IRNS Ironstone Group Inc (CE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Activities

Ironstone Group, Inc. and subsidiaries purchases business interests where the Company has a relationship and influence; examples include being a current or prior board of director member, providing seed level capital, and serving in an advisory capacity. Currently Ironstone Group, Inc. is seeking appropriate business combination opportunities. Ironstone Group, Inc, (“Ironstone” or the “Company”) a Delaware corporation, was incorporated in 1972.

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of Ironstone Group, Inc. and its subsidiaries, AcadiEnergy, Inc., Belt Perry Associates, Inc., DeMoss Corporation, and TaxNet, Inc. (collectively the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.

Basis of Presentation

The unaudited condensed consolidated financial statements included herein have been prepared by the Company in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with U.S. GAAP, have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Company as of September 30, 2022 and December 31, 2021, the results of its operations for the three month periods ended September 30, 2022 and September 30, 2021 and nine months ending September 30, 2022 and September 30, 2021 and its cash flows for the nine month periods ended September 30, 2022 and September 30, 2021. The results of operations for the periods presented are not necessarily indicative of those that may be expected for the full year. The condensed consolidated financial statements presented herein have been prepared by management, without audit by independent auditors who do not express an opinion thereon and does not include all disclosures required for annual periods. The last audited annual report on Form 10-K was for the fiscal year ended December 31, 2014.

There have been no significant changes in the Company’s significant accounting policies from those were disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Going Concern

These financial statements contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. Ironstone Group has incurred losses and negative cash flows from operations over the last ten years. The Company has operated in the past principally with the assistance of loans from private institutions and related party individuals. The on-going accrual of unpaid interest on external and related party debt, excluding the LOC, continues to increase the financial risk to the Company as a going concern. Conversion of a material portion of the outstanding debt to equity will help alleviate such financial pressure. The financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Marketable and Non-Marketable Securities

Marketable and non-marketable securities have been classified by management as available for sale in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320, marketable securities are recorded at fair value and any unrealized gains and losses are excluded from earnings and reported as a separate component of stockholders’ equity until realized. The fair value of the Company’s marketable securities and investments at September 30, 2022 and December 31, 2021 are based on quoted market prices. For the purpose of computing realized gains and losses, cost is identified on a specific identification basis. For marketable securities for which there is an other-than-temporary impairment, an impairment loss is recognized as a realized loss, and related adjustments are not made for recovery in value. The Company has not realized any such impairment losses to date.

IRONSTONE GROUP, INC. AND SUBSIDIARIES

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1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Securities determined to be non-marketable by the Company do not have readily determinable fair values. The Company estimates the fair value of these instruments using various pricing models and the information available to the Company that it deems most relevant. Among the factors considered by the Company in determining the fair value of financial instruments are discounted anticipated cash flows, the cost, terms and liquidity of the instrument, the financial condition, operating results and credit ratings of the issuer or underlying company, the quoted market price of publicly traded securities with similar duration and yield, the Black-Scholes Options Valuation methodology adjusted for active market, the share price of recent round of financings by an outsider, and other considerations on a case-by-case basis and other factors generally pertinent to the valuation of financial instruments.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made in the financial statements relate to the valuation of the Company’s non-marketable investments. Actual results could differ from those estimates.

Income Taxes

The Company and its wholly owned subsidiaries file a consolidated federal income tax return. Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred income taxes. Deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Deferred income taxes are also recognized for net operating loss carryforwards that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As of September 30, 2022 and December 31, 2021, a full valuation allowance has been recorded to offset loss carryforwards as, in management’s opinion, there is uncertainty as to whether or not the Company will be able to generate taxable income in the future.

The Company follows the authoritative guidance on accounting for and disclosure of uncertainty in tax positions, which requires the Company to determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant taxing authority. The Company has determined that there is no effect on the financial statements from this authoritative guidance.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state, local, and foreign jurisdictions, where applicable. As of September 30, 2022, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations is from the year 2017 forward for Federal and 2016 forward for California (with limited exceptions).

