-   $- 

 

NOTE 3: OTHER REAL ESTATE OWNED

 

“Other real estate owned” in the Company’s Condensed Balance Sheet was $0 and $166,973 at June 30, 2020 and December 31, 2019, respectively.

 

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, 2020 and 2019, GROUNDFLOOR incurred $0 and $0 of costs on the Company’s behalf, respectively. No such costs were due and payable to GROUNDFLOOR as of June 30, 2020 and December 31, 2019, 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

 

The Company has evaluated subsequent events through September 9, 2020, the date the Condensed Financial Statements were available to be issued, and determined that there have been no events that have occurred that would require adjustments to our disclosures in the Condensed Financial Statements.

 

F-10

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Audited Financial Statements

 

December 31, 2019 and 2018

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Table of Contents

 

December 31, 2019 and 2018

 

Independent Auditors’ Report F-11
   
Financial Statements  
   
Balance Sheets as of December 31, 2019 and 2018 F-13
   
Statements of Operations for the years ended December 31, 2019 and 2018 F-14
   
Statements of Member’s (Deficit) Equity for the years ended December 31, 2019 and 2018 F-15
   
Statements of Cash Flows for the years ended December 31, 2019 and 2018 F-16
   
Notes to Financial Statements F-17

 

 

 

 

Report of Independent Auditor

 

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, 2019 and 2018, 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, 2019 and 2018, 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-11

 

 

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
April 6, 2020

 

F-12

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Balance Sheets

 

   December 31, 
   2019   2018 
Assets        
Current assets:          
Cash  $1,700   $20,100 
Loans to developers, net   -    157,070 
Interest receivable on loans to developers   -    9,903 
Other real estate owned   166,973    23,569 
Total current assets   168,673    210,642 
Total assets  $168,673   $210,642 
Liabilities and Member’s Equity          
Current liabilities:          
Accrued interest on limited recourse obligations  $9,903   $9,903 
Limited recourse obligations, net   158,770    200,739 
Total current liabilities   168,673    210,642 
Total liabilities   168,673    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  $168,673   $210,642 

 

See accompanying notes to financial statements

 

F-13

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Statements of Operations

 

   Year Ended December 31, 
   2019   2018 
Loan servicing revenue  $7,045   $5,200 
Net interest income:          
Interest income   -    95,899 
Interest expense   -    (95,899)
Net interest income   -    - 
Net revenue   7,045    5,200 
Cost of revenue   -    3,250 
Gross profit   7,045    1,950 
Operating expenses:          
General and administrative   7,045    1,950 
Total operating expenses   7,045    1,950 
Income from operations   -    - 
Net (loss) income  $-   $- 

 

See accompanying notes to financial statements

 

F-14

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

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  $100   $(100)  $-   $- 
Member contributions   -    -    -    - 
Net income   -    -    -    - 
Member’s equity as of December 31, 2018  $100   $(100)  $-   $- 
Net loss   -    -    -    - 
Member’s equity as of December 31, 2019  $100   $(100)  $-   $- 

 

See accompanying notes to financial statements

 

F-15

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Statements of Cash Flows

 

   Year Ended December 31, 
   2019   2018 
Cash flows from operating activities          
Net (loss) income  $-   $- 
Adjustments to reconcile net income to net cash provided by operating activities:          
Non-cash recovery of servicing costs through write-down of limited recourse obligations   (7,045)     
Changes in operating assets and liabilities:          
Interest receivable on loans to developers   (9,903)   (95,899)
Accrued interest on limited recourse obligations   9,903    95,899 
Net cash used in operating activities   (7,045)   - 
Cash flows from investing activities          
Loan payments to developers   -    (299,644)
Repayments of loans from developers   -    3,057,065 
Proceeds from other real estate held for sale   23,569    - 
Net cash provided by (used in) investing activities   23,569    2,757,421 
Cash flows from financing activities          
Repayments of limited recourse obligations   (34,924)   (3,126,721)
Net cash (used in) provided by financing activities   (34,924)   (3,126,721 
Net (decrease) increase in cash   (18,400)   (369,300)
Cash as of beginning of the period   20,100    389,400 
Cash as of end of the period  $1,700   $20,100 
Supplemental disclosure of noncash investing and financing activities:          
Loans to developers transferred to other real estate owned  $166,973   $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-16

 

 

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 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-17

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Financial Statements

 

Effective for 2019, the Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“Topic 606”). Topic 606 supersedes the revenue requirements in ASC Topic 605, Revenue Recognition. The Company has evaluated the impact of this accounting standard on its Consolidated Financial Statements and concluded that the Company’s contracts with customers continue to fall within the scope of existing guidance. Servicing fees, origination fees, net interest income, and gains and losses on sales of loans remain within the scope of ASC topic 310—Receivables or ASC topic 860—Transfers and Servicing. Consequently, there was no transition adjustment required on the accompanying financial statements for adopting Topic 606.

