UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X]
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30,
2016
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Financial
Gravity Companies, Inc.
(Exact name of registrant
as specified in its charter)
Nevada
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333-144504
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20-4057712
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(State or other jurisdiction of incorporation or organization)
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(Commission File No.)
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(IRS Employee Identification No.)
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800 N. Watters Rd., Suite 120, Allen,
Texas 75013
(Address of Principal Executive Offices)
469-342-9100
(Issuer Telephone
number)
Securities registered pursuant to Section
12(b) of the Act: None
Securities registered pursuant to Section
12(g) of the Act: Common Stock, $.001 par value
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
[_]
No
[X]
Indicate by check mark if the registrant is not required
to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes
[_]
No
[X]
Indicate by check mark whether the issuer: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes
[X]
No [_]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes [X] No [_]
Indicate by check mark if disclosures of delinquent filers pursuant
to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
of this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer
[_]
Accelerated Filer
[_]
Non-Accelerated Filer
[_]
Smaller Reporting Company
[X]
Indicate by check mark whether the registrant is a shell
company as defined in Rule 12b-2 of the Exchange Act. Yes
[_]
No
[X]
As of January 17, 2017, the aggregate market
value of the registrant’s Common Stock held by non-affiliates of the issuer was approximately $43,578,625 based on the last
sales price of the issuer’s Common Stock, as reported by OTC Markets. This amount excludes the market value of all shares
as to which any executive officer, director or person known to the registrant to be the beneficial owner of at least 5% of the
registrant’s Common Stock may be deemed to have sole or shared voting power.
The number of shares outstanding of the registrant’s Common
Stock as of January 20, 2017 was 34,862,900.
DOCUMENTS INCORPORATED BY REFERENCE
Listed below are documents incorporated herein by reference
and the part of this Report into which each such document is incorporated:
None
FINANCIAL GRAVITY COMPANIES, INC.
FORM 10-K
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Report
that are not statements of historical fact constitute “forward-looking statements.” Words such as “may,”
“seek,” “expect,” “anticipate,” “estimate,” “project,” “budget,”
“goal,” “forecast,” “anticipate,” “intend,” “plan,” “may,”
“will,” “could,” “should,” “strategy,” “believes,” “predicts,”
“potential,” “continue,” and similar expressions are intended to identify such forward-looking statements
but are not the exclusive means of identifying such statements. Although the Company believes that the current views and expectations
reflected in these forward-looking statements are reasonable, those views and expectations, and the Company’s future plans,
operations, business strategies, operating results and financial position, are inherently subject to risks, uncertainties, and
other factors, many of which are not under the Company’s control. Those risks, uncertainties, and other factors could cause
the actual results to differ materially from those in the forward-looking statements. Those risks, uncertainties, and factors (including
the risks contained in the section of this report titled “Risk Factors”) that could cause the Company’s actual
results, performance or achievements to differ materially from those described or implied in the forward-looking statements and
its goals and strategies to not be achieved. You are cautioned not to place undue reliance on forward-looking statements, which
speak only as of the date of this Report. The Company expressly disclaims any obligation to release publicly any updates or revisions
to these forward-looking statements to reflect any change in its views or expectations. The Company can give no assurances that
such forward-looking statements will prove to be correct.
PART I
Item 1. BUSINESS.
General
Financial Gravity Companies, Inc. (“Financial
Gravity” or the “Company”) was incorporated under the laws of the State of Nevada on December 5, 2005. Its principal
executive offices are located at 800 N. Watters Rd., Suite 120, Allen, Texas 75013. The Company’s telephone number is 469-342-9100.
The Company’s stock symbol is POIL.
Unless otherwise provided in footnotes,
all references from this point forward in this Report to “Financial Gravity,” “we,” “us,” “our
company,” “our,” or the “Company” refer to the combined Financial Gravity Companies, Inc. entity,
together with its subsidiaries.
Business Overview
The Company was incorporated in Nevada
on December 5, 2005 as Kat Racing, Inc. On January 4, 2013, the Articles of Incorporation were amended to change the name of the
Company to Prairie West Oil & Gas, Ltd. On July 26, 2013, the Articles of Incorporation were amended to change the name of
the Company to Pacific Oil Company. On October 31, 2016, following a reverse merger transaction (the “Merger”), the
Articles of Incorporation were amended to change the name of the Company to Financial Gravity Companies, Inc.
The accounting acquirer (legal acquiree)
in the Merger, Financial Gravity Holdings, Inc. (“Financial Gravity Holdings”), was incorporated in Texas on September
29, 2014. On the effective date of the Merger, the business of Financial Gravity Holdings became the only business of Pacific Oil
Company (currently named Financial Gravity Companies, Inc.).
Also pursuant to the Merger, each of the
shares of Financial Gravity Holdings common stock issued and outstanding prior to the Merger was automatically converted into and
exchangeable for an equivalent number of fully paid and non-assessable shares of Company common stock.
The accounting acquirer (legal
acquiree) in the reverse merger transaction, Financial Gravity Holdings, is now a subsidiary of the Company. Business Legacy,
Inc., founded in 2002, and Pollock Advisory Group, founded in 2007, were added on September 29, 2014, as subsidiaries. During
fiscal year 2015, the Company acquired as additional subsidiaries, Cloud9b2b, LLC and SASH Corporation (dba Metro Data
Processing). During fiscal year 2016, the Company acquired an additional subsidiary, Tax Coach Software, LLC. The Company and
its subsidiaries deliver a wide range of accounting, tax planning and management services to high net worth individuals and
businesses nationwide.
Organic growth has come in four key areas.
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Tax Services, including Tax Blueprints and ongoing Tax Operating system services
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Wealth Management Services
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Other Products and Services (Insurance and other miscellaneous products and services).
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All future growth is expected to come from
these four key areas, as well as through organic growth, acquisitions, and strategic alliances.
Products and Services
The following outline briefly describes Financial Gravity’s
various subsidiaries and the products and services they offer:
Financial Gravity Operations, Inc.
Financial
Gravity Operations manages operational expenses for the shared services of the subsidiaries.
Financial Gravity Tax, Inc. formerly
Business Legacy, Inc.
Financial Gravity Tax is a bookkeeping, tax planning and payroll service provider for small
companies and individuals.
Financial Gravity Wealth, Inc. formerly
Pollock Advisory Group, Inc.
Financial Gravity Wealth is a registered investment advisor and provides asset management
services.
Financial Gravity Business, LLC formerly
Cloud9b2b, LLC
Financial Gravity Business provides business consulting services to Small Business Owners that identify way
to leverage a business’ current assets (people, platforms and processes) and reduce exposure to risk, both short-term and
long-term, while simplifying the business and increasing profitability.
Financial Gravity Ventures, LLC formerly
Cloud9Accelerator, LLC
Financial Gravity Ventures holds acquired companies and business assets until they are integrated into
the main stream Financial Gravity business structure.
Sash Corporation dba Metro Data Processing
Metro Data Processing provides payroll services, software and support solutions to business owners.
Tax Coach Software, LLC
Tax Coach Software provides three primary services including monthly subscriptions to the “TaxCoach” software
system, coaching and email marketing services.
Recent Developments
On December 20, 2016, the firm of Lane
Gorman Trubitt, LLC (“Lane Gorman”) resigned as auditors of Financial Gravity Companies, Inc. This action was in response
to concerns raised by the SEC about the independence of Lane Gorman Trubitt LLC based on the firm’s involvement in the preparation
of footnote disclosures on prior audit reports for the years ended December 31, 2015 and 2014. After discussions with SEC staff
the Company and Lane Gorman determined that resignation was the most prudent action to take, in order for the Company to timely
engage a new firm and complete a new audit of the
financial statements for the
two
years ended September 30, 2016 and 2015.
On December 26, 2016, the Company engaged
the firm of Whitley Penn LLP (“Whitley Penn”) as the new independent auditors for the years ended September 30, 2016
and 2015.
Competition
The market is comprised of a very large
selection of varied suppliers that provide financial advisory, accounting, and tax needs. These include accounting firms, certified
public accountants (“CPA's”), bookkeeping businesses, estate planners, lawyers, wealth management consultants, estate
offices, private offices, banks, and large financial institutions. However, many of these firms are either too big to provide the
customized services that small business owners are seeking, are too expensive, or simply do not have the customized services that
Financial Gravity offers to meet the needs of small business owners and high net worth individuals.
Financial Gravity has a unique product
and service delivery model that has been proven to work over the past years. Financial Gravity believes that its superior products,
services and overall customer service will enable it to achieve its target sales and revenue.
In addition, Financial Gravity considers
a number of its small to medium-sized business competitors to potentially be attractive acquisition targets.
Intellectual Property
Financial Gravity maintains copyrights
or trademarks on all of its printed marketing materials, the financialgravity.com website and other web pages, and proprietary
software. Financial Gravity’s goal is to preserve its trade secrets, and operate without infringing on the proprietary rights
of other parties.
To help protect its proprietary know-how,
which is not patentable, Financial Gravity currently relies and will in the future rely on trade secret protection and confidentiality
agreements to protect its interests. To this end, Financial Gravity requires all of its employees, consultants, advisors and other
contractors to enter into confidentiality agreements that prohibit the disclosure of confidential information and, where applicable,
require disclosure and assignment to Financial Gravity of the ideas, developments, discoveries and inventions important to its
business.
Employees
As of September 30, 2016, Financial Gravity
had approximately 24 full-time employees. None of the Company’s employees are covered by a collective bargaining agreement.
Financial Gravity believes that it maintains good relations with its employees.
Legal Proceedings
From time to time, we are a party to or
otherwise involved in legal proceedings, claims and other legal matters, arising in the ordinary course of our business or otherwise.
A subsidiary of the Company is currently involved in one legal proceeding, the outcome of which will not be material to our ability
to operate or market our services, our consolidated financial position, results of operations or cash flows.
Government Regulation
The services provided by Financial Gravity,
through its subsidiaries, are extensively regulated by federal and state authorities in the United States. Financial Gravity believes
it is in compliance with federal and state qualification and registration requirements in order that it may continue to provide
services to its clients consistent with applicable laws and regulations.
Item 1A. RISK FACTORS.
Our limited operating history may not
serve as an adequate basis to judge our future prospects and results of operations
. Financial Gravity has a relatively limited
operating history. Our limited operating history and the unpredictability of the wealth management industry make it difficult for
investors to evaluate our business. An investor in our securities must consider the risks, uncertainties and difficulties frequently
encountered by companies in rapidly evolving markets.
We will need additional
financing to implement our business plan.
The Company will need additional financing to fully implement its business plan in
a manner that not only continues to expand an already established direct-to-consumer approach, but also allows the Company to establish
a stronger brand name in all the areas in which it operates. In particular, the Company will need additional financing to:
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Effectuate its business plan and further develop its product and service lines;
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Expand its facilities, human resources, and infrastructure; and
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Increase its marketing efforts and lead generation.
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There are no assurances that additional
financing will be available on favorable terms, or at all. If additional financing is not available, the Company will need to reduce,
defer or cancel development programs, planned initiatives and overhead expenditures. The failure to adequately fund its capital
requirements could have a material adverse effect on the Company’s business, financial condition and results of operations.
Moreover, the sale of additional equity securities to raise financing will result in additional dilution to the Company’s
stockholders, and incurring additional indebtedness could involve the imposition of covenants that restrict the Company’s
operations.
Our products and services are subject
to changes in applicable laws and regulations.
The Company’s business is particularly subject to changing
federal and state laws and regulations related to the provision of financial services to consumers. The Company’s continued
success depends in part on its ability to anticipate and respond to these changes, and the Company may not be able to respond in
a timely or commercially appropriate manner. If the Company fails to adjust its products and services in response to changing legal
and/or regulatory requirements, the ability to deliver its products and services may be hindered, which in turn could have an adverse
effect on the Company’s business, financial condition and results of operations.
We may continue
to encounter substantial competition in our business.
The Company believes that existing and new competitors will
continue to improve their products and services, as well as introduce new products and services with competitive price and performance
characteristics. The Company expects that it must continue to innovate, and to invest in product development and productivity improvements,
to compete effectively in the several markets in which the Company participates. The Company’s competitors could develop
a more efficient product or service or undertake more aggressive and costly marketing campaigns than those implemented by the Company,
which could adversely affect the Company’s marketing strategies and have an adverse effect on the Company's business, financial
condition and results of operations.
Important factors
affecting the Company's current ability to compete successfully include:
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lead generation and marketing costs;
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service delivery protocols;
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branded name advertising; and
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product and service pricing.
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In periods of reduced demand for the Company's
products and services, the Company can either choose to maintain market share by reducing product and service pricing to meet the
competition, or maintain its product and service pricing, which would likely sacrifice market share. Sales and overall profitability
may be reduced in either case. In addition, there can be no assurance that additional competitors will not enter the Company's
existing markets, or that the Company will be able to continue to compete successfully against its competition.
We may not successfully
manage our growth.
Our success will depend upon the expansion of our operations and the effective management of our growth,
which will place a significant strain on our management and on our administrative, operational and financial resources. To manage
this growth, we must expand our facilities, augment our operational, financial and management systems, and hire and train additional
qualified personnel. If we are unable to manage our growth effectively, our business would be harmed.
We rely on key executive officers, and
their knowledge of our business and technical expertise would be difficult to replace.
We are highly dependent on our executive
officers. If one or more of the Company's senior executives or other key personnel are unable or unwilling to continue in their
present positions, the Company may not be able to replace them easily or at all, and the Company’s business may be disrupted.
Competition for senior management personnel is intense, the pool of qualified candidates is very limited, and we may not be able
to retain the services of our senior executives or attract and retain high-quality senior executives in the future. Such failure
could have a material adverse effect on the Company's business, financial condition and results of operations.
We may never pay dividends to our common
stockholders.
The Company currently intends to retain its future earnings to support operations and to finance expansion;
accordingly, the Company does not anticipate paying any cash dividends in the foreseeable future.
The declaration, payment and amount of
any future dividends on common stock will be at the discretion of the Company's Board of Directors, and will depend upon, among
other things, earnings, financial condition, capital requirements, level of indebtedness and other considerations the Board of
Directors considers relevant. There is no assurance that future dividends will be paid on common stock or, if dividends are paid,
the amount thereof.
Our common stock is quoted through the
OTC Markets, which may have an unfavorable impact on our stock price and liquidity.
The Company’s common stock
is quoted on the OTC Markets, which is a significantly more limited market than the New York Stock Exchange or NASDAQ. The trading
volume may be limited by the fact that many major institutional investment funds, including mutual funds, follow a policy of not
investing in OTC Markets stocks and certain major brokerage firms restrict their brokers from recommending OTC Markets stocks because
they are considered speculative and volatile.
The trading volume of the Company’s
common stock has been and may continue to be limited and sporadic. As a result, the quoted price for the Company’s common
stock on the OTC Markets may not necessarily be a reliable indicator of its fair market value.
Additionally, the securities of small capitalization
companies may trade less frequently and in more limited volume than those of more established companies. The market for small capitalization
companies is generally volatile, with wide price fluctuations not necessarily related to the operating performance of such companies.
Our common stock
is subject to price volatility unrelated to our operations.
The market price of the Company’s common stock
could fluctuate substantially due to a variety of factors, including market perception of the Company’s ability to achieve
its planned growth, operating results of the Company and of other companies in the same industry, trading volume in the Company’s
common stock, changes in general conditions in the economy and the financial markets or other developments affecting the Company
or its competitors.
Our common stock
is classified as a “penny stock.”
Rule 3a51-1 of the Securities Exchange
Act of 1934 establishes the definition of a “penny stock,” for purposes relevant to us, as any equity security that
has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited
number of exceptions which are not available to us. It is likely that the Company’s common stock will be considered to be
a penny stock for the immediately foreseeable future.