Stock-Based Compensation

Ironstone recognizes the fair value of stock options granted on a straight-line basis over the requisite service period of the option grant, which is the standard vesting term of three years. The full impact of stock-based compensation in the future is dependent upon, among other things, the total number of stock options granted, the fair value of the stock options at the time of grant and the tax benefit that Ironstone may or may not receive from stock-based expenses. Additionally, stock-based compensation requires the use of an option-pricing model to determine the fair value of stock option awards. This determination of fair value is affected by Ironstone’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include but are not limited to Ironstone’s expected stock price volatility over the term of the awards.

IRONSTONE GROUP, INC. AND SUBSIDIARIES

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1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)

Basic and Diluted Loss per Share

Basic loss per share (“EPS”) excludes dilution and is computed by dividing net income (loss) applicable to common shareholders by the weighted average number of common shares actually outstanding during the period. Diluted EPS reflects the dilution from potentially dilutive securities, except where inclusion of such potentially dilutive securities would have an anti-dilutive effect, using the average stock price during the period in the computation and because of the net loss for the periods presented.

Recent Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 introduces an explicit requirement for management to assess and provide certain disclosures if there is substantial doubt about an entity’s ability to continue as a going concern. ASU 2014-15 is effective for the annual period ending after December 15, 2016. The Company has adopted ASU 2014-15.

In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. ASU 2018-13 removes certain disclosures, modifies others and introduces additional disclosure requirements for entities. The amendments in ASU 2018-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted the new standard on January 1, 2020. The adoption did not have a material impact on the Company’s financial statements.

2. FAIR VALUE MEASUREMENTS

Fair value is defined under FASB ASC 820, “Fair Value Measurement and Disclosures”. ASC 820 defines fair value, establishes a framework for measuring fair value under U.S. GAAP and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 describes a fair value hierarchy based on three levels of inputs of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:

Level 1–Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since

valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

Level 2–Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3–Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level of input that is significant to the fair value measurement.

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2. FAIR VALUE MEASUREMENTS (continued)

The Company’s assets and liabilities that are measured at fair value on a non-recurring basis include cash, accounts payable, accrued expenses, and interest payable given their short-term nature. Furthermore, the fair value of the Company’s notes payable are initially measured at fair value given that they are estimated based on current rates that would be available for debt of similar terms.

The following tables provide information about the Company’s financial instruments measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 by the fair value hierarchy:

The following tables presents the Company’s investments measured at fair value using significant unobservable inputs (Level 3), including the valuation technique and unobservable inputs used to measure the fair value of those financial instruments:

IRONSTONE GROUP, INC. AND SUBSIDIARIES

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2. FAIR VALUE MEASUREMENTS (concluded)

The following table presents additional information about Level 3 assets measured at fair value on a recurring basis for six months ended September 30, 2022 and 2021. Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, unrealized gains or (losses) during the period for assets and liabilities within the Level 3 category presented in the tables below may include changes in fair value during the period that were attributable to both observable and unobservable inputs.

3. INVESTMENTS

TangoMe, Inc.

On March 30, 2012, the Company purchased 468,121 shares of Series A Preferred stock from related party William R. Hambrecht at $2.14 per share, resulting in a total investment of $1,000,000. For the year ended December 31, 2021 there was no valuation gain or loss for TangoMe, Inc., remaining at a valuation of $4,781,520. During the third quarter 2022, there was a 10% reduction in value (-$478,564), resulting in a valuation of $4,302,956. The investment fair value is based on using an average company valuation for TangoMe Inc. as determined by the “MESE” big data analysis system. This is the primary significant unobservable input used in the fair value measurement of the Company’s investment. 

Arcimoto, Inc.

During fiscal year 2014 the Company purchased 37,000 shares of Arcimoto, Inc. series A-1 preferred stock for $100,011.

The A-1 preferred stock was converted to common stock during 2017 prior to Arcimoto filing for its initial public offering. During 2017, prior to the initial public offering, there was a two for one stock split, increasing the shares held to 74,000. On October 2, 2015 the Ironstone Group, Inc. was granted 2,500 Arcimoto options, strike price $4.121 per share, expiration October 2, 2025. Following the two for one stock split, the options held increased to 5,000 with a $2.0605 strike price per share. On September 17, 2017, Arcimoto listed on Nasdaq. During the third quarter of 2022, 7,000 shares of Arcimoto were sold to fund operations, reducing the Arcimoto common stock holdings to 62,000 shares at September 30, 2022.