 

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, 2019 and 2018. 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-18

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Financial Statements

 

Nonaccrual and Past Due Loans

 

Accrual of interest on “Loans to developers, net” and corresponding “Limited recourse obligations, net” is discontinued when, in management’s opinion, the collection of the interest income appears doubtful. “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. A Loan may also be placed on nonaccrual status when, in management’s judgment, the collection of the interest income appears doubtful based on the status of the underlying development project, even if the Loan is not yet 90 days delinquent. Loans may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

The “Loans to developers, net” and corresponding “Limited recourse obligations, net” are charged off to the extent principal or interest is deemed uncollectible. All interest accrued but later charged off for “Loans to developers, net” and “Limited recourse obligations, net” is reversed against “Interest income” and the corresponding LROs recorded “Interest expense”.

 

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, 2019 and 2018, respectively. “Limited recourse obligations, net” are presented net of a reserve for doubtful accounts of $0 and $35,054 as of December 31, 2019 and 2018, respectively.

 

F-19

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Financial Statements

 

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, 2019 and 2018.

 

NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS

 

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 became 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 guidance in these pronouncements related to equity investments and deferred tax assets for securities classified as available for sale did not have a material effect on the Company’s Consolidated Financial Statements. The guidance further eliminates a requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public entities, and eliminates a requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost. The adoption of this standard did not have a material effect on the Company’s Consolidated Financial Statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The FASB subsequently issued a number of pronouncements amending or clarifying ASU 2016-13, including the following: in November 2018, Accounting Standards Update 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses (“ASU 2018-19”); in May 2019, Accounting Standards Update 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”); in November 2019, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates (“ASU 2019-10”); and in November 2019, Codification Improvements to Topic 326, Financial Instruments—Credit Losses (“ASU 2019-11”). ASU 2016-13 and the subsequent related pronouncements significantly change 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. For public business entities that meet the definition of an SEC filer, ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2029; for all other public business entities, the guidance is effective for fiscal years beginning after December 15, 2020; for all other entities (private companies, not-for-profit organizations, and employee benefit plans), the guidance is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. 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.

 

F-20

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to 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. The adoption of this guidance did not have a material effect on the Company’s Consolidated Financial Statements in the periods presented.

 

In December 2019, the FASB issued Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The amendments in this update simplify the accounting for income taxes by removing certain exceptions in Topic 740 and introducing other changes intended to clarify and improve existing guidance. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020; for all other entities, the amendments are effective for fiscal years beginning after December 15, 2021. 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 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.

 

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.

 

F-21

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Financial Statements

 

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

 

    Current    Workout    Fundamental
Default
    Total 
Loan grades:                    
A  $-   $-   $-   $- 
B   -    -    -    - 
C   -    -    -    - 
D   -    -    -    - 
E   -    -    -    - 
F   -    -    -    - 
G   -    -    -    - 
Carrying amount as of December 31, 2019  $-   $-   $-   $- 

 

   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 

 

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, 2019 and 2018, the Company placed Loans of $0 and 157,070 recorded to “Loans to developers, net” on nonaccrual status, respectively.

 

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

 

    Carrying
Amount
    Allowance for
Loan Losses
    Loans to
Developers,
net
 
Aging schedule:               
Current  $-   $-   $- 
Less than 90 days past due   -    -    - 
More than 90 days past due   -    -    - 
Total as of December 31, 2019  $-   $-   $- 

 

F-22

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Financial Statements

 

   Carrying
Amount
   Allowance for
Loan Losses
   Loans to
Developers,
net
 
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 December 31, 2019:

 

    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, 2019:

 

    Balance 
Principal loan balance  $- 
      
Related allowance   - 
Average recorded investment  $- 

 

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 
      
Related allowance   - 
Average recorded investment  $157,070 

 

F-23

 

 

GROUNDFLOOR REAL ESTATE 1, LLC

 

Notes to Financial Statements

 

Credit Quality Monitoring

 

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

 

    Carrying
Amount
    Allowance
for Loan
Losses
    Loans to
Developers,
Net
 
Performance states:               
Current  $-   $-   $- 
Workout   -    -    - 
Fundamental default   -    -    - 
Total as of December 31, 2019  $-   $-   $- 

 

   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 

 

Allowance for Loan Losses

 

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

 