For any transaction involving a penny stock,
unless exempt, the penny stock rules require that a broker or dealer approve a person’s account for transactions in penny
stocks and the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and
quantity of the penny stock to be purchased. In order to approve a person’s account for transactions in penny stocks, the
broker or dealer must obtain financial information and investment experience and objectives of the investor, make a reasonable
determination that transactions in penny stocks are suitable for that person, and make a reasonable determination that that person
has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also provide
disclosure to its customers, prior to executing trades, about the risks of investing in penny stocks in both public offerings and
in secondary trading, the commissions payable to both the broker-dealer and the registered representative, and the rights and remedies
available to an investor in cases of fraud in penny stock transactions.
Because of these
regulations, broker-dealers may not wish to furnish the necessary paperwork and disclosures and/or may encounter difficulties in
their attempt to buy or sell shares of the Company’s common stock, which may in turn affect the ability of Company stockholders
to sell their shares.
Accordingly, the penny stock classification
adversely affects any market liquidity for the Company’s common stock, and subjects the shares to certain risks associated
with trading in penny stocks. These risks include difficulty for investors in purchasing or disposing of shares, difficulty in
obtaining accurate bid and ask quotations, difficulty in establishing the market value of the shares, and a lack of securities
analyst coverage.
Item 1B. UNRESOLVED STAFF COMMENTS.
On October 12, 2016, the Company submitted
a Form 8-K in regards to the acquisition of Financial Gravity Holdings by Pacific Oil Company, effected as a reverse merger. On
November 8, 2016, the staff of the Securities and Exchange Commission (the “
Commission
”) sent the Company a
comment letter to which the Company responded on November 23, 2016. The Commission sent the Company a new comment letter on December
12, 2016 to which the Company responded on January 4, 2017, and also via supplemental response on January 6, 2017.
As of January 25, 2017, the Commission and
the Company have completed discussions regarding the Form 8-K filed on October 12, 2016. The Company will file an amended Form
8-K promptly following the completion of this Form 10-K and incorporate therein the audit report for the 2 years ended September
30, 2016 and 2015.
Item 2. PROPERTIES.
The Company’s corporate offices are
located at 800 N Watters Road, Suite 120, Allen, Texas 75013, where Financial Gravity has 4,015 square feet of office space under
lease. Pursuant to an office lease dated December 3, 2013, Financial Gravity is required to make monthly lease payments of $6,995
per month (including operating expenses). The lease expires on October 31, 2018.
Metro Data Processing’s offices
are located at 1545 S. Harvard Avenue, Tulsa, Oklahoma 74112, where the company occupies 1,590 square feet of office space under
lease. Pursuant to an office lease dated September 10, 2015, Metro Data Processing is required to make monthly lease payments
of $1,182 per month (including operating expenses). The lease automatically renews every 12 months.
Tax Coach Software’s offices
are located at 2619 Erie Ave., Suite 2D, Cincinnati, Ohio 75208. The company makes monthly lease payments of $1,250 per month
(including operating expenses) pursuant to a month to month lease agreement with a 30 day notice to terminate.
Item 3. LEGAL PROCEEDINGS.
From time to time, we are a party to or
otherwise involved in legal proceedings, claims and other legal matters, arising in the ordinary course of our business or otherwise.
A subsidiary of the Company is currently involved in one legal proceeding, the outcome of which will not be material to our ability
to operate or market our services, our consolidated financial position, results of operations or cash flows.
See Note 9 to the consolidated financial
statements in Part II, Item 8 of this Form 10-K for more information.
Item 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES.
Market Information
The Company’s Common Stock is currently
traded in the over-the-counter market and quoted under the symbol POIL. The following are the high and low sales prices for the
Company’s Common Stock for the periods reflected below:
Fiscal Year Ended September 30, 2015
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High
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Low
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First Quarter
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$.02
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$.01
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Second Quarter
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$2.00
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$.00
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Third Quarter
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$1.49
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$.01
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Fourth Quarter
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$1.00
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$.01
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Fiscal Year Ended September 30, 2016
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High
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Low
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First Quarter
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$1.00
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$.02
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Second Quarter
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$1.00
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$.01
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Third Quarter
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$1.00
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$.01
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Fourth Quarter
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$.01
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$.01
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The above prices reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not represent actual transactions.
Holders
The approximate number of stockholders
of record of the Company’s Common Stock on September 30, 2016 was 1,689.
Dividends
The Company has never paid any cash dividends
on its common stock, and it is anticipated that none will be paid in the foreseeable future.
Recent Sales of Unregistered Securities
Issuances by Pacific Oil Company
Pursuant to the Merger Agreement, effective
September 30, 2016 we issued to the former stockholders of Financial Gravity Holdings an aggregate of 32,248,183 shares of the
Company’s common stock. Such securities were not registered under the Securities Act of 1933. The issuance of these shares
was exempt from registration pursuant to Section 4(2) and Rule 501(a) of Regulation D promulgated by the Commission under the
Securities Act of 1933. We made this determination based on the representations of each former stockholder of Financial Gravity
who voted with respect to the Merger, which included, in pertinent part, that such stockholder is acquiring the shares of the
Company’s common stock for his, her or its sole account, for investment and not with a view to the resale or distribution
thereof, and that such stockholder either (A) is an “accredited investor,” as defined in Regulation D of the Securities
Act, (B) has such knowledge and experience in financial and business matters that the stockholder is capable of evaluating the
merits and risks of receiving the shares of the Company’s common stock, or (C) has appointed an appropriate person to act
as the stockholder’s purchaser representative in connection with evaluating the merits and risks of receiving the shares
of the Company’s common stock. Appropriate legends have been affixed to all shares of the Company’s common stock to
be issued in such transaction.
Issuances by Financial Gravity Holdings
During the year ended September 30, 2015, Financial
Gravity Holdings, a subsidiary of the Company, issued 21,150,000 shares of common stock to the founding members of Financial Gravity
Holdings and also 5,625,000 shares of common stock to a number of accredited investors pursuant to a private placement, for an
aggregate price of approximately $1,875,000. Also during the year ended September 30, 2015, Financial Gravity Holdings issued 150,000
common shares to two non-employee directors (total of 300,000 shares), in lieu of stock option grants. Also during the year ended
September 30, 2015, Financial Gravity Holdings acquired 100% of the capital stock of Cloud9 Holdings Company. In consideration
of such purchase, the Company issued 1,314,477 shares of Company common stock to the selling shareholder (this number of
shares reflects the three-for-one (3:1) forward split effective March 25, 2016). The selling stockholder in the transaction was
Mr. Paul Boyd, then serving as Chief Operating Officer of the Company. The shares of Company common stock, which served as the
consideration in the transaction, had an approximate value of $438,159.
During the year ended September 30, 2016,
Financial Gravity Holdings issued an additional 785,000 shares of common stock to a number of accredited investors pursuant to
the private placement, for an aggregate price of $535,000. In January 2016 one of the founding members of Financial Gravity Holdings
forfeited 2,926,294 common shares. Also during the year ended September 30, 2016, Financial Gravity Holdings acquired 100% of
the capital stock of Tax Coach Software, LLC. In consideration of such purchase, Financial Gravity Holdings issued 6,000,000 shares
of common stock to the sellers.
Subsequent to September 30, 2016 an aggregate
of 350,000 shares of Company common stock have been sold.
The sales of the securities identified above
were made pursuant to privately negotiated transactions that did not involve a public offering of securities and, accordingly,
the Company believes that these transactions were exempt from the registration requirements of the Securities Act pursuant to Section
4(2) thereof. Each investor represented that such investor either (A) is an “accredited investor,” (B) has such knowledge
and experience in financial and business matters that the investor is capable of evaluating the merits and risks of acquiring the
shares of Financial Gravity Holdings common stock, or (C) appointed an appropriate person to act as the investor’s purchaser
representative in connection with evaluating the merits and risks of acquiring the shares of Financial Gravity Holdings common
stock. The investors received written disclosures that the securities had not been registered under the Securities Act and that
any resale must be made pursuant to a registration or an available exemption from such registration. All of the foregoing securities
are deemed restricted securities for purposes of the Securities Act.
The Financial Gravity Holdings option grants
were effected pursuant to Rule 701 promulgated under the Securities Act.
Repurchases of Equity Securities
The Company did not repurchase any of its
equity securities during the years ended September 30, 2016 or 2015.
Item 6. SELECTED FINANCIAL DATA.
Not applicable.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
.
Forward-Looking Statements
The following Management’s
Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand
our historical results of operations during the periods presented and our financial condition. This MD&A should be read in
conjunction with our financial statements and the accompanying notes, and contains forward-looking statements that involve risks
and uncertainties and assumptions that could cause our actual results to differ materially from management’s expectations.
See the sections entitled “Forward-Looking Statements” and “Risk Factors” above.
Plan of Operations
Financial
Gravity Companies, Inc., based in Allen, Texas, was formed specifically to be the parent company of several subsidiaries that
provide integrated tax, business, and financial solutions. Financial Gravity’s clients include small businesses, small
business owners and high net worth individuals. The Company’s services are focused on helping clients make more money
and build wealth, most often with tax savings, lowering costs and improving efficiency. In addition to expanding through
client procurement and organic growth, Financial Gravity intends to make a number of acquisitions. The primary acquisition
targets currently include accounting, bookkeeping, financial advisory firms. In fiscal year 2015 the Company acquired two
firms: Cloud9 Holdings Company (and its subsidiary Cloud9b2b) which became Financial Gravity Business and MDP (a Tulsa, OK
payroll processor). In fiscal year 2016 the Company acquired Tax Coach Software. The Company is actively identifying
additional potential acquisition candidates to fuel more rapid growth.
Financial Gravity’s Subsidiaries:
Financial Gravity Operations, Inc.
This entity was created
to raise capital to take the company public, it will be eliminated now that the public transaction is complete. This entity integrates
the delivery of Financial Gravity Tax, Business, and Wealth Solutions to our growing customer base around the country. This integration,
impossible to do for the small business marketplace until now, is what sets Financial Gravity apart from our peers. This integration
will now be handled by Financial Gravity Companies, Inc.
Financial Gravity Tax
Financial Gravity
has developed a precise procedure that has proven to be very successful in delivering lower taxes, higher profit, and greater wealth
for small business owners.
The process begins
with an extensive and comprehensive review of the client’s needs. This assessment sets the requirements for the program that
is subsequently developed. Next, Financial Gravity designs a unique "Tax Blueprint®" which identifies several strategies
for lowering the client's taxes.
The second step is
to use the client’s custom Tax Blueprint® to build that business entity and documentation that captures the identified
savings. This is called their Tax Operating System® (TOS). This process is repeated as required and tuned for optimal efficiency
thus ensuring that the client receives the best service and optimal solutions in the phases of the business cycle during the year.
Clients continue to pay a monthly or weekly subscription fee as part of their TOS service for ongoing tax planning, tax return
preparation, payroll and bookkeeping services.
This business unit
promises clients they’ll pay the lowest legal, moral and ethical taxes possible. Tax savings is the “tip of the spear”
in all our offerings. No company has ever successfully married tax, wealth and business solutions together for Small Business Owners
(SBOs) and high net worth individuals. Powered by our no-risk “2x Promise” (we guarantee to find double our initial
fee in tax savings), clients are quick to sign up for proactive tax planning. Lowering their personal tax expenses then fuels insurance,
wealth and business services sales. These multi-tiered sales provide a 4-8 times multiple to a typical accounting or bookkeeping
practice.
SBO’s look
for two things from a typical CPA and bookkeeping firm, 1. Lower personal income taxes. 2. Numbers that help them run/grow their
business better. There is no national firm that provides these two services at any level. Our tax planning sets us apart from typical
accounting and tax preparation firms. We look forward to setting up a client’s business to be tax efficient. The typical
service model employed by CPA firms is oriented more toward compliance, which is the recording of historical data. These providers
work on historical records instead of looking forward to proactively plan. SBOs are growing more and more frustrated with accountants
who “put numbers in boxes” when what’s truly needed is a partner to help advise them in how to be more efficient
in their business. Many SBOs can’t read an P/L or Balance Sheet and even when the can the data is too old to act on. As technology
speeds up the pace of business real time data is becoming more important. Most CPAs don’t even calculate tax savings for
their clients, asking them to produce unique data to each client is outside the factory mentality of the industry. Our average
tax savings is over $20,000 per year per business owner. Financial Gravity Tax is pursuing several M&A and/or partnership opportunities
to deliver on the product Bookkeeping with Purpose®, that will help deliver the promised tax savings and producer actionable
real time data.
Financial Gravity Wealth
After saving thousands
in taxes, clients are happy to trust us with managing their wealth, especially when treated to a different wealth management experience.
Financial Gravity Wealth is a Registered Investment Advisory (RIA) firm. An RIA is an advisor or firm engaged in financial planning
and wealth management business and is registered either with the Securities and Exchange Commission (SEC) or state securities authorities.
An RIA has a fiduciary duty to his or her clients, which means that he or she has a fundamental obligation to provide suitable
investment advice and always act in the clients' best interests.
The recent regulatory
changes where the Department of Labor was given power over retirement accounts enhances the RIA’s fiduciary model over the
traditional Broker/Dealer suitability standard. While the status of this Department of Labor rule is uncertain following the election
we are positioned to do what we have always done, control advisor fees and reduce one of the biggest “fees” in a mutual
fund and ETF portfolio, which is “tax friction”. These taxes erode about 1% per year in performance.
Only 5% of all financial
planners are RIAs. 95% prefer the higher fees and commissions paid to brokers and broker/dealers. The advantage of the RIA model
is lower cost to the client. Also, since RIAs are not compensated by commissions on financial products, their advice is considered
less biased and more accurate. Coupled with tax savings, this makes our firm very attractive to the most profitable clients.
Financial Gravity Business
The complexity of
Advanced Tax Planning next fuels Financial Gravity Business services. The first product that was developed with a partner is Advisor
Architect, this product is designed to help financial advisors and accountants run their businesses better. We intend to test the
service offering / coaching program with the first two markets we are the most experienced with and then roll it out to other industries
at a later date. Clients spend some of their tax savings from Financial Gravity Tax planning for these services, rendering them
“cost neutral”.
We have also developed
our Partner Programs that teach financial advisors how to serve an underserved community, the Small Business Owner. Financial Gravity
Business is the only non-product centric business system for financial advisors that helps them serve the needs of the small business
owner without needing to sell a financial services product like a life insurance policy or a 401k.
To solve the industry
problem discussed in the Financial Gravity Tax section we have created the Certified Tax Master® designation and partner program
for CPA’s and EA’s. We expect to roll this out in early 2017. There is no business like this of its kind. This was
created in Financial Gravity Business, but will be sold and build revenue in the Tax Coach Software platform.
Financial Gravity Ventures
Employs our M&A
strategy to acquire talent and build wealth for Financial Gravity Companies, Inc. and acquired companies. As mentioned earlier,
Financial Gravity is pursuing several opportunities.
Tax Coach Software
Tax Coach Software (TCS)
was a key acquisition in fiscal year 2016. TCS supports over 550 CPA and Enrolled Agent professionals, training them to add crucial
tax planning services to support its clients. Not only did this acquisition bring high-end tax planning to Financial Gravity,
but the TCS customer base adds significant business development opportunities for Financial Gravity Wealth. We developed the Certified
Tax Master® for this group and rolled out new client systems in mid-2016.
Sash Corporation
Sash Corporation dba
Metro Data Processing was the Company’s first acquisition and Metro Data Processing is based in Tulsa, OK. The company has
been a fixture in payroll processing in the Tulsa area for years and should prove to be a compelling storefront to begin selling
additional tax services.