The Arcimoto closing price on September 30, 2022 was $1.38 per share, resulting in a stock holdings valuation of $85,560 and in-the-money options valuation of $0. On December 31, 2021 the closing price was $7.78 per share, representing a common stock valuation of $575,720 resulting in a mark-to-market net of executed stock sales loss of $456,522 for the nine months ended September 30, 2022. At December 31, 2021 the in-the-money options valuation was $28,598, resulting in a valuation loss of $28,598 for the nine months ended September 30, 2022.

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Buoy Health, Inc.

On March 17, 2021 the Company purchased 11,233 common shares of the private company Buoy Health, Inc. at $15.92 per share. The total value of the investment was $160,942 at September 30, 2022. During the third quarter, the holding was marked down by 10% (-$17,882) from its previous valuation of $178,824.

Aristotle

On June 10, 2022 the Company purchased 5,037 preferred shares of the private company Aristotle Inc. from CEO and Board of directors member William Hambrecht at $19.85 per share totaling $100,000. On June 16, 2022 the Company purchased 5,037 preferred shares of the private company Aristotle Inc. from its Chairman of the Board, William Mayer for at $19.85 per share totaling $19.85 per share. Aristotle’s predominant business is operating an internet based political election betting platform. The total investment of 10,074 shares was valued at $200,000 as of September 30, 2022.

4. RELATED PARTY TRANSACTIONS

On December 31, 2014 the Company combined all the various notes payable, which were issued at various times to Mr. William Hambrecht, to one note for $182,000 at 7.75% interest.

A loan was made to Ironstone Group by William Hambrecht resulting from William Hambrecht paying the interest on the Bank Letter of Credit from the time period January 2016 through March 2021. The loan from William Hambrecht interest rate is 7.75%.

On March 10, 2021 William Hambrecht loaned Ironstone Group, Inc. $300,000 at 6.0% interest rate with a March 11, 2026 maturity.

On May 27, 2022 William Hambrecht converted to common stock the entirety of the debt outstanding to him, including the aforementioned loans and related accrued interest owed by the Ironstone Properties, Inc. totaling $824,269 for 404,054 common shares of Ironstone Properties, Inc. at $2.04 per share.

On June 6, 2022 Harold Bradley, Board of Director member Ironstone Properties Inc. purchased 121,212 common shares from Ironstone Properties Inc. at $1.65 per share, totaling $200,000.

On June 10, 2022 Ironstone Properties, Inc. purchased 5,037 preferred shares of private company Aristotle Inc. from William Hambrecht, CEO at $19.85 per share totaling $100,000.

On June 16, 2022 Ironstone Properties, Inc. purchased 5,037 preferred shares of private company Aristotle Inc. from William Mayer, Chairman of the Board of Directors at $19.85 per share totaling $100,000.

5. NOTE PAYABLE

On March 31, 2012, the Company received $1,000,000 from a third party and issued a related promissory note. The note carries an 8% interest rate, per annum, and has a maturity date of March 31, 2017. Interest accrues on the balance and converts to separate notes payable on a quarterly basis. The total amounts due under this agreement, including the notes related to accrued interest, are due in full at the end of the term. The note is secured by all of the assets of the Company through an accompanying security agreement. If the Company defaults on the note or security agreement, interest would accrue at 10% per annum. The company was unable to meet its payment obligation by the prescribed deadline, therefore the interest rate stepped up to 10% and interest has been accrued using at the stepped up rate starting April 1, 2017. The gross amounts payable under the agreement as of September 30, 2022 and December 31, 2021 were $2,509,411 and $2,329,510 respectively. Ironstone Properties and the lending entity have recently verbally agreed to revised terms and maturity and are currently finalizing the terms and conditions.

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(UNAUDITED)

The scheduled maturities of notes and LOC payable outstanding as of September 30, 2021 are as follows:

6. LINE OF CREDIT ARRANGEMENT

The Company has a line of credit arrangement with First Republic Bank (the “lender”) with a borrowing limit of $350,000 with interest based upon the lender’s prime rate plus 4.5% and is payable monthly. At September 30, 2022 and December 31, 2021, interest was being paid at a rate of 7.75%. The line is guaranteed by both William R. Hambrecht, Director and Chief Executive Officer, and Robert H. Hambrecht. The line of credit is due on demand and is secured by all of the Company’s business assets. As of September 30, 2022 and December 31, 2021, the outstanding balance under the line was $348,843. The total recorded interest expense on this note for the quarter ended September 30, 2022 and quarter ended December 31, 2021 was $6,963 and $6,843 respectively.