    Balance 
Balance, December 31, 2018  $- 
Allowance for loan loss   - 
Loans charged off  - 
Outstanding as of December 31, 2019  $- 
Period-end amount allocated to:     
Loans individually evaluated for impairment  $- 
Loans collectively evaluated for impairment   - 
Balance, December 31, 2019  $- 
Loans:     
Individually evaluated for impairment  $- 
Collectively evaluated for impairment   - 
Balance, December 31, 2019  $- 

 

   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 

 

F-24

 

 

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 $166,973 and $23,569 at December 31, 2019 and 2018, respectively. During the year ended December 31, 2019 the Company transferred $157,070 from “Loans to developers, net” and $9,903 from “Interest receivable on loans to developers” 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 did not record a decrease to “Loans to developers, net” or 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, 2019 and 2018, GROUNDFLOOR incurred $7,045 and $5,100 of costs on the Company’s behalf, respectively. No such costs were due and payable to GROUNDFLOOR as of December 31, 2019 and 2018, respectively.

 

GROUNDFLOOR GA Holdings LLC

 

GROUNDFLOOR GA Holdings LLC may close and fund a Loan prior to its 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 February 29, 2020, the date the Financial Statements were available to be issued. Based on this evaluation, it was determined that no subsequent events occurred that require recognition or disclosure in the financial statements.

 

F-25

 

 

GROUNDFLOOR FINANCE INC.

AND SUBSIDIARIES

 

Condensed Consolidated Financial Statements

 

June 30, 2020 and 2019 (Unaudited)

 

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Table of Contents

 

June 30, 2020 and 2019

 

Condensed Consolidated Financial Statements (unaudited)

 

Condensed Consolidated Balance Sheets (unaudited) F-26
   
Condensed Consolidated Statements of Operations (unaudited) F-27
   
Condensed Consolidated Statements of Stockholders’ Deficit (unaudited) F-28
   
Condensed Consolidated Statements of Cash Flows (unaudited) F-29
   
Notes to Condensed Consolidated Financial Statements (unaudited) F-30

 

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Condensed Consolidated Balance Sheets

 

   June 30,   December 31, 
   2020   2019 
Assets        
Current assets:          
Cash  $830,825   $1,699,196 
Loans to developers, net   75,004,428    73,851,996 
Interest receivable on loans to developers   4,828,345    2,867,914 
Other current assets   2,155,884    937,645 
Total current assets   82,819,482    79,356,751 
Property, equipment, software, website, and intangible assets, net   942,854    971,607 
Other assets   -    42,603 
Total assets  $83,762,336   $80,370,961 
Liabilities and Stockholders’ Deficit          
Current liabilities:          
Accounts payable and accrued expenses  $2,348,246   $4,602,116 
Accrued interest on limited recourse obligations   4,264,856    2,251,926 
Limited recourse obligations, net   63,422,922    53,124,759 
Revolving credit facility   -    10,460,752 
Convertible notes, net of discount of $267,254 and $368,526   3,339,746    3,238,474 
Short-term notes payable   11,617,750    8,085,257 
Total current liabilities   84,993,590    81,763,284 
Long-term notes payable   829,100    - 
Other liabilities   128,835    136,819 
Total liabilities   85,951,525    81,900,103 
Commitments and contingencies (See Note 12)          
Stockholders’ equity:          
Common stock, no par, 5,000,000 shares authorized, 2,133,465 and 2,102,720 issued and outstanding   11,102,809    10,564,771 
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   1,907,821    1,802,895 
Accumulated deficit   (22,770,785)   (21,467,774)
Stock subscription receivable   (560)   (560)
Total stockholders’ deficit   (2,189,189)   (1,529,142)
Total liabilities and stockholders’ deficit  $83,762,336   $80,370,961 

 

See accompanying notes to Condensed Consolidated Financial Statements

 

F-26

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Operations

 

   Six Months Ended June 30, 
   2020   2019 
Non-interest revenue:          
Origination fees  $1,552,929   $1,216,642 
Loan servicing revenue   845,695    752,162 
Total non-interest revenue   2,398,624    1,968,804 
Net interest income:          
Interest income   5,210,695    2,854,020 
Interest expense   (3,968,122)   (2,245,280)
Net interest income   1,242,573    608,740 
Net revenue   3,641,197    2,577,544 
Cost of revenue   (320,372)   (328,706)
Gross profit   3,320,372    2,248,838 
Operating expenses:          
General and administrative   1,465,993    940,396 
Sales and customer support   1,293,443    1,264,973 
Development   402,005    356,836 
Regulatory   172,352    189,068 
Marketing and promotions   443,067    591,799 
Total operating expenses   3,776,860    3,343,072 
Loss from operations   (456,035)   (1,094,234)
Interest expense   846,976    1,018,025 
Net loss  $(1,303,011)  $(2,112,259)

 

See accompanying notes to Condensed Consolidated Financial Statements

 