We go to market primarily
via Financial Advisors and accountants. Our Partner Program is proven to provide financial professionals with recognized trademarked
service offerings, business support, and marketing materials. These trademarks/servicemarks include Financial Gravity®, Tax
Blueprint®, Tax Operating System®, Bookkeeping with Purpose®, Diversity Trinity®, Investor Peace University®,
Factor Based Investing™, Fractional Family Office®, TaxCoach™, Certified Business Strategist™ offerings,
allowing them to add additional value to their clients and their business.
Significant effort
and investment capital has been incurred by the Company over the past few years in order to attract and maintain a qualified and
capable staff, develop proprietary solutions, and implement systems, procedures, and infrastructure to execute the business plan
on a large scale. Given the short time frame this current market opportunity has existed and due to the complexity of the model
we have a significant competitive advantage over others who may try to execute the same business plan.
Results of Operations for the year ended September 30, 2016
compared to the year ended September 30, 2015
Revenues
For the year ended September 30, 2016, revenue
increased $1,447,198 or 110.5% to $2,756,999 from $1,309,801 for the year ended September 30, 2015. The increase in revenue reflects
increase in service income, primarily new customer product and service sales, which more than doubled over the same period. Revenues
from Tax Services increased over 90%, while the acquisition of Tax Coach Software, LLC added revenues of $394,814.
Operating Expenses
Professional services expenses include
merger costs, legal expense, professional fees, contract labor, business consulting, computer and internet expense, and earnest
money forfeited. Professional services expenses increased $785,073 or 173.6% to $1,237,221 for the year ended September 30, 2016
from $452,148 for the year ended September 30, 2015. This 173.6% increase is primarily attributable to the acquisition of TaxCoach
Software, LLC which added $493,484 in expenses.
Depreciation and amortization expenses
include depreciation on fixed assets and amortization of definite lived intangibles. Depreciation and amortization expenses increased
$153,258 to $153,547 for the year ended September 30, 2016 from $289 for the year ended September 30, 2015. The increase is primarily
due to the acquisition of Tax Coach that gave rise to an additional $1,094,702 in goodwill, $583,478 in intangible assets and $141,080
in fixed assets. These intangible and fixed assets had a corresponding depreciation and amortization expense in the year ended
September 30, 2016 of $151,122.
Impairment of goodwill of $662,967 was made
of the impairment of goodwill from the acquisitions of Cloud9B2B and MDP.
General and administrative expenses decreased
$2,698 or 0.7% to $408,537 for the year ended September 30, 2016 from $411,235 for the year ended September 30, 2015. General and
Administrative activity remained relatively stable from fiscal 2015 to fiscal 2016.
Management fees – related party expenses
increased $57,676 or 37.1% to $213,333 for the year ended September 30, 2016 from $155,657 for the year ended September 30, 2015.
During the year ended September 30, 2015, the Company entered into a consulting agreement with BW3, LLC, which is owned by John
Pollock. BW3, LLC services include, but not limited to, providing weekly Podcasts, radio interviews, public speaking, conference
contribution, biweekly blogs, content for the newsletters, and other services. The variance is primarily because the fees were
paid for the twelve months ended September 30, 2016 vs only nine months for the year ended September 30, 2015.
Marketing expenses increased $169,498
or 72.8% to $402,402 for the year ended September 30, 2016 from $232,904 for the year ended September 30, 2015. During the year
ended September 30, 2016, the Company began doing Press Releases and advertising on Facebook. In addition, the Company engaged
several consultants to assist leadership and build new business funnels in an effort to continue to grow revenue streams.
Salaries and wages expenses increased $783,146
or 82.7% to $1,730,278 for the year ended September 30, 2016 from $947,132 for the year ended September 30, 2015. During the year
ended September 30, 2016, the number of clients increased which resulted in higher commissions paid. Furthermore, commission rates
increased in 2016 as sales representatives moved from salary plus commission to 100% commission.
The Company experienced a decrease in
its bottom line of $1,191,255 or 126.2% to a net loss of $2,135,139 for the year ended September 30, 2016 from a net loss of $943,884
for the year ended September 30, 2015, primarily attributable to the reasons noted above.
Significant Accounting Policies
Certain critical accounting policies affect
the more significant judgments and estimates used in the preparation of Financial Gravity’s consolidated financial statements.
These policies are contained in Note 1 to the consolidated financial statements.
Use of Estimates and Assumptions
.
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues
and expenses during the reported period. Actual results could differ from those estimates.
Revenue Recognition and Accounts
Receivable
.
Investment management fees are recognized
as services are provided by the Company. Investment management fees include fees earned from assets under management by providing
professional services to manage clients’ investments.
Services income is recognized as consulting
and other professional services are performed by the Company.
Commission revenue is derived from the
sale of premiums on life insurance policies held by third parties. The revenue is recognized at the time the policy is issued.
Revenue represents gross billings less
discounts, net of sales tax, as applicable. Amounts invoiced for work not yet completed are shown as deferred revenue in the accompanying
consolidated balance sheets.
Trade accounts receivable are carried at
the invoiced amount less estimate made for doubtful accounts based on management’s review of outstanding balances. The collectability
of the Company’s accounts receivable is reviewed on an ongoing basis, using historical payment trends and review of specific
accounts. Accounts receivable are written off after all reasonable collection efforts have been exhausted and when management determines
the amounts to be uncollectible. Recoveries of receivables previously written off are recorded when received.
In the normal course of business, the Company
extends credit on an unsecured basis to its customers, substantially all of whom are located in the United States of America. The
Company does not believe that it is exposed to any significant risk of loss on accounts receivable.
Stock-Based Compensation.
The Company recognizes
the fair value of stock-based compensation awards as wages in the accompanying statements of operations on a straight-line basis
over the vesting period, using the Black-Scholes option pricing model, which is based on a risk-free rates of 0.70% thru 0.94%
in 2016 and 2015, dividend yield of 0%, expected life of 2 years and volatility of 1.00.
Liquidity and Capital Resources
As of September 30, 2016, the Company had cash and cash equivalents
of $132,803. The decrease of $668,739 in cash and cash equivalents from September 30, 2015 was due to net cash used in operating
activities of $1,291,503, offset by net cash provided by investing activities of $44,541 and net cash provided by financing activities
of $578,223.
Net cash used in operating activities was
$1,291,503 for the year ended September 30, 2016, compared to $910,518 net cash used in operating activities for the year ended
September 30, 2015. The net cash used in operating activities for the year ended September 30, 2016 was due to net loss of $2,135,139,
adjusted primarily by the following: (1) increases in depreciation and amortization of $153,258, goodwill impairment of $662,967,
a forfeiture of deposit for $50,000, trade account receivable of $22,420, prepaid expenses of $16,136 and deferred revenue of $32,739,
(2) offset by decreases in accounts receivable – related party of $2,300, accounts payable – trade of $55,474 and accrued
expenses of $12,230.
Net cash provided by investing activities
was $44,541 for the year ended September 30, 2016, compared to net cash used in investing activities of $96,605 for the year ended
September 30, 2015. The Company paid a deposit of $50,000 in the year ended September 30, 2015 that was returned in the year ended
September 30, 2016 and there was less trademark activity as $17,755 less was spent on trademarks in 2016 compared to 2015 and
purchase of fixed assets for $7,942 compared to $66 in fiscal 2016. Additionally, in fiscal 2015, $75,800 was used as part of
the consideration for the purchase of a subsidiary.
Net cash provided by financing activities
was $578,223 for the year ended September 30, 2016, compared to net cash provided by financing activities of $1,808,665 for the
year ended September 30, 2015. Financing activities for the year ended September 30, 2016 consisted primarily of $535,000 in proceeds
from sales of common stock and $43,223 in proceeds from sale of notes payable.
As shown below, at September 30, 2016,
our contractual cash obligations totaled approximately $269,131 all of which consisted of operating lease obligations and debt
principal.
|
|
Payments due by period
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
Contractual obligations
|
|
1 year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
5 years
|
|
|
Total
|
|
Line of credit
|
|
$
|
19,732
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
19,732
|
|
Notes payable
|
|
|
93,397
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
93,397
|
|
Operating leases
|
|
|
81,902
|
|
|
|
74,100
|
|
|
|
–
|
|
|
|
–
|
|
|
|
156,002
|
|
Total contractual cash obligations
|
|
$
|
195,031
|
|
|
$
|
74,100
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
269,131
|
|
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern, which contemplates the Company will need
additional financing to fund additional material capital expenditures and to fully implement its business plan. There are no assurances that additional financing will be available
on favorable terms, or at all. If additional financing is not available, the Company will need to reduce, defer or cancel development
programs, planned initiatives and overhead expenditures as a way to supplement the cash flows generated by operations. The Company
has a backlog of fees under contract in addition to the Company’s accounts receivable balance. The failure to adequately
fund its capital requirements could have a material adverse effect on our business, financial condition and results of operations.
Moreover, the sale of additional equity securities to raise financing will result in additional dilution to the Company’s
stockholders, and incurring additional indebtedness could involve the imposition of covenants that restrict our operations. Management,
in the normal course of business, is trying to raise additional capital through sales of common stock as well as seeking financing
from third parties, via both debt and equity, to balance the Company’s cash requirements and to finance specific capital
projects.
Off Balance Sheet Transactions and Related Matters
Other than operating leases discussed in
Note 9 to the consolidated financial statements, there are no off-balance sheet transactions, arrangements, obligations (including
contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material
effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources of the Company.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Interest Rate Risk.
Our business
is leveraged and, accordingly, is sensitive to fluctuations in interest rates. Any significant increase in interest rates could
have a material adverse effect on our financial condition and ability to continue as a going concern.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this item are included
in this report in Part IV, Item 15 beginning on page F-2.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Previous registered public accounting
firm
On December 20, 2016, the firm of Lane
Gorman Trubitt, LLC (“Lane Gorman”) resigned as auditors of Financial Gravity Companies, Inc. (the “Company”).
This action was in response to concerns about the independence of Lane Gorman based on the firm’s involvement in the preparation
of footnote disclosures on prior audit reports for the years ended December 31, 2015 and 2014. These concerns were highlighted
in comment letters received from the SEC dated November 8, 2016 and December 12, 2016. Lane Gorman determined that resignation
was the most prudent action to take, in order for the Company to timely engage a new firm and complete a new audit of the
financial
statements for the
two years ended September 30, 2016 and 2015.
Lane Gorman’s
reports
on the
Company’s
financial statements for the past two years did not contain
an adverse opinion or a disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope, or accounting
principles.
During
the Company’s
two most recent fiscal years and any subsequent interim period
preceding
Lane Gorman’s
resignation, there were no disagreements with
Lane
Gorman
on any matter of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure.
During
the Company’s
two most recent fiscal years and any subsequent interim period
preceding
Lane Gorman’s
resignation
, there were no “reportable
events” (as described in paragraph (a)(1)(v) of Item 304 of Regulation S-K).
New registered public accounting
firm
On December 26, 2016 (the “Engagement
Date”), the Company engaged the firm of Whitley Penn LLP (“Whitley Penn”) as the new independent auditors for
the years ended September 30, 2016 and 2015. The decision to engage Whitley Penn as the Company’s independent registered
public accounting firm was approved by the Company’s Board of Directors.
During the two most recent fiscal years
and through the Engagement Date, the Company has not consulted with Whitley Penn regarding either:
|
1.
|
The application of accounting principles to any specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company’s financial statements, and neither a written report was
provided to the Company nor oral advice was provided that Whitley Penn concluded was an important factor considered by the Company
in reaching a decision as to the accounting, auditing or financial reporting issue; or
|
|
2.
|
Any matter that was either the subject of a “disagreement” (as defined in paragraph
(a)(1)(iv) of Item 304 of Regulation S-K and the related instructions thereto) or a “reportable event” (as described
in paragraph (a)(1)(v) of Item 304 of Regulation S-K).
|
Item 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting. Responsibility, estimates and judgments by management are required
to assess the expected benefits and related costs of control procedures. The objectives of internal control include providing management
with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, and
that transactions are executed in accordance with management’s authorization and recorded properly to permit the preparation
of consolidated financial statements in conformity with accounting principles generally accepted in the United States. Our management,
including our chief executive officer and chief financial officer, assessed the effectiveness of our internal control over financial
reporting as of September 30, 2016. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Our management,
including our chief executive officer and chief financial officer, has concluded that, as of September 30, 2016, our internal control
over financial reporting was not effective in providing reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with US generally accepted accounting principles. Our
management reviewed the results of their assessment with our board of directors.
This annual report does not include
an attestation report of our company’s registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our company’s registered public accounting firm
pursuant to rules of the Securities and Exchange Commission that permit our company to provide only management’s report
in this annual report.
Inherent Limitations on Effectiveness
of Controls
Internal control over financial reporting
has inherent limitations which include but is not limited to the use of independent professionals for advice and guidance, interpretation
of existing and/or changing rules and principles, segregation of management duties, scale of organization, and personnel factors.
Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses
in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented
by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements on a timely basis, however these inherent limitations are known features of the financial
reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation
and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial
Reporting
During the period covered by this report,
there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. OTHER INFORMATION.
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
Directors and Executive Officers
Set forth below is certain information regarding the persons
who were directors and executive officers at any time during the fiscal year 2016.
Name
|
Age
|
Positions with the Company
|
John Pollock
|
50
|
Chairman of the Board, Chief Executive Officer
|
Paul Williams
|
60
|
Vice Chairman of the Board, Chief Financial Officer, Assistant Secretary and Assistant Treasurer
|
Dave Crowley
|
60
|
President, Chief Strategy Officer, Secretary, Treasurer and Board Member
|
Rick Johnson
|
57
|
Chief Operating Officer
|
James F. Reggio
|
53
|
Chief Technology Officer and Chief Marketing Officer
|
Edward A. Lyon
|
52
|
Chief Tax Strategist and Board Member
|
George Crumley
|
49
|
Board Member
|
John Pollock
, 50, has been
CEO/Founder of Business Legacy, Inc. since 2002, Pollock Advisory Group since 2007 and he is currently CEO and Chairman of Financial
Gravity Companies, Inc. Mr. Pollock’s specific experience, qualifications, attributes or skills that led to the conclusion
that he should serve as a director for the Company:
|
·
|
Has served as CEO and Chairman of Financial Gravity since its inception
|
Paul O. Williams
, 60, has
served on our Board of Directors and as Vice Chairman of the Board since 2015, and has served as our Chief Financial Officer and
Assistant Secretary – Assistant Treasurer since 2016. He graduated from Austin College in Sherman, Texas in 1978 and the
Institute for Organization Management in Washington, DC in 1982. Since 2007, Mr. Williams has served as Chief Executive Officer
of Bison Financial Group, Inc., a corporate financial advisory and business development firm serving middle market growth companies.
Through Bison Financial Group, Mr. Williams personally provides corporate financial advisory and business development consulting
services.
Mr. Williams also currently serves as Chairman
of the Board of the following private companies: Curtis Mathes, Inc. (since 2013); Championship Sports Group, Inc. (since 2012);
Triton Consolidated, Inc. (since 2016); Day One Consulting, Inc. (since 2016); and Investor Relations, Inc. (since 2016). Mr. Williams
also currently serves as Vice Chairman of the Board and Chief Financial Officer of Dynamic Chemical Solutions, Inc. (since 2016),
and is on the Board of Directors of the Frisco (Texas) Chamber of Commerce.
On behalf of Halo Companies, Inc. (OTC:
HALN), Mr. Williams has served as Vice Chairman of the Board, Treasurer, and Assistant Secretary from 2009 to Present, and Served
as Chief Financial Officer from 2009 to 2012 and from 2015 to Present. Halo Companies, Inc. is a nationwide distressed asset services
company, providing technology-driven asset management, portfolio due diligence, acquisition, repositioning and liquidation strategies
for the private investment and mortgage servicing industry.