7. STATE FRANCHISE TAXES PAYABLE

During the three months ended September 30, 2022 the Company recorded $9,135 in state franchise tax expense, and for the three months ended September 30, 2021 the Company recorded $2,358 in state franchise tax.

8. STOCKHOLDERS’ EQUITY

Common Stock

On January 2, 2014, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with new investors and existing investors (each, a “Share Purchaser” and, collectively, the “Share Purchasers”), pursuant to which, the Company issued and sold to such Share Purchasers 131,429 shares of the Company’s Common Stock, representing approximately 7% of Ironstone’s outstanding equity securities on the date of purchase, for an aggregate purchase price of $230,000.

On May 1, 2014, a third party exercised warrants for 187,296 shares of the Company’s Common Stock. As of September 30, 2014, the Company issued 187,296 shares from the warrant exercise to the third party.

On May 27, 2022, William Hambrecht, CEO converted a total of $824,269 of debt and accrued interest for 404,054 shares of Ironstone Properties, Inc. common stock at a price of $2.04 per share.

On June 6, 2022 Board of Director member Harold Bradley purchased 121,212 new issue common shares from the Company for a total of $200,000 at a price of $1.65 per share.

Treasury Stock

On September 15, 2003, the Board of Directors authorized the Company to purchase 745,536 shares of Company common stock at $0.70 per share for an aggregate purchase price of $521,875. The repurchase represented 50.11% of the issued and outstanding shares of the Company. During the year ended December 31, 2008, the Company paid $699 for fractional Treasury shares. As of September 30, 2022 and December 31, 2021, the treasury shares are held by the Company.

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Preferred Stock

The Company is authorized to issue up to five million shares of preferred stock without further shareholder approval; the rights, preferences and privileges of which would be determined at the time of issuance. No shares have been issued as of September 30, 2022 and December 31, 2021.

Stock Option Plans

On April 29, 2021 the Company is revised its existing Equity Incentive Plan. As of April 29, 2021, 175,000 options were granted under the Plan, with an exercise price of $1.99 per share, which is based on the weighted average price for the trailing six month average price and an illiquidity discount of 15%. The options vest straight line over three years and expire seven years following the grant date. The plan provides for incentive stock options to be granted at times and prices determined by the Company’s Board of Directors. The stock options are to be granted to directors, officers and employees of the Company, as well as certain consultants and other persons providing services to the Company.

Stock-Based Compensation

For the quarter ended September 30, 2022 the Company recorded stock options based compensation relating to the Equity Incentive Plan of $62,209.

Operating Earnings (Loss) Per Share

Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income

(loss) for the period by the weighted average number of common and dilutive potential common shares outstanding during the period, if dilutive. Potentially dilutive common equivalent shares are composed of the incremental common shares issuable upon the exercise of stock options. The following is the computations of the basic and diluted net income per share and from operations and the dilutive common stock equivalents for the periods presented:

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9. MANAGEMENT’S PLANS

As reflected in the accompanying financial statements, the Company has net losses and has a negative cash flow from operations. The attainment of profitable operations is dependent upon future events, including liquidity events in privately held investments in excess of purchase price, and or the profitable sale of publicly traded investments. If necessary, to provide liquidity, the Company may seek to sell additional equity securities, or convert existing privately held debt to equity, providing the debt holders are agreeable to the terms and share conversion price. The Company cannot make assurances that it will be able to complete any financing, liquidity, or debt conversion transaction, that such financing, liquidity, or debt conversion transaction will be adequate for the Company’s needs, or that a financing, liquidity or debt conversion transaction will be completed in a timely manner. Furthermore, the Company may seek to sell its marketable securities to meet its operating needs. However, the fair value of these marketable securities fluctuates and may not be adequate for the Company’s needs. The Company has extended its line of credit payment terms with the lender with similar terms to the recently expired line of credit.