F-27

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Stockholders’ Deficit

 

   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’ 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)
Shares issued in the 2019 Common Stock Offering, net of offering costs   -    -    -    -    214,535    3,073,307    -    -    -    3,073,307 
Shares issued upon conversion of convertible notes   -    -    -    -    147,663    1,348,821    -    -    -    1,348,821 
Exercise of stock options   -    -    -    -    7,937    17,379    -    -    -    17,379 
Share-based compensation expense and warrants   -    -    -    -    -    -    318,545    -    -    318,545 
Beneficial conversion feature on sale of convertible notes                                 400,778              400,778 
Net loss   -    -    -    -    -    -    -    (3,837,266)   -    (3,837,266)
Stockholders’ deficit as of December 31, 2019   747,373   $4,962,435    568,796   $2,609,091    2,102,720   $10,564,771   $1,802,895   $(21,467,774)  $(560)  $(1,529,142)
Shares issued in the 2020 Common Stock Offering, net of offering costs   -    -    -    -    30,745    538,038    -    -    -    538,038 
Share-based compensation expense and warrants   -    -    -    -    -    -    104,926    -    -    104,926 
Net loss   -    -    -    -    -    -    -    (1,303,011)   -    (1,303,011)
Stockholders’ deficit as of June 30, 2020   747,373   $4,962,435    568,796   $2,609,091    2,133,465   $11,102,809   $1,907,821   $(22,770,785)  $(560)  $(2,189,189)

 

See accompanying notes to Condensed Consolidated Financial Statements

 

F-28

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Cash Flows (unaudited)

 

   Six Months Ended June 30, 
   2020   2019 
Cash flows from operating activities          
Net loss  $(1,303,011)  $(2,112,259)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   271,273    254,269 
Share-based compensation   104,926    74,634 
Noncash interest expense   133,772    97,587 
Loss (gain) on sale of real estate owned   -    - 
Origination of loans held for sale   (1,060,410)   (6,478,955)
Proceeds from sales of loans held for sale   1,968,800    6,478,955 
Conversion of beneficial interests   -    198,723 
Changes in operating assets and liabilities:          
Other assets   (249,456)   36,634 
Interest receivable on loans to developers   (1,955,959)   (2,769,347)
Accounts payable and accrued expenses   (2,261,854)   565,740 
Accrued interest on limited recourse obligations   2,012,930    2,192,469 
Net cash used in operating activities   (1,840,077)   (2,593,030)
Cash flows from investing activities          
Loan payments to developers   (33,490,056)   (33,864,787)
Repayments of loans from developers   29,400,490    20,236,326 
Proceeds from sale of properties held for sale   279,180    301,067 
Purchases of computer equipment and furniture and fixtures   (36,626)   (11,757)
Payments of software and website development costs   (205,894)   (276,489)
Net cash used in investing activities   (4,052,906)   (13,615,640)
Cash flows from financing activities          
Proceeds from limited recourse obligations   58,508,193    33,802,754 
Repayments of limited recourse obligations   (47,889,960)   (20,236,326)
Payment of deferred financing costs   -    (10,000)
Borrowings from the revolving credit facility   3,069,028    24,309,980 
Repayments on the revolving credit facility   (13,562,280)   (24,522,291)
Proceeds from issuance of short-term notes payable   27,966,723    9,686,010 
Repayments of short-term notes payable   (24,434,230)   (6,410,250)
Proceeds from  Paycheck Protection Program loan   829,100    - 
Proceeds from Regulation A+ common stock offering, net of offering costs   538,038    3,213,844 
Exercise of stock options   -    3,740 
Repayments of shareholder loan   -    (100,000)
Net cash provided by financing activities   5,024,612    17,186,827 
Net increase (decrease) in cash   (868,371)   (978,157)
Cash as of beginning of the year   1,699,196    1,069,392 
Cash as of end of the year  $830,825   $2,047,549 
Supplemental cash flow disclosures:          
Cash paid for interest  $808,143   $659,602 

 

F-29

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business

 

The terms "we," "our," “GROUNDFLOOR,” 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 its 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 its name to Groundfloor Finance Inc. The accounting effects of these conversions were 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 and Groundfloor Real Estate 2 LLC were created for the purpose of financing real estate in any state. 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.

 

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.

 

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 $1,300,000 in equity financing, see Note 12, “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.

 

F-30

 

 

GROUNDFLOOR FINANCE INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

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 may simultaneously enter into loan servicing agreements under which it acquires the right to service the loans. The Company calculates a gain or loss on a whole loan sale based on the net proceeds from the whole loan sale, less the carrying value of the loans sold. All unamortized origination fees incurred in the origination process are recognized directly to Consolidate