The breadth of Mr. Williams’ entrepreneurial
and financial services experience led the Board of Directors to the conclusion that he is qualified to serve as a director for
the Company. Mr. Williams’ specific experience, qualifications, attributes or skills that led to the conclusion that he should
serve as a director for the Company:
|
·
|
Over 30 years of business experience, primarily in capital markets, mergers, and acquisitions
|
|
·
|
Chief Executive Officer of Bison Financial Group, a corporate financial advisory and business development
firm serving middle market growth companies
|
|
·
|
Has served as both officer and director of other public companies
|
|
·
|
Financial Gravity is the third public company for which Mr. Williams is serving as Chief Financial
Officer
|
|
·
|
Within the last 5 years, Mr. Williams served as Vice-Chairman of the Board and Chief Financial
Officer at Halo Companies, Inc., a public company
|
A. David Crowley
, 60, began
at Financial Gravity Companies as Chief Sales Officer in January 2013, has served on our Board of Directors and as Secretary of
the Board since January 2015, and served as our President and Chief Strategy Officer since June 2016. He graduated from University
of MO - Rolla with a BS in Electrical Engineering in June 1978 and the University of MN with an MS in Electrical Engineering in
April 1986. Mr. Crowley owned and operated Resonate, Inc., a management consulting and training company for small business owners
from July 1999 to July 2008, co-owned 80/20 Health Insurance, an insurance agency with over 20 field agents in Colorado from January
2004 to December 2010 and co-owned United Meridian Insurance, a property & casualty agency in Colorado from January 2010 to
December 2012. Mr. Crowley’s specific experience, qualifications, attributes or skills that led to the conclusion that he
should serve as a director for the Company:
|
·
|
21 years as an Engineer with high technology computer company
|
|
·
|
10 years of project management and process engineering experience at General Motors helping develop
their vehicle development process
|
|
·
|
5 years teaching graduate school Management Information Systems course at Walsh College
|
|
·
|
8 years of financial services experience in health, life and property & casualty insurance
business
|
|
·
|
4 years of tax business experience with Financial Gravity developing the process that the company
now uses to sell tax services to business owners and to expand nationally to financial advisors
|
Edward A. Lyon
, 52, has
been our Chief Tax Strategist and a Director since October, 2015. From 2005 until 2015, he was Partner-in-Charge of Content
at Tax Coach Software, which he founded in 2005. Mr. Lyon received a B.A. in History from Hamilton College in 1986 and a J.D.
from the University of Cincinnati College of Law in 1991. Mr. Lyon’s specific experience, qualifications, attributes or
skills that led to the conclusion that he should serve as a director for the Company:
|
·
|
The founder of Tax Coach Software, managing the company for 11 years
|
|
·
|
A deep knowledge of accounting and financial services industries
|
|
·
|
A nationally-recognized expert on tax planning
|
|
·
|
The author of 8 books, and has appeared on over 500 radio and television broadcasts to speak about
his areas of expertise
|
George E. Crumley
, 49, has
been on the Board of Directors since January 2015. From 1994 to 2007 he was a practicing litigation attorney with the law firm
of Stradley & Wright in Dallas, Texas where he was named partner in 2001. He formed Pittenger, Nuspl & Crumley in 2008
where he continues to practice, advising businesses in matters including formation, contracts, employees, real estate and litigation
among other areas of law. He received BA. and J.D. degrees from Baylor University in 1989 and 1993, respectively. Mr. Crumley currently
serves on the Board of Directors for Legacy Christian Academy in Frisco, Texas. Mr. Crumley’s specific experience, qualifications,
attributes or skills that led to the conclusion that he should serve as a director for the Company:
|
·
|
23 years of experience in civil litigation and representing
businesses with formation, contracts, lawsuits, employee disputes, real estate, and other matters.
|
James F. Reggio
, 53, has
been our Chief Marketing Officer & Chief Technology Officer since January of 2015 when he joined the company via the Cloud9
Holdings acquisition, where he served as CTO beginning in 2013. From 2006 – 2013, Mr. Reggio held various roles with EFA
Processing LP, including Chief Technology Officer, Senior Vice President of Technology, and Executive Vice President. Mr. Reggio
was principle with Exectech Consulting Services from 2004 – 2006. He served as Chief Information Officer of Affirmative Insurance
Holdings, Inc. from 2001 – 2004 and Chief Information Officer of Instant Insurance Holdings, Inc. from 1999 – 2001,
as well as Chief Information Officer and Vice President of The St. Paul Specialty Auto Group from 1997 – 1999. Mr. Reggio
received his BA in Computer Science from Western Michigan University in 1986, and currently serves as a board member for the Innovate
Flower Mound Entrepreneur Center, and is a managing partner in Tri-Liberty LLC and DayOne Consulting LLC.
Rick J. Johnson
, 57, has
been our Chief Operating Officer since June of 2016, and previously served Financial Gravity as Vice President of Operations beginning
in May of 2015. Mr. Johnson joined Cloud9b2b, LLC (a Financial Gravity acquisition) as President and General Manager in April of
2015. Prior to his involvement in Financial Gravity, Mr. Johnson served as Chief Operating Officer for Bridge Metrics 2013 –
2014, and was Chief Operating Officer of Smart Customer Acquisition 2011 – 2013. From 2008 – 2011, Mr Johnson was with
U.S. Leadership where he held various positions including President in his last year there. He served as Chief Operating Officer
for James One Companies 2005 – 2007, and served as Chief Operating Officer of Software Medium 2003 – 2004. From 1997
– 2003, Mr. Johnson was Chief Operating Officer for Migratec, Inc. From 1995 – 1997, he served in various roles including
Business Manager, and then Director with Software AG. Mr. Johnson began his career with what is now Accenture (previously Andersen
Consulting and Arthur Andersen MICD), where he progressed from Staff Consultant, Senior Consultant, Manager, Sr Manager, and Director
from 1982 – 1994. Mr. Johnson received his BBA in Finance from Texas Tech University in 1981.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), requires officers, directors and persons who beneficially own more than
10% of a class of our equity securities registered under the Exchange Act to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us
during fiscal year 2011 and Forms 5 and amendments thereto furnished to us with respect to fiscal year 2011, or written representations
that Form 5 was not required for fiscal year 2011, we believe that all Section 16(a) filing requirements applicable to each of
our officers, directors and greater-than-ten percent stockholders were fulfilled in a timely manner. We have notified all known
beneficial owners of more than 10% of our common stock of their requirement to file ownership reports with the Securities and
Exchange Commission.
Code of Ethics
We do not currently have a Code of Ethics applicable to our
principal executive, financial, and accounting officers.
No Committees of the Board of Directors; No Financial Expert
We do not presently have a separately constituted
audit committee, compensation committee, nominating committee, executive committee or any other committees of our Board of Directors.
Nor do we have an audit committee “financial expert”. At present, our entire Board of Directors acts as our audit committee.
None of the members of our Board of Directors meets the definition of “audit committee financial expert” as defined
in Item 407(d) of Regulation S-K promulgated by the Securities and Exchange Commission. We have not retained an audit committee
financial expert because we do not believe that we can do so without undue cost and expense. Moreover, we believe that the present
members of our Board of Directors, taken as a whole, have sufficient knowledge and experience in financial affairs to effectively
perform their duties.
Item 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The particulars of compensation paid to
the following persons during the fiscal period ended September 30, 2016 and 2015 are set out in the summary compensation table
below:
|
·
|
our Chief Executive Officer (Principal Executive Officer);
|
|
·
|
our Chief Accounting Officer (Principal Financial Officer);
|
|
·
|
each of our three most highly compensated executive officers, other than the Principal Executive
Officer and the Principal Financial Officer, who were serving as executive officers at the end of the fiscal year ended September
30, 2016 and 2015; and
|
|
·
|
up to two additional individuals for whom disclosure would have been provided under the item above
but for the fact that the individual was not serving as our executive officer at the end of the fiscal year ended September 30,
2016 and 2015.
|
(collectively, the “
Named Executive Officers
”):
SUMMARY COMPENSATION TABLE
Name and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
All Other
Compensation
($)
|
Total
($)
|
John Pollock
CEO, Principal
Executive Officer
|
2016
2015
|
$100,000
$95,833
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
$203,333 (*)
$162,000 (*)
|
$303,333
$257,833
|
Dave Crowley
President and CSO
|
2016
2015
|
$100,000
$70,576
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
-0-
$19,377
|
$100,000
$89,953
|
Edward A. Lyon, CTS
|
2016
2015
|
$42,000
$3,500
|
-0-
-0-
|
-0-
-0-
|
-0-
-0-
|
$198,000 (**)
$235,852
|
$240,000
$239,352
|
Except as described below, none of the
Named Executive Officers has an employment agreement.
Edward A. Lyon, a member of the Board of
Directors, is party to an employment agreement with Tax Coach Software, LLC, a subsidiary of the Company. The Agreement was entered
into effective November 1, 2015, and provides for Mr. Lyon to serve as General Manager, responsible for supervising the business
and affairs of Tax Coach Software. The agreement has a three-year term, which may be extended. The agreement provides for base
salary of $42,000.00 per year, plus bonus. The annual bonus is the sum of the following: (i) for Tax Coach Software revenues in
excess of $850,000 and less than $950,000, forty percent (40%) of Tax Coach Software’s gross profit (as determined in accordance
with generally acceptable accounting principles, net of amounts paid under employment agreements and consulting agreements), plus
(ii) for Tax Coach Software revenues in excess of $950,000, twenty percent (20%) of Tax Coach Software’s gross profit (as
determined in accordance with generally acceptable accounting principles, net of amounts paid under employment agreements and consulting
agreements).
(*) For Mr. Pollock, the amount shown in the Summary Compensation
Table under the heading All Other Compensation represents amounts paid by Financial Gravity to a consulting firm owned and controlled
by Mr. Pollock, in compensation for services not related to his roles as an officer and director of Financial Gravity.
(**) For Mr. Lyon, the amount shown in the Summary Compensation
Table under the heading All Other Compensation represents amounts paid by Financial Gravity to a consulting firm owned and controlled
by Mr. Lyon, in compensation for services not related to his roles as an officer and director of Financial Gravity.
Summary Compensation
Except as described above, the Company has no employment agreements
with any of its Directors or executive officers.
For the fiscal year ended September 30,
2016, no outstanding stock options or other equity-based awards were re-priced or otherwise materially modified. No stock appreciation
rights have been granted to any of our Directors or executive officers and none of our Directors or executive officers exercised
any stock options or stock appreciation rights. There are no non-equity incentive plan agreements with any of our Directors or
executive officers.
Outstanding Equity Awards at Fiscal Year-end
This section is not applicable to any Named Executive Officer
as of 9/30/2016.
Compensation of Directors
DIRECTOR COMPENSATION
|
Name
|
Fees earned or
Paid in Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
All Other
Compensation
($)
|
Total
($)
|
John Pollock
|
$100,000
|
-0-
|
-0-
|
$203,333
|
$303,000
|
Dave Crowley
|
$100,000
|
-0-
|
-0-
|
-0-
|
$100,000
|
Paul Williams
|
-0-
|
-0-
|
-0-
|
$49,000
|
$49,000
|
Edward A. Lyon
|
$42,000
|
-0-
|
-0-
|
$198,000
|
$240,000
|
George Crumley
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
Employment Contracts, Termination of Employment, Change-in-Control
Arrangements
There is no employment or other contracts
or arrangements with officers or Directors. There are no compensation plans or arrangements, including payments to be made by us,
with respect to our officers, Directors or consultants that would result from the resignation, retirement or any other termination
of service in respect of such Directors, officers or consultants. There are no arrangements for Directors, officers, employees
or consultants that would result from a change-in-control.
Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain
information with respect to the beneficial ownership, as of September 30, 2016, of the Company’s common stock, which is the
Company’s only outstanding class of voting securities, and the voting power resulting from such beneficial ownership, by
|
·
|
each stockholder known by the Company to be the beneficial owner of more than 5% of the Company’s outstanding common
stock;
|
|
·
|
each director of the Company;
|
|
·
|
each executive officer of the Company; and
|
|
·
|
all directors and executive officers of the Company as a group.
|
|
|
Amount of Beneficial
|
|
|
Percentage
|
|
Beneficial Owner(1)
|
|
Ownership (1)
|
|
|
of Shares
|
|
John Pollock (2)
|
|
|
15,037,962
|
|
|
|
41.5%
|
|
Dave Crowley (2)
|
|
|
3,000,000
|
|
|
|
8.3%
|
|
Keith VandeStadt (2, 4)
|
|
|
2,821,500
|
|
|
|
7.8%
|
|
Edward A. Lyon (2)
|
|
|
2,593,500
|
|
|
|
7.2%
|
|
Paul Williams (2)
|
|
|
1,896,414
|
|
|
|
5.2%
|
|
James F. Reggio (2, 3)
|
|
|
778,100
|
|
|
|
*
|
|
Rick Johnson (2, 3)
|
|
|
650,000
|
|
|
|
*
|
|
George Crumley (2)
|
|
|
150,000
|
|
|
|
*
|
|
Directors and executive officers as group (seven persons)
|
|
|
23,952,706
|
|
|
|
64.8%
|
|
____________________
(1) except as noted below, each beneficial owner has sole voting
and investment power with respect to all shares attributable to that owner.
(2) The address for each such beneficial owner is 800 N. Watters
Road, Suite 120, Allen, Texas 75013.
(3) Includes 1,330 options that vested upon closing of the
merger on September 30, 2016.
(4) Non director or executive officer with more than 5% ownership
* indicates an ownership percentage of less than one percent.
Changes in Control
We are unaware of any contract or other arrangement the operation
of which may at a subsequent date result in a change of control of our Company.
Securities authorized for issuance under equity compensation
plans
The following table provides information as of the end of the
most recently completed fiscal year, with respect to Company compensation plans (including individual compensation arrangements)
under which equity securities of the Company are authorized for issuance.
Equity Compensation
Plan Information
|
|
A(1)
|
|
|
B
|
|
|
C
|
|
|
|
Number of securities to be issued upon exercise of outstanding options, warrants
|
|
|
Weighted average exercise price of outstanding options, warrants
|
|
|
Number of securities remaining available for future issuance under equity compensation
plan (excluding securities reflected in
|
|
Plan Category
|
|
and rights
|
|
|
and rights
|
|
|
Column A)
|
|
Equity compensation plans approved by security holders
|
|
|
9,000,000
|
(2)
|
|
$
|
0.64
|
|
|
|
6,799,654
|
(3)
|
Equity compensation plans not approved by security holders
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
|
9,000,000
|
|
|
$
|
0.64
|
|
|
|
6,799,654
|
|
___________________
(1) As consequence of the Merger, outstanding options as
to 2,211,146 of the Company’s shares have vested.
(2) Shares subject to stock options under 2015 Stock
Option Plan.
(3) Shares available for grant of stock options to
employees, directors and consultants under the 2015 Stock Option Plan.
Following is a brief description of the
material features of each compensation plan under which equity securities of the Company are authorized for issuance. The 2015
Stock Option Plan was adopted without approval of Company security holders.
The Company has granted stock options
to certain employees and contractors under its 2015 Stock Option Plan, assumed from Financial Gravity Holdings. The Company is
authorized to issue an aggregate of 9,000,000 options, of which 6,799,654 remain available for issuance, as non-statutory (non-qualified)
stock options, under the 2015 Stock Option Plan. Currently outstanding options under the 2015 Stock Option Plan vest over a period
of no greater than two years, and expire ten years from the grant date.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE. Transactions with Related Persons, Promoters and Certain Control Persons
Except as set forth below, none of the
Company’s directors or officers, nor any person who beneficially owns, directly or indirectly, shares carrying more than
10% of the voting rights attached to the Company’s shares, nor any relative or spouse of any of the foregoing persons, has
had any material interest, direct or indirect, in any transaction to which the Company was a party, and in which the amount
involved exceeds the lesser of (i) $120,000 or (ii) one percent of the average of the Company’s total
assets at year-end for the last two completed fiscal years.
Bison Financial Group, whose Chief Executive
Officer is Mr. Paul Williams, has provided corporate financial advisory and business development services to the Company for a
flat fee of $5,000 per month. The provision of services commenced in 2014, during which time Mr. Williams had no formal affiliation
with the Company. The provision of services by Bison Financial Group continued in 2015, during which time the Company paid Bison
Financial Group an aggregate of $9,020. During 2015, Mr. Williams was appointed to the board of directors of the Company and consequently
became an affiliate of the Company. The provision of services by Bison Financial Group continued in 2016, during which time the
Company paid Bison Financial Group an aggregate of $49,000 for the years ended September 30, 2016. In 2016, Mr. Williams was appointed
as Chief Financial Officer of the Company.
Effective as of October 1, 2015, Financial
Gravity Holdings, a subsidiary of the Company, purchased all of the equity interests of Tax Coach Software, LLC, an Ohio limited
liability company, for aggregate consideration of 2,000,000 shares of the common stock of Financial Gravity (the “Tax Coach
Software Transaction”). The Purchase Agreement for the Tax Coach Software Transaction was amended effective as of March 25,
2016 to give effect to a three-for-one (3:1) forward split of the Financial Gravity Holdings common stock, bringing the aggregate
consideration to 6,000,000 shares of the common stock of Financial Gravity Holdings.
TaxTuneup, LLC, which is an entity owned
by Mr. Edward A. Lyon, a current director of the Company, received approximately 43% of the shares of Financial Gravity Holdings
issued in the Tax Coach Software Transaction, then having an approximate value of $864,500. As a consequence of such issuance,
Mr. Lyon is the beneficial owner of 7.2% of the Company’s common stock as of September 30, 2016 (after giving effect to the
Merger).
Additionally, Van Data, LLC, which is an
entity owned Keith VandeStadt, a greater than 5% beneficial shareholder of the Company, received approximately 47% of the shares
of Financial Gravity Holdings issued in the Tax Coach Software Transaction, then having an approximate value of $940,500. As a
consequence of such issuance, Mr. VandeStadt is the beneficial owner of 7.8% of the Company’s common stock as of September
30, 2016 (after giving effect to the Merger).
In the Tax Coach Software Transaction,
the shares of Financial Gravity Holdings common stock received by TaxTuneup, LLC (owned by Mr. Lyon), do not include any of the
shares of Financial Gravity Holdings common stock received by Van Data, LLC (owned by Mr. VandeStadt). Their respective holdings
of Company common stock are completely separated.
During fiscal 2016, Financial Gravity
Holdings paid
$218,990
to Van Data, LLC, a consulting firm owned and controlled by Keith VandeStadt,
in compensation for maintaining the Tax Coach Software application and data, making enhancements and modifications to software
as needed, maintaining server platform and web environment, applying updates to licensed content, and other services agreed upon
in writing.
During fiscal 2015, Financial Gravity
Holdings paid
$198,000
to Tax Tuneup, LLC, a consulting firm owned and controlled by Mr. Lyon,
in compensation for services not related to his roles as an officer and director. The services rendered to Financial Gravity Holdings
involved providing weekly content for company newsletters, hosting weekly events, hosting additional webinars as needed,
and other services agreed upon in writing.
On December 30, 2014, Financial Gravity
Holdings acquired 100% of the capital stock of Cloud9 Holdings Company. In consideration of such purchase, Financial Gravity Holdings
issued 1,314,477 shares of Financial Gravity Holdings common stock to the selling shareholder. The selling stockholder in the transaction
was Mr. Paul Boyd, then serving as Chief Operating Officer of the Company. The shares of Financial Gravity Holdings common stock
which served as the consideration in the transaction had an approximate value of $438,159. In connection with the transaction,
Financial Gravity Holdings also agreed to pay $132,682 of pre-existing expenses, including a payable to Mr. Boyd.
Director Independence; Board Leadership Structure
The Company’s common stock is quoted
through the OTC System. For purposes of determining whether members of the Company’s Board of Directors are “independent,”
the Company’s Board utilizes the standards set forth in the NASDAQ Stock Market Marketplace Rules. At present, the Company’s
entire Board serves as its Audit, Compensation and Nominating Committees. The Company’s Board of Directors has determined
that, of the Company’s present directors, George Crumley, constituting one of the five members of the Board, is an “independent
director,” as defined under NASDAQ’s Marketplace Rules, for purposes of qualifying as independent members of the Board
and an Audit, Compensation and Nominating Committee of the Board, but that John Pollock, Dave Crowley, Paul Williams and Edward
A. Lyon are not “independent directors” since they currently serve as executive officers of the Company.
The Company’s Board of Directors
is of the view that the current leadership structure is suitable for the Company at its present stage of development, and that
the interests of the Company are best served by the combination of the roles of Chairman of the Board and Chief Executive Officer.
As a matter of regular practice, and as part
of its oversight function, the Company’s Board of Directors undertakes a review of the significant risks in respect of the
Company’s business. Such review is conducted in concert with outside professionals (including legal counsel) with expertise
in substantive areas germane to the Company’s business. With the Company’s current governance structure, the Company’s
Board of Directors and senior executives are, by and large, the same individuals, and consequently, there is not a significant
division of oversight and operational responsibilities in managing the material risks facing the Company.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following information summarizes the
fees billed to us by Lane Gorman Trubitt, PLLC for professional services rendered for the fiscal year ended September 30, 2016
and 2015, respectively.
Audit Fees
.
Fees billed
or remainder to be billed for audit services by Lane Gorman Trubitt, PLLC were $132,536 for fiscal year 2016 and $20,741 for fiscal
year 2015. Audit fees include fees associated with the annual audit and the reviews of the Company’s quarterly reports on
Form 10-Q, and other SEC filings.
Audit-Related Fees.
The Company
did not pay any audit-related service fees to Lane Gorman Trubitt, PLLC, other than the fees described above, for services rendered
during fiscal year 2016 or 2015.
Tax Fees
.
None
All Other Fees.
None
Consistent with SEC policies regarding
auditor independence, the audit committee has responsibility for appointing, setting compensation, approving and overseeing the
work of the independent auditor. In recognition of this responsibility, the audit committee pre-approves all audit and permissible
non-audit services provided by the independent auditor. The Board of Directors serves as the audit committee for the Company.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
Financial Statements and financial statement schedules
(1) and (2) The financial statements
and financial statement schedules required to be filed as part of this report are set forth in Item 8 of Part II of this report.
(3) Exhibits. See Item 15(b) below.
(b)
Exhibits required by Item 601 of Regulation S-K
Exhibit No.
|
Description
|
16.1
|
Changes in Registrant’s Certifying Accountant
|
|
|
31.1
|
Sarbanes-Oxley Section 302(a) Certification of John Pollock
|
31.2
|
Sarbanes-Oxley Section 302(a) Certification of Paul Williams
|
32.1
|
Sarbanes-Oxley Section 906 Certifications
|
101.INS
|
XBRL Instance Document
|
101.SCH
|
XBRL Schema Document
|
101.CAL
|
XBRL Calculation Linkbase Document
|
101.DEF
|
XBRL Definition Linkbase Document
|
101.LAB
|
XBRL Label Linkbase Document
|
101.PRE
|
XBRL Presentation Linkbase Document
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: January 25, 2017
|
By:
/s/ John Pollock
|
|
John Pollock
|
|
Chief Executive Officer
|
|
(Principal Executive Officer)
|
|
|
|
|
Date: January 25, 2017
|
By:
/s/ Paul Williams
|
|
Paul Williams
|
|
Chief Financial Officer
|
|
(Principal Financial Officer)
|
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature
|
Capacity
|
Date
|
|
|
|
/s/ John Pollock
|
Chairman, CEO
|
January 25, 2017
|
John Pollock
|
(principal executive officer)
|
|
|
|
|
|
|
|
/s/ Paul Williams
|
Vice Chairman, CFO
|
January 25, 2017
|
Paul Williams
|
(principal financial officer)
|
|
|
|
|
|
|
|
/s/ Dave Crowley
|
Director
|
January 25, 2017
|
Dave Crowley
|
|
|
|
|
|
|
|
|
/s/ Edward A. Lyon
|
Director
|
January 25, 2017
|
Edward A. Lyon
|
|
|
|
|
|
|
|
|
/s/ George Crumley
|
Director
|
January 25, 2017
|
George Crumley
|
|
|
FINANCIAL GRAVITY COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
SEPTEMBER 30, 2016 AND 2015
FINANCIAL GRAVITY COMPANIES, INC.
AND SUBSIDIARIES
SEPTEMBER 30, 2016 AND 2015
CONTENTS
|
Page
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-1
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
CONSOLIDATED BALANCE SHEETS
|
F-2
|
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
F-3
|
|
|
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
F-4
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOW
|
F-5
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-6-19
|
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Stockholders
of
Financial Gravity Companies, Inc.
We have audited the accompanying consolidated
balance sheets of Financial Gravity Companies, Inc. (the “Company”), as of September 30, 2016 and 2015, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. The Company’s
management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing 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 over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of the Company, as of September 30,
2016 and 2015, and the results of their operations and their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements
have been prepared assuming that the entity will continue as a going concern. As discussed in Note 1 to the financial statements,
the entity has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Whitley Penn LLP
Dallas, Texas
January 25, 2017
Financial Gravity Companies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
As of September 30,
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
132,803
|
|
|
$
|
801,542
|
|
Trade accounts receivable
|
|
|
78,843
|
|
|
|
40,948
|
|
Accounts receivable - related party
|
|
|
4,506
|
|
|
|
29,326
|
|
Prepaid expenses
|
|
|
32,239
|
|
|
|
16,103
|
|
Total current assets
|
|
|
248,391
|
|
|
|
887,919
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
141,080
|
|
|
|
6,639
|
|
Investment
|
|
|
10,000
|
|
|
|
–
|
|
Customer relationships, net
|
|
|
33,675
|
|
|
|
–
|
|
Proprietary content, net
|
|
|
459,463
|
|
|
|
–
|
|
Trade name
|
|
|
69,300
|
|
|
|
–
|
|
Non-compete agreements, net
|
|
|
21,040
|
|
|
|
–
|
|
Deposits
|
|
|
–
|
|
|
|
50,000
|
|
Trademarks
|
|
|
22,592
|
|
|
|
20,174
|
|
Goodwill
|
|
|
1,094,702
|
|
|
|
662,967
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,100,243
|
|
|
$
|
1,627,699
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable - trade
|
|
$
|
27,229
|
|
|
$
|
82,703
|
|
Accounts payable - related party
|
|
|
–
|
|
|
|
2,300
|
|
Accrued expenses
|
|
|
103,654
|
|
|
|
46,400
|
|
Deferred revenue
|
|
|
32,739
|
|
|
|
–
|
|
Line of credit
|
|
|
19,732
|
|
|
|
–
|
|
Notes payable
|
|
|
93,397
|
|
|
|
–
|
|
Pre-merger payables
|
|
|
99,056
|
|
|
|
–
|
|
Total current liabilities
|
|
|
375,807
|
|
|
|
131,403
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Common stock - 300,000,000 shares authorized; $0.001 par value
|
|
|
34,863
|
|
|
|
28,389
|
|
Additional paid-in capital
|
|
|
4,768,596
|
|
|
|
2,411,791
|
|
Accumulated deficit
|
|
|
(3,079,023
|
)
|
|
|
(943,884
|
)
|
Total stockholders’ equity
|
|
|
1,724,436
|
|
|
|
1,496,296
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,100,243
|
|
|
$
|
1,627,699
|
|
The accompanying notes are in integral part
of these consolidated financial statements.
Financial Gravity Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September
30,
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
Investment management fees
|
|
$
|
920,813
|
|
|
$
|
747,869
|
|
Service income
|
|
|
1,750,613
|
|
|
|
547,806
|
|
Commissions
|
|
|
69,073
|
|
|
|
8,126
|
|
Rental income
|
|
|
16,500
|
|
|
|
6,000
|
|
Total revenue
|
|
|
2,756,999
|
|
|
|
1,309,801
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
75,378
|
|
|
|
76,828
|
|
Professional services
|
|
|
1,237,221
|
|
|
|
452,148
|
|
Depreciation and amortization
|
|
|
153,547
|
|
|
|
289
|
|
Impairment of goodwill
|
|
|
662,967
|
|
|
|
–
|
|
General and administrative
|
|
|
408,537
|
|
|
|
411,235
|
|
Management fees - related party
|
|
|
213,333
|
|
|
|
155,657
|
|
Marketing
|
|
|
402,402
|
|
|
|
232,904
|
|
Salaries and wages
|
|
|
1,730,278
|
|
|
|
947,132
|
|
Total operating expenses
|
|
|
4,883,663
|
|
|
|
2,276,193
|
|
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
|
(2,126,664
|
)
|
|
|
(966,392
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Other income
|
|
|
–
|
|
|
|
27,383
|
|
Interest expense
|
|
|
(8,475
|
)
|
|
|
(4,875
|
)
|
Total other (expense) income
|
|
|
(8,475
|
)
|
|
|
22,508
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(2,135,139
|
)
|
|
$
|
(943,884
|
)
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE - Basic and Diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.04
|
)
|
The accompanying notes are in integral part
of these consolidated financial statements.
Financial Gravity Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the years ended September 30, 2016 and 2015
|
|
Number of Shares Issued and Outstanding
|
|
|
Common Stock Par Value Amount
|
|
|
Additional Paid-In Capital
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
Balance at September 30, 2014
|
|
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
|
|
|
21,150,000
|
|
|
|
21,150
|
|
|
|
(20,445
|
)
|
|
|
–
|
|
|
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued under a private placement memorandum
|
|
|
5,625,000
|
|
|
|
5,625
|
|
|
|
1,869,375
|
|
|
|
–
|
|
|
|
1,875,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued to non-employee directors
|
|
|
300,000
|
|
|
|
300
|
|
|
|
99,700
|
|
|
|
–
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued on acquisition of Cloud9 Holdings, LLC
|
|
|
1,314,477
|
|
|
|
1,314
|
|
|
|
436,845
|
|
|
|
–
|
|
|
|
438,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on acquisition of BLI and PAG
|
|
|
–
|
|
|
|
–
|
|
|
|
26,316
|
|
|
|
–
|
|
|
|
26,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(943,884
|
)
|
|
|
(943,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2015
|
|
|
28,389,477
|
|
|
|
28,389
|
|
|
|
2,411,791
|
|
|
|
(943,884
|
)
|
|
|
1,496,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued under a private placement memorandum
|
|
|
785,000
|
|
|
|
785
|
|
|
|
534,215
|
|
|
|
–
|
|
|
|
535,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued on acquisition of Tax Coach Software, LLC (shares placed in escrow)
|
|
|
6,000,000
|
|
|
|
6,000
|
|
|
|
1,898,620
|
|
|
|
–
|
|
|
|
1,904,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock surrendered by former officer
|
|
|
(2,926,294
|
)
|
|
|
(2,926
|
)
|
|
|
2,926
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock held by Pacific Oil Company (reverse merger)
|
|
|
2,614,717
|
|
|
|
2,615
|
|
|
|
(101,671
|
)
|
|
|
–
|
|
|
|
(99,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
22,715
|
|
|
|
–
|
|
|
|
22,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(2,135,139
|
)
|
|
|
(2,135,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
|
34,862,900
|
|
|
$
|
34,863
|
|
|
$
|
4,768,596
|
|
|
$
|
(3,079,023
|
)
|
|
$
|
1,724,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are in integral part
of these consolidated financial statements.
Financial Gravity Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September
30
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,135,139
|
)
|
|
$
|
(943,884
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
153,547
|
|
|
|
289
|
|
Impairment of goodwill
|
|
|
662,967
|
|
|
|
–
|
|
Forfeiture of deposit for failed acquisition
|
|
|
50,000
|
|
|
|
–
|
|
Write off of fixed assets
|
|
|
–
|
|
|
|
15,787
|
|
Stock based compensation
|
|
|
22,715
|
|
|
|
100,000
|
|
Changes in operating assets and liabilities, net of effects of purchase of subsidiaries
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(22,420
|
)
|
|
|
57,315
|
|
Accounts receivable - related party
|
|
|
30,228
|
|
|
|
(14,254
|
)
|
Prepaid expenses
|
|
|
(16,136
|
)
|
|
|
2,425
|
|
Accounts payable - trade
|
|
|
(55,474
|
)
|
|
|
32,560
|
|
Accounts payable - related party
|
|
|
(2,300
|
)
|
|
|
(48,700
|
)
|
Accrued expenses
|
|
|
(12,230
|
)
|
|
|
(112,056
|
)
|
Deferred revenue
|
|
|
32,739
|
|
|
|
–
|
|
Net cash used in operating activities
|
|
|
(1,291,503
|
)
|
|
|
(910,518
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Payments for purchase of investment
|
|
|
(10,000
|
)
|
|
|
–
|
|
Cash paid for purchase of property and equipment
|
|
|
(65
|
)
|
|
|
(7,942
|
)
|
Cash paid for purchase of MDP
|
|
|
–
|
|
|
|
(71,679
|
)
|
Cash acquired upon acquisition of subsidiaries
|
|
|
57,025
|
|
|
|
53,190
|
|
Deposit for future acquisition
|
|
|
–
|
|
|
|
(50,000
|
)
|
Purchases of trademarks
|
|
|
(2,419
|
)
|
|
|
(20,174
|
)
|
Net cash provided by (used in) investing activities
|
|
|
44,541
|
|
|
|
(96,605
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Borrowings on line of credit
|
|
|
24,391
|
|
|
|
–
|
|
Payments on line of credit
|
|
|
(900
|
)
|
|
|
(55,000
|
)
|
Borrowings on note payable
|
|
|
26,086
|
|
|
|
–
|
|
Payments on note payable
|
|
|
(6,354
|
)
|
|
|
–
|
|
Payments on capital lease obligations
|
|
|
–
|
|
|
|
(12,040
|
)
|
Proceeds from the sale of common stock
|
|
|
535,000
|
|
|
|
1,875,705
|
|
Net cash provided by financing activities
|
|
|
578,223
|
|
|
|
1,808,665
|
|
|
|
|
|
|
|
|
|
|
TOTAL (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(668,739
|
)
|
|
|
801,542
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
|
|
801,542
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF YEAR
|
|
$
|
132,803
|
|
|
$
|
801,542
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
5,921
|
|
|
$
|
4,401
|
|
Taxes
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
Common stock issued upon acquisition of:
|
|
|
|
|
|
|
|
|
Cloud9 Holdings Company (Note 9)
|
|
$
|
–
|
|
|
$
|
438,159
|
|
Tax Coach Software, LLC (Note 9)
|
|
$
|
1,904,620
|
|
|
$
|
–
|
|
Net assets (liabilities) assumed for purchase of:
|
|
|
|
|
|
|
|
|
Cloud9 Holdings Company (Note 9)
|
|
$
|
–
|
|
|
$
|
(154,210
|
)
|
Business Legacy, Inc. and Pollock Advisory Group, Inc. (Note 9)
|
|
$
|
–
|
|
|
$
|
26,316
|
|
Tax Coach Software, LLC (Note 9)
|
|
$
|
809,918
|
|
|
$
|
–
|
|
Payables owed by Pacific Oil Company
|
|
$
|
(99,056
|
)
|
|
$
|
–
|
|
Equity in escrow to offset payables owed by legacy Pacific Oil Company
|
|
$
|
99,056
|
|
|
$
|
–
|
|
Transfer of capital lease obligation to the majority member
|
|
$
|
–
|
|
|
$
|
17,543
|
|
The accompanying notes are in integral
part of these consolidated financial statements.
Financial Gravity Companies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURE OF BUSINESS
Financial Gravity Companies, Inc. and
Subsidiaries (“the Company”) is located in Allen, Texas. The wholly-owned subsidiaries of the organization include:
Financial Gravity Holdings, Inc., Financial Gravity Operations, Inc., Financial Gravity Tax, Inc., Financial Gravity Wealth, Inc.,
Cloud9 Holdings Company, Financial Gravity Business, LLC, Financial Gravity Ventures, LLC., SASH Corporation (doing business as
Metro Data Processing) and Tax Coach Software, LLC.
Financial Gravity Holdings, Inc. (“FGH”)
was established on September 29, 2014 to engage in the acquisition and integration of financial and other businesses which will
deliver a wide range of accounting, tax planning and management services to high net worth individuals and businesses in the Dallas/Fort
Worth region, with further expansion into other markets in accordance with its long-term growth rate and strategic business plan.
Financial Gravity Operations, Inc. (“FGO”)
was established as a wholly-owned subsidiary of FGH in Texas on September 29, 2014. FGO did not have any activity through September
30, 2014. Activity commenced in 2015 for FGO related to the management of operational expenses for the shared services of the subsidiaries.
Financial Gravity Business, LLC. (“FGB”)
formerly Cloud9b2b, LLC (“Cloud9 B2B”) was acquired by Cloud9 Holdings Company effective December 31, 2014 and provides
business consulting services to Small Business Owners that identify ways to leverage a business’ current assets (people,
platforms and processes) and reduce exposure to risk, both short-term and long-term, while simplifying the business and increasing
profitability. FGB does not have any financial activity through September 30, 2016.
Financial Gravity Ventures, LLC. (“FGV”)
formerly Cloud9 Accelerator, LLC was acquired by Cloud9 Holdings Company effective December 31, 2014 and holds acquired companies
and business assets until they are integrated into the main stream Financial Gravity business structure. FGV does not have any
financial activity through September 30, 2016.
Effective January 1, 2015, Cloud9 assigned
100% of the membership interest in Cloud9 Accelerator, LLC and Cloud9b2b, to FGO.
Financial Gravity Tax, Inc. (“FG
Tax”) formerly Business Legacy, Inc., (“BLI”) was acquired by FGO for no cost effective January 1, 2015 and is
located in Allen, Texas. BLI is a bookkeeping, tax planning, tax preparation, and payroll service provider to small companies and
individuals.
Financial Gravity Wealth, Inc. (“FG
Wealth”) formerly Pollock Advisory Group, Inc., (“PAG”) was acquired by FGO for no cost effective January 1,
2015 and is a registered investment advisor, located in Allen, Texas. PAG provides asset management services.
SASH Corporation, an Oklahoma corporation
doing business as Metro Data Processing (“MDP”) was acquired August 12, 2015. The purchase was made by Cloud9Accelerator,
LLC. MDP is located in Tulsa, Oklahoma, and provides payroll services, software, and support solutions to business owners.
Tax Coach Software, LLC (“TCS”),
was acquired effective October 1, 2015, and is an Ohio limited liability company. The purchase was made by FGH. TCS, located in
Cincinnati, Ohio, provides three primary services including monthly subscriptions to the “Tax Coach” software system,
coaching and email marketing services.
|
1.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
A summary of the significant accounting
polices consistently applied in the preparation of the accompanying consolidated financial statement in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) is as follows.
Basis of Consolidation
The consolidated financial statements include
the accounts of FGH, FGO, Cloud9 (from the date of acquisition), including Cloud9b2b and Cloud9 Accelerator, LLC, PAG (from the
date of acquisition), BLI (from the date of acquisition), TCS (from the date of acquisition), and MDP (from the date of acquisition),
(collectively referred to as “the Company”). All significant intercompany accounts and transactions have been eliminated
on consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with an initial maturity of three months or less, when purchased, to be cash equivalents. The Company maintains cash
balances at several financial institutions located throughout the United States, which at times may exceed insured limits. The
Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and
cash equivalents.
Trade Accounts Receivable
Trade accounts receivable are carried at
the invoiced amount less an estimate made for doubtful accounts based on management’s review of outstanding balances. The
collectability of the Company’s accounts receivable is reviewed on an ongoing basis, using historical payment trends and
a review of specific accounts. Accounts receivable are written off after all reasonable collection efforts have been exhausted
and when management determines the amounts to be uncollectible. Recoveries of receivables previously written off are recorded when
received. There was no allowance for doubtful accounts recorded as of September 30, 2016 and 2015.
In the normal course of business, the Company
may extend credit to its customers, on an unsecured basis, substantially all of whom are located in the United States of America.
The Company does not believe that they are exposed to any significant risk of loss on accounts receivable.
Prepaid Expenses
Prepaid expenses consist of expenses the
Company has paid for prior to the service or good being provided. These prepaid expenses will be recorded as expense at the time
the service has been provided.
Property and Equipment
Property and equipment are stated at cost,
less accumulated depreciation. Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to earnings
over their estimated service lives by the straight-line method.
Maintenance and repairs are charged to
earnings as incurred; major repairs and replacements are capitalized. When items of property or equipment are sold or retired,
the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in operations.
Property and equipment operated under material
leases which transfer substantially all benefits and risks associated with the assets to the Company are capitalized. An asset
and liability equal to the present or fair value, if appropriate, of minimum payments over the term of the leases are recorded.
Amortization of the asset is computed using the straight-line method. Expenses associated with all other leases (operating leases)
are charged to income as incurred.
Customer Relationships
The customer relationships acquired from
the TCS purchase have been recognized in the accompanying consolidated balance sheets at $44,900, the value attributed to it on
the date of the purchase (see Note 9). The customer relationships are being amortized on a straight-line basis over a four-year
estimated life. During the year ended September 30, 2016, the Company recorded amortization expense of $11,225 on this intangible
asset, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Accumulated
amortization at September 30, 2016 was $11,225.
Future amortization of customer relationships is estimated to
be as follows for the years ended September 30:
|
2017
|
|
|
$
|
11,225
|
|
|
2018
|
|
|
|
11,225
|
|
|
2019
|
|
|
|
11,225
|
|
|
|
|
|
$
|
33,675
|
|
Proprietary Content
The proprietary content acquired as a part
of the TCS purchase has been recognized in the accompanying consolidated balance sheets at $525,100, the value attributed to it
on the date of the purchase (see Note 9). The proprietary content is being amortized on a straight-line basis over an eight-year
estimated life. During the year ended September 30, 2016, the Company recorded amortization expense of $65,638 on this intangible
asset, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Accumulated
amortization at September 30, 2016 was $65,638.
Future amortization of proprietary content is estimated to
be as follows for the years ended September 30:
|
2017
|
|
|
$
|
65,638
|
|
|
2018
|
|
|
|
65,638
|
|
|
2019
|
|
|
|
65,638
|
|
|
2020
|
|
|
|
65,638
|
|
|
2021
|
|
|
|
65,638
|
|
|
Thereafter
|
|
|
|
131,273
|
|
|
|
|
|
$
|
459,463
|
|
Trade Name
The trade name acquired as a part of the
TCS purchase has been recognized in the accompanying consolidated balance sheets at $69,300, the value attributed to it on the
date of the purchase (see Note 9). Management has determined that the trade name has an indefinite life and does not consider the
value of the trade name recorded in the accompanying consolidated balance sheet to be impaired as of September 30, 2016.
Prospect List
The prospect list acquired as a part of
the TCS purchase has been recognized in the accompanying consolidated balance sheets at $53,800, the value attributed to it on
the date of the purchase (see Note 9). The prospect list is being amortized on a straight-line basis over a one-year estimated
life. During the year ended September 30, 2016, the Company recorded the full amortization expense of $53,800 on this intangible
asset, which is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Accumulated
amortization at September 30, 2016 was $53,800.
Non-compete Agreements
Non-compete agreements established as a
part of the TCS purchase have been recognized in the accompanying consolidated balance sheets at $26,300, the value attributed
to them on the date of the purchase (see Note 9). The non-compete agreements are being amortized on a straight-line basis over
the five-year term of the non-compete clause of the agreement. During the year ended September 30, 2016, the Company recorded amortization
expense of $5,260 on this intangible asset, which is included in depreciation and amortization expense in the accompanying consolidated
statements of operations. Accumulated amortization at September 30, 2016 was $5,260.
Future amortization of the non-compete agreements is estimated
to be as follows for the years ended September 30:
|
2017
|
|
|
$
|
5,260
|
|
|
2018
|
|
|
|
5,260
|
|
|
2019
|
|
|
|
5,260
|
|
|
2020
|
|
|
|
5,260
|
|
|
|
|
|
$
|
21,040
|
|
Trademarks
The Company accounts for trademarks in
accordance with GAAP and accordingly, trademarks are stated at cost. Trademarks with indefinite lives are not amortized but are
tested for impairment at least annually. Management has determined that the trademarks have an indefinite life and do not consider
the value of trademarks recorded in the accompanying consolidated balance sheet to be impaired as of September 30, 2016 and 2015.
Goodwill
Goodwill represents the excess of the
value of the purchase price and related costs over the identifiable assets from business acquisitions. The Company conducts an
annual impairment assessment, at the reporting unit level, of its recorded goodwill. The Company assesses qualitative factors
in order to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
The qualitative factors evaluated by the Company include: macro-economic conditions of the local business environment, overall
financial performance, and other entity specific factors as deemed appropriate. If, through this qualitative assessment, the conclusion
is made that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, a two-step
impairment test is performed. Management determined, by assessing the qualitative factors, that it is more likely than not that
the fair value of the reporting unit is greater than its carrying value. Management does not consider the value of goodwill recorded
for TCS in the accompanying consolidated balance sheet to be impaired as of September 30, 2016, and 2015. However, goodwill attributed
to Cloud9 and MDP was deemed to be impaired as that business offering has been discontinued.
The fair values of the assets acquired
and liabilities assumed were determined primarily using the income approach, which determines the fair value for the asset based
on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a rate of return
that reflects the relative risk of achieving the cash flow and the time value of money. The fair value of relationships were determined
by projecting expected cash flows and subtracting the portion of the cash flow derived by the relevant contributory assets.
The accompanying consolidated balance sheets,
consolidated statements of operations, changes in stockholders’ equity and cash flows include the results of operations of
the acquired subsidiaries from the date of acquisition.
Goodwill consists of the following:
Goodwill at September 30, 2014
|
|
$
|
–
|
|
Goodwill generated from acquisition of Cloud9 (see note 9)
|
|
|
592,369
|
|
Goodwill generated from acquisition of MDP (see note 9)
|
|
|
70,598
|
|
Goodwill at September 30, 2015
|
|
|
662,967
|
|
Goodwill generated from acquisition of TCS (see note 9)
|
|
|
1,094,702
|
|
Impairment of Cloud9
|
|
|
(592,369
|
)
|
Impairment of MDP
|
|
|
(70,598
|
)
|
Goodwill at September 30, 2016
|
|
$
|
1,094,702
|
|
Income Taxes
The Company accounts for Federal and state
income taxes pursuant to GAAP, which requires an asset and liability approach for financial accounting and reporting for income
taxes based on tax effects of differences between the financial statement and tax basis of assets and liabilities.
The Company accounts for all uncertain
tax positions in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
740 – Income Taxes (“ASC 740”). ASC 740 provides guidance on de-recognition, classification, interest and penalties
and disclosure related to uncertain income tax positions. The Company recognizes accrued interest and penalties related to unrecognized
tax benefits as a component of income tax expense. There was no accrued interest or penalties as of September 30, 2016 and 2015.
From time to time, the Company is audited
by taxing authorities. These audits could result in proposed assessments of additional taxes. The Company believes that its tax
positions comply in all material respects with applicable tax law. However, tax law is subject to interpretation, and interpretations
by taxing authorities could be different from those of the Company, which could result in the imposition of additional taxes. The
Company’s Federal returns since 2014 are still subject for examination by taxing authorities.
Earnings Per Share
Basic earnings per common share is computed
by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding for the reporting
period. Average number of common shares were 31,626,189 and 24,769,739 for years ended September 30, 2016 and 2015, respectively.
For the years ended September 30, 2016
and 2015, approximately 2,200,346 and 1,500,996 common stock options, respectively, were not added to the diluted average shares
because inclusion of such shares would be antidilutive.
Revenue Recognition
FG Wealth generates investment management
fees for services provided by the Company. Investment management fees include fees earned from assets under management by providing
professional services to manage client investments.
FG Tax and MDP generate service income from its consulting and
other professional services performed.
Commission revenue is derived from the
sale of annuities and premiums on life insurance policies held by third parties. The revenue is recognized at the time the policy
is issued.
Revenue represents gross billings less
discounts, and are net of sales taxes, as applicable. Amounts invoiced for work not yet completed are shown as deferred revenue
in the accompanying consolidated balance sheets.
TaxCoach Software has 3 types of
services that are charged and collected on a month to month subscription basis (TaxCoach basic membership, All-Stars
coaching, and Wire Service weekly broadcast email). None of these programs come with a long-term commitment or contract, and
there is no up-front payment beyond the monthly subscription fee. Cancellations are processed within the month
requested and memberships are closed at the end of the period for which the most recent payment was made. Members are
not entitled to refunds for unused memberships.
Advertising
Advertising costs are charged to operations
when incurred. Advertising and marketing expense was $402,402 and $232,904 for the years ended September 30, 2016 and 2015, respectively.
Stock-Based Compensation
The Company recognizes the fair value
of the stock-based compensation awards as wages in the accompanying statements of operations on a straight-line basis over the
vesting period based on the Black-Scholes option pricing model based on a risk free rate from 0.70% in 2015 and 0.97% in 2016,
dividend yield of 0%, expected life of 2 years and volatility of 1.00.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ from these estimates.
Going Concern
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern, which contemplates the Company will need
to manage additional asset units under contract and/or additional financing to fully implement its business plan, including continued
growth and establishment of a stronger brand.
The Company is actively seeking growth
of its service offerings, both organically and via new client relationships. Management, in the ordinary course of business, is
trying to raise additional capital through sales of common stock as well as seeking financing via equity or debt, or both from
third parties. There are no assurances that additional financing will be available on favorable terms, or at all. If additional
financing is not available, the Company will need to reduce, defer or cancel development programs, planned initiatives and overhead
expenditures. The failure to adequately fund its capital requirements could have a material adverse effect on the Company’s
business, financial condition and results of operations. Moreover, the sale of additional equity securities to raise financing
will result in additional dilution to the Company’s stockholders, and incurring additional indebtedness could involve an
increased debt service cash obligation, the imposition of covenants that restrict the Company’s operations or the Company’s
ability to perform on its current debt service requirements. The consolidated financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
Future Accounting Pronouncements
In April 2015, the FASB issued ASU No.
2015-15, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, part of
the FASB’s simplification initiative. ASU 2015-15 requires companies to present debt issuance costs the same way they currently
present debt discounts, as a direct deduction from the carrying value of that debt liability. ASU 2015-15 does not impact the recognition
and measurement guidance for debt issuance costs. ASU 2015-15 is effective for fiscal years beginning after December 15, 2015.
In November 2015, the FASB issued ASU No.
2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, part of the FASB’s simplification initiative.
ASU 2015-17 requires companies to classify deferred tax liabilities and assets as noncurrent. ASU 2015-17 is effective for fiscal
years beginning after December 15, 2018.
In February 2016, the FASB issued ASU
Update No. 2016-02 Leases (Topic 842). Under the new guidance, a lessee will be required to recognize assets and liabilities
for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and
presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a
finance or operating lease. However, unlike current GAAP - which requires only capital leases to be recognized on the balance
sheet - the new ASU will require both types of leases to be recognized on the balance sheet. ASU 2016-02 is effective for the
years beginning after December 15, 2018 and for all periods presented. Early application of the amendments in this ASU is
permitted.
In March 2016, the FASB issued ASU Update
No. 2016-07, Investments – Equity Method and Joint Ventures (Topic 323). The amendments in this Update eliminate the requirement
that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or
degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step
basis as if the equity method had been in effect during all previous periods that the investment had been held. ASU 2016-07 is
effective for the years beginning after December 15, 2016. Early application of the amendments in this ASU is permitted.
In March 2016, the FASB issued ASU
Update No. 2016-08, Revenue From Contracts with Customers (Topic 606). The amendments in this Update are intended to improve
the operability and understandability of the implementation guidance on principal versus agent considerations by clarifying
the criteria in determining a principal versus agent relationship. The core principle of the guidance is that an entity
should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core
principle, an entity should apply the following five steps: (1) identify contracts with customers, (2) identify the
performance obligations in the contracts, (3) determine the transaction price, (4) allocate the transaction price to the
performance obligation in the contract, and (5) recognize revenue as the entity satisfies performance obligations. The new
guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that
reporting period. Early application is permitted for annual reporting periods beginning after December 15, 2016, including
interim periods within that reporting period. We are currently evaluating what impact adoption of this guidance will have on
our financial position, results of operations, cash flows and disclosures.
In March 2016, the FASB issued ASU Update
No. 2016-09, Compensation – Stock Compensation (Topic 718). The amendments in this Update are to simplify several aspects
of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either
equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning
after December 15, 2016, and interim periods within those annual periods. The Company has yet to do a full analysis on the impact
this will have but will do during the next fiscal year.
|
2.
|
PROPERTY AND EQUIPMENT
|
Property and equipment consist of the following at September
30:
|
|
Estimated
Service Lives
|
|
2016
|
|
|
2015
|
|
Furniture and fixtures
|
|
5 years
|
|
$
|
6,994
|
|
|
$
|
6,928
|
|
Internally developed software
|
|
10 years
|
|
|
152,000
|
|
|
|
–
|
|
|
|
|
|
|
158,994
|
|
|
|
6,928
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
17,914
|
|
|
|
289
|
|
|
|
|
|
$
|
141,080
|
|
|
$
|
6,639
|
|
Depreciation expense was $17,625 and $289 during the years ended
September 30, 2016 and 2015, respectively.
Trademarks consist of the following:
Trademarks at September 30, 2014
|
|
$
|
–
|
|
Trademarks purchased from related party at cost
|
|
|
16,272
|
|
Trademarks purchased at cost
|
|
|
3,902
|
|
Trademarks at September 30, 2015
|
|
|
20,174
|
|
Trademarks purchased at cost
|
|
|
2,418
|
|
Trademarks at September 30, 2016
|
|
$
|
22,592
|
|
The Company has a revolving line of credit
with Wells Fargo Bank, N.A. in the amount of $55,000. Amounts drawn under this line of credit are due on demand, and monthly interest
and principal payments are required. The interest rate on the line of credit is 7.5%. This line of credit is collateralized by
the personal guarantee of the majority stockholder. Line of credit balance was $19,732 and $-0- for the years ended September 30,
2016 and 2015, respectively.
With the acquisition of Tax Coach
Software, LLC, the Company also acquired a promissory note payable to The Huntington National Bank. The note permits maximum
borrowings of $100,000. Interest is paid monthly at prime plus 1.25% and the balance is due on demand. The facility matures
in February 2017, is collateralized by substantially all assets of Tax Coach Software, LLC, and is secured by a personal
guarantee from Keith VandeStadt, a significant stockholder of the Company. The balance outstanding under this note payable
was $93,397 and $0 at September 30, 2016 and 2015, respectively.
Accrued expenses consist of the following
at September 30:
|
|
2016
|
|
|
2015
|
|
Accrued payroll
|
|
$
|
44,327
|
|
|
$
|
35,778
|
|
Accrued operating expenses
|
|
|
59,077
|
|
|
|
7,615
|
|
Deferred rent
|
|
|
250
|
|
|
|
3,007
|
|
|
|
$
|
103,654
|
|
|
$
|
46,400
|
|
The Company elected C Corporation tax status
upon inception in 2014. Net operating losses (“NOL”) since that date total $3,079,023 as of September 30, 2016, and
may be carried forward to offset future taxable income; accordingly, no current provision for income tax has been recorded in the
accompanying statements of operations. NOL carry-forward benefits begin to expire in 2035.
The following table summarizes the difference
between the actual tax provision and the amounts obtained by applying the statutory tax rates to the income or loss before income
taxes for the years ended September 30:
|
|
2016
|
|
|
2015
|
|
Tax benefit calculated at statutory rate
|
|
|
35%
|
|
|
|
35%
|
|
Changes to valuation allowance
|
|
|
(35%
|
)
|
|
|
(35%
|
)
|
Provision for income taxes
|
|
|
0%
|
|
|
|
0%
|
|
A deferred tax liability or asset is determined
based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax
rates which will be in effect when these differences reverse. Deferred tax expense or benefit in the accompanying consolidated
statements of operations are the result of changes in the assets and liabilities for deferred taxes. The measurement of deferred
tax assets is reduced, if necessary, by the amount for any tax benefits that, based on available evidence, are not expected to
be realized. Income tax expense is the current tax payable or refundable for the year plus or minus the net change in the deferred
tax assets and liabilities. Deferred income taxes of the Company arise from the temporary differences between financial statement
and income tax recognition of NOL carry-forwards.
The deferred tax assets and liabilities
in the accompanying consolidated balance sheets include the following components at September 30:
|
|
2016
|
|
|
2015
|
|
Net non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry-forward
|
|
$
|
924,304
|
|
|
$
|
330,359
|
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
109,471
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
814,833
|
|
|
|
330,359
|
|
Less valuation allowance
|
|
|
(814,833
|
)
|
|
|
(330,359
|
)
|
Net deferred taxes
|
|
$
|
–
|
|
|
$
|
–
|
|
|
8.
|
COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
|
Leases
The Company conducts operations from leased
premises. Some of these leases provide for payment of taxes, insurance, utilities and maintenance. The Company also leases certain
equipment under operating leases. Total rent expense for the years ended September 30, 2016 and 2015 was $89,150 and $86,149, respectively.
Rent expense is recorded on a straight-line basis over the term of the lease. The difference between rental expense and rental
payments is recorded as deferred rent within accrued expenses in the accompanying consolidated balance sheets. Management expects
that in the normal course of business, leases will be renewed or replaced by other leases.
|
2017
|
|
|
$
|
81,902
|
|
|
2018
|
|
|
|
68,400
|
|
|
2019
|
|
|
|
5,700
|
|
|
|
|
|
$
|
156,002
|
|
Deposits
Deposits represented a down payment of
$50,000 made on a potential purchase at September 30, 2015. The application of the deposit to the purchase price was contingent
upon the completion of the acquisition. This acquisition did not take place and this deposit was ultimately forfeited during the
year ended September 30, 2016.
Contingencies
Under the terms of the TCS purchase agreement,
the common stock issued has been placed in escrow. The sellers maintain the right to unwind this transaction under certain conditions
(see Note 9).
Pacific Oil Company still has some outstanding
payables that the previous owners are in process of liquidating. Those liabilities have been shown here but are expected to be
settled by the previous owners. However, shares of the Company are being held in escrow to cover the chance that these liabilities
will ultimately have to be settled by the Company.
Legal Proceedings
From time to time, we are a party to or
otherwise involved in legal proceedings, claims and other legal matters, arising in the ordinary course of our business or otherwise.
A subsidiary of the Company is currently involved in one legal proceeding, the outcome of which will not be material to our ability
to operate or market our services, our consolidated financial position, results of operations or cash flows.
Business Acquisition – Cloud9
Effective December 31, 2014, the Company
completed the acquisition of Cloud9, a business consulting firm located in Allen, Texas. Under the terms of the acquisition, the
Company acquired 100% of Cloud9’s stock in a stock exchange. Total stock exchanged during the year ended September 30, 2015,
was approximately 1,314,477 shares, at par value of $0.001 per share, from the Company for all 40,000,000 shares of Cloud9. Goodwill,
as a result of this acquisition, is not deductible for tax purposes.
The transaction resulted in recording liabilities and goodwill
at a fair value of $592,369 as follows:
Common stock issued in stock exchange
|
|
$
|
438,159
|
|
Net liabilities assumed
|
|
|
154,210
|
|
Total value of the goodwill generated on acquisition
|
|
$
|
592,369
|
|
The tangible assets acquired and liabilities
assumed were as follows:
Assets acquired:
|
|
|
|
Cash
|
|
$
|
30,840
|
|
Accounts receivable
|
|
|
22,039
|
|
Prepaid expenses and deposits
|
|
|
7,000
|
|
Total tangible assets
|
|
|
59,879
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
Accounts payable
|
|
|
30,407
|
|
Accounts payable - intercompany eliminated upon consolidation
|
|
|
51,000
|
|
Accounts payable - related party
|
|
|
132,682
|
|
Total liabilities
|
|
|
214,089
|
|
|
|
|
|
|
Net acquired liabilities
|
|
$
|
(154,210
|
)
|
The primary asset acquired from Cloud9 is
the expertise of Cloud9, which the Company believes it will be able to leverage in maximizing the benefits of consulting with
customers. As of September 30, 2015, these factors contributed to a purchase price in excess of the fair value of
Cloud9’s tangible assets acquired, and, as a result, the Company has recorded goodwill in the amount of $592,369 in
connection with this transaction which is recorded in the accompanying consolidated balance sheets.
As noted in Note 1, the Company reviewed
the enterprise value of the Cloud9 entity in fiscal 2016 and determined that the value of Goodwill that was acquired was no longer
supported. As such, $592,369 was written off during the year ended September 30, 2016.
Business Acquisition – Business
Legacy, Inc. and Pollock Advisory Group, Inc.
Effective January 1, 2015 Financial Gravity
Operations, Inc. completed the acquisition of Business Legacy, Inc. and Pollock Advisory Group, Inc., related financial services
firms located in Allen, Texas. Under the terms of the acquisition, the Company acquired 100% of stock of Business Legacy, Inc.
and Pollock Advisory Group, Inc., wholly-owned entities of the majority stockholder of Financial Gravity Holdings, Inc. for no
cost.
The transaction resulted in recording a gain within APIC (as
the entities were under common control) of $26,316 as follows:
Net assets acquired
|
|
$
|
26,316
|
|
Total gain on bargain purchase generated at acquisition of entities under
common control
|
|
$
|
26,316
|
|
The tangible assets acquired and liabilities
assumed were as follows:
Assets acquired:
|
|
|
|
Cash
|
|
$
|
22,350
|
|
Accounts receivable
|
|
|
73,321
|
|
Accounts receivable - related party
|
|
|
9,272
|
|
Prepaid expenses
|
|
|
11,528
|
|
Fixed assets
|
|
|
32,316
|
|
Total tangible assets
|
|
|
148,787
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
Accounts payable
|
|
|
15,505
|
|
Accrued expenses
|
|
|
22,383
|
|
Line of credit
|
|
|
55,000
|
|
Capital lease obligations
|
|
|
29,583
|
|
Total liabilities
|
|
|
122,471
|
|
|
|
|
|
|
Net acquired assets
|
|
$
|
26,316
|
|
The primary asset acquired from Business
Legacy, Inc. and Pollock Advisory Group is the expertise in the respective area of service. The Company believes they will be able
to leverage this expertise in maximizing the benefits of consulting with customers. The acquisition of these two entities increases
the additional services the Company can provide to high net worth individuals and business in accordance with the strategic business
plan of the Company.
Business Acquisition – SASH Corporation
d.b.a. Metro Data Processing
Effective August 12, 2015, the Company
completed the acquisition of SASH Corporation, an Oklahoma corporation doing business as MDP. The purchase was made by a subsidiary
of the Company, Cloud9 Accelerator, LLC. Under the terms of the acquisition, the Company agreed to purchase 100% of stock of MDP
for $75,800. The terms also require two employees of MDP to continue working in their current role for a period of not less than
12 months and not less than 6 months for compensation of an amount that is not less than $30,000 and $24,000, respectively. Goodwill,
as a result of this acquisition, is not deductible for tax purposes.
MDP, located in Tulsa, Oklahoma, provides payroll services,
software, and support solutions to business owners. The transaction resulted in recording assets and goodwill at a fair value
of $70,598 as follows:
Cash consideration
|
|
$
|
75,800
|
|
Less: net assets acquired
|
|
|
(5,202
|
)
|
Total value of the goodwill generated on acquisition
|
|
$
|
70,598
|
|
The tangible assets acquired and liabilities
assumed were as follows:
Assets acquired:
|
|
|
|
Cash
|
|
$
|
4,121
|
|
Accounts receivable
|
|
|
2,903
|
|
Accounts receivable - other
|
|
|
5,800
|
|
Total tangible assets
|
|
|
12,824
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
Accounts payable
|
|
|
7,622
|
|
Total liabilities
|
|
|
7,622
|
|
|
|
|
|
|
Net acquired assets
|
|
$
|
5,202
|
|
The primary asset acquired from MDP is
the expertise in the respective area of service. The Company believes they will be able to leverage the expertise of MDP as a payroll
service provider in Oklahoma which will also allow for an expansion of services to provide further access to high net worth individuals
and businesses beyond the Dallas/Ft. Worth area in accordance with the strategic business plan of the Company.
As noted in Note 1, the Company reviewed
the enterprise value of the MDP entity in fiscal 2016 and determined that the value of Goodwill that was acquired was no longer
supported. As such, $70,598 was written off during the year ended September 30, 2016.
Business Acquisition – Tax Coach
Software, Inc.
Effective October 1, 2015, the Company
completed the acquisition of Tax Coach Software, LLC, an Ohio limited liability company (“Tax Coach Software”). The
purchase was made by Financial Gravity Holdings, Inc. Under the terms of the acquisition, the Company acquired 100% of Tax Coach
Software’s stock in a stock exchange. Total stock exchanged was 6,000,000 shares (as amended), at par value of $0.001 per
share, from the Company for 100% of the shares of Tax Coach Software. Goodwill, as a result of this acquisition, is not deductible
for tax purposes.
Certificates representing the shares were
required to be deposited in escrow as of the effective date of the acquisition. As part of the purchase agreement documentation,
the Sellers maintained the right to unwind the transaction under certain conditions as described. The Sellers also retained all
rights as shareholders while shares were held in escrow, including the right to vote. Under the escrow agreement, if the average
daily closing price of the shares for any continuous 10-day trading period equals or exceeds $1.00 during the thirty-six months
following October 28, 2015, the Company had the right to cause the shares deposited in escrow to be distributed to the Sellers,
terminating any right to unwind the transaction. If the shares did not trade as to provide a closing price during the thirty-six
months following October 28, 2015 or if the average daily closing price of the shares for any continuous 10-day trading period
failed to equal or exceed $1.00 during the thirty-six months following October 28, 2015, then no later than five days following
the conclusion of the thirty-six month period, the Sellers would have the right to unwind the acquisition of Tax Coach Software
by the Company and the Company would immediately transfer the ownership of Tax Coach Software back to the Sellers in exchange for
the return of common stock issued during the acquisition. The closing price was defined as the last closing trade price for the
shares on an electronic bulletin board as reported by Bloomberg or on the NASDAQ Capital Market or the highest bid price as reported
on “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If listed for trading on the American
or New York Stock Exchange during the thirty-six months following October 28, 2015 it will be deemed to meet the $1.00 benchmark.
On November 11, 2016, the parties to the
escrow agreement agreed (in a Company Distribution Notice) that the average daily closing price of the shares had exceeded the
$1.00 threshold and accordingly, the shares were released from escrow and the right to unwind the Tax Coach Software acquisition
transaction terminated.
Three employment agreements were made as
a condition to the acquisition. Each agreement has an effective date as of November 1, 2015 and is effective for a period of three
years. Two employee agreements include a base salary of $42,000 per year, per employee. These same two agreements, include a bonus
that is calculated, for each employee, as the sum of 40% of the gross profit of Tax Coach Software for all revenues that exceed
$850,000 and are less than $950,000 and 20% of the gross profit of Tax Coach Software for all revenues earned in excess of $950,000.
One employee agreement includes a base salary of $60,000 per year. This same agreement, includes a bonus that is calculated as
the sum of 20% of the gross profit of Tax Coach Software for all revenues that exceed $850,000 and are less than $950,000 and 10%
of the gross profit of Tax Coach Software for all revenues earned in excess of $950,000. Gross profit is determined in accordance
with generally acceptable accounting principles, net of other amounts paid under employment and consulting agreements. The agreements
also include other certain termination and non-compete clauses. Compensation during the month of October 2015 to be paid to the
three employees totals an aggregate amount of $49,150. Three consulting agreements were made as a condition to the acquisition.
Two agreements require certain services at a fixed fee of $17,000 per month, per agreement, commencing on November 1, 2015 with
a 90-day termination clause. One agreement requires certain services at a fixed fee of $3,500 per month, commencing on November
1, 2015 with a 90-day termination clause. $444,650 in professional fees were paid under these 3 agreements in the year ended September
30, 2016.
Tax Coach Software, located in Cincinnati,
Ohio, provides three primary services including monthly subscription revenue from the “Tax Coach” software system,
coaching revenue and email marketing services for customers.
The transaction resulted in a fair value of the acquisition of $1,094,702 as follows:
Common stock issued in stock exchange at a value of $0.25 per share (as amended)
|
|
$
|
1,500,020
|
|
Additional paid in capital for the escrow agreement provision
|
|
|
404,600
|
|
Total value of the goodwill generated on acquisition
|
|
|
1,904,620
|
|
|
|
|
|
|
Intangible assets acquired
|
|
|
(719,400
|
)
|
Net tangible assets acquired
|
|
|
(90,518
|
)
|
Total assets acquired
|
|
|
(809,918
|
)
|
|
|
|
|
|
Total fair value of acquisition
|
|
$
|
1,094,702
|
|
The intangible assets were as follows:
Customer relationships
|
|
$
|
44,900
|
|
Proprietary content
|
|
|
525,100
|
|
Trade name
|
|
|
69,300
|
|
Prospect list
|
|
|
53,800
|
|
Non-compete agreements
|
|
|
26,300
|
|
Total intangible assets
|
|
$
|
719,400
|
|
The tangible assets acquired and liabilities
assumed were as follows:
Assets acquired:
|
|
|
|
Cash
|
|
$
|
57,025
|
|
Accounts receivable
|
|
|
15,476
|
|
Accounts receivable - other
|
|
|
5,408
|
|
Internally developed software
|
|
|
152,000
|
|
Total tangible assets
|
|
|
229,909
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
Accrued expenses
|
|
|
69,485
|
|
Line of credit
|
|
|
69,906
|
|
Total liabilities
|
|
|
139,391
|
|
|
|
|
|
|
Net acquired assets
|
|
$
|
90,518
|
|
The primary asset acquired from Tax Coach
Software is the proprietary content which includes a comprehensive platform of tax planning strategies including marketing and
instructional guides. TCS will provide the Company with expertise in areas of service which expand beyond the Company’s current
service areas. The Company believes they will also be able to leverage the use of the proprietary content in maximizing the benefits
of consulting with customers. The acquisition of this entity increases the additional services the Company can provide to high
net worth individuals and business in accordance with its strategic business plan.
Supplemental Unaudited Pro Forma Information
As noted above, all acquisitions were
completed prior to or as of October 1, 2015. Accordingly, fiscal year 2016 includes the full impact of all the acquisitions. The
fiscal year 2015 acquisitions were effective at various parts of the year, and had each of the acquisitions been effective on
October 1, 2015, the revenue and net income/(loss) would be as follows:
|
|
As Reported
|
|
|
Cloud9
|
|
|
BLI
|
|
|
PAG
|
|
|
MDP
|
|
|
TCS
|
|
|
Pro Forma
|
|
|
|
FY 2015
|
|
|
10/1/14 -
12/30/14
|
|
|
10/1/14 -
12/30/14
|
|
|
10/1/14 -
12/31/14
|
|
|
10/1/14 -
8/11/15
|
|
|
10/1/14 -
9/30/15
|
|
|
FY 2015
|
|
Total Revenue
|
|
$
|
1,309,801
|
|
|
$
|
61,800
|
|
|
$
|
340,403
|
|
|
$
|
222,925
|
|
|
$
|
102,550
|
|
|
$
|
860,805
|
|
|
$
|
2,898,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) / Income
|
|
$
|
(943,884
|
)
|
|
$
|
(9,024
|
)
|
|
$
|
(52,446
|
)
|
|
$
|
62,548
|
|
|
$
|
12,468
|
|
|
$
|
395,007
|
|
|
$
|
(535,331
|
)
|
TCS net income includes expenses for the
amortization of the definite lived intangibles of $82,123. Operating expenses recognized in fiscal year 2015 were approximately
$4,000 for MDP and $660 for Cloud9. The BLI and PAG acquisitions each had immaterial amounts of operating expenses associated with
them. Operating expenses recognized in fiscal year 2016 were approximately $44,000 for TCS.
Common Stock
The Company is authorized to issue up to
300,000,000 shares of common stock, par value $0.001 per share.
Preferred Stock
The Company does not have a preferred stock
authorization in its articles of incorporation.
Financial Gravity Holdings, a subsidiary
of the Company, has authorized the issuance of up to 10,000,000 shares of preferred stock, by action of the Board of Directors.
The preferred stock authorization has not been formalized via the filing of an amendment to the certificate of formation of Financial
Gravity Holdings. The rights and obligations of the preferred stock are as determined by the Board of Directors at the time of
issuance.
For each of the Company and Financial Gravity
Holdings, its subsidiary, no preferred shares are issued or outstanding as of September 30, 2016 and 2015, respectively.
Private Placement Memorandum, Financial
Gravity Holdings
On October 31, 2014, Financial Gravity
issued a private placement memorandum (“PPM”) for stock purchases of up to 2,000,000 shares of common stock at a cost
of $1.00 and a par value of $0.00001, with a minimum purchase level of $50,000 per investor. The subscription period initially
expired June 30, 2015, however, the Board of Directors extended the offering period indefinitely, and increased the number of shares
authorized for sale under the PPM incrementally to accommodate additional investor interest.
During the years ended September 30, 2016
and 2015, 785,000 shares and 5,625,000 shares, respectively, were issued under the PPM for $535,000 and $1,875,000 of additional
paid-in capital at September 30, 2016 and 2015, respectively.
Additional Common Stock Issuances, Financial
Gravity Holdings
During the year ended September 30, 2015,
Financial Gravity Holdings issued 21,150,000 shares of common stock in addition to the shares sold under the PPM and common shares
issued in connection with the Cloud9 Holding Company acquisition that were discussed above. Also during September 30, 2015, 300,000
common shares were issued to two non-employee directors.
During the year ended September 30, 2016,
one of the founding members of Financial Gravity Holdings forfeited 2,926,294 common shares, in addition to the issuance of shares
sold under the PPM and common shares issued in connection with the Tax Coach Software, LLC acquisition, both of which are discussed
above.
Subsequent to September 30, 2016, Financial
Gravity Holdings has sold 350,000 shares of common stock.
Stock Split, Financial Gravity Holdings
Effective October 20, 2015, Financial Gravity
Holdings declared a three for one stock split of its common stock. Upon the stock split, every one share of common stock issued
and outstanding was automatically reclassified and converted into three shares of common stock. The common stock retained a par
value of $0.00001 per share.
Effective February 27, 2015, the Company
established the 2015 Stock Option Plan (the “Plan”). The Board of Directors of the Company has the authority and discretion
to grant stock options. The maximum number of shares of stock that may be issued and exercised under the Plan is 9,000,000. Eligible
individuals include any employee of the Company or any director, consultant, or other person providing services to the Company.
The expiration date and exercise price are as established by the Board of Directors of the Company. No option may be issued under
the Plan after February 27, 2017.
Stock option activity is summarized as follows:
|
|
2016
|
|
|
2015
|
|
|
|
Shares
Under
Option
|
|
|
Value of
Shares
Under
Option
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Shares
Under
Option
|
|
|
Value of
Shares
Under
Option
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Outstanding - beginning of year
|
|
|
1,500,996
|
|
|
$
|
7,359
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
–
|
|
|
|
|
|
|
$
|
–
|
|
|
|
–
|
|
Granted
|
|
|
1,024,400
|
|
|
$
|
19,677
|
|
|
|
1.00
|
|
|
|
111
months
|
|
|
|
1,520,196
|
|
|
$
|
7,649
|
|
|
|
0.33
|
|
|
|
119
months
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
–
|
|
|
|
–
|
|
Canceled or expired
|
|
|
325,050
|
|
|
$
|
4,907
|
|
|
|
0.33
|
|
|
|
–
|
|
|
|
19,200
|
|
|
$
|
290
|
|
|
|
0.33
|
|
|
|
–
|
|
Outstanding - end of year
|
|
|
2,200,346
|
|
|
$
|
22,129
|
|
|
|
0.64
|
|
|
|
109
months
|
|
|
|
1,500,996
|
|
|
|
|
|
|
|
0.33
|
|
|
|
119
months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable - end of year
|
|
|
2,200,346
|
|
|
|
|
|
|
|
0.64
|
|
|
|
109
months
|
|
|
|
–
|
|
|
|
|
|
|
|
–
|
|
|
|
–
|
|
All outstanding stock options at September
30, 2016 became immediately vested upon the completion of the reverse merger with Pacific Oil Company. Total compensation expense
included in salaries and wages of previously unamortized stock compensation was $22,715 and $0 for the years ended September 30,
2016 and 2015, respectively.
|
12.
|
RELATED PARTY TRANSACTIONS
|
Effective December 31, 2014, the Company
acquired Cloud9 (see Note 9). The majority stockholder of Cloud9 Holdings Company is also a stockholder of the Company.
Effective January 1, 2015, the Financial
Gravity Operations, Inc. also acquired BLI and PAG (see Note 9). BLI and PAG were acquired at no cost from a major stockholder
of FGH.
Account receivable due for services performed
for a related party, included in accounts receivable – related party
in the accompanying consolidated
balance sheets was $-0- and $27,267 as of September 30, 2016, and 2015.
Accounts receivable due from the majority
stockholder of the entity, included in accounts receivable – related party in the accompanying consolidated balance sheets
was $4,506 and $2,059 as of September 30, 2016, and 2015.
The Company also has a payable due to a
stockholder related to payment for services provided and repayment for goods (as incurred through the acquisition of Cloud9) and
services purchased on behalf of the Company of approximately $-0- and $2,300 as of September 30, 2016 and 2015. This is included
in the consolidated balance sheets as accounts payable - related party.
Management fees paid to the majority stockholder
of the entity, included as management fees - related party in the accompanying consolidated statement of operations were $213,333
and $155,657 for fiscal 2016, and 2015.
A board member who is also a stockholder
provided services to the Company. Expenses for these services totaled $49,000 and $9,020 for the years ending September 30, 2016,
and 2015, respectively, and were included as general and administrative expenses in the accompanying consolidated statement of
operations.
In addition to the 350,000 common shares
issued subsequent to September 30, 2016 for $350,000 and the Company has issued 150,000 warrants exercisable for $206,250.
In December 2016, the Company’s
board authorized 20 million shares to be made available under a new Stock Option Plan.